ITEM
1. Financial Statements
hopTo
Inc.
C
ondensed
Consolidated Balance Sheets
|
|
(Unaudited)
|
|
|
|
|
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
756,300
|
|
|
$
|
1,015,400
|
|
Accounts
receivable, net
|
|
|
234,800
|
|
|
|
426,800
|
|
Prepaid
expenses
|
|
|
147,400
|
|
|
|
112,900
|
|
Total
Current Assets
|
|
|
1,138,500
|
|
|
|
1,555,100
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
3,400
|
|
|
|
30,800
|
|
Other
assets
|
|
|
17,800
|
|
|
|
17,800
|
|
Total
Assets
|
|
$
|
1,159,700
|
|
|
$
|
1,603,700
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
590,100
|
|
|
$
|
635,100
|
|
Deferred
rent
|
|
|
42,700
|
|
|
|
74,100
|
|
Deposit
liability
|
|
|
93,500
|
|
|
|
93,500
|
|
Deferred
revenue
|
|
|
1,036,000
|
|
|
|
1,845,100
|
|
Other
current liabilities
|
|
|
—
|
|
|
|
855,100
|
|
Total
Current Liabilities
|
|
|
1,762,300
|
|
|
|
3,502,900
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
|
522,300
|
|
|
|
1,409,700
|
|
Total
Liabilities
|
|
|
2,284,600
|
|
|
|
4,912,600
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Deficit:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.0001 par value, 195,000,000 shares authorized, 9,804,400 shares issued and outstanding at September 30, 2018 and
December 31, 2017, respectively
|
|
|
1,000
|
|
|
|
1,000
|
|
Additional
paid-in capital
|
|
|
79,238,700
|
|
|
|
78,539,300
|
|
Accumulated
deficit
|
|
|
(80,364,600
|
)
|
|
|
(81,849,200
|
)
|
Total
Stockholders’ Deficit
|
|
|
(1,124,900
|
)
|
|
|
(3,308,900
|
)
|
Total
Liabilities and Stockholders’ Deficit
|
|
$
|
1,159,700
|
|
|
$
|
1,603,700
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenue
|
|
$
|
832,300
|
|
|
$
|
1,025,900
|
|
|
$
|
2,520,600
|
|
|
$
|
2,933,200
|
|
Costs
of revenue
|
|
|
34,800
|
|
|
|
15,900
|
|
|
|
101,300
|
|
|
|
53,000
|
|
Gross
profit
|
|
|
797,500
|
|
|
|
1,010,000
|
|
|
|
2,419,300
|
|
|
|
2,880,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
99,100
|
|
|
|
87,400
|
|
|
|
309,200
|
|
|
|
259,400
|
|
General
and administrative
|
|
|
374,000
|
|
|
|
206,700
|
|
|
|
1,007,000
|
|
|
|
1,268,900
|
|
Research
and development
|
|
|
352,800
|
|
|
|
383,800
|
|
|
|
1,139,300
|
|
|
|
1,123,900
|
|
Total
operating expenses
|
|
|
825,900
|
|
|
|
677,900
|
|
|
|
2,455,500
|
|
|
|
2,652,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/
(loss) from operations
|
|
|
(28,400
|
)
|
|
|
332,100
|
|
|
|
(36,200
|
)
|
|
|
228,000
|
|
Other
income (loss), net
|
|
|
100
|
|
|
|
(63,700
|
)
|
|
|
129,800
|
|
|
|
(123,800
|
)
|
Income
/ (loss) before provision for income tax
|
|
|
(28,300
|
)
|
|
|
268,400
|
|
|
|
93,600
|
|
|
|
104,200
|
|
Provision
for income tax
|
|
|
—
|
|
|
|
14,800
|
|
|
|
900
|
|
|
|
16,800
|
|
Net
income / (loss)
|
|
$
|
(28,300
|
)
|
|
$
|
253,600
|
|
|
$
|
92,700
|
|
|
$
|
87,400
|
|
Basic
and diluted earnings / (loss) per share
|
|
$
|
(0.00
|
)
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Average
weighted common shares outstanding – basic
|
|
|
9,804,400
|
|
|
|
9,804,400
|
|
|
|
9,804,400
|
|
|
|
9,804,400
|
|
Average
weighted common shares outstanding – diluted
|
|
|
9,804,400
|
|
|
|
9,804,400
|
|
|
|
10,368,956
|
|
|
|
9,804,400
|
|
See
accompanying notes to unaudited condensed consolidated financial statements
hopTo
Inc.
