ITEM
1. Financial Statements
hopTo
Inc.
C
ondensed
Consolidated Balance Sheets
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(Unaudited)
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|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
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|
Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
551,300
|
|
|
$
|
546,200
|
|
Accounts receivable, net
|
|
|
353,300
|
|
|
|
355,300
|
|
Prepaid expenses
|
|
|
26,800
|
|
|
|
38,700
|
|
Total Current Assets
|
|
|
931,400
|
|
|
|
940,200
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
39,800
|
|
|
|
143,300
|
|
Other assets
|
|
|
109,000
|
|
|
|
109,000
|
|
Total Assets
|
|
$
|
1,080,200
|
|
|
$
|
1,192,500
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Deficit
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|
|
|
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|
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Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
759,700
|
|
|
$
|
975,800
|
|
Deferred rent
|
|
|
23,400
|
|
|
|
24,100
|
|
Capital lease
|
|
|
—
|
|
|
|
6,800
|
|
Lease liability
|
|
|
24,900
|
|
|
|
—
|
|
Deferred revenue
|
|
|
1,579,500
|
|
|
|
1,759,000
|
|
Other current liabilities
|
|
|
855,100
|
|
|
|
571,100
|
|
Total Current Liabilities
|
|
|
3,242,600
|
|
|
|
3,336,800
|
|
|
|
|
|
|
|
|
|
|
Deposit liability
|
|
|
93,500
|
|
|
|
81,400
|
|
Deferred revenue
|
|
|
1,523,600
|
|
|
|
1,694,600
|
|
Deferred rent
|
|
|
41,500
|
|
|
|
2,600
|
|
Total Liabilities
|
|
|
4,901,200
|
|
|
|
5,115,400
|
|
|
|
|
|
|
|
|
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Commitments and contingencies
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Stockholders’ 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 September 30, 2017 and December 31, 2016, respectively
|
|
|
14,700
|
|
|
|
14,700
|
|
Additional paid-in capital
|
|
|
78,526,700
|
|
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|
78,512,200
|
|
Accumulated deficit
|
|
|
(82,362,400
|
)
|
|
|
(82,449,800
|
)
|
Total Stockholders’ Deficit
|
|
|
(3,821,000
|
)
|
|
|
(3,922,900
|
)
|
Total Liabilities and Stockholders’ Deficit
|
|
$
|
1,080,200
|
|
|
$
|
1,192,500
|
|
See
accompanying notes to unaudited condensed consolidated financial statements
hopTo
Inc.
Condensed
Consolidated Statements of Operations
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
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2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
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(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenue
|
|
$
|
1,025,900
|
|
|
$
|
898,500
|
|
|
$
|
2,933,200
|
|
|
$
|
2,864,400
|
|
Costs of revenue
|
|
|
15,900
|
|
|
|
8,300
|
|
|
|
53,000
|
|
|
|
129,500
|
|
Gross profit
|
|
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1,010,000
|
|
|
|
890,200
|
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|
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2,880,200
|
|
|
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2,734,900
|
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|
|
|
|
|
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|
|
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Operating expenses:
|
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|
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Selling and marketing
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87,400
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93,900
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|
|
|
259,400
|
|
|
|
664,600
|
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General and administrative
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|
|
206,700
|
|
|
|
821,600
|
|
|
|
1,268,900
|
|
|
|
2,114,600
|
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Research and development
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|
|
383,800
|
|
|
|
491,500
|
|
|
|
1,123,900
|
|
|
|
1,860,900
|
|
Total operating expenses
|
|
|
677,900
|
|
|
|
1,407,000
|
|
|
|
2,652,200
|
|
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4,640,100
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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Gain / (loss) from operations
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|
|
332,100
|
|
|
|
(516,800
|
)
|
|
|
228,000
|
|
|
|
(1,905,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other income (expense):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrants liability
|
|
|
—
|
|
|
|
54,400
|
|
|
|
—
|
|
|
|
29,300
|
|
Other income (expense), net
|
|
|
(63,700
|
)
|
|
|
1,100
|
|
|
|
(123,800
|
)
|
|
|
(3,700
|
)
|
Loss from operations before provision for income tax
|
|
|
268,400
|
|
|
|
(461,300
|
)
|
|
|
104,200
|
|
|
|
(1,872,200
|
)
|
Provision for income tax
|
|
|
14,800
|
|
|
|
700
|
|
|
|
16,800
|
|
|
|
2,300
|
|
Net profit / (loss)
|
|
$
|
253,600
|
|
|
$
|
(462,000
|
)
|
|
$
|
87,400
|
|
|
$
|
(1,874,500
|
)
|
Basic and diluted earnings / (loss) per share
|
|
$
|
0.03
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.19
|
)
|
Average weighted common shares outstanding – basic and diluted
|
|
|
9,804,400
|
|
|
|
9,784,163
|
|
|
|
9,804,400
|
|
|
|
9,763,111
|
|
See
accompanying notes to unaudited condensed consolidated financial statements
hopTo
Inc.
