ITEM
1. Financial Statements
hopTo
Inc.
Condensed
Consolidated Balance Sheets
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(Unaudited)
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March
31, 2017
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December
31, 2016
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Assets
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Current Assets:
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|
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Cash
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$
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673,100
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$
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546,200
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Accounts receivable,
net
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183,800
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355,300
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Prepaid
expenses
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35,400
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38,700
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Total Current Assets
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892,300
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940,200
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Property and equipment, net
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124,600
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143,300
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Other assets
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109,000
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109,000
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Total Assets
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$
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1,125,900
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$
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1,192,500
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Liabilities
and Stockholders’ Equity (Deficit)
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Current Liabilities:
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Accounts payable
and accrued expenses
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$
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1,036,100
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$
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975,800
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Deferred rent
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20,900
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24,100
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Capital lease
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4,600
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6,800
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Deferred revenue
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1,720,500
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1,759,000
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Other
current liabilities
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766,200
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571,100
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Total Current Liabilities
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3,548,300
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3,336,800
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Deposit liability
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81,400
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81,400
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Deferred revenue
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1,557,500
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1,694,600
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Deferred rent
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—
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2,600
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Total Liabilities
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5,187,200
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5,115,400
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Stockholders’ Equity (Deficit):
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Preferred stock,
$0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding
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—
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—
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Common stock, $0.0001
par value, 195,000,000 shares authorized, 9,804,400 shares issued and outstanding at March 31, 2017 and December
31, 2016
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14,700
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14,700
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Additional paid-in capital
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78,527,500
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78,512,200
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Accumulated deficit
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(82,603,500
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)
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(82,449,800
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)
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Total Stockholders’
Equity (Deficit
)
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(4,061,300
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)
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(3,922,900
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)
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Total Liabilities
and Stockholders’ Equity (Deficit
)
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$
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1,125,900
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$
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1,192,500
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See
accompanying notes to unaudited condensed consolidated financial statements
hopTo
Inc.
Condensed
Consolidated Statements of Operations
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Three
Months Ended March 31,
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2017
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2016
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(Unaudited)
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(Unaudited)
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Revenue
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$
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982,500
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$
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1,007,300
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Costs of revenue
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18,800
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53,800
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Gross profit
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963,700
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953,500
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Operating expenses:
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Selling and marketing
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89,900
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317,100
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General and administrative
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641,100
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678,100
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Research
and development
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385,000
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885,800
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Total operating
expenses
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1,116,000
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1,881,000
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Loss from operations
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(152,300
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)
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(927,500
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)
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Other income (expense):
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Change in fair value of warrants liability
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—
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(47,300
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)
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Other income
(expense), net
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(500
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)
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600
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Loss before provision for income tax
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(152,800
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)
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(974,200
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)
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Provision for
income tax
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900
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700
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Net loss
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$
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(153,700
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)
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$
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(974,900
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)
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Loss per share
– basic and diluted
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$
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(0.02
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)
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$
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(0.10
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)
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Average weighted
common shares outstanding – basic and diluted
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9,804,400
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9,737,946
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See
accompanying notes to unaudited condensed consolidated financial statements
hopTo
Inc.
Condensed
Consolidated Statements of Stockholders’ Equity (Deficit)
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Three
Months Ended March 31,
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2017
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2016
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(Unaudited)
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(Unaudited)
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Preferred
stock – shares outstanding
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Beginning balance
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—
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—
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Ending balance
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—
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—
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—
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—
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Common
stock – shares outstanding
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Beginning balance
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9,804,400
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9,731,233
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Vesting of restricted
stock awards
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—
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13,275
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Ending balance
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9,804,400
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9,744,508
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Common
stock – amount
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Beginning balance
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$
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14,700
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$
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14,600
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Ending balance
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$
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14,700
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$
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14,600
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Additional
paid-in capital
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Beginning balance
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$
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78,512,200
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$
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78,189,300
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Stock-based compensation expense
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15,300
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86,200
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Company payment
of employee taxes for stock-based compensation
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—
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(1,500
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)
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Ending balance
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$
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78,527,500
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$
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78,274,000
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Accumulated
deficit
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Beginning balance
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$
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(82,449,800
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)
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$
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(80,596,900
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)
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Net loss
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(153,700
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)
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(974,900
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)
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Ending balance
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$
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(82,603,500
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)
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$
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(81,571,800
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)
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Total
Stockholders’ Deficit
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$
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(4,061,300
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)
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$
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(3,283,200
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)
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See
accompanying notes to unaudited condensed consolidated financial statements
hopTo
Inc.
Condensed
Consolidated Statements of Cash Flows
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Three
Months Ended March 31,
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2017
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2016
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Cash
Flows Provided By and (Used In) Operating Activities:
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(Unaudited)
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(Unaudited)
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Net Loss
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$
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(153,700
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)
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$
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(974,900
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)
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Adjustments to reconcile
net loss to net cash provided by and (used in) operating activities:
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Depreciation and amortization
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18,100
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28,400
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Stock-based compensation
expense
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15,300
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86,200
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Company payments of
employee taxes for stock-based compensation
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—
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(1,500
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)
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Revenue deferred to
future periods
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558,000
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778,600
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Recognition of deferred
revenue
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(733,600
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)
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(873,900
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)
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Changes to allowance
for doubtful accounts
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(2,700
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)
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(2,500
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)
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Change in fair value
of derivative instruments warrants
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—
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47,300
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Accretion of warrants
liability for consulting services
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—
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4,200
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Changes in severance
liability
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—
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(5,900
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)
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Changes in deferred
rent
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(5,800
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)
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(5,100
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)
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Interest accrued for
capital lease
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100
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300
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Loss
/(gain)
on disposal of fixed
assets
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600
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(200
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)
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Changes
in operating assets and liabilities:
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Accounts
receivable
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174,200
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4,300
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Prepaid
expenses
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3,300
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(9,800
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)
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Accounts
payable and accrued expenses
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60,300
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222,300
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Other
current liabilities
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195,100
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—
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Net
Cash Provided By and (Used In) Operating Activities
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129,200
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(702,200
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)
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Cash
Flows Provided By and (Used In) Investing Activities:
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Proceeds
from sale of equipment
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—
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200
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Net
Cash Provided By and (Used In) Investing Activities
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|
—
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200
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Cash
Flows Provided By and (Used In ) Financing Activities:
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|
|
|
|
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Payment
of capital lease
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(2,300
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)
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|
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(2,300
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)
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Net
Cash Provided By and (Used In ) Financing Activities
|
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(2,300
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)
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(2,300
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)
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Net Increase (Decrease)
in Cash
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126,900
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(704,300
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)
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Cash - Beginning
of Period
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546,200
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1,777,300
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Cash - End of
Period
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$
|
673,100
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$
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1,073,000
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|
See
accompanying notes to unaudited condensed consolidated financial statements
hopTo
Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
1.
