Notes
to Consolidated Financial Statements
1.
Basis of Presentation
The
Company
. Our Board of Directors adopted an amendment to our Certificate of Incorporation changing our name from GraphOn Corporation
to hopTo Inc. effective September 9, 2013. A Certificate of Amendment of Incorporation was filed with the Delaware Secretary of
State implementing the name change. The amendment had been previously approved by our stockholders. Our headquarters are in Concord,
NH.
hopTo
Inc., and its subsidiaries 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.
The
Company sells a family of products under the brand name GO-Global, which is a software application publishing business and is
the Company’s 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 2016,
we also worked to integrate hopTo Work with certain software products offered by Citrix Systems.
As
of Q4 2016, we have effectively ceased all of our sales, marketing and R&D 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 IP including source-code, related patents, and the relevant trademarks, other than seven patents
we sold to Salesforce.com in 2017. 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.
Over
the years, the Company has also made significant investments in intellectual property (“IP”). It has filed many patents
designed to protect the new technologies embedded in hopTo. As of March 31, 2018, 53 patents have been granted by the USPTO. Due
to financial constraints on our operations, we have suspended patent prosecution activity other than to pay maintenance or issuance
fees for patents already approved by USPTO.
On
January 27, 2016, we filed an amendment of our Amended and Restated Certificate of Incorporation, as amended, to effect a 1-for-15
reverse stock split of our common stock (the “Reverse Stock Split”). The Reverse Stock Split became effective in the
stock market upon commencement of trading on January 28, 2016. As a result of the Reverse Stock Split, every fifteen shares of
our pre-Reverse Stock Split common stock were combined and reclassified into one share of our common stock. No fractional shares
were issued in connection with the Reverse Stock Split, and cash paid to stockholders for potential fractional shares was insignificant.
The number of shares of common stock subject to outstanding options, restricted stock units, warrants and convertible securities
were also reduced by a factor of fifteen as of January 27, 2016. All historical share and per share amounts reflected throughout
this report have been adjusted to reflect the Reverse Stock Split. The authorized number of shares and the par value per share
of our common stock were not affected by the Reverse Stock Split.
2.
Significant Accounting Policies
Basis
of Presentation and Use of Estimates
. The consolidated financial statements include the accounts of hopTo Inc. and its subsidiaries
(collectively, “we”, “us”, “our”, or “Company”); significant intercompany accounts
and transactions are eliminated upon consolidation. The preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States (“GAAP”) requires management 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 consolidated 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 of property
of equipment, valuation and amortization of intangible assets (including capitalized software); depreciation of long-lived assets;
valuation of warrants; post-employment benefits; and accruals for liabilities and taxes. While the Company believes that such
estimates are fair, actual results could differ materially from those estimates.
Property
and Equipment
. Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the
estimated useful lives of the respective assets, between three and seven years. Amortization of leasehold improvements is calculated
using the straight-line method over the lesser of the lease term or useful lives of the respective assets, between three and seven
years.
Shipping
and Handling
. Shipping and handling costs are included in cost of revenue for all periods presented.
Software
Development Costs
. Under the criteria set forth in Financial Accounting Standards Board’s (FASB) Accounting Standards
Codification (ASC) 985-20,
“Costs of Software to be Sold, Leased or Marketed,”
development costs incurred in
the research and development of new software products are expensed as incurred until technological feasibility, in the form of
a working model, has been established, at which time such costs are capitalized until the product is available for general release
to customers. The Company did not capitalize any software development costs during 2017 or 2016. The Company makes ongoing evaluations
of the recoverability of its capitalized software projects by comparing the net amount capitalized for each product to the estimated
net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net
realizable value, the Company writes off the amount by which the unamortized software development costs exceed net realizable
value (see Note 3).
Revenue
Recognition
. The Company markets and licenses 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. Its product licenses are perpetual. The Company also separately
sells intellectual property licenses, maintenance contracts (which are comprised of license updates and customer service access),
and other products and services.
For
the years ended December 31, 2016 and 2017, software license revenues were recognized when:
|
●
|
Persuasive
evidence of an arrangement exists (i.e., when the Company signs a non-cancelable 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 generally 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
programs), and
|
|
|
|
|
●
|
The
price to the customer is fixed or determinable, as typically evidenced in a signed non-cancelable 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, or customer training. The Company limits its 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 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 evidence 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 the Company 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 one or more licenses from a stocking reseller’s inventory (a “draw
down order”), the Company will ship the licenses(s) in accordance with the draw down order’s instructions. The Company
defers 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 purchasers of the Company’s software products.
Effective
January 1, 2018, ASC 606, Revenue from Contracts with Customers, changed the recognition of revenue standards for reporting periods
beginning after December 31, 2017.
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 is January 1, 2018. The new standard
supersedes nearly all existing revenue recognition standards. The Company expects to adopt this standard using the modified retrospective
approach. The Company has substantially completed its assessment of the new standard, but is continuing to assess potential impacts
primarily related to upgrade rights held by a limited number of customers. We believe the most significant change to the timing
and amount of revenue recognition under the new standard is related to our stocking orders. Under the current standard, we defer
substantially all of the licensing revenue associated with stocking orders until delivery to the end user. Under the new standard,
substantially all licensing revenue from stocking orders will be recognized at the time the licenses are delivered to our customers,
who are generally resellers or distributors. Based upon our agreements with our customers, we believe that under the new standard,
the ownership rights and rewards of the software licenses have been transferred. Due to this change, we anticipate that we will record substantially all of our deferred licensing revenue to retained earnings under the modified retrospective approach in
Q1 2018.