Condensed
Consolidated Statements of Stockholders’ Deficit
|
|
Nine
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Preferred
stock – shares outstanding
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
|
—
|
|
|
|
—
|
|
Ending
balance
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Common
stock – shares outstanding
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
|
9,804,400
|
|
|
|
9,804,400
|
|
Ending
balance
|
|
|
9,804,400
|
|
|
|
9,804,400
|
|
|
|
|
|
|
|
|
|
|
Common
stock – amount
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Ending
balance
|
|
|
1,000
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
78,539,300
|
|
|
$
|
78,525,900
|
|
Stock-based
compensation expense
|
|
|
—
|
|
|
|
14,500
|
|
Issuance
of new warrants and settlement of liquidated damage
|
|
|
699,400
|
|
|
|
—
|
|
Ending
balance
|
|
$
|
79,238,700
|
|
|
$
|
78,540,400
|
|
|
|
|
|
|
|
|
|
|
Accumulated
deficit
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
(81,849,200
|
)
|
|
$
|
(82,449,800
|
)
|
Cumulative
effect from change of accounting principle
|
|
|
1,391,900
|
|
|
|
—
|
|
Net
income / (loss)
|
|
|
92,700
|
|
|
|
87,400
|
|
Ending
balance
|
|
$
|
(80,364,600
|
)
|
|
$
|
(82,362,400
|
)
|
Total
Stockholders’ Deficit
|
|
$
|
(1,124,900
|
)
|
|
$
|
(3,821,000
|
)
|
See
accompanying notes to unaudited condensed consolidated financial statements
hopTo
Inc.
Condensed
Consolidated Statements of Cash Flows
|
|
Nine
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash
Flows Provided By (Used In) Operating Activities:
|
|
|
|
|
|
|
|
|
Net
income / (loss)
|
|
$
|
92,700
|
|
|
$
|
87,400
|
|
Adjustments
to reconcile net income/ (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
26,700
|
|
|
|
42,200
|
|
Stock-based
compensation expense
|
|
|
—
|
|
|
|
14,500
|
|
Changes
in deferred rent
|
|
|
(31,400
|
)
|
|
|
—
|
|
Changes
to allowance for doubtful accounts
|
|
|
(5,200
|
)
|
|
|
(3,300
|
)
|
Loss
on disposal of fixed assets
|
|
|
700
|
|
|
|
60,400
|
|
Loss
on sublease
|
|
|
—
|
|
|
|
63,100
|
|
Interest
accrued for capital lease
|
|
|
—
|
|
|
|
200
|
|
Changes
to liquidated damage on warrant liability
|
|
|
(155,700
|
)
|
|
|
284,000
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
197,200
|
|
|
|
5,300
|
|
Prepaid
expenses
|
|
|
(34,500
|
)
|
|
|
11,900
|
|
Accounts
payable and accrued expenses
|
|
|
(45,000
|
)
|
|
|
(216,100
|
)
|
Deposit
liability
|
|
|
—
|
|
|
|
12,100
|
|
Deferred
revenue
|
|
|
(304,600
|
)
|
|
|
(350,500
|
)
|
Net
Cash Provided By (Used In) Operating Activities
|
|
|
(259,100
|
)
|
|
|
11,200
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows Provided By (Used In) Investing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of equipment
|
|
|
—
|
|
|
|
900
|
|
Net
Cash Provided By (Used In) Investing Activities
|
|
|
—
|
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows Provided By (Used In) Financing Activities:
|
|
|
|
|
|
|
|
|
Payment
for capital lease
|
|
|
—
|
|
|
|
(7,000
|
)
|
Net
Cash Provided By (Used In) Financing Activities
|
|
|
—
|
|
|
|
(7,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash
|
|
|
(259,100
|
)
|
|
|
5,100
|
|
Cash
- Beginning of Period
|
|
|
1,015,400
|
|
|
|
546,200
|
|
Cash
- End of Period
|
|
$
|
756,300
|
|
|
$
|
551,300
|
|
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, 2017, which was filed with the SEC on April 17, 2018 (“2017 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, 2018 or any future period.
Certain
prior year information has been reclassified to conform to current year presentation.
2.
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; deferred rent, 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 hosting service providers, 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.
Effective
January 1, 2018, the Company adopted guidance ASC 606. For further details, see below “Recently Adopted Accounting Pronouncements”.
For
the year ended December 31, 2017 including interim periods therein, the Company recognized revenue under ASC 605. Under ASC 605
software license revenues were recognized when persuasive evidence of an arrangement exists, delivery has occurred, 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. For additional detail on the Company’s revenue recognition policies in prior periods,
please see Note 2 of Notes to Consolidated Financial Statements in the 2017 10-K Report.
The
impact of the adoption of ASC 606 is the effect on revenue treatment of certain resellers (“stocking resellers”) who
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.
Under
ASC 605, we would defer recognition of revenue from inventory stocking orders until the underlying licenses were 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. Under ASC 606, we recognize revenue at the time that the stocking reseller places
an inventory stocking order and their account is credited with available licenses because at that time control over the licenses
has been transferred to the reseller and there are no remaining performance obligations for the Company other than the administrative
task of electronic transfer of license keys.
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.
