UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

For the fiscal year ended December 31, 20162018.

 

OR

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

 

Commission File Number 000-10822001-36530

 

One Horizon Group, Inc.

(Exact name of registrant as specified in its charter)

 

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

   

T1-017 Tierney Building, University of649 NE 81st Street
Limerick, Limerick, Ireland.

Miami

  
  N/AFL 33138
(Address of principal executive offices) (Zip Code)

 

+353-61-5184771 (305) 420-6640

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None

Title of each className of each exchange on which
registered
n/an/a

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $0.0001

(Title of Class) None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ¨  No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes ¨  No þ

 

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 if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨Accelerated filer ¨
Non-accelerated filer ¨Smaller reporting company þ
(Do not check if smaller reporting company)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 7(a)(2)(B) of the Securities 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

 

The aggregate market value of the 35,347,283 shares ofregistrant’s voting and non-voting common equity stock held by non-affiliates of the registrant was approximately $ 26.8613.5 million as of June 30, 2016,29, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, based on the last sale price of the registrant’s common stock on such date of $0.76$0.535 per share, as reported on Nasdaq. The Nasdaq Stock Market.

 

As of April 3, 2017, 37,316,71410, 2019, 88,401,431 shares of the registrant’s common stock, par value $0.0001, were outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

Item Description Page
  Cautionary Note Regarding Concerning-Looking Statements 3
     
  Part I  
Item 1 Business 4
Item 1A Risk Factors 13
Item 1B2 Unresolved Staff CommentsProperties 16
Item 23 PropertiesLegal Proceedings 2016
Item 34 Legal Proceedings20
Item 4Mine Safety Disclosures 2016
     
  Part II  
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 2117
Item 6 Selected Financial Data 2218
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 2319
Item 7A Quantitative and Qualitative Disclosures about Market Risk 3123
Item 8 Financial Statements and Supplementary Data23
Item 9AControls and Procedures23
Item 9BOther Information24
Part III
Item 10Directors, Executive Officers and Corporate Governance25
Item 11Executive Compensation30
Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 31
Item 913 Changes inCertain Relationships and Disagreements with Accountants on AccountingRelated Transactions, and Financial DisclosureDirector Independence31
Item 9AControls and Procedures 33
Item 9B14 Other InformationPrincipal Accounting Fees and Services 34
     
  Part IIIIV  
Item 1015Exhibits, Financial Statement Schedules36
Item 16 Directors, Executive Officers and Corporate GovernanceForm 10-K Summary 35
Item 11Executive Compensation42
Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters43
Item 13Certain Relationships and Related Transactions, and Director Independence45
Item 14Principal Accounting Fees and Services4640
  Signatures 
Part IV
Item 15Exhibits, Financial Statement Schedules48
Signatures5241

2


Introductory Note

 

Unless otherwise noted, references to the “Company” in this Report include One Horizon Group, Inc. and all of its subsidiaries.

 

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 theseThese risks include, but are not limited to, risks and uncertainties are the competition we face;relating to our abilitycurrent cash position and our need to adaptraise additional capital in order to rapid changes  in the market for voice and messaging services;be able to continue to fund our operations; our ability to retain customersour managerial personnel and to attract new customers;additional personnel; competition; 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 relevantprotect intellectual property rights; intellectual propertyrights, and any 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 profitabilityfactors, including the risk factors identified in the future. documents we have filed, or will file, with the Securities and Exchange Commission.

In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this report or in any document incorporated herein by reference might not occur. Investors are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the respective dates of this report or the date of the document incorporated by reference in this report. We expressly disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by federal securities laws.

These and other matters the Company discusses in this Report, or in the documents it incorporates by reference into this Report, may cause actual results to differ from those the Company describes. The Company assumes no obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.

3


PART I

 

ITEM 1.  BUSINESS

One Horizon Group, Inc. and its Subsidiaries (the “Company”) is the inventor of the patented SmartPacketTM 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-device to work programs.

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

The SmartPacket™ 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 reduced battery usage while transmitting a VoIP call on a smartphone. This is of commercial interest to operators that wish to have a high quality VoIP call on congested metropolitan networks and on legacy 2G and 3G cellular networks.

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 Zimbabwe, Ghana, China, United Kingdom, Singapore, Canada and Hong Kong.

Based on the SmartPacketTM solution, the Company is the sole owner and operator of 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 40 million times since 2015 and has produced revenues throughout 2016. Aishuo offers subscribers very competitive telephone call rates and a virtual number rental service plus additional innovative smartphone social media features. Aishuo has been made available to users across 25 Chinese Android app stores and through iTunes. Aishuo subscribers pay for VoIP or can have a free VoIP call sponsored by advertisers. Aishuo supports top-up payment services inside the smartphone app including China UnionPay, Apple In-App Purchases, Alibaba’s Alipay and Tencent’s Wechat Wallet.

Our business model is focused on winning new B2B Tier-1 telecommunications operators, winning new VaaS subscribers and driving Aishuo retail 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 9001a holding company which, through our operating subsidiaries, is engaged in the digital media, entertainment and ISO 20000-1 certified company with assets and operations in Switzerland, Ireland, the United Kingdom, China, India, Russia, Hong Kong and Latin America.secure messaging businesses, described below.

 

4

Current Structure of the Company

 

The Company has the following wholly owned subsidiaries:

·One Horizon Group PLCSubsidiary name% Owned
·Abbey Technology GmbH123Wish, Inc. (acquired February 2018)51%
·Horizon Globex GmbH
·Global Phone Credit Ltd
·Horizon Globex Ireland Ltd
·One Horizon Hong Kong Ltd100%
·Horizon Network Technology Co. Ltd100%
Love Media House, Inc. (acquired March 2018)100%
Browning Productions & Entertainment, Inc. (acquired October 2018)51%

 

 

In addition to the subsidiaries listed above, Suzhou Aishuo Network Information Co., Ltd (“Suzhou Aishuo”) is a limited liability company, organized in China and controlled by us via various contractual arrangements. Suzhou Aishuo is treated as one of our subsidiaries for financial reporting purposepurposes in accordance with generally accepted accounting principles in the United States (“GAAP”).

 

5

Current Business OperationsSummary Description of Businesses

 

In 2015, we announcedWe have the rollout of our platform in China, brand namedAishuo(http://www.ai-shuo.cn/). This rollout entailed multiple strategies including advertisements, search engine optimization, press releases, event marketing, business-traveler direct marketing, as well as on and off-line promotions and leveraging the brand new One Horizon Sponsored-Call platform.  Based on the SmartPacketTM solution, we are the owner and operator of this retail smartphone VoIP, messaging and advertising service in the People’s Republic of China.

Since its commercial availability in the second quarter of 2015, Aishuo has to date, been downloaded over 43 million 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 25 Chinese Android app stores and through iTunes. Aishuo subscribers pay for VoIP or can have a 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.

Aishuo is operated by, Suzhou Aishuo Network Information Co., Ltd. a Chinese company controlled by us and headquartered in Nanjing, China.

6

 

Figure 1. Aishuo Retail

At the end of Q1 2017, we announced the rollout of our VoIP as a Service “VaaS” platform on the Microsoft Azure cloud. We sell our 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. The Company was showcased by Microsoft Corp. for its Azure technology (https://customers.microsoft.com/en-us/story/onehorizon).

 

Figure 2. VaaS Hosted Offering

7

 

Figure 3. Cloud-based Secure, Fault Tolerant and Low Latency Architecture

 

Figure 4. Microsoft Showcases One Horizon Group Inc.

OurB2B platform is being used by a pre-paid VoIP Smartphone application launched by different carriers respectively, some of which are listed as follows:following three core businesses:

 

·123Wish, Inc. formerly Once In A Lifetime, LLC (“123Wish”) – an experience based platform where subscribers have a chance to play and win experiences from celebrities, athletes and artists.

Smart Communications, Inc,Love Media House, Inc. formerly known as C-Rod, Inc. (“SmartLove Media House”). Smart -a full-service music production, artist representation and digital media business that providesa broad range of entertainment services including branding and advertising, video and photo production, recording (including music production, arranging, mixing and mastering), songwriting (arranging writing sessions with experienced and multi-platinum writers), artist development, digital distribution, billboard chart promotion, and consulting and life coaching. The entertainment marketplace is the Philippines' leading wireless services providerhighly competitive. The team at Love Media House, headed by Chis Rodriguez, has worked with 62.8 million subscribers on its GSM network as of December 2016.many famous artists and achieved many Billboard numbers and giving Love Media House an important edge in promoting new talent.

 

8

·Singapore TelecommunicationsBrowning Productions & Entertainment, Inc. (“SingtelBrowning Productions”). Singtel is the Singapore’s leading wireless services provider with - a combined mobile subscriber basefull service video production company and executive producer for all entertainment projects. Browning Productions has been selected to produce and distribute numerous television programs spanning dozens of 600 million customers from its own operationsepisodes in 2019 for acclaimed television networks including A&E, FYI and regional associates in 25 countries at end of July 2016.History Channel.

 

 The Company is based in the United States of America, Hong Kong, Singapore, China and the United Kingdom.

 

Figure 1. Horizon B2B Operator Core NetworkEntertainment Production Services (Love House and Browning Productions)

 

OfferingThe primary business of Love House and Market RelatedBrowning Productions are entertainment production services. Video projects are divided into four parts: (i) pre-production, (ii) production, (iii) post-production and (iv) distribution. During pre-production, the client describes the need and the purpose of the production. Production is the part of the process where raw materials that will be formed into the final product are created. Post-production is where the first rough cut of the final product is created. Client input is then used to create the final version of the production.


Video production services through Browning Productions include production of television shows, commercials, corporate videos, music videos, film, motion pictures (full length features), make-up and hair, casting, writing, producing, directing, stunts, post production services, graphic design (animation and special effects), audio production, and audio mastering and integration. Music production services through Love House include recording (including music production, arranging, mixing and mastering), songwriting (arranging writing sessions with experienced and multi-platinum writers), artist development, digital distribution, billboard chart promotion, branding and advertising, video and photo production, and consulting and life coaching.

 

Browning Productions has produced and has ownership rights to dozens of national and international television programs currently airing on a number of the most recognized television networks including A&E, FYI and History Channel. Browning Productions distributes content on a proprietary Internet/Over-The-Top (“OTT”) content platform that operates in conjunction with Verizon Digital Media Services (“VDMS”). Current productions of Browning Productions include “Wine Warriors”; the spin-off “Whisky Warriors, for which Browning Productions recently secured the Big Sky Film Grant from the State of Montana’s Film Office, “Training Grounds”; a new docuseries called “The Cryptos,” unveiling the inner workings of the cryptocurrency industry, soon to be distributed on one of the world’s most widely recognized global business news networks; and “America’s Crowdfunding,” an equity crowd-funding television series (the concept is “Shark Tank” meets “America’s Got Talent,” where the viewers vote with their wallets for equity stakes in the featured companies) in conjunction with Equity Bender, among others.

We also provide through Browning Productions marketing services and branded entertainment. Branding and name recognition is generally achieved through exposure in repetition. Through branded entertainment, a product or service stands out throughout a television series in precise placement from segment to segment for each viewer to see or hear, where the product or service is referred or mentioned by the celebrity cast. The pinnacle of all product or service inclusion into television is to allow for a full integration into the storyline and scripting of the segments centering the brand in the show content, which we believe is one of the best forms of marketing for any product or service.

The recording studio of Love House is a facility for sound recording and mixing. Ideally both the recording and monitoring spaces are specially designed by an acoustician to achieve optimum acoustic properties (acoustic isolation or diffusion or absorption of reflected sound that could otherwise interfere with the sound heard by the listener). The typical recording studio consists of a room called the "studio" or "live room", where instrumentalists and vocalists perform; and the "control room", where sound engineers sometimes with producer(s) as well operate either professional audio mixing consoles or computers with specialized software suites to manipulate and route the sound for analogue or digital recording. Often, there will be smaller rooms called "isolation booths" present to accommodate loud instruments such as drums or electric guitar, to keep these sounds from being audible to the microphones that are capturing the sounds from other instruments, or to provide "drier" rooms for recording vocals or quieter acoustic instruments.

Our recording studios through Love House may be used to record musicians, voice-over artists for advertisements or dialogue replacement in film, television or animation, foley, or to record their accompanying musical soundtracks.

Competitive Strengths

We believe our competitive strengths through Browning Productions include:

Excellent reputation:    We believe we have earned an excellent reputation for our creative ability, innovation, execution and on-time delivery of complex and challenging media content.

Our creative storytelling capabilities:    We believe our creative content turns ideas into visual, relatable stories that resonate with consumers and influences their behavior. We believe that our years of experience and access to creative talent allow us to tell compelling stories whether in seconds or minutes.


Diverse, creative talent base:    We employ or represent directors and designers, technical directors and other artists who we believe deliver a unique combination of creative direction (character, world and story development) and execution (unique and high quality imagery and related production content).

Strong relationships with advertising agencies and brands:    We have produced highly successful and creative advertising campaigns for our customers, many of which are global brands which we believe have allowed us to develop long-standing, strong relationships with leading advertising agencies and brands. We are often commissioned to create multiple campaigns for brands over many years, acting as the go-to production company for these clients. In September 2016,addition, despite that some of our competitors are larger than us, we have been able to compete effectively with them and win projects from new and existing clients.

End-to end solution:    We have developed in-house production processes that enable us to serve as a one-stop-shop, providing a full suite of solutions to the advertising industry and brands. We are able to conduct a project from concept through design and all stages of production using in-house and contracted creative talent when necessary.

We believe our competitive strengths through Love House include:

High quality services: We provide high quality sound recording and audio production services. We have a high end recording and production studio for use for customers.  Use of the studio is billed on an hourly basis plus fees relating to the rental of the studio. Reproduction of recorded materials will also be sold 198,413to customers. The benefits that are afforded to clients in our studio include:

a convenient, reasonably priced recording studio.

a comfortable studio experience that allows artists to record their music while being in an inviting atmosphere.

high end audio equipment that will make high quality sound recordings for our clients.

professional and expert staff members that will help artists mix and produce their albums with minimal hassle.

Supplemental Services to Music Production: We also provide songwriting (arranging writing sessions with experienced and multi-platinum writers), artist development, digital distribution, billboard chart promotion, branding and advertising, video and photo production.

Competition

The team at Love Media House, headed by Chis Rodriguez, has worked with many famous artists and achieved many Billboard numbers giving Love House an important edge in promoting new talent. The team at Browning Productions, headed by William Browning, has produced and has ownership rights to dozens of national and international television programs currently airing on a number of the most recognized television networks including A&E, FYI and History Channel. Notwithstanding, the entertainment marketplace is highly competitive. There are few barriers of entry in the business and level of competition is extremely high. There are many video production companies and recording studios in United States. Many of these companies may have a greater, more established customer base than us.  

Our Industry

We create branded advertising and entertainment content primarily for television, digital and other platforms.


The global advertising market is large and growing.    Global advertising spending was a $591 billion global market in 2017, projected to grow to $724 billion in 2020, according to eMarketer. The U.S. is currently Browning Productions’ customers’ primary target market. eMarketer forecasts that the U.S. will have the largest share of global advertising spending in 2020, which it estimates will be $243 billion. As Browning Productions’ business grows, we expect to capitalize on the large and expanding demand for services such as Browning Productions.

Television spending continues to be strong.    Television has historically been the single largest advertising medium worldwide. Zenith forecasts that television advertising in the U.S. peaked in 2017 at $69 billion and will decline slightly to $66 billion in 2020. Television and online video together are becoming more important to advertisers seeking to build brands than either form alone.

Digital advertising spending is increasing.    Digital technologies have transformed media consumption, viewing habits and social interaction. Content is being viewed at ever-increasing rates on wired and wireless smart devices across the globe. In 2017, global digital advertising spending surpassed global television advertising spending for the first time, according to MAGNA. MAGNA projects that, in 2018, U.S. digital advertising spending will exceed $100 billion and will account for half of total U.S. advertising sales for the first time. MAGNA projects that U.S. digital advertising sales will be $163 billion by 2023.

Creative short-form video content attracts audiences.    Given the proliferation of entertainment channels, capturing the attention of audiences is becoming increasingly challenging. We believe that brands are seeking creative content in short-form video that includes animation and mixed media to evoke emotions that resonate with viewers. According to AOL Advertising, while online video consumption is increasing across all video lengths, short-form video is growing the fastest. According to AOL Advertising, 59% of consumers watch videos that are under one minute long every day.

Our Growth Strategy

We intend to build upon our proven ability to aggregate large audiences for brands by continuing to make compelling content that is viewable on both traditional and new platforms. We have begun to implement the growth strategies described below, and expect to continue to do so over the several years following this offering. Although the net proceeds of this offering will be available to assist us to implement our growth strategies, we cannot estimate the ultimate amount of capital needed to achieve our expected growth. We may need additional capital to implement these strategies, particularly in the event we pursue acquisitions of complementary businesses or technologies.

We intend to grow our business by:

Capitalizing on market trends in advertising and digital media:    We believe our long history of creating award-winning content for television provides us with the expertise to continue to capture television advertising spending. We also believe our expertise in delivering entertaining, narrative-based short-form video content positions us well for the expected growth in digital advertising. We intend to build our core business by leveraging the increased use of animation and visual effects to differentiate marketing messages and capture audiences in the growing digital media market.

Implementing client service teams:    We believe we can increase recurring work from our existing clients with a more client-focused approach to delivering our services. We are hiring account directors with knowledge of the needs of brands in key industries so that we can collaborate more closely with brands and the advertising agencies. By doing so, we believe we can get involved earlier and more intimately in a particular pitch.

Expanding direct-to-brand sales:    Brands are increasingly working directly with content creators, bypassing advertising agencies. We believe this industry disruption is being caused by the desire of brands to obtain greater cost-effectiveness, transparency and control over customer data. We believe that we can increase our direct-to-brand sales by increasing business development efforts with brands. We recently reorganized our sales organization to include a specific focus on brand management.

 7

Growing through acquisitions:We believe that the highly fragmented content creation media industry, which is comprised primarily of small-to-medium-sized private companies, provides us with significant opportunities to grow our business through acquisitions. We intend to pursue acquisitions that provide services within our current core product offerings, extend our geographic reach and expand our product offerings.

Cross-selling services:    Our ability to produce diverse, engaging content across various media platforms allows us to offer clients a one-stop-shop for all of their content needs. We intend to cross-sell our various capabilities to drive additional revenue from existing clients and to seek to win new clients.

Further developing intellectual property:    We intend to build upon our success in developing original series that we own and license to brands, networks and major and new digital media studios. When we develop an original series, we retain the copyright of that content. By licensing to other platforms portions of the content from original series that we develop, we can create additional revenue streams from development fees, brand license fees, distribution license fees and ancillary sources (such as from foreign viewership).

Expanding our geographic presence:    We believe that by expanding our physical presence into select international regions, we will be better able to attract and retain internationally-based brands as clients. With a physical presence outside of the U.S., we believe we can provide better customer service and offer local talent who can work more intimately with internationally-based brands than we can from our offices in the U.S.

Expanding our talent roster:    We intend to continue to seek to attract and retain world-class creative and technical talent, thereby increasing our ability to win jobs and build brand equity through additional high quality creative content. We believe that our reputation and our client base will allow us to continue to attract top creative talent.

Celebrity Experience Marketplace (123Wish)

123Wish, available in the Apple App Store, Google Play and www.123wish.com, is a subscription-based, experience marketplace that focuses on providing users with exclusive opportunities to enjoy personalized, dream experiences with some of the world’s most renowned social media influencers including Super Influencer Jake Paul and Team 10 as well as celebrities, professional athletes, fashion designers, and artists while supporting a diverse range of charities.

123Wish provides experiences to fans of high profile celebrities but with the ability to ensure charities can benefit from proceeds of subscriptions paid. 123Wish is a super fan platform bringing fans closer to their favorite influencers, celebrities, musicians and more. 123Wish offers its users unique experiences, face time sessions, weekly giveaways, limited edition merchandise, VIP events, video shouts and exclusive video content.

The influencer or celebrity for each 123Wish experience selects a philanthropic cause to benefit or is randomly matched to a non-profit organization. Once the charitable contribution goal for an experience has been met and the designated timeframe for entry has expired, 123Wish randomly selects the winner who receives exclusive access to interact with the influencer or celebrity. Yet, everyone who enters wins a specialized gift for participation, which may include limited edition merchandise, gift cards or personalized video or voice messages from experience contributors.

Each 123Wish subscriber will soon have a digital wallet and will receive four digital coins each month that his or her subscription remains active, which the subscriber may contribute to charity. 123Wish are committed to making at least $1,000,000 in digital coin value available for charitable contribution premised on the number of subscribers. Development for inclusion of the coin technology is underway and we will be providing blockchain integration.


Competitive Strengths

We believe our competitive strengths through 123Wish include:

Excellent reputation:    We believe we have earned an excellent reputation for providing users with exclusive opportunities to enjoy personalized, dream experiences with celebrities.

Contacts with Celebrities: We have successfully established relationships with a number of social media influences, music artists and other celebrities to ensure the success of our experience marketplace.

Regulatory Status

Certain jurisdictions, including California where 123 Wish maintains it principal offices, have regulations that require 123 Wish to register as a commercial fundraiser and notify governmental authorities of events that it is sponsoring. The failure to comply with applicable regulations could subject 123 Wish to fines and other penalties, including being enjoined from conducting solicitation activities for charitable purposes within the jurisdiction and other civil remedies provided by law.

CORPORATE HISTORY

We were initially incorporated in Pennsylvania in 1972 as Coratomic, Inc. We changed our name five times thereafter, with the last name change in 2012 to One Horizon Group, Inc.In addition, we changed our domicile from Pennsylvania to Delaware in 2013.

Our authorized capital is 200,000,000 shares of Common Stock, par value $0.0001 per share (the “Common Stock”), and 50,0000,000 shares of preferred stock, par value $0.0001 per share (the “Preferred Stock”). The designation of rights including voting powers, preferences, and restrictions shall be determined by the Board of Directors before the issuance of any shares. As of the date hereof, 88,401,431 shares of our Common Stock are issued and outstanding and no preferred stock is issued and outstanding.

Acquisition of a Controlling Interest in Once In A Lifetime LLC

On February 22, 2018, we acquired 51% of the membership interests in Once In A Lifetime LLC, a Florida limited liability company d/b/a/ 123 Wish (“123 Wish”), pursuant to an Exchange Agreement dated January 18, 2018, with 123 Wish and its members in consideration for 1,333,334 shares of our common stock, plus an additional number of shares of our common stock based upon the net after tax earnings of 123 Wish during the six month periods ending six and twelve months after the completion of the acquisition. Once In A Lifetime LLC has been merged into our newly formed majority-owned Delaware subsidiary, 123 Wish, Inc.

123 Wish is a subscription-based, experience marketplace that focuses on providing users with exclusive opportunities to enjoy personalized, dream experiences with social media influencers, including Jake Paul and Team 10, as well as celebrities, professional athletes, fashion designers and artists, while supporting a diverse range of charities.

Acquisition of C-Rod, Inc.

On March 20, 2018, we acquired C–Rod, Inc., including its record label, Velveteen Entertainment, and media division, Mues Media (collectively, the “C-Rod Companies”) pursuant to an Exchange Agreement dated February 27, 2018 with C-Rod, Inc., Christopher Rodriguez and Patricia Rodriguez, in consideration for $150,000, 1,376,147 shares of our common stock issued to Cap United LLC, plus an additional number of shares of our common stock based upon the net after tax earnings of C-Rod during the two years ending after the completion of the acquisition. On May 2, 2018, we amended the articles of incorporation of C-Rod, Inc. to change its corporate name to Love Media House, Inc.

C-Rod, Inc., a music production company founded in 2002 by Grammy-nominated, multi-platinum producer and composer Christopher Rodriguez, regularly works with artists, which have included many celebrity acts.


Acquisition of a Controlling Interest in Banana Whale Studios Pte. Ltd.

On May 18, 2018,we entered into and consummated an Exchange Agreement (the “Exchange Agreement”) with Banana Whale Studios Pte. Ltd., a Singapore corporation (“Banana Whale”), and the founding shareholders of Banana Whale (the “Banana Whale Stockholders”), pursuant to whichwe acquired 51% of the outstanding shares (“Controlling Interest in Banana Whale”) ofBanana Whale in exchange for a number of our shares of common stock to be based upon the earnings of Banana Whale. Banana Whale is a B2B software provider in the $100+ billion-dollar gaming industry focusing on innovation and next generation games and entertainment. As a condition to closing the acquisition, Banana Whale Stockholders demanded and we deposited in escrow for their benefit 7,383,000 shares of our common stock (“OHGI Shares”) with a fair value of $4,983,000 as security for our obligation to issue such shares to which they may become entitled. If the number of shares to which the Banana Whale Stockholders become entitled is less than 7,383,000, the excess shares will be returned to us for cancellation. We also granted Banana Whale the right to use our secure messaging software.

Acquisition of 123Wish Software

Pursuant to the terms of that certain institutional investors atAgreement on Sale of 123Wish Software dated September 27, 2018 (“Software Sale Agreement”), among us, Once in a purchase priceLifetime Platform LLC (“OIALP”), and One Horizon Hong Kong Limited (“OHHK”), OIALP sold and assigned to OHHK eighty percent (80%) of $0.63the intellectual property rights to OIALP’s software platform and App that underlies 123Wish’s business in exchange for aggregate gross proceedsour making an additional investment of $125,000$100,000 into 123Wish without requiring the minority shareholders in 123Wish (some of whom are members of OIALP) to put up matching funds and our issuing 3,000,000 shares of its common stock to members of OIALP.

Acquisition of a Controlling Interest in Browning Productions& Entertainment, Inc.

On October 22, 2018, we entered into an Exchange Agreement (“Browning Exchange Agreement”) pursuant to which we acquired a securities purchase agreement. majority of the outstanding shares (the “Controlling Interest in Browning”) of Browning Productions& Entertainment, Inc., a Florida corporation (“Browning Productions”), from William J. Browning, the sole stockholder of Browning. Browning Productions produces television programs which have aired internationally as well as nationally.

