| 2. Summary of Significant Accounting Policies | Basis
of Accounting and Presentation These consolidated
financial statements have been prepared in conformity with accounting principles generally accepted in the United States Foreign
Currency Translation The reporting
currency of the Company is the United States dollar. Assets and liabilities of operations other than those denominated in U.S.
dollars, primarily in Switzerland, Ireland, the United Kingdom and China, are translated into United States dollars at the rate
of exchange at the balance sheet date. Revenues and expenses are translated at the average rate of exchange throughout
the period. Gains or losses from these translations are reported as a separate component of other comprehensive income
(loss) until all or a part of the investment in the subsidiaries is sold or liquidated. The translation adjustments do not
recognize the effect of income tax because the Company expects to reinvest the amounts indefinitely in operations. Transaction
gains and losses that arise from exchange-rate fluctuations on transactions denominated in a currency other than the functional
currency are included in general and administrative expenses. Cash Cash and cash
equivalents include bank demand deposit accounts and highly liquid short term investments with maturities of three months or less
when purchased. Cash consists of checking accounts held at financial institutions in the United Kingdom, Switzerland, Ireland,
Singapore, Hong Kong and China which, at times, balances may exceed insured limits. The Company has not experienced
any losses related to these balances, and management believes the credit risk to be minimal. Accounts
Receivable Accounts receivable
result primarily from sale of software and licenses to customers and are recorded at their principal amounts. The categories of
sales and receivables and their terms of payment are as follows:
a) Master
License Agreement (Agreement) deposits these deposits are payable in accordance with the terms of the Agreement.
The deposits are invoiced and recognized when the Agreement is signed providing the deposits are due to be received within
12 months. When the deposits under the Agreement are due in later periods, the later deposits are invoiced when they are due.
b) Maintenance
and operational fees and end user licenses fees these charges are invoiced and recognized when a customer is due to
pay them under the Agreement. In some Agreements, the charges are invoiced and payable when the service/licenses have been
delivered by the Company. In the other cases, the Company has agreed to payments on revenue share basis whereby the Company
will receive an agreed proportion of a customers revenue from its operation of the Horizon service. On revenue share
basis, the income for maintenance and operational fees together with end user licenses fees are not recognized until these
charges are invoiced and due. In 2014, the Company reported that it had converted a significant number of its customers
to a revenue share basis of collection (see note in Revenue Recognition) and the balance outstanding at the point of conversion
for those customers will be collected prior to the commencement of recognizing income on revenue share basis. In addition,
on revenue share basis, the Company also offers a hosted service where a customer can buy vouchers for resale of PSTN minutes
to be used over the Public Service Telephone Network (PSTN). These voucher sales are recognized when invoiced
and payment terms are 30 days.
c) Software consultancy
fees When customers require customization of software, the Company quotes a flat project amount or a daily rate for
the work. When a Customer has confirmed their approval of the quote and the work has been undertaken, the Company will invoice
consultancy fee and recognize the revenue. The terms of payment are fixed terms and normally 30 days of the date of the invoice.
d) Hardware
fees Hardware fees represent the fees the Company charges for the supply of ancillary equipment which customers occasionally
ask us to source and supply. The Company quotes the price prior to the delivery and upon delivery, invoices the
customer with payment due within stated terms, normally 30 days from the date of the invoice. When
necessary, the Company provides an allowance for doubtful accounts that is based on a review of outstanding receivables, historical
collection information, and current economic conditions. The Company has strong collection history in all categories above except
category b), and does not believe that an allowance for doubtful accounts for these categories except category b) is necessary.
For receivables in category b), when the Company becomes aware of a customers inability to meet its financial obligations,
such as in the case of bankruptcy or deterioration in the customers operating results, financial position, or credit rating,
the Company records a specific reserve for bad debts to reduce the related receivable to the amount it believes to be collectable.
There was an allowance of $692,000 and $492,000 for doubtful accounts at September 30, 2015 and December 31, 2014, respectively.
Receivables are generally unsecured. Account balances are charged off against the allowance when the Company determines that certain
receivable will probably not be recovered. The Company does not have off-balance sheet credit exposure related to its customers.