Long-Lived
Assets
Long-lived
assets are assessed for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may
not be recoverable, whenever we have committed to a plan to dispose of the assets or, at a minimum, annually. Typically, for long-lived
assets to be held and used, measurement of an impairment loss is based on the fair value of such assets, with fair value being
determined based on appraisals, current market value, comparable sales value, and discounted future cash flows, among other variables,
as appropriate. Assets to be held and used (which assets are affected by an impairment loss) are depreciated or amortized at their
new carrying amount over their remaining estimated life; assets to be sold or otherwise disposed of are not subject to further
depreciation or amortization. No such impairment charge was recorded during either of the three or nine-month periods ended September
30, 2018 or 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.
Allowance
for doubtful accounts as of September 30, 2018 and December 31, 2017 amounted to $2,600 and $7,800, respectively.
Concentration
of Credit Risk
For
the three and nine-month periods ended September 30, 2018 and 2017 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, 2018 and December 31, 2017.
|
|
Three
Months Ended
September 30, 2018
|
|
|
As
of
September 30, 2018
|
|
|
Three
Months Ended
September 30, 2017
|
|
|
As
of
December 31, 2017
|
|
Customer
|
|
Sales
|
|
|
Accounts
Receivable
|
|
|
Sales
|
|
|
Accounts
Receivable
|
|
Alcatel
|
|
|
5.3
|
%
|
|
|
15.8
|
%
|
|
|
4.0
|
%
|
|
|
0.0
|
%
|
Centric
|
|
|
5.0
|
%
|
|
|
3.3
|
%
|
|
|
9.5
|
%
|
|
|
12.6
|
%
|
IDS
|
|
|
11.2
|
%
|
|
|
0.0
|
%
|
|
|
8.2
|
%
|
|
|
0.0
|
%
|
Elosoft
|
|
|
19.4
|
%
|
|
|
49.6
|
%
|
|
|
13.6
|
%
|
|
|
56.2
|
%
|
Uniface
|
|
|
3.3
|
%
|
|
|
1.0
|
%
|
|
|
15.1
|
%
|
|
|
0.8
|
%
|
Total
|
|
|
44.2
|
%
|
|
|
69.7
|
%
|
|
|
50.4
|
%
|
|
|
69.6
|
%
|
|
|
Nine
Months
Ended
September
30, 2018
|
|
|
Nine
Months
Ended
September
30, 2017
|
|
Customer
|
|
Sales
|
|
|
Sales
|
|
Alcatel
|
|
|
2.2
|
%
|
|
|
5.0
|
%
|
Centric
|
|
|
12.3
|
%
|
|
|
6.9
|
%
|
Elosoft
|
|
|
10.1
|
%
|
|
|
13.8
|
%
|
Uniface
|
|
|
4.8
|
%
|
|
|
8.2
|
%
|
Total
|
|
|
29.4
|
%
|
|
|
33.9
|
%
|
Recent
Accounting Pronouncements
Revenue
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09, Revenue from Contracts with Customers (ASC 606). This ASU is a comprehensive new revenue recognition model that requires
a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration
it expects to receive in exchange for those goods or services. In August 2015, FASB issued ASU 2015-14, Revenue from Contracts
with Customers (ASC 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to reporting periods
beginning after December 15, 2017, with early adoption permitted for reporting periods beginning after December 15, 2016. Subsequently,
FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09, including: ASU 2016-08, Revenue from Contracts
with Customers (ASC 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve
the operability and understandability of the implementation guidance on principal versus agent considerations; ASU 2016-10, Revenue
from Contracts with Customers (ASC 606): Identifying Performance Obligations and Licensing, which is intended to clarify two aspects
of ASC 606: identifying performance obligations and the licensing implementation guidance; and ASU 2016-12, Revenue from Contracts
with Customers (ASC 606): Narrow-Scope Improvements and Practical Expedients, which contains certain practical expedients in response
to identified implementation issues. The Company elected to adopt ASC 606 under the Modified Retrospective approach. Under the
Modified Retrospective approach, only contracts with customers for which there were remaining unsatisfied performance obligations
(open contracts) at the beginning of initial year of adoption must be restated to apply retrospectively the guidance under ASC
606. Any resulting impact for such contracts prior to the beginning of the initial year of adoption are made as an adjustment
to opening accumulated deficit for such year.
On
January 1, 2018, the Company adopted ASC 606 using the Modified Retrospective method. This method required retrospective application
of the new accounting standard to those contracts which were not completed as of January 1, 2018. Results for the reporting periods
beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported
in accordance with our historic accounting under ASC 605.
The
change to the current revenue policy is the timing of revenue recognition for software licenses purchased by stocking resellers.
Under the guidance ASC 605, the Company recognized revenue upon the delivery of licenses to end users when they were purchased
from the stocking reseller. Under the guidance ASC 606, license revenue is recognized upon crediting of the licenses to the stocking
resellers account for draw down at their discretion after placement of the stocking order by the stocking reseller. During the
three-month and nine-month periods ended September 30, 2018, this change in revenue policy resulted in lower license revenue of
$70,900, and $102,700, respectively. This lower license revenue had the same impact on gross profit, loss from operations
and net income.