As a result of the adoption of ASU NO. 2014-09
we expect our annual and quarterly revenues to be subject to greater variability.
Revenue
is recognized from maintenance contracts ratably over the related contract period, which generally ranges from one to five years.
All
of the Company’s 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 (See Notes 7 and 12). 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.
Allowance
for Doubtful Accounts
. The Company maintains an allowance for doubtful accounts that reflects our best estimate of potentially
uncollectible trade receivables. Such 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 illustrates the
details of the Allowance for Doubtful Accounts for the years ended December 31, 2017 and 2016:
|
|
Beginning
Balance
|
|
|
Charge Offs
|
|
|
Recoveries
|
|
|
Provision
|
|
|
Ending
Balance
|
|
2017
|
|
$
|
7,700
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
100
|
|
|
$
|
7,800
|
|
2016
|
|
$
|
17,300
|
|
|
$
|
(3,700
|
)
|
|
$
|
—
|
|
|
$
|
(5,900
|
)
|
|
$
|
7,700
|
|
Income
Taxes
. In accordance with FASB ASC 740-10-05,
“Income Taxes,”
the Company performed a comprehensive review
of uncertain tax positions as of December 31, 2017. In this regard, an uncertain tax position represents the expected treatment
of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring
income tax expense for financial reporting purposes.
The
Company and one or more of its subsidiaries are subject to United States federal income taxes, as well as income taxes of multiple
state and foreign jurisdictions. The Company and its subsidiaries are no longer subject to U.S. federal, state and local, or non-U.S.
income tax examinations by tax authorities for years prior to 2011. There are no tax examinations currently underway for any of
the Company’s or its subsidiaries’ tax returns for years subsequent to 2010.
The
Company’s policy for deducting interest and penalties is to treat interest as interest expense and penalties as taxes. The
Company had not accrued any amount for the payment of interest or penalties related to any uncertain tax positions at either December
31, 2017 or 2016, as its review of such positions indicated that such potential positions were minimal.
Under
FASB ASC 740-10-05,
“Income Taxes,”
deferred income taxes are recognized for the tax consequences of temporary
differences between the financial statement and income tax bases of assets, liabilities and net loss carryforwards using enacted
tax rates. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely
than not expected to be realized. Realization is dependent upon future pre-tax earnings, the reversal of temporary differences
between book and tax income, and the expected tax rates in effect in future periods.
Fair
Value of Financial Instruments
. The fair value of the Company’s accounts receivable, accounts payable and other current
liabilities approximate their carrying amounts due to the relative short maturities of these items.
The
fair value of the Company’s warrants are determined in accordance with FASB 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 and liabilities 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.
|
As
of December 31, 2017 and 2016, the Company did not have any Warrants Liability reported.
Derivative
Financial Instruments
. The Company currently does not have a material exposure to either commodity prices or interest rates;
accordingly, it does not currently use derivative instruments to manage such risks. The Company evaluates all of its financial
instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. All derivative
financial instruments are recognized in the balance sheet at fair value. Changes in fair value are recognized in earnings if they
are not eligible for hedge accounting or in other comprehensive income if they qualify for cash flow hedge accounting.
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 the Company has 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 undiscounted
future cash flows, among other variables, as appropriate. Assets to be held and used 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 2017 and 2016, we determined that there was an impairment of $0 and
$15,500, respectively, associated with certain capitalized software development expense (see Note 3).
Loss
Contingencies
. The Company is subject to the possibility of various loss contingencies arising in the ordinary course of business.
The Company considers the likelihood of the loss or impairment of an asset or the incurrence of a liability as well as its ability
to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it
is probable that a liability has been incurred or an asset has been impaired and the amount of the loss can be reasonably estimated.
The Company regularly evaluates current information available to it to determine whether such accruals should be adjusted. No
such loss contingency was recorded during the years ended December 31, 2017 and 2016.
Stock-Based
Compensation
. The Company applies the fair value recognition provisions of FASB ASC 718-10, “
Compensation –
Stock Compensation.
”
Valuation
and Expense Information Under FASB ASC 718-10
The
Company recorded stock-based compensation expense of $13,400 and $324,400 in the years ended December 31, 2017 and 2016, respectively.
No expense was capitalized related to software development. As required by FASB ASC 718-10, the Company estimates forfeitures
of employee stock-based awards and recognizes compensation cost only for those awards expected to vest. Forfeiture rates are estimated
based on an analysis of historical experience and are adjusted to actual forfeiture experience as needed.
During
2016, we awarded 35,000 shares of restricted common stock to seven members of our board of advisors. The valuation of the restricted
common stock awards was based on the closing fair market value of our common stock on the grant date. For these awards, such fair
market value was $1.65 per share. These shares were canceled in the three month period ended September 2016.
For
stock options granted, the Company set the exercise price equal to the closing fair market value of the Company’s common
stock as of the grant date. No options were issued during the years ended December 31 2017 and 2016.