Basis of Presentation
The
unaudited condensed consolidated financial statements include the accounts of hopTo Inc. and its subsidiaries (collectively, “we”,
“us” or “our”); significant intercompany accounts and transactions are eliminated upon consolidation.
The unaudited condensed consolidated financial statements included herein have been prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”) applicable to interim financial information and the rules and regulations
promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, such unaudited condensed consolidated
financial statements do not include all information and footnote disclosures required in annual financial statements.
The
unaudited condensed consolidated financial statements included herein reflect all adjustments, which include only normal, recurring
adjustments, that are, in our opinion, necessary to state fairly the results for the periods presented. This Quarterly Report
on Form 10-Q should be read in conjunction with our audited consolidated financial statements contained in our Annual Report on
Form 10-K for the year ended December 31, 2016 which was filed with the SEC on April 7, 2017 (“2016 10-K Report”).
The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the
full fiscal year ending December 31, 2017 or any future period.
2.
Going Concern and Management’s Liquidity Plans
The
accompanying condensed consolidated financial statements have been prepared in conformity with GAAP, assuming we will continue
as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
Accordingly, the condensed consolidated financial statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible
inability of the Company to continue as a going concern.
We
have incurred significant net losses since our inception. For the three months ended March 31, 2017, the Company incurred a net
loss of $153,700. At March 31, 2017, the Company had an accumulated deficit of $82,603,500 and a working capital deficit of $2,656,000.
Due to our inability to date to generate meaningful revenue from our hopTo Work business and our continued estimation that revenue
from this product is unlikely in any reasonable time frame, our cash resources will not be sufficient to fund our business for
the next 12 months. The Company’s ability to continue as a going concern is dependent on our ability to continue to generate
revenue from our legacy GO-Global business and to raise additional capital through the issuance of new equity, debt financing,
or from the sale of certain assets to meet short and long-term operating requirements.
If
the Company raises additional funds through the issuance of equity or convertible debt securities, the percentage ownership of
our current shareholders could be reduced, and such securities might have rights, preferences or privileges senior to the Company’s
common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available
or are not available on acceptable terms, the Company may not be able to take advantage of prospective business endeavors or opportunities,
which could significantly and materially restrict our operations. We are continuing to pursue external financing alternatives
to improve our working capital position. If the Company is unable to obtain the necessary capital, the Company may have to cease
operations.
These
factors raise substantial doubt about our ability to continue as a going concern.
In
order to maintain operations, we previously implemented significant expense reductions, including a limited number of employee
layoffs, and continue to implement further costs and employment reductions. During the three month period ended September 30,
2016, our CEO and CFO voluntarily agreed with our board of directors to defer 50% of their salary beginning September 1, 2016
until such time as the Company can reasonably pay such compensation upon approval by the board of directors.
Although
maintaining our SEC filing status is a significant expense, we are considering all options to preserve value for shareholders,
including potentially suspending or terminating our filing status, however we have not made any decision to do so.
We
have worked extensively to explore additional sources of capital including the issuance of new shares, securing debt financing,
and the sale of assets including certain software products and patents. Although this process is ongoing and we are in active
discussions with multiple parties, there is no guarantee that they will result in transactions that are sufficient to provide
the Company with the required liquidity to remove the substantial doubt as to our ability to continue as a going concern. We are
also in discussions with some parties about the possibility of other strategic transactions although there is no guarantee that
these discussions will result in an actual transaction. The accompanying condensed consolidated financial statements do not include
any adjustments that may result from the outcome of the uncertainties set forth above.
3.
Significant Accounting Policies
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period. These estimates include: the amount of stock-based
compensation expense; the allowance for doubtful accounts; the estimated lives, valuation, and amortization of intangible assets
(including capitalized software); depreciation of long-lived assets; valuation of warrants; post-employment benefits, and accruals
for liabilities. While we believe that such estimates are fair, actual results could differ materially from those estimates.
Revenue
Recognition
We
market and license our products indirectly through channel distributors, independent software vendors (“ISVs”), value-added
resellers (“VARs”) (collectively, “resellers”) and directly to corporate enterprises, governmental and
educational institutions and others. Our product licenses are perpetual. We also separately sell intellectual property licenses,
maintenance contracts, which are comprised of license updates and customer service access, as well as other products and services.