In connection withexchange for the purchase of common stock the purchasers received a warrantcontrolling interest in Browning Productions, we paid Mr. Browning $10,000 and issued to acquire 148,810him 150,000 shares of common stock, atand agreed to issue to him an exerciseadditional 150,000 shares of common stock following completion of the audit of Browning Productions’ financial statements, plus an additional number of shares of common stock which can be up to a maximum of 17,000,000 shares, determined by dividing two and a half times the net after tax earnings of Browning Productions during the twelve month period ending December 31, 2019 by the average of the closing price of $0.819 per share. The warrants became exercisable onour common stock during the dateten consecutive trading days immediately preceding the end of issuance2019. To the extent the number of shares which we are obligated to issue to Mr. Browning exceeds 13,553,506 shares, representing 19.99% of our outstanding shares of common stock immediately prior to the acquisition (the “Excess Shares”), instead of issuing the Excess Shares to Mr. Browning we will pay him an amount in cash for a three-year term.

In October 2016, we sold 320,512the Excess Shares. We had previously paid Mr. Browning $10,000 and issued 35,000 shares of common stock to certain institutional investors athim upon execution of a purchase pricenon-binding letter of $0.39intent for aggregate gross proceedsthe acquisition of $125,000 pursuant to a securities purchase agreement.. In connection with the purchase of common stock the purchasers received a warrant to acquire 240,385 shares of common stock at an exercise price of $0.5616 per share. The warrants became exercisableBrowning Productions on the date of issuance for a three-year term.May 10, 2018.

 

In December 2016,Though the terms of this transaction only required a $20,000 cash payment ($10,000 in cash under the non-binding letter of intent and $10,000 in cash under the Browning Exchange Agreement) to Mr. Browning, we sold 500,000 shares of common stockwere required to certain institutional investors atprovide Browning Productions with a purchase price of $0.30 for aggregate gross proceedsworking capital loan in an initial amount of $150,000, pursuantwhich is to a securities purchase agreement. . In connection withbe repaid out of the purchasepost-closing net profit of common stockBrowning Productions as well as earmark an additional $150,000 in cash for future investment in Browning Productions (to assist in funding the purchasers received a warrant to acquire 375,000 sharesfuture operations of common stock at an exercise price of $0.35 per share. The warrants became exercisable on the date of issuance for a three-year term.

The above financings are conducted as at-the-market shelf-take down under our registration statement on Form S-3 (File No. 333-205049)Browning Productions).

 

On August 10, 2015,We have agreed to register for resale the initial 150,000 shares issued to Mr. Browning.

We have a right of first refusal to purchase the remaining shares of Browning Productions.


Proposed Acquisition of a Controlling Interest in connection with an UnderwritingMaham

Pursuant to the terms of a definitive Exchange Agreement, dated August 4, 2015February 20, 2019, among us, Maham LLC (“Maham”), the members of Maham, and Mr. Hauswirth (the “Underwriting“Maham Exchange Agreement”) with Aegis Capital Corp. (“Aegis”), as representative of the several underwriters named therein (the “Underwriters”), we closed a firm commitment underwritten public offeringagreed to (i) issue to the members of 1,714,286Maham unregistered shares of Common Stock equal to (a) 25% of the dollar value the Members have invested in Maham to date, with all non-cash investment based equity owned by members will be exchanged at the same valuation as the valuation of Maham at the time that such non-cash investment based equity was issued, divided by (b) the market value of OHGI Common Stock, determined in accordance with the terms of the Exchange Agreement, as of the closing date (the “Initial Shares”), and warrants to purchase(ii) upon completion of the second 12-month period following the closing, issue up to an aggregatea maximum of 857,14317,000,000 unregistered shares to the members of Maham on a pro-rata basis based on their holdings, which number of additional shares will be equal to two-and-a-half times (2.5x) the net after-tax earnings of Maham for the First Adjustment Period (as defined in the Maham Exchange Agreement), divided by the market value of our Common Stock. Upon the closing of the Maham transaction, we will own 51% of the issued and outstanding interests in Maham.

Adoption of One Horizon Group, Inc. Amended and Restated 2018 Equity Incentive Plan

Our board of directors and shareholders adopted and approved on November 2, 2018 and December 27, 2018, respectively, the One Horizon Group, Inc. Amended and Restated 2018 Equity Incentive Plan, effective December 27, 2018, under which stock options and restricted stock may be granted to officers, directors, employees and consultants. Under the Plan, 15,000,000 of Common Stock, at a combined offering price of $1.75par value $0.0001 per share, are reserved for issuance, subject to increase pursuant to the terms and accompanying Warrant.conditions as set forth in the Plan.

Recent Developments

Disposition of a Controlling Interest in Banana Whale Studios Pte. Ltd.  

On February 4, 2019, we entered into and consummated an agreement (the “Agreement”) with Banana Whale and the Banana Whale Stockholders, pursuant to which we sold the Controlling Interest in Banana Whale in exchange for $2,000,000, consisting of $1,500,000 in cash and a $500,000 promissory note bearing interest at 5% per annum payable on December 31, 2019 (the “BWS Note”). Under the BWS Note, Banana Whale can prepay the BWS Note in whole or in part without premium or penalty. Pursuant to the UnderwritingBWS Note, the Banana Whale Stockholders agreed to guarantee the payments of all amounts due thereunder on a limited-recourse basis. On February 4, 2019, we also entered into a Pledge and Escrow Agreement with the Banana Whale Stockholders pursuant to which the Banana Whale Stockholders agreed to place the Controlling Interest in Banana Whale in escrow as security for payment of the BWS Note.

The Agreement also terminated certain of the remaining obligations under the Exchange Agreement which was previously entered into by us and the Banana Whale Stockholders, releasing us, Banana Whale and the Banana Whale Stockholders from their remaining obligations thereunder. Pursuant to the Exchange Agreement, we had agreed to acquire the Controlling Interest in Banana Whale in exchange for a number of our shares to be based upon the earnings of Banana Whale. Under the Agreement, the Underwriters exercisedCompany agreed to leave the OHGI Shares in escrow and together with the Banana Whale Stockholders, to instruct the escrow agent that the OHGI Shares will remain in escrow for a period of at least 90 days pending an option to purchase 151,928 additional sharesabsence of asserted claims under the Agreements indemnification provisions.

Recent Voluntary Termination By OHGI of Listing of Common Stock and 75,964 additional warrants. The net proceeds fromon the offering were approximately $2.89 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

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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 stockholders), 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.Nasdaq Capital Market

 

Recent Developments

Notice of Delisting or Failure to Satisfy a Continued Listing Rule

Our common stock commenced trading on the Nasdaq Capital Market (“Nasdaq”) on July 9, 2014 under the ticker symbol “OHGI”. On August 30, 2016,May 10, 2018, the Company received a written alertnotice (the “Notice”) from Nasdaq Listing Qualifications that our listed security has not regained compliance with the minimum $1 bid price per share requirement, within the 180 calendar days. However, the Staff has determinedindicating that the Company is eligible for an additional 180 calendar day period, pursuant toCompany’s common stock did not meet the continued listing requirement as set forth in Nasdaq Listing Rule 5810(c)(3)(a). If at any time during this 180 day period5550(a)(2) based on the closing bid price of ourthe common stock is at least $1 for a minimum of ten consecutivethe preceding 30 business days, we will regain compliance. In order to regain compliance, we may have to affect a reverse stock-split. If we are required to effect a reverse stock-split, it would have to be completed at least 10 days prior to the expiration of the date by which we must regain compliance with Rule 5550(a)(2).days.

 


On February 28, 2017,Under Nasdaq Listing Rule 5810(c)(3)(A), the Company received a notice180-calendar day grace period from The Nasdaq Stock Market LLC (“Nasdaq”) Listing Qualifications Staff (the “Staff”) stating that the Staff has determined, unlessdate of the Notice to regain compliance by meeting the continued listing standard of a minimum closing bid price of at least $1.00 per share for 10 consecutive business days during the 180-calendar day grace period ended on November 6, 2018. During the grace period, the Company timely requests an appeal of the Staff’s determination, before Nasdaq’s Hearing Panel (the “Panel”), by March 7, 2017, to delist the Company’s common stock from the Nasdaq Capital Market because the Company is not in compliance with the $1.00 minimum bid price requirement (the “Minimum Bid Price”) for continued listing set forth in the Nasdaq Listing Rule 5550(a)(2).The Company filed a request for a hearing before the Panel, on March 2, 2017, which request will stay any delisting or suspension action by the Staff pending the issuance of the Panel’s decision and the expiration of any extension granted by the Panel.

On March 3, 2017, the Staff informed the Company that they were granted a hearing to be held on April 20, 2017 (the “Hearing”). As such, the delisting action, referenced above, has been stayed, pending a final written decision by the Panel at the Hearing.

At the Hearing, we will present its planwas unable to regain compliance with the Minimum Bid Price by effectingminimum bid price standard.

In accordance with NASDAQ Listing Rule 5810(c)(3)(A), in addition to such initial grace period, the Company could be afforded an additional 180-calendar day compliance period, provided that on the 180th calendar day of the initial grace period, the Company (i) met the applicable market value of publicly held shares requirement for continued listing and all other applicable requirements for initial listing on the Nasdaq (except for the bid price requirement) and (ii) notified Nasdaq of its intent to cure the minimum bid price deficiency. Prior to expiration of the initial grace period, the Company requested an additional 180-calendar day compliance period and notified Nasdaq of the Company’s compliance with the stated listing standards and its intent to cure the minimum bid price deficiency through a reverse stock split.split, if necessary. On November 7, 2018, the Company received written notification from Nasdaq granting an additional 180-calendar day period, which expires on May 6, 2019, to regain compliance with the minimum bid price requirement described above. This second 180-calendar day period relates exclusively to the bid price deficiency and we could be delisted during the 180-calendar day period for failure to maintain compliance with any other listing requirements that occurs during the 180-calendar day period.

During subsequent interactions between the Company and the Nasdaq it became apparent that the Nasdaq may make a finding of noncompliance with the stockholder approval requirements of Nasdaq Listing Rule 5635 and may initiate delisting proceedings against the Company.

As a result of the foregoing, on February 26, 2019, Martin Ward, Chief Financial Officer of the Company, approved the voluntary termination of the listing of OHGI’s common stock on the Nasdaq. On March 20, 2017,8, 2019, the Company filed a definitive proxy statementan application on Form 25 with the Securities and Exchange Commission in connection with special meetingSEC to voluntarily terminate its Nasdaq listing. The delisting from the Nasdaq became effective on March 8, 2019. As of stockholders (the “Stockholders’ Meeting”) to be heldMarch 8, 2019, the Company’s common stock is quoted on April 14, 2017.  The proposal being submitted is for a votethe OTCQB tier of the stockholders atOTC Markets under the Stockholders’ Meeting isticker symbol “OHGI.” The transition from the approval of a 6Nasdaq to 1the OTCQB did not materially affect the Company’s business operations.

Reverse Stock Split

A reverse stock split of all(“Reverse Stock Split”) of the issued and outstanding shares of the Company’s common stock. Management believes that effectingCommon Stock in the reverse stock split will allow our common stockrange from one-for-two (1-for-2) to regain compliance with Nasdaq Listing Rule 5550(a)(2)one-for-fifty (1-for-50), which should allowratio will be selected by the Company’s common stock to continue to trade on the Nasdaq Capital Market. Assuming the reverse stock split proposal isBoard of Directors was approved by our Board of Directors and by our shareholders at the Company’s stockholders,annual meeting of the Company’s board of directors currently intendsshareholders held on December 27, 2018 as described in that proxy statement on that certain Definitive Schedule 14A filed with the SEC on November 28, 2018. We will announce publicly our plans to effect the reverse stock split immediately afterReverse Stock Split once the Stockholders’ Meeting, unless it determines that doing so would not have the desired effectBoard of satisfying the Minimum Bid Price requirement.

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IndustryDirectors makes its determination.

 

Rapid Growth in Global Mobile Voice over IP Service MarketCorporate Information

 

We aimOur principal executive offices are located at 649 NE 81st Street, Miami, Florida 33138, and our telephone number at that location is (305) 420-6640. The URL for our website is www.onehorizongroup.com. The information contained on or connected to deliver our patented smartphone software towebsite is not incorporated by reference into, and you must not consider the ever expanding mobile Voice over IP (“mVoIP”) user. By 2019 there are expected to be over 2.7 billion smartphones consumers, or more than one-third of all people worldwide (Source: https://www.statista.com/statistics/330695/number-of-smartphone-users-worldwide. Each new smartphone represents an opportunity for us to deliver our innovative mobile VoIP, Messaging over IP and Advertising over IP solution in whatever mobile app brand is attractive to the end user throughout the globe.

By partnering with national carriers and delivering our solution as a licensed service to regional mobile operators, we leverage the power of their brand and join them to fight back against already lost revenues, or potential revenue loss, to network bandwidth-intensive Over The Top (“OTT”) VoIP apps; such as SkypeTM in the USA or LineTM in Japan and the like.

In the past mobile operators relied upon blocking VoIP on their networks but they have realized that this is no longer a viable option. They must embrace innovations in VoIP software, especially on the smartphone, from businesses like ours. Not only can we offer a multi-media, multi-faceted software solution to smartphones, but we are the only company that offers a package that aids the operators in the rollout, expansion, maintenance and upgrade of their mobile network in metro and rural areas to cater for smartphones.

From the beginning of the first smartphones in 2008, our software was specifically targetedinformation to be a disruptive technology, which was and has been explicitly designed, and patented, to workpart of, this Annual Report on congested wireless Internet connections; the absolute fundamental basis of mobile phones in 2016 and beyond.Form 10-K.

 

As moreDuring the year ended December 31, 2017, we restructured our operations and more smartphones come online, each one places a significantly higher loadsimplified and strengthened our capital structure by:

Selling certain of our operating subsidiaries (the “Discontinued Entities”) to our former Chief Executive Officer pursuant to a Stock Purchase Agreement entered into August 10, 2017, in consideration for the forgiveness of $1,968,243 payable to our former CEO.

Issuing: (A) (i) 13,000,000 shares of our common stock in exchange for $3,000,000 principal amount of an outstanding subordinated debenture in the principal amount of $3,500,000 and the forgiveness of accrued and unpaid interest thereon, and (ii) our 7% promissory note in the principal amount of $500,000 for the surrender of the remaining principal amount of the debenture; (B) 4,000,000 shares of our common stock and our 7% promissory note in the principal amount of $500,000 for all of the outstanding shares of our Series A-1 Convertible Preferred Stock; and (C) 859,802 shares of our common stock to our Chief Financial Officer in exchange for $662,048 of indebtedness payable to him.


The restructuring and simplification and strengthening of our capital structure has allowed us to concentrate on the existing cellular infrastructure;developing our secure messaging business, which has focused on gaming, educational and security applications in China and Hong Kong, while seeking acquisition opportunities. In September 2017, Mark White who had previously served as smartphone users now use smartphoneour Chief Executive Officer, was appointed Chief Executive Officer to check for emails, surf the Internet, check the weather, read the news, etc. while in the past, all a mobile phone did was callingdevelop and Short Messaging (SMS). In order for carriers to keep up with the explosive growth of smartphones and their increased network consumption they are in need of any possible tool to assist them in managing their network and maintaining relevance on the users’ device.implement our acquisition strategy.

 

We offer operators a mobile VoIP call that has ten (10) times less bandwidth than a standard telephone call over GSM or legacy mobile VoIP solutions such as Session Initiation Protocol (“SIP”). This gives operators a higher quality call on busy and legacy networks such as 2G, 3G and congested metro-based 4G using less bandwidth; meaning more bang for their “spectrum buck”. We will not replace traditional calls nor prevent the delivery of newer call types such as Voice over LTE (“VoLTE”) etc., but we give operators yet another tool in their arsenal to deliver the best quality voice, for the best value, for their diversified customer bases.

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Our Technology

Our TechnologyStrategy

We have a very detailed knowledge of these wireless data network issues and have invented a totally new solution to successfully deliver a high quality voice call over a wireless Internet connection. Our solution is designed specifically to address such issues as call latency (i.e. delay) and network jitter (i.e. lost data) in a way that achieves a much higher likelihood of a voice packet (i.e. tiny piece of recorded voice) arriving in time and not being lost or delayed. Our awareness of these problems led us to develop a completely new algorithm for sending and receiving (and ordering) voice packets so as to reduce the likelihood of packet loss due to congestion, which we call SmartPacket™; and to the end user this just means near HD audio at a fraction of the cellular consumption.

 

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SmartPacket™ Technology

 

The core of the Horizon solutionCompany’s strategy is our truly innovative, and patented, SmartPacket™ technology. This enables VoIP from only 2 kilobytes/second (kbps) compared to around 8kbps and upwards from other VoIP platforms available today.  This industry-leading solution has been developed in-house and is fully compatible with digital telecommunications standards.  This technology is capable of interconnecting any phone system over IP - on mobile, fixed and satellite networks.  Our SmartPacket™ technology is not based on legacy SIP (Session Initiation Protocol) or RTP (Real-time Transport Protocol).  Rather, the Horizon signaling protocol is much simpler and benchmark testing has shown that it consumes significantly less bandwidth for the same audio quality score.  Our SmartPacket™ technology is the world’s most bandwidth efficient IP communication platform designed for mobile communications. The technology optimizes voice flow, delivery and playback and delivers excellent call quality, reduced delays and drops.   As amake further illustration, the technology is considerably more efficientacquisitions in the way it handles silence.  Traditional VoIP calls senddigital media and entertainment space, while continuing to trade in the same amount of datasecure messaging business in both directions, regardless of whether or not someone is speaking.  SmartPacket™ technology is designed to detect silencegaming, educational and send tiny “indications of silence”, rather than the silence itself. This massively reduces the amount of data transmitted, lowers the load on the cellular infrastructure which, in turn, means that more data can get through.  This results in higher audio quality and a better user experience.security segments.

 

Our Benchmark Testing: Horizon vs the biggest smartphone VoIP technologies in the world

University published testing has shown that Horizon is up to 8.8 times more efficient, depending on which one of our voice compression settings is selected by the user. 

 

Proprietary Technology

The Horizon Platform has been developed entirely in-house, patented, and is fully compatible with digital telecommunications standards. It is capable of interconnecting any phone system over IP – on mobile, fixed and satellite networks.

The Horizon Platform was initially developed for the burgeoning smartphone market and the challenging mobile VoIP over satellite market by Abbey Technology to make the best use of the limited wireless bandwidth available and to minimize the amount of data consumed.

We further developed the Horizon Platform for the broader telecommunications market on Apple’s iOS, Google’s Android and a Windows PC client focusing on the mobile Internet sector. This sector also benefits from our optimized mobile VoIP as it allows voice calls over new and legacy cellular telecom data networks. With the explosive growth in smartphone sales and increased usage of mobile data services, mobile operators face the challenge of dealing with increasingly congested networks, more dropped calls and rising levels of churn. Since the wireless spectrum is a finite resource, it is not always possible, or can be cost prohibitive, to increase network capacity. For these reasons, we believe that the demand for solutions to optimize the use of IP bandwidth will inevitably increase.

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Our Strategy

We have developed a mobile application template called “Horizon Call,” that enables highly bandwidth-efficient VoIP calls over a smartphone using a 2G/EDGE, 3G, 4G/LTE, WiFi or Satellite connection. Our Horizon Call application is currently available for the iPhone and for Android handsets and we use it to showcase all of our functions, features, our call quality and the level of software innovation that we can brand for our potential clients.

Unlike the majority of mobile VoIP applications, Horizon Call creates a white-label business-to-business solution for mobile operators. Telecommunications operators are able to license from us, brand with us and deploy with us a completely new “white-labeled” solution so that they can optimize their highly pressurized mobile internet bandwidth and deliver innovation that in turn brings them new smartphone users. The operators decide how to integrate our application within their portfolio, how to offer it commercially and can customize it according to their own branding.  Our solution helps them to manage increased traffic volumes while combating the competitive threat to their voice telephony revenues from other mobile VoIP applications by giving its mobile data customers a more efficient mobile VoIP solution that adds value to their mobile data network.

We are positioning ourselves as an operator-enabler by licensing our technology to mobile operators in a manner that can be fully customized to the needs of their subscribers. As shown below, operators are able to offer our platform to deliver branded smartphone applications to their existing customers to reduce lost Voice/Text revenue and minimize customer churn.

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By offering Horizon Call to their existing customer base, our customers can offer innovative data-based voice and data services that are different from the existing Over The Top (“OTT”) data applications running on their networks. OTT refers to voice and messaging services that are delivered by a third party to an end user’s smartphone, leaving the mobile network provider responsible only for transporting internet data packets and not the value-added content. The Horizon Call voice services allow mobile operators’ customers to make VoIP calls under mobile operators’ call plans, thereby allowing mobile operators to capture value-added content, including voice calls, text messaging, voice messaging, group messaging, multimedia messaging, and advertising, that would have otherwise gone to the providers of other OTT services.

Horizon Call runs on both smartphone and tablet devices and, as networks become more congested, software services such as Horizon Call become ever more relevant. We believe that although more network capacity will eventually come on stream with 4G/LTE, it, like all other highways, will quickly become congested and this is why we believe that Horizon Call is ideally placed to add value to mobile data networks.

Incumbent mobile operators are suffering a reduction in revenue per user due to the OTT software services on mobile devices. OTT applications, such as Skype and Line, can negatively impact mobile operators’ traditional revenue streams of voice and SMS (short message service). As shown below, the Horizon Platform positions the Company to enable mobile operators to operate their own OTT solution branded in their image allowing use on all mobile data networks.

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In addition to delivering new data services to their existing customers, mobile operators can offer their brand of Horizon Call on anyother operators’ handsets. Because the Horizon Call application can be installed on the smartphone from the Internet, the potential customer base for the operators’ data application surpasses the customer base that they can reach through traditional mobile phone SIM card distribution. We believe that this service innovation, coupled with the fact that the Horizon Call application can also use existing mobile operator pre-paid credit redemption and distribution services, presents a very compelling service against OTT services.

We believe that emerging markets represent a key opportunity for Horizon Call because these are significant markets with high population densities, high penetration of mobile phones, congested mobile cellular networks and high growth in the adoption of smartphones.  It is forecast that over 2.7 billion people will use smartphones in 2019.  Asia-Pacific will account for over half of all smartphone users in 2016, estimated at 1.1 billion users. Globally, China is the largest smartphone market with an estimated 563.1 million handsets. These factors will put increased pressure on mobile operators to manage their network availability.

In this context, where necessary, we have created our own brand in China, called Aishuo, formed a number of strategic ventures with local partners in regions of various emerging markets to seize upon this opportunity.

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Marketing

Our marketing objective is to become a broadly adopted solution in the regions of the world with large concentrations of smartphone users and high network congestion. We aim at becoming the preferred solution for carriers who wish to deploy branded VoIP solutions that enable them to minimize revenue erosion, reduce churn, increase the effective capacity of their network infrastructure and improve user experience. We employ an integrated multi-channel approach to marketing, whereby we evaluate and focus our efforts on selling through telecommunications companies to enable them to provide the Horizon Platform to their customers. We routinely evaluate our marketing efforts and try to reallocate budgets to identify more effective media mixes.

We conduct marketing research to gain consumer insights into brand, product, and service performance, and utilize those findings to improve our messaging and media plans. Market research is also leveraged in the areas of testing, retention marketing, and product marketing to ensure that we bring compelling products and services to market.

Sales

Direct Sales. Our primary sales channel for the products and services of Horizon Platform is the sale of Horizon Platforms to Tier 1 and Tier 2 telecommunications companies to enable them to provide the product and services to their customers. We continue our efforts to develop new customers globally but particularly in Asia, Africa and Latin America.

Strategic Ventures.In addition to our direct sales channel, we also offer increased sales through our strategic venture channel. In this context, as mentioned above, we are working towards forming a number of strategic ventures in areas where regulatory issues require local representation.

Target Markets. The markets for our primary and joint venture channels will have high population density, high penetration of mobile phones, congested mobile cellular networks and high growth in the adoption of smartphones.

Competition

Our direct competitors for its technology primarily consist of systems integrators that combine various elements of SIP (Session Initiation Protocol) dialers and media gateways. Other dial-back solutions exist but they are not IP-based. Because SIP dialers and media gateways currently are unable to provide a low bandwidth solution, they do not currently compete with the Company’s technology in those markets in which their high bandwidth needs are unsupported by the existing cellular networks. They do, however, compete in those markets where the cellular networks are accessible by those SIP dialers and gateways.

We license the Horizon Platform to mobile operators, who in turn may offer the application to their end-user subscribers. The Company’s principal competitors for the mobile operators’ end-users are Skype, Viber, WeChat, and WhatsApp. Having a mobile operator’s subscriber opt to use the operator’s (branded) Horizon Call service instead of existing OTT services means that the mobile operator will gain market share of some of the OTT voice and messaging traffic. We are currently unaware of any other companies that seek to license VoIP technology directly to mobile operators.

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One of our key competitive advantages is that we are not a threat to mobile operators. Rather, the Company’s Horizon Platform is a tool that can be used by mobile operators to compete against the OTT provider’s applications that are running on their networks. Through the Horizon Platform, mobile operators are able to compete directly with OTT services that, by their design, divert voice and messaging services away from mobile operators. The solution is delivered completely and is easy to install and operate. This means that a mobile operator has a turnkey mobile voice and messaging solution to deploy to its customer (i.e., the end-user).

The turnkey Horizon software platform and the Horizon SmartPacket™ technology give us a competitive advantage by managing credit, routing, rating, security, performance, billing and monitoring. Horizon SmartPacket™ is the world’s lowest bandwidth voice compression and transmission protocol and is 100% developed and owned by the Company. Though other software companies can offer part of this solution space, we believe none offers it in such a complete and integrated fashion as we do. We believe it will take a substantial number of years to copy/replicate the Horizon Platform in its entirety, by which time we believe the Horizon Platform will have improved and further distanced itself from potential competition.

Intellectual Property

Our strategy with respect to our intellectual property is to patent our core software concepts wherever possible. The Company’s current software patent has been approved in the United States and is pending in other jurisdictions around the world. Our patent strategy serves to protects the Horizon Platform and the central processing service of the Horizon Platform.

The Company endeavors to protect its internally developed systems and technologies. All of our software is developed “in-house,” and then licensed to our customers. We take steps, including by contracts, to ensure that any changes, modifications or additions to the Horizon Platform requested by our customers remain the sole intellectual property of the Company.

Research and Development and Software Products

We have spent approximately $0.5 million on capitalizable research and development during 2016.

Throughout 2016 we continued with our focus on innovation and our research and development teams (“R&D”) brought us software 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 lower per minute rate 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.