The
Company recorded $1,391,900 to opening accumulated deficit as of January 1, 2018 due to the cumulative impact of adopting ASC
606, with the impact primarily related to reversal of deferred license revenue associated with stocking orders placed in prior
periods which had not been sold through to end users as of December 31, 2017.
The
cumulative effect of the changes made to our condensed consolidated balance sheet as of January 1, 2018 under current assets,
deferred revenue and accumulated deficit for the adoption ASU 2014-09, Revenue - Revenue from Contracts with Customers were as
follows:
Balance
Sheet
|
|
Balance
at
December
31, 2017
|
|
|
Adjustments
due to ASC 606
|
|
|
Balance
at
January 1, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
COGS
|
|
$
|
—
|
|
|
$
|
20,000
|
|
|
$
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Deficit
|
|
$
|
(81,849,200
|
)
|
|
$
|
1,391,900
|
|
|
$
|
(80,457,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Revenue
|
|
$
|
1,845,100
|
|
|
$
|
(609,700
|
)
|
|
$
|
1,235,400
|
|
Long
Term Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Revenue
|
|
$
|
1,409,700
|
|
|
$
|
(802,200
|
)
|
|
$
|
607,500
|
|
Income
Taxes
The
Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income
tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that
were previously tax deferred and creates new taxes on certain foreign sourced earnings. Among these new taxes on certain foreign
sourced earnings, the Act created a new category of income inclusion: the global intangible low-taxed income (“GILTI”).
The objective of GILTI is to deter U.S. corporations from transferring intangible property to non-U.S. low-tax jurisdictions by
subjecting the non-U.S. income to current U.S. taxation. The Act also adds a provision for a deduction to offset the GILTI inclusion
for C corporations only, which is 50 percent (37.5 percent after 2025) of the GILTI inclusion. The GILTI deduction is subject
to limitation based mainly on the taxpayer’s taxable income.
In
addition to GILTI, the Act also introduced the foreign-derived intangible income (“FDII”) category. FDII is eligible
income derived in connection with property sold or services provided by the U.S. taxpayer to a non-U.S. person. The taxpayer must
establish that the property is foreign use property, and, in the case of services, the taxpayer must provide that the services
are rendered to a non-U.S. person who is located outside of the United States. C corporations receive a deduction equal to 37.5
percent (21.875 percent after 2025) of foreign-derived intangible income (FDII). Similar to the GILTI deduction, the FDII deduction
is subject to limitation.
The
Act significantly changes how the U.S. taxes corporations. The Act requires complex computations to be performed that were not
previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the Act, estimates
in calculations, and preparation and analysis of information not previously relevant or regularly produced. As of September 30,
2018, the Company has not completed the accounting for all of the tax effects of the Act; however, preliminary calculations for
the two new aforementioned provisions of the Act, GILTI and FDII, provide that the impact of the provisions are immaterial to
the provision for income taxes.
As
the Company completes its analysis of the Act, collects and prepares necessary data, and interprets any additional guidance set
forth by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company may alter its assessment if it
determines that the Act has a material impact on the provision for income taxes.
Leases
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. Under this guidance, an entity is required to
recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing
arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions.
Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a
user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This
guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that
reporting period, and requires a modified retrospective adoption, with early adoption permitted. Upon adoption of this
accounting policy, we do not expect a material impact to our consolidated financial statements. The Company has one operating
lease which expired in October 2018.
Disclosure
Update and Simplification
In
July 2016, the SEC released Disclosure Update and Simplification, No. 33-10532 amendments to certain disclosure requirements that
have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements,
U.S. GAAP, International Financial Reporting Standards (“IFRS”), or changes in the information environment. The Commission
also solicited comments on a number of disclosure requirements that overlap with, but require information incremental to, U.S.
GAAP to determine whether to retain, modify, eliminate, or refer them to the FASB for potential incorporation into U.S. GAAP.
This rule is effective November 5, 2018. Although we are evaluating the impact of this guidance on our financial statements,
we do not expect any material changes.
3.
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, 2018 and 2017, respectively, by
classification:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
Statement
of Operations Classification
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Costs
of revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
100
|
|
Selling
and marketing expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
200
|
|
General
and administrative expense
|
|
|
—
|
|
|
|
(4,100
|
)
|
|
|
—
|
|
|
|
14,100
|
|
Research
and development expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
100
|
|
|
|
$
|
—
|
|
|
$
|
(4,100
|
)
|
|
$
|
—
|
|
|
$
|
14,500
|
|
4.
Supplemental Disclosure of Cash Flow Information
During
the nine-month period ended September 30, 2018, we reversed an accrual for potential liquidated damages of $855,100, crediting
APIC for $699,400 and other income for $155,700 pursuant to an agreement to issue warrants to purchase 564,556 shares of the Company’s
Common stock as disclosed in the Current Report on Form 8-K, which was filed with the SEC on May 30, 2018.
