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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2014

or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to _____________

Commission File Number: 000-10822
 
One Horizon Group, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
46-3561419
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
Weststrasse 1, Baar
   
Switzerland
 
CH6340
(Address of principal executive offices)
 
(Zip Code)
 
+41-41-7605820
(Registrant’s telephone number, including area code)
 
_____________________________________________________ 
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  No o
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ  No o
  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
þ
(Do not check if smaller reporting company)
     
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No þ
  
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  As of August 7, 2014, 32,921,533  shares of the registrant’s common stock, par value $0.0001, were outstanding.
 


 
 
 
 
 
 
TABLE OF CONTENTS
 
Part I – FINANCIAL INFORMATION
     
       
Item 1.
Financial Statements
   
4
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
21
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
   
28
 
Item 4.
Controls and Procedures
   
28
 
           
Part II – OTHER INFORMATION
       
         
Item 1.
Legal Proceedings
   
29
 
Item 1A.
Risk Factors
   
29
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
   
29
 
Item 3.
Defaults Upon Senior Securities
   
29
 
Item 4.
Mine Safety Disclosures
   
29
 
Item 5.
Other Information
   
29
 
Item 6.
Exhibits
   
30
 
           
SIGNATURES
   
31
 
 
 
 
 
2

 
 
 
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

The statements made in this Report, and in other materials that the Company has filed or may file with the Securities and Exchange Commission, in each case that are not historical facts, contain “forward-looking information” within the meaning of the Private Securities Litigation Reform Act of 1995, and Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, which can be identified by the use of forward-looking terminology such as “may,” “will,” “anticipates,” “expects,” “projects,” “estimates,” “believes,” “seeks,” “could,” “should,” or “continue,” the negative thereof, and other variations or comparable terminology as well as any statements regarding the evaluation of strategic alternatives.  These forward-looking statements are based on the current plans and expectations of management, and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements.  Among these risks and uncertainties are the competition we face; our ability to adapt to rapid changes  in the market for voice and messaging services; our ability to retain customers and attract new customers; our ability to establish and expand strategic alliances; governmental regulation and related actions and taxes in our international operations; increased market and competitive risks, including currency restrictions, in our international operations; risks related to the acquisition or integration of future businesses or joint ventures; our ability to obtain or maintain relevant intellectual property rights; intellectual property and other litigation that may be brought against us; failure to protect our trademarks and internally developed software; security breaches and other compromises of information security; our dependence on third party facilities, equipment, systems and services; system disruptions or flaws in our technology and systems; uncertainties relating to regulation of VoIP services; liability under anti-corruption laws; results of regulatory inquiries into our business practices; fraudulent use of our name or services; our ability to maintain data security; our dependence upon key personnel; our dependence on our customers' existing broadband connections; differences between our service and traditional phone services; our ability to obtain additional financing if required; our early history of net losses and our ability to maintain consistent profitability in the future. These and other matters the Company discusses in this Report, or in the documents it incorporates by reference into this Report, may cause actual results to differ from those the Company describes. The Company assumes no obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.
 
 
3

 
 
PART I – FINANCIAL INFORMATION
 
ONE HORIZON GROUP, INC.
 
Condensed Consolidated Balance Sheets
 
June 30, 2014 and December 31, 2013
 
(in thousands, except share data)
 
(unaudited)
   
June 30,
   
December 31,
 
   
2014
   
2013
 
Assets
           
             
Current assets:
           
Cash
 
$
424
   
$
2,070
 
Accounts receivable
   
7,938
     
7,264
 
Other assets
   
854
     
139
 
Total current assets
   
9,216
     
9,473
 
                 
Property and equipment, net
   
270
     
315
 
Intangible assets, net
   
12,411
     
12,760
 
Investments
   
21
     
23
 
Total assets
 
$
21,918
   
$
22,571
 
                 
Liabilities and Stockholders' Equity
               
                 
Current liabilities:
               
Accounts payable
 
$
681
   
$
661
 
Accrued expenses
   
1,227
     
964
 
Accrued compensation
   
50
     
59
 
Income taxes
   
94
     
117
 
Amounts due to related parties
   
3,500
     
3,500
 
Current portion of long-term debt
   
66
     
65
 
Total current liabilities
   
5,618
     
5,366
 
                 
Long-term liabilities
               
                 
Long term debt, net of current portion
   
153
     
184
 
Deferred income taxes
   
289
     
445
 
Mandatorily redeemable preferred shares
   
90
     
90
 
Total liabilities
   
6,150
     
6,085
 
                 
Stockholders' Equity
               
Preferred stock:
               
$0.0001 par value, authorized 50,000,000;
               
no shares issued or outstanding
   
-
     
-
 
Common stock:
               
$0.0001 par value, authorized 200,000,000 shares
               
issued and outstanding 32,935,069 shares (December 2013  32,920,069)
   
3
     
3
 
Additional paid-in capital
   
28,592
     
28,269
 
Accumulated deficit
   
(14,230
)
   
(13,319
)
Accumulated other comprehensive income
   
1,072
     
1,137
 
    Total One Horizon Group, Inc. stockholders' equity
   
15,437
     
16,090
 
Non-controlling interest
   
331
     
396
 
Total stockholders' equity
   
15,768
     
16,486
 
                 
Total liabilities and stockholders' equity
 
$
21,918
   
$
22,571
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
4

 
 
ONE HORIZON GROUP, INC.
Condensed Consolidated Statements of Operations
For the three and six months ended June 30, 2014 and 2013
(in thousands, except share data)
(unaudited)
 
     
Three Months ended June 30,
   
Six Months ended June 30,
 
     
2014
   
2013
   
2014
   
2013
 
                           
Revenue
   
$
1,304
   
$
1,253
   
$
2,489
   
$
3,172
 
                                   
Cost of revenue:
                               
  Hardware
   
66
     
481
     
128
     
488
 
  Amortization of software development costs
   
483
     
404
     
969
     
850
 
Gross margin
   
755
     
368
     
1,392
     
1,834
 
                                   
Expenses:
                                 
 
General and administrative
   
1,190
     
2,221
     
2,318
     
3,694
 
 
Depreciation 
   
46
     
39
     
94
     
75
 
       
1,236
     
2,260
     
2,412
     
3,769
 
                                   
Loss  from operations
   
(481
)
   
(1,892
)
   
(1,020
)
   
(1,935
)
                                   
Other income and expense:
                               
 
Interest expense
   
(20
)
   
(7
)
   
(20
)
   
(12
)
 
Interest expense - related parties
   
(35
)
   
(50
)
   
(75
)
   
(100
)
 
Foreign exchange
   
(10
)
   
-
     
(19
)
   
-
 
 
Interest income
   
1
     
-
     
2
     
-
 
       
(64
)
   
(57
)
   
(112
)
   
(112
)
                                   
Loss before income taxes
   
(545
)
   
(1,949
)
   
(1,132
)
   
(2,047
)
                                   
Income taxes expense (benefit)
   
-
     
-
     
(156)
     
-
 
                                   
Net Loss for the period
   
(545
)
   
(1,949
)
   
(976
)
   
(2,047
)
                                   
Loss attributable to the non-controlling interest
   
(22
)
   
(44
)
   
(65
)
   
(44
)
                                   
Net Loss for the period attributable to One Horizon Group, Inc.
 