The
following table illustrates the non-cash stock-based compensation expense recorded during the years ended December 31, 2017 and
2016 by income statement classification:
|
|
2017
|
|
|
2016
|
|
Cost of revenue
|
|
$
|
100
|
|
|
$
|
5,600
|
|
Selling and marketing expense
|
|
|
200
|
|
|
|
69,200
|
|
General and administrative expense
|
|
|
13,000
|
|
|
|
156,000
|
|
Research and development expense
|
|
|
100
|
|
|
|
93,600
|
|
|
|
$
|
13,400
|
|
|
$
|
324,400
|
|
Estimated
compensation expense is based on the estimated fair value of each option granted on the date of grant using a binomial model,
using the estimated annualized forfeiture rate based on an analysis of historical data and considered the impact of events such
as work force reductions we carried out in previous years. The expected term of our stock-based awards was based on historical
award holder exercise patterns and considered the market performance of our common stock and other items. The estimated exercise
factor was based on an analysis of historical data; historical exercise patterns; and a comparison of historical and current share
prices. The approximate risk free interest rate was based on the implied yield available on U.S. Treasury issues with remaining
terms equivalent to our expected term on our stock-based awards.
The
Company used the average historical volatility of its daily closing price for a period of time equal in length to the expected
option term for the option being issued. The period of time over which historical volatility was measured ended on the last day
of the quarterly reporting period during which the stock-based award was made.
The
Company does not anticipate paying dividends on its common stock for the foreseeable future.
Earnings
Per Share of Common Stock
. FASB ASC 260-10,
“Earnings Per Share,”
provides for the calculation of basic
and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income or loss attributable
to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of securities by adding other common stock equivalents, including common stock options, warrants,
and unreleased (unvested) restricted stock awards in the weighted average number of common shares outstanding for a period, if
dilutive. Potentially dilutive securities are excluded from the computation if their effect is antidilutive. For the year ended
December 31, 2017 and 2016, 1,153,287 and 1,382,841, respectively, common shares equivalents were excluded in the computation
of diluted earnings per share since its effect would be antidilutive.
Comprehensive
Loss
. FASB ASC 220-10,
“Reporting Comprehensive Income,”
establishes standards for reporting comprehensive
income and its components in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive
income, as defined, includes all changes in equity (net assets) during the period from non-owner sources. Examples of items to
be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and
unrealized gain/loss of available-for-sale securities. The individual components of comprehensive income (loss) are reflected
in the consolidated statement of operations. For the years ended December 31, 2017 and 2016, there were no changes in equity (net
assets) from non-owner sources.
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 2017-17, ASU 2017-13, ASU 2016- 20, ASU 2016-12, ASU-2016-10,
ASU-2016-08, and ASU-2015-14. The effective date for ASU 2014-09 is January 1, 2018. See discussion of the impact of this
new standard in the Revenue Recognition section of this note above.
3.
Capitalized Software Development Costs
As
of December 31, 2017 and 2016, the Company’s total capitalized software development costs of $490,440 were fully amortized.
There was no amortization expense in either 2017 or 2016.
During
2017 and 2016, we did not capitalize any software development costs associated with hopTo. Such costs were the cost of licenses
to third party software used by hopTo.
Amortization
of capitalized software development costs is a component of costs of revenue. Capitalized software development costs amortization
aggregated $0 and $5,400 during the years ended December 31, 2017 and 2016, respectively.
During
2017 and 2016, we determined that an impairment of $0 and $15,500, respectively, existed with certain capitalized software development
costs associated with our
hopTo
consumer product and recognized that cost as part of cost of revenue.
4.
Property and Equipment
Property
and equipment as of December 31, 2017 and 2016 consisted of the following:
|
|
2017
|
|
|
2016
|
|
Equipment
|
|
$
|
184,600
|
|
|
$
|
258,700
|
|
Furniture & fixture
|
|
|
3,600
|
|
|
|
190,600
|
|
Leasehold improvements
|
|
|
167,600
|
|
|
|
167,600
|
|
|
|
|
355,800
|
|
|
|
616,900
|
|
Less: accumulated depreciation and amortization
|
|
|
325,000
|
|
|
|
473,600
|
|
|
|
$
|
30,800
|
|
|
$
|
143,300
|
|
Aggregate
property and equipment depreciation expense for the years ended December 31, 2017 and 2016 was $51,200 and $89,200 respectively.
During 2017 and 2016, we did not capitalize any property and equipment. During 2017, we retired equipment with costs of $74,100
and furniture and fixtures with costs of $187,000. During 2016, we retired equipment with costs of $55,000 and furniture and fixtures
with costs of $43,300. The $261,100 and $98,300 total in assets retired in 2017 and 2016, respectively, had total remaining book
value of $61,300 and $20,000.
5.
Accrued Expenses
Accrued
expenses as of December 31, 2017 and 2016 consisted of the following:
|
|
2017
|
|
|
2016
|
|
Consulting services
|
|
$
|
20,500
|
|
|
$
|
35,000
|
|
Franchise tax
|
|
|
900
|
|
|
|
1,500
|
|
Software and subscription fees
|
|
|
100
|
|
|
|
2,300
|
|
Board of director fees
|
|
|
64,000
|
|
|
|
23,000
|
|
Royalty fees
|
|
|
5,400
|
|
|
|
10,800
|
|
Other
|
|
|
16,800
|
|
|
|
14,800
|
|
|
|
$
|
107,700
|
|
|
$
|
87,400
|
|
6.
Severance Liability
In
August of 2015 we agreed to provide a terminated employee a lump sum payment $15,000 and six months of medical coverage payments
which ended on March 2, 2016. As of December 31, 2017 and 2016, the Company had no outstanding severance liability.