Software
license revenues are recognized when:
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●
|
Persuasive
evidence of an arrangement exists, (i.e., when we sign a non-cancellable license agreement wherein the customer acknowledges
an unconditional obligation to pay, or upon receipt of the customer’s purchase order), and
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|
●
|
Delivery
has occurred or services have been rendered and there are no uncertainties surrounding product acceptance (i.e., when title
and risk of loss have been transferred to the customer, which occurs when the media containing the licensed program(s) is
provided to a common carrier or, in the case of electronic delivery, when the customer is given access to the licensed program(s)),
and
|
|
●
|
The
price to the customer is fixed or determinable, as typically evidenced in a signed non-cancellable contract, or a customer’s
purchase order, and
|
|
●
|
Collectability
is probable. If collectability is not considered probable, revenue is recognized when the fee is collected.
|
Revenue
recognized on software arrangements involving multiple deliverables is allocated to each deliverable based on vendor-specific
objective evidence (“VSOE”) or third party evidence of the fair values of each deliverable; such deliverables include
licenses for software products, maintenance, private labeling fees, and customer training. We limit our assessment of VSOE for
each deliverable to either the price charged when the same deliverable is sold separately or the price established by management
having the relevant authority to do so, for a deliverable not yet sold separately.
If
sufficient VSOE of the fair value does not exist so as to permit the allocation of revenue to the various elements of the arrangement,
all revenue from the arrangement is deferred until such evidence exists or until all elements are delivered. If VSOE of the fair
value does not exist, and the only undelivered element is maintenance, then we recognize revenue on a ratable basis. If VSOE of
the fair value of all undelivered elements exists but does not exist for one or more delivered elements, then revenue is recognized
using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining
portion of the arrangement fee is recognized as revenue.
Certain
resellers (“stocking resellers”) purchase product licenses that they hold in inventory until they are resold to the
ultimate end user (an “inventory stocking order”). At the time that a stocking reseller places an inventory stocking
order, no product licenses are shipped by us to the stocking reseller; rather, the stocking reseller’s inventory is credited
with the number of licenses purchased and the stocking reseller can resell (issue) any number of licenses from their inventory
at any time. Upon receipt of an order to issue a license(s) from a stocking reseller’s inventory (a “draw down order”),
we will ship the license(s) in accordance with the draw down order’s instructions. We defer recognition of revenue from
inventory stocking orders until the underlying licenses are sold and shipped to the end user, as evidenced by the receipt and
fulfillment of the stocking reseller’s draw down order, assuming all other revenue recognition criteria have been met.
There
are no rights of return granted to resellers or other purchasers of our software products.
Revenue
from maintenance contracts is recognized ratably over the related contract period, which generally ranges from one to five years.
All
of our software licenses are denominated in U.S. dollars.
Deferred
Rent
The
leases for both the Company’s current office in Campbell, California and the subleased former office in Campbell, California
contain free rent and predetermined fixed escalations in our minimum rent payments. Rent expense related to these leases is recognized
on a straight-line basis over the terms of the leases. Any difference between the straight-line rent amounts and amounts payable
under the leases is recorded as part of deferred rent in current or long-term liabilities, as appropriate. The monthly rent payments
due to the Company for the sublease of the office at 1919 S. Bascom Avenue fully offsets the rent payments due under the Company’s
lease for that space.
Incentives
received upon entering into the lease agreement are recognized on a straight-line basis as a reduction to rent over the term of
the lease. The unamortized portion of these incentives are recorded as a part of deferred rent in current or long-term liabilities,
as appropriate.
Long-Lived
Assets
Long-lived
assets are assessed for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may
not be recoverable, whenever we have committed to a plan to dispose of the assets or, at a minimum, annually. Typically, for long-lived
assets to be held and used, measurement of an impairment loss is based on the fair value of such assets, with fair value being
determined based on appraisals, current market value, comparable sales value, and discounted future cash flows, among other variables,
as appropriate. Assets to be held and used (which assets are affected by an impairment loss) are depreciated or amortized at their
new carrying amount over their remaining estimated life; assets to be sold or otherwise disposed of are not subject to further
depreciation or amortization. No such impairment charge was recorded during either of the three-month periods ended March 31,
2017 or 2016.
Allowance
for Doubtful Accounts
We
maintain an allowance for doubtful accounts that reflects our best estimate of potentially uncollectible trade receivables. The
allowance is based on assessments of the collectability of specific customer accounts and the general aging and size of the accounts
receivable. We regularly review the adequacy of our allowance for doubtful accounts by considering such factors as historical
experience, credit worthiness, and current economic conditions that may affect a customer’s ability to pay. We specifically
reserve for those accounts deemed uncollectible. We also establish, and adjust, a general allowance for doubtful accounts based
on our review of the aging and size of our accounts receivable.
The
following table sets forth the details of the Allowance for Doubtful Accounts for the three-month periods ended March 31, 2017
and 2016:
|
|
|
Beginning
Balance
|
|
|
Charge
Offs
|
|
|
Recoveries
|
|
|
Change
in Provision
|
|
|
Ending
Balance
|
|
Three
Months Ended March 31,
|
|
|
2017
|
|
|
$
|
7,700
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2,700
|
)
|
|
$
|
5,000
|
|
|
2016
|
|
|
$
|
17,300
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2,500
|
)
|
|
$
|
14,800
|
|
Concentration
of Credit Risk
For
the three-month periods ended March 31, 2017 and 2016, respectively, we considered the customers listed in the following table
to be our most significant customers. The table sets forth the percentage of sales attributable to each customer during the periods
presented, and the respective customer’s ending accounts receivable balance as a percentage of reported accounts receivable,
net, as of March 31, 2017 and 2016.
|
|
Three
Months Ended
March 31, 2017
|
|
|
As of March 31, 2017
|
|
|
Three Months Ended March 31, 2016
|
|
|
As of March 31, 2016
|
|
Customer
|
|
Sales
|
|
|
Accounts
Receivable
|
|
|
Sales
|
|
|
Accounts
Receivable
|
|
Centric
|
|
|
7.2
|
%
|
|
|
26.2
|
%
|
|
|
6.4
|
%
|
|
|
10.9
|
%
|
Raytheon
|
|
|
10.0
|
%
|
|
|
0.0
|
%
|
|
|
5.5
|
%
|
|
|
3.4
|
%
|
Thermo Lab Systems
|
|
|
6.3
|
%
|
|
|
19.2
|
%
|
|
|
7.0
|
%
|
|
|
9.2
|
%
|
Uniface
|
|
|
4.6
|
%
|
|
|
14.5
|
%
|
|
|
3.1
|
%
|
|
|
2.0
|
%
|
Total
|
|
|
28.10
|
%
|
|
|
55.90
|
%
|
|
|
22.0
|
%
|
|
|
25.5
|
%
|
Fair
Value of Financial Instruments
The
fair value of our accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the
relative short maturities of these items.