We
disbursed $0 and $200 for the payment of interest expense during the nine-month periods ended September 30, 2018 and 2017, respectively.
We
disbursed $800 and $2,800 for the payment of income taxes during the nine-month periods ended September 30, 2018 and 2017, respectively.
Such disbursement was made for the payment of foreign income taxes related to the operation of our Israeli subsidiary, GraphOn
Research Labs, Ltd.
5.
Earnings (Loss) Per Share
Earnings
or loss per share is calculated by dividing the net income or loss for the period by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings or loss per share (“Diluted EPS”) is calculated by dividing
the net income or loss for the period by the total of the weighted average number of shares of common stock outstanding during
the period plus the effects of any dilutive securities. Diluted EPS considers the impact of potentially dilutive securities except
in periods in which there is a loss because the inclusion of such potential shares of common stock would have an anti-dilutive
effect. During all periods presented in our Condensed Consolidated Statements of Operations, potentially dilutive securities included
shares of common stock potentially issuable upon exercise of stock options, release of unvested restricted stock awards and exercise
of warrants. Diluted EPS excludes the impact of potential issuance of shares of common stock related to our stock options in periods
in which the exercise price of the stock option is greater than the average market price of our common stock during such periods.
For
the three-month periods ended September 30, 2018, 975,698 shares of common stock equivalents were excluded from the computation
of dilutive loss per share since their effect would be anti-dilutive. For nine-month periods ended September 30, 2018, we included
564,556 shares of common stock equivalents in the computation of dilutive earnings per share.
For
the three and nine-month periods ended September 30, 2017, 1,375,509 and 411,142 shares of common stock equivalents, respectively,
were excluded from the computation of dilutive loss per share since their effect would be anti-dilutive.
6.
Segment Information
Revenue
by country for the three-month and nine-month periods ended September 30, 2018 and 2017 was as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
Revenue by Country
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
$
|
289,500
|
|
|
$
|
292,100
|
|
|
$
|
887,000
|
|
|
$
|
922,300
|
|
Brazil
|
|
|
182,000
|
|
|
|
220,200
|
|
|
|
540,000
|
|
|
|
582,600
|
|
Netherlands
|
|
|
32,900
|
|
|
|
126,600
|
|
|
|
103,800
|
|
|
|
198,300
|
|
Other Countries
|
|
|
327,900
|
|
|
|
387,000
|
|
|
|
989,800
|
|
|
|
1,230,000
|
|
Total
|
|
$
|
832,300
|
|
|
$
|
1,025,900
|
|
|
$
|
2,520,600
|
|
|
$
|
2,933,200
|
|
ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking
Information
This
report includes, in addition to historical information, “forward-looking statements”. All statements other than statements
of historical fact we make in this report are forward-looking statements. In particular, the statements regarding industry prospects
and our expectations regarding future results of operations or financial position (including those described in this Management’s
Discussion and Analysis of Financial Condition and Results of Operations) are forward-looking statements. Such statements are
based on management’s current expectations and are subject to a number of uncertainties and risks that could cause actual
results to differ significantly from those described in the forward-looking statements. Factors that may cause such a difference
include the following:
|
●
|
the
success of products depends on a number of factors including market acceptance and our ability to manage the risks associated
with product introduction;
|
|
●
|
local,
regional, national and international economic conditions and events, and the impact they may have on us and our customers;
|
|
●
|
our
revenue could be adversely impacted if any of our significant customers reduces its order levels or fails to order during
a reporting period; customer demand is based on many factors out of our control;
|
|
●
|
as
a result of the new revenue recognition standards, if any significant end user customer or reseller 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; and
|
|
●
|
other
factors, including, but not limited to, those set forth under Item 1A, “Risk Factors” in our Annual Report on
Form 10-K for the year ended December 31, 2017 which was filed with the Securities and Exchange Commission (the “SEC”)
on April 17, 2018, and in other documents we have filed with the SEC.
|
Statements
included in this report are based upon information known to us as of the date that this report is filed with the SEC, and we assume
no obligation to update or alter our forward-looking statements made in this report, whether as a result of new information, future
events or otherwise, except as otherwise required by applicable federal securities laws.
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.
In
2012, we began 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. We also made significant investments in intellectual property (“IP”)
and filed many patents designed to protect the new technologies embedded in hopTo. We have been granted a total of 56 patents
by the United States Patent and Trademark Office.
During
the fourth quarter of 2016, we have 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.
Except
for the sale of 7 patents sold to Salesforce.com during the fourth quarter of 2017, we own all hopTo-related intellectual property
including source-code, related patents, and the relevant trademarks. We believe these assets have value and are continuously evaluating
opportunities to maximize such potential benefits from these assets. For detailed information on the hopTo products and technologies,
please refer to our previously filed Annual Reports on Form 10-K and other SEC filings which are available at www.sec.gov. Such
filings are being noted for historical information only; unless expressly noted, they are not incorporated herein by reference.