$
(523
)
 
$
(1,905
)
 
$
(911
)
 
$
(2,003
)
                                   
Earnings (loss) per share attributable to One Horizon Group, Inc. shareholders
                               
                                   
 
Basic and diluted net (loss) per share
 
$
(0.02
)
 
$
(0.06
)
 
$
(0.03
)
 
$
(0.06
)
                                   
Weighted average number of shares outstanding
                               
 
Basic and Diluted
   
32,935
     
31,676
     
32,935
     
31,446
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
5

 
 
ONE HORIZON GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
For the three and six months ended June 30, 2014 and 2013
(in thousands)
(unaudited)
 
   
Three Months ended June 30,
   
Six Months ended June 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Net Loss
 
$
(545
)
 
$
(1,949
)
 
$
(976
)
 
$
(2,047
)
Other comprehensive income (loss):
                               
Foreign currency translation adjustment gain (loss)
   
(84
)
   
13
     
(65
)
   
(50
)
Total comprehensive loss
   
(629
)
   
(1,936
)
   
(1,041
)
   
(2,097
)
                                 
Comprehensive loss attributable to the non-controlling interest
   
(22
)
   
(44
)
   
(65
)
   
(44
)
                                 
Comprehensive loss attributable to One Horizon Group, Inc.
 
$
(607
)
 
$
(1,892
)
 
$
(976
)
 
$
(2,053
)
 
See accompanying notes to condensed consolidated financial statements
 
 
6

 
 
ONE HORIZON GROUP, INC.
Consolidated Statement of Equity
For the six months ended June 30, 2014
(in thousands)
(unaudited)
 
   
Common Stock
   
Additional
Paid-in
   
Retained
Earnings
   
Accumulated Other Comprehensive Income
   
Non-controlling
   
Total
 
   
Number of Shares
   
Amount
   
Capital
   
(Deficit)
   
(Loss)
   
Interest
   
Equity
 
                                           
Balance December 31, 2013
   
32,921
   
$
3
   
$
28,269
   
$
(13,319
)
 
$
1,137
   
$
396
   
$
16,486
 
                                                         
Net income (loss)
                           
(911
)
           
(65
)
   
(976
)
Foreign currency translations
                                   
(65
)
           
(65
)
                                                         
Common stock issued for services received
   
15
             
65
                             
65
 
                                                         
Options issued for services
                   
258
                             
258
 
                                                         
Balance June  30, 2014
   
32,936
   
$
3
   
$
28,592
   
$
(14,230
)
 
$
1,072
   
$
 331
   
$
15,768
 
 
See accompanying notes to consolidated financial statements.

 
7

 
 
ONE HORIZON GROUP, INC.
   
Condensed Consolidated Statements of Cash Flows
   
For the six months ended June 30, 2014 and 2013
   
(in thousands)
   
(unaudited)
   
 
   
2014
   
2013
 
Cash provided by (used in) operating activities:
           
             
Net income (loss) for the period
 
$
(911
)
 
$
(2,003
)
                 
Adjustment to reconcile net income (loss) for the period to
               
net cash provided by (used in) operating activities:
               
Depreciation of property and equipment
   
94
     
75
 
Amortization of intangible assets
   
969
     
850
 
Common stock issued for services received
   
65
     
593
 
Options issued for services received
   
258
     
-
 
                 
Deferred income taxes
   
(156
)
   
-
 
Warrants issued for services received
   
-
     
247
 
                 
Net income (loss) attributable to non-controlling interest
   
(65
)
   
(44
)
Changes in operating assets and liabilities:
               
                 
   Accounts receivable
   
(674
)
   
(2,181
)
   Other assets
   
(715
)
   
(86
)
   Accounts payable and accrued expenses
   
276
     
821
 
                 
Net cash provided by (used in) operating activities
   
(859
)
   
(1,728
)
                 
Cash used in investing activities:
               
                 
Acquisition of intangible assets
   
(637
)
   
(494
)
Acquisition of property and equipment
   
(49
)
   
(104
)
Other assets
   
-
     
(31
)
                 
Net cash  (used in) investing activities
   
(686
)
   
(629
)
                 
Cash provided by (used in) financing activities:
               
                 
Increase (decrease) in long-term borrowing, net
   
(30
)
   
2
 
Proceeds from issuance of common stock
   
-
     
3,100
 
Advances from related parties, net of repayment
   
-
     
500
 
                 
Net cash provided by (used in)  financing activities
   
(30
)
   
3,602
 
                 
Increase (decrease) in cash during the period
 
$
(1,575
)
 
$
1,245
 
Foreign exchange effect on cash
   
(71
)
   
-
 
                 
Cash at beginning of the period
   
2,070
     
699
 
                 
Cash at end of the period
 
$
424
   
$
1,944
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
8

 
 
ONE HORIZON GROUP, INC.
   
Condensed Consolidated Statements of Cash Flows (continued)
   
For the six months ended June 30, 2014 and 2013
   
(in thousands)
   
(unaudited)
   
 
Supplementary Information:
 
   
2014
   
2013
 
                 
Interest paid
 
$
-
   
$
-
 
Income taxes paid
   
-
     
-
 
Non-cash transactions:
               
Common stock issued for subscription receivable
   
-
     
2,900
 
Common stock issued for services received
   
-
     
593
 
Warrants issued, and vested, for services received
   
-
     
247
 
Contribution of software for non-controlling interest in exchange for software with a fair value of $500
   
-
     
500
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
9

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
June 30, 2014

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

Description of Business

One Horizon Group, Inc., (the “Company” or “Horizon”) develops proprietary software primarily in the Voice over Internet Protocol (VoIP) and bandwidth optimization markets (“Horizon Globex”) and provides it under perpetual license arrangements (“Master License”) throughout the world. The Company sells related user licenses and software maintenance services as well.

Interim Period Financial Statements

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the Securities and Exchange Commission’s instructions.  Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.  The results of operations reflect interim adjustments, all of which are of a normal recurring nature and, in the opinion of management, are necessary for a fair presentation of the results for such interim period.  The results reported in these interim consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year.  Certain information and note disclosure normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations.  These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on April 15, 2014.

Principles of Consolidation and Combination

The June 30, 2014 and 2013 consolidated financial statements include the accounts of One Horizon Group, Inc. and its wholly owned subsidiaries One Horizon Group plc (“OHG”), Horizon Globex GmbH, Abbey Technology GmbH, One Horizon Hong Kong Limited,  Horizon Globex Ireland Limited, Global Phone Credit Limited and Ishuo Network Information Co., Ltd. together with Horizon Network Technology Co. Ltd. which is a 75% owned subsidiary.