7.
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 December 31, 2017, $13,800 remains on the balance sheet as a lease liability to be amortized
over the remaining 10 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.
As
of December 31, 2017 deferred rent was:
Component
|
|
Current
Liabilities
|
|
|
Long-Term
Liabilities
|
|
|
Total
|
|
Lease liability - ST
|
|
$
|
13,800
|
|
|
$
|
—
|
|
|
$
|
13,800
|
|
Deferred rent expense
|
|
|
27,200
|
|
|
|
—
|
|
|
|
27,200
|
|
Deferred rent benefit
|
|
|
33,100
|
|
|
|
—
|
|
|
|
33,100
|
|
|
|
$
|
74,100
|
|
|
$
|
—
|
|
|
$
|
74,100
|
|
As
of December 31, 2016 deferred rent was:
Component
|
|
Current
Liabilities
|
|
|
Long-Term
Liabilities
|
|
|
Total
|
|
Deferred
rent expense
|
|
$
|
(15,600
|
)
|
|
$
|
(30,500
|
)
|
|
$
|
(46,100
|
)
|
Deferred
rent benefit
|
|
|
39,700
|
|
|
|
33,100
|
|
|
|
72,800
|
|
|
|
$
|
24,100
|
|
|
$
|
2,600
|
|
|
$
|
26,700
|
|
Deferred
rent expense represents the remaining balance of the aggregate free rent we received from our landlord and escalations that are
being recognized over the life of the lease as a component of rent expense. Deferred rent benefit relates to the unamortized portion
of the leasehold improvements provided to us by our landlord (i.e., incentives) that we are recognizing on a straight-line basis
as a reduction to rent expense over the term of the lease.
8.
Liability Attributable to Warrants
On
January 7, 2014, we entered into a securities purchase agreement (the “SPA”) with a limited number of institutional
investors, pursuant to which we issued and sold for cash an aggregate 753,333 shares of our common stock at a purchase price of
$4.50 per share (the “2014 Transaction”). We also issued warrants to the investors for no additional consideration
to purchase an aggregate 376,667 shares of our common stock at an exercise price of $6.00 per share from January 7, 2014 through
January 7, 2019.
Under
certain conditions of the SPA that were to expire no later than January 7, 2015, we could have been required to issue a variable
number of additional warrants to the investors at a below-market value exercise price. Accordingly, we have concluded that the
warrants issued to the investors are not indexed to our common stock; therefore, the fair value of these warrants had been recorded
as a liability of $1,356,000 on January 7, 2014 on our Balance Sheet. Since these conditions did not occur as of January 7, 2015,
we have reclassified the warrant from liability to equity.
Using
a binomial pricing model, we calculated the fair value of the warrants issued to the investors on January 7, 2015 to be $407,300.
We used the following assumptions in the binomial pricing model to derive the fair value: estimated volatility 113%; annualized
forfeiture rate 0%; expected term 4.1 years; estimated exercise factor 3.5; risk free interest rate 1.20; and dividends 0.
We
used the exercise price of the warrants, as well as the fair market value of our common stock, to determine the fair value of
our warrants. The exercise price for warrants issued in conjunction with a 2011 transaction, including those issued to the placement
agent, was either $3.00 or $3.90 per share, and was $3.90 per share for the warrants issued to ipCapital. The warrants issued
to the placement agent included anti-dilution provisions for repricing of the warrants in the event that future issuances of stock
by hopTo met certain conditions. The 2015 Transaction (Note 10) met those conditions and resulted in the placement agent warrants
being repriced from $3.00 and $3.90 to $2.55 and $3.30, respectively. On September 1, 2016, the liability warrants for the 2011
transaction expired.
The
following tables reconcile the number of warrants outstanding for the periods indicated:
|
|
For the Year Ended December 31, 2017
|
|
|
|
Beginning
Outstanding
|
|
|
Issued
|
|
|
Exercised
|
|
|
Cancelled /
Forfeited
|
|
|
Ending
Outstanding
|
|
2014 Transaction
|
|
|
376,667
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
376,667
|
|
Exercise Agreement
|
|
|
300,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
300,000
|
|
Consultant Warrant
|
|
|
11,285
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,285
|
|
Offer to Exercise
|
|
|
10,167
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,167
|
|
|
|
|
698,119
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
698,119
|
|
|
|
For the Year Ended December 31, 2016
|
|
|
|
Beginning
Outstanding
|
|
|
Issued
|
|
|
Exercised
|
|
|
Cancelled /
Forfeited
|
|
|
Ending
Outstanding
|
|
2011 Transaction
|
|
|
686,833
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(686,833
|
)
|
|
|
—
|
|
2014 Transaction
|
|
|
376,667
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
376,667
|
|
ipCapital
|
|
|
26,667
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(26,667
|
)
|
|
|
—
|
|
Exercise Agreement
|
|
|
300,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
300,000
|
|
Consultant Warrant
|
|
|
11,285
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,285
|
|
Offer to Exercise
|
|
|
10,167
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,167
|
|
|
|
|
1,411,619
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(713,500
|
)
|
|
|
698,119
|
|
9.