The
fair value of warrants at issuance and for those recorded as a liability at each reporting date are determined in accordance with
the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 820,
“Fair Value Measurement,”
which establishes a fair value hierarchy that prioritizes the assumptions (inputs)
to valuation techniques used to price assets or liabilities that are measured at fair value. The hierarchy, as defined below,
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority
to unobservable inputs. The guidance for fair value measurements requires that assets, liabilities and certain equity instruments
measured at fair value be classified and disclosed in one of the following categories:
|
●
|
Level
1: Defined as observable inputs, such as quoted (unadjusted) prices in active markets for identical assets or liabilities.
|
|
|
|
|
●
|
Level
2: Defined as observable inputs other than quoted prices included in Level 1. This includes quoted prices for similar assets
or liabilities in active markets, quoted prices for identical or similar assets and liabilities 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: Defined as unobservable inputs to the valuation methodology that are supported by little or no market activity and that
are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include
those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation
techniques, as well as significant management judgment or estimation.
|
4.
Property and Equipment
Property
and equipment was:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Equipment
|
|
$
|
248,700
|
|
|
$
|
258,700
|
|
Furniture
|
|
|
190,600
|
|
|
|
190,600
|
|
Leasehold improvements
|
|
|
167,600
|
|
|
|
167,600
|
|
|
|
|
606,900
|
|
|
|
616,900
|
|
Less: accumulated
depreciation and amortization
|
|
|
482,300
|
|
|
|
473,600
|
|
|
|
$
|
124,600
|
|
|
$
|
143,300
|
|
Aggregate
property and equipment depreciation and amortization expense was $18,100 and $25,800 during the three-month periods ended March
31, 2017 and 2016, respectively. During the three month period ended March 31, 2017, we disposed of an equipment at a loss of
$600 that was originally purchased for $10,000.
5.
Stock-Based Compensation
The
following table summarizes the stock-based compensation expense, net of amounts capitalized, we recorded in our Unaudited Condensed
Consolidated Statements of Operations for the three-month periods ended March 31, 2017 and 2016, respectively, by classification:
|
|
Three
Months Ended March 31,
|
|
Statement
of Operations Classification
|
|
2017
|
|
|
2016
|
|
Costs of revenue
|
|
$
|
100
|
|
|
$
|
3,100
|
|
Selling and marketing expense
|
|
|
100
|
|
|
|
14,100
|
|
General and administrative expense
|
|
|
15,100
|
|
|
|
53,100
|
|
Research and
development expense
|
|
|
—
|
|
|
|
15,900
|
|
|
|
$
|
15,300
|
|
|
$
|
86,200
|
|
6.
Revenue
Revenue
for the three-month periods ended March 31, 2017 and 2016 was:
|
|
|
|
|
2017
Over (Under) 2016
|
|
Revenue
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
Software
Licenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
$
|
283,000
|
|
|
$
|
290,100
|
|
|
$
|
(7,100
|
)
|
|
|
-2.4
|
%
|
UNIX/Linux
|
|
|
108,000
|
|
|
|
84,400
|
|
|
|
23,600
|
|
|
|
28.0
|
%
|
|
|
|
391,000
|
|
|
|
374,500
|
|
|
|
16,500
|
|
|
|
4.4
|
%
|
Software
Service Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
|
444,200
|
|
|
|
452,000
|
|
|
|
(7,800
|
)
|
|
|
-1.7
|
%
|
UNIX/Linux
|
|
|
136,800
|
|
|
|
169,300
|
|
|
|
(32,500
|
)
|
|
|
-19.2
|
%
|
|
|
|
581,000
|
|
|
|
621,300
|
|
|
|
(40,300
|
)
|
|
|
-6.5
|
%
|
Other
|
|
|
10,500
|
|
|
|
11,500
|
|
|
|
(1,000
|
)
|
|
|
-8.7
|
%
|
Total Revenue
|
|
$
|
982,500
|
|
|
$
|
1,007,300
|
|
|
$
|
(24,800
|
)
|
|
|
-2.5
|
%
|
7.
Cost of Revenue
Cost
of revenue for the three-month periods ended March 31, 2017 and 2016 was:
|
|
|
|
|
2017
Over (Under) 2016
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
Software service costs
|
|
$
|
15,500
|
|
|
$
|
39,400
|
|
|
$
|
(23,900
|
)
|
|
|
-60.8
|
%
|
Software product
costs
|
|
|
3,300
|
|
|
|
14,400
|
|
|
|
(11,100
|
)
|
|
|
-77.1
|
%
|
|
|
$
|
18,800
|
|
|
$
|
53,800
|
|
|
$
|
(35,000
|
)
|
|
|
-65.1
|
%
|
8.
Commitments and Contingencies
Operating
Leases
On
February 1, 2014, we had previously relocated our corporate offices to a larger suite within our landlord’s office complex
in Campbell, California. We are currently leasing 10,659 square feet under a five-year lease that, unless renewed, will expire
in October 2018.
On August 11, 2015 we entered into a sublease
agreement to sublease the entirety of the South Bascom office space to a third party. The term of the sublease extends from November
1, 2015 through the end of our office lease term for that space in October, 2018. The monthly rent payments due to hopTo under
this sublease fully offset the monthly rent payments due to the landlord under hopTo’s lease for that space.