Condensed
Consolidated Statements of Stockholders’ Deficit
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Preferred stock – shares outstanding
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
—
|
|
|
|
—
|
|
Ending balance
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Common stock – shares outstanding
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|
|
|
|
|
|
|
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Beginning balance
|
|
|
9,804,400
|
|
|
|
9,731,233
|
|
Employee stock option issuances
|
|
|
—
|
|
|
|
1,800
|
|
Vesting of restricted stock awards
|
|
|
—
|
|
|
|
71,429
|
|
Ending balance
|
|
|
9,804,400
|
|
|
|
9,804,462
|
|
|
|
|
|
|
|
|
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Common stock – amount
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
14,700
|
|
|
$
|
14,600
|
|
Vesting of restricted stock awards
|
|
|
—
|
|
|
|
100
|
|
Ending balance
|
|
|
14,700
|
|
|
$
|
14,700
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
78,512,200
|
|
|
$
|
78,189,300
|
|
Stock-based compensation expense
|
|
|
14,500
|
|
|
|
303,400
|
|
Company payment of employee taxes for stock-based compensation
|
|
|
—
|
|
|
|
(2,700
|
)
|
Proceeds from exercise of employee stock options
|
|
|
—
|
|
|
|
1,500
|
|
Other rounding
|
|
|
—
|
|
|
|
(200
|
)
|
Ending balance
|
|
$
|
78,526,700
|
|
|
$
|
78,491,300
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(82,449,800
|
)
|
|
$
|
(80,596,900
|
)
|
Net profit / (loss)
|
|
|
87,400
|
|
|
|
(1,874,500
|
)
|
Ending balance
|
|
$
|
(82,362,400
|
)
|
|
$
|
(82,471,400
|
)
|
Total Stockholders’ Deficit
|
|
$
|
(3,821,000
|
)
|
|
$
|
(3,965,400
|
)
|
See
accompanying notes to unaudited condensed consolidated financial statements
hopTo
Inc.
Condensed
Consolidated Statements of Cash Flows
|
|
Nine
Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash
Flows Provided By (Used In) Operating Activities:
|
|
|
|
|
|
|
|
|
Net
profit / (loss)
|
|
$
|
87,400
|
|
|
$
|
(1,874,500
|
)
|
Adjustments
to reconcile net profit / loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
42,200
|
|
|
|
76,200
|
|
Write-down
of capitalized purchased technology
|
|
|
—
|
|
|
|
15,500
|
|
Stock-based
compensation expense
|
|
|
14,500
|
|
|
|
303,400
|
|
Company
payment of employee taxes for stock-based compensation
|
|
|
—
|
|
|
|
(2,700
|
)
|
Change
in fair value of derivative instruments – warrants
|
|
|
—
|
|
|
|
(29,300
|
)
|
Accretion
of warrants liability for consulting services
|
|
|
—
|
|
|
|
(2,300
|
)
|
Changes
in severance liability
|
|
|
—
|
|
|
|
(5,900
|
)
|
Changes
in deferred rent
|
|
|
—
|
|
|
|
23,200
|
|
Changes
to allowance for doubtful accounts
|
|
|
(3,300
|
)
|
|
|
(12,000
|
)
|
Revenue
deferred to future periods
|
|
|
1,828,500
|
|
|
|
1,955,700
|
|
Recognition
of deferred revenue
|
|
|
(2,179,000
|
)
|
|
|
(2,478,800
|
)
|
Loss
/ (gain) on disposal of fixed assets
|
|
|
60,400
|
|
|
|
(3,200
|
)
|
Loss
on sublease
|
|
|
63,100
|
|
|
|
—
|
|
Interest
accrued for capital lease
|
|
|
200
|
|
|
|
800
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
5,300
|
|
|
|
296,400
|
|
Prepaid
expenses
|
|
|
11,900
|
|
|
|
(40,900
|
)
|
Accounts
payable and accrued expenses
|
|
|
(216,100
|
)
|
|
|
(127,300
|
)
|
Deposit
liability
|
|
|
12,100
|
|
|
|
—
|
|
Other
liabilities
|
|
|
284,000
|
|
|
|
392,900
|
|
Net
Cash Provided By (Used In) Operating Activities
|
|
|
11,200
|
|
|
|
(1,431,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows Provided By (Used In) Investing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of equipment
|
|
|
900
|
|
|
|
23,300
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows Provided By (Used In) Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of employee stock options
|
|
|
—
|
|
|
|
1,500
|
|
Payment
for capital lease
|
|
|
(7,000
|
)
|
|
|
(7,000
|
)
|
Net
Cash Provided By (Used In) Financing Activities
|
|
|
(7,000
|
)
|
|
|
(5,500
|
)
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash
|
|
|
5,100
|
|
|
|
(1,413,200
|
)
|
Cash
- Beginning of Period
|
|
|
546,200
|
|
|
|
1,777,300
|
|
Cash
- End of Period
|
|
$
|
551,300
|
|
|
$
|
364,100
|
|
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”,”our” or the “Company”); 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.