There
is no certainty as to timing or success of our efforts to extract value from our hopTo assets, and stockholders should not place
any reliance on the outcome of such efforts unless and until definitive agreements are reached, which may include the sale of
certain of our hopTo software products or additional sales of patents.
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, our toll-free phone number is 1-800-472-7466, and our phone number for local and international calls is 408-688-2674. We
have remote employees located in various states, as well as internationally in the United Kingdom. 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 at
www.hopto.com
(click on “SEC Reporting”) as soon as reasonably practicable
after such reports are electronically filed with or furnished to the SEC.
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.
|
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 2017 10-K Report and Note 2 to our Notes to Unaudited Condensed Consolidated Financial
Statements.
Results
of Operations for the Three and Nine-Month Periods Ended September 30, 2018 and 2017
The
following operating results should be read in conjunction with our critical accounting policies.
Revenue
Revenue
for the three-month periods ended September 30, 2018 and 2017 was:
|
|
|
|
|
2018
Over (Under) 2017
|
|
Revenue
|
|
2018
|
|
|
2017
|
|
|
Dollars
|
|
|
Percent
|
|
Software
Licenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
$
|
218,400
|
|
|
$
|
360,300
|
|
|
$
|
(141,900
|
)
|
|
|
-39.4
|
%
|
UNIX/Linux
|
|
|
10,100
|
|
|
|
71,200
|
|
|
|
(61,100
|
)
|
|
|
-85.8
|
%
|
|
|
|
228,500
|
|
|
|
431,500
|
|
|
|
(203,000
|
)
|
|
|
-47.0
|
%
|
Software
Service Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
|
489,300
|
|
|
|
445,200
|
|
|
|
44,100
|
|
|
|
9.9
|
%
|
UNIX/Linux
|
|
|
90,500
|
|
|
|
131,600
|
|
|
|
(41,100
|
)
|
|
|
-31.2
|
%
|
|
|
|
579,800
|
|
|
|
576,800
|
|
|
|
3,000
|
|
|
|
0.5
|
%
|
Other
|
|
|
24,000
|
|
|
|
17,600
|
|
|
|
6,400
|
|
|
|
36.4
|
%
|
Total
Revenue
|
|
$
|
832,300
|
|
|
$
|
1,025,900
|
|
|
$
|
(193,600
|
)
|
|
|
-18.9
|
%
|
Revenue
for the nine-month periods ended September 30, 2018 and 2017 was:
|
|
|
|
|
2018
Over (Under) 2017
|
|
Revenue
|
|
2018
|
|
|
2017
|
|
|
Dollars
|
|
|
Percent
|
|
Software
Licenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
$
|
605,600
|
|
|
$
|
939,800
|
|
|
$
|
(334,200
|
)
|
|
|
-35.6
|
%
|
UNIX/Linux
|
|
|
78,800
|
|
|
|
223,300
|
|
|
|
(144,500
|
)
|
|
|
-64.7
|
%
|
|
|
|
684,400
|
|
|
|
1,163,100
|
|
|
|
(478,700
|
)
|
|
|
-41.2
|
%
|
Software
Service Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
|
1,458,500
|
|
|
|
1,324,300
|
|
|
|
134,200
|
|
|
|
10.1
|
%
|
UNIX/Linux
|
|
|
300,900
|
|
|
|
403,400
|
|
|
|
(102,500
|
)
|
|
|
-25.4
|
%
|
|
|
|
1,759,400
|
|
|
|
1,727,700
|
|
|
|
31,700
|
|
|
|
1.8
|
%
|
Other
|
|
|
76,800
|
|
|
|
42,400
|
|
|
|
34,400
|
|
|
|
81.1
|
%
|
Total
Revenue
|
|
$
|
2,520,600
|
|
|
$
|
2,933,200
|
|
|
$
|
(412,600
|
)
|
|
|
-14.1
|
%
|
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. During the three and nine-month
periods ended September 30, 2017, we deferred 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. As of January 1, 2018, we have adopted the new revenue recognition policies and guidance ASC 606 and as a result, during
the three and nine-month periods ended September 30, 2018, all software licenses either sold directly by us to an end user, to
a stocking reseller, or to a reseller who does not stock licenses is immediately recognized upon shipment (see Note 2 to the Financial
Statements).
Consequently,
if any significant end user customer or reseller 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 decreased for the three and nine-month periods ended September 30, 2018, as compared
with the same periods of the prior year due to our adoption of ASC 606 effective January 1, 2018 and lower orders for software
licenses. Under ASC 605, Windows software license revenue for the three and nine-month periods ended September 30, 2018
would have been $289,400 and $837,100 respectively, which is $70,900 or 19.7% lower than the prior year three-month period and
$102,700 or 10.9% lower than the prior year nine-month period.
Software
license revenue from our UNIX/Linux products decreased during the three-month and nine-month periods ended September 30, 2018,
as compared with the same period of the prior year, primarily due the fact that during the prior year period we received a larger
than typical order from one of our U.S. government customers and lower orders from a European telecommunications customer.