On August 24, 2015, we entered into a new office
lease for our corporate headquarters in Campbell, California which became effective on October 1, 2015, is better suited to our
California operations and results in significant monthly savings. The term of this lease is from October 1, 2015 through September
30, 2018 (see Note 12).
The following table sets forth the minimum lease
payments we will be required to make throughout the remainder of the lease:
Year
|
|
Amount
|
|
Remainder of 2017
|
|
$
|
85,900
|
|
2018
|
|
|
68,300
|
|
|
|
$
|
154,200
|
|
9. Supplemental Disclosure of Cash Flow Information
We disbursed $100 and $300
for the payment of interest expense during the three-month periods ended both March 31, 2017 and 2016, respectively. Such disbursement
was for capital lease payments. We disbursed $700 and $300 for the payment of income taxes during the three-month period ended
March 31, 2017 and 2016, respectively. Such disbursements were made for the payment of foreign income taxes related to the operation
of our Israeli subsidiary, GraphOn Research Labs, Ltd.
10. Earnings (Loss) Per Share
Earnings or loss per share
is calculated by dividing the net income or loss for the period by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings or loss per share (“Diluted EPS”) is calculated by dividing the net income or loss
for the period by the total of the weighted average number of shares of common stock outstanding during the period plus the effects
of any dilutive securities. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there
is a loss because the inclusion of such potential shares of common stock would have an anti-dilutive effect. During all periods
presented in our Condensed Consolidated Statements of Operations, potentially dilutive securities included shares of common stock
potentially issuable upon exercise of stock options, release of unvested restricted stock awards and exercise of warrants. Diluted
EPS excludes the impact of potential issuance of shares of common stock related to our stock options in periods in which the exercise
price of the stock option is greater than the average market price of our common stock during such periods.
For the three-month periods
ended March 31, 2017 and 2016, 1,375,509 and 2,198,512 shares of common stock equivalents, respectively, were excluded from the
computation of dilutive loss per share since their effect would be anti-dilutive.
11. Segment Information
Revenue by country for the
three-month periods ended March 31, 2017 and 2016 was as follows:
|
|
Three Months Ended March 31,
|
|
Revenue by Country
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
358,600
|
|
|
$
|
421,300
|
|
Brazil
|
|
|
128,400
|
|
|
|
139,800
|
|
Japan
|
|
|
110,600
|
|
|
|
63,600
|
|
Other Countries
|
|
|
384,900
|
|
|
|
382,600
|
|
Total
|
|
$
|
982,500
|
|
|
$
|
1,007,300
|
|
12. Subsequent Event
On April 28, 2017 we entered into a sublease
agreement to sublease the entirety of the leased space at 51 East Campbell Avenue to a third party. The term of the sublease begins
on June 1, 2017 and extends through the end of our office lease term for that space. The monthly rent payments due to hopTo will
offset approximately 62% of the monthly rent payments due to the landlord under hopTo’s lease for that space.
ITEM 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Update on HopTo Plans
As of Q4 2016, we have effectively ceased all
of our sales, marketing and development efforts for the hopTo products, and at this time we do not expect any meaningful revenues
from these products in the foreseeable future.
We continue to own all hopTo-related intellectual
property including source-code, related patents, and the relevant trademarks. We continue to believe that we may be able to extract
value from these assets and are currently working to do so at this time. For detailed information on the hopTo products and technologies,
please refer to our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the SEC
on April 7, 2017 as well as our other SEC filings which are available at www.sec.gov.
Although there is no certainty as to timing or success of these
efforts to extract value from these assets, and stockholders should not place any significant reliance on the outcome of such efforts
unless and until definitive agreements are reached, this may include the sale of certain of our hopTo software products, the sale
of patents, and the monetization of the GO-Global business or some combinations of these transactions. (See Note 2 to our Notes
to Consolidated Financial Statements).
The following description of our business and
business opportunities is expressly qualified by the preceding statement and the going concern disclosure in Note 2 to our Consolidated
Financial Statements.
Introduction
We are developers of application publishing
software which includes application virtualization software and cloud computing software for multiple computer operating systems
including Windows, UNIX and several Linux-based variants. Our application publishing software solutions are sold under the brand
name GO-Global, which is our sole revenue source at this time. GO-Global is an application access solution for use and/or resale
by independent software vendors (“ISVs”), corporate enterprises, governmental and educational institutions, and others
who wish to take advantage of cross-platform remote access and Web-enabled access to their existing software applications, as well
as those who are deploying secure, private cloud environments.
Since 2012 we have also been developing several
products in the field of software productivity for mobile devices such as tablets and smartphones, which have been marketed under
the hopTo brand.
The hopTo products were originally marketed
to consumers and were later also marketed to small and medium sized businesses and enterprise level customers under the name hopTo
Work. hopTo Work allows customers to instantly transform their legacy applications to become touch friendly on modern mobile devices.
During 2015 and 2016 we also worked to integrate hopTo Work with certain software products offered by Citrix Systems.
Over the years, we have also made significant
investments in intellectual property (“IP”). We have filed many patents designed to protect the new technologies embedded
in hopTo.
Corporate Background
We are a Delaware corporation, founded
in May 1996. Our headquarters are located at 51 East Campbell Avenue, Campbell, California, 95008, our toll-free phone number is
1-800-472-7466, and our phone number for local and international calls is 408-688-2674. We also have an office in Concord, New
Hampshire, and we have remote employees located in various states, as well as internationally in the United Kingdom and Israel.
Our corporate Internet Website is http://www.hopto.com. The information on our website is not part of this quarterly report.
Our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports filed with or furnished to the SEC under sections
13(a) or 15(d) of the Securities Exchange Act of 1934 are made available free of charge on our corporate Internet Website (click
“Investors” on our home page, click “Financial Reporting” and then click “SEC Filings”) as
soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.