All significant intercompany balances and transactions have been eliminated.

Note 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

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, 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.
 
 
10

 
 
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. Receivables are considered past due once they exceed the terms of the sales transaction. 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. There was an allowance of $212,000 and $218,000 for doubtful accounts at June 30, 2014 and 2013, respectively. Receivables are generally unsecured. Account balances are charged off against the allowance when the Company determines it is probable the receivable will not be recovered. The Company does not have off-balance sheet credit exposure related to its customers. At June 30, 2014 and December 31, 2013, two customers accounted for 24% and one customer accounted for 15%, respectively, of the accounts receivable balance.

Property and Equipment

Property and equipment is primarily comprised of leasehold property improvements, motor vehicles and equipment that are recorded at cost and depreciated or amortized using the straight-line method over their estimated useful lives as follows: motor vehicles – 5 years, equipment – between 3 and 5 years, leasehold property improvements, over the lesser of the estimated remaining useful life of the asset or the remaining term of the lease.

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

Fair Value Measurements

Fair value is defined as the exchange price that will be received for an asset or paid to transfer a liability (an exit price) in the principal.  Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs.  To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, of which the first two are considered to be observable and the third unobservable:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs are supported by little or no market activity and are significant to the fair value of the assets or liabilities.

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.

 
11

 
 
The Company expenses all costs related to the development of software as incurred, other than those incurred after the achievement of technological feasibility during the application development stage. 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.  Judgment is required in determining when technological feasibility of a product is established.  The Company has determined that after technological feasibility for software products is reached, the Company continues to address all high-risk development issues through coding and testing prior to the 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 six months ended June 30, 2014 and 2013 software development costs of $637,000 and $494,000, respectively, have been capitalized.

Impairment of Other Long-Lived Assets

The Company evaluates the recoverability of its property and equipment and other long-lived assets whenever events or changes in circumstances indicate impairment may have occurred.  An impairment loss is recognized when the net book value of such assets exceeds the estimated future undiscounted cash flows attributed to the assets or the business to which the assets relate.  Impairment losses, if any, are measured as the amount by which the carrying value exceeds the fair value of the assets.  During the six months ended June 30, 2014 and 2013 the Company identified no impairment losses related to the Company’s long-lived assets.

Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned.  The Company establishes persuasive evidence of a sales arrangement for each type of revenue transaction based on a signed contract with the customer and that delivery has occurred or services have been rendered, price is fixed and determinable, and collectability is reasonably assured.
 
  
Software licenses – revenue from sales of perpetual licenses to customers when payments for the licenses are fixed is recognized at the inception of the arrangement, unless the payment term exceeds one year and then only if the presumption that the license fee is not fixed or determinable can be overcome, presuming all other relevant revenue recognition criteria are met. If the presumption cannot be overcome, revenue is recognized as payments from the customer become due. Revenue from sales of perpetual licenses when payments for the licenses are payable over a period exceeding a year, and those payments are variable based on customer usage,  are recognized as payments from the customer become due.
  
Revenues for user licenses purchased by customers is recognized when the user license is delivered.
  
Revenues for maintenance services are recognized over the period of delivery of the services.
 
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.

 
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For purposes of revenue recognition for perpetual licenses, the Company considers payment terms exceeding one year as a presumption that the fee in the transaction is not fixed and determinable.   This presumption however, may be overcome if persuasive evidence demonstrates that the Company has a business practice of extending payment terms and has been successful in collecting under the original terms, without providing any concessions.  In doing so, the Company considers if the arrangement is sufficiently similar to historical arrangements in terms of similar customers and products is assessing whether there is evidence of a history of successful collection.

In order to determine the company’s historical experience is based on sufficiently similar arrangements, the Company considers the various factor including the types of customers and products, product life cycle, elements Included in the arrangement, length of payment terms and economics of license arrangement.

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.

Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Assets held under finance leases are recognized as assets of the Company at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income.

Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease.

Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term.

Advertising Expenses

It is the Company’s policy to expense advertising costs as incurred.  No advertising costs were incurred during the three and six months ended June 30, 2014 and 2013.

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 incurred no research and development costs in the three and six months ended June 30, 2014 and 2013.

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.

 
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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.

Net Loss per Share

Basic net loss per share is calculated by dividing the net loss attributable to common shareholders by the weighted average number of common shares outstanding in the period.  Diluted loss per share takes into consideration common shares outstanding (computed under basic loss per share) and potentially dilutive securities.  For the three and six months ended June 30, 2014 and 2013, 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 income, 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, 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 Company has the following financial instruments: cash, amounts due to related parties and long-term debt.  The carrying value of these financial instruments approximates their fair value due to their liquidity or their short-term nature valued consistent with the use of level 2 inputs. The fair value of amounts due to related parties is not determinable.

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 is consistent with the Company’s valuation techniques previously utilized for options in footnote disclosures.

 
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Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2014-09 - Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under U.S. GAAP.  The core principal of this ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.  This ASU will be effective for us in our first quarter of 2018.  Early adoption is not permitted. The ASU allows for either full retrospective or modified retrospective adoption. We are evaluating the transition method that will be elected and the potential effects of the adoption of this ASU on our financial statements.

Note 3.  China Operations

During the year ended December 31, 2013,  the Company established a subsidiary in China, Horizon Network Technology Co. Ltd. (“HNT”). The establishment of HNT is part of the Company’s strategic plan to expand the application of mobile software and related marketing efforts into emerging markets. The Company contributed $1.5 million for a 75% ownership interest in HNT. The remaining 25% ownership interest in HNT was acquired by non-related parties through the transfer of noncash assets with a fair value of $500,000.

The results of operations, assets, liabilities and cash flows of HNT have been consolidated in the accompanying condensed consolidated financial statements as the Company owns a controlling interest. The ownership interests in HNT held by parties other than the Company are presented separately from the Company’s equity on the Consolidated Balance Sheet. The amount of consolidated net loss attributable to the Company and the non-controlling interest are both presented on the face of the Consolidated Statement of Operations.


Note 4.  Property and Equipment, net

Property and equipment consist of the following: (in thousands)

    June 30
 
 
December 31
 
   
2014
   
2013
 
             
Leasehold improvements
  $ 265     $ 265  
Motor vehicle
    120       120  
Equipment
    358       310  
      743       695  
Less accumulated depreciation
    (473 )     (380 )
                 
Property and equipment, net
  $ 270     $ 315  


Note 5.  Intangible Assets

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

    June 30    
December 31
 
   
2014
   
2013
 
             
Horizon software
  $ 18,214     $ 17,599  
ZTEsoft Telecom software
    494       497  
Contractual relationships
    885       885  
      19,593       18,981  
Less accumulated amortization
    (7,182 )     (6,221 )
                 
Intangible assets, net
  $ 12,411     $ 12,760  
 
Amortization of intangible assets for each of the next five years is estimated to be $1,900,000 per year.