Although
for the three and nine months ended September 30, 2017, respectively, the Company generated net profits of $253,600 and
$87,400, respectively, historically we have incurred significant net losses since our inception. At September 30, 2017, the Company
had an accumulated deficit of $82,362,400 and a working capital deficit of $2,311,200. We were unable to generate meaningful revenue
from our hopTo Work business and our most recent estimation is that revenue from this product is unlikely in any reasonable time
frame. We have, however, recently improved our revenue and operating results from our legacy GO-Global business. If this trend
continues, subject to our contingent liabilities, we believe we would have sufficient capital resources to fund our GO-Global
business (which is our only active business) for at least the next 12 months. However, due to the uncertainty at the current time
about this trend and the outcome of our contingent liabilities, we have determined that our cash resources may not be sufficient
to fund our business for at least 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. See Note 12 –
Subsequent Events.
Although
maintaining our SEC filing status is a significant expense, we currently intend to maintain such status; however, we consider
all options to preserve value for shareholders, including potentially suspending or terminating our filing status.
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. See
Note 12 – Subsequent Events. 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:
|
●
|
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
|
|
|
|
|
●
|
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 of the Company’s subleased former offices 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 offset the rent payments due under the Company’s lease for that space.
The monthly rent payments due to the Company for the sublease of the office at 51 East Campbell Avenue will offset approximately
62% of the monthly rent payments due to the landlord under the Company’s lease for that space. During the three-month period
ended September 30, 2017, the Company recorded a loss of $62,900 representing the total of the shortfall of monthly rent payments
over the life of this sublease. As of September 30, 2017, $24,900 remains on the balance sheet as a lease liability to be amortized
over the remaining 12 months of the sublease.
Incentives
that we received upon entering into the S. Bascom Avenue lease agreement are recognized on a straight-line basis as a reduction
to rent over the term of the lease. We record the unamortized portion of these incentives 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. During the three month and nine month period ended September 30, 2016 we determined that an impairment
of $0 and $15,500, respectively, existed with certain capitalized software development costs associated with our hopTo Work product
and recognized that cost as part of cost of revenue. No such impairment charge was recorded during either of the three or nine-month
periods ended September 30, 2017.
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 September 30,
2017 and 2016:
|
|
Beginning
Balance
|
|
|
Charge
Offs
|
|
|
Recoveries
|
|
|
Provision
|
|
|
Ending
Balance
|
|
2017
|
|
$
|
15,300
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(10,900
|
)
|
|
$
|
4,400
|
|
2016
|
|
|
14,900
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,600
|
)
|
|
|
5,300
|
|
The
following table sets forth the details of the Allowance for Doubtful Accounts for the nine-month periods ended September 30, 2017
and 2016
|
|
Beginning
Balance
|
|
|
Charge
Offs
|
|
|
Recoveries
|
|
|
Provision
|
|
|
Ending
Balance
|
|
2017
|
|
$
|
7,700
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3,300
|
)
|
|
$
|
4,400
|
|
2016
|
|
|
17,300
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,000
|
)
|
|
|
5,300
|
|
Concentration
of Credit Risk
For
the three and nine-month periods ended September 30, 2017 and 2016 respectively, we considered the customers listed in the following
tables to be our most significant customers. The tables set 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 September 30, 2017 and 2016.
|
|
Three Months Ended
September 30, 2017
|
|
|
As of
September 30, 2017
|
|
|
Three Months Ended
September 30, 2016
|
|
|
As of
September 30, 2016
|
|
Customer
|
|
Sales
|
|
|
Accounts
Receivable
|
|
|
Sales
|
|
|
Accounts
Receivable
|
|
Centric
|
|
|
9.5
|
%
|
|
|
14.3
|
%
|
|
|
2.0
|
%
|
|
|
3.8
|
%
|
Elosoft
|
|
|
13.6
|
%
|
|
|
26.5
|
%
|
|
|
10.8
|
%
|
|
|
10.4
|
%
|
Uniface
|
|
|
15.1
|
%
|
|
|
27.0
|
%
|
|
|
6.0
|
%
|
|
|
16.5
|
%
|
Total
|
|
|
38.2
|
%
|
|
|
67.8
|
%
|
|
|
18.8
|
%
|
|
|
30.7
|
%
|
|
|
Nine Months Ended
September 30, 2017
|
|
|
As of
September 30, 2017
|
|
|
Nine Months Ended
September 30, 2016
|
|
|
As of
September 30, 2016
|
|
Customer
|
|
Sales
|
|
|
Accounts
Receivable
|
|
|
Sales
|
|
|
Accounts
Receivable
|
|
Centric
|
|
|
6.9
|
%
|
|
|
14.3
|
%
|
|
|
5.4
|
%
|
|
|
3.8
|
%
|
Elosoft
|
|
|
13.8
|
%
|
|
|
26.5
|
%
|
|
|
8.9
|
%
|
|
|
10.4
|
%
|
Uniface
|
|
|
8.2
|
%
|
|
|
27.0
|
%
|
|
|
6.1
|
%
|
|
|
16.5
|
%
|
Total
|
|
|
28.9
|
%
|
|
|
67.8
|
%
|
|
|
20.4
|
%
|
|
|
30.7
|
%
|
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.
|
Recent
Accounting Pronouncements
In
May 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers
(Topic 606)” (“ASU 2014-09”). Subsequently FASB has released several updates to ASU 2014-09 including ASU 2016-
20, ASU 2016-12, ASU-2016-10, ASU-2016-08, and ASU-2015-14. The effective date for ASU 2014-09 will be the first quarter of fiscal
year 2018 with early adoption permitted in the first quarter of fiscal year 2017. During the three-month period ended June 30,
2017, the Company completed a detailed review of the Topic 606 standard relative to our revenue recognition policies and practice.
