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.
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, deferred rent, and taxes. While the Company believes
that such estimates are fair, actual results could differ materially from those estimates.
Certain
prior year information has been reclassified to conform to current year presentation.
Liquidity
.
The Company has incurred significant net losses since inception. As of December 31, 2018, we had an accumulated deficit of $80,448,700
and a working capital deficit of $716,200, which includes deferred revenue of $1,300,300. Our ability to continue to generate
net income and positive cash flows from operations is dependent on our ability to continue to generate revenue from our legacy
GO-Global business, which in turn is subject to a variety of risks. The Company believes its current cash balances coupled with
anticipated cash flow from operating activities will be sufficient to meet its working capital requirements for at least one year
from the date of the issuance of the accompanying financial statements. The Company continues to control its cash expenses as
a percentage of expected revenue on an annual basis and thus may use its cash balances in the short-term to invest in revenue
growth. Based on current internal projections, the Company believes it has and/or will generate sufficient cash for its operational
needs, for at least one year from the date of issuance of the accompanying financial statements. Management is focused on growing
the Company’s existing product offering, as well as its customer base, to increase its revenues. The Company cannot give
assurance that it can increase its cash balances or limit its cash consumption and thus maintain sufficient cash balances for
its planned operations or future acquisitions. Future business demands may lead to cash utilization at levels greater than recently
experienced. The Company may need to raise additional capital in the future. However, the Company cannot assure that it will be
able to raise additional capital on acceptable terms, or at all. Subject to the foregoing, management believes that the Company
has sufficient capital and liquidity to fund its operations for at least one year from the date of issuance of the accompanying
financial statements.
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.
There
are no rights of return granted to purchasers of the Company’s software products.
For
the year ended December 31, 2017, software license revenues were recognized when:
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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
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Delivery
has occurred or services have been rendered and there are no uncertainties surrounding product acceptance (i.e., when title
and risk of loss have been transferred to the customer, which 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
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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
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Collectability
is probable. If collectability is not considered probable, revenue is recognized when the fee is collected.
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In
2017, 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 existed, so as permitted the allocation of revenue to the various elements of the arrangement,
all revenue from the arrangement was deferred until such evidence existed or until all elements were delivered. If VSOE of the
fair value did not exist and the only undelivered element was maintenance, then revenue was recognized on a ratably. If VSOE of
the fair value of all undelivered elements exists but evidence did not exist for one or more delivered elements, then revenue
was recognized using the residual method. Under the residual method, the fair value of the undelivered elements was deferred and
the remaining portion of the arrangement fee was recognized as revenue.
Certain
resellers (“stocking resellers”) purchased product licenses that they held in inventory until they were resold to
the ultimate end-user (an “inventory stocking order”). At the time that a stocking reseller placed an inventory stocking
order, no product licenses were shipped by the Company to the stocking reseller rather, the stocking reseller’s inventory
was 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 would ship the licenses(s) in accordance with the draw down order’s instructions.
In
2017, maintenance revenue was recognized from service contracts ratably over the related contract period, which generally ranges
from one to five years.
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.
For
the year ended December 31, 2018, revenue recognition was determined by
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identifying
the contract, or contracts, with a customer;
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identifying
the performance obligations in each contract;
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determine
the transaction price;
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allocating
the transaction price to the performance obligations in each contract; and
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recognizing
revenue when, or as, we satisfy performance obligations by transferring the promised goods or services
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When
control of the promised products and services are transferred to our customers, we recognize revenue in the amount that reflects
the consideration we expect to receive in exchange for these products and services.
Product
Sales
All
of our licenses are delivered to the customer electronically. The Company sends the license key to the customer to download the
related software from Company portal. We recognize revenue upon delivery of these licenses. For stocking resellers who purchase
licenses through inventory stocking orders with the intent to resell to an end-user, revenue is recognized when the resellers’
accounts have been credited, at their discretion, for the number of licenses purchased.
Service
Revenue
Similar
to 2017, 2018 maintenance revenue was also recognized from service contracts ratably over the related contract period.
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
year ended December 31, 2018, this change in revenue policy resulted in lower license revenue of $231,300 when compared to 2017.