 
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Note 6.  Long-term Debt
 
Long – term liabilities consist of the following (in thousands) :

    June 30    
December 31
 
   
2014
   
2013
 
             
Vehicle loan
  $ 44     $ 51  
Equipment loan
    22       27  
Office term loan
    153       171  
      219       249  
Less current portion
    (66 )     (65 )
                 
Balance
  $ 153     $ 184  
 
Note 7.  Related-Party Transactions

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

   
June 30
   
December 31
 
   
2014
   
2013
 
             
Loans due to stockholders
  $ 3,500     $ 3,500  

Loans due to stockholders include:
 
●  
Balance of loans, advanced during 2011, of $1,500,000 which are unsecured and have an interest rate of 10%. During the six months ended June 30, 2014 and 2013 interest of $75,000 and $100,000, respectively, has been accrued.

●  
Loans advanced by two officers and directors during 2012 totaling $1,500,000 which are unsecured and have an interest rate of 0.21%. The loans are due on or before December 31, 2014 and can be repaid in cash or shares of ordinary shares of OHG at an exchange price of $5.14 per share.

●  
Convertible loans advanced in January 2013 from two officers and directors in the amount of $250,000 each. These convertible loans bear an interest rate of 0.21% and are repayable on or before January 22, 2015. The Company has the option to repay the loans, without penalty, at any time in cash or shares of common stock of the Company at a price of $5.14 per share. If the Company elects to repay the convertible loans in full by the issuance of shares the Company will issue 48,650 shares of common stock for each loan so repaid.
 
During the year ended June 30, 2011, the Company entered into a sales contract, in the normal course of business with a customer in which the Company holds an equity interest. The customer purchased a perpetual software license with total commitment of $2.0 million, of which $22,500 and $nil have been recognized in the six months ended June 30, 2014 and 2013, respectively. The Company owns a cost based investment interest of 18% in the voting capital of the customer.
 
 
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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.

No shares of preferred stock are issued and outstanding as of June 30, 2014 and December 31, 2013.

Mandatorily Redeemable Preferred Shares (Deferred Stock)

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

Common Stock

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

During the six months ended June 30, 2014, the Company:

●  
issued 15,000 shares of common stock for services received with a fair value of $64,500.

During the year ended December 31, 2013, the Company:

●  
issued 5,000 shares of common stock for services received with a fair value of $30,000
●  
issued 62,543 shares of common stock for services received with a fair value of $562,891.
●  
issued 806,452 shares of common stock for $6 million cash.
●  
issued 33,333 shares of common stock for services received with a fair value of $50,000.
●  
issued 1,167,600 shares of common stock upon the exercise of warrants with an exercise price of $nil

Stock Purchase Warrants

At June 30, 2014, the Company had reserved 519,986 shares of its common stock for the following outstanding warrants:

Number of Warrants
 
Exercise Price
 
Expiry
         
116,760
 
$    0.86
 
no expiry date
403,226
 
$    5.94
 
January 2018

There were no warrants issued or exercised during the six months ended June 30, 2014.

 
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Note 9.  Stock-Based Compensation

The shareholders approved a stock option plan on August 6, 2013, the 2013 Equity Incentive Plan. This stock option plan is for the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalents, cash bonuses and other stock-based awards to employees, directors and consultants of the Company.

There are 3,000,000 shares of common stock available for granting awards under the plan. Each year, commencing 2014 until 2016, the number of shares of common stock available for granting awards shall be increased by the lesser of 1,000,000 shares of common stock and 5% of the total number of shares of common stock outstanding.
 
During the six months ended June 30, 2014 the Company issued options to purchase 500,000 shares of common stock under the 2013 Equity Incentive Plan. The options shall become fully vested on January 15, 2017 and are exercisable, at an exercise price of $4.54 per common share, to January 15, 2024. On January 1, 2014,  the number of shares available for granting awards under the 2013 Equity Incentive Plan was increased by 1,000,000 shares.

A summary of the Company’s 2013 Equity Incentive Plan as of June 30, 2014 is as follows:
 
   
Number of
   
Weighted Average
 
   
Options
   
Exercise Price
 
             
Outstanding at December 31, 2013
    -     $ -  
Options issued
    500,000       4.54  
Outstanding at June 30, 2014
    500,000       4.54  

The fair value of these options, using the Black-Scholes option-pricing model, is estimated to be $2,200,000. This expense, less an estimated forfeiture rate of 30%, will be recognized over the three year vesting period. The amount of $258,000 has been recognized during the six months ended June 30, 2014. As of June 30, 2014,  there was unrecognized compensation expense of approximately $1.3 million to be recognized over a period of 2.5 years.

Prior to the adoption of 2013 Equity Incentive Plan,  the Company issued stock options to directors, employees, advisors, and consultants.
 
A summary of the Company’s other stock options as of June 30, 2014 is as follows:

   
Number of
   
Weighted Average
 
   
Options
   
Exercise Price
 
             
Outstanding at December 31, 2013
    584,650     $ 0.53  
Options forfeited or issued
    -       -  
Outstanding at December 31, 2013 and June 30, 2014
    584,650       0.53  
 
Other than the options to purchase 500,000 shares of common stock issued under 2013 Equity Incentive Plan, there were no options issued, exercised or forfeited during the six months ended June 30, 2014.

 
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The following table summarizes stock options outstanding at June 30, 2014:

     
Number
   
Average
   
Number
   
Intrinsic
 
     
Outstanding
   
Remaining
   
Exercisable
   
Value
 
     
at
   
Contractual
   
at
   
at
 
     
June 30,
   
Life
   
June 30,
   
June 30,
 
Exercise Price
   
2014
   
(Years)
   
2014
   
2014
 
$ 0.51       850       1.33       850     $ 3,222  
  0.53       291,900       6.00       291,900       1,100,463  
  0.53       291,900       8.50       -       -  
  4.54       500,000       9.50       -       -  

At June 30, 2014, 4,584,650 shares of common stock were reserved for all outstanding options and future commitments under the 2013 Equity Incentive Plan.

The fair value of each option granted is estimated at the date of grant using the Black-Scholes option-pricing model.  The assumptions used in calculating the fair value of the options granted were: risk-free interest rate of 1.68%, an expected life of 3 years, a dividend yield of 0.0%, and a stock price volatility factor of 192%.

Note 10.  Commitments and Contingencies

The Company has an agreement with an employee to pay for certain services provided and to be provided during 2014by the issuance of options to purchase 291,900 shares of common stock of the Company.

Contractual Commitments

The Company incurred total rent expense of $47,000 and $72,000, respectively, for the six months ended June 30, 2014 and 2013.