We also expanded our R&D effort into the cellular operators' core network with a feature set 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 way and then allowing this USSD top up to be applied to a mobile VoIP smartphone app, an industry first.

The Cyber-Security 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 leveraging the power of Virtual Private Networks (VPN) native client 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. Management expect this platform to drive a new revenue stream for Cyber Secure VoIP.

Also in 2016 our Cyber-Security R&D team delivered a stand alone version of our optimized VoIP core network server software for vertical markets covering Government, Banks and Small to Medium Enterprises that ensures privacy of their internal voice and messaging services in a cryptographically secure way. Our stand alone service can be installed on-site at the customer and requires minimal operational support thereby delivering secure communications in a cost efficient manner.

18

R&D also delivered a standalone Lawful Intercept module for operators that are legally required to have call recording features. This service is capable of recording calls from VoIP application on the handset to another handset or to the traditional telephone network. Such features are required by regulators in certain jurisdictions around the world.  This feature also allows our mobile solution to internet connect with Microsoft's Skype for Business Unified Communication platform.

R&D also delivered a complete mobile app telephone conferencing service where a user of our VoIP service can bring in other parties to an on-going call, an ad-hoc conference. This feature is targeting the B2B user that may need multi-party calls on lower quality or congested mobile data networks.

R&D delivered a complete integration into one of Africa's largest micropayments platforms, Ecocash.  App users can now securely pay for their calls from inside the app using this widely used payment solution.

Cyber-Security team delivered a completely new security messaging solution with external key-broker for the ultimate in message security.  Using our solution, not even the service-host can decrypt the app-app messages as the keys are not available inside the core network.  Our distributed key broker can be located anywhere in the world, independent of the service-host passing messages thereby guaranteeing message security for the end to end communication.

R&D delivered a bespoke real-time network quality monitor that automatically adjusts the bandwidth consumed by a handset for a VoIP call depending out network strength.  This allow for a much smoother call with reduced jitter and enhanced user acceptance.

R&D commenced the development work on iOS for the latest Apple CallKit service.

Cyber-Security R&D team commenced development on an encrypted call solution that can avail of the independent key broker service for the ultimate in VoIP security.

19

Employees

 

As of December 31, 2016,2018, we had 2313 employees, all of whom were full-time employees.

ITEM 1A. RISK FACTORS

RISKS RELATED TO OUR BUSINESS

We incurred a net loss in 2018 and 2017 with negative cash flows and we cannot assure you as to when, or if, we will become profitable and generate positive cash flows.

We incurred a net loss of $13.8 million for the year ended December 31, 2018 and a net loss of $7.5 million for the year ended December 31, 2017 and negative cash flows from operations of $3.0 million for the year ended December 31, 2018 and $0.4 million for the year ended December 31, 2017. Such losses have historically required us to seek additional funding through the issuance of debt or equity securities. Our long term success is dependent upon among other things, achieving positive cash flows from operations and if necessary, augmenting such cash flows using external resources to satisfy our cash needs.

We may be unable to effectively manage our planned expansion.

Our planned expansion may strain our financial resources. In addition, any significant growth into new markets may require an expansion of our employee base for managerial, operational, financial, and other purposes. During any growth, we may face problems related to our operational and financial systems and controls. We would also need to continue to expand, train and manage our employee base. Continued future growth will impose significant added responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees.

If we are unable to successfully manage our expansion, we may encounter operational and financial difficulties which would in turn adversely affect our business and financial results.


We may require additional funding for our growth plans, and such funding may result in a dilution of your investment.

We have estimated our funding requirements in order to implement our growth plans. If the costs of implementing such plans should exceed these estimates significantly or if we come across opportunities to grow through expansion plans which cannot be predicted at this time, and our funds generated from our operations prove insufficient for such purposes, we may need to raise additional funds to meet these funding requirements.

These additional funds may be raised by issuing equity or debt securities or by borrowing from banks or other resources. We cannot assure you that we will be able to obtain any additional financing on terms that are acceptable to us, or at all. If we fail to obtain additional financing on terms that are acceptable to us, we will not be able to implement such plans fully if at all. Such financing even if obtained, may be accompanied by conditions that limit our ability to pay dividends or require us to seek lenders’ consent for payment of dividends, or restrict our freedom to operate our business by requiring lender’s consent for certain corporate actions.

Further, if we raise additional funds by way of a rights offering or through the issuance of new shares, any shareholders who are unable or unwilling to participate in such an additional round of fund raising may suffer dilution in their investment.

The activities of 123 Wish are subject to regulation in certain jurisdictions, and the failure to comply with those regulations could result in fines and other penalties.

Certain jurisdictions, including California where 123 Wish maintains it principal offices, have regulations that require 123 Wish to register as a commercial fundraiser and notify governmental authorities of events that it is sponsoring. The failure to comply with applicable regulations could subject 123 Wish to fines and other penalties, including being enjoined from conducting solicitation activities for charitable purposes within the jurisdiction and other civil remedies provided by law.

Our operations and managements are partially located outside of the United States; U.S. investors may experience difficulties in attempting to effect service of process and to enforce judgments based upon U.S. federal securities laws against the company and its non U.S. resident officers and directors.

While we are organized under the laws of State of Delaware, our management, our officers and directors are non-U.S. residents, and our headquarters are located outside of the United States. Consequently, it may be difficult for investors to effect service of process on such officers and directors in the United States and to enforce in the United States judgments obtained in United States courts against such persons based on the civil liability provisions of the United States securities laws. Since all our assets are located outside of the U.S. it may be difficult or impossible for U.S. investors to collect a judgment against us. As well, any judgment obtained in the United States against us may not be enforceable.

We are dependent on our management team and the loss of any key member of that team could have a material adverse effect on our operations and financial condition.

We attribute our success to the leadership and contributions of our managing team comprising executive directors and key executives, in particular to Mark White, our Chief Executive Officer, and Martin Ward, our Chief Financial Officer.


Our continued success is therefore dependent to a large extent on our ability to retain the services of these key management personnel. The loss of their services without timely and qualified replacement, would adversely affect our operations and hence, our revenue and profits.

We may not have sufficient insurance coverage and an interruption of our business or loss of a significant amount of property could have a material adverse effect on our financial condition and operations.

We currently do not maintain any insurance policies against loss of key personnel and business interruption as well as product liability claims. If such events were to occur, our business, financial performance and financial position may be materially and adversely affected.

We may be unable to adequately safeguard our intellectual property or we may face claims that may be costly to resolve or that limit our ability to use such intellectual property in the future.

Our business is reliant on our intellectual property. Our software is the result of our research and development efforts, which we believe to be proprietary and unique. However, we are unable to assure you that third parties will not assert infringement claims against us in respect of our intellectual property or that such claims will not be successful. It may be difficult for us to establish or protect our intellectual property against such third parties and we could incur substantial costs and diversion of management resources in defending any claims relating to proprietary rights. If any party succeeds in asserting a claim against us relating to the disputed intellectual property, we may need to obtain licenses to continue to use the same. We cannot assure you that we will be able to obtain these licenses on commercially reasonable terms, if at all. The failure to obtain the necessary licenses or other rights could cause our business results to suffer.

Where litigation is necessary to safeguard our intellectual property, or to determine the validity and scope of the proprietary rights of others, this could result in substantial costs and diversion of our resources and could have a material adverse effect on our business, financial condition, operating results or future prospects.

RISKSRELATED TO OUR COMMON STOCK AND OUR STATUS AS A PUBLIC COMPANY.

As a result of being a public company, we are subject to additional reporting and corporate governance requirements that will require additional management time, resources and expense.

As a public company we are obligated to file with the SEC annual and quarterly information and other reports that are specified in the Exchange Act. We are also subject to other reporting and corporate governance requirements under the Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations promulgated thereunder, all of which impose significant compliance and reporting obligations upon us and require us to incur additional expense in order to fulfill such obligations.


Our shares of common stock are from time to time thinly-traded, so stockholders may be unable to sell at or near ask prices or at all if they need to sell shares to raise money or otherwise desire to liquidate their shares.

Our common stock has from time to time been “thinly traded,” meaning that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give stockholders any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained.

There is only a limited public market for our common stock and a large number of outstanding shares of common stock may be sold in the market.

A substantial number of our shares of common stock are freely tradeable without restriction or further registration under the Securities Act any may be sold in the public market which may cause the market price of our common stock to decline. Because the Company believes Mr. Zhanming Wu is not an affiliate, as that term is defined in Rule 144 under the Securities Act, and has beneficially owned his shares for more than one year, the shares of common stock available for sale in the market include 15,484,039 shares currently owned by him.

We do not expect to pay dividends in the foreseeable future.

We do not intend to declare dividends for the foreseeable future, as we anticipate that we will reinvest any future earnings in the development and growth of our business. Therefore, investors will not receive any funds unless they sell their common stock, and stockholders may be unable to sell their shares on favorable terms. We cannot assure you of a positive return on investment or that you will not lose the entire amount of your investment in our common stock.

Certain provisions of the General Corporation Law of the State of Delaware may have anti-takeover effects, which may make an acquisition of our company by another company more difficult.

We are subject to the provisions of Section 203 of the General Corporation Law of the State of Delaware, which prohibits a Delaware corporation from engaging in any business combination, including mergers and asset sales, with an interested stockholder (generally, a 15% or greater stockholder) for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The operation of Section 203 may have anti-takeover effects, which could delay, defer or prevent a takeover attempt that a holder of our common stock might consider in its best interest.

 

ITEM 2.  PROPERTIES

 

We do not currently own any real property. In March 2017, we leasedWe lease the following offices:

 

Location Approximate size Approximate monthly rent 
      
Ireland 840 sqft $2,050 
China 1,900 sqft $1,400 
UK 120 sqft $1, 250 

Executive Offices

Our executive offices are located at T1-017 Tierney Building, University of Limerick, Limerick, Ireland.

Location Approximate size Approximate monthly rent 
      
Hong Kong 150 sqft $1,900 
USA 1,000 sqft $1,400 
UK 120 sqft $1,250 

 

ITEM 3. 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.

Since 2014 the Company has been involved in legal proceedings with Broadband Satellite Services Limited (“BSS”) to whom we sold had sold former subsidiaries in 2012.  In December 2016 the parties agreed to drop their respective claims and counterclaims without any payment required to paid by either party. As a result we have written off receivable amounts due by BSS totaling $455,000 in the Company’s books having provided previously an amount totaling $605,000 against the original unpaid sales invoices.

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

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PART II

 

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

 

Our common stock is quoted on the NASDAQ CapitalOTCQB Venture Market under the symbol OHGI. Prior to March 8, 2019, our Company’s common stock was listed on the NASDAQ Capital Market.

 

The following table sets forth the high and low bid information, as reported by Nasdaq on its website, www.nasdaq.com, for our common stock for each quarterly period in 2016 and 2015.Record Holders

  Low  High 
       
Fiscal year ending December 31, 2016:        
Quarter ended December 31 $0.22  $0.65 
Quarter ended September 30  0.52   1.27 
Quarter ended June 30  0.61   0.85 
Quarter ended March 31  0.78   1.17 
         
Fiscal year ending December 31, 2015:        
Quarter ended December 31 $0.90  $1.62 
Quarter ended September 30  1.11   3.34 
Quarter ended June 30  1.03   5.84 
Quarter ended March 31  1.21   3.92 

 

As of April 3, 2017, the closing bid price of the common stock was $0.28 and10, 2019, we had approximately 37,316,714269 record holders of our common stock. This number excludes any estimate by us of theThe number of beneficial owners of sharesrecord holders does not include persons who held our common stock in street name, the accuracy of which cannot be guaranteed.

nominee or “street name” accounts through brokers.

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Dividend Policy

 

The payment of cash dividends by us is within the discretion of our board of directors and depends in part upon our earnings levels, capital requirements, financial condition, any restrictive loan covenants, and other factors our board considers relevant. Since the share exchange in 2012, weWe have not declared or paid any dividends on our common stock, during the periods included in this report, and we do not anticipate paying such dividends in the foreseeable future. We intend to retain earnings, if any, to finance our operations and expansion.

 

Description of Equity Compensation Plans Approved by ShareholdersStock compensation

Prior to the Share Exchange, One Horizon UK had authorized securities for issuance under equity compensation plans that have not been approved by the stockholders, but none under equity compensation plans that were approved by the stockholders. The following table shows the aggregate amount of securities authorized for issuance under all equity compensation plans as of December 31, 2016:

Number of securities to be issued upon exercise of outstanding options,
warrants and rights
(a)
    Weighted-
average
exercise price
of
outstanding
options,
warrants and
rights
(b)
  Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
(c)
 
             
Equity compensation plans approved by security holders  847,500  $2.47   4,936,000 

 

The securities referencedshareholders approved a stock option plan on August 6, 2013, the 2013 Equity Incentive Plan (“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 have been no options issued in the table above reflect stockyear ended December 31, 2018 and there are no options granted and approved by security holders pursuant to the 2013 plan.outstanding as at December 31, 2018.

 

In addition share optionsSales of Unregistered Equity Securities

On December 6, 2017, we entered into an agreement with Maxim Group LLC (“Maxim”) for investment banking and advisory services. Under the agreement we agreed to issue 225,000 shares of common stock to Maxim. The certificates evidencing the shares were issued to employees under previous unapproved plans, 875,700 of such options are fully vested.  583,800 of such options are expiring in 2020;2018 and 291,900 are expiring in 2022. The number of optionswere endorsed with, the customary Securities Act legend. Except as previously reported in the table above reflect a conversion that occurred in connection withreports we have filed under the Share Exchange wherebyAct, we have not issued or sold any other unregistered equity securities during the number of options (to purchase One Horizon UK shares) heldperiod by each employee was increased by 175.14 times and the exercise price was decreased by the option exercise price divided by 175.14, and additionally reflect a 1-for-600 reverse stock split effected as of August 6, 2013.this report. 

 

On April 5, 2018 the Company entered into a “Buy-Side” agreement with Maxim for 12 months ending April 4, 2019 whereby Maxim would act for the Company in introducing an acquisition target. The Company agreed the annual fee of 225,000 shares of common stock together with a cash fee equivalent to 3% of the agreed price of any such acquisition.

On September 2, 2018 the investment bank advisory agreement signed in December 2017 was extended to a minimum period of 24 months with it terminating thereafter by either party giving a minimum of 15 days written notice of cancellation. The Company issued 500,000 shares of common stock in compensation for this contract extension.

Repurchases of Equity Securities

 

We have not repurchased any equity securities during the periodsperiod covered by this Report.report.

 

ITEM 6.  SELECTED FINANCIAL DATA

 

Not applicable.

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ITEM 7.  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 audited consolidated financial statements and notes for the fiscal years ended December 31, 20162018 and 2015.2017. The following discussion and analysis contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Our actual results may differ significantly from the results, expectations and plans discussed in these forward-looking statements. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

See “Cautionary Note Concerning Forward-Looking Statements.” You also should specifically consider the various risk factors identified in this report that could cause actual results to differ materially from those anticipated in these forward-looking statements.

 

Overview

 

One Horizon Group, Inc.During the year ended December 31, 2018, the Company continued to generate cash losses related to the legacy operations (Horizon Globex/VoIP Business). For the year ended December 31, 2018 the Company’s net loss totaled $13.8 million. The losses were primarily made up of non-cash items totaling $11.2 million including, impairment charges, amortization of intangible assets, issuance of common stock warrants for services received, amortization of debt issue costs and its Subsidiaries (the “Company”) is the inventor of the patentedSmartPacketTM Voice over Internet Protocol (“VoIP”) platform. Our proprietary 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 networksdebt discounts, and the expansion of enterprise bring-your-own- device to work programs.non cash other income.

 

TheDuring 2018, the Company designs, develops and sells white label SmartPacketTMVoIP software and services to large Tier-1 telecommunications operators. Our licensees market and deliver an operator-branded mobile Internet communication solution to smartphones including VoIP, multi-media messaging, video, conference calling, and mobile advertising to their retail subscribers; and to theirBusiness to Business(“B2B”)has pursued investments in the digital media business subscribers.

The SmartPacket™ 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 reduced battery usage while transmitting a VoIP call on a smartphone. This is of commercial interest to operators that wish to have a high quality VoIP call on congested metropolitan 4G networks and on legacy 2GFebruary 22, 2018, acquired a controlling interest in Once In A Lifetime, LLC d/b/a 123Wish (www.123wish.com), anexperience based platform that offers participants an opportunity to play and 3G cellular networkswin unique experiences from renowned celebrities, influencers, athletes, designers, artists, luxury items and our optimizations benefits operators by reducing their payments by over 10x to overseas operators when their subscribers make VoIP calls whilst roaming.

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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 representsmore while supporting a very large opportunity for future growth in sales.

 

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By leveraging its SmartPacketTM solution, the Company is also a VoIP as a Service (“VaaS”) cloud communications leader for hosted smartphone VoIP that run globally on the Microsoft Azure cloud. The Company sells its software, 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.

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; Since its inception in the second quarter of 2015 Aishuo has been downloaded over 40 million times and has increased its revenues for the first 5 quarters of operations. Aishuo offers subscribers very competitive telephone call rates and a travel-SIM rental service plus lots of innovative smartphone social media features. Aishuo has been made available to users across 25 Chinese Android app stores and through iTunes. Aishuo subscribers pay for VoIP or can have a free VoIP call sponsored by advertisers. Aishuo supports top-up payment services inside the smartphone app including China UnionPay, Apple In-App Purchases, Alibaba’s Alipay and Tencent’s Wechat Wallet.

Our business model is focused on winning newB2BTier-1 telecommunications operators, winning newVaaSsubscribers and drivingAishuoretail revenues. We are also commercially focused on expanding sales of new and existing licensed products and services to existing customers, and renewing subscriptions and software support agreements. We target customers of all sizes and across a broaddiverse 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 February 2015, we announced the rollout of our platform in China, brand named, Aishuo. The Aishuo platform provides VoIP services, a travel SIM solution delivered through a People’s Republic of China (“PRC”) entity controlled by us via various contractual arrangements, Suzhou Aishuo. The Aishuo product has been delivered to the major stores in Chinese App marketplace including Baidu’s 91.com and Baidu.com, the Tencent App store MyApp.com, 360 Qihoo store 360.cn, Apple’s iTunes and the ever growing Xiaomi store mi.com. The Aishuo smartphone app is expected to drive multiple revenue streams from the supply of its value-added services including the rental of Chinese telephone phone numbers linked to the app, low cost local and international calling plans and sponsorship from advertisers. Subscribers can top up their app credit from the biggest online payment services in China including AliPay (from Alibaba), Union Pay, PayPal and Tencent’s WeChat payment service.

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 September 30, 2016, we had exceeded our two year target of 15 million and in December 2016 had grown to over 40 million downloads of Aishuo smartphone app.

Also during 2016 Company was granted a 20-year patent for Invention in the People's Republic of China for its mobile VoIP software solution.charities.

 

In addition on March 20, 2018, we acquired all of the outstanding shares of C-Rod, Inc., a Florida corporation, including its record label, Velveteen Entertainment, and media division, Mues Media (collectively, the “C-Rod Companies”), pursuant to an Exchange Agreement with C-Rod, Inc., Christopher Rodriguez and Patricia Rodriguez, in exchange for $150,000 in cash and 3,376,000 shares of our common stock plus an additional number of shares of our common stock based upon the developmentsnet after tax earnings of C-Rod during the two years ending after the completion of the acquisition.

The C-Rod Companies will continue business operations as ‘Love Media House,’ a wholly owned subsidiary of our company.

Love Media House, a premier music production company founded in 2002 by Grammy-nominated, multi-platinum producer and composer Christopher Rodriguez, regularlyworks with superstar artists, which have included many celebrity acts such as Rihanna, Jennifer Lopez, Lady Gaga, Enrique Iglesias and Pet Shop Boys.

In May 2018 the rolloutCompany acquired a 51% interest of Aishuo smartphone app brand in mainland China, we delivered a data roaming VoIP solution with, Smart Communications, the Philippines' leading wireless service provider with an estimated 55 million prepaid subscribers. For the first time, 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/smartroamerSingaporean Gaming Software developer called Banana Whale Studios PTE Ltd.(“BWS”). The management expect this commercial rolloutBWS required funding of an optimized data voice solutionthe development of the software games and the Company provided the necessary funding. In February 2019 the Company sold its interest in BWS for roamers to drive further mobile operator interest$2.0 million and the results for BWS are reflected in discontinued operations in the Company’s productsfinancial statements.

On October 23, 2018 the Company acquired a 51% stake in Browning Production & Entertainment, Inc., a Television production company with productions on Over The Top platforms like “Wine Warriors” and “Training Grounds”.

On February 21, 2019 the Company entered into an exchange agreement to drive revenuesacquire a 51% share of the Maham LLC, an innovative, technology- driven yoga studio concept. The purchase price is ultimately based on 2.5 times the aggregate net profit earned during the 24 month period from its rolloutclosing.


Results of Operations

The following table sets forth information from our statements of operations for the years ended December 31, 2018 and 2017. 

Comparison of year ended December 31, 2018 and 2017 (in thousands) excluding discontinued items.

  For the Year Ended  Year to Year Comparison 
  December 31,  Increase/  Percentage 
  2018  2017  (decrease)  Change 
             
Revenue $787  $714  $73   10.2%
                 
Cost of revenue                
Software and production costs  91      91   N/A 
Amortization of intangible assets  2,148   855   1,293   151.2%
   2,239   855         
                 
Gross deficit  (1,452)  (141)  (1,311)  (929.8)%
                 
Operating Expenses                
                 
General and administrative  7,139   4,236   2,903   68.5%
Acquisition services  1,874      1,874    N/A 
Depreciation  1   17   (16)  (94.1)%
Impairment charge  3,761      3,761   N/A 
Total Operating Expenses  12,775   4,253   8,522   200.4%
                 
Loss from Operations  (14,227)  (4,394)  9,833   223.8%
                 
Other Income(expense)                
Interest expense  (428)  (666)  238   35.7%
Other Income  989      989   N/A 
Foreign currency exchange (losses) gains  (5)  1   (6  (600.0)%
                 
                 
Loss from continuing operations (13,671) (5,059)  (8,612)  (170.2)%

Revenue: Our revenue for continuing operations for the year ended December 31, 2018 was approximately $787,000 as compared to Filipinos throughoutapproximately $714,000 for the year ended December 31, 2017, an increase of approximately $73,000 or 10.2%. The increase was primarily due to revenue generated from companies acquired in the year.


Cost of Revenue: Cost of revenue was primarily the amortization of intangible assets relating to subsidiaries acquired together with intellectual property associated with the secure messaging.

Gross Deficit:  Gross deficit for the year ended December 31, 2018 was approximately $1.45 million as compared to $0.15 million for the year ended December 31, 2017. The increased deficit is primarily due to the increase in amortization.

Operating Expenses: Operating expenses including general and administrative expenses, consultancy expenses, depreciation and impairment charges were approximately $12.8 million for the year ended December 31, 2018, as compared to approximately $4.3 million, for the same period in 2017, an increase of approximately $8.5 million or 200%. The increase in expenses primarily arose due to an increase in non-cash consulting expenses paid in shares and an impairment charge related to our secure messaging software.

Other Income (Expense): Net other income totaled $0.56 million for the year ended December 31, 2018, and increase of $1.22 million over the year ended December 31, 2017. The increase in net other income is due primarily to a decrease in interest expense charges and other income recognized from the planned disposition of Banana Whale.

Net Loss: Net loss from continuing operations for the year ended December 31, 2018 was approximately $13.7 million as compared to a net loss of $5.1 million for the same period in 2017.  Going forward, management believes the Company will continue to grow the business and increase profitability through acquisitions.

Foreign Currency Translation Adjustment:     Our reporting currency is the U.S. dollar. Our local currencies, Hong Kong Dollars, British pounds and Chinese Renminbi, are our functional currencies. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.


Years Ended December 31, 2018 and December 31, 2017

The following table sets forth a summary of our approximate cash flows for the periods indicated:

  For the Years Ended
December 31
(in thousands)
 
  2018  2017 
Net cash used in operating activities from continuing operations  (3,012)  (382)
Net cash used in operating activities from discontinued operations  (39)  (321
Net cash used in investing activities from continuing operations  (170)  (2)
Net cash used in investing activities from discontinued operations  (980)  (261)
Net cash provided by financing activities from continuing operations  3,516   1,477 
Net cash provided by financing activities from discontinued operations  301    

Net cash used by operating activities from continuing operations was approximately $3.0 million for the year ended December 31, 2018 as compared to approximately $0.4 million for the same period in 2017. The increase in cash used in operating activities from continuing operations is largely due to the increase in cash expenditures in 2018 as compared to 2017 related to the newly acquired entities.

Net cash used in investing activities from continuing operations was approximately $0.17 million for the year ended December 31, 2018. Net cash used in investing activities was primarily focused on acquisition and investment in acquired subsidiaries. 

Net cash provided by financing activities from continuing operations amounted to approximately $3.5 million for 2018 and $1.5 million for 2017. Cash provided by financing activities in 2018 and 2017 was primarily from the sale of Common Stock and conversion of warrants, net of related costs.

Our working capital surplus as of December 31, 2018, was approximately $1.6 million, as compared to a working capital surplus of approximately $0.9 million for the same date in 2017.

 

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Corporate GovernanceOff-Balance Sheet Arrangements

 

Research & DevelopmentWe have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

During the fiscal year 2016, we spent approximately $500,000 on capitalizable research and development together with approximately $600,000 on expensed research and development.

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Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. Our significant accounting policies are described in notes accompanying the consolidated financial statements. The preparation of the consolidated financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. Estimates are based on information available as of the date of the financial statements, and accordingly, actual results in future periods could differ from these estimates. Significant judgments and estimates used in the preparation of the consolidated financial statements apply critical accounting policies described in the notes to our consolidated financial statements.

 

We consider our recognition of revenues, accounting for the consolidation of operations, accounting for stock-based compensation, accounting for intangible assets and related impairment analyses, the allowance for doubtful accounts and accounting for equity transactions, to be most critical in understanding the judgments that are involved in the preparation of our consolidated financial statements.

 

Additionally, we consider certain judgments and estimates to be significant, including those relating to the timing of revenue recognition from the sales of perpetual licenses to certain Tier 1 and Tier 2 telecom entities, those relating to the determination of vendor specific objective evidence (“VSOE”) for purposes of revenue recognition, allowance for doubtful accounts, useful lives for amortization of intangibles, determination of future cash flows associated with impairment testing of long-lived assets, determination of the fair value of stock options and other assessments of fair value. We base our estimates on historical experience, current conditions and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates and assumptions.