Stockholders’ Equity
Common
Stock
The
Company did not issue any stock or pay any dividends during the years ended December 31, 2017 and 2016. During 2016, we awarded
35,000 shares of restricted common stock to seven members of our board of advisors. The valuation of the restricted common stock
awards was based on the closing fair market value of our common stock on the grant date. For the awards made to board of advisors,
such fair market value was $1.65 per share. These shares were canceled in the three-month period ended September 2016 and we did
not recognize additional stock compensation expense on the unvested awards upon cancellation.
Stock-Based
Compensation Plans
Active
Plans
2012
Equity Incentive Plan
. In November 2012, the Company’s 2012 Equity Incentive Plan (the “12 Plan”) was approved
by the stockholders. Pursuant to the terms of the 12 Plan, stock options, stock appreciation rights, restricted stock and restricted
stock units (sometimes referred to individually or collectively as “awards”) may be granted to officers and other
employees, non-employee directors and independent consultants and advisors who render services to the Company. The Company is
authorized to issue options to purchase up to 643,797 shares of common stock, stock appreciation rights, or restricted stock in
accordance with the terms of the 12 Plan.
In
the case of a restricted stock award, the entire number of shares subject to such award would be issued at the time of the grant
and subject to vesting provisions based on time or other conditions specified by the Board or an authorized committee of the Board.
For awards based on time, should the grantee’s service to the Company end before full vesting occurred, all unvested shares
would be forfeited and returned to the Company. In the case of awards granted with vesting provisions based on specific performance
conditions, if those conditions were not met, then all shares would be forfeited and returned to the Company. Until forfeited,
all shares issued under a restricted stock award would be considered outstanding for dividend, voting and other purposes.
Under
the 12 Plan, the exercise price of non-qualified stock options granted is to be no less than 100% of the fair market value of
the Company’s common stock on the date the option is granted. The exercise price of incentive stock options granted is to
be no less than 100% of the fair market value of the Company’s common stock on the date the option is granted provided,
however, that if the recipient of the incentive stock option owns greater than 10% of the voting power of all shares of the Company’s
capital stock then the exercise price will be no less than 110% of the fair market value of the Company’s common stock on
the date the option is granted. The purchase price of the restricted stock issued under the 12 Plan shall also not be less than
100% of the fair market value of the Company’s common stock on the date the restricted stock is granted.
All
options granted under the 12 Plan are immediately exercisable by the optionee; however, there is a vesting period for the options.
The options (and the shares of common stock issuable upon exercise of such options) vest, ratably, over a 33-month period; however,
no options (and the underlying shares of common stock) vest until after three months from the date of the option grant. The exercise
price is immediately due upon exercise of the option. The maximum term of options issued under the 12 Plan is ten years. Shares
issued upon exercise of options are subject to the Company’s repurchase, which right lapses as the shares vest. The 12 Plan
will terminate no later than November 7, 2022.
During
the years ended December 31, 2017 and 2016, no options were granted under the 12 Plan. There were 35,000 shares of restricted
common stock, with a weighted average grant date fair value of $1.65, granted, no options had been exercised and 404,926 shares
of common stock remained available for issuance under the 12 Plan.
No
options previously issued under the 12 Plan were exercised during the years ended December 31, 2017 and December 31, 2016.
Inactive
Plans
The
following table summarizes options outstanding as of December 31, 2017 and 2016 that were granted from stock based compensation
plans that are inactive. As of December 31, 2017 no options can be granted under these plans.
|
|
|
|
|
Options Outstanding
|
|
|
|
Year
|
|
|
Beginning
of
Year
|
|
|
Granted
|
|
|
Exercised
|
|
|
Cancelled
|
|
|
End of Year
|
|
2008 Stock Option Plan
|
|
|
2017
|
|
|
|
380,611
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(186,666
|
)
|
|
|
193,945
|
|
2005 Equity Incentive Plan
|
|
|
2017
|
|
|
|
7,666
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,999
|
)
|
|
|
667
|
|
Supplemental Stock Option Agreement
|
|
|
2017
|
|
|
|
333
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(333
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
388,610
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(193,998
|
)
|
|
|
194,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Stock Option Plan
|
|
|
2016
|
|
|
|
395,545
|
|
|
|
—
|
|
|
|
(1,800
|
)
|
|
|
(13,134
|
)
|
|
|
380,611
|
|
2005 Equity Incentive Plan
|
|
|
2016
|
|
|
|
14,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,334
|
)
|
|
|
7,666
|
|
Supplemental Stock Option Agreement
|
|
|
2016
|
|
|
|
333
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
333
|
|
|
|
|
|
|
|
|
409,878
|
|
|
|
—
|
|
|
|
(1,800
|
)
|
|
|
(19,468
|
)
|
|
|
388,610
|
|
Summary
– All Plans
A
summary of the status of all of the options outstanding under all of the Company’s stock option plans, and non-plan grants
to consultants, as of December 31, 2017 and 2016, and changes during the years then ended, is presented in the following table:
|
|
2017
|
|
|
2016
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Beginning
|
|
|
684,722
|
|
|
$
|
2.64
|
|
|
|
705,990
|
|
|
$
|
2.63
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
(1,800
|
)
|
|
$
|
0.81
|
|
Forfeited or expired
|
|
|
(369,555
|
)
|
|
$
|
|
|
|
|
(19,468
|
)
|
|
$
|
2.74
|
|
Ending
|
|
|
315,167
|
|
|
$
|
2.46
|
|
|
|
684,722
|
|
|
$
|
2.64
|
|
Exercisable at year-end
|
|
|
315,167
|
|
|
$
|
2.46
|
|
|
|
684,722
|
|
|
$
|
2.64
|
|
Vested or expected to vest at year-end
|
|
|
315,167
|
|
|
$
|
2.46
|
|
|
|
684,571
|
|
|
$
|
2.64
|
|
Weighted average fair value of options granted during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.64
|
|
As of December 31, 2017 and 2016, of the options
exercisable, 315,167 and 684,571 were vested, respectively.