Minimum contractual commitments, as of June 30, 2014, is as follows:

   
Operating
   
Long-term
 
   
leases
   
Financing
 
             
2014
  $ 86,000     $ 33,000  
2015
    75,000       87,000  
2016
    75,000       48,000  
2017
    75,000       45,000  
2018
    -       4,000  

Note 11.   Subsequent Events

Series A Preferred Financing

On July 21, 2014, in connection with a security purchase agreement between the Company and certain investors, we closed a private placement of $1,000,000  for a total of 10 units at a purchase price of $100,000 per Unit, each consisting of, (i) 17,094 shares of the Company’s Series A Redeemable Convertible Preferred Stock, par value $0.0001 per share, initially convertible into 17,094 shares of the Company’s common stock, par value $0.0001 per share, and (ii) 10,000 Class B Warrants, each exercisable to purchase 1 share of Common Stock at an exercise price of $4.00 per share. The Financings were completed in reliance upon the exemption from securities registration afforded by Regulation S (“Regulation S”) as promulgated under the Securities Act of 1933.

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

 
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Shares of Series A Preferred Stock are convertible in whole or in part, at the option of the holders, into shares of our common stock at $5.85 per share prior to the Maturity, and all outstanding shares of the 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 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.
 
Adjustments to Class A Warrants

In connection with and as a consideration to the closing of the private placement of $1M, on the same day,  the Company entered into an Amended and Restated Subscription Agreement with the investor in an offering of $6,000,000 the Company closed on February 18, 2013 ( the “$6M Offering”), whereby the exercise price of Class A warrants issued in the $6M Offering was reduced from $5.94 to $4.25 per share and the amount of shares issuable upon exercise of Class A warrants was increased from 403,225 to 1,209,675. In addition, the expiration date of Class A warrants was extended an additional 12 months.
 
Resignation of Chairman and Chief Executive Officer

On July 24, 2014, Mr. Mark White, resigned from his position as the Chief Executive Officer of One Horizon Group, Inc. (the “Company” or “we”, “us”) and a director of the Board of Directors of the Company. Mr. White did not resign due to any disagreement with the Company or any matter relating to the Company’s operations, policies or practices.
 
In connection with his resignation, the Company entered into a mutual Settlement and Release Agreement with Mr. White, effective July 24, 2014, pursuant to which the Company and Mr. White agreed that Mr. White shall immediately resign from all positions as an employee, officer or director of the Company, including any subsidiary.  Further, Mr. White agreed to waive any salary, deferred compensation, severance, accrued vacation time and any other compensation due as a result of his employment by the Company; provided, however, that the Company shall remain liable for the repayment of any loans made to the Company by Mr. White. In consideration for the release by Mr. White, the Company agreed that the loans will be repaid over a twelve month period from the date of the Settlement and Release Agreement; provided, however, that if during such twelve month period, in the event of a private sale of a portion of shares of the Company to a buyer introduced by the Company, Mr. White has agreed to waive all or part of the loan balance due to him by the Company.
 
Appointment of New Chairman and Chief Executive Officer

On July 28, 2014, our Board of Directors appointed Brian Collins as the Chief Executive Officer and President of the Company, effective July 28, 2014. Mr. Collins will also act as the Chairman of the Board of the Company upon his appointment as the Chief Executive Officer of the Company.
 
Mr. Collins has been the CEO of Abbey Technology, a subsidiary of the Company since he founded it in 1999. After the Company acquired Abbey Technology in November 2010, Mr. Collins was appointed Vice President and Chief Technology Officer of the Company. Mr. Collins is the co-inventor of the Horizon Platform, and has over 20 years’ experience in the technology sector with a background in software engineering. Mr. Collins brings experience in founding and operating technology companies along with his extensive knowledge of software engineering.

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

The following discussion provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2014 and 2013 and notes thereto contained elsewhere in this Reportand our annual  report on Form 10-K for the twelve months ended December 31, 2013 and 2012  including the consolidated financial statements and notes thereto. The following discussion and analysis contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ significantly from the results, expectations and plans discussed in these forward-looking statements. See “Cautionary Note Concerning Forward-Looking Statements.”

Overview

Business

We develop and license software to telecommunications operators through our wholly-owned subsidiaries Horizon Globex GmbH and Abbey Technology GmbH, each incorporated under the laws of Switzerland (“Horizon Globex” and “Abbey Technology,” respectively).  Specifically, Horizon Globex and Abbey Technology develop software application platforms that optimize mobile voice, instant messaging and advertising communications over the internet, collectively, the “Horizon Platform.” Our proprietary software techniques (“SmartPacket™”) use internet bandwidth more efficiently than other techniques that are unable to provide a low-bandwidth solution.  The Horizon Platform is a bandwidth-efficient Voice over Internet Protocol (“VoIP”) platform for smartphones and tablets, and also provides optimized data applications including multi-media messaging and mobile advertising.  Using our SmartPacket™ platform, we have been able to significantly improve the efficiency by which voice signals are transmitted by radio over the Internet resulting in a 10X reduction in mobile spectrum required to transmit a VoIP call. We license our software solutions to telecommunications network operators and service providers in the mobile, fixed line, cable TV and satellite communications markets.  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 and Hong Kong.

The Horizon Platform delivers a turnkey mobile VoIP solution to telecommunications operators.  We believe that the technology underlying SmartPacket™ is the world’s most bandwidth-efficient VoIP technology.  Our VoIP platform allows voice calls over the Internet that use as little as 4kbps of data compared to around 48kbps offered by other optimized VoIP platforms, thereby enabling voice communications over limited bandwidth and congested cellular telecom data networks including 2G, 3G and 4G.  The kbps rates above include bi-directional voice communication including IP overhead.

We believe that emerging markets represent a key opportunity for Horizon Call because there are significant markets with high population density, high penetration of mobile phones, congested mobile cellular networks and high growth in the adoption of smartphones. These factors will put increased pressure on mobile operators to manage their network availability. 

In this context, the Company is forming a number of joint ventures with local partners in the regions of interest to seize upon this opportunity. We expect to form joint ventures when local regulations prevent us from accessing a particular market directly. As of the date of this report, we have formed joint ventures in India, Russia and China.
 
We plan to fund this proposed expansion through debt financing, cash from operations and potential equity financing. However, we may not be able to obtain additional financing at acceptable terms, or at all, and, as a result, our ability to continue to improve and expand our software products and to expand our business could be adversely affected.
 
Recent developments

During the six months ended June 30, 2014, we expanded our Irish software development team with the addition of a new senior software developer at our recently opened software research and development office at the Nexus Innovation Center on the campus of the University of Limerick.  As part of this process, we signed an agreement with the Industrial Development Agency (IDA) Ireland whereby IDA granted certain financial assistance toward the cost of establishing and carrying a service undertaking for a software development center in Ireland in connection with our VoIP software platform. The software development center is intended to give employment of 25 persons and could allow us to more quickly increase the size of this research and development team. We believe that the further expansion of our Irish development team will allow the further advance of our unique mobile VoIP solutions.
 
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We also completed the development and continued to refine the Horizon billing system.  The completion of the Horizon Billing System software add-on package allows one Horizon to deliver an additional turn-key element to our customers that will allow our customers to invoice their customers and enterprise on a postpaid monthly basis.  This adds greater flexibility and reach to the Horizon platform as offered by our customers to those subscribers that wish to utilize the service on a post paid basis.