Together with our critical accounting policies set out above, our significant accounting policies are summarized in Note 2 of our audited financial statements as of December 31, 2016.

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 the customer and that delivery has occurred or services have been rendered, 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 installments due under the agreement, unless payment terms exceed one year, as described below, presuming all other relevant revenue recognition criteria are met.
·Revenue for user licenses purchased by customers is recognized when the user license is delivered except as set out below.
·Revenue for maintenance services is recognized over the period of delivery of the services except as set out below.
·Effective as of 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. Effective October 1, 2014 revenue will be 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 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 will be recorded only after existing accounts receivable balances are fully collected.

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·Revenues from Aishuo retail sales are recognized when the PSTN calls and texts are made

Where the Company has entered into a Revenue Share with the customer then all future revenue from granting of user licenses and for maintenance services will be recognized when the Company has delivered user licenses and is entitled to invoice.

We enter into arrangements 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 the deliverable elements if there are multiple elements. PCS may include rights to unspecified upgrades, when and if available, support, updates and enhancements. When vendor specific objective evidence (“VSOE”) of fair value exists for all elements in a multiple element arrangement, revenue is allocated to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when the same element is sold separately. Accordingly, the judgments involved in assessing the fair values of various elements of an agreement can impact the recognition of revenue in each period. Changes in the allocation of the sales price between deliverables might impact the timing of revenue recognition, but would not change the total revenue recognized on the contract. When elements such as software and services are contained in a single arrangement, or in related arrangements with the same customer, we allocate revenue to each element based on its relative fair value, provided that such element meets the criteria for treatment as a separate unit of accounting. In the absence of fair value for a delivered element, revenue is first allocated to the fair value of the undelivered elements and then allocated to the residual delivered elements. In the absence of fair value for an undelivered element, the arrangement is accounted for as a single unit of accounting, resulting in a delay of revenue recognition for the delivered elements until the undelivered elements are fulfilled. No sales arrangements to date include undelivered elements for which VSOE does not exist.

For purposes of revenue recognition for perpetual licenses, the Company considers payment terms exceeding one year as a presumption that the fee in the transaction is not fixed and determinable.

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If the presumption cannot be overcome due to a lack of such evidence, revenue is recognized as payments become due, assuming all other revenue recognition criteria has been met.

Results of Operations

The following table sets forth information from our statements of operations for the year ended December 31, 2016 and 2015. 2018.

 

Comparison of year ended December 31, 2016 and 2015 (in thousands)Revenue Recognition

 

  For the Year Ended
December 31,
  Year to Year Comparison 
  2016   2015
(restated)
  Increase/
(decrease)
  Percentage
Change
 
             
Revenue $1,615  $1,532  $83   5.4%
                 
Cost of revenue                
Hardware, calls and network charges  98   116   (18)  (15.5)%
Amortization of software development costs  2,010   2,111   (101)  (4.8)%
   2,108   2,227         
                 
Gross margin  (493)  (695)  (202)  (29.1)%
                 
Operating Expenses                
                 
General and administrative  3,267   3,326   (59)  (0.2)%
Increase in Allowance for doubtful accounts  455   934   (501)  (53.6)%
Depreciation  59   67   (8)  (11.9)%
Research and development  605   579   26   4.5%
Total Operating Expenses  4,386   4,906   (520)  (10.6)%
                 
Loss from Operations  (4,879)  (5,601)  (722)  (12.9)%
                 
Other Income(Expense)                
Interest expense  (712)  (722)  10   1.4%
Interest expense - related parties  -   (2)  2   100%
Gain on settlement of lease  -   36   (36)  (100)%
Foreign Exchange gain/(loss), net  9   (29)  38   131.0%
Interest income  -   2   (2)  (100)%
                 
Loss for continuing operations before income taxes  (5,582)  (6,316)  (734)  (11.3)%
                 
Income tax recovery  (43)  (20)  (23)  (115.0)%
Net loss for the year  (5,539)  (6,296)  (757)  (12.0)%

Revenue: Our revenue for the year ended December 31, 2016 was approximately $1.6 million as compared to approximately $1.5 million for the year ended December 31, 2015, an increase of roughly $0.1 million or 5%. The increase was primarily due to increase in B2B business primarily in the Asia region.

 291.Digital secure messaging revenue involves the sale of user licenses, at a fixed price per license, to the customers, which is our sole performance obligation under the existing licensing agreements. The Company recognizes the revenue from the sale of the user licenses when the valid licenses have been delivered to the customer’s server in useable form.

 2.123Wish derives income from user subscriptions, sale of merchandise, sale of tickets for experiences with social media influencers and artists, and the sale of corporate sponsorships, each of which is a separate performance obligation. User subscriptions cover a defined period of time (typically one month) and the revenue is recognized as the Company satisfies the requisite performance obligation (over the defined subscription period). Sale of merchandise and tickets are recognized when the customer has paid for the item and when the merchandise and/or ticket has been delivered to the customer. Corporate sponsorship packages are non-refundable and relate to brand association. The Company has no further service deliverable to the sponsor and the revenue is recognized when the agreement is entered into by both parties and the required marketing materials have been delivered to the corporate sponsor for their use.

 

3.Love Media House derives income from recording and video services. Income is recognized when the recording and video services are performed and the final customer product is delivered and the point at which the performance obligation is satisfied. These revenues are non-refundable.

4.Banana Whale derives income primarily through licensing arrangements with gaming customers. Under these arrangements, Banana Whale provides the customers with a license (functional IP), implementation services and ad-hoc support, which may include unspecified upgrades and enhancements. The Company has determined that these promised goods and services represent one combined performance obligation since the individual promised goods or services are not distinct in the context of the contract. The revenues earned from the arrangements are primarily based on usage-based royalties. As the Company has determined that the license is the predominant item to which the royalty relates, revenues are recognized when the related sale or usage by the customer occurs.

5.Browning Production & Entertainment, Inc derives income from the advertising associated with the airing of television series produced by BP&E and also license income from the show of series on certain channels based on the number of viewers attracted.

 

Cost of Revenue: Recent Accounting PronouncementsCost of revenue for hardware calls and network charges was approximately $0.1 million for the year ended December 31, 2016, compared to approximately the same amount for the year ended December 31, 2015. Our cost of sales is primarily composed of the amortization of software development costs together with the costs of hardware, calls and network charges.

 

Gross Profit:  Gross profit beforeIn May 2014, the amortization chargeFinancial Accounting Standards Board issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements of Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition” and most industry-specific guidance on revenue recognition throughout the ASC. The new standard is principles-based and provides a five step model to determine when and how revenue is recognized. The core principle of the new standard is that revenue should be recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also requires disclosure of qualitative and quantitative information surrounding the amount, nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. The new standard, as updated in 2015, was effective for us in the first quarter of the year endedending December 31, 2016 was approximately $1.5 million2018 and can be applied either retrospectively to all periods presented or as compared to $1.4 millionfor the previous year.  Our gross profits increased by 6% from 2015 to 2016.  The increase was mainly due to the increase in B2B business primarily in the Asia region.

Operating Expenses: Operating expenses including general and administrative expenses, allowance for doubtful accounts, depreciation and research and development expenses were approximately $ 4.4 million or 272% of revenue for the year ended December 31, 2016,a cumulative-effect adjustment as compared to approximately $4.9 million, or 322% of sales for the same period in 2015, a decrease of $0.5 million. The decrease in expenses arose due to the reduction in provision for doubtful accounts of $0.4 million in the year ended December 31, 2016 when compared to the same period in 2015. General and administrative expenses were approximately $3.3 million for the year ended December 31, 2016 as compared to approximately the same amount as the same period in 2015.

Net Loss: Net loss for the year ended December 31, 2016 was approximately $5.5 million as compared to a net loss of $6.3 million for the same period in 2015.  Going forward, management expects to generate a growth in revenue based on the roll out of the products primarily indate of adoption. We have evaluated the China, Asia and Latin America regions. Going forward, management believes the Company will continue to grow the business and increase profitability if we are successful in selling the Horizon B2B solution to new telecommunications company customers globally and the B2C service to end users.

Foreign Currency Translation Adjustment:     Our reporting currency is the U.S. dollar. Our local currencies, Swiss Francs, Euro, British pounds and Chinese Renminbi, are our functional currencies. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate at the endimpact of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. Transaction gainsnew accounting standard on our revenue recognition policies and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Currency translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statement of shareholders' equity and amounted to approximately $65,000 for the year ended December 31, 2016.

Liquidity and Capital Resources

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 December 31, 2016 the Companyit 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 supportan impact on 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. As a result , our auditors’ report for our 2016 Financial Statements, which are included as part of this report, contains a statement concerning our ability to continue as a “going concern”.

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Years Ended December 31, 2016 and December 31, 2015financial statements.

 

The following table sets forth a summary        In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. This ASU applies to all companies that enter into contracts with customers to transfer goods or services. This ASU is effective for public entities for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. Entities have the choice to apply the ASU either retrospectively to each reporting period presented or by recognizing the cumulative effect of our approximate cash flows forapplying these standards at the periods indicated:

  For the Years Ended
December 31
(in thousands)
 
  2016  2015 
Net cash used in operating activities  (1,303)  (2,115)
Net cash used in investing activities  (475)  (1,072)
Net cash provided by financing activities  334   1,787 

Net cash used by operating activities was approximately $1.3 million for the year ended December 31, 2016 as compared to approximately $2.1 million for the same period in 2015. The decrease in cash used in operating activities is largely due to the deferraldate of payments to vendors during 2016

Net cash used in investing activities was approximately $0.5 millioninitial application and $1.1 million for the years ended December 31, 2016 and 2015, respectively. Net cash used in investing activities was primarily focused on investment in software development costs. 

Net cash provided by financing activities amounted to approximately $0.3 million for 2016 and $1.8 million for 2015. Cash provided by financing activities in 2016 primarily from the sale of Common Stock in September, October and December 2016, net of related costs. Cash provided by financing activities in 2015 was primarily due to the sale of Common Stock in August and September 2015.

Our working capital deficit as of December 31, 2016, was approximately $1.9 million, as compared to working capital of approximately $3.9 million for the same date in 2015.

Off-Balance Sheet Arrangements

not adjusting comparative information. We have no off-balance sheet arrangements thatevaluated the impact of the new accounting standard on our revenue recognition policies and it did not have or are reasonably likely to have, a current or future effectan impact on itsour financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.statements.

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Our financial statements, including the independent registered public accounting firm’s report on our financial statements, are included beginning at page F-1 immediately following the signature page of this report.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

(a) Dismissal of Independent Certifying Accountant.

(1) Previous Independent Public Accounting Firm

On October 12, 2016, Peterson Sullivan LLP (“Peterson”) resigned as One Horizon Group, Inc.’s (the “Company”) independent registered public accounting firm. The report of Peterson on the Company’s financial statements for the year ended December 31, 2014, did not contain an adverse opinion or disclaimer of opinion, and such report was not qualified or modified as to uncertainty, audit scope, or accounting principles. During the year ended December 31, 2014, there were no disagreements between the Company and Peterson on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. No reportable event, as described in Item 304(a)(1)(v) of Regulation S-K, has occurred from the resignation of Peterson.

As a result of Peterson’s resignation, Peterson determined not to reissue their report on our financial statements for fiscal year ended December 31, 2015.

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(2) New Independent Public Accounting Firm

On October 12, 2016, the Company entered into an engagement with Cherry Bekaert LLP (“Cherry”) to retain Cherry as the Company’s independent public accounting firm. On October 12, 2016, the audit committee of the Company approved and ratified the engagement of Cherry as its new independent registered public accounting firm.

Cherry re-audited our financial statements for the fiscal year ended December 31, 2015 and determined there is no material change to the prior report issued by Peterson for that period, but for the emphasis of matter paragraph with respect to the restatement of the previously reported consolidated financial statement as of and for the year ended December 31, 2015.

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ITEM 9A.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including itsour chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Limitations on the Effectiveness of Disclosure Controls. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our chief executive officerChief Executive Officer and our chief financial officer,Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures for the period ended December 31, 2016. Based on2018. Our Chief Executive Officer and Chief Financial Officer concluded that due to the foregoing, our chief executive officer and chiefdeficiency in the internal control over financial officer concluded thatreporting discussed below, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not operating effectivelyeffective as of December 31, 2016. Our disclosure controls and procedures were not effective because of the “material weaknesses” described below under “Management’s Annual Report on Internal Controls Over Financial Reporting”.2018.


Management’s Report on Internal Control over Financial Reporting

 

Our management is also responsible for establishing and maintaining adequate internal controls over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors (notably, the Audit Committee thereof), management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

·           Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

·           Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

·           Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, our internal control over financial reporting may not prevent or detect all misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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Our management, including our Chief Executive Officer and our Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31, 2016.2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Tread wayTreadway Commission (COSO) in Internal Control—Integrated Framework. BecauseControl-Integrated Framework (2013). Due to a lack of accounting personnel, the Company's inability to segregate various accounting functions, lack of a control function over original documentation of agreements, and a lack of a documented control environment with respect to our operating entities, management has concluded that there was a material weaknesses describedweakness in the following paragraphs, management believesour internal control environment based on these matters and has concluded that as of December 31, 2016,2018, our internal control over financial reporting was not effective based on those criteria.effective.

 

A “material weakness” is defined under the SEC rules as a deficiency, or a combinationThis annual report does not include an attestation report of deficiencies, inour registered public accounting firm regarding internal control over financial reporting such that there is a reasonable possibility that a material misstatementreporting. The rules of a company’s annual or interim financial statements willthe Securities and Exchange Commission do not be prevented or detected on a timely basisrequire an attestation of the Management’s report by our internal controls. As a result of its review, management concluded that we had material weaknessesregistered public accounting firm in our internal control over financial reporting process consisting of the following:this annual report.

 

(i)   Lack of in-house US GAAP Expertise. Currently we do not have sufficient in-house expertise in US GAAP reporting. Instead, we rely on the expertise and knowledge of external financial advisors to account for transactions in accordance with US GAAP.

During the years ended December 31, 2015 and 2016, we implemented the following measures to remediate the material weaknesses identified:

During 2015 and 2016, the Company engaged external CPA consultants to provide the Company with improved in-house US GAAP expertise. Despite these measures which were intended to address the identified material weaknesses as well as to enhance our overall internal control environment, management concluded that as of December 31, 2016, the material weaknesses identified above had not been fully remediated.

Management Plan to Remediate Material Weaknesses

We intend to continue in the future using external financial advisors throughout the year to assist on the reporting of complex transactions and the overall review of the quarterly and annual filings.

Changes in Internal Control over Financial Reporting

 

Other than described above, duringDuring the fourth quarter of the fiscal year ended December 31, 2016,2018, there were no other changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B.  OTHER INFORMATION

 

None.

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PART III

 

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors and Executive Officers

 

The following table and text set forth the names and ages of all directors and executive officers as of April 3, 2017. There are no family relationships among our directors and executive officers. Each director is elected at our annual meeting of shareholders and holds office until the next annual meeting of shareholders, or until his successor is elected and qualified. Also provided herein are brief descriptions of the business experience of each director, executive officer and advisor during the past five years and an indication of directorships held by each director in other companies subject to the reporting requirements under the Federal securities laws. None of our officers or directors is a party adverse to us or has a material interest adverse to us.  Each director has been elected to the term indicated. Directors whose term of office ends in 2016 shall serve until the next Annual Meeting of Stockholders and until their successors are elected and qualified.

Name Age Principal Occupation or Employment First Became Director Current
Board Term
Expires
 
          
Brian Collins  49 President, Chief Executive Officer, Chief Technology Officer, Director 12/10/12  2017 
            
Martin Ward  59 Chief Financial Officer, Director 12/10/12  2017 
            
Nicholas Carpinello  67 Owner, Carpinello Enterprises LLC, Director 3/7/13 Until the date of removal or resignation 
            
Richard Vos  71 Director 8/21/2013 Until the date of removal or resignation 
            
Robert Law  66 Director 8/28/2013 Until the date of removal or resignation 
            
Robert Vogler  66 Director 1/8/14 Until the date of removal or resignation 
NameAgePosition
Mark White 58President, Chief Executive Officer and Director
Martin Ward 61Chief Financial Officer and Director
Nicholas Carpinello 69Director
Richard Vos 73Director
Robert Law 68Director
Aling Zhang61Director
Pengfei Li31Director

 

Brian CollinsMark White.  

Mr. CollinsWhite was appointed as thePresident, Chief Executive OfficeOfficer and Presidenta director on July 28, 2014.September 8, 2017. Mr. Collins also actsWhite previously served as the Chairman of the Board of the Company upon his appointmentCompany’s Chief Executive Officer from November 30, 2012 to July 24, 2014 and as a director from December 2012 to July 2014. From July 2014 to August 2017, he was engaged as a private investor seeking business and investment opportunities. Mr. White served as the Chief Executive Officer of One Horizon Group, PLC from 2004 to November 2012. His entrepreneurial career in the Company.distribution of electronic equipment and telecommunications spans over 20 years. He founded Next Destination Limited in 1993, the European distributor for Magellan GPS and satellite products, and sold the business in 1997. Prior to that, Mr. CollinsWhite was earlier appointedChief Executive Officer for Garmin Europe, where he built up the company’s European distribution network. He previously sold Garmin’s GPS products through Euro Marine Group Ltd, a company he formed in 1990, which established distribution in Europe for U.S. manufacturers of marine electronic equipment. Earlier in his career, Mr. White was the Sales Director for Cetrek Limited, a maritime autopilot manufacturer.

Martin Ward. Mr. Ward has served as Vice President and Chief TechnologyFinancial Officer onsince November 30, 2012 and a director onsince December 10, 2012. Prior to his appointment as Vice President and Chief Technology Officer, Mr. Collins had served as Chief Technology Officer of One Horizon Group, PLC since 2010, following the acquisition by One Horizon Group of Abbey Technology GmbH, a company that was founded by, and employed, Mr. Collins in 1999, and which became a subsidiary of One Horizon Group upon its acquisition. He is the co-inventor of the Horizon Platform, and has over 20 years’ experience in the technology sector with a background in software engineering. Abbey Technology developed software systems for the Swiss banking industry. Prior to his employment at Abbey, he worked as a software engineer for Credit Suisse First Boston Equities in Zurich. Earlier in his career, between 1993 and 1996, he worked as a software engineer for Sybase, an information technology company, in California and Amsterdam. Mr. Collins graduated in 1990 with a BSc Hons in Computer Systems from the University of Limerick, Ireland. He also undertook further software research and development at International Computers Limited between 1990 and 1993. Mr. Collins brings experience founding and working at technology companies along with extensive knowledge of software engineering.

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Martin Ward

Mr. Ward was appointed Chief Financial Officer on November 30, 2012 and director on December 10, 2012. Prior to his appointment as Chief Financial Officer, Mr. Ward had served as the Chief Financial Officer and Company Secretary of One Horizon Group, PLC since 2004.from 2004 to November 2012. Prior to joining One Horizon Group, Mr. Ward was a partner at Langdowns DFK, a United Kingdom-based chartered accountancy practice. Earlier in his career, between 1983 and 1987, he worked for PricewaterhouseCoopers as an Audit Manager. Mr. Ward is a fellow of the Institute of Chartered Accountants of England and Wales. Mr. Ward brings significant experience in accounting, corporate finance and public company reporting.


Nicholas CarpinelloCarpinello.

Mr. Carpinello was appointedhas served as a director onsince March 7, 2013. He has been the owner of Carpinello Enterprises LLC d/b/a Cottman Transmission Center, a national auto service franchise, since 2004 and also has worked as a consultant to SatCom Distribution Inc. (“SDI”), assisting in various business, tax and financial matters of US operations of UK-based distributors of satellite communication hardware and airtime, since 2005. Prior to November 2012, SDI was a subsidiary of One Horizon Group PLC. Mr. Carpinello’s years of professional experience are extensive, and include experience as CFO and Treasurer with multinational public and private manufacturers of armored vehicles and, later in his career, CFO of privately-held companies in the computer science field. He is a Certified Public Accountant, an alumnus of Arthur Andersen & Co., and holds a BA degree in Accounting from the University of Cincinnati. The Board decided that Mr. Carpinello should serve as a director because of his significant U.S. public company experience, as well as years of experience as a certified public accountant.

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Richard VosVos.

Mr. Vos was appointed as a director on August 28, 2013. Mr. Vos has been a non-executive director of NSSC Operations Ltd., which operates the National Space Centre in the United Kingdom.  He is theKingdom, until February 2018 and was chairman of its audit committee. From August 2014 to March 2017. Mr. Vos since August 2014 has beenwas a non-executive director of Tawsat Limited and Tawsat Holdings Limited, both Irish registered companies which hold intellectual property in certain satellite operations.

 

Mr. Vos was an Independent Director from 2007 to January 2017 of Avanti CommunicationsCommunication Group plc, a public company listed on the London Stock Exchange (LSE:AVN), where he was chairman of its remuneration committee and past chairman of its audit committee. From June 2005 to June 2010, Mr. Vos was a director of our United Kingdom subsidiary,subsidiary. One Horizon Group plc (formerly SatCom Group Holdings plc) (“One Horizon UK”), and from October 2006 to June 2010 was also Chairman. From July 2005 to March 2010, One Horizon UK was listed on the Alternative Investment Market of the London Stock Exchange (AIM: SGH). From October 2008 to October 2010, Mr. Vos served as a director of TerreStar Europe Ltd., a former start-up business seeking to provide mobile satellite services in Europe. From April 2003 to 2009, Mr. Vos was chairman of the Telecommunications and Navigation Advisory Board of the British National Space Centre (subsequently reconstituted as the United Kingdom Space Agency). From September 2006 to June 2009, Mr. Vos was a director of Avanti Screenmedia Group plc, formerly listed on the London Stock Exchange (LSE:ASG), which provided satellite and other services. Mr. Vos obtained his Bachelor of Arts with Honors in Modern Languages from University of London in 1968, and his Diploma in Management Studies from KingstonKingdom Polytechnic in 1973. He is a member of the Institute of Directors.

Robert LawLaw.

Mr. Law was appointedhas served as a director onsince August 28, 2013. Between MayFrom 1990 and Januaryto 2016, Mr. Law has served as chief executive officer of Langdowns DFK Limited (“Langdowns”), a United Kingdom-based accounting, tax and business advisory firm, and sincefrom 1979 hasto 2018 served as a director of Langdowns. Also, between Mayfrom 1990 and Januaryto 2016, Mr. Law has beenserved as the chief executive officer of Southern Business Advisers LLP (“Southern Business Advisers”), a United Kingdom-based business associated with Langdowns that also offers accounting, tax and business advisory services, and has beenwas a member of Southern Business Advisers since 1979. Mr. Law is a Fellow of the Institute of Chartered Accountants in England and Wales (“ICAEW”).  Mr. Law, having qualified as an ICAEW Chartered Accountant in 1976.

 

Robert VoglerAjing Zhang.

Mr. VoglerZhang was appointed as a director onin January 8, 2014.2019. Hewas managing director of Shanghai Suonengderui Energy Science and Technology Development Co., Ltd. from March 2011 to April 2018. From March 2010 to February 2011 he was Executive Deputy General Manager of China Energy Conservation and Environmental Protection Shanghai Company. From June 2006 to March 2010 he was Deputy General Manager of Shanghai Citelum Kighting Design Co. LTd. From March 2003 to June 2006 he was Assistant General Manager of Oriental Pearl Group Co., Ltd. From May 1992 to March 2003, he was Assistant General Manager and Financial Manager of Oriental Pearl Taxi Co., Ltd. From April 1989 to May 1992 he was Finance Supervisor of Shanghai Qichongtian Hotel. Mr. Zhang received a Bachelor’s degree from Shanghai Lixin College of Accounting in 1987 (where he majored in Accounting), a postgraduate degree from East China Normal University in 1999 )(where he majored in Economic Information Management) and a Master’s degree from Macau University of Science and Technology in 2004 (where he majored in Business Administration Management).

Pengfei Li. Mr. Li was appointed as a director in January 2019. He has been Investment Director of Dachao Asset Management (Shanghai) Co., Ltd., of which Mr. Wu is Chairman, since January 2018. From June 2015 to December 2017 he was Assistant resident of Shanghai Lighter Capital Management Co., Ltd. From June 2013 to June 2015 he was Investment Manager of Shanghai Fosun Hiogh Technology (Group) Co., Ltd/Shanghai Yuyuan Gold and Jewelry Group Ltd. Mr. Li received a long-standing history asBachelor’s degree from Shanghai University of Engineering Science in 2011 (where he majored in International Economics and Trade) and a successfulMaster of Science degree from the University of Brighton (United Kingdom) in 2013 (where he majored in MSc Finance and Investment).

There are no family relationships among our directors and executive officers. Each director is elected at our annual meeting of shareholders and business owner. He also has extensive experiencesholds office until the next annual meeting of shareholders, or until his successor is elected and practices as an accounting specialist.  Mr. Vogler has beenqualified, or his earlier death, resignation or removal. Officers are elected by and serve at the owner and Chairmandiscretion of the Board of Kreivo AG,Directors.


Information Concerning the Board of Directors

Board Leadership Structure and the Board’s Role in Risk Oversight.

The Board of Directors currently does not have a Chairman. Our Chief Executive Officer acts as the Chairman of the Board. The Board determined that in the best interest of the Company the most effective leadership structure at this time is not to separate the roles of Chairman and Chief Executive Officer. A combined structure provides the Company with a single leader who represents the Company to our stockholders, regulators, business partners and other stakeholders, among other reasons set forth below. Should the Board conclude otherwise, the Board will separate the roles and appoint an accountingindependent Chairman.

This structure creates efficiency in the preparation of the meeting agendas and related Board materials as the Company’s Chief Executive Officer works directly with those individuals preparing the necessary Board materials and is more connected to the overall daily operations of the Company. Agendas are also prepared with the permitted input of the full Board of Directors allowing for any concerns or risks of any individual director to be discussed as deemed appropriate. The Board believes that the Company has benefited from this structure, and Mr. White’s continuation in the combined role of the Acting Chairman and Chief Executive Officer is in the best interest of the stockholders.

The Company believes that the combined structure is necessary and allows for efficient and effective oversight, given the Company’s relatively small size, its corporate strategy and focus.