The
following table summarizes information about stock options outstanding as of December 31, 2017:
|
|
Options Outstanding
|
|
Range of Exercise
Price
|
|
Number
Outstanding/Exercisable
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted
Average
Outstanding/Exercise
Price
|
|
$0.75-$1.80
|
|
|
99,843
|
|
|
|
3.19
|
|
|
$
|
1.38
|
|
$1.83-$2.40
|
|
|
23,334
|
|
|
|
6.85
|
|
|
$
|
2.28
|
|
$2.49-$2.54
|
|
|
31,112
|
|
|
|
7.93
|
|
|
$
|
2.54
|
|
$2.55-$3.00
|
|
|
74,001
|
|
|
|
5.07
|
|
|
$
|
2.71
|
|
$3.01-$3.30
|
|
|
37,602
|
|
|
|
4.81
|
|
|
$
|
3.08
|
|
$3.31-$3.45
|
|
|
33,749
|
|
|
|
4.81
|
|
|
$
|
3.45
|
|
$3.46-$4.20
|
|
|
13,333
|
|
|
|
4.69
|
|
|
$
|
4.20
|
|
$4.21-$6.88
|
|
|
2,193
|
|
|
|
3.85
|
|
|
$
|
6.38
|
|
$0.75-$6.88
|
|
|
315,167
|
|
|
|
4.02
|
|
|
$
|
2.46
|
|
As of December 31, 2017, there were outstanding
options to purchase 315,167 shares of common stock with a weighted average exercise price of $2.46 per share, a
weighted average remaining contractual term of 4 years and an aggregate intrinsic value of $0. All of the options outstanding
as of December 31, are fully vested and 0 were estimated to be forfeited or to expire in future periods.
As
of December 31, 2017, there was no unrecognized compensation cost, net of estimated forfeitures, related to unvested options.
During
2016, the Company awarded 35,000 shares of restricted common stock, which vest ratably, over a 12-month period; however, these
shares were canceled in the three-month period ended September 30, 2016. The Company includes the common stock underlying the
restricted stock award in shares outstanding once the common stock underlying the restricted stock award has vested and the restriction
has been removed (“releases” or “released”).
During
the year ended 2016, we accelerated and released all of the remaining employee unvested restricted award shares and there was
no unreleased restricted stock awards as of December 31, 2017 and 2016.
As
of December 31, 2017, there was $0 of total unrecognized compensation cost, net of estimated forfeitures, related to unreleased
restricted stock awards.
10.
Income Taxes
The
components of the provision (benefit) for income taxes for the years ended December 31, 2017 and 2016 consisted of the following:
|
|
2017
|
|
|
2016
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
3,300
|
|
|
|
2,800
|
|
|
|
$
|
3,300
|
|
|
$
|
2,800
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
3,300
|
|
|
$
|
2,800
|
|
The
following table summarizes the differences between income tax expense and the amount computed applying the federal income tax
rate of 34% for the years ended December 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Federal income tax (benefit) at statutory rate
|
|
$
|
205,300
|
|
|
$
|
(629,000
|
)
|
State income tax (benefit) at statutory rate
|
|
|
800
|
|
|
|
(3,700
|
)
|
Foreign tax rate differential
|
|
|
(600
|
)
|
|
|
(300
|
)
|
IRC 965 Subpart F Income
|
|
|
21,000
|
|
|
|
—
|
|
Compensation from exercise of non-qualified stock options and restricted stock awards
|
|
|
—
|
|
|
|
2,100
|
|
SBC – NQ cancellations
|
|
|
235,900
|
|
|
|
163,100
|
|
Change in valuation allowance
|
|
|
(439,700
|
)
|
|
|
434,000
|
|
Warrant liability
|
|
|
—
|
|
|
|
(10,000
|
)
|
Meals and entertainment (50%)
|
|
|
700
|
|
|
|
2,500
|
|
Tax rate changes
|
|
|
—
|
|
|
|
(800
|
)
|
Other items
|
|
|
(20,100
|
)
|
|
|
44,900
|
|
Provision (benefit) for income tax
|
|
$
|
3,300
|
|
|
$
|
2,800
|
|
Deferred
income taxes and benefits result from temporary timing differences in the recognition of certain expense and income items for
tax and financial reporting purposes. The following table sets forth those differences as of December 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Net operating loss carryforwards
|
|
$
|
13,566,000
|
|
|
$
|
21,808,000
|
|
Tax credit carryforwards
|
|
|
1,047,000
|
|
|
|
1,047,000
|
|
Compensation expense – non-qualified stock options
|
|
|
238,000
|
|
|
|
620,000
|
|
Deferred revenue and maintenance service contracts
|
|
|
691,000
|
|
|
|
1,181,000
|
|
Reserves and other
|
|
|
108,000
|
|
|
|
73,000
|
|
Total deferred tax assets
|
|
|
15,650,000
|
|
|
|
24,729,000
|
|
Deferred tax liability – depreciation, amortization and capitalized software
|
|
|
(7,000
|
)
|
|
|
(7,000
|
)
|
Net deferred tax asset
|
|
|
15,643,000
|
|
|
|
24,722,000
|
|
Valuation allowance
|
|
|
(15,643,000
|
)
|
|
|
(24,722,000
|
)
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
For
financial reporting purposes, with the exception of the year ended December 31, 2017, the Company has incurred a loss in
each year since inception. Based on the available objective evidence, management believes it is more likely than not that the
net deferred tax assets will not be fully realizable. Accordingly, the Company has provided a full valuation allowance against
its net deferred tax assets at December 31, 2017 and 2016. The net change in the valuation allowance was $9,079,000 and $(434,000)
for the years ended December 31, 2017 and 2016, respectively.