That review is still in process and the Company expects that it will be completed by November 30, 2017. However, the Company continues
to believe that adoption of this standard will not have a material effect on either our historical financial results or future
financial results.
4.
Property and Equipment
Property
and equipment was:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Equipment
|
|
$
|
184,600
|
|
|
$
|
258,700
|
|
Furniture
|
|
|
3,600
|
|
|
|
190,600
|
|
Leasehold improvements
|
|
|
167,600
|
|
|
|
167,600
|
|
|
|
|
355,800
|
|
|
|
616,900
|
|
Less: accumulated depreciation and amortization
|
|
|
316,000
|
|
|
|
473,600
|
|
|
|
$
|
39,800
|
|
|
$
|
143,300
|
|
Aggregate property and equipment depreciation
and amortization expense was $8,900 and $42,200 during the three-month period and nine-month ended September 30, 2017, respectively,
and $21,200 and $70,800 during the same periods ended September 30, 2016. During the nine-month periods ended September 30, 2017
and 2016, we disposed of equipment and furniture with a combined net book value of $61,300 and $20,100, respectively.
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 and nine-month periods ended September 30, 2017 and 2016, respectively, by
classification:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
Statement of Operations Classification
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Costs of revenue
|
|
$
|
—
|
|
|
$
|
2,200
|
|
|
$
|
100
|
|
|
$
|
5,400
|
|
Selling and marketing expense
|
|
|
—
|
|
|
|
4,600
|
|
|
|
200
|
|
|
|
69,000
|
|
General and administrative expense
|
|
|
(4,100
|
)
|
|
|
40,500
|
|
|
|
14,100
|
|
|
|
135,500
|
|
Research and development expense
|
|
|
—
|
|
|
|
26,400
|
|
|
|
100
|
|
|
|
93,500
|
|
|
|
$
|
(4,100
|
)
|
|
$
|
73,700
|
|
|
$
|
14,500
|
|
|
$
|
303,400
|
|
6.
Revenue
Revenue
for the three-month periods ended September 30, 2017 and 2016 was:
|
|
|
|
|
2017 Over (Under) 2016
|
|
Revenue
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
Software Licenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
$
|
360,300
|
|
|
$
|
222,500
|
|
|
$
|
137,800
|
|
|
|
61.9
|
%
|
UNIX/Linux
|
|
|
71,200
|
|
|
|
64,000
|
|
|
|
7,200
|
|
|
|
11.3
|
%
|
|
|
|
431,500
|
|
|
|
286,500
|
|
|
|
145,000
|
|
|
|
50.6
|
%
|
Software Service Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
|
445,200
|
|
|
|
444,700
|
|
|
|
500
|
|
|
|
0.1
|
%
|
UNIX/Linux
|
|
|
131,600
|
|
|
|
149,400
|
|
|
|
(17,800
|
)
|
|
|
-11.9
|
%
|
|
|
|
576,800
|
|
|
|
594,100
|
|
|
|
(17,300
|
)
|
|
|
-2.9
|
%
|
Other
|
|
|
17,600
|
|
|
|
17,900
|
|
|
|
(300
|
)
|
|
|
-1.7
|
%
|
Total Revenue
|
|
$
|
1,025,900
|
|
|
$
|
898,500
|
|
|
$
|
127,400
|
|
|
|
14.2
|
%
|
Revenue
for the nine-month periods ended September 30, 2017 and 2016 was:
|
|
|
|
|
2017 Over (Under) 2016
|
|
Revenue
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
Software Licenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
$
|
939,800
|
|
|
$
|
774,200
|
|
|
$
|
165,600
|
|
|
|
21.4
|
%
|
UNIX/Linux
|
|
|
223,300
|
|
|
|
209,200
|
|
|
|
14,100
|
|
|
|
6.7
|
%
|
|
|
|
1,163,100
|
|
|
|
983,400
|
|
|
|
179,700
|
|
|
|
18.3
|
%
|
Software Service Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
|
1,324,300
|
|
|
|
1,367,200
|
|
|
|
(42,900
|
)
|
|
|
-3.1
|
%
|
UNIX/Linux
|
|
|
403,400
|
|
|
|
473,700
|
|
|
|
(70,300
|
)
|
|
|
-14.8
|
%
|
|
|
|
1,727,700
|
|
|
|
1,840,900
|
|
|
|
(113,200
|
)
|
|
|
-6.1
|
%
|
Other
|
|
|
42,400
|
|
|
|
40,100
|
|
|
|
2,300
|
|
|
|
5.7
|
%
|
Total Revenue
|
|
$
|
2,933,200
|
|
|
$
|
2,864,400
|
|
|
$
|
68,800
|
|
|
|
2.4
|
%
|
7.