As of September 30, 2015 and December 31, 2014, two customers accounted for 21% and 28%, respectively, of the accounts receivable
balance. When
a portion of the receivable balances of certain customers, under category b) above, is expected to be received in more than 12
months, the relevant balances are shown as a non-current asset. A provision for a discount for the deferred payments totaling
$200,000 has been recorded, averaging approximately 3.9% per annum for payments expected to be received beyond 12 months. Property
and Equipment Property and
equipment is primarily comprised of leasehold property improvements, motor vehicles and equipment that are recorded at cost and
depreciated or amortized using the straight-line method over their estimated useful lives as follows: motor vehicles 5
years, equipment between 3 and 5 years, leasehold property improvements, over the lesser of the estimated remaining useful
life of the asset or the remaining term of the lease. Repairs and
maintenance are charged to expense as incurred. Expenditures that substantially increase the useful lives of existing
assets are capitalized. Fair
Value Measurements Fair value
is defined as the exchange price that will be received for an asset or paid to transfer a liability (an exit price) in the principal. Valuation
techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. To
measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, of which the first two
are considered to be observable and the third unobservable: Level 1
Quoted prices in active markets for identical assets or liabilities. Level 2
Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities. Level 3
Unobservable inputs are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Intangible
Assets Intangible
assets include software development costs and customer lists and are amortized on a straight-line basis over the estimated useful
lives of five years for customer lists and ten years for software development. The Company periodically evaluates whether
changes have occurred that would require revision of the remaining estimated useful life. The Company performs periodic
reviews of its capitalized intangible assets to determine if the assets have continuing value to the Company. The Company
expenses all costs related to the development of internal-use software as incurred, other than those incurred during the application
development stage, after achievement of technological feasibility. Costs incurred in the application development stage
are capitalized and amortized over the estimated useful life of the software. Internally developed software costs are
amortized on a straight-line basis over the estimated useful life of the software. The Company performs periodic reviews
of its capitalized software development costs to determine if the assets have continuing value to the Company. Costs
for assets that are determined to be of no continuing value are written off. The amortization of these costs is included in cost
of revenue over the estimated life of the products. During the
nine months ended September 30, 2015 and 2014, software development costs of $844,000 and $874,000, respectively, have been capitalized. Impairment
of Other Long-Lived Assets The Company
evaluates the recoverability of its property and equipment and other long-lived assets whenever events or changes in circumstances
indicate impairment may have occurred. An impairment loss is recognized when the net book value of such assets exceeds
the estimated future undiscounted cash flows attributed to the assets or the business to which the assets relate. Impairment
losses, if any, are measured as the amount by which the carrying value exceeds the fair value of the assets. During
the nine months ended September 30, 2015 and 2014, the Company identified no impairment losses related to the Companys long-lived
assets. Revenue
Recognition The Company
recognizes revenue when it is realized or realizable and earned. The Company establishes persuasive evidence of a sales
arrangement for each type of revenue transaction based on a signed contract with a customer and that a delivery has occurred or
services have been rendered, the price is fixed and determinable, and collectability is reasonably assured.
●
Software
and licenses revenue from sales of perpetual licenses to telecom entities is recognized at the date of invoices raised
for 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.
●
Revenues
for user licenses purchased by customers are recognized when the user license is delivered.
●
Revenues
for maintenance services are recognized over the period of delivery of the services.
● 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 will support and operate the customers global exchange
providing fully terminated services and the Company then sells vouchers to the customer for usage for the customer to
resell. Sales for this service and vouchers 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 customers 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. We enter into
arrangements with telecommunication entities in which a customer purchases a combination of software licenses, maintenance services
and post-contract customer support (PCS). As a result, judgment is sometimes required to determine the appropriate
accounting, including how the price should be allocated among multiple deliverable elements. PCS may include rights to upgrades,
when and if available, support, updates and enhancements. When vendor specific objective evidence (VSOE) of fair value
exists for all elements in a multiple element arrangement, revenue is allocated to each element based on the relative fair value
of each of the elements. VSOE of fair value is established by the price charged when the same element is sold separately. Accordingly,
the judgments involved in assessing the fair values of various elements of an agreement can impact the recognition of revenue
in each period. Changes in the allocation of the sales price between deliverables might impact the timing of revenue recognition,
but would not change the total revenue recognized on the contract. When elements such as software and services are contained in
a single arrangement, or in related arrangements with the same customer, we allocate revenue to each element based on its relative
fair value, provided that such element meets the criteria for treatment as a separate unit of accounting. In the absence of fair
value for a delivered element, revenue is first allocated to the fair value of the undelivered elements and then allocated to
the residual delivered elements. In the absence of fair value for an undelivered element, the arrangement is accounted for as
a single unit of accounting, resulting in a delay of revenue recognition for the delivered elements until the undelivered elements
are fulfilled. No sales arrangements to date include undelivered elements for which VSOE does not exist. Advertising
Expenses It is the