At
December 31, 2017, the Company had approximately $62.3 million of federal net operating loss carryforwards and approximately $6.9
million of California state net operating loss carryforwards available to reduce future taxable income. The federal loss carryforwards
will begin to expire in 2018 and the California state loss carry forwards began to expire in 2015. During the year ended
December 31, 2017, the Company utilized $193,376 federal and no California net operating losses. Under the Tax Reform Act of 1986,
the amounts of benefits from net operating loss carryforwards may be impaired or limited if the Company incurs a cumulative ownership
change of more than 50%, as defined, over a three-year period.
At
December 31, 2017, the Company had approximately $1 million of federal research and development tax credits that will begin to
expire in 2018.
11.
Concentration of Credit Risk
Financial
instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and trade receivables.
The Company places cash and, when applicable, cash equivalents, with high quality financial institutions and, by policy, limits
the amount of credit exposure to any one financial institution. As of December 31, 2017, the Company had approximately $765,400
of cash with financial institutions in excess of FDIC insurance limits. As of December 31, 2016, the Company had approximately
$330,400 of cash with financial institutions in excess of FDIC insurance limits.
For
the years ended December 31, 2017 and December 31, 2016, the Company considered the following to be its most significant customers:
|
|
2017
|
|
|
2016
|
|
Customer
|
|
% Sales
|
|
|
% Accounts
Receivable
|
|
|
% Sales
|
|
|
% Accounts
Receivable
|
|
Centric Systems
|
|
|
6.9
|
%
|
|
|
12.6
|
%
|
|
|
5.0
|
%
|
|
|
11.5
|
%
|
Elosoft
|
|
|
16.9
|
%
|
|
|
56.2
|
%
|
|
|
11.0
|
%
|
|
|
18.8
|
%
|
IDS
|
|
|
5.5
|
%
|
|
|
0.0
|
%
|
|
|
3.6
|
%
|
|
|
0.0
|
%
|
Uniface
|
|
|
6.5
|
%
|
|
|
0.8
|
%
|
|
|
6.1
|
%
|
|
|
10.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
35.80
|
%
|
|
|
69.60
|
%
|
|
|
25.7
|
%
|
|
|
41.2
|
%
|
The
Company performs credit evaluations of customers’ financial condition whenever necessary, and does not require cash collateral
or other security to support customer receivables.
12.
Commitments and Contingencies
Operating
Leases
.
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 December 31, 2017, $13,800 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.
The
following table sets forth the net minimum lease payments we will be required to make throughout the remainder of these leases:
Year
ended December 31, 2017
|
|
|
Lease
Payments
|
|
|
Sublease Receipts
|
|
|
Total
|
|
2018
|
|
|
475,400
|
|
|
|
(461,600
|
)
|
|
|
13,800
|
|
Rent
expense aggregated approximately $67,600 and $141,700 for the years ended December 31, 2017 and 2016, respectively.
Contingencies.
Under its Amended and Restated Certificate of Incorporation and Second Amended and Restated Bylaws and certain agreements
with officers and directors, the Company has agreed to indemnify its officers and directors for certain events or occurrences
arising as a result of the officer’s or director’s serving in such capacity. Generally, the term of the indemnification
period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could
be required to make under these indemnification agreements is limited as the Company currently has a directors and officers liability
insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. The Company believes
the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as
of December 31, 2017.
The
Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business,
including contractors and customers and (ii) its agreements with investors. Under these provisions, the Company generally indemnifies
and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s
activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification
provisions often include indemnifications relating to representations made by the Company with regard to intellectual property
rights, and often survive termination of the underlying agreement. The maximum potential amount of future payments the Company
could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to
defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated
fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December
31, 2017.
The
Company’s software license agreements also generally include a performance guarantee that the Company’s software products
will operate substantially as described in the applicable program documentation for a period of 90 days after delivery. The Company
also generally warrants that services that the Company performs will be provided in a manner consistent with reasonably applicable
industry standards. To date, the Company has not incurred any material costs associated with these warranties and has no liabilities
recorded for these agreements as of December 31, 2017.
During
the year ended December 31, 2017 and 2016, we reported non-cash expense of $284,000 and $571,100, respectively, related to potential
liquidated damages resulting from delays in filing registration statements for shares and shares underlying warrants for certain
private placements that the Company closed in prior periods. While we believe that the applicable agreements, in most cases, provide
exceptions or defenses to liquidated damages that may result in the reduction or non-payment of such damages, we have chosen to
accrue to the full extent potentially required by the registration rights agreements that contained liquidated damages provisions
due to uncertainty of such matters. The potential liquidated damages is reported as other current liabilities on the consolidated
balance sheet and as a component of general and administrative expense on the consolidated statements of operations.