Cost of Revenue
Cost
of revenue for the three-month periods ended September 30, 2017 and 2016 was:
|
|
|
|
|
2017 Over (Under) 2016
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
Software service costs
|
|
$
|
13,000
|
|
|
$
|
2,100
|
|
|
$
|
10,900
|
|
|
|
519.0
|
%
|
Software product costs
|
|
|
2,900
|
|
|
|
6,200
|
|
|
|
(3,300
|
)
|
|
|
-53.2
|
%
|
Total Cost of Revenue
|
|
$
|
15,900
|
|
|
$
|
8,300
|
|
|
$
|
7,600
|
|
|
|
91.6
|
%
|
Cost
of revenue for the nine-month periods ended September 30, 2017 and 2016 was:
|
|
|
|
|
2017 Over (Under) 2016
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
Software service costs
|
|
$
|
44,000
|
|
|
$
|
78,100
|
|
|
$
|
(34,100
|
)
|
|
|
-43.7
|
%
|
Software product costs
|
|
|
9,000
|
|
|
|
51,400
|
|
|
|
(42,400
|
)
|
|
|
-82.5
|
%
|
Total Cost of Revenue
|
|
$
|
53,000
|
|
|
$
|
129,500
|
|
|
$
|
(76,500
|
)
|
|
|
-59.1
|
%
|
8.
Commitments and Contingencies
On
February 1, 2014, we relocated our corporate offices to a larger suite within our landlord’s office complex on South Bascom
Avenue 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 Avenue 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 at 51 East Campbell Avenue in Campbell, California
which was better suited to our California operations and resulted in significant monthly savings. The term of this lease is from
October 1, 2015 through September 30, 2018.
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 began 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. (See Deferred Rent section of Note 3.)
The
following table sets forth the net minimum lease payments we will be required to make throughout the remainder of these leases:
|
|
Lease
Payments
|
|
|
Sublease
Receipts
|
|
|
Total
|
|
Remainder of 2017
|
|
$
|
150,200
|
|
|
$
|
(179,900
|
)
|
|
$
|
(29,700
|
)
|
2018
|
|
|
475,400
|
|
|
|
(420,800
|
)
|
|
|
54,600
|
|
|
|
$
|
625,600
|
|
|
$
|
(600,700
|
)
|
|
$
|
24,900
|
|
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. The deferred salaries are recorded as a component of accounts payable and accrued expenses on the Condensed
Consolidated Balance Sheet. See Note 12 – Subsequent Events.
During
the three and nine-month periods ended September 30, 2017, respectively, we reported non-cash expense of $0 and $284,000, respectively,
related to potential liquidated damages resulting from delays in filing registration statements for shares and shares underlying
warrants for certain of the private placements that the Company closed in prior periods. There were no such expenses recorded
in the comparable prior year period. We are in the process of seeking waivers from shareholders for such liquidated damages. The
potential liquidated damages is reported as other current liabilities on the condensed consolidated balance sheet and as a component
of general and administrative expense on the condensed consolidated statements of operations.
9.
Supplemental Disclosure of Cash Flow Information
We
disbursed $200 and $800 for the payment of interest expense during the nine-month periods ended September 30, 2017 and
2016, respectively.
We
disbursed $2,800 and $2,300 for the payment of foreign income taxes associated with the operation of our Israeli subsidiary during
the nine-month periods ended September 30, 2017 and 2016, respectively.
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 and nine-month periods ended September 30, 2017 and for the three and nine-month periods ended September 30, 2016, 1,375,509
and 1,412,507 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 and nine-month periods ended September 30, 2017 and 2016 was as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
Revenue by Country
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
292,100
|
|
|
$
|
370,800
|
|
|
$
|
922,300
|
|
|
$
|
1,158,100
|
|
Brazil
|
|
|
220,200
|
|
|
|
122,900
|
|
|
|
582,600
|
|
|
|
418,100
|
|
Other Countries
|
|
|
513,600
|
|
|
|
404,800
|
|
|
|
1,428,200
|
|
|
|
1,288,200
|
|
Total
|
|
$
|
1,025,900
|
|
|
$
|
898,500
|
|
|
$
|
2,933,100
|
|
|
$
|
2,864,400
|
|
12.
Subsequent Events
On
October 10, 2017, the Company and salesforce.com entered into a Patent Purchase Agreement (effective as of October 5, 2017), pursuant
to which the Company sold seven of its patents for an aggregate consideration of $400,000, and also received, subject to various
terms, conditions and limitations, a license back of those patents. The patents sold were U.S. Patent numbers: 9395826, 9398111,
9419848, 8745280, 8892782, 8738814 and 8856907.
On
October 25, 2017, the board of directors of the Company determined that the financial status of the Company had improved from
the financial status of the Company during the three month period ended September 30, 2016, when the Company’s CEO and CFO
voluntarily agreed with the board of directors to defer 50% of their salary beginning September 1, 2016 until such time as the
Company could reasonably pay such compensation upon approval by the board of directors. Accordingly, the board of directors determined
that it was reasonable for the Company to pay 50% of this deferred salary and such payments were made to the CFO and CEO on October
30, 2017.