Our Intellectual Property
We believe that IP is a business tool that
potentially maximizes our competitive advantages and product differentiation, grows revenue opportunities, encourages collaboration
with key business partners, and protects our long-term growth opportunities. Strategic IP development is therefore a critical component
of our overall business strategy. It is a business function that consistently interacts with our research and development, product
development, and marketing initiatives to generate further value from those operations.
We rely primarily on trade secret protection,
copyright law, confidentiality, and proprietary information agreements to protect our proprietary technology and registered trademarks.
Despite our precautions, it may be possible for unauthorized third parties to copy portions of our products, or to obtain information
we regard as proprietary. The loss of any material trade secret, trademark, trade name or copyright could have a material adverse
effect on our results of operations and financial condition. We intend to defend our proprietary technology rights; however, we
cannot give any assurance that our efforts to protect our proprietary technology rights will be successful.
We also currently hold rights to patents but
are not currently pursuing additional patent applications.
We do not believe our products infringe on
the rights of any third parties, but we can give no assurance that third parties will not assert infringement claims against us
in the future, or that any such assertion will not result in costly litigation or require us to obtain a license to proprietary
technology rights of such parties.
ipCapital Group, Inc.
On October 11, 2011, we engaged ipCapital Group,
Inc. (“ipCapital”), an affiliate of John Cronin, who is one of our directors, to assist us in the execution of our
strategic decision to significantly strengthen, grow and commercially exploit our intellectual property assets. Our engagement
agreement with ipCapital, which has been amended three times, affords us the right to request ipCapital to perform a number of
diverse services, employing its proprietary processes and methodologies, to facilitate our ability to identify and extract from
our current intellectual property base new inventions, potential patent applications, and marketing and licensing opportunities.
In addition to the fees we agreed to pay ipCapital
for its services, we issued ipCapital a five-year warrant to purchase up to 26,667 shares of our common stock at an initial price
of $3.90 per share. Half of the warrant (13,333 shares) has a time-based vesting condition, with such vesting to occur in three
equal annual installments. The vesting installments occurred on October 11, 2012, 2013 and 2014, respectively. The remaining 13,333
shares became fully vested upon the completion to our satisfaction of all services that we requested from ipCapital under the engagement
agreement, prior to the signing of the amendments. Such performance was deemed satisfactory during 2012. We believe that these
fees, together with the issuance of the warrant, constitute no greater compensation than we would be required to pay an unaffiliated
person for substantially similar services. The warrant expired in October of 2016.
As a result of ipCapital’s work under
the engagement agreement, as amended, as of May 15, 2017, 173 new patent applications have been filed. Of these 173 applications,
53 patents have been granted by the United States Patent and Trademark Office (“USPTO”). Due to financial constraints
on our operations, we have suspended patent prosecution activity other than to pay issuance fees for patents already approved by
USPTO. As of May 15, 2017 there are 4 patent applications that remain pending with the USPTO. We do not expect to file more applications
in 2017.
The GO-Global Software Products
Our GO-Global product offerings,
which currently are the source of nearly all of our revenue, can be categorized into product families as follows:
|
●
|
GO-Global for Windows:
Allows access to Windows-based applications from remote locations and a variety of connections, including the Internet and dial-up connections. The Windows applications run on a central computer server along with GO-Global Windows Host software. This allows the applications to be accessed remotely via GO-Global Client software, or a Web browser, over many types of data connections, regardless of the bandwidth or operating system. Web-enabling is achieved without modifying the underlying application’s code or requiring costly add-ons.
|
|
|
|
|
●
|
GO-Global for UNIX:
Allows access to UNIX and Linux-based applications from remote locations and a variety of connections, including the Internet and dial-up connections. The UNIX/Linux applications run on a central computer server along with the GO-Global for UNIX Host software. This allows the applications to be accessed and run remotely via GO-Global Client software or a Web browser without having to modify the application’s code or requiring costly add-ons.
|
|
|
|
|
●
|
GO-Global Client:
We offer a range of GO-Global Client
software that allows remote application access from a wide variety of local, remote and mobile platforms, including Windows, Linux,
UNIX, Apple OS X and iOS, and Google Android. We plan to continue to develop GO-Global Client software for new portable and mobile
devices.
|
Critical Accounting Policies
We believe that several accounting policies are
important to understanding our historical and future performance. We refer to these policies as “critical” because
these specific areas require us to make judgments and estimates about matters that are uncertain at the time we make the estimates.
Actual results may differ from these estimates. For a summary of our critical accounting policies, please refer to our 2016 10-K
Report and Note 2 to our Notes to Unaudited Condensed Consolidated Financial Statements.
Results of Operations for the Three-Month Periods Ended March
31, 2017 and 2016
The following operating results
should be read in conjunction with our critical accounting policies.
Revenue
Revenue for the three-month
periods ended March 31, 2017 and 2016 was:
|
|
|
|
|
|
|
|
2017 Over (Under) 2016
|
|
Revenue
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
Software Licenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
$
|
283,000
|
|
|
$
|
290,100
|
|
|
$
|
(7,100
|
)
|
|
|
-2.4
|
%
|
UNIX/Linux
|
|
|
108,000
|
|
|
|
84,400
|
|
|
|
23,600
|
|
|
|
28.0
|
%
|
|
|
|
391,000
|
|
|
|
374,500
|
|
|
|
16,500
|
|
|
|
4.4
|
%
|
Software Service Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
|
444,200
|
|
|
|
452,000
|
|
|
|
(7,800
|
)
|
|
|
-1.7
|
%
|
UNIX/Linux
|
|
|
136,800
|
|
|
|
169,300
|
|
|
|
(32,500
|
)
|
|
|
-19.2
|
%
|
|
|
|
581,000
|
|
|
|
621,300
|
|
|
|
(40,300
|
)
|
|
|
-6.5
|
%
|
Other
|
|
|
10,500
|
|
|
|
11,500
|
|
|
|
(1,000
|
)
|
|
|
-8.7
|
%
|
Total Revenue
|
|
$
|
982,500
|
|
|
$
|
1,007,300
|
|
|
$
|
(24,800
|
)
|
|
|
-2.5
|
%
|
Revenue
Our software revenue is entirely
related to our GO-Global product line, and historically has been primarily derived from product licensing fees and service fees
from maintenance contracts. The majority of this revenue has been earned, and continues to be earned, from a limited number of
significant customers, most of whom are resellers. Many of our resellers (a “stocking reseller”) purchase software
licenses that they hold in inventory until they are resold to the ultimate end user. We defer recognition of revenue from these
sales (on our Condensed Consolidated Balance Sheet under the caption “Deferred Revenue”) until the stocking reseller
sells the underlying software licenses to the ultimate end user. Consequently, if any of our significant stocking resellers materially
change the rate at which they resell our software licenses to the ultimate end user, our software licenses revenue could be materially
impacted.