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 salaries beginning September 1, 2016 until such time as the Company can reasonably pay such compensation, upon approval
by the board of directors. In the fourth quarter of 2017, the Company paid out $63,000 to CEO and $32,800 to CFO. During the year
ended December 31, 2017, total deferred salaries remaining for the CEO and CFO was $63,000 and $32,800, respectively. There is
currently no definitive schedule for the remaining portion of the accrued payments although the Company remains obligated to pay
these amounts and intends to do so in the near future, subject to liquidity requirements. The deferred salaries are recorded as
a component of accounts payable and accrued expenses on the consolidated balance sheet.
Employment
Agreement – Eldad Eilam
On
August 21, 2013, our Board of Directors and Compensation Committee approved a new employment agreement for Eldad Eilam, our President
and Chief Executive Officer. Under the employment agreement, Mr. Eilam received an annual base salary of $275,000 and was eligible
for a performance-based bonus in the discretion of our Compensation Committee. The employment agreement included other elements
related to restricted shares, stock options and insurance. Mr. Eilam resigned as our President and CEO on July 28, 2017 and this
agreement is no longer in effect.
During
the three month period ended September 30, 2016, Mr. Eilam voluntarily agreed with our board of directors to defer 50% of his
salary beginning September 1, 2016. On October 25, 2017, the board of directors of the Company determined that the financial status
of the Company had improved and accordingly, 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.
13.
Employee 401(k) Plan
In
December 1998, the Company adopted a 401(k) Plan (the “Plan”), to provide retirement benefits for employees. As allowed
under Section 401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary deductions for eligible employees. Employees
may contribute up to 15% of their annual compensation to the Plan, limited to a maximum annual amount as set periodically by the
Internal Revenue Service. In addition, the Company may make discretionary/matching contributions. During 2017 and 2016, the Company
contributed a total of approximately $0 and $39,100, to the Plan, respectively.
14.
Supplemental Disclosure of Cash Flow Information
The
following table presents supplemental disclosure information for the statements of cash flows for the years ended December 31,
2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Cash Paid:
|
|
|
|
|
|
|
|
|
Income Taxes (1)
|
|
$
|
3,500
|
|
|
$
|
2,900
|
|
Interest
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
All
such disbursements were for the payment of foreign income taxes.
|
During
2017 and 2016, we incurred $0 and $15,500, respectively, of impairment loss from writing down certain capitalized software development
cost that were associated with our consumer products.
15.
Related Party Transactions
ipCapital
Group, Inc.
On
October 11, 2011, we engaged 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.
For
the years ended December 31, 2017 and 2016, there were no services performed, additional charges incurred or payments made to
ipCapital under the agreement.
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 first, second, and third vesting installments occurred
on October 11, 2012, 2013, and 2014. 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
exercise price of the warrant issued to ipCapital could be reset to below-market value. Consequently, we have concluded that such
warrant is not indexed to our common stock; thus, we will accrete the fair value of the warrant as a liability over the anticipated
service period. Additionally, in accordance with the liability method of accounting, we will re-measure the fair value of the
then-outstanding warrant at each future balance sheet date and recognize the change in fair value as general and administrative
compensation expense. (See Note 8) We recognized $0 and $(2,300) as a component of general and administrative expense during the
years ended December 31, 2017 and 2016, respectively, resulting from the change in fair value.
The
warrants expired on October 11, 2016.
ipCapital
Licensing Company I, LLC
In
February 2013, we entered into an IP Brokerage agreement with ipCapital Licensing Company I, LLC (“ipCLC”) (the “IP
Brokerage Agreement”). At the time that we entered into this agreement, John Cronin was a partner at ipCLC. He is no longer
affiliated with ipCLC. Pursuant to the IP Brokerage Agreement, we engaged ipCLC, on a no-retainer basis, to identify and present
us with candidates who may be seeking to acquire a certain limited group of our patents unrelated to our current business strategy.
In June 2016, we determined that the IP Brokerage Agreement is no longer in effect since ipCLC no longer exists as an entity.
16.
Segment Information
The
Company’s operations have historically been conducted and reported in two segments, GO-Global and hopTo, each representing
a specific product line and dedicated operating resources. During the fourth quarter of 2014, the Company developed its hopTo
Work product and go to market strategy, and beginning in January of 2015, it reorganized to a functional organization structure
with consolidated decision-making authority over engineering, product management, sales and marketing resources. Resources in
these functional departments are now shared for the development, sales and support of both the GO-Global and hopTo products. The
GO-Global and hopTo Work products also have similar target customers, distribution channels, and common reseller partners.
Beginning
with the three-month period ended March 31, 2015, the Company will no longer report financial results in two segments. Software
revenue and services revenue for the hopTo Work product will be included in the Windows software and Windows services revenue,
respectively.
Revenue
by country for the years ended December 31, 2017 and 2016 was as follows:
|
|
Years Ended December 31,
|
|
Revenue by Country
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
1,239,300
|
|
|
$
|
1,554,800
|
|
Brazil
|
|
|
758,000
|
|
|
|
606,600
|
|
Other Countries
|
|
|
1,892,200
|
|
|
|
1,839,900
|
|
Total
|
|
$
|
3,889,500
|
|
|
$
|
4,001,300
|
|