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 actively operate our GO-Global business and we are currently evaluating ways to enhance its performance.
Other
than recent sales of selected patents (see Note 12 to our Notes to Unaudited Condensed Consolidated Financial Statements), we
continue to own all hopTo-related and GO-Global 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
additional 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 Notes 2 and 12 to our Notes to Unaudited Condensed 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 Unaudited Condensed 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 6 Loudon Road, Suite 200, Concord, New Hampshire,
03301 and our phone number is 1-800-472-7466. Our phone number for local and international calls is 408-688-2674. Additionally,
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:
www.hopto.com
,, our our home page, click “Financial Reporting”) as soon
as reasonably practicable after such reports are electronically filed with or furnished to the SEC.
Our
Intellectual Property
We
believe that intellectual property (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. We occasionally file patent applications to protect innovations arising from our research,
development and design.
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., or 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.
As
a result of ipCapital’s work under the engagement agreement, as amended, as of November 14, 2017, 173 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 November 14, 2017 there are no patent applications that remain pending with the USPTO.
We do not expect to file more applications in 2017.
Our
GO-Global Software Products
Our
GO-Global product offerings, which currently are our only revenue source, 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.
|
We
intend to continue to operate Go-Global, as it remains a viable stand-alone business and our sole revenue source at this
time.
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 3 to our Notes to Unaudited Condensed Consolidated Financial
Statements.
Results
of Operations for the Three and Nine-Month Periods Ended September 30, 2017 and 2016
The
following operating results should be read in conjunction with our critical accounting policies. See Note 3 to our Notes to Unaudited
Condensed Consolidated Financial Statements.
Revenue
Revenue
for the three-month periods ended September 30, 2017 and 2016 was:
|
|
|
|
|
2017 Over (Under) 2016
|
|
Revenue
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
Software Licenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
$
|
360,300
|
|
|
$
|
222,500
|
|
|
$
|
137,800
|
|
|
|
61.9
|
%
|
UNIX/Linux
|
|
|
71,200
|
|
|
|
64,000
|
|
|
|
7,200
|
|
|
|
11.3
|
%
|
|
|
|
431,500
|
|
|
|
286,500
|
|
|
|
145,000
|
|
|
|
50.6
|
%
|
Software Service Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
|
445,200
|
|
|
|
444,700
|
|
|
|
500
|
|
|
|
0.1
|
%
|
UNIX/Linux
|
|
|
131,600
|
|
|
|
149,400
|
|
|
|
(17,800
|
)
|
|
|
-11.9
|
%
|
|
|
|
576,800
|
|
|
|
594,100
|
|
|
|
(17,300
|
)
|
|
|
-2.9
|
%
|
Other
|
|
|
17,600
|
|
|
|
17,900
|
|
|
|
(300
|
)
|
|
|
-1.7
|
%
|
Total Revenue
|
|
$
|
1,025,900
|
|
|
$
|
898,500
|
|
|
$
|
127,400
|
|
|
|
14.2
|
%
|
Revenue
for the nine-month periods ended September 30, 2017 and 2016 was:
|
|
|
|
|
2017 Over (Under) 2016
|
|
Revenue
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
Software Licenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
$
|
939,800
|
|
|
$
|
774,200
|
|
|
$
|
165,600
|
|
|
|
21.4
|
%
|
UNIX/Linux
|
|
|
223,300
|
|
|
|
209,200
|
|
|
|
14,100
|
|
|
|
6.7
|
%
|
|
|
|
1,163,100
|
|
|
|
983,400
|
|
|
|
179,700
|
|
|
|
18.3
|
%
|
Software Service Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
|
1,324,300
|
|
|
|
1,367,200
|
|
|
|
(42,900
|
)
|
|
|
-3.1
|
%
|
UNIX/Linux
|
|
|
403,400
|
|
|
|
473,700
|
|
|
|
(70,300
|
)
|
|
|
-14.8
|
%
|
|
|
|
1,727,700
|
|
|
|
1,840,900
|
|
|
|
(113,200
|
)
|
|
|
-6.1
|
%
|
Other
|
|
|
42,400
|
|
|
|
40,100
|
|
|
|
2,300
|
|
|
|
5.7
|
%
|
Total Revenue
|
|
$
|
2,933,200
|
|
|
$
|
2,864,400
|
|
|
$
|
68,800
|
|
|
|
2.4
|
%
|
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
Software
license revenue from our Windows products increased for the three and nine-month periods ended September 30, 2017, as compared
with the same periods of the prior year primarily due to higher license purchases from certain of our OEM partners and stocking
resellers.
Software
license revenue from our UNIX/Linux products increased during the three-month period ended September 30, 2017, as compared with
the same period of the prior year, primarily due to higher revenue from certain of our telecommunications customers. Software
licenses revenue from our UNIX/Linux products increased during the nine-month period ended September 30, 2017, as compared with
the same period of the prior year, primarily due to higher revenue from certain U.S. government customers.