We also expanded our software development capabilities for China by hiring 4 new junior software developers in our Horizon Nanjing JV, known as Horizon Network Technology Co. Ltd..  We believe that the expansion of our software development team at our Chinese joint venture will support the company’s strategy of  continuing to develop our products in areas with high population density, high penetration of mobile phones, congested mobile cellular networks and high growth in the adoption of smartphones while working within the constraints of local regulations.
 
During the first half of our 2014 fiscal year, Chongqing Leixin Network Technology (“Leixin”), a joint venture with Leiqiang Telecommunications Co. Ltd (“Leiqiang”) through a PRC entity controlled by us delivering the 95131 area code to smartphones throughout China, commenced the first phase of its infrastructure rollout in five cities in China: Tianjin, Beijing, Chongqing, Changchun and Shijiazhuang.  These initial five locations will connect the 95131 to the national telephone network to commence the commissioning of the Leixin VoIP service in China.  To date, we have successfully installed eight servers in  support of Leixin smart phone app   The Leixin smart phone app will be able to provide various optimized internet value added services to its mobile subscribers including but not limited to voice and social media services including text, picture, video and geo-location messaging. These value added services are made possible through the creation of a "Virtual SIM" that utilizes the 95131 area code number range and One Horizon's proprietary communication software, an industry first. The "Virtual SIM" will be deployed via a Leixin-branded smart phone app that will also make use of the One Horizon on-line payment service to enable the purchase of call and message credits as well as the purchase and sharing of Stickers, Emojis & Emoticons. Combined with One Horizon's location aware mobile advertising services, the Leixin branded smart phone app is expected to drive multiple revenue streams from the supply of its value-added services. Leixin will seek to acquire 100 million new app subscribers for the Leixin branded smartphone app over a three-year period and expects to achieve industry average revenues per user (ARPU) for similar social media apps.
 
During the three months ended June 30, 2014,  we continued building up the LeiXin core network rollout.  The Global Exchange (network control center) was placed in a high availability Data Center in Shanghai and eight (8) Horizon line servers were connected to the telecommunications network.  This level of rollout allowed us to issue a preliminary Android Application (App) to a group of Chinese students in Nanjing for them to evaluate the user Interface and the core features of our optimized smartphone App.  Based on this feedback the research and development teams in Ireland and China made some adjustments to the Application look and feel service to accommodate this target user community.
 
During the second quarter of 2014, we signed a global exchange agreement with a second tier telecommunication company that targets US citizens traveling overseas by providing the Horizon VoIP application in a new configuration called “RoamFrii” that allows customers to eliminate certain roaming charging while traveling internationally.  Going forward, we plan to work with our partner to expand this offering to other international travelers.
 
In the first half year of 2014, we continued our research and development of the Horizon product platform.  The Swiss based team made significant strides towards the next generation of the product suite with particular emphasis going to the User Interface (UI) re-engineering.  Further to the UI the Research and Development for version 2.0,  our Irish based team made progress on the latest multi-core solution with a view to releasing this software in the third quarter of 2014.  The software team in China is pushing ahead with integrating the user feedback garnered from Chinese students using our Application on the smartphone and also working on a new and exciting method for Direct Inward Dial number rental for the Chinese marketplace.
 
 
22

 
 
On July 2, 2014, we received approval by NASDAQ's Listing Qualifications Department to list our common stock on the NASDAQ Capital Market. Our common stock commenced trading on the NASDAQ Capital Market on July 9, 2014 under the same ticker symbol "OHGI".

On July 21, 2014, we closed a private placement of $1,000,000  for a total of 10 units at a purchase price of $100,000 per Unit, each consisting of, (i) 17,094 shares of the Company’s Series A Redeemable Convertible Preferred Stock, par value $0.0001 per share, initially convertible into 17,094 shares of the Company’s common stock, par value $0.0001 per share, and (ii) 10,000 Class B Warrants, each exercisable to purchase 1 share of Common Stock at an exercise price of $4.00 per share. The Financings were completed in reliance upon the exemption from securities registration afforded by Regulation S (“Regulation S”) as promulgated under the Securities Act of 1933.

On July 28, 2014, we appointed Brian Collins, Vice President and the Chief Technology officer of the Company, the Chief Executive Officer of the Company, following our former CEO, Mark White’s resignation. Mr. Collins is the co-inventor of the Horizon Platform, and has over 20 years’ experience in the technology sector with a background in software engineering. Mr. Collins brings experience in founding and operating technology companies along with his extensive knowledge of software engineering.

Results of Operations

Comparison of three months ended June 30, 2014 and 2013
 
The following table sets forth key components of our results of operations for the periods indicated.
 
(All amounts, other than percentages, in thousands of U.S. dollars)
 
   
Three Months Ended
June 30,
   
Change
 
   
2014
   
2013
   
Increase/ (decrease)
   
Percentage Change
 
                         
Revenue
 
$
1,304
   
$
1,253
   
$
51
     
4.1
%
                                 
Cost of revenue
   
549
     
885
     
(336)
     
(40.0)
 
                                 
Gross margin
   
755
     
368
     
387
     
105.1
 
                                 
Operating expenses:
                               
                                 
  General and administrative
   
1,190
     
2,221
     
(1,031
)
   
(46.2
)
  Depreciation
   
46
     
39
     
7
     
17.9
 
  
                               
Total operating expenses
   
1,236
     
2,260
     
(1,024
)
   
(45.3
)
                                 
Loss from operations
   
(481
)
   
(1,892
)
   
1,411
         
                                 
Other income (expense)
   
(64 
)
   
(57
)
               
Income (Loss) before income taxes
   
(545
)
   
(1,949
)
   
1,404
         
                                 
Income taxes (recovery)
   
-
     
-
     
-
     
-
 
Net Loss for period
   
(545
)
   
(1,949
)
   
1,404
         
                                 
Net loss attributable to non-controlling interest
   
(22
)
   
(44
)
   
22
         
                                 
Net loss attributable to One Horizon Group, Inc.
   
(523
)
   
(1,905
)
   
(1,382
)
       
 
 
23

 
 
Revenue: Our revenue for the three months ended June 30, 2014 was approximately $1.304 million as compared to approximately $1.253 million for the three months ended June 30, 2013, an increase of roughly $51,000, or 4.1%. The increase was primarily due to increase in sales of user licenses  The Company expects sales to continue to increase going forward and that sales will begin to grow more quickly as more companies have signed up for the Horizon Platform.

As of June 30, 2014, the following table sets forth the value of all existing contracts as it related to master licenses and the amount of revenue recognized to date as well as the revenue recognized during the three  months ended June 30, 2014. This table represents the contract value for the sale of the master license, excluding other revenues recognized under the terms of the contract for maintenance, user licenses, and other sales.
 
