NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
Note
1. Description of Business, Organization and Principles of Consolidation
Description
of Business
One
Horizon Group, Inc. (the “Company”) has the following three core businesses:
|
(i)
|
123Wish, Inc. formerly Once In A Lifetime, LLC
(“123Wish”) – an experience based platform where subscribers have a chance to play and win experiences from
celebrities, athletes and artists.
|
|
(ii)
|
Love Media House, Inc. formerly known as C-Rod,
Inc. (“Love Media House”) -
a full-service music production, artist representation
and digital media business that provides
a broad range of entertainment services including branding and advertising,
video and photo production, recording (including music production, arranging, mixing and mastering), songwriting (arranging
writing sessions with experienced and multi-platinum writers), artist development, digital distribution, billboard chart promotion,
and consulting and life coaching. The entertainment marketplace is highly competitive. The team at Love Media House, headed
by Chis Rodriguez, has worked with many famous artists and achieved many Billboard numbers and giving Love Media House an
important edge in promoting new talent.
|
|
(iii)
|
Browning Productions & Entertainment, Inc.
(“Browning Productions”) - a full service video production company and executive producer for all entertainment
projects. Browning Productions has been selected to produce and distribute numerous television programs spanning dozens of
episodes in 2019 for acclaimed television networks.
|
In
February 2019, the Company entered into an agreement to acquire a majority interest in Maham LLC, an innovative, technology driven
yoga studio concept, which the Company expects to close during the second quarter of 2019.
The
Company is based in the United States of America, Hong Kong, China and the United Kingdom.
Interim
Period Financial Statements
The
accompanying unaudited interim condensed 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, 2018, as filed with the
Securities and Exchange Commission on April 15, 2019.
Current
Structure of the Company
The
Company has the following subsidiary companies:
|
|
Subsidiary
name
|
%
Owned
|
|
●
|
123Wish, Inc. (acquired
February 2018)
|
51%
|
|
●
|
One Horizon Hong
Kong Ltd
|
100%
|
|
●
|
Horizon Network
Technology Co. Ltd
|
100%
|
|
●
|
Love Media House,
Inc. (acquired March 2018)
|
100%
|
|
●
|
Browning Productions
& Entertainment, Inc. (acquired October 2018)
|
51%
|
In
addition to the subsidiaries listed above, Suzhou Aishuo Network Information Co., Ltd (“Suzhou Aishuo”) is a limited
liability company, organized in China and controlled by us via various contractual arrangements. Suzhou Aishuo is treated as one
of our subsidiaries for financial reporting purpose in accordance with GAAP.
All
significant intercompany balances and transactions have been eliminated in consolidation.
Note
2. Summary of Significant Accounting Policies
Foreign
Currency Translation
The
reporting currency of the Company is the United States dollar. Assets and liabilities other than those denominated in U.S. dollars,
primarily in Hong Kong and the United Kingdom, 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.
Liquidity
and Capital Resources
Historically,
the Company has incurred net losses and negative cash flows from operations which raise substantial doubt about the
Company’s ability to continue as a going concern. The Company has principally financed these losses from the sale of
equity securities and the issuance of debt instruments.
The
Company may be required to raise additional funds through various sources, such as equity and debt financings. While the Company
believes it is probable that such financings could be secured, there can be no assurance the Company will be able to secure additional
sources of funds to support its operations, or if such funds are available, that such additional financing will be sufficient
to meet the Company’s needs or on terms acceptable to us.
At
March 31, 2019, the Company had cash of approximately
$1,076,000. Together with the Company’s
current operational plan and budget, the Company believes that it is probable that it will have sufficient cash to fund its operations
into at least the third quarter of 2020. However, actual results could differ materially from the Company’s projections.
Accounts
receivable, revenue recognition and concentrations
Performance
Obligations
- A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and
is the unit of account under the revenue recognition standard. The transaction price is allocated to each distinct performance
obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s contracts do not
typically have variable consideration that needs to be considered when the contract consideration is allocated to each performance
obligation.
Revenue
Recognition
– We recognize revenues from each business segment as described below:
|
1.
|
123Wish derives income from user subscriptions,
sale of merchandise, sale of tickets for experiences with social media influencers and artists, and the sale of corporate
sponsorships, each of which is a separate performance obligation. User subscriptions cover a defined period of time (typically
one month) and the revenue is recognized as the Company satisfies the requisite performance obligation (over the defined subscription
period). Sale of merchandise and tickets are recognized when the customer has paid for the item and when the merchandise and/or
ticket has been delivered to the customer. Corporate sponsorship packages are non-refundable and relate to brand association.