The Board of Directors does not have a specific role in risk oversight of the Company. The Chairman, President and bookkeeping companyChief Executive Officer and other executive officers and employees of the Company provide the Board of Directors with information regarding the Company’s risks.

Compensation of Directors

Non-employee directors are entitled to receive compensation for serving Swiss companiesas directors and may receive option grants from our company. Employee directors do not receive any compensation for their services as directors. All of our directors are reimbursed for expenses incurred by them in a varietyconnection with attending Board of industries with operations throughout Europe since 1974. Mr. VoglerDirectors’ meetings. The following table sets forth all cash compensation paid by us, as well as certain other compensation paid or accrued, in 2018, to each of our non-employee directors.

Name Fees
Earned
or
Paid in
Cash
($)
  Stock
Awards
($)
  Option
Awards
($)
  Non-Equity
Incentive
Plan
Compensation
($)
  Nonqualified
Deferred
Compensation
Earnings
($)
  All Other
Compensation
($)
  Total ($) 
Nicholas Carpinello  18,000   0   0   0   0   0   18,000 
Robert Law  16,000   0   0   0   0   0   16,000 
Richard Vos  16,000   0   0   0   0   0   16,000 

Independent Directors

Our Board of Directors has serveddetermined that Nicholas Carpinello, Robert Law and Richard Vos are “independent directors” within the meaning of NASDAQ Marketplace Rule 5605(a)(2).As of March 8, 2019, our common stock is quoted on the BoardsOTCQB tier of other Swiss accounting firms such as RV Revisions AG, Impe Zug AGthe OTC Markets and also served as President of Lüfta Baar, a HVAC Company also based in Switzerland. Mr. Vogler is not a director of any public companies except One Horizon.ceased trading on Nasdaq.


Board Meetings; Committees and Membership

 

Significant Employees

Qingsong  Li

Mr. Li, aged 40, was appointed the General ManagerThe Board of Horizon Network Technology Co., Ltd at the end of 2012. Mr. Li was the Deputy General Manager of Nanjing ZTEsoft CO., Ltd, in charge of international marketing and national business development from 2008 to 2012. Before that period, he was a Software Engineer(2002-2003), Chief of International Development Team(2003-2004), Deputy Head of International Sales Department(2004-2005) and Head of International Sales Department(2006-2007) of Nanjing ZTEsoft Co., Ltd. Mr. Li graduated from Southeast University, Nanjing with a master degree in System Engineering and Hefei University of Technology with a bachelor degree in Accounting and minor in Computer Science.

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Peter Hall

Peter Hall, aged 43, joined One Horizon Group in 2011 and was appointed Chief Information Officer in August 2014. Before joining the Company, he worked at Microsoft within the Premier Field Engineering Division (2008-2011).  Between 2004 and 2008 he worked as a Security Consultant for Atos Origin and a CRM software company, AIT Group plc, between 1998 and 2002. Mr. Hall hasDirectors held the CISSP certification since 2010. He graduated from the University of Sheffield in 1995 and also holds an MSc (Distinction) Degree from University College London in 2006.

Andrew Le Gear

Dr. Andrew Le Gear, aged 34, joined One Horizon Group in 2013 and was appointed Chief Horizon Architect in September 2015.  Before joining the Company, he worked as a Senior Solutions Architect at Dell Inc. (2012-1013),and as an Equity Trading Software Engineer at Lehman Brothers Inc. and Nomura Plc. (2007-2012).  Prior to this he was co-founder of Juneberi Ltd., a research driven software tech start up (2004-2007). Dr. Le Gear graduated from the University of Limerick in 2003 and again in 2006, with a B.Sc. in Computer Systems and a Ph.D. in Computer Science respectively.

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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act and the rules thereunder require our officers and directors, and persons that own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and to furnish us with copies. Based solely on our review of the copies of the Section 16(a) forms received by us, or written representations from certain reporting persons, we believe that none of our officers, directors, and greater than 10% beneficial owners filed on a timely basis reports required by Section 16(a) of the Exchange Act prior to the Share Exchange on November 30, 20127 meetings during the fiscal year ended December 31, 2012. After2018 (“fiscal 2018”). During fiscal 2018, each of the Share Exchange, we believe that none of our officers, directors and beneficial owners withthen in office attended more than 10% shareholding, failed to file on a timely basis reports required by Section 16(a)75% of the Exchange Act duringaggregate of (i) the fiscal year ended December 31, 2016.

Board Committees

Committeestotal number of meetings of the Board of Directors and (ii) the total number of meetings of all committees of the Board on which such director served.

 

We maintain the following committees of the Board of Directors: the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee. Each committee is comprised entirely of directors who are “independent” within the meaning of NASDAQ Marketplace Rule 5605(a)(2). Each committee acts pursuant to a separate written charter, and each such charter has been adopted and approved by the Board of Directors. Copies of the committee charters are available on our website at airindustriesgroup.com under the heading “Investor Relations.” As of March 8, 2019, our common stock is quoted on the OTCQB tier of the OTC Markets and ceased trading on Nasdaq.

Audit Committee

 

Our Audit Committee consists of Nicholas Carpinello, Robert Law and Richard Vos, each of whom is independent. The Audit Committee assists the Board of Directors oversight of (i) the integrity of financial statements, (ii) our compliance with legal and regulatory requirements, (iii) the independent auditor’s qualifications and independence, and (iv) the performance of our internal audit function and independent auditor, and prepares the report that the Securities and Exchange Commission requires to be included in our annual proxy statement. The audit committee operates under a written charter. Mr. Carpinello is the Chairman of our audit committee.

 

The Board of Directors determined that Mr. Carpinello possesses accounting or related financial management experience that qualifies him as financially sophisticated within the meaning of Rule 4350(d)(2)(A) of the Nasdaq Marketplace Rules and that he is an “audit committee financial expert” as defined by the rules and regulations of the SEC.As of March 8, 2019, our common stock is quoted on the OTCQB tier of the OTC Markets and ceased trading on Nasdaq.

 

A copy of current charter of Audit Committee is available on the Company’s websitehttp://content.stockpr.com/onehorizongroup/media/6f6926ac07f2526da1eaa0d94f84c6d7.pdf

Nominating and Corporate Governance Committee

 

The purpose of the Nominating and Corporate Governance Committee is to assist the Board of Directors in identifying qualified individuals to become members of our Board of Directors, in determining the composition of the Board of Directors and in monitoring the process to assess Board effectiveness. Each of Nicholas Carpinello, Robert Law and Richard Vos are members of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee operates under a written charter. Mr. Richard Vos is the Chairman of the Nominating and Corporate Governance Committee.

 

·Our Nominating and Corporate Governance Committee has, among the others, the following authority and responsibilities:
  
·To determine and recommend to the Board, the criteria to be considered in selecting nominees for the director;

 

·

To identify and screen candidate consistent with such criteria and consider any candidates recommended by our stockholders pursuant to the procedures described in our proxy statement or in accordance with applicable laws, rules and regulations and provisions of our charter documents.

  
·To select and approve the nominees for director to be submitted to a stockholder vote at the annual meeting of stockholders.

 

A copy of current charter of Nominating and Corporate Governance Committee is available on the Company’s websitehttp://content.stockpr.com/onehorizongroup/media/8eccadeceb1ccc10b249cc5ab2456058.pdf

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Compensation Committee

 

The Compensation Committee is responsible for overseeing and, as appropriate, making recommendations to the Board of Directors regarding the annual salaries and other compensation of our executive officers and general employees and other policies, and for providing assistance and recommendations with respect to our compensation policies and practices. Each of Nicholas Carpinello, Robert Law and Richard Vos are members of the Compensation Committee. The Compensation Committee operates under a written charter. Mr. Robert Law is the Chairman of Compensation Committee.

 

As required by Rule 10C-1(b)(2), (3) and (4)(i)(vi) under the Securities Exchange Act of 1934 (the “Act”), our Compensation Committee has, among the others,  the following responsibilities and authority.

 

·The compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, legal counsel or other adviser.

·The compensation committee shall be directly responsible for the appointment, compensation and oversight of the work of any compensation consultant, legal counsel and other adviser retained by the compensation committee or said group.

 

·The Company must provide for appropriate funding, as determined by the compensation committee, for payment of reasonable compensation to a compensation consultant, legal counsel or any other adviser retained by the compensation committee or said group.

·The compensation committee select, or receive advice from, a compensation consultant, legal counsel or other adviser to the compensation committee or said group, other than in-house legal counsel, only after conducting an independence assessment with respect to the adviser as provided for in the Act.

 

A copy of current Charter of Compensation Committee is available on the Company’s websitehttp://content.stockpr.com/onehorizongroup/media/abf14232f92dbd65d5ee4c83d7b1fa3b.pdf

 

Code of Ethics

 

Our board of directors has adopted a Policy Statement on Business Ethics and Conflicts of Interest (“Code of Ethics”) applicable to all employees, including the Company’s chief executive officer and chief financial officer. A copy of the Code of Ethics and Business Conduct is available on the Company’s website http://content.stockpr.com/onehorizongroup/media/250c1db923f658aca6cc69dfc35c7f89.pdf

 

Board Leadership StructureSection 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act and the Board’s Rolerules thereunder require our officers and directors, and persons that own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in Risk Oversight.ownership with the Securities and Exchange Commission and to furnish us with copies. Based solely on our review of the copies of the Section 16(a) forms received by us, or written representations from certain reporting persons, we believe that during the fiscal year ended December 31, 2018 all of our officers, directors, and beneficial owners of more than 10% of our outstanding shares of common stock filed on a timely basis all reports required by Section 16(a) of the Exchange Act.

 

TheStockholder Communications

OHGI stockholders who want to communicate with our Board of Directors currently does not have a Chairman. Our Chief Executive Officer acts asor any individual director can write to:

One Horizon Group, Inc.  

649 NE 81st Street 

Miami FL 33138 

Attn: Board Administration

Your letter should indicate that you are an OHGI stockholder.  Depending on the Chairman of the Board. The Board determined that in the best interest of the Company the most effective leadership structure at this time is not to separate the roles of Chairman and Chief Executive Officer. A combined structure provides the Company with a single leader who represents the company to our stockholders, regulators, business partners and other stakeholders, among other reasons set forth below. Should the Board conclude otherwise, the Board will separate the roles and appoint an independent Chairman.subject matter, management will:

 

·This structure creates efficiency inForward the preparation of the meeting agendas and related Board materials as the Company’s Chief Executive Officer works directly with those individuals preparing the necessary Board materials and is more connectedcommunication to the overall daily operations of the Company. Agendas are also prepared with the permitted input of the full Board ofDirector or Directors allowing for any concerns or risks of any individual director to be discussed as deemed appropriate. The Board believes that the Company has benefited from this structure, and Mr. Collin’s continuation in the combined role of the Acting Chairman and Chief Executive Officerwhom it is in the best interest of the stockholders.addressed;

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·The Company believes thatAttempt to handle the combined structureinquiry directly, for example where it is necessary and allowsa request for efficient and effective oversight, giveninformation about OHGI or it is a stock-related matter; or 
Not forward the Company’s relatively small size, its corporate strategy and focus.communication if it is primarily commercial in nature or if it relates to an improper or irrelevant topic.

 

TheAt each Board meeting, a member of management presents a summary of all communications received since the last meeting that were not forwarded and makes those communications available to the Directors does not have a specific role in risk oversight of the Company. The Chairman, President and Chief Executive Officer and other executive officers and employees of the Company provide the Board of Directors with information regarding the Company’s risks.

on request.

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ITEM 11.  EXECUTIVE COMPENSATION

 

The following tables set forth, for each of the last two completed fiscal years of the Company,periods indicated, the total compensation awarded to, earned by or paid to anyeach person who was aserved as the principal executive officer during the preceding fiscal year ended December 31, 2018 (“Fiscal 2018”) and everyeach other highest compensated executive officers earning more thanofficer whose total compensation awarded to, earned by or paid to such other executive officer for Fiscal 2018 was in excess of $100,000 duringfor services rendered in all capacities to the last fiscal yearCompany and its subsidiaries (together, the “Named Executive Officers”).

 

2018 Summary Compensation Table: Executives

 

Name and
Principal
Position
 Period Salary
($)
 Bonus
($)
 Stock
Award(s)
($)
 Option
Awards
($)
 Non-
Equity
Incentive
Plan
Compensation
 Non-
Qualified
Deferred
Compen-
sation
Earnings 
($)
 All Other
Compensation 
($)
 Total ($)  Period Salary
($)
 Bonus
($)
 Stock
Award(s)
($)
 Option
Awards
($)
 Non-
Equity
Incentive
Plan
Compensation
 Non-
Qualified
Deferred
Compensation
Earnings 
($)
 All Other
Compensation 
($)
 Total ($) 
                                      
Brian Collins, CEO (1) Year ended 12/31/16  360,000   0   0   0   0   0   0   360,000 
                                                      
 Year ended 12/31/15  360,000   0   0   357,000   0   0   0   717,000 
Mark White CEO (1) Year ended 12/31/18 480,000 0 0 0 0 0 0 480,000 
                                   Year ended 12/31/17  160,000  0 1,504,000  0  0  0  0  1,664,000 
Martin Ward, CFO(2) Year ended 12/31/16  254,000   0   0   0   0   0   0   254,000  Year ended 12/31/18 240,000 0 0 0 0 0 0 240,000 
 Year ended 12/31/15  287,000   0   0   0   0   0   0   287,000  Year ended 12/31/17 240,000 0 0 0 0 0 0 240,000 

 (1)For the year ended December 31, 2018, Mr. White was paid in US Dollars. For the year ended December 31, 2017, Mr. White’s remuneration was accrued in US Dollars, that remuneration remains unpaid. Mr. White was awarded a stock award of 1.6 million shares with a value of approximately $1.5 million for the signing of the 5 year employment contract. The value was based on the closing stock price at the date of execution of the contract.

 

(1)(2)Mr. Collins was appointed our Chief Executive Officer effective July 28, 2014 and our chief technology officer effective November 30, 2012. For the two years ended December 31, 2016,2017 and 2018, Mr. CollinsWard was paid predominately in US Dollars.

  

(2)Mr. Ward was appointed our Chief Financial Officer effective November 30, 2012. For the period ended December 31, 2016, Mr. Ward was paid predominately in British pounds, with conversion rate of £1.00 = $1.351, which rate represents the average exchange rate for that period. For the period ended December 31, 2015, Mr. Ward was paid predominately in British pounds (GBP 1 = USD 1.5288).

We have entered into an Amended and Restated Employment Agreement with Mark White which continues for an initial term through July 31, 2022, and which automatically renews for one year terms thereafter, subject to the rights of both parties to terminate the Agreement. Mr. White’s Employment Agreement provided for a signing grant of 1,600,000 shares of the Company’s common stock, an annual salary of $480,000 per annum, an annual bonus to be determined by the Board and an acquisition bonus whereby Mr. White will receive additional shares each time the Company completes an acquisition of a new business. Mr. White’s Agreement contains customary non-disclosure and non-compete provisions which are operative during the term of his agreement and for one year thereafter. Mr. White’s agreement provides for severance of one year’s salary if his agreement is terminated by the Company without cause or in the event of a change in control of the Company. In addition we have agreed that upon termination of Mr. White’s Employment Agreement upon request we would register our shares of common stock then held by him for sale under the Securities Act of 1933, as amended.

 

We have entered into an Employment Agreement with Martin Ward which continues for an initial term through July 31, 2022, and which automatically renews for one year terms thereafter, subject to the rights of both parties to terminate the Agreement. Mr. Ward’s Employment Agreement provides for an annual salary of $240,000 per annum and an annual bonus to be determined in accordance with a program to be developed by the Board of Directors. Mr. Ward’s Agreement contains customary non-disclosure and non-compete provisions which are operative during the term of his agreement and for one year thereafter. Mr. Ward’s agreement provides for severance of one year’s salary if his agreement is terminated by the Company without cause or in the event of a change in control of the Company. In addition we have agreed that upon termination of Mr. Ward’s Employment Agreement upon request we would register our shares of common stock then held by him for sale under the Securities Act of 1933, as amended.

Pension Benefit

 

None during the periods covered in this Report.

 

Nonqualified Deferred Compensation

 

None during the periods covered in this Report.

 

Retirement/Resignation Plans

 

None during the periods covered in this Report.

 

Outstanding Equity Awards at 20162018 Year-End

 

As of the year ended December 31, 2016, there were unexercised options to purchase an aggregate of 364,000, shares of common stock that were not vested held by any of the Company’s named executive officers.

None.

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Compensation of Directors

Our directors are reimbursed for expenses incurred by them in connection with attending Board of Directors’ meetings. The following table sets forth all cash compensation paid by us, as well as certain other compensation paid or accrued, in 2016, to each of the following named directors.

Name Fees
Earned
or
Paid in
Cash
($)
  Stock
Awards
($)
  Option
Awards
($)
  Non-Equity
Incentive
Plan
Compensation
($)
  Nonqualified
Deferred
Compensation
Earnings
($)
  All Other
Compen-
sation
($)
  Total ($) 
Nicholas Carpinello  18,000   0   0   0   0   0   18,000 
Brian Collins  360,000   0   0   0   0   0   360,000 
Robert Law  16,000   0   0   0   0   0   16,000 
Richard Vos  16,000   0   0   0   0   0   16,000 
Martin Ward  254,000   0   0   0   0   0   254,000 
Robert Vogler  18,000   0   0   0   0   0   18,000 

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth certain information regarding beneficial ownership of our Common Stock as of April 3, 201710, 2019 by (i) each person (or group of affiliated persons) who is known by us to own more than five percent (5%) of the outstanding shares of our Common Stock, (ii) each director, executive officer and director nominee, and (iii) all of our directors, executive officers and director nominees as a group. As of April 3, 2017,10, 2019, we had 37,316,71488,401,431 shares of Common Stock issued and outstanding.

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Beneficial ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities. For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person has the right to acquire within 60 days of March 21, 2016.April 10, 2019. For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above,below, any shares that such person or persons has the right to acquire within 60 days of March 21, 2016April 10, 2019  is deemed to be outstanding for such person, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership.

 

Name of Person or Group Amount And
Nature of
Beneficial
Ownership(1)
  Percent 
       
Principal Stockholders:        
         
Alexandra Mary Johnson
44 Fairway Lakes Village
Fritton, Great Yarmouth, NR31 9EY
United Kingdom
  1,942,666   5.3%
         
Adam Christe Thompson
547A Wellington Road
Crisfield, MD 21817
  1,942,666   5.3%
         
Mark White(2)  4,262,397   11.6%
         
Named Executive Officers and Directors:        
         
Brian Collins  6,247,074   16.9%
         
Martin Ward  3,059,609   8.3%
         
 Richard Vos  20,413   * 
         
Nicholas Carpinello  10,700   * 
         
Robert Law  10,684   * 
         
Robert Vogler  205,284   * 
All Executive Officers and Directors as a Group (6 persons):  9,553,764   25.9%
Name  Amount And
Nature of
Beneficial
Ownership(1)
  Percent 
       
Owners of More than 5% of Outstanding Shares:        
         
Zhanmang Wu  15,354,409   17.4%
         
BK Consulting Group, LLC  4,750,000   5.4%
         
Directors and Named Executive Officers:        
         
Mark White  4,140,603   4.7%
         
Martin Ward  1,369,738   1.5%
         
Richard Vos  3,402   * 
         
Nicholas Carpinello  1,781   * 
         
Robert Law  1,781   * 
       * 
All Executive Officers and Directors as a Group (5 persons):  5,517,305   6.2%

 

*Less than 1%.
(1)Except as otherwise indicated, each of the stockholders listed above has sole voting and investment power over the shares beneficially owned.
(2)Mr. White was appointed our chief executive officer effective November 30, 2012 and resigned on July 24, 2014 due to personal reasons.

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ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Our Policy Concerning Transactions with Related Party TransactionsPersons

 

Under Item 404 of SEC Regulation S-K, a related person transaction is any actual or proposed transaction, arrangement or relationship or series of similar transactions, arrangements or relationships, including those involving indebtedness not in the ordinary course of business, to which we or our subsidiaries were or are a party, or in which we or our subsidiaries were or are a participant, in which the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years and in which any of our directors, nominees for director, executive officers, beneficial owners of more than 5% of any class of our voting securities (a “significant shareholder”), or any member of the immediate family of any of the foregoing persons, had or will have a direct or indirect material interest.

We recognize that transactions between us and any of our Directors or Executives or with a third party in which one of our officers, directors or significant shareholders has an interest can present potential or actual conflicts of interest and create the appearance that our decisions are based on considerations other than the best interests of our Company and stockholders.

The Audit Committee of the Board of Directors is charged with responsibility for reviewing, approving and overseeing any transaction between the Company and any related person (as defined in Item 404 of Regulation S-K), including the propriety and ethical implications of any such transactions, as reported or disclosed to the Committee by the independent auditors, employees, officers, members of the Board of Directors or otherwise, and to determine whether the terms of the transaction are not less favorable to us than could be obtained from an unaffiliated party.

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

 

 December 31 December 31  December 31, 
 2016  2015  2018 
Loans due to stockholders        
Loans due to stockholders and related parties   
Due within one year $-  $-  $1,205 
Long-term  2,343   2,354   0 
 $2,343  $2,354  $1,205 

 

The balanceforegoing transactions were reviewed and approved by the Audit Committee or our Board of $2,343,000 matures on April 1, 2018 and bears no interest.Directors. We believe that the terms of each transaction were not less favorable to us than those terms that could be obtained from an unaffiliated third party.


Director Independence 

 

In the quarter ended March 31, 2015 the Company entered into a sales contract in the normal courseOur Board of business with a customer (Horizon Latin America) which the Company holds minority ownership interest. The customer purchased perpetual software license for $500,000. The Company owns a cost based investment interest of 10% in the customer with limited voting rights or board representation.

45

Promoters and Certain Control Persons

None of our management or other control persons were “promoters” (within the meaning of Rule 405 under the Securities Act), and none of such persons took the initiative in the formation of our business or received any of our debt or equity securities or any of the proceeds from the sale of such securities in exchange for the contribution of property or services, during the last five years.

Director Independence

Under the definition of independent directors found in Nasdaq Rule 5605(a)(2),we currently have four independent directors, Nicholas Carpinello, Robert Law, Robert Vogler and Richard Vos. The audit committee is comprised of Nicholas Carpinello (chair), Robert Law and Richard Vos, the compensation committee is comprised of Nicholas Carpinello, Robert Law (chair) and Richard Vos, and the corporate governance/nominating committee is comprised ofDirectors has determined that Nicholas Carpinello, Robert Law and Richard Vos (chair), allare “independent directors” within the meaning of whom are independent.NASDAQ Marketplace Rule 5605(a)(2).As of March 8, 2019, our common stock is quoted on the OTCQB tier of the OTC Markets and ceased trading on Nasdaq.

 

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm

The Audit Committee pre-approves all audit and permissible non-audit services provided by our independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services.

Principal Accountant Fees and Services

As required by our Audit Committee charter, our Audit Committee pre-approved the engagement of Cherry Bekaert LLP for all audit and permissible non-audit services. The Audit Committee annually reviews the audit and permissible non-audit services performed by our principal accounting firm and reviews and approves the fees charged by our principal accounting firm. The Audit Committee has considered the role of Cherry Bekaert LLP in providing tax and audit services and other permissible non-audit services to us and has concluded that the provision of such services, if any, was compatible with the maintenance of such firm’s independence in the conduct of its auditing functions.  

 

Aggregate fees for professional services rendered to the Company by Peterson Sullivan LLP (“Peterson”) and Cherry Bekaert LLP (“Cherry”) for the years ended December 31, 20162018 and 20152017 were as follows:

 

Services Provided 2016 2015  2018 2017 
Audit Fees $167,000  $150,000  $101,684 $88,700 
Audit Related Fees  0   30,000  16,100 0 
Tax Fees  0   0  20,000 0 
All Other Fees  0   0  0 0 
Total $167,000  $180,000  $137,784 $ 88,700 

 

Audit Fees

 

Audit fees billed by Peterson, the Company’s prior independent registered public accounting firm, and by Cherry, the Company’s current independent registered public accounting firm, were for the audit of our annual consolidated financial statements, including any fees related to other filings with the SEC.


Audit-Related Fees

Audit-related fees billed in 2015 were for the work undertaken in respect of amendments to the 2015 consolidated financial statements.

46

Tax Fees

 

There were no$16,100 of audit related fees incurred in 2018 in relation to work on Form S-3 registration statements issued. 

Tax Fees

There were $20,000 of tax fees billed or accrued during the Reported Periods. 

 

All Other Fees

 

There were no other fees billed or accrued during the Reported Periods.

Preapproval Policies and Procedures

Before the independent registered accountants are engaged to render audit services or non audit activities, the engagement is approved by the audit committee.

47

PART IV

 

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1) Financial Statements

The consolidated financial statements and Report of Independent Registered Public Accounting Firm are listed in the Index to Financial Statements on page F-1 and included beginning on page F-2.

(2) Financial Statement Schedules

All schedules for which provision is made in the applicable accounting regulations of the SEC are either not required under the related instructions, are not applicable (and therefore have been omitted), or the required disclosures are contained in the financial statements included herein.

(3) Exhibits.