When a software license is
sold directly to an end user by us, or by one of our resellers who does not stock licenses into inventory, revenue is recognized
immediately upon shipment, assuming all other criteria for revenue recognition are met. Consequently, if any significant end user
customer substantially changes its order level, or fails to order during the reporting period, whether the order is placed directly
with us or through one of our non-stocking resellers, our software licenses revenue could be materially impacted.
Almost all stocking resellers
maintain inventories of our Windows products; few stocking resellers maintain inventories of our UNIX products.
Software Licenses
The decrease in Windows software
licenses revenue was primarily due to lower license purchases from certain of our OEM partners during the three-month period ending
March 31, 2017.
Software licenses revenue from our UNIX/Linux
products increased primarily due to higher revenue from certain of our U.S. government customers.
We expect aggregate GO-Global software license
revenue in 2017 to be modestly lower than 2016 levels due to lower aggregate revenue from our stocking resellers and our European
telecommunications customers. At the same time, we will seek to improve cash flow from the GO-Global business through cost control
and other measures.
Software Service Fees
The decrease in software
service fees revenue attributable to our Windows products during the three-month period ended March 31, 2017, as compared to the
same period of the prior year, was primarily due to the timing of customer renewals of maintenance contacts.
The decrease in service fees
revenue attributable to our UNIX products for the three-month period ended March 31, 2017, as compared with the same period of
the prior year, was primarily the result of the low level of our UNIX product sales throughout the current and prior year and a
decrease in maintenance contract renewals. The majority of this decrease was attributable to our European telecommunications customers.
We expect that software service fees for 2017
will be modestly lower than those for 2016, consistent with the modest decreases in GO-Global software license revenue.
Other
The decrease in other revenue
was primarily due to a decrease in private labeling fees. Private labeling fees do not comprise a material portion of our revenue
streams, nor do we anticipate that they will, and they can vary from period to period.
Costs of Revenue
Costs of revenue are comprised
primarily of software service costs, which represent the costs of customer service, and software product costs, which are primarily
comprised of the amortization of capitalized software development costs, and costs associated with licenses for third party software
included in our product offerings. We incur no shipping or packaging costs as all of our deliveries are made via electronic means
over the Internet.
Under accounting principles
generally accepted in the United States (“GAAP”), development costs for new product development, after technological
feasibility is established, are recorded as “capitalized software” on our Condensed Consolidated Balance Sheet. Such
capitalized costs are subsequently amortized as cost of revenue (software product costs) over the shorter of three years or the
remaining estimated life of the product. We recorded $0 capitalized software development costs during the three-month periods ended
March 31, 2017 and 2016.
Amortization of capitalized
software development costs was $0 and $2,600 during the three-month periods ended March 31, 2017 and 2016, respectively.
Cost of revenue was 1.9%
and 5.3% of total revenue for the three-month periods ended March 31, 2017 and 2016, respectively.
Cost of revenue for the three-month
periods ended March 31, 2017 and 2016 was:
|
|
|
|
|
|
|
2017 Over (Under) 2016
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
Software service costs
|
|
$
|
15,500
|
|
|
$
|
39,400
|
|
|
$
|
(23,900
|
)
|
|
|
-60.7
|
%
|
Software product costs
|
|
|
3,300
|
|
|
|
14,400
|
|
|
|
(11,100
|
)
|
|
|
-77.1
|
%
|
|
|
$
|
18,800
|
|
|
$
|
53,800
|
|
|
$
|
(35,000
|
)
|
|
|
-65.1
|
%
|
Software service costs decreased
for the three-month period ending March 31, 2017, as compared with 2016 for the same period, as less time was required for customer
service issues, primarily due to the mature state of our GO-Global products. We anticipate that customer service costs will decrease
in 2017, as compared with 2016.
The decrease in software product costs was
almost entirely due to decreased amortization of capitalized software development cost in GO-Global. We expect 2017 costs of revenue
to be lower than 2016 levels.
Selling and Marketing Expenses
Selling and marketing expenses
primarily consist of employee costs, outside services, advertising, public relations and travel and entertainment expense.
Selling and marketing expenses
for the three-month period ended March 31, 2017 decreased by $227,200 or 71.6%, to $89,900, from $317,100 for the same period of
2016, and represented approximately 9.2% and 31.5% of revenue during these periods, respectively.
The decrease in selling and
marketing expenses was due to a combination of lower headcount and the cessation of advertising and promotional activity associated
with hopTo Work as we have suspended all sales and marketing activity for that product.
We expect to maintain our
sales and marketing efforts in 2017 for anticipated GO-Global releases at a level consistent with the second half of 2016; accordingly,
we expect 2017 sales and marketing expenses to be lower than 2016 levels.
General and Administrative Expenses
General and administrative
expenses primarily consist of employee costs, depreciation and amortization, legal, accounting, other professional services (including
those related to our patents), rent, travel and entertainment and insurance. Certain costs associated with being a publicly held
corporation are also included in general and administrative expenses, as well as bad debts expense.