The Company has no further service deliverable to the sponsor and the revenue is recognized when the agreement is entered
into by both parties and the required marketing materials have been delivered to the corporate sponsor for their use.
|
|
2.
|
Love Media House derives income from recording
and video services. Income is recognized when the recording and video services are performed and the final customer product
is delivered and the point at which the performance obligation is satisfied. These revenues are non-refundable.
|
|
3.
|
Browning
Production & Entertainment, Inc derives income from the advertising associated with the airing of television series
produced by BP&E and also license income from the show of series on certain channels based on the number of viewers
attracted. Advertising revenue is recognized when the series to which the advertising relates is aired.
|
The
Company does not have off-balance sheet credit exposure related to its customers. As of March 31, 2019 four customers accounted
for 69% of the accounts receivable balance and as of December 31, 2018, three customers accounted for 68% of the accounts receivable
balance. Two customers accounted for 69% of the revenue for the quarter ended March 31, 2019 and one customer accounted for 82%
of the revenue for the quarter ended March 31, 2018.
During
the three months ended March 31, 2019, $7,500 of revenue were generated from Maham, LLC, an acquisition target.
Income
taxes
The
Company continually evaluates its uncertain income tax positions and may record a liability for any unrecognized tax benefits
resulting from uncertain income tax positions taken or expected to be taken in an income tax return. Estimated interest and penalties
are recorded as a component of interest expense and other expense, respectively.
Because
tax laws are complex and subject to different interpretations, significant judgment is required. As a result, the
Company makes certain estimates and assumptions in: (1) calculating its income tax expense, deferred tax assets, and deferred
tax liabilities; (2) determining any valuation allowance recorded against deferred tax assets; and (3) evaluating the amount
of unrecognized tax benefits, as well as the interest and penalties related to such uncertain tax positions. The
Company’s estimates and assumptions may differ significantly from tax benefits ultimately realized. Historically the
Company has not filed income tax returns and the related required informational filings in the US. Certain informational
filings if not filed contain penalties and such penalties could be material. The Company is currently addressing this issue with
advisors to determine the amount, if any, of potential payments due. Given the complexity of the issue the Company is unable
to quantify a range of potential loss, if any. Accordingly no liability has been recorded in the accompanying consolidated
balance sheets in respect of this matter
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 month periods ended March 31, 2019 and 2018 all outstanding
warrants and shares underlying convertible debt are antidilutive because of net losses, and as such, their effect has not been
included in the calculation of diluted net loss per share. Common shares issuable are considered outstanding as of the original
approval date for purposes of earnings per share computations.
Share-Based
Compensation
The
Company accounts for stock-based awards at fair value on date of grant and recognition of compensation over the service period
for awards expected to vest. The fair value of stock options is determined using the Black-Scholes option pricing model, which
includes subjective judgements about the expected life of the awards, forfeiture rates and stock price volatility.
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 reporting period.
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.
Recently
Adopted Accounting Pronouncements
In February 2016, the FASB issued
ASU 2016-02, “Leases,” which created a new Topic, ASC Topic 842 and established the core principle that a lessee should
recognize the assets, representing rights-of-use, and liabilities to make lease payments, that arise from leases. For leases with
a term of 12 months or less, a lessee is permitted to make an election under which such assets and liabilities would not be recognized,
and lease expense would be recognized generally on a straight-line basis over the lease term. This standard is effective for the
Company beginning in 2019 and was adopted by the Company for the year beginning January 1, 2019. The Company has evaluated the
impact of this revised guidance on its financial statements and determined it had no material impact, as the Company has no leasing
arrangements with terms greater than one year.
Note
3. Discontinued operations
In
November 2018 the management of the Company’s then 51% controlled subsidiary, Banana Whale Studios PTE Ltd. (“BWS”),
entered into discussions whereby the Company would sell its shares of BWS to a third party. Under the agreement, which has an
effective date of January 1, 2019, the Company received cash of $1,500,000 and a promissory note of $500,000 and the return of
the 7,383,000 Company shares issued on acquisition. The Company shares are held in Escrow for three months to secure certain warranties
given by the Company on closure.
The
Company realized a gain of $553,000 on the sale of its 51% interest is BWS during the three months ended March 31,
2019.
Note
4. Intangible Assets
Intangible
assets consists of the following (in thousands)
:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Horizon secure messaging software
|
|
$
|
548
|
|
|
$
|
548
|
|
Social online application software
|
|
|
2,307
|
|
|
|
2,307
|
|
Customer lists
|
|
|
900
|
|
|
|
900
|
|
|
|
|
3,755
|
|
|
|
3,755
|
|
Less accumulated amortization
|
|
|
(731
|
)
|
|
|
(571
|
)
|
Intangible assets, net
|
|
$
|
3,024
|
|
|
$
|
3,184
|
|
Note
5. Goodwill
Goodwill consists of the following (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
123Wish, Inc.
|
|
$
|
419
|
|
|
$
|
419
|
|
Love Media House, Inc. (formerly C. Rod, Inc.)
|
|
|
1,172
|
|
|
|
1,172
|
|
Browning Productions & Entertainment, Inc
|
|
|
622
|
|
|
|
622
|
|
|
|
$
|
2,213
|
|
|
$
|
2,213
|
|
Note
6. Equipment long-term debt
During
the three months ended March 31, 2019, the Company financed the purchase of certain production equipment through a five
year finance contract payable at $830 per month including interest of approximately 20% per annum.