 

Exhibit
Number
 Title of Document Location
     
Item 22.1 Plan of acquisition, reorganization, arrangement, liquidation or succession
2.1Agreement and Plan of Merger effective as of August 26, 2013 

Incorporated by reference from Definitive Information Statement on Form 14C Appendix C

filed May 26, 2013

     
Item 32.2 Articles of Incorporation and BylawsStock Purchase Agreement with Brian Collins dated August 11, 2017 Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 filed August 14, 2017
     
3.1 Amendment to Articles of Incorporation as filed December 27, 2012, with the Pennsylvania Department of State Corporate Bureau Incorporated by reference from the Current Report on Form 10-K filed May 13, 2013
     
3. 23.2 Amendment to Articles of Incorporation as filed, with the Pennsylvania Department of State Corporate Bureau 

Incorporated by reference from Definitive Information Statement on Form 14C Appendix B

filed May 26, 2013

     
3. 33.3 Amended and restated articles of incorporation of BICO, Inc as filed,  with the Pennsylvania Department of State Corporate Bureau 

Incorporated by reference from Definitive Information Statement on Form 14C Appendix F

filed May 26, 2013

     
3. 43.4 Bylaws of BICO, Inc. as filed, with the Pennsylvania Department of State Corporate Bureau Incorporated by reference from Definitive Information Statement on Form 14C Appendix G filed May 26, 2013
     
3.5 Certificate of incorporation of  One Horizon Group, Inc., as filed, with Delaware Secretary of State Incorporated by reference from Definitive Information Statement on Form 14C Appendix D filed May 26, 2013
     
3.6 Certificate of Amendment to Certificate of Incorporation effecting a 1-for-6 reverse stock splitIncorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed May 1, 2017.
3.7Certificate of Designation for Series A-1 Convertible Preferred StockIncorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed July 14, 2017.
3.8Bylaws of One Horizon Group, Inc., as filed, with Delaware Secretary of State Incorporated by reference from Definitive Information Statement on Form 14C Appendix E filed May 26, 2013

48

Exhibit
Number
 Title of Document Location
Item 104.1 Material ContractsCommon Stock Purchase Warrant dated May 1, 2013 Incorporated by reference to Exhibit 4.1 of Quarterly Report on Form 10-Q/A filed May 30, 2013
     
10.14.2 Form of Class A WarrantIncorporated by reference from Current Report on Form 8-K filed July 25, 2014.
4.3Form of Class B WarrantIncorporated by reference from Current Report on Form 8-K filed July 25, 2014
4.5Form of Convertible DebentureIncorporated by reference from Current Report on Form 8-K filed December 29, 2014
4.6Form of Amended and Restated Class C WarrantIncorporated by reference from Current Report on Form 8-K filed January 23, 2015
4.7Form of Amended and Restated Class D WarrantIncorporated by reference from Current Report on Form 8-K filed January 23, 2015
4.8Form of Amended and Restated Performance WarrantIncorporated by reference from Current Report on Form 8-K filed January 23, 2015
4.9Form of Amended and Restated Placement Agent WarrantIncorporated by reference from Current Report on Form 8-K filed January 23, 2015
4.10Form of WarrantIncorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed July 18, 2017
4.11Form of Warrant issued to Bespoke Growth Partners, Inc.Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-3 (File No. 333-221300) filed October 17, 2017
4.12Form of warrants issued to First Choice International Company, Inc.Incorporated by reference to the exhibits to Exhibit 10.1 to Current Report on Form 8-K Filed December 19, 2017
4.13

Warrant issued to BK Consulting Group, LLC, as amended

Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-3 filed on September 10, 2018 and declared effective on September 14, 2018

4.14

Form of Warrant issued to First Choice International Company, IncIncorporated by reference to Exhibit A to Exhibit 10.1 to Current Report on Form 8-K filed on October 9, 2018

Exhibit
Number
Title of DocumentLocation
10.1Loan Agreement dated January 22, 2013 between the Company and Mark White Incorporated by reference to the Quarterly Report on Form 10-Q/A filed on May 30, 2013
     
10.2 Loan Agreement dated January 22, 2013 between the Company and Brian Collins Incorporated by reference to the Quarterly Report on Form 10-Q/A filed on May 30, 2013
     
10.3 Subscription Agreement, as amended, dated as of February 18, 2013, between the Company and Patrick Schildknecht Incorporated by reference to the Quarterly Report on Form 10-Q/A filed on May 30, 2013
     
10.4 Warrant Agreement, dated as of February 18, 2013, between the Company and Patrick Schildknecht Incorporated by reference from the Current Report  on Form 10-8K filed September 5, 2013
     
10.5 Advisory Agreement dated as of April 15, 2013 between the Company and TriPoint Global Equities, LLC Incorporated by reference to the Quarterly Report on Form 10-Q/A filed on May 30, 2013
     
10.6 Common Stock Purchase Warrant dated May 1, 2013
10.6Amended and Restated Subscription Agreement, dated as of August 30, 2013, between the Company and Patrick Schildknecht Incorporated by reference from the Current Report on Form 10-8K8-K filed September 5, 2013
     
10.7 Amended and Restated Warrant Agreement, dated as of August 30, 2013, between the Company and Patrick Schildknecht 

Incorporated by reference from the Current Report on Form 8-K filed September 5, 2013 

     
10.8 Form of Independent Director Agreement between the Company and Richard Vos/Nicholas Carpinello/Robert Law Incorporated by reference from the Current Report on Form 8-K filed August 22, 2013
     
10.9 From of Indemnification Agreement between the Company and Richard Vos/Nicholas Carpinello/Robert Law Incorporated by reference from the Current Report on Form 8-K filed August 22, 2013
     
10.10 Agreement, dated November 29, 2013, between One Horizon Group, Inc. and Newport Coast Securities, Inc. Incorporated by reference from the Current Report on Form 8-K filed December 3, 2013
     
10.11 Director Agreement between the Company and Robert Vogler dated January 8, 2014 Incorporated by reference from the Current Report on Form 8-K filed January 13, 2014
     
10.12 Securities Purchase Agreement dated July 21, 2014 Incorporated by reference from the Current Report on Form 8-K filed on July 25, 2014


49

10.13Exhibit
Number
 Title of DocumentLocation
10.13

Form of Class B WarrantSecurities Purchase Agreement dated July 14, 2017

 Incorporated by reference from theto Exhibit 10.1 to Current Report on Form 8-K filed on July 25, 201418, 2017
     
10.14 Form of Class A WarrantStock Purchase Agreement dated August 10, 2017 with Brian Collins, former CEO Incorporated by reference from the Currentto Exhibit 10.1 to Quarterly Report on Form 8-K10-Q filed on July 25, 2014August 14, 2017  
     
10.15 Amendment to Certain Transaction Documents dated August 15, 2014 Incorporated by reference from the Current Report on Form 8-K filed on August 8, 2014
     
10.16 Securities Purchase Agreement dated December 22, 2014 Incorporated by reference from the Current Report on Form 8-K filed on December 29, 2014
     
10.17 FormAgreement with Zhanming Wu for conversion of Convertible DebentureIncorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed September 8, 2017
10.18Registration Rights Agreement dated December 22, 2014 Incorporated by reference from the Current Report on Form 8-K filed on December 29, 2014
     
10.1810.19 Registration Rights Agreement with Mark White dated December 22, 2014August 4, 2017 for Exchange of Series A-1 Preferred Stock Incorporated by reference from theto Exhibit 10.2 to Current Report on Form 8-K filed on December 29, 2014September 8, 2017
     
10.1910.20 Form of Amended and Restated Class C WarrantConsulting Agreement dated October 17, 2017 with Bespoke Growth Partners, Inc. Incorporated by reference from the Current Reportto Exhibit 10.1 to Registration Statement on Form 8-KS-3(File No. 333-221300) filed on January 23, 2015October 17,  2017
     
10.2010.21 Form of Amended and Restated Class D WarrantAgreement dated December 6, 2017 with Maxim Group LLC Incorporated by reference from the Currentto Exhibit 10.21 to Annual Report on Form 8-K10-K filed on January 23, 2015April 2, 2018
     
10.2110.22 Form of Amended and Restated Performance WarrantAgreement dated December 13, 2017 with First Choice International Company, Inc. Incorporated by reference from theto Exhibit 10.1 to Current Report on Form 8-K filed on January 23, 2015December 19, 2017
     
10.2210.23 Form of Amended and Restated Placement Agent WarrantIncorporated by reference from the Current Report on Form 8-K filed on January 23, 2015
10.23Indemnification Agreement between the Company and Brian Collins Incorporated by reference from the Annual Report on Form 10-K filed on April 1, 2015
     
10.24 Indemnification Agreement between the Company and Martin Ward dated Incorporated by reference from the Annual Report on Form 10-K filed on April 1, 2015

 50
10.25Form of Securities Purchase Agreement dated July 14, 2017.Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed July 18, 2017.
10.26Exchange Agreement dated January 18, 2018 with Once In A Lifetime, LLCIncorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed January 24, 2018
1 0.27Exchange Agreement dated February 26, 2018 with C-Rod, Inc.Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed February 28, 2018
10.28†Employment Agreement with Mark WhiteIncorporated by reference to Exhibit 10.28 to Annual Report on Form 10-K filed April 2, 2018
10.29†Employment Agreement with Martin WardIncorporated by reference to Exhibit 10.29 to Annual Report on Form 10-K filed April 2, 2018
10.30†2018 Equity Incentive PlanIncorporated by reference to Exhibit 10.30 to Annual Report on Form 10-K filed April 2, 2018

10.31Exchange Agreement dated as of May 18, 2018 by and among One Horizon Group, Inc., Banana Whale Studios, Sargon Petros, Mark Hogbin, Rita Liu and Jeremy ChungIncorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 24, 2018
10.32Subscription Agreement dated as of August 29, 2018Incorporated by reference to Exhibit 10.1 to Registration Statement on Form S-3 filed on September 10, 2018 and declared effective on September 14, 2018
10.33Consulting Agreement dated as of March 30, 2018 with BK Consulting Group, LLCIncorporated by reference to Exhibit 10.2 to Registration Statement on Form S-3 filed on September 10, 2018 and declared effective on September 14, 2018
10.34Subscription Agreement dated as of September 21, 2018.Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed on September 21, 2018
10.35Securities Purchase Agreement dated as of October 4, 2018 with First Choice International Company, Inc.Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on October 9, 2018
10.36Exchange Agreement dated as of October 22, 2018 for the acquisition of a majority of the outstanding shares of BrowningIncorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on October 24, 2018
10.37

Settlement Agreement relating to the Wu Litigation

Incorporated by reference to Registration Statement on Form S-3 (Registration No. 333-227971) filed October 24, 2018 and declared effective November 2, 2018
10.38Consulting Agreement with One Percent Investments, Inc.Incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q filed November 16, 2018
10.39Securities Purchase Agreement with Bespoke Growth Partners, Inc.Incorporated by reference to Exhibit 10.7 to Quarterly Report on Form 10-Q filed November 16, 2018
10.40Securities Purchase Agreement with BK Consulting Group, LLC.Incorporated by reference to Exhibit 10.8 to Quarterly Report on Form 10-Q filed November 16, 2018
 


Exhibit
Number
 Title of Document Location
Item 14.14.1 Code of Ethics
14.1Policy Statement on Business Ethics and Conflicts of Interest Incorporated by reference from the Annual Report on Form 10-KSB for the year ended December 31, 2004, filed May 23, 2005
     
14.221.1 Insider Trading PolicySubsidiaries Incorporated by reference from the Registration Statement on Form S-1 filed February 5, 2015Filed as part of this report
23.1Consent of Cherry Bekaert, LLPFiled as part of this report
     
Item 31.31.1Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Principal Executive Officer Pursuant to Rule 13a-14 Filed as part of this report
     
31.2 Certification of Principal Financial Officer Pursuant to Rule 13a-14 Filed as part of this report
     
Item 32.32.1Section 1350 Certifications
32.1 Certification of ChiefPrincipal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed as part of this report
     
32.2101.INS CertificationXBRL InstanceFiled as part of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,this report
101.SCHXBRL Taxonomy Extension SchemaFiled as Adopted Pursuant to Section 906part of the Sarbanes-Oxley Actthis report
101.CALXBRL Taxonomy Extension CalculationFiled as part of 2002this report
101.DEFXBRL Taxonomy Extension DefinitionFiled as part of this report
101.LABXBRL Taxonomy Extension LabelsFiled as part of this report
101.PREXBRL Taxonomy Extension Presentation Filed as part of this report

 

51

† Management contract, compensation plan or arrangement.

 

Item 16. Form 10-K Summary

None. 


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: April 10, 201715, 2019By:/s/ Brian CollinsMark White 
  Brian CollinsMark White 
  President and PrincipalChief Executive Officer 

 

POWER OF ATTORNEY

Each person whose signature appears below hereby appoints Mark White and Martin Ward, and each of them, as attorneys-in-fact with full power of substitution, severally, to execute in the name and on behalf of the registrant and each such person, individually and in each capacity stated below, one or more amendments to the annual report on Form 10-K, which amendments may make such changes in the report as the attorney-in-fact acting deems appropriate and to file any such amendment to the annual report on Form 10-K with the Securities and Exchange Commission.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant has duly caused this report to be signedand in the capacities and on its behalf by the undersigned, thereunto duly authorized.

Dated:  April 10, 2017dates indicated.

 

By:/s/ Brian CollinsSignature TitleDate
  Brian Collins 
/s/ Mark White President, Chief Executive Officer and Director (principal executive officer) April 15, 2019

Mark White By:/s/ Martin Ward 
  
/s/ Martin WardChief Financial Officer and Director (principal financial officer and principal accounting officer)April 15, 2019
Martin Ward 
  Chief Financial Officer, Principal Finance and Accounting Officer and
/s/ Nicholas CarpinelloDirector April 15, 2019

Nicholas Carpinello By:/s/ Robert Vogler 
  
/s/ Robert VoglerLawDirectorApril 15, 2019
Robert Law 
  Director 

By:/s/ Nicholas Carpinello 
Nicholas Carpinello
/s/ Richard Vos Director April 15, 2019
Richard Vos

ONE HORIZON GROUP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2018 AND 2017

 

 By:Page
Reports of Independent Registered Public Accounting Firm/s/ Robert LawF-1
Consolidated Financial Statements: 
Consolidated Balance Sheets as of December 31, 2018 and 2017Robert LawF-2
Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017F-3
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2018 and 2017DirectorF-4
Consolidated Statements of Temporary and Stockholders’ Equity for the Years Ended December 31, 2018 and 2017F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017F-6
Notes to Consolidated Financial StatementsF-8

 

By:/s/ Richard Vos
Richard Vos
Director

 

52

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders

Stockholders of
One Horizon Group, Inc.

Limerick, Ireland

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of One Horizon Group, Inc. (the “Company”) as of December 31, 20162018 and 20152017, and the related consolidated statements of operations, comprehensive loss, stockholders’ deficitequity, and cash flows for each of the years then ended. These financial statements areended, and the responsibility ofrelated notes (collectively referred to as the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America)“financial statements”). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis of designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company atas of December 31, 20162018 and 20152017, and the results of its operations and its cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.

Going Concern Matters

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has recurring losses and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern. Management’s evaluations of the events and conditions and management’s plans in regard to theseregarding those matters are also described in Note 2 to the financial statements.2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

As discussed in Note 12Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board of the United States of America (“PCAOB”) and are required to be independent with respect to the consolidatedCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the 2015 consolidatedpurpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, have been restatedwhether due to correcterror or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a misstatement.test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Cherry Bekaert LLP

Tampa, Florida

Date: April 10, 2017

F-1

15, 2019

 

We have served as the Company’s auditors since 2016.


ONE HORIZON GROUP, INC.

Consolidated Balance Sheets

December 31, 20162018 and 20152017

(in thousands, except share data)

 

  2016  2015 
       (As
Restated,
note 12)
 
Assets        
Current assets:        
Cash $260  $1,772 
Accounts receivable, net  1,208   1,760 
Other assets  472   402 
Total current assets  1,940   3,934 
         
Property and equipment, net  42   96 
Intangible assets, net  8,407   9,823 
Investments  17   18 
         
Total assets $10,406  $13,871 
         
Liabilities and Stockholders' Equity        
         
Current liabilities:        
Accounts payable $364  $223 
Accrued expenses  206   220 
Accrued compensation  156   18 
Income taxes payable  90   90 
Convertible debenture, net  3,068   - 
Current portion of long-term debt  -   5 
Total current liabilities  3,884   556 
         
Long-term liabilities        
Long term debt, net of current portion  -   - 
Amount due to related parties  2,343   2,354 
Convertible debenture  -   2,636 
Deferred income taxes  172   215 
Mandatorily redeemable preferred shares  62   73 
Total liabilities  6,461   5,834 
         
Stockholders' Equity        
One Horizon Group, Inc. stockholders' equity        
Preferred stock: $0.0001 par value, authorized 50,000,000; issued and outstanding 170,940 shares  1   1 
Common stock: $0.0001 par value, authorized 200,000,000 shares, issued and outstanding 35,147,283 (2016)and 33,281,069 (2015)  4   3 
Additional paid-in capital  37,501   36,070 
         
Retained Earnings (Deficit)  (33,590)  (28,001)
Accumulated other comprehensive income/(loss)  29   (36)
Total stockholders' equity  3,945   8,037 
Total liabilities and stockholders' equity $10,406  $13,871 
  December 31, 
  2018  2017 
       
Assets        
Current assets:        
Cash $353  $763 
Accounts receivable, net  325   102 
Prepaid compensation  550   550 
Investment  100    
Other receivable  2,022    
Advances to acquisition target  70    
Deferred production costs  87    
Other current assets  386   28 
   3,893   1,443 
Current assets of discontinued operations  129    
Total current assets  4,022   1,443 
         
Property and equipment, net  3   2 
Goodwill  2,213    
Intangible assets, net  3,184   5,340 
Prepaid compensation (non-current)  1,467   2,017 
Non current assets of discontinued operations  36    
         
Total assets $10,925  $8,802 
         
Liabilities, Temporary Equity and Stockholders’ Equity        
         
Current liabilities:        
Accounts payable $334  $167 
Accrued expenses  156   55 
Accrued compensation  181   251 
Deferred income  177    
Notes payable  101   32 
Notes payable, related parties  205    
Convertible notes, net of debt discount of $155     45 
Promissory notes, related parties  1,000    
   2,154   550 
Current liabilities of discontinued operations  301    
Total current liabilities  2,455   550 
         
Long-term liabilities        
         
Promissory notes, related parties     1,000 
         
Total liabilities  2,455   1,550 
         
Temporary Equity - redeemable common stock outstanding 848,611  605    
         
Stockholders’ Equity        
One Horizon Group, Inc. stockholders’ equity        
Preferred stock: $0.0001 par value, authorized 50,000,000; nil shares issued or outstanding      
Common stock: $0.0001 par value, authorized 200,000,000 shares, issued and outstanding 87,559,672 (2018) and 30,255,123 (2017)  8   3 
Additional paid-in capital  62,600   48,356 
Share subscription receivable  (1,425)   
Accumulated (Deficit)  (54,854)  (41,085)
Accumulated other comprehensive loss  (35)  (22)
Total One Horizon Group, Inc stockholders’ equity  6,294   7,252 
Non-controlling interest  1,571    
Total stockholders’ equity  7,865   7,252 
Total liabilities, temporary equity and stockholders’ equity $10,925  $8,802 

 

See accompanying notes to consolidated financial statements.

F-2


ONE HORIZON GROUP, INC.

Consolidated Statements of Operations

For the years ended December 31, 20162018 and 20152017

(in thousands, except per share data)

 

 Years ended December 31,  Years ended December 31, 
 2016  2015  2018  2017 
   (As
Restated,
note 12
      
Revenue $1,615  $1,532  $787  $714 
Cost of revenue                
Hardware, calls and network charges  98   116 
Amortization of intangibles  2,010   2,111 
Software and production costs  91    
Amortization of intangible assets  2,148   855 
  2,108   2,227   2,239   855 
Gross deficit  (493)  (695)  (1,452)  (141)
                
Expenses:                
General and administrative  3,267   3,326   7,139   4,236 
Increase in Allowance for doubtful accounts  455   934 
Acquisition related costs  1,874    
Depreciation  59   67   1   17 
Research and development  605   579 
Intangible asset impairment charge  3,761    
  4,386   4,906   12,775   4,253 
                
Loss from operations  (4,879)  (5,601)  (14,227)  (4,394)
                
Other income and expense:                
Interest expense  (712)  (722)  (428)  (666)
Interest expense - related parties  -   (2)
Gain on settlement of lease  -   36 
Foreign currency exchange  9   (29)
Interest income  -   2 
Other income (Note 3)  989    
Foreign currency exchange (losses)/gains  (5)  1 
  (703)  (715)        
          556   (665)
Loss from continuing operations before income taxes  (5,582)  (6,316)
Income taxes benefit  (43)  (20)
Net loss  (5,539)  (6,296)
                
Loss attributable to non-controlling interest  -   (50)
Net loss attributable to One Horizon Group, Inc.  (5,539)  (6,246)
Less: Preferred dividends  (50)  (100)
Loss from continuing operations  (13,671)  (5,059)
        
        
Loss from discontinued operations  (908)  (2,375)
Net loss for the year  (14,579)  (7,434)
Net loss attributable to non controlling interest  810    
Net loss attributable to One Horizon Group, Inc. Common stockholders $(5,589) $(6,346) $(13,769) $(7,434)
                
Earnings per share                
Basic and diluted net loss per share $(0.16) $(0.18)        
- Continuing operations $(0.27) $(0.40)
- Discontinued operations $(0.02) $(0.19)
Weighted average number of shares outstanding                
Basic and diluted  35,411   33,996   50,857   12,534 

 

See accompanying notes to consolidated financial statements.

F-3


ONE HORIZON GROUP, INC.

Consolidated Statements of Comprehensive Loss

For the years ended December 31, 20162018 and 20152017

(in thousands)

 

  Years ended December 31, 
  2016  2015 
     (As
Restated,
note 12
 
Net loss $(5,539) $(6,296)
Other comprehensive (loss):        
Foreign currency translation adjustment gain (loss)  65   (99)
Comprehensive loss  (5,474)  (6,395)
Comprehensive loss attributable to the non-controlling interest  -   (50)
         
Total comprehensive loss $(5,474) $(6,345)
  Years ended December 31, 
  2018  2017 
       
Net loss $(13,769) $(7,434)
Other comprehensive loss:        
Foreign currency translation adjustment loss  (13)  (51)
         
         
Total comprehensive loss $(13,782) $(7,485)

 

See accompanying notes to consolidated financial statements.

F-4


ONE HORIZON GROUP, INC.

Consolidated Statements of Stockholders'Temporary and Stockholders’ Equity

For the years ended December 31, 20162018 and 20152017

(in thousands)

 

   Preferred
Stock
   Common Stock   Additional 
Paid-
in Capital
   Deferred
Compensation
   Retained
Earnings
(Deficit)
   Accumulated
Other
Comprehensive
Income
(Loss)
   Non-
controlling
Interest
   Total
Stockholders'
Equity
 
   Number
of
Shares
   Amount   Number
of
Shares
   Amount                         
                                         
Balance December 31, 2014
(Restated, note 12)
  171  $1   33,282  $3  $32,163  $(214) $(21,655) $63  $291  $10,652 
Net loss                          (6,246)      (50)  (6,296)
Foreign currency translations                              (99)      (99)
Preferred dividends                          (100)          (100)
Amortization of deferred compensation                      214               214 
Options issued for services                  660                   660 
Common Stock issued for cash          1,866       3,266                   3,266 
Contribution of shares of subsidiary                   241               (241  - 
Costs of financing                  (391)                  (391)
Amounts owing to related party forgiven                  131                   131 
                                         

Balance December 31, 2015

(restated, note 12)

  171  $1   35,148  $3  $36,070  $-  $(28,001) $(36) $-  $8,037 
                                         
Net loss                          (5,539)          (5,539)
Foreign currency translation                              65       65 
Preferred dividends                          (50)          (50)
Issuance of common stock for cash          1,374   1   524                   525 
Common Stock issued for services          347       204                   204 
Options issued for services                  703                   703 
Balance December 31, 2016  171  $1   36,869  $4  $37,501  $-  $(33,590) $29  $-  $3,945 
  Temporary Equity  Common Stock  Additional
Paid-In
  Stock Subscription  Accumulated  Accumulated  Non-Controlling  Total
Stockholders’
 
  Shares  Amount  Shares  Amount  Capital  Receivable  Deficit  OCI  Interest  Equity 
Balance January 1, 2017    $   6,145  $1  $37,504   —   $(33,590) $29  $  $3,944 
                                         
Net loss        —        —      (7,434)        (7,434)
                                         
Foreign currency translation         —       —         (51)     (51)
                                         
Deemed distribution         —      61      (61)         
                                         
Shares issued for services provided        4,275      4,170             —   4,170 
                                         
Shares issued for exercise of warrants        1,521      980    —       —   —    980 
                                         
Options issued for services         —      132          —      132 
                                         
Warrants issued for services         —      1,486          —      1,486 
                                         
Reclassification of redeemable preference shares        —       62          —    —   62 
                                        
Shares issued in settlement of debt        897      692          —    —   692 
                                        
Conversion of preferred shares and note payable to common stock        4,000   1   (500)         —    —   (499)
                                         
Conversion of debenture to common stock        13,000   1   3,349       —    —    —   3,350 
                                         
Beneficial conversion feature        —       155    —    —   —       155 
                                         
Shares issued for sale of stock        417      265       —    —      265 
                                         
Balances, December 31, 2017    $   30,255  $3  $48,356  $  $(41,085) $(22) $  $7,252 
                                         
Net loss                    (13,769)     (810)  (14,579)
                                         
Foreign currency translation                       (13)     (13)
                                         
Shares issued for business combinations        12,277   1   3,340            2,381   5,722 
                                         
Shares issued for exercise of warrants        8,675      2,096               2,096 
                                         
Shares issued for services provided  171   199   11,474   2   4,748               4,750 
                                         
Shares issued for sale of stock        21,525   2   2,672   (1,425)           1,249 
                                         
Shares issued for IP agreement        3,000      548               548 
                                         
Shares issued for conversion of debt  677   406                         
                                         
Shares issued for settlement agreement        354      96               96 
                                         
Beneficial conversion feature              200               200 
                                         
Warrant modification expense              544               544 
                                         
Balances, December 31, 2018  848  $605   87,560  $8  $62,600  $(1,425) $(54,854) $(35) $1,571  $7,865 

 

See accompanying notes to consolidated financial statements.

F-5


ONE HORIZON GROUP, INC.