This lower license revenue had the same impact on gross profit, income (loss) from operations and net income (loss).
The
Company recorded $1,391,900 to opening accumulated deficit as of January 1, 2018 due to the cumulative impact of adopting ASC
606, with the impact primarily related to reversal of deferred license revenue associated with stocking orders placed in prior
periods which had not been sold through to end users as of December 31, 2017.
The
cumulative effect of the changes made to our condensed consolidated balance sheet as of January 1, 2018 under current assets,
deferred revenue and accumulated deficit for the adoption ASU 2014-09, Revenue - Revenue from Contracts with Customers were as
follows:
Balance
Sheet
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Balance
at
December
31, 2017
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Adjustments
due to ASC 606
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Balance
at
January 1, 2018
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Current
Assets
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Deferred
COGS
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$
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—
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$
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20,000
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$
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20,000
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Liabilities
and Stockholders’ Equity
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Accumulated
Deficit, net of tax
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$
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(81,849,200
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)
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$
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1,391,900
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$
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(80,457,300
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)
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Current
Liabilities
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Deferred
Revenue
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$
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1,845,100
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$
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(609,700
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)
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$
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1,235,400
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Long
Term Liabilities
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Deferred
Revenue
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$
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1,409,700
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$
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(802,200
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)
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$
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607,500
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All
of the Company’s software licenses are denominated in U.S. dollars.
As
a result of the adoption of ASU NO. 2014-09, our 2018 revenues were subject to greater variability.
Cash
and Cash equivalents.
The Company considers cash equivalents to be all highly liquid investments with a maturity of three
months or less when purchased.
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 2018 or 2017. 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.
Deferred
Rent
. Our former corporate headquarters office leases at both 51 E. Campbell Ave in Campbell, California and at 1919 S. Bascom
Ave in Campbell, California were terminated on September 30, 2018 and October 31, 2018, respectively. As of December 31, 2018,
we have $0 deferred rent remaining to be amortized.
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.
Allowance
for doubtful accounts years ended December 31, 2018 and 2017, amounted to $3,600 and $7,800, respectively.
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, 2018. 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 2012. There are no tax examinations currently underway for
any of the Company’s or its subsidiaries’ tax returns for years subsequent to 2011.
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, 2018 or 2017, 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.
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 by 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 December 31,
2018, the Company’s impact from the Act was immaterial.
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.
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:
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Level
1: Defined as observable inputs, such as quoted (unadjusted) prices in active markets for identical assets or liabilities.
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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.
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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.
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As
of December 31, 2018 and 2017, the Company did not have any Warrants Liability reported.
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. Typically, for long-lived assets 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 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 2018 and 2017, no such impairment was recorded.
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, 2018 and 2017.
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 $0 and $13,400 in the years ended December 31, 2018 and 2017, respectively.
As required by FASB ASC 718-10, the Company estimates forfeitures of employee stock-based awards and recognizes compensation cost
only for those awards expected to vest. Forfeiture rates are estimated based on an analysis of historical experience and are adjusted
to actual forfeiture experience as needed.
For
stock options granted, the Company set the exercise price equal to the closing fair market value of the Company’s common
stock as of the grant date. No options were issued during the years ended December 31, 2018 and 2017.
The
following table illustrates the non-cash stock-based compensation expense recorded during the years ended December 31, 2018 and
2017 by income statement classification:
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2018
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2017
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Cost
of revenue
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$
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-
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$
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100
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Selling
and marketing expense
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-
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200
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General
and administrative expense
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-
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13,000
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Research
and development expense
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-
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100
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$
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-
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$
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13,400
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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 is computed by dividing net income or loss attributable to common shareholders
by the weighted-average number of common shares outstanding, including penny warrants, 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
years ended December 31, 2018 and 2017, 353,231 and 1,013,286, respectively, of common shares equivalents were excluded
in the computation of diluted earnings per share since its effect would be antidilutive. For the years ended December 31,
2018 and 2017, no common shares equivalents were included in the computation of dilutive earnings per share.
Comprehensive
Income (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. For the years ended December 31, 2018 and 2017, we did not have comprehensive
income (loss).