Note
7. Notes Payable, Related Parties
As
of March 31, 2019, amounts totaling $203,000 (December 31, 2018 - $205,000) were owed to certain members of the management at subsidiary
companies. The amounts are unsecured, interest free and have no specified repayment dates.
Note
8. Notes Payable
a)
Promissory notes.
The
promissory notes due to Zhanming Wu ($500,000) and the Company’s CEO, Mark White ($500,000), both considered related parties,
including accrued interest of 7% per annum from issuance, are due for repayment on August 31, 2019.
b)
Other notes payable.
Notes
payable by Browning Productions & Entertainment, Inc. totaling $110,000 are due to unrelated parties and are repayable on
demand and interest bearing at average rates of 5.4% per year.
Note
9. Share Capital
Common
Stock
The
Company is authorized to issue 200 million shares of common stock, par value of $0.0001.
During
the three months ended March 31, 2019 there were no shares of common stock issued.
Stock
Purchase Warrants
As
at March 31, 2019, the Company had reserved 185,169 shares of its common stock for the outstanding warrants with weighted average
exercise price of $0.80. Such warrants expire at various times up to July 2020.
During
the three months ended March 31, 2019, no warrants were issued, forfeited or exercised.
Note
10. Stock-Based Compensation
The
shareholders approved a stock option plan on August 6, 2013, the 2013 Equity Incentive Plan (“2013 Plan”). The 2013
Plan is for the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards,
dividend equivalents, cash bonuses and other stock-based awards to employees, directors and consultants of the Company.
There
have been no options issued in the three months ended March 31, 2019 and 2018 and there are no options outstanding as at March
31, 2019.
In
March 2018 the Company adopted an Equity Incentive Plan (“the 2018 Plan”) to provide additional incentives to the
employees, directors and consultants of the Company to promote the success of the Company’s business. During the three months
ended March 31, 2019, no common stock of the Company was issued under the 2018 Plan.
Note
11. Segment Information
The
Company has the following business segments for the three months ended March 31, 2019 and 2018.
The
Company’s revenues were generated in the following business segments (in thousands)
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Sale of secure messaging licenses
|
|
$
|
—
|
|
|
$
|
100
|
|
123Wish
|
|
|
—
|
|
|
|
102
|
|
Love Media House
|
|
|
67
|
|
|
|
72
|
|
Browning Productions
|
|
|
134
|
|
|
|
—
|
|
Total
|
|
$
|
201
|
|
|
$
|
274
|
|
The
following is a detail of the Company’s cost of sales by business segment:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Sale of secure messaging licenses including amortization of software
|
|
$
|
—
|
|
|
$
|
405
|
|
123Wish
|
|
|
113
|
|
|
|
—
|
|
Love Media House
|
|
|
83
|
|
|
|
—
|
|
Browning Productions
|
|
|
46
|
|
|
|
—
|
|
Total
|
|
$
|
242
|
|
|
$
|
405
|
|
The
following is a detail of the Company’s general and administrative and other expenses by business segment:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
123Wish
|
|
|
22
|
|
|
|
345
|
|
Love Media House
|
|
|
165
|
|
|
|
33
|
|
Browning Productions
|
|
|
129
|
|
|
|
—
|
|
Corporate
|
|
|
869
|
|
|
|
1,763
|
|
Total
|
|
$
|
1,185
|
|
|
$
|
2,190
|
|
The
following is a detail of the Company’s other income and expenses by business segment:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
123Wish
|
|
$
|
—
|
|
|
$
|
—
|
|
Love Media House
|
|
|
—
|
|
|
|
—
|
|
Browning Productions
|
|
|
(3
|
)
|
|
|
—
|
|
Corporate
|
|
|
539
|
|
|
|
(373
|
)
|
Total
|
|
$
|
536
|
|
|
$
|
(373
|
)
|
The
following is a detail of the continuing net income (loss) by business segment:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Sale of secure messaging licenses
|
|
$
|
—
|
|
|
$
|
51
|
|
123Wish
|
|
|
(26
|
)
|
|
|
(243
|
)
|
Love Media House
|
|
|
(131
|
)
|
|
|
39
|
|
Browning Productions
|
|
|
(45
|
)
|
|
|
—
|
|
Corporate
|
|
|
(488
|
)
|
|
|
(2,541
|
)
|
Total
|
|
$
|
(690
|
)
|
|
$
|
(2,694
|
)
|