General and administrative expenses decreased
by $37,000, or 5.5%, to $641,100, for the three-month period ended March 31, 2017, from $678,100 for the same period of 2016, and
represented approximately 65.3% and 67.3% of revenue during these periods, respectively.
The decrease in general and
administrative expense was primarily due to a combination of decreased headcount, lower legal expenses associated with activity
related to our patents and other lower costs associated with investor relations.
In 2017, we intend to continue these cost controls.
We therefore expect that our 2017 general and administrative costs will be slightly lower than those for 2016.
Research and Development Expenses
Research and development expenses consist primarily
of employee costs, payments to contract programmers, travel and entertainment for all our engineers, and all rent for our leased
engineering facilities.
Research and development expenses decreased
by $500,800, or 56.5%, to $385,000 for the three-month period ended March 31, 2017, from $885,800 for the same period of 2016,
and represented approximately 39.2% and 87.9% of revenue for these periods, respectively.
The decrease in research
and development expense is primarily due to lower employee costs associated with lower headcount, lower payments to contract programmers
resulting from the discontinuation of our development efforts on the hopTo Work product.
In 2017, we expect to maintain a level of research
and development resource consistent with the levels of the second half of 2016. We therefore expect 2017 research and development
expenses to be lower than 2016 levels.
Change in Fair Value of Warrants Liability
During
the three-month period ended March 31, 2017, we reported no income or expense due to the change in fair value of our warrants
liability as the applicable warrants expired during September and October of 2016. During the same period of the prior year,
we reported non-cash expense of $47,300 related to the change in fair value of our warrants liability. Such changes resulted
from our liability warrants which expired in the fourth quarter of 2016.
Net Loss
Based on the foregoing, we
reported net losses of $153,700 and $974,900 for the three-month periods ended March 31, 2017 and 2016, respectively.
Liquidity and Capital Resources
Our reported net loss for the three-month period
ended March 31, 2017 of $153,700 included two non-cash items: depreciation and amortization of $18,100, which was primarily comprised
of depreciation of fixed assets; stock-based compensation expense of $15,300; and a loss in the change in value of our warrants
liability of $0.
See the Update on hopTo Plans at the beginning
of this section for a discussion on our plans.
We have incurred significant net losses since
our inception. At March 31, 2017, the Company had an accumulated deficit of $82,603,500 and a working capital deficit of $2,656,000.
Due to our inability to date to generate meaningful revenue from our hopTo Work business and our continued estimation that revenue
from this product is unlikely in any reasonable time frame, we have suspended all development and sales activity associated with
the hopTo products. The Company’s ability to continue as a going concern is dependent on our ability to continue to generate
revenue from our legacy GO-Global business, which continued to operate profitably throughout 2016 and in the three-month period
ended March 31, 2017, and to raise additional capital through the issuance of new equity, debt financing, or from the sale of certain
assets to meet short and long-term operating requirements.
If the Company raises additional funds through
the issuance of equity or convertible debt securities, the percentage ownership of our current shareholders could be reduced, and
such securities might have rights, preferences or privileges senior to the Company’s common stock. Additional financing may
not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms,
the Company may not be able to take advantage of prospective business endeavors or opportunities, which could significantly and
materially restrict our operations. We are continuing to pursue external financing alternatives to improve our working capital
position. If the Company is unable to obtain the necessary capital, the Company may have to cease operations.
These factors raise substantial doubt about
our ability to continue as a going concern. (See Note 2 to our Notes to Consolidated Financial Statements).
In order to maintain operations, we previously
implemented significant expense reductions, including a limited number of employee layoffs primarily related to the hopTo product.
During the three month period ended September 30, 2016, our CEO and CFO voluntarily agreed with our board of directors to defer
50% of their salary beginning September 1, 2016 until such time as the Company can reasonably pay such compensation upon approval
by the board of directors.
Although maintaining our SEC filing status
is a significant expense, we are considering all options to preserve value for shareholders, including potentially suspending or
terminating our filing status, however we have not made any decision to do so.
We have worked extensively to explore additional
sources of capital including the issuance of new shares, securing debt financing, and the sale of assets including certain of our
software products and patents. Although this process is ongoing and we are in active discussions with multiple parties, there is
no guarantee that they will result in transactions that are sufficient to provide the Company with the required liquidity to remove
the substantial doubt as to our ability to continue as a going concern. We are also in discussions with some parties about the
possibility of other strategic transactions although there is no guarantee that these discussions will result in an actual transaction.
Cash
As of March 31, 2017, our cash balance was $673,100,
as compared with $546,200 as of December 31, 2016, an increase of $126,800, or 23%. The increase primarily resulted from the collections
from orders placed in December of 2016.
Accounts Receivable, net
At March 31, 2017 and December
31, 2016, we reported accounts receivable, net, of $183,800 and $355,300, respectively. Such amounts were reported net
of the allowance for doubtful accounts, which allowances totaled $5,000 and $7,700 at March 31, 2017 and December 31, 2016, respectively.
We collect the significant majority of our quarter-end accounts receivable during the subsequent quarter; accordingly, increases
or decreases in accounts receivable from one period to the next tends to be indicative of the trend in our sales from one period
to the next. During the three-month period ended March 31, 2017, we received a significant amount of orders during January, resulting
in more cash collected during the three-month period and a lower accounts receivable balance at the end of the period. From time
to time, we could have individually significant accounts receivable balances due us from one or more of our significant customers.
If the financial condition of any of these significant customers should deteriorate, our operating results could be materially
affected.
Working Capital
As of March 31, 2017, we
had current assets of $892,300 and current liabilities of $3,548,300, which netted to a working capital deficit of $2,656,000.
Included in current liabilities was the current portion of deferred revenue of $1,720,500.