We
expect aggregate orders for software licenses during 2018 to be lower than 2017 due to larger than expected orders in 2017 that
we do not expect to recur in 2018. We expect that GO-Global software license revenue in 2018 will be lower than 2017 levels and
the decline will be more pronounced than the decline in orders due to the impact of adoption of ASC 606.
Software
Service Fees
The
increase in software service fees revenue attributable to our Windows products, during the three-month and nine-month periods
ended September 30, 2018, as compared to the same period of the prior year, was primarily due to the increased license sales that
we reported during fiscal year 2017.
The
decrease in service fees revenue attributable to our UNIX products for the three and nine-month periods ended September 30, 2018,
as compared with the same period of the prior year, was primarily the result of the lower level of our UNIX product sales throughout
the current and prior year and a resultant decrease in maintenance contract renewals. The majority of this decrease was attributable
to our European telecommunications customers.
We
expect that software service fees for 2018 for our Windows products will be modestly higher than those for 2017 and software service
fees for our UNIX products will be lower than those for 2017.
Other
The
increase in other revenue for the three and nine-month periods ended September 30, 2018, as compared with the same periods of
the prior year was primarily due to an increase in private labeling fees resulting from changes to our OEM partner programs that
were implemented during 2017. Private labeling fees do not comprise a material portion of our revenue streams, but as a result
of the new program we expect these fees to be slightly higher in 2018 than in 2017.
Costs
of Revenue
Costs
of revenue are comprised primarily of software service costs, which represent the costs of customer service, and software product
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.
Cost
of revenue was 4.2% and 1.5% of total revenue for the three months ended September 30, 2018 and 2017, respectively, and 4.0% and
1.8% of total revenue for the nine months ended September 30, 2018 and 2017, respectively.
Cost
of revenue for the three-month periods ended September 30, 2018 and 2017 was:
|
|
|
|
|
2018
Over (Under) 2017
|
|
|
|
2018
|
|
|
2017
|
|
|
Dollars
|
|
|
Percent
|
|
Software
service costs
|
|
$
|
13,100
|
|
|
$
|
13,000
|
|
|
$
|
100
|
|
|
|
0.8
|
%
|
Software
product costs
|
|
|
21,700
|
|
|
|
2,900
|
|
|
|
18,800
|
|
|
|
648.3
|
%
|
Total
Cost of Revenue
|
|
$
|
34,800
|
|
|
$
|
15,900
|
|
|
$
|
18,900
|
|
|
|
118.9
|
%
|
Cost
of revenue for the nine-month periods ended September 30, 2018 and 2017 was:
|
|
|
|
|
2018
Over (Under) 2017
|
|
|
|
2018
|
|
|
2017
|
|
|
Dollars
|
|
|
Percent
|
|
Software
service costs
|
|
$
|
39,000
|
|
|
$
|
44,000
|
|
|
$
|
(5,000
|
)
|
|
|
-11.4
|
%
|
Software
product costs
|
|
|
62,300
|
|
|
|
9,000
|
|
|
|
53,300
|
|
|
|
592.2
|
%
|
Total
Cost of Revenue
|
|
$
|
101,300
|
|
|
$
|
53,000
|
|
|
$
|
48,300
|
|
|
|
91.1
|
%
|
The
increases in software product costs for the three-month and nine-month periods ended September 30, 2018, as compared with the
same periods of the prior year, was almost entirely due to certain taxes that our Brazilian resellers are required to pay for
importation of our software.
Due
to the above reason, we expect that software costs of revenue for 2018 will be higher than 2017.
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, 2018 increased by $11,700, or 13.4%, to $99,100, from $87,400
for the same period of 2017, which represented approximately 11.9% and 8.5% of revenue during these periods, respectively. Selling
and marketing expenses for the nine-month period ended September 30, 2018 increased by $49,800 or 19.2% to $309,200 from $259,400
for the same period in 2017, which represented approximately 12.3% and 8.8% of revenue during those periods, respectively.
The
increases in selling and marketing expenses were due to a combination of investment in an updated website for the GO-Global products
and higher wages for our sales and marketing employees.
We
expect to maintain our sales and marketing efforts in 2018 for anticipated GO-Global releases with select targeted modest investments
in promotional activity; accordingly, we expect 2018 sales and marketing expenses to be slightly higher than 2017 levels.
General
and Administrative Expenses
General
and administrative expenses primarily consist of employee costs, depreciation and amortization, legal, accounting, other professional
services (including those related to our patents), rent, travel and entertainment and insurance. Certain costs associated with
being a publicly held corporation are also included in general and administrative expenses, as well as bad debts expense.
General
and administrative expenses increased by $167,300, or 80.9%, to $374,000, for the three-month period ended September 30, 2018,
from $206,700 for the same period of 2017, which represented approximately 44.9% and 20.1% of revenue during these periods, respectively.