   
Master License
 
Customer Type
       
Balance
   
Revenue
   
Revenue
 
         
to be
   
recognized
   
for 3 months
 
   
Contract Value
   
recognized
   
to date
   
ending 6/30/2014
 
Tier 1
 
$
13,425,000
   
$
9,512,500
   
$
3,912,500
   
$
-
 
Tier 2
   
52,000,000
     
46,861,419
     
5,138,581
     
500,000
 
                                 
Total
 
$
65,425,000
   
$
56,373,919
   
$
9,051,081
   
$
500,000
 
 
In addition to the above revenue recognized from Master Licenses of approximately $500,000, the Company also recognized approximately $804,000 from the sale of hardware, user licenses, consultancy and maintenance services during  the three months ended June 30, 2014.
 
Cost of Revenue: Cost of revenue was approximately $549,000 or 42% of sales for the three months ended June 30, 2014, compared to cost of  revenue of $885,000 or 71% of sales for the three months ended June 30, 2013. Our cost of sales is primarily composed of the amortization of software development costs. In addition, when a customer requires ancillary hardware, there are costs relating to the provision of that hardware.   The decrease in cost of sales was mainly attributed to a reduction in sales of ancillary hardware and the associated cost of sale during the three months ended June 30, 2014 as compared to the same quarter in 2013. 

Gross ProfitGross profit for the three months ended June 30, 2014 was approximately $0.76 million as compared to $0.37 million for the three months ended June 30, 2013, an increase of approximately 105%. The main reason for the increase in gross profit was the reduction in hardware costs described above herein.  Management expects that gross profit shall increase withthe growth in business and the smartphone market globally, as well as the Company’s ability to capitalize on market opportunities by entering areas with high population density, high penetration of mobile phones, congested mobile cellular networks and high growth in the adoption of smartphones.
 
Operating Expenses: Operating expenses, including general and administrative expenses and depreciation were approximately $1.24 million and $2.26 million during the three months ended June 30, 2014 and 2013, respectively. The reduction arose from reduced accounting and legal costs incurred in 2014. We had relatively higher level of accounting and legal costs in the comparative period in 2013 compared to the same period in 2013 following the share exchange between and among Intelligent Communication Enterprise Corp. and One Horizon Group PLC  closed on November 20, 2012.  The reduced operating expenses were also due to our reduced staff costs during the three months ended June 30, 2014 as we transited certain development positions from Switzerland to Ireland and China. In addition, during the comparative period in 2013, we recognized a non-cash expenditure of more than $500,000 in connection with the issuance of certain shares to our advisors while we did not record such non-cash expenditure in the same period in 2014. 

 
24

 
 
Net Loss:Net Loss for the three months ended June 30, 2014 was approximately $545,000 as compared to net loss of approximately $1.95 million for the same period in 2013. The decrease in net loss reflected a slight increase in revenue coupled with a reduction in operating expenses for reasons set out above herein. Management believe the net loss will continuously decrease and eventually become net income going forward with our growth in the sales and operations; provided that we are able to successfully sell Horizon Platform solution to new telecommunications companies globally.  
 
Non-Controlling Interest:  The non-controlling interest holders in our  Chinese subsidiary Horizon Network Technology Co Ltd were attributed their 25% share of the net loss of the Company in the amount of $22,000 for the three months ended June 30, 2014. The remaining portion of net loss of $523,000 for the three months ended June 30, 2014 was attributable to the stockholders of the Company.

Going forward, management believes the Company will continue to grow the business and increase profitability if we are successful in selling the Horizon Platform solution to new telecommunications company customers globally.
 
Comparison of six months ended June 30, 2014 and 2013
 
The following table sets forth key components of our results of operations for the periods indicated above.
 
(All amounts, other than percentages, in thousands of U.S. dollars)
 
   
Six Months Ended
June 30,
   
Change
 
   
2014
   
2013
   
Increase/ (decrease)
   
Percentage Change
 
                         
Revenue
 
$
2,489
   
$
3,172
   
$
(683
)
   
(21.5
)%
                                 
Cost of revenue
   
1,097
     
1,338
     
(241)
     
(18.0
)
                                 
Gross margin
   
1,392
     
1,834
     
(442
)
   
(24.1
)
                                 
Operating expenses:
                               
                                 
  General and administrative
   
2,318
     
694
     
(1,376
)
   
(37.2
)
  Depreciation
   
94
     
75
     
(19
)
   
(25.3
)
  
                               
Total operating expenses
   
2,412
     
3,769
     
(1,357
)
   
(36.0
)
                                 
Loss from operations
   
(1,020
)
   
(1,935
)
   
717
         
                                 
Other income (expense)
   
(112
)
   
(112
)
               
Income (Loss) before income taxes
   
(1,132
)
   
(2,047
)
   
717
         
                                 
Income taxes (recovery)
   
(156)
     
-
     
-
     
-
 
Net Loss for period
   
(976
)
   
(2,047
)
   
1,071
         
                                 
Net loss attributable to non-controlling interest
   
(65
)
   
(44
)
   
(21
)
       
                                 
Net loss attributable to One Horizon Group, Inc.
   
(911
)
   
(2,003
)
   
1,092
         
 
 
25

 
 
Revenue: Our revenue for the six months ended June 30, 2014 was approximately $2.49 million as compared to approximately $3.17 million for the six months ended June 30, 2013, a decrease of roughly $0.68 million, or 21.5%. The decrease was primarily due to revenue generated in 2013 for the maintenance of a banking software which is now no longer supported by One Horizon, and  licenses for a customer booked in January 2013 which were due for renewal in December 2013 and consequently issued and invoiced  in December 2013, two of which accounted for approximately $700,000  in revenue. . The total effect of these two items was a reduction in revenue of roughly $700,000.   The Company expects revenue to increase as we have new companies signed up for Horizon Platform.

The following table sets forth the value of all existing contracts as it related to master licenses and the amount of revenue recognized as of June 30, 2014 as well as the revenue recognized during the 6  months ended June 30, 2014. This table represents the contract value for the sale of the master license, excluding other revenues recognized under the terms of the contract for maintenance, user licenses, and other sales.
 
   
Master License
 
Customer Type
       
Balance
   
Revenue
   
Revenue
 
         
to be
   
recognized
   
for 6 months
 
   
Contract Value
   
recognized
   
to date
   
ending 6/30/2014
 
Tier 1
 
$
13,425,000
   
$
9,512,500
   
$
3,912,500
   
$
500,000
 
Tier 2
   
52,000,000
     
46,861,419
     
5,138,581
     
660,000
 
                                 
Total
 
$
65,425,000
   
$
56,373,919
   
$
9,051,081
   
$
1,160,000
 
 
In addition to the revenue recognized from Master Licenses of approximately $1,160,000, we also recognized an amount of approximately $1,329,000 from the sale of user licenses, consultancy and maintenance services for the six months ended June 30, 2014.

Cost of Revenue: Cost of revenue was approximately $1.1 million for the six months ended June 30, 2014, or 44% of sales, compared to cost of revenue of $1.34 million, or 42% of sales for the six months ended June 30, 2013. Our cost of sales is primarily composed of the amortization of software development costs. In addition, we recognize costs relating to the provision of hardware when a customer requires such ancillary hardware.