Companys policy to expense advertising costs as incurred. Advertising and promotion costs incurred
during the three and nine month periods ended September 30, 2015 were $12,000 and $24,000 respectively, and $nil in
2014. Research
and Development Expenses Research
and development expenses include all direct costs, primarily salaries for Company personnel and outside consultants, costs related
to the development of new products, significant enhancements to existing products, and the portion of costs of development of
internal-use software required to be expensed. Research and development costs are charged to operations as incurred
with the exception of those software development costs that may qualify for capitalization. Debt
Issue Costs Debt issue
costs related to long-term debt are capitalized and amortized over the term of the related debt using the effective interest method. Income
Taxes Deferred income
tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and
liabilities, operating loss, and tax credit carryforwards, and are measured using the enacted income tax rates and laws that will
be in effect when the differences are expected to be recovered or settled. Realization of certain deferred income tax
assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction. The Company records
a valuation allowance to reduce deferred income tax assets to amounts that are more likely than not to be realized. The
initial recording and any subsequent changes to valuation allowances are based on a number of factors (positive and negative evidence). The
Company considers its actual historical results to have a stronger weight than other, more subjective, indicators when considering
whether to establish or reduce a valuation allowance. The Company
continually evaluates its uncertain income tax positions and may record a liability for any unrecognized tax benefits resulting
from uncertain income tax positions taken or expected to be taken in an income tax return. Estimated interest and penalties
are recorded as a component of interest expense and other expense, respectively. Because tax
laws are complex and subject to different interpretations, significant judgment is required. As a result, the Company
makes certain estimates and assumptions in: (1) calculating its income tax expense, deferred tax assets, and deferred tax liabilities;
(2) determining any valuation allowance recorded against deferred tax assets; and (3) evaluating the amount of unrecognized tax
benefits, as well as the interest and penalties related to such uncertain tax positions. The Companys estimates
and assumptions may differ significantly from tax benefits ultimately realized. Net
Loss per Share Basic net
loss per share is calculated by dividing the net loss attributable to common shareholders by the weighted average number of common
shares outstanding in the period. Diluted loss per share takes into consideration common shares outstanding (computed
under basic loss per share) and potentially dilutive securities. For the three and nine month periods ended September 30,
2015 and 2014, outstanding stock options and warrants are antidilutive because of net losses, and as such, their effect has not
been included in the calculation of diluted net loss per share. Common shares issuable are considered outstanding as
of the original approval date for purposes of earnings per share computations. Accumulated
Other Comprehensive Income (Loss) Other comprehensive
income (loss), as defined, includes net loss, foreign currency translation adjustments, and all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any significant transactions that are required
to be reported in other comprehensive income (loss), except for foreign currency translation adjustments. Use
of Estimates The preparation
of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the fiscal year. The Company makes estimates
for, among other items, useful lives for depreciation and amortization, determination of future cash flows associated with impairment
testing for long-lived assets, determination of the fair value of stock options and warrants, determining fair values of assets
acquired and liabilities assumed in business combinations, valuation allowance for deferred tax assets, allowances for doubtful
accounts, and potential income tax assessments and other contingencies. The Company bases its estimates on historical
experience, current conditions, and other assumptions that it believes to be reasonable under the circumstances. Actual
results could differ from those estimates and assumptions. Financial
Instruments The carrying
value of our financial assets and liabilities such as cash, accounts receivable and accounts payable approximate their fair values
based on level 1 inputs in the fair value hierarchy because of the short maturity of these instruments. Due to the conversion
features and other terms, it is not practical to estimate the fair value of amounts due to related parties and long term debt. Share-Based
Compensation The Company
accounts for stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards
expected to vest. The fair value of stock options is determined using the Black-Scholes valuation model, which includes
subjective judgments about the expected life of the awards, forfeiture rates and stock price volatility. Recently
Issued Accounting Standards In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09
Revenue From Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under U.S.
GAAP. The core principal of this ASU is that an entity should recognize revenue when it transfers promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash
flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs
incurred to obtain or fulfill a contract. The
original effective date for ASU 2014-09 would have required the Company to adopt beginning in its first quarter 2017. In July
2015, the FASB voted to amend ASU 2014-09 by approving a one year deferral of the effective date as well as providing the option
to early adopt the standard on the original effective date. Accordingly, the Company may adopt the standard in either its first
quarter of 2017 or 2018. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively
with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the timing of its adoption
and the impact of adopting the new revenue standard on its consolidated financial statements. In
April 2015, the FASB issued ASU2015-03, Imputation of Interest, requiring entities to present debt issuance costs related to a
debt liability as a reduction of the carrying amount of the liability. In August 2015, the FASB issued ASU 2015-15 to provide
additional guidance related to debt issuance costs related to line-of-credit arrangements. The guidance is effective for annual
and interim periods beginning after December 15, 2015, and early adoption is permitted. The Company is evaluating the impact,
if any,that the adoption of this guidance will have on the Companys consolidated financial statements and related disclosures. |