We
expect aggregate GO-Global software license revenue for both Windows and UNIX in 2017 to be approximately the same as the license
revenue levels for 2016.
Software
Service Fees
The
decrease in software service fees revenue attributable to our Windows products, during the nine-month period ended September 30,
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 and nine-month periods ended September 30, 2017,
as compared with the same period of the prior year, was primarily the result of the lower level of our UNIX product sales during
prior years and a resultant decrease in maintenance contract renewals. The majority of this decrease was attributable to our European
telecommunications customers.
Due
to the trends mentioned above we expect that software service fees for 2017 will be modestly lower than those for 2016.
Other
The
increase in other revenue for the three and nine-month periods ended September 30, 2017, as compared with the same period of the
prior year was primarily due to increase in professional services and private labeling fees.
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
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. During the three-month
and nine-month periods ended September 30, 2017 we did not capitalize or impair any software development costs. During the three-month
and nine-month periods ended September 30, 2016, we capitalized $0 software development costs and impaired $15,000 associated
with the hopTo Work product during the three-month period ended June 30, 2016.
Amortization
of capitalized software development costs was $0 and $200 during the three-month periods ended September 30, 2017 and 2016, respectively,
and $0 and $5,300 during the nine-month periods ended September 30, 2017 and 2016, respectively.
Cost
of revenue was 1.5% and 0.9% of total revenue for the three months ended September 30, 2017 and 2016, respectively, and 1.8% and
4.5% of total revenue for the nine months ended September 30, 2017 and 2016, respectively.
Cost
of revenue for the three-month periods ended September 30, 2017 and 2016 was:
|
|
|
|
|
2017 Over (Under) 2016
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
Software service costs
|
|
$
|
13,000
|
|
|
$
|
2,100
|
|
|
$
|
10,900
|
|
|
|
519.0
|
%
|
Software product costs
|
|
|
2,900
|
|
|
|
6,200
|
|
|
|
(3,300
|
)
|
|
|
-53.2
|
%
|
|
|
$
|
15,900
|
|
|
$
|
8,300
|
|
|
$
|
7,600
|
|
|
|
91.6
|
%
|
Cost
of revenue for the nine-month periods ended September 30, 2017 and 2016 was:
|
|
|
|
|
2017 Over (Under) 2016
|
|
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
Software service costs
|
|
$
|
44,000
|
|
|
$
|
78,100
|
|
|
$
|
(34,100
|
)
|
|
|
-43.7
|
%
|
Software product costs
|
|
|
9,000
|
|
|
|
51,400
|
|
|
|
(42,400
|
)
|
|
|
-82.5
|
%
|
|
|
$
|
53,000
|
|
|
$
|
129,500
|
|
|
$
|
(76,500
|
)
|
|
|
-59.1
|
%
|
The
increase in software service costs for the three-month period ended September 30, 2017 was due to a reclassification of $15,500
of customer supports costs that was allocated from Selling and Marketing expense to software service costs until three-month period
ended December 31, 2016, partially offset by a decrease of $4,600 from lower customer support costs, as compared to the same periods
of the prior year. The decrease in software service costs in the nine-month period ended September 30, 2017, as compared with
the same periods of the prior year was primarily due to lower customer support costs associated with GoGlobal. Upon release of
the commercial versions of hopTo and hopTo Work, we began charging costs associated with supporting the products to costs of revenue.
We expect software service costs for 2017 to be lower than those for 2016 as we have been able to reduce headcount costs in this
area due to a lower level of effort required.
The
decreases in software product costs for the three-month and nine-month periods ended September 30, 2017, as compared with the
same periods of the prior year, was almost entirely due to decreased amortization of capitalized software development costs. We
expect that software costs of revenue for 2017 will 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 September 30, 2017 decreased by $6,500, or 6.9%, to $87,400, from $93,900
for the same period of 2016, which represented approximately 8.5% and 10.5% of revenue during these periods, respectively. Selling
and marketing expenses for the nine-month period ended September 30, 2017 decreased by $405,200 or 61.0% to $259,400 from $664,600
for the same period in 2016, which represented approximately 8.8% and 23.2% of revenue during those periods, respectively.
The
decreases in selling and marketing expenses was due to a combination of lower headcount and a decrease in headcount and promotional
costs 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.
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 $614,900, or 74.8%, to $206,700, for the three-month period ended September 30, 2017,
from $821,600 for the same period of 2016, which represented approximately 20.1% and 91.4% of revenue during these periods, respectively.
General
and administrative expenses decreased by $845,700, or 40%, to $1,268,900 for the nine-month period ended September 30, 2017, from
$2,114,600 for the same period of 2016, which represented approximately 43.3% and 73.8% of revenue during these periods, respectively.