Recent
Accounting Pronouncements
.
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. (Refer to Note 2)
Future
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. As of December 31, 2018, the Company does not have any material leases.
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. As of December 31, 2018, we did not have any material change affecting our financial
statements.
3.
Property and Equipment
Property
and equipment as of December 31, 2018 and 2017 consisted of the following:
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2018
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2017
|
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Equipment
|
|
$
|
154,300
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|
|
$
|
184,600
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Furniture
& fixture
|
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|
1,600
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|
3,600
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Leasehold
improvements
|
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-
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167,600
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155,900
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355,800
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|
Less:
accumulated depreciation and amortization
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155,500
|
|
|
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325,000
|
|
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$
|
400
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$
|
30,800
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Aggregate
property and equipment depreciation expense for the years ended December 31, 2018 and 2017 was $29,700 and $51,200 respectively.
During 2018 and 2017, we did not capitalize any property and equipment. During 2018, we retired leasehold improvement with costs
of $167,600, equipment with costs of $30,200 furniture and fixtures with costs of $2,000. During 2017, we retired equipment with
costs of $74,100 and furniture and fixtures with costs of $187,000. The $199,800 and $261,100 total in assets retired in 2018
and 2017, respectively, had total remaining book value of $700 and $61,300.
4.
Accrued Expenses
Accrued
expenses as of December 31, 2018 and 2017 consisted of the following:
|
|
2018
|
|
|
2017
|
|
Consulting
services
|
|
$
|
10,600
|
|
|
$
|
20,500
|
|
Board
of director fees
|
|
|
85,600
|
|
|
|
64,000
|
|
Rent
|
|
|
8,000
|
|
|
|
-
|
|
Royalty
fees
|
|
|
5,400
|
|
|
|
5,400
|
|
Other
|
|
|
12,100
|
|
|
|
16,900
|
|
|
|
$
|
121,700
|
|
|
$
|
107,700
|
|
5.
Deferred Rent
Our
former corporate headquarters office leases at both 51 E. Campbell Ave in Campbell, California and at 1919 S. Bascom Ave in Campbell,
California were terminated on September 30, 2018 and October 31, 2018, respectively.
As
of December 31, 2018 and 2017 deferred rent was:
Component
|
|
2018
|
|
|
2017
|
|
Lease
liability
|
|
$
|
—
|
|
|
$
|
13,800
|
|
Deferred
rent expense
|
|
|
—
|
|
|
|
27,200
|
|
Deferred
rent benefit
|
|
|
—
|
|
|
|
33,100
|
|
|
|
$
|
—
|
|
|
$
|
74,100
|
|
6.
Liability Attributable to Warrants
During
the year ended December 31, 2018, pursuant to a settlement agreement to issue warrants to purchase 564,556 shares of the Company’s
Common stock, we derecognized the accrued liability for potential liquidated damages of $855,100 by crediting Additional Paid-In
Capital for $699,400 and other income for $155,700. The warrants we issued were at $0.01 per share and will expire in 5 years
from the date of issuance. Following the issuance, the Company purchased back 52,755 shares from certain warrant holders.
The
following tables reconcile the number of warrants outstanding for the periods indicated:
|
|
For
the Year Ended December 31, 2018
|
|
|
|
Beginning
Outstanding
|
|
|
Issued
|
|
|
Exercised/Sold
|
|
|
Cancelled
/
Forfeited
|
|
|
Ending
Outstanding
|
|
2014
Transaction
|
|
|
376,667
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(265,556
|
)
|
|
|
111,111
|
|
Exercise
Agreement
|
|
|
300,000
|
|
|
|
564,556
|
|
|
|
(52,755
|
)
|
|
|
(300,000
|
)
|
|
|
511,801
|
|
Consultant
Warrant
|
|
|
11,285
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,285
|
)
|
|
|
—
|
|
Offer
to Exercise
|
|
|
10,167
|
|
|
|
|
|
|
|
|
|
|
|
(10,167
|
)
|
|
|
—
|
|
|
|
|
698,119
|
|
|
|
564,556
|
|
|
|
(52,755
|
)
|
|
|
(587,008
|
)
|
|
|
622,912
|
|
|
|
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
|
|
7.