The increase in the three month periods, ended September 30, 2018 was primarily related to the increase in accounting fees and
legal fees due to the filing S-1 and annual meeting, and board fees associated for the issuance of 120,000 shares of stock to
two former board members.
General
and administrative expenses decreased by $261,900, or 20.6%, to $1,007,000 for the nine-month period ended September 30, 2018,
from $1,268,900 for the same period of 2017, which represented approximately 40.0% and 43.3% of revenue during these periods,
respectively. The decrease in general and administrative expense in the nine months was primarily due to a combination of decreased
executive compensation associated with the part-time arrangement for our CEO and CFO positions, and the elimination of accruals
for potential liquidated damages resulting from delays in filing registration statements for shares of common stock and shares
of common stock underlying warrants for certain of the private placements that the Company closed in prior periods.
In
2018, we intend to continue cost controls related to executive compensation and anticipate a reduction in legal fees compared
to third quarter 2018 levels, which were higher due filing the S-1, annual meeting and related expenses. We therefore expect that
our 2018 general and administrative costs will be lower than those for 2017.
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 $31,000, or 8.1%, to $352,800, for the three-month period ended September 30, 2018, from
$383,500 for the same period of 2017, which represented approximately 42.4% and 37.4% of revenue for these periods, respectively.
The decrease in research and development expense for the three months is primarily due to lower employee costs associated with
lower headcount primarily in the Israeli subsidiary.
Research
and development expenses increased by $15,400, or 1.4%, to $1,139,300, for the nine-month period ended September 30, 2018, from
$1,123,900 which represented approximately 45.2% and 38.3% of revenue for these periods, respectively. The slight increase for
the nine months was is primarily due to higher employee costs associated with increased wages for our research and development
employees and certain contract labor associated with the GO-Global products.
In
2018, we expect to maintain a level of research and development resource consistent with the levels of 2017 with targeted investments
in the GO-Global products. We therefore expect 2018 research and development expenses to be slightly higher than 2017 levels.
Other
Income
During
the nine-month period ended September 30, 2018, we reversed an accrual for potential liquidated damages of $855,100, crediting
APIC for $699,400 and other income for $155,700 pursuant to an agreement to issue warrants to purchase 564,556 shares of the Company’s
Common stock as disclosed in the Current Report on Form 8-K, which was filed with the SEC on May 30, 2018.
Net
Income / (Loss)
Based
on the foregoing, we reported net loss of $28,300 and net income of $253,600 for the three-month periods ended September 30, 2018
and 2017 respectively. Additionally, we reported net income of $92,700 and $87,400 for the nine-month periods ended September
30, 2018 and 2017, respectively.
Liquidity
and Capital Resources
Our
reported net income for the nine-month period ended September 30, 2018 of $92,700 included four non-cash items: changes in deferred
rent liability of $31,400, allowance for doubtful accounts of $5,200, $700 loss from disposal of fixed asset, and depreciation
and amortization of $26,700, which was primarily comprised of depreciation of fixed assets.
We
have incurred significant net losses since our inception. At September 30, 2018, the Company had an accumulated deficit of $80,364,600
and a working capital deficit of $623,800.
During
fiscal 2017: (1) we reduced our operating expense from approximately $1.3 million per quarter to an average of $0.8 million per
quarter; (2) we have improved the operating results from our GO-Global business and have reasonable confidence in its ability
to generate cash for at least the next 12 months; (3) sold several patents for cash; and (4) we increased our cash position from
a low of $300 thousand in August of 2016 to $1.0 million at December 31, 2017. During fiscal 2018 we have continued to carefully
manage our operating expense and are seeking areas to reduce operating expense further.
In
addition, for the reasons described above, we expect our results from operations and capital resources will be sufficient to fund
our operations for at least the next 12 months from the date of the filing of this quarterly report on Form 10-Q. However,
we do not expect these funds and resources to be sufficient for material new investments in our GO-Global business.
We
have had, and as a regular part of our business from time to time continue to have, discussions with various parties about the
possibility of strategic transactions.
Cash
As
of September 30, 2018, our cash balance was $756,300, as compared with $1,015,400 as of December 31, 2017, a decrease of $259,100,
or 25.5%. The decrease primarily resulted from the collection of accounts receivable partially offset by the cash used in our
operations.
Accounts
Receivable, net
At
September 30, 2018 and December 31, 2017, we reported accounts receivable, net, of $234,800 and $426,800, respectively. Such amounts
were reported net of the allowance for doubtful accounts, which allowances totaled $2,600 and $7,800 at September 30, 2018 and
December 31, 2017, respectively. The decrease in accounts receivable, net, was mainly due to lower sales and receivable during
the three-month ended September 30, 2018, as compared with the three-month period ended December 31, 2017. 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, 2018, we had current assets of $1,138,500 and current liabilities of $1,762,300, which netted to working capital
deficit of $623,800. Included in current liabilities was the current portion of deferred revenue of $1,036,000.