The
decreases in general and administrative expense in the three-month and nine-month period ended September 30, 2017, as compared
with the same periods of the prior year, were due to a combination of lower administrative salary expense associated with part-time
status of our Chief Financial Officer effective April 1, 2017 and the resignation of our Chief Executive Officer in August 2017,
combined with the elimination of accruals for potential liquidated damages that had been made in the prior year periods due to
delays in filing registration statements for shares and shares underlying warrants for certain of the private placements that
the Company closed in prior periods. There were no such liquidated damages accruals recorded in the comparable current year periods
as the Company filed the necessary registration statement in May 2017 eliminating the further need for such accruals. These lower
expenses were also due to a combination of decreased rent expense associated with lower net operating leases, decreased legal
expenses associated with activity related to our patents, lower stock compensation expense associated with the termination of
headcount and other lower costs associated with investor relations, and decreased outside services expense.
In
2017, we intend to continue cost controls and therefore expect that our 2017 general and administrative costs will be 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 $107,700, or 21.9%, to $383,800, for the three-month period ended September 30, 2017, from
$491,500 for the same period of 2016, which represented approximately 37.4% and 54.7% of revenue for these periods, respectively.
Research
and development expenses decreased by $737,000, or 39.6%, to $1,123,900, for the nine-month period ended September 30, 2017, from
$1,860,900 which represented approximately 38.3% and 65.0% of revenue for these periods, respectively.
The
decrease in research and development expense is primarily due to lower employee costs associated with lower headcount primarily
due to the suspension of efforts on our hopTo Work products, lower payments to contract programmers, and lower operating rent
expense.
In
2017, we expect to maintain a level of research and development resource lower than the second half of 2016. We therefore expect
2017 research and development expenses, net of capitalized software developments costs, to be lower than 2016 levels.
Change
in Fair Value of Warrants Liability
During
the three-month periods and nine-months period ended September 30, 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
periods of the prior year, we reported non-cash income of $54,400 and $29,300, respectively. Such changes resulted from our liability
warrants which expired in the fourth quarter of 2016.
Net Profit / (Loss)
Based
on the foregoing, we reported net profit of $253,600 and a net loss of $462,000 for the three-month periods ended September
30, 2017 and 2016 respectively. Additionally, we reported net profit of $87,400 and a net loss of $1,874,500 for the nine-month
periods ended September 30, 2017 and 2016, respectively.
Liquidity
and Capital Resources
Our
reported net profit for the nine-month period ended September 30, 2017 of $87,400 included the following non-cash items: depreciation
and amortization of $42,200 which was primarily related to depreciation of fixed assets; loss of $60,400 from disposal
of fixed assets; loss of $62,900 from sublease; stock-based compensation expense of $14,500; interest expense of $200 from
capital lease equipment.
For
the nine-month period ended September 30, 2017, we disposed of some capitalized equipment at a loss of $60,400 which had net book
value of $61,300. We sold some non-capitalized equipment for $900.
For
the nine-month period ended September 30,2017, we subleased our East Campbell office at a loss of $62,900 with the remaining
$46,800 lease amount due to the landlord.
See
the Update on HopTo Plans at the beginning of this section for a discussion of our future plans and option we are considering.
Although
for the three and nine months ended September 30, 2017, respectively, the Company generated net profits of $253,400 and $87,400,
respectively, historically we have incurred significant net losses since our inception. At September 30, 2017, the Company had
an accumulated deficit of $82,362,400 and a working capital deficit of $2,311,200. We were unable to generate meaningful revenue
from our hopTo Work business and our most recent estimation is that revenue from this product is unlikely in any reasonable time
frame. We have, however, recently improved our revenue and operating results from our legacy GO-Global business. If this trend
continues, subject to our contingent liabilities, we believe we would have sufficient capital resources to fund our GO-Global
business (which is our only active business) for at least the next 12 months. However, due to the uncertainty at the current time
about this trend and the outcome of our contingent liabilities, we have determined that our cash resources may not be sufficient
to fund our business for at least 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. (See Note 2 to our Notes to Unaudited Condensed
Consolidated Financial Statements).
In
order to maintain operations, we previously implemented significant expense reductions, including a limited number of employee
layoffs, and have decided to implement further cost cuts 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. (See Note 12 to our
Notes to Unaudited Condensed Consolidated Financial Statements).
Although
maintaining our SEC filing status is a significant expense, we currently intend to maintain such status; however, we consider
all options to preserve value for shareholders, including potentially suspending or terminating our filing status.
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. See
Note 12 – Subsequent Events. 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 September 30, 2017, our cash balance was $551,300, as compared with $546,200 as of December 31, 2016, an increase of $5,100,
or 0.9%. The slight increase primarily resulted from the collection of accounts receivable partially offset by the cash used in
our operations.
Accounts
Receivable, net
At
September 30, 2017 and December 31, 2016, we reported accounts receivable, net, of $353,300 and $355,300, respectively. Such amounts
were reported net of the allowance for doubtful accounts, which allowances totaled $4,400 and $7,700 at September 30, 2017 and
December 31, 2016, respectively. The slight decrease in accounts receivable, net, was mainly due to timing of sales and collections
during the three-month period ended September 30, 2017, as compared with the three-month period ended December 31, 2016. 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.
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 September 30, 2017, we had current assets of $931,400 and current liabilities of $3,242,600, which netted to working capital
deficit of $2,311,200. Included in current liabilities was the current portion of deferred revenue of $1,579,500