Stockholders’ Equity
Common
Stock
The
Company did not issue any stock or pay any dividends during the years ended December 31, 2018 and 2017.
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, 2018 and 2017, no options or restricted common stock were granted under the 12 Plan. 411,593 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, 2018 and December 31, 2017.
Inactive
Plans
The
following table summarizes options outstanding as of December 31, 2018 and 2017 that were granted from stock based compensation
plans that are inactive. As of December 31, 2018, no options can be granted under these plans as the plans have expired.
|
|
|
|
|
Options
Outstanding
|
|
|
|
Year
|
|
|
Beginning of
Year
|
|
|
Granted
|
|
|
Exercised
|
|
|
Cancelled
|
|
|
End
of Year
|
|
2008
Stock Option Plan
|
|
2018
|
|
|
|
193,945
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(79,468
|
)
|
|
|
114,477
|
|
2005
Equity Incentive Plan
|
|
2018
|
|
|
|
667
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(667
|
)
|
|
|
—
|
|
|
|
|
|
|
|
194,612
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(80,135
|
)
|
|
|
114,477
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
2.59
|
|
|
|
|
|
|
|
|
|
|
|
2.69
|
|
|
|
2.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
2.59
|
|
|
|
|
|
|
|
|
|
|
|
3.36
|
|
|
|
2.59
|
|
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, 2018 and 2017, and changes during the years then ended, is presented in the following table:
|
|
2018
|
|
|
2017
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Beginning
|
|
|
315,167
|
|
|
$
|
2.46
|
|
|
|
684,722
|
|
|
$
|
2.64
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
or expired
|
|
|
(197,492
|
)
|
|
$
|
2.39
|
|
|
|
(369,555
|
)
|
|
$
|
2.79
|
|
Ending
|
|
|
117,675
|
|
|
$
|
2.57
|
|
|
|
315,167
|
|
|
$
|
2.46
|
|
Exercisable
at year-end
|
|
|
117,675
|
|
|
$
|
2.57
|
|
|
|
315,167
|
|
|
$
|
2.46
|
|
Vested
or expected to vest at year-end
|
|
|
117,675
|
|
|
$
|
2.57
|
|
|
|
315,167
|
|
|
$
|
2.46
|
|
As
of December 31, 2018 and 2017, of the options exercisable, 117,675 and 315,167 were vested, respectively.
The
following table summarizes information about stock options outstanding as of December 31, 2018:
|
|
|
Options
Outstanding
|
|
Range
of Exercise Price
|
|
|
Number
Outstanding/Exercisable
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Weighted
Average Outstanding/Exercise Price
|
|
$
|
0.75-$1.80
|
|
|
|
39,132
|
|
|
|
3.20
|
|
|
$
|
0.80
|
|
$
|
1.83-$2.40
|
|
|
|
1,667
|
|
|
|
7.29
|
|
|
$
|
2.06
|
|
$
|
2.55-$3.00
|
|
|
|
667
|
|
|
|
5.07
|
|
|
$
|
2.55
|
|
$
|
3.01-$3.30
|
|
|
|
29,268
|
|
|
|
4.82
|
|
|
$
|
3.03
|
|
$
|
3.31-$3.45
|
|
|
|
32,082
|
|
|
|
4.79
|
|
|
$
|
3.45
|
|
$
|
3.46-$4.20
|
|
|
|
13,333
|
|
|
|
4.69
|
|
|
$
|
4.20
|
|
$
|
4.21-$6.88
|
|
|
|
1,526
|
|
|
|
2.57
|
|
|
$
|
6.71
|
|
$
|
0.75-$6.88
|
|
|
|
117,675
|
|
|
|
4.26
|
|
|
$
|
2.57
|
|
As
of December 31, 2018, there were outstanding options to purchase 117,675 shares of common stock with a weighted average exercise
price of $2.57 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, 2018 are fully vested and 0 were estimated to be forfeited or to expire in future
periods.
As
of December 31, 2018, there was no unrecognized compensation cost, net of estimated forfeitures, related to unvested options.