Consolidated Statements of Cash Flows

For the years ended December 31, 20162018 and 20152017

(in thousands)

 

 Years ended December 31,  Years ended December 31, 
 2016  2015  2018  2017 
   (As
Restated,
note 12
      
Cash used in operating activities:                
Operating activities:                
Net loss for the year $(5,539) $(6,246) $(13,671) $(5,059)
                
Adjustment to reconcile net loss for the year to net cash used in operating activities:                
Depreciation of property and equipment  59   67   2   17 
Amortization of intangible assets  2,010   2,111   2,148   855 
Increase in allowance for doubtful accounts  455   934 
Amortization of debt issue costs  132   132      132 
Amortization of beneficial conversion feature  100   101   355   101 
Amortization of debt discount  200   199      199 
Amortization of deferred compensation  -   214 
Impairment charge  3,761    
Amortization of shares issued for services  47   -   550   270 
Gain on settlement of lease  -   (36)
Warrants issued for services received  544   1,530 
Options issued for services received  703   660      132 
Common shares issued for services received  70   -   4,949   1,244 
Net loss attributable to non-controlling interest  -   (50)
Other income  (930)   
Changes in operating assets and liabilities:                
Accounts receivable  96   (50)  (180)  (100)
Other assets  18   174   (465)  17 
Accounts payable and accrued expenses  389   (302)  (179)  280 
Income taxpayable  -   (3)
Deferred income taxes  (43)  (20)
Deferred revenue  105    
Net cash flows from continuing operating activities  (3,012)  (382)
                
Net cash used in operating activities  (1,303)  (2,115)
Net cash flows from discontinued operating activities  (39)  (321)
        
        
Net cash flows from operating activities  (3,051)  (703)
                
Cash used in investing activities:                
                
Acquisition of intangible assets  (467)  (1,063)
Cash consideration of acquisitions (net of cash acquired)  (168)   
      
Acquisition of property and equipment  (8)  (9)  (2)  (2)
Net cash used in investing activities  (475)  (1,072)
Net cash flows from investing activities – continuing operations  (170)  (2)
                
Cash flow from financing activities:        
Cash flows from investing activities – discontinued operations  (980)  (261)
                
Decrease in long-term borrowing, net  (5)  (144)
Net cash flows from investing activities  (1,150)  (263)
        
Cash flows from financing activities:        
        
Cash proceeds from exercise of warrants  2,096   980 
Cash proceeds from issuance of common stock  400   2,875   1,449   465 
Preferred dividends paid  (50)  (100)
Repayments to related parties  (11)  (844)
Net cash provided by financing activities  334   1,787 
Advances from/(repayments to) related parties  (29)  32 
Net cash flows from financing activities – continuing operations  3,516   1,477 
Cash flows from financing activities – discontinued operations  301    
Net cash flows from financing activities  3,817   1,477 
                
Decrease in cash during the year  (1,444)  (1,400)
Increase/(decrease) in cash during the year  (384)  511 
Foreign exchange effect on cash  (68)  -   (26)  (8)
Cash at beginning of the year  1,772   3,172 
Cash at end of the year $260  $1,772 
        
Cash at the beginning of the year - continuing operations  763   106 
Cash at the beginning of the year – discontinued operations     154 
Cash at end of the year – total $353  $763 

 

See accompanying notes to consolidated financial statements.

F-6


ONE HORIZON GROUP, INC.

Consolidated Statements of Cash Flows (continued)

For the years ended December 31, 20162018 and 20152017

(in thousands)

 

 Year ended December 31,  Year ended December 31, 
 2016  2015  2018  2017 
          
Interest paid $209  $216 
Cash paid for interest $  $ 
Non-cash transactions:                
Common stock issued for services provided  204   - 
Common stock issued in acquisitions $5,722  $ 
Common stock issued for software $548  $ 
Common stock issued for settlement of accrued compensation  125   -  $  $662 
Reclassification of preferred shares $  $62 
Forgiveness of related party debt for sale of discontinued operations $  $1,968 

 

See accompanying notes to consolidated financial statements.

F-7


 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 20162018 and 20152017

 

Note 1. Description of Business, Organization and Principles of Consolidation

 

Description of Business

 

One Horizon Group, Inc (“the Company”) has the following core businesses following the acquisition of 123Wish Inc., (the “Company” or “Horizon”Love Media House, Inc (formerly called C-Rod, Inc.) develops proprietary software primarily, Banana Whale Studios PTE Ltd and Browning Productions & Entertainment, Inc. 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 customers 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.

Principles of Consolidation and Combination

The 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 consolidated financial statements as of and for the yearsyear ended December 31, 20162018 (See Note 3). The core trading businesses are:

(i)Secure Messaging – offers digitally secure messaging software and sells licenses primarily into the gaming, security and educational markets.
(ii)123Wish – an experience based platform where subscribers have a chance to play and win experiences from celebrities, athletes and artists.
(iii)Love Media House (formerly called C-Rod) -a full-service music production, artist representation and digital media business.
(iv)Banana Whale Studios (“BWS”) – a B2B software provider in the online gaming industry that develops and supplies online games to Asian gaming platforms.The interest in BWS was disposed on in February 2019 (see note 4)
(v)Browning Productions & Entertainment - a television filming and production company was acquired on October 23, 2018.

The Company is based in the United States of America, Hong Kong, Singapore, China and 2015, are the accountsUnited Kingdom.

Current Structure of the Company

The Company has the following subsidiaries:

Subsidiary name% Owned
123Wish, Inc.51%
One Horizon Hong Kong Ltd100%
Horizon Network Technology Co. Ltd100%
Love Media House, Inc100%
Global Phone Credit Limited100%
Browning Production & Entertainment Inc.51%

In addition to the subsidiaries listed above, Suzhou Aishuo Network Information Co., Ltd. whichLtd (“Suzhou Aishuo”) is a limited liability company, organized in China and controlled by One Horizon Group, Inc. throughus via various contractual arrangements (Note 3).arrangements. Suzhou Aishuo is treated as one of our subsidiaries for financial reporting purposes in accordance with GAAP.

 

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 net loss attributable toIn February 2019 the Company and the non-controllingentered into to an agreement to acquire a majority interest up to the time that the shareholdings were returned, are both presented in the Consolidated statement of operations.Maham LLC.

 

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

F-8

Note 2. Summary of Significant Accounting Policies

 

Liquidity and Capital Resources

 

As we continue to pursue our operationsHistorically, the Company has incurred net losses 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. Asflows from operations. The Company has principally financed these losses from the sale of equity securities.

On February 4, 2019 the Company sold its equity stake in BWS for $2.0 million of which $1.5 million was received in cash immediately and the balance is payable by December 31, 2016,2019. The impact on the Company’s liquidity is twofold, (i) the immediate increase in cash balances of $1.5 million, and (ii) the ceasing of the investment funding to cover the Banana Whale software development.

In addition, and as more fully described in Note 3, the Company did not have any available credit facilities. Asacquired three additional operating entities during 2018. Coupled with the reduction of expenses due to the disposal of the interest in BWS described above, the Company projects the results of these acquisitions will provide positive cash contributions to the Company’s corporate and central costs by the fourth quarter of 2019.

At December 31, 2018, the Company had cash of $353,000. In addition, in February 2019, the Company received cash proceeds of $1,500,000 together with a promissory note for $500,000 for the disposal of the Company’s interest in BWS. Together with the cash on hand as a result we are inof these transactions and based on the processCompany’s current operational plan and budget, the Company believes that it is probable that it has will have sufficient cash to fund its operations into at least the second quarter of seeking new financing by way of sale of either convertible2020.

However, actual results could materially differ from the Company’s projections. Accordingly, the Company may be required to raise additional funds through various sources, such as equity and debt or equities. Whilst we have been successful infinancings. While the past in obtaining the necessary capital to support our investment and operationsCompany believes it is probable that such financings could be secured, there iscan be no assurance that wethe Company will be able to obtainsecure additional sources of funds to support its operations, or if such funds are available, that such additional financing underwill be sufficient to meet the Company’s needs or on terms 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 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. As a result, our auditors’ report for our 2016 Financial Statements, which are included as part of this report, contains a statement concerning our ability to continue as a “going concern”.us.

 

Basis of Accounting and Presentation

 

These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States.

 

Foreign Currency Translation

 

The reporting currency of the Company is the United States dollar. Assets and liabilities of operations other than those denominated in U.S. dollars, primarily in Switzerland, Ireland,Singapore, 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 Other incomegeneral and expense.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.

 

Accounts Receivablereceivable, concentrations and revenue recognition

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)1.Master License Agreement (“Agreement”) deposits– Deposits are payable in accordance withDigital secure messaging revenue involves the termssale of user licenses, at a fixed price per license, to the customers, which is our sole performance obligation under the existing licensing agreements. The Company recognizes the revenue from the sale of the Agreement. Payment terms may vary from Agreementuser licenses when the valid licenses have been delivered to Agreement, with payment due generally within 30 days of the execution of an Agreement.customer’s server in useable form.

 

b)2.Software consultancy123Wish derives income from user subscriptions, sale of merchandise, sale of tickets for experiences with social media influencers and hardware feesartists, and the sale of corporate sponsorships, each of which is a separate performance obligation. User subscriptions cover a defined period of time (typically one month) and the revenue is recognized as the Company satisfies the requisite performance obligation (over the defined subscription period). Sale of merchandise are recognized when the customer has paid for the item and when the merchandise has been delivered to the customer. Corporate sponsorship packages are non-refundable and relate to brand association. The terms of payment are fixed terms, with payment normally due within stated terms, normally 30 days fromCompany has no further service deliverable to the date ofsponsor and the invoice.revenue is recognized when the agreement is entered into by both parties and the required marketing materials have been delivered to the corporate sponsor for their use.

 

 F-93.Love Media House derives income from recording and video services. Income is recognized when the recording and video services are performed and the final customer product is delivered and the point at which the performance obligation is satisfied. These revenues are non-refundable.

 

c)4.MaintenanceBanana Whale derives income primarily through licensing arrangements with gaming customers. Under these arrangements, Banana Whale provides the customers with a license (functional IP), implementation services and operational feesad-hoc support, which may include unspecified upgrades and end user licenses fees – Payments varyenhancements. The Company has determined that these promised goods and services represent one combined performance obligation since the individual promised goods or services are not distinct in the context of the contract. The revenues earned from the arrangements are primarily based on usage-based royalties. As the Company has determined that the license is the predominant item to which the royalty relates, revenues are recognized when the related sale or usage by the customer to customer. For customers who have not entered into a revenue share agreement,which the terms of payment are fixed and payment is due within stated terms, normally 30 days from the date of the invoice. For customers who have entered into a revenue share agreement, the Company will receive an agreed proportion of a customer’s revenue from the customer’s operation of the Horizon service. The proportion of a customer’s revenue received is used to pay the receivable balance until the balance is paid.royalty relates, occurs.

 

Receivables are generally unsecured. Account balances are charged off against the allowance when the Company determines that certain receivable will probably not be recovered.

5.Browning Production & Entertainment, Inc derives income from the advertising associated with the airing of television series produced by BP&E and also license income from the show of series on certain channels based on the number of viewers attracted advertising. The advertising revenue is recognized when the series to which the advertising relates is aired. Customer payments received prior to the satisfaction of the company’s performance obligation are recorded as deferred revenue in the Company’s consolidated balance sheet.

 

The Company does not have off-balance sheet credit exposure related to its customers. As of December 31, 2016 and December 31, 2015, two2018 three customers accounted for 61% and 51%, respectively,68% of the accounts receivable balance and as of December 31, 2017, one customer accounted for 100% of the accounts receivable balance. Two customers accounted for 31% of the revenue for the year ended December 31, 2018 and one customer accounted for 76% of the revenue for the year ended December 31, 2017.


In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements of Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition” and most industry-specific guidance on revenue recognition throughout the ASC. The new standard is principles-based and provides a five step model to determine when and how revenue is recognized. The core principle of the new standard is that revenue should be recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also requires disclosure of qualitative and quantitative information surrounding the amount, nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. Topic 606 was effective for us in the first quarter of the year ended December 31, 2018 and adoption did not have a material impact on our financial statements.

 

PropertyIn April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Equipment

PropertyLicensing.” ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. This ASU applies to all companies that enter into contracts with customers to transfer goods or services. Topic 606 was effective for us in the first quarter of the year ending December 31, 2018 and equipment is primarily comprised of equipment that is recorded at cost and depreciated or amortized using the straight-line method over their estimated useful lives of between 3 and 5 years.adoption did not have a material impact on our financial statements.


Repairs and maintenance are charged to expense as incurred. Expenditures that substantially increase the useful lives of existing assets are capitalized.

Intangible Assets

 

Intangible assets include software development costs, acquired technology and customer lists and are amortized on a straight-line basis over the estimated useful lives ofranging from four to five years for customer lists and ten years for software development.years. 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, noAs a result of this review, an impairment charges werechange relating to Horizon Software totaling $3.8 million was recognized during either ofin the years December 31, 2016 or 2015.

The Company expenses 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 customers. Judgement is required in determining when technical feasibility of a product is established. The Company has determined that after technological feasibility for software products is reached, the Company continues to address all high risk development issues through coding and testing prior to release of the products to customers. The amortization of these costs is included in cost of revenue over the estimated life of the products.

During the yearsyear ended December 31, 2016 and 2015 software development costs of $467,000 and $1,063,000 respectively, have been capitalized.

2018 (2017: $nil).

F-10


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 years ended December 31, 20162018 and 20152017 the Company recorded no impairment losses related to the Company’s long-lived assets.

Revenue Recognition

assets other than the previously discussed intangible asset impairment charge. The Company recognizes revenue when itimpairment determination is realized or realizablesubject to a high degree of estimation uncertainty and earned. The Company establishes persuasive evidence of a sales arrangement for each type of revenue transaction based on a signed contract withare ongoing as we continue to develop the customer and that delivery has occurred or services have been rendered, 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 date of invoices raised for installments due under the agreement, unless payment terms exceed one year, as described below, presuming all other relevant revenue recognition criteria are met. Revenue from sales of perpetual licenses to other entities is recognized over the agreed collection period.

·Revenue for user licenses purchased by customers is recognized when the user license is delivered.

·Revenue for maintenance services is recognized over the period of delivery of the services.

·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 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.

F-11

We enter into arrangements 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 the deliverable elements if there are multiple elements. PCS may include rights to upgrades, when and if available, support, updates and enhancements. When vendor specific objective evidence (“VSOE”) of fair value exists for all elements in a multiple element arrangement, revenue is allocated to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when the same element is sold separately. Accordingly, the judgments involved in assessing the fair values of various elements of an agreement can impact the recognition of revenue in each period. Changes in the allocation of the sales price between deliverables might impact the timing of revenue recognition, but would not change the total revenue recognized on the contract. When elements such as software and services are contained in a single arrangement, or in related arrangements with the same customer, we allocate revenue to each element based on its relative fair value, provided that such element meets the criteria for treatment as a separate unit of accounting. In the absence of fair value for a delivered element, revenue is first allocated to the fair value of the undelivered elements and then allocated to the residual delivered elements. In the absence of fair value for an undelivered element, the arrangement is accounted for as a single unit of accounting, resulting in a delay of revenue recognition for the delivered elements until the undelivered elements are fulfilled. No sales arrangements to date include undelivered elements for which VSOE does not exist.acquired companies.

 

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.

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 year ended December 31, 2016 $1,175,000 or 73% of the Company’s revenue was concentrated in the hands of one major customer. During the year ended December 31, 2015, $1,205,000 or 79% of the Company’s revenue was concentrated in the hands of two customers.

Advertising Expenses

It is the Company’s policy to expense advertising costs as incurred. Advertising costs incurred during the years ended December 31, 2016 and 2015 were $39,000 and $30,000, respectively.

Research and Development Expenses

Research and development expenses include all direct costs, primarily salaries for Company personnel and outside consultants, 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 years ended December 31, 2016 and 2015 of $605,000 and $579,000, respectively.

Debt Issue Costs

In accordance with the ASU No. 2015-03 the debt issue costs related to long-term debt are shown 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.

F-12

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.loss. Accordingly no liability has been recorded in the accompanying consolidated balance sheets in respect of this mattermatter. However, such potential penalties may be material to the Company’s financial statements.

 

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 years ended December 31, 20162018 and 2015,2017, all 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 comparisons.computations.

 

Accumulated Other Comprehensive Income (Loss)

Other comprehensive income (loss), as defined, includes net income (loss), foreign currency translation adjustment, 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, 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.

F-13


Stock-based payments

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

 

Recently Issued Accounting Standards Not Yet AdoptedFair Value Measurements

GAAP establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of fair value hierarchy defined by GAAP are described below:

Level 1 - Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2 - Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3 - Pricing inputs that are generally observable inputs and not corroborated by market data.

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

The Company’s Level 3 financial liabilities consist of contingent consideration relating to the acquisitions of 123Wish and LMH which requires significant judgment or estimation (see Note 3).


Note 3. Acquisitions

123Wish, Inc.

In February 2018 the Company completed the acquisition of a 51% controlling interest in 123 Wish, Inc. (formerly Once in a Lifetime LLC) a Delaware corporation in exchange for the issuance of 1,333,334 fully paid and non-assessable shares of common stock with a fair value of $1.39 million. In addition, the Company shall issue fully paid and non-assessable shares of common stock equal to 2.5 times of the net, after tax, earnings of 123 Wish for the nine month period after the date of acquisition and fully paid and non-assessable shares of common stock equal to 4.5 times the net, after tax, earnings of 123 Wish for the second six month period after the date of acquisition. 123 Wish, Inc. has proprietary applications which use the social media aspect of the internet.

The following table summarizes the consideration paid and the fair value of the assets acquired and liabilities assumed (In thousands):

Consideration Paid:

Common stock $1,387 
Non controlling interest  1,353 
  $2,740 
     
Fair values of identifiable assets acquired and liabilities assumed:    
     
Assets acquired:    
Cash $14 
Other intangible assets  2,307 
Goodwill  419 
     
Net Assets Acquired $2,740 

The consideration paid was 1,333,334 common shares valued at $1.04 per share. Separately identifiable intangible assets include technology which were valued by management using discounted cash flow and replacement cost approaches.

As of December 31, 2018, the Company has estimated that no additional share amounts will need to be issued as contingent consideration and therefore is not included in the Company’s allocation of the purchase price in the table above.

Love Media House, Inc. (formerly C-Rod, Inc.)

In March 2018 the Company completed the acquisition of 100% ownership of Love Media House, Inc. (“LMH”) a Florida corporation in exchange for $150,000 cash and 3,376,147 fully paid and non-assessable shares of common stock with a fair value of $1.9 million. LMH is in the music and video content business. The financial statements of LMH have been included in the consolidated financial statements from the date of acquisition.


The following table summarizes the consideration paid and the fair value of the assets acquired and liabilities assumed (In thousands):

Consideration Paid:

Cash $150 
Common stock  1,885 
  $2,035 
     
Fair values of identifiable assets acquired and liabilities assumed:    
     
Assets acquired:    
Cash $5 
Other intangible assets  900 
Goodwill  1,172 
Total assets acquired  2,077 
     
Liabilities assumed:    
Accounts payable  42 
Total Liabilities Assumed  42 
     
Net Assets Acquired $2,035 

Separately identifiable intangible assets were customer relationships and were valued by management using discounted cash flow and replacement cost approaches.

As of December 31, 2018, the Company has estimated that no additional share amounts will need to be issued as contingent consideration and therefore is not included in the Company’s allocation of the purchase price in the table above.

Banana Whale Studios PTE Ltd

 

In May 2014,2018 the Financial Accounting Standards BoardCompany completed the acquisition of 51% ownership of Banana Whale Studios PTE Ltd (“FASB”BWS”) issued Accounting Standard Update (“ASU”) 2014-09 –Revenue From Contracts with Customers which will supersede nearlya Singapore corporation. The acquisition of Banana Whale was based on an earnout formula solely and should Banana Whale fail to reach forecasted profit numbers during the first 24 months then some, or all existing revenue recognition guidance under U.S. GAAP.of the shares allocated would be refundable to the Company.

At the time of acquisition 7,383,000 shares of common stock were placed in escrow for payment of the confirmed earn out. However, based on the terms of the ultimate disposition (note 4) of BWS no shares were ultimately transferred or other consideration paid. 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 reflectsfollowing table summarizes the consideration topaid and the fair value of the assets acquired and liabilities assumed in May 2018 (In thousands):

Consideration Paid:

Common stock $ 
Non-controlling interest  894 
  $894 

Fair values of identifiable assets acquired and (liabilities) assumed:

Assets acquired:    
Cash $42 
Accounts receivable  11 
Equipment  37 
Other receivable  2,022 
Liabilities assumed:    
Accounts payable  (288)
  $1,824 
Bargain purchase gain $930 

On February 4, 2019 the Company sold it’s holding in Banana Whale for $2.0 million of which $1.5 million was in cash on completion and the entity expects to be entitledbalance was a note receivable for $500,000 payable by December 31, 2019. The note is secured by a pledge of Banana Whale shares held in the name the four founding shareholders of Banana Whale. The pledged shares are held in escrow pending the payout of the Note.

Browning Production & Entertainment

In October 2018 the Company completed the acquisition of 51% ownership of Browning Productions & Entertainment, Inc. (“Browning Productions”) a Florida corporation in exchange for those goods or services. This ASU also requires additional disclosure about$10,000 cash and an allocation of 300,000 fully paid shares of common stock with a fair value of $101,100. Of these shares, 150,000 have been issued with the nature, amount, timingremaining balance of 150,000 to be issued upon receipt of audited financial statements of Browning Productions. The Company had previously paid a deposit of $10,000 cash and uncertainty35,000 fully paid shares of revenue and cash flows arising from customer contracts, including significant judgements and changes in judgements and assets recognized from costs incurred to obtain or fulfillcommon stock with a contract.fair value of $18,200.

 

The original effective date for ASU 2014-09 would have requiredfollowing table summarizes the consideration paid and the fair value of the assets acquired and liabilities assumed as of October 22, 2018 (In thousands):

Consideration Paid:

Common stock $119 
Cash  20 
Non-controlling interest  134 
  $273 

Fair values of identifiable assets acquired and (liabilities) assumed:

Assets acquired:    
Cash $ 
Accounts receivable  43 
Other assets  23 
Equipment  2 
Goodwill  622 
Liabilities assumed:    
Accounts payable  (42)
Deferred revenue  (72)
Loans and advances  (303)
     
Net Assets Acquired $273 


Note 4. Discontinued Operations

In November 2018 the management of the Company’s then 51% controlled subsidiary, Banana Whale Studios PTE Ltd., entered into discussions whereby the Company would sell its shares of BWS to adopt beginning in its first quarter 2017. In July 2015,a third party. Under the FASB voted to amend ASU 2014-09 by approvingagreement dated January 31, 2019, the Company received cash of $1,500,000 and a one year deferralpromissory note of $500,000 and the return of the effective date as well as providing the option7,383,000 Company shares issued on acquisition. The Company shares are held in Escrow for three months to early adopt the standard on the original effective date. Accordingly,secure certain warranties given by the Company may adopt the standard in either its first quarter of 2017 or 2018. The new revenue standard may be applied 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 it consolidated financial statements.closure.

 

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 ofaccounted for the operations assets, liabilities and cash flows of Aishuo have been consolidated in the accompanying consolidated financial statements.

Summarized assets, liabilities and resultsas discontinued operations. The statement of operations prior to eliminations in consolidation, of Aishuo areinclude discontinued operations as follows:(in thousands)

 

  December 31  December 31 
  2016  2015 
         
Assets $5  $43 
Intercompany receivables/(payables)  (355)  (123)
Other liabilities  (12)  (60)
Revenue  224   56 
Net Loss  (292)  (286)

F-14

  Year ended
December 31,
 
  2018 
    
Revenue $156 
Cost of Revenue    
 Hardware  504 
   504 
Gross Deficit  (348)
Expenses    
 General and administrative  551 
 Depreciation  9 
   560 
Loss from Discontinued Operations $(908

 

Note 4. Property and Equipment, netThe balance sheet of discontinued operations as at December 31, 2018 is as follows: (in thousands)

 

Property

  December 31, 
  2018 
    
Current assets    
Cash 18 
Accounts Receivable  111 
   129 
Property and equipment   36 
  $165 
Current liabilities    
Accounts payable 1 
Loans payable  300 
   $301 
Shareholder deficiency   (136)
  $165 

In the year ended December 31, 2017 the Company disposed of a Voice over I.P. software business together with the subsidiaries incorporated in Ireland, Switzerland and equipment consistUnited Kingdom, which were involved in that business segment to Mr. Collins, the former Chief Executive Officer of the following:(inCompany. In consideration Mr. Collins forgave the liability of $1.97 million then due to Mr. Collins. The Company accounted for the operations of this business segment as discontinued operations. The 2017 statement of operations include discontinued operations as follows (in thousands)

 

  December 31  December 31 
  2016  2015 
         
Equipment $285  $291 
Less accumulated depreciation  (243)  (195)
Property and equipment, net $42  $96 
  Year ended
December 31,
 
  2017 
    
Revenue $496 
Cost of Revenue  1,012 
Gross Deficit  (516)
Expenses    
 General and administrative  998 
 Depreciation  5 
 Research and development  255 
   1,258 
Impairment Loss  (622)
Income Taxes  21 
Loss from Discontinued Operations $(2,375)

Note 5. Intangible Assets

 

Intangible assets consist primarily of software development costs, intellectual property and customer and reseller relationships which are amortized over the estimated useful life, generally on a straight-line basis with the exception of customer relationships, which are generally amortized over the greater of straight-line or the related asset’s pattern of economic benefit.basis.(in thousands)

 

 December 31  December 31  December 31 December 31 
 2016  2015  2018 2017 
             
Horizon software $18,634  $17,879  $ $6,527 
ZTEsoft Telecom software  438   469 
123Wish Platform intellectual property 548  
Social online application software 2,307  
Customer lists  885   885  900  
  19,957   19,233      
 3,755 6,527 
Less accumulated amortization  (11,550)  (9,410) (571) (1,187)
       
Intangible assets, net $8,407  $9,823  $3,184 $5,340 

 

Amortization of intangible assets for each of the next four years is estimated to be approximately $2,100,000$796,000 per year

F-15

Note 6. Convertible Debentureyear.

 

InNote 6. Goodwill

The following is the detail of the Goodwill that arose on acquisitions described in Note 3:

  December 31  December 31 
  2018  2017 
       
123Wish, Inc. $419  $ 
Love Media House, Inc. (formerly C. Rod, Inc.)  1,172    
Browning Productions & Entertainment, Inc  622     
  $2,213  $ 

Note 7. Notes Payable, Related Parties

As of December 22, 201431, 2018 amounts totalling $205,000 were owed to certain members of the management at subsidiary companies. The amounts are unsecured, interest free and have no specified repayment dates.


Note 8. Notes Payable

a) Promissory notes.

The promissory notes due to Zhanming Wu ($500,000) and the Company’s CEO, Mark White ($500,000), both considered related parties, including accrued interest of 7% per annum from issuance, are due for repayment on August 31, 2019. The promissory notes were issued as a result of the re-organization of the Company closed a private placementin August 2017 involving the removal 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 388,889Redeemable Preference Shares and the Debenture totaling in exchange for new shares of common stock and the potential for performance warrants.promissory notes.

 

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.b) Other notes payable.