Gross ProfitGross profit for the six months ended June 30, 2014 was approximately $1.39 million as compared to $1.83 million for the six months ended June 30, 2013, a decrease of roughly 24%. The decrease was mainly due to the reduced revenue as set forth above herein. However, management anticipate gross profit to increase with the growth of our business and the global smartphone market as well as our established expansion plan of entering into markets with high population density, high penetration of mobile phones, congested mobile cellular networks and high adoption of smartphones. 
 
Operating Expenses: Operating expenses including general and administrative expenses and depreciation were approximately $2.41 million and $3.77 million during the six months ended June 30, 2014 and 2013, respectively. The decrease was mainly due to reduced accounting and legal costs for the six months ended June 30, 2014. For the same period in 2013, we incurred higher accounting and legal costs following the share exchange between and among Intelligent Communication Enterprise Corp. and One Horizon Group PLC closed on November 20, 2012. The decrease was also partially due to reduced staff cost in 2014 as we transited certain development positions from Switzerland to Ireland and China.  In addition, for the comparative period in 2013 we incurred non cash expenditure in respect of shares given to our advisors of over $500,000 which hasn’t been incurred for the same period in 2014.
 
Net Loss:Net Loss for the six months ended June 30, 2014 was approximately $976,000 as compared to net loss of approximately $2.0 million for the same period in 2013. The decrease in net loss reflected a reduction in operating expenses for reasons set out above herein. We showed a breakeven position when adjusted for non cash items of depreciation and amortization. Management believes that the net loss will continuously decrease with our business growth; provided that we can successfully sell the Horizon Platform solution to new telecommunications company customers globally. 

 
 
26

 
 
Non-Controlling Interest:  The non-controlling interest holders in our Chinese subsidiary were attributed their 25% share of the net loss of the Company in the amount of $65,000 for the six months ended June 30, 2014. The remaining portion of net loss of $911,000 for the six months ended June 30, 2014 was attributable to the stockholders of the Company.

Going forward, management believes the Company will continue to grow the business and increase profitability if we are successful in selling the Horizon Platform solution to new telecommunications company customers globally.
 
Foreign Currency Translation Adjustment:   Our reporting currency is the U.S. dollar. Our local currencies, Swiss Francs and British pounds, are our functional currencies. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by  http://www.oanda.com/currency/historical-rates/  at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
 
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 $19,000 for the six months ended June 30, 2014.
 
Liquidity and Capital Resources
 
Six Months Ended June 30, 2014  and June 30, 2013
 
The following table sets forth a summary of our approximate cash flows for the periods indicated:
 
   
For the Six Months Ended
June 30
(in thousands)
 
   
2014
   
2013
 
Net cash provided by (used in) operating activities
   
(859
   
(1,728
)
Net cash (used in) investing activities
   
(686
)
   
(629
)
Net cash provided by (used in) financing activities
   
(30
)
   
3,602
 
 
Net cash used by operating activities was approximately $859,000 for the six months ended June 30, 2014 as compared to net cash used of approximately $1.73 million for the same period in 2013. The decrease in cash used by operations was primarily due to the reduced loss incurred for the period.
 
Net cash used in investing activities was approximately $686,000 and $629,000 for the six months ended June 30, 2014 and 2013, respectively. Net cash used in investing activities was primarily focused on acquisitions of intangible assets and property and equipment.
 
Net cash used in financing activities was $30,000 for the six months ended June 30, 2014 as compared to net cash provided by financing activities amounted to $3.6 million for the six months ended June 30, 2013. Cash used by financing activities in 2014 was primarily due to repayment in long term bank borrowing.  Cash provided by financing activities in 2013 was primarily due to the advances from related parties.
 
Our working capital as of June 30, 2014 was approximately  $3.6 million.  Our working capital as of December 31, 2013, was approximately $4.1 million. The reduction in working capital was due primarily to the loss incurred during the six months as well as the reduction in long–term liabilities.

 
27

 
 
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Not applicable.
 
ITEM 4.CONTROLS AND PROCEDURES.

(a) Evaluation of Disclosure Controls and Procedures

Our management maintains disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our current chief executive officer and chief financial officer (our “Certifying Officers”), as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation, under the supervision and with the participation of our management, including our Certifying Officers, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Certifying Officers have concluded that our disclosure controls and procedures were ineffective in ensuring that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission, and were ineffective in providing reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

(b) Changes in Internal Control over Financial Reporting

In connection with the preparation of our financial statements for the fiscal year ended December 31, 2013, the management determined that our internal control environment is not properly designed due to the existence of certain material weaknesses and that it did not operate effectively to ensure that the Company’s financial statements (and related financial statement disclosures) were prepared in accordance with US generally accepted accounting principles (US GAAP).  We have established a number of remediation measures, which we believe will remediate the material weaknesses identified, if such measures are effectively implemented and maintained. As of the end of the period covered by the report, we continue the process of implementing and maintaining the remediation measures, but we cannot assure when or if we will be able to successfully implement these remedial measures.  For more information regarding our controls and procedures, please refer to Item 9A. Controls and Procedures in our Annual Report on Form 10-K for fiscal year ended December 31, 2013, filed with the SEC on April 15, 2014)

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter covered by this report that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
28

 
 
PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We are currently not aware of any legal proceedings or claims that would require disclosure under Item 103 of Regulation S-K. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

ITEM 1A. RISK FACTORS

Not applicable.

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

On July 21, 2014,   we closed a private placement of $1,000,000  for a total of 10 units (the “Units”) at a purchase price of $100,000 per Unit, each consisting of, (i) 17,094 shares of our Series A Redeemable Convertible Preferred Stock, par value $0.0001 per share (the “Series A Preferred Shares”), initially convertible into 17,094 shares of our Common Stock, and (ii) 10,000 Class B Warrants, each exercisable to purchase 1 share of Common Stock,  in reliance upon the exemption from securities registration afforded by Regulation S.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None 
 
 
29

 
 
ITEM 6. EXHIBITS
 
Exhibit Number
 
Description
31.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1+
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2+
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS**
 
XBRL Instance Document
     
101.SCH **
 
XBRL Taxonomy Schema
     
101.CAL **
 
XBRL Taxonomy Calculation Linkbase
     
101.DEF **
 
XBRL Taxonomy Definition Linkbase
     
101.LAB **
 
XBRL Taxonomy Label Linkbase
     
101.PRE **
 
XBRL Taxonomy Presentation Linkbase
 
** Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

+ In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are furnished and not filed.
  
 
30

 
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
ONE HORIZON GROUP, INC.
 
       
Date: August 12, 2014
By:
/s/ Brian Collins  
    Brian Collins  
   
President , Chief Executive Officer,
 
    Chief Technology Officer and Director  
     
       
 
By:
/s/ Martin Ward  
    Martin Ward  
   
Chief Financial Officer, Principal
 
    Finance and Accounting Officer and Director  
 
 
 
31