 

The Class C and Class D warrants have a term of four yearsNotes payable by Browning Productions & Entertainment, Inc. totaling $101,000 are due to unrelated parties and are each entitled to purchase one-fourthrepayable on demand and interest bearing at average rates of a share of common stock. In total the Company issued 388,889 Class C warrants and 388,889 Class D warrants.5.4% per year.


Note 9. Share Capital

 

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 debt discount 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 statements 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. Related-Party Transactions

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

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

F-16

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

In the quarter ended March 31, 2015 the Company entered into a sales contract in the normal course of business with a customer (Horizon Latin America) which the Company holds minority ownership interest. The customer purchased perpetual software license for $500,000. As at December 31, 2015 Horizon Latin America owed the Company $250,000 (2015: $400,000)

The Company owns a cost based investment interest of 10% in the customer with limited voting rights or board representation.

Note 8. Share Capital

Preferred Stock

The Company’s authorized capital includes 50,000,000 shares of preferred stock of $0.0001 par 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.

The holders of Series A Preferred Stock were entitled to receive cumulative dividends during a period of twenty-four (24) months from and after the Issuance Date (the “Dividend Period”). The Dividend Period ended on July 21, 2016. During the Dividend Period for each outstanding share of Series Preferred Stock, dividends were payable quarterly in cash, at the rate of 10% per annum on or before each ninety (90) day period following the Issuance Date (each a “Dividend Payment Date”), with the first Dividend Payment Date to occur promptly following the three month period following the Issuance Date, and continuing until the end of the Dividend Period. Following the expiration of the Dividend Period, the holders of Series A Preferred Stock shall not be entitled to any additional dividend payment or coupon rate.

Shares of Series A Preferred Stock are convertible in whole or in part, at the option of the holders, into shares of common stock at $5.85 per share prior to the Maturity, and all outstanding shares of Series A Preferred Stock shall automatically convert to shares of common stock upon Maturity, provided however, at no time may holders convert shares of Series A Preferred Stock if the number of shares of common stock to be issued pursuant to such conversion would cause the number of shares of common stock beneficially owned by such holder and its affiliates to exceed 9.99% of the then issued and outstanding shares of common stock outstanding at such time, unless the holder provides us with a waiver notice in such form and with such content specified in the Series A Certificate of Designation.

Shares of Series A Preferred Stock are redeemable, at the option of the holders commencing any time after 12 months from and after the closing at a price equal to the original purchase price plus all accrued but unpaid dividends. In the event that the Company completes a financing of $10 million or greater prior to Maturity, the Series A Preferred Stock will be redeemed at a price equal to the original purchase price plus all accrued but unpaid dividends.

170,940 shares of Series A preferred stock are issued and outstanding as of December 31, 2016.

F-17

Mandatorily Redeemable Preferred Shares (Deferred Stock)

The Company’s subsidiary OHG has in issue 50,000 shares of deferred stock, par value of £1 to third parties. These shares are non-voting, non-participating, redeemable and have been presented as a long-term liability.

Common Stock

The Company is authorized to issue 200 million shares of common stock, par value of $0.0001.

 

During the year ended December 31, 20162018 the Company:

 

·issued 200,000Issued 225,000 shares of common stock for services with a fair value of $357,750
Issued 1,333,334 shares of common stock, with a fair value of $1.4 million, for the acquisition of 51% of Once in a Lifetime
Issued 100,000 shares of common stock for services provided with a fair value of $204,000
Issued 504,167 shares of common stock for conversion of convertible note and accrued interest in the amount of $302,500
Issued 172,222 shares of common stock for conversion of convertible note and accrued interest in the amount of $103,000
Issued 172,222 shares of common stock for services provided with a fair value of $200,000
Issued 750,000 shares of common stock for exercise of warrants at a price of $0.75 per share.
Issued 50,000 shares of common stock for services provided with a fair value of $80,000.
Issued 1,376,147 shares of common stock, with a fair value of $1,541,285, as part consideration for the acquisition of Love Media House, Inc.
Issued 100,000 shares of common stock for services to be provided with a fair value of $133,960$85,000.
Issued 225,000 shares of common stock for services to be provided with a fair value of $168,750
Issued 850,000 shares of common stock for services provided with a fair value of $425,000
·issued 1,018,925Issued 7,383,000 shares of common stock, for the acquisition of 51% of Banana Whale Studios Pte., Ltd see note 3.
Issued 1,575,000 shares of common stock for services provided with a fair value of $787,500
Issued 850,000 shares of common stock for exercise of warrants at a price of $0.50 per share
Issued 600,000 shares of common stock for services provided with a fair value of $306,000
Issued 300,000 shares of common stock for services provided with a fair value of $150,000
Issued 1,750,000 shares of common stock for cash of $0.20 per share
Issued 1,850,000 shares of common stock for exercise of warrants at a price of $0.10 per share
Issued 35,000 shares of common stock, with a fair value of $18,200, for an option to acquire an interest in Browning Productions.
Issued 1,525,000 shares of common stock for cash of $114,375
Issued 975,000 shares of common stock for exercise of warrants at a price of $0.075 per share
Issued 4,500,000 shares of common stock for cash of $360,000
Issued 1,000,000 shares of common stock for services provided with a fair value of $175,000
Issued 3,000,000 shares of common stock for acquisition of software with a fair value of $548,000
Issued 150,000 shares of common stock, with a fair value of $51,000, for the acquisition of 51% of Browning Productions.
Issued 5,550,000 shares of common stock for services provided with a fair value of $1,148,000
Issued 4,250,000 shares of common stock for cash of $324,500
Issued 4,250,000 shares of common stock for exercise of warrants at a price of $0.20 per share
Issued 354,409 shares of common stock, with a fair value of $96,000, pursuant to a settlement
Issued 2,000,000 shares of common stock, with a fair value of $344,000, as an adjustment to the purchase price of Love Media House, Inc.
Issued 9,500,000 shares of common stock for subscription receivable of $1,425,000

During the year ended December 31, 2017 the Company:

Issued 91,667 shares of common stock for services provided with a fair value of $176,055
Issued 127,366 shares of common stock for exercise of warrants at a price of $0.80 per share
Issued 417,461 shares of common stock for cash proceeds of $400,000$265,000
·issued 45,000Issued 859,802 shares of common stock for settlement of related party loan in the amount of $662,048
Issued 3,000,000 shares of common stock in connection with five year employment contracts for executives with a fair value of $2,750,000
Issued 55,556 shares of common stock for exercise of warrants at a price of $0.80 per share
Issued 37,500 shares of common stock for settlement of amount owing of $30,000
Issued 13,000,000 shares of common stock as part of settlement of convertible debenture and accrued interest in the amount of $3,350,000
Issued 4,000,000 shares of common stock for redemption of 555,555 shares of Series A-1 Preferred Stock
Issued 108,333 shares of common stock for services receivedprovided with a fair value of $33,750$83,416
·issued 457,366Issued 833,334 shares of common stock in part settlementfor the exercise of accrued compensation inwarrants at a price of $0.60 per share
Issued 1,075,000 shares of common stock for services provided with a fair value of $1,161,000
Issued 350,000 shares of common stock for the amountexercise of $160,535warrants at a price of $0.60 per share
Issued 155,000 shares of common stock for the exercise of warrants at a price of $0.80 per share

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 accompanying warrants. 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 the Company’s consent.

Stock Purchase Warrants

AtAs at December 31, 2016,2018, the Company had reserved 3,898,941185,169 shares of its common stock for the following outstanding warrants:warrants with weighted average exercise price of $0.80. Such warrants expire at various times up to July 2020.

Number of Warrants   Weighted average
exercise price
  Expiry Intrinsic value
           
 3,898,941   2.73  To December 2019 -

 

During the year ended December 31, 2016 160,0002018, 5,225,000 warrants were issued, 301,219 warrants were forfeited 764,195and 8,675,000 warrants were issued and none exercised.exercised, for proceeds of $2,096,000.

 

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During the year ended December 31, 2018, the Company agreed to reduce the exercise price on 6.5 million outstanding warrants, which resulted in additional compensation cost of $544,000, in order to obtain additional funding.

 

If, atUnder the timeengagement agreement with Maxim Group LLC, the Company has agreed for any financing arranged by Maxim for the Company, during the contractual period, the Company will in addition to paying a cash fee of exerciseup to 7% of warrants issued pursuantfunds raised to deliver a cash warrant to Maxim to purchase shares in the financingCompany equal to 4% of August 2015, wherein a totalthe number of 933,107 warrants were issued, that the shares issued upon exercise arein the financing. The warrants will be exercisable at 120% of the pricing of the common stock issued in the raise. The exercisable period is 12 months from the date of the raise, thereafter if not able to be included in a registration statement then the holder may request thatexercised the warrants so exercised be done on a cashless basis.will lapse.

 

Note 9.10. Stock-Based Compensation

 

The shareholders approved a stock option plan on August 6, 2013, the 2013 Equity Incentive Plan (“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 Following the reorganization in August 2017, all outstanding employee stock available for granting awardsoptions were forfeited under the 2013 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%rules of the total number of shares of common stock outstanding. On each of January 1, 2014, 2015 and 2016 the number of shares available for granting awards under the 2013 Plan has been increased by 1,000,000 shares.Plan.

 

There have been no options issued in the yearyears ended December 31, 2016.2017 and 2018.


A summary of the 2013 Plan options for the yearstwelve months ended December 31, 2015 and 2016,2017, is as follows:

 

  Number of  Weighted
Average
 
  Options  Exercise Price 
       
Outstanding at January 1, 2015  500,000  $4.54 
Options issued  564,000   1.09 
Options forfeited  (120,000)  4.54 
Outstanding at December 31, 2015  944,000  $2.48 
Options forfeited  (96,500)  2.52 
Outstanding at December 31, 2016  847,500   2.47 
  Number of  Weighted
Average
 
  Options  Exercise Price 
       
Outstanding at January 1, 2017  141,250  $14.83 
Forfeited  (141,250)  22.61 
Outstanding at December 31, 2017     N/A 

 

As atDuring the year ended December 31, 20162018 there was unrecognized compensation expense of approximately $167,000no stock option activity relating to be recognized over the remaining vesting periods.

At December 31, 2016, 4,936,000 shares of common stock were reserved for all outstanding options and future commitments under the 2013 Equity Incentive Plan.

 

Prior to the 2013 Plan the Company issued stock options to employees “Other Stock Options”.under other stock plans.

 

A summary of the Company’s other stock options for the yearsyear ended December 31, 2015 and 2016,2017, is as follows:

 

  Number of  Weighted
Average
 
  Options  Exercise Price 
       
Outstanding at January 1, 2015  584,650  $0.53 
Options issued  291,900  $0.53 
Options forfeited  (850) $0.51 
Outstanding at December 31, 2015  875,700  $0.53 
Options issued  -   - 
Options forfeited  -   - 
Outstanding at December 31, 2016  875,700  $0.53 

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  Number of  Weighted
Average
 
  Options  Exercise Price 
       
Outstanding at January 1, 2017  145,950  $3.18 
Forfeited  (145,950)  22.61 
Outstanding at December 31, 2017     N/A 

 

As of December 31, 2016 there was unrecognized compensation expense of approximately $64,000, related to Other Stock Options, to be recognized over the remaining vesting period.

The following table summarizes all stock options outstanding at December 31, 2016:

   Number  Average  Number  Intrinsic 
   Outstanding  Remaining  Exercisable  Value 
   at  Contractual  at  at 
   December 31,  Life  December 31,  December 31, 
Exercise Price  2016  (Years)  2016  2016 
                   
$0.53   291,900   3.50   291,900   - 
 0.53   291,900   5.50   291,900   - 
 0.53   291,900   8.75   291,900   - 
 4.54   340,000   7.00   -   - 
 1.09   507,500   8.50   -   - 
Total   1,723,200       875,700   - 

The fair value of each option granted is estimated at the date of grant using the Black-Scholes option-pricing model.

The assumptions used in calculating the grant date fair value of options and other stock options granted duringDuring the year ended December 31, 2015 were as follows:

·Risk free interest rate2.50%
·Expected term2–3 years
·Volatility95–123%
·Dividend
·forfeiture rate0–30%

Note 10. Income Taxes2018 there was no stock option activity relating to other stock plans. 

 

In March, 2018 the Company adopted an Equity Incentive Plan (“the 2018 Plan”) to provide additional incentives to the employees, directors and consultants of the Company to promote the success of the Company’s business. During the year ended December 31, 2018, no common stock of the Company was issued under the 2018 Plan.

Note 11. Income tax benefit of $43,000 and $20,000 in 2016 and 2015, respectively, is recognized for the impact of deferred tax assets and liabilities, which represent consequences of events that have been recognized differently in the financial statements under GAAP than for tax purposes. Taxes

The difference between the U.S. statutory federal tax rate of 34% in 2016 and 2015 and the provision for income tax recorded by the Company is primarily attributable to the change in the Company’s valuation allowance against its deferred tax assets and to a lesser extent to the tax the differential on losses in foreign countries.

 

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Deferred Tax Assets

The Company’s United Kingdom subsidiary has non-capital losses of approximately $10.9 million available for future deductions from taxable income derived in the United Kingdom, which do not expire. The potential benefit of net operating loss carryforwards has not been recognized in the combinedconsolidated financial statements since the Company cannot determine that it is more likely than not that such benefit will be utilized in future years. The tax years 2006 through 20152017 remain open to examination by federal authorities and otherin certain jurisdictions in which the Company operates namely United Kingdom, Switzerland, Ireland, China and Hong Kong. The components of the net deferred tax assetassets and the amount of the valuation allowance are as follows:(in thousands)

 

  December 31 
  2018  2017 
       
Deferred tax assets        
Net operating loss carryforwards  3,577   2,138 
Valuation allowance  (3,577)  (2,138)
Net deferred tax assets $  $ 

  December 31 
  2016  2015 
       
Deferred tax assets        
Net operating loss carryforwards - International  6,097   4,527 
Valuation allowance  (6,097)  (4,527)
Net deferred tax assets $-  $- 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 became law (the “Tax Act”). The increase inTax Act enacts a broad range of changes to the valuation allowance was $529,000Internal Revenue Code of 1986, as amended (the “IRC”). The Tax Act, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and net operating losses, allows for the year ended December 31, 2016expensing of capital expenditures and $449,000 forputs into effect the year ended December 31, 2015.

Note 11. Commitmentsmigration from a “worldwide” system of taxation to a territorial system. The tax reform did not have a material impact to our financial statements as our net deferred tax assets and Contingencies

Contractual Commitments

The Company incurred rent expense of $63,000liabilities are fully reserved. We urge our stockholders to consult with their legal and $86,000, respectively, for the years ended December 31, 2016 and 2015.

There are no minimum contractual lease commitments in excess of one year from December 31, 2016.

Legal Proceedings

Since 2014 the Company has been involved in legal proceedings with Broadband Satellite Services Limited (“BSS”) to whom we sold had sold former subsidiaries in 2012.  In December 2016 the parties agreed to drop their respective claims and counterclaims without any payment required to paid by either party. As a result the Company has written off receivable amounts due by BSS totaling approximately $455,000 in the Company’s books having provided previously an amount totaling approximately $605,000 against the original unpaid sales invoices.

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Note 12. Restatements

In the first quarter of 2017, management’s working with the Company’s advisers and auditors’ reviewed the pace of rollout of the Company’s licensed softwaretax advisors with respect to revenue share customers over the previous two years. Based on the reviewany such legislation and the slower than forecasted commercial roll out by somepotential tax consequences of the customers during the past two years management determined that the timing of the write off of slow paying account receivable balances should be altered. Accordingly the previously reported balances as outlined below have been restated. As a result, the allocation of the provision for uncertain accounts receivable madeinvesting in 2015 and 2016 was restated as follows.our common stock.

Annual Balance Sheet data:

  December 31, 2014  December 31, 2015 
  As reported  As restated  As reported  As restated 
   $000’s   $000’s   $000’s   $000’s 
                 
Accounts receivable  9,072   2,644   3,560   1,760 
Total current assets  12,820   6,392   5,734   3,934 
Total assets*  24,406   17,978   15,934   14,134 
Retained earnings deficit  (15,227)  (21,655)  (26,201)  (28,001)
Total stockholders’ equity  17,080   10,652   9,837   8,037 

Quarterly Balance Sheet data:

  March 31, 2015  June 30, 2015  September 30, 2015 
  As reported  As restated  As reported  As restated  As reported  As restated 
   $000’s   $000’s   $000’s   $000’s   $000’s   $000’s 
                         
Accounts receivable current portion  5,879   2,567   5,448   2,476   3,811   2,510 
Total current assets  8,386   5,074   6,887   3,915   6,903   5,206 
Accounts receivable, net of current portion  3,116   0   3,456   0   5,127   0 
Total assets*  23,024   16,596   21,823   15,395   22,870   16,442 
Retained earnings deficit  (16,185)  (22,613)  (17,758)  (24,186)  (19,386)  (25,814)
Total stockholders’ equity  16,305   9,877   15,287   8,859   16,321   9,893 

  March 31, 2016  June 30, 2016  September 30, 2016 
  As reported  As restated  As reported  As restated  As reported  As restated 
   $000’s   $000’s   $000’s   $000’s   $000’s   $000’s 
                         
Accounts receivable current portion  3,058   1,258   2,963   1,163   3,037   1,237 
Total current assets  5,114   3,314   4,552   2,752   3,840   2,040 
Total assets*  14,943   13,143   13,806   12,006   12,793   10,993 
Retained earnings deficit  (27,484)  (29,284)  (28,927)  (30,727)  (30,420)  (32,220)
Total stockholders’ equity  9,114   7,314   7,795   5,995   6,586   4,786 

* = Prior to giving effect to the implementation of ASU 2015-03 (Note 2).

F-22

Statement of operations data:

  December 31, 2015 
  As reported  As restated 
   $000’s   $000’s 
         
Increase in allowance for doubtful accounts  5,562   934 
Loss from operations  (10,229)  (5,601)
Loss from operations before income taxes  (10,944)  (6,316)
Net loss for the year  (10,924)  (6,296)
Net loss for the year attributable to One Horizon Group, Inc  (10,874)  (6,246)
Net loss attributable to One Horizon Group Inc common stockholders  (10,974)  (6,346)
Earnings per share – basic $(0.32) $(0.18)
Earnings per share – diluted $(0.30) $(0.16)

There was no impact of the restatement on the previously reported quarterly income statements during the years ended December 31, 2015 and 2016 as previously filed on Form 10-Q as the allowance was initially recorded the fourth quarter of each year. Accordingly such information has not been presented in this restatement

 

Note 13.12. Segment Information

 

The Company has twothe following business segments both of which involvefor the development and licensing of software for mobile VoIP. One for business to business line and one for business to consumer line, primarily represented by Aishuo. For the yearsyear ended December 31, 20162018 and 2015 activity in the business to consumer line is not material for separate segment presentation.2017.

 

The Company’s revenues for continuing operations were generated in the following geographic areas:(inbusiness segments (in thousands)

  December 31,  December 31, 
  2018  2017 
       
Sale of secure messaging licenses $228  $714 
123Wish (from January 2018)  109    
Love Media House (from March 2018)  446    
Browning Productions (from November 2018)  4     
Total $787  $714 

 The following is a detail of the Company’s cost of sales by business segment:

  December 31,  December 31, 
  2018  2017 
       
Sale of secure messaging licenses including amortization of software $1,577  $855 
123Wish (from January 2018)  404    
Love Media House (from March 2018)  258    
Browning Productions (from November 2018)      
Total $2,239  $855 

The following is a detail of the Company’s general and administrative and other expenses by business segment:

  December 31,  December 31, 
  2018  2017 
       
Sale of secure messaging licenses including impairment charge $4,021  $ 
123Wish (from January 2018)  869    
Love Media House (from March 2018)  490    
Browning Productions (from November 2018)  12    
Corporate  7,383   4,253 
Total $12,775  $4,253 

 The following is a detail of the Company’s other income and expenses by business segment:

  December 31,  December 31, 
  2018  2017 
       
Sale of secure messaging licenses $  $ 
123Wish (from January 2018)      
Love Media House (from March 2018)      
Browning Productions (from November 2018)  22    
Corporate  534   (665) 
Total $556  $(665) 


The following is a detail of the continuing net (loss) by business segment:

  December 31,  December 31, 
  2018  2017 
       
Sale of secure messaging licenses $(5,327) $(149) 
123Wish (from January 2018)  (760)   
Love Media House (from March 2018)  (135)    
Browning Productions (from November 2018)  14    
Corporate  (7,463)  (4,910)
Total $(13,671) $(5,059)

Note 13. Legal proceedings

 

  Year ended December 31, 
  2016  2015 
       
China $224  $57 
Rest of Asia  1,325   900 
Europe and Russia  48   25 
The Americas  7   550 
  $1,615  $1,532 

Note 14. Subsequent events

On February 28, 2017,May 30, 2018, Zhanming Wu (“Wu”), the record owner of 15,000,000 shares of common stock of One Horizon Group, Inc. (the “Company”)  received a notice from The Nasdaq Stock Market LLC (“Nasdaq”) Listing Qualifications Staff (the “Staff”) stating that, commenced an action in the Staff has determined, unlessCourt of Chancery of the State of Delaware [Case No.2018-0387-JRS; the “Injunction Action”] against the Company timely requests an appealand its directors and officers (collectively, the “Director Defendants”) alleging multiple breaches of contract between the Company and Wu, and seeking (i) damages; (ii) to enjoin the Company from issuing, offering, selling or granting any shares of its common stock to any person or entity, or consummate any merger, acquisition or similar transaction without the prior approval of Wu, and to prevent the Individual Defendants from undermining that right by engaging in any further transactions designed to entrench themselves as directors and officers of the Staff’s determination, before Nasdaq’s Hearing Panel (the “Panel”), by March 7, 2017,Company and to delistdilute Wu’s stock ownership below 30% of the outstanding shares of the Company, (iii) to enforce Wu’s right to appoint four directors to the Company’s common stock from the Nasdaq Capital Market because the Company is not in compliance with the $1.00 minimum bid price requirement (the “Minimum Bid Price”) for continued listing set forth in the Nasdaq Listing Rule 5550(a)(2).The Company filed a request for a hearing before the Panel, on March 2, 2017, which request will stay any delisting or suspension action by the Staff pendingBoard of Directors, (iv) to rescind the issuance of 7,383,000 shares to the Panel’s decisionformer stockholders of Banana Whale Studios Pte. Ltd (“Banana Whale”) in exchange for 51% of the outstanding shares of Banana Whale (the “Banana Whale Acquisition”), (iv) to obtain a declaration that the Individual Defendants have breached their fiduciary duty of loyalty by taking actions to entrench themselves on the Company’s Board of Directors; and (v) seeking an award of attorneys’ fees and costs in connection with the expiration of any extension granted bylitigation and such other relief as the Panel.Court deems fair and equitable.

F-23

 

On March 3, 2017,June 11, 2018, Wu commenced a second action in the Staff informedCourt of Chancery of the State of Delaware [Case No.2018-0427-JRS; the “225 Action”] under Section 225 of the Delaware General Corporation Law seeking (i) to appoint four directors to the Company’s Board of Directors, (ii) to enjoin the Company that they were granted a hearing to be held on April 20, 2017 (the “Hearing”). As such, the delisting action, referenced above, has been stayed, pending a final written decision by the Panel at the Hearing.

At the Hearing, the Company will presentand its plan to regain compliance with the Minimum Bid Price by effecting a reverse stock split. On March 3, 2017, the Company filed a preliminary proxy statement with the Securities and Exchange Commission in connection with special meeting of stockholders (the “Stockholders’ Meeting”) to be held on April 14, 2017.  One of the proposals being submitted to a vote of the stockholders at the Stockholders’ Meeting is the approval of a 6 to 1 reverse stock split of all of the issued and outstandingaffiliates from issuing, offering, selling or granting any shares of the Company’s common stock. Management believesstock to any person or entity, or consummate any merger, acquisition or similar transaction without the prior approval of Wu during the pendency of the action and (iii) seeking an award of attorneys’ fees and costs in connection with the litigation and such other relief as the Court deems fair and equitable.

On October 15, 2018, the parties entered into an agreement (the “Settlement Agreement”) which provides for the immediate cessation of all activities in the two actions and which will result in the dismissal of the two actions upon the fulfillment by the Company of certain conditions. Among the conditions to dismissal which the Company is required to meet to obtain the complete dismissal of the actions are the issuance of 354,409 shares to Wu to reimburse a portion of the expenses incurred in connection with the actions, the nomination and election to the Company’s Board of Directors of up to two individuals designated by Wu, the redemption of up to approximately 850,000 shares of common stock at $0.65 each, from certain investors whom Wu recommended to invest in the Company (the “Additional Investors”) should they request that effecting the reverse stock split will allowCompany do so and the facilitation of the sale of shares of the Company’s common stock by Wu, including the registration of such shares for sale under the Securities Act. Based on ASC 840, which requires that conditionally redeemable securities be classified outside of permanent stockholders’ equity, $605,000 was reclassified as mezzanine equity effective October 15, 2018. Pending the re-election of Wu’s nominees to regain compliance with Nasdaq Listing Rule 5550(a)(2), which should allowthe Board of Directors at the Company’s common stock to2018 Annual Meeting of Stockholders, the Company will continue to trade oncomply with the Nasdaq Capital Market. Assumingterms of the reverse stock split proposal is approvedStatus Quo Order issued in July in connection with the 225 Action. The 225 Action will be dismissed and the Company will no longer be obliged to comply with the Status Quo Order upon the re-election of Wu’s nominees to the Board of Directors at the Company’s 2018 Annual Meeting of Stockholders.

A Stipulation of Dismissal in respect of the Injunction Action will be filed and the parties will exchange releases upon the fulfillment of certain conditions, including the registration of Wu’s shares and the removal of the restrictive legend from Wu’s shares and the shares held by the Company’s stockholders,Additional Investors. Notwithstanding such dismissal, should the Company’s boardregistration of directors currently intendsWu’s shares lapse for any reason prior to effectOctober 1, 2019, Wu shall be entitled to enforce his rights under the reverse stock split, unless it determines that doing so would notside letters which were the basis of many of his claims, which letters are deemed to be a part of the Settlement Agreement as if set forth therein. If the Dismissal Stipulation has been filed in the Injunction Action and Wu’s shares have remained continuously registered until October 1, 2019, the desired effectside letters shall be deemed of satisfying the Minimum Bid Price requirement.no force and effect.

 

F-26 

F-24