8.
Income Taxes
The
components of the provision (benefit) for income taxes for the years ended December 31, 2018 and 2017 consisted of the following:
|
|
2018
|
|
|
2017
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
900
|
|
|
|
3,300
|
|
|
|
$
|
900
|
|
|
$
|
3,300
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
900
|
|
|
$
|
3,300
|
|
The
following table summarizes the differences between income tax expense and the amount computed applying the federal income tax
rate of 21% and 34% for the years ended December 31, 2018 and 2017, respectively:
|
|
2018
|
|
|
2017
|
|
Federal
income tax (benefit) at statutory rate
|
|
$
|
(6,600
|
)
|
|
$
|
205,300
|
|
State
income tax (benefit) at statutory rate
|
|
|
(900
|
)
|
|
|
800
|
|
Foreign
tax rate differential
|
|
|
900
|
|
|
|
(600
|
)
|
IRC
965 Subpart F Income
|
|
|
—
|
|
|
|
21,000
|
|
SBC
– NQ cancellations
|
|
|
(83,900
|
)
|
|
|
235,900
|
|
Change
in valuation allowance
|
|
|
(92,800
|
)
|
|
|
(439,700
|
)
|
Meals
and entertainment (50%)
|
|
|
700
|
|
|
|
700
|
|
Prior
Year True-Up Adjustments
|
|
|
165,300
|
|
|
|
—
|
|
Deferred
Compensation
|
|
|
17,800
|
|
|
|
—
|
|
Other
items
|
|
|
400
|
|
|
|
(20,100
|
)
|
Provision
(benefit) for income tax
|
|
$
|
9
00
|
|
|
$
|
3,300
|
|
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, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Net
operating loss carryforwards
|
|
$
|
13,870,200
|
|
|
$
|
13,566,000
|
|
Tax
credit carryforwards
|
|
|
977,500
|
|
|
|
1,047,000
|
|
Compensation
expense – non-qualified stock options
|
|
|
166,800
|
|
|
|
238,000
|
|
Deferred
revenue and maintenance service contracts
|
|
|
425,000
|
|
|
|
691,000
|
|
Depreciation,
amortization, and capitalized software
|
|
|
11,300
|
|
|
|
—
|
|
Reserves
and other
|
|
|
52,400
|
|
|
|
108,000
|
|
Total
deferred tax assets
|
|
|
15,503,100
|
|
|
|
15,650,000
|
|
Deferred
tax liability – depreciation, amortization and capitalized software
|
|
|
—
|
|
|
|
(7,000
|
)
|
Net
deferred tax asset
|
|
|
15,503,100
|
|
|
|
15,643,000
|
|
Valuation
allowance
|
|
|
(15,503,100
|
)
|
|
|
(15,643,000
|
)
|
Net
deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
For
financial reporting purposes, with the exception of the years ended December 31, 2018 and 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, 2018 and 2017. The net change in the valuation allowance was decreased by $139,900
and $9,079,000 for the years ended December 31, 2018 and 2017, respectively.
At
December 31, 2018, the Company had approximately $63.8 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 2019 and the California state loss carry forwards began to expire in 2028. During
the year ended December 31, 2018, the Company did not utilize any federal and California net operating losses. Under the Tax Reform
Act of 1986, the amount 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, 2018, the Company had approximately $0.9 million of federal research and development tax credits that will begin
to expire in 2018.
9.
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, 2018, the Company had approximately $642,500
of cash with financial institutions in excess of FDIC insurance limits. As of December 31, 2017, the Company had approximately
$765,400 of cash with financial institutions in excess of FDIC insurance limits.
For
the years ended December 31, 2018 and 2017, we
currently consider
the following to be our most significant customers and partners. For the purposes of this table, “Sales” refers to
the dollar value of orders received from these customers and partners in the period indicated. These Sales values do not necessarily
equal recognized revenue for these periods due to our revenue recognition policies which require deferral of revenue associated
with prepaid software service fees. In 2017, deferrals of fees associated with stocking orders of software licenses were also
required
|
|
2018
|
|
|
2017
|
|
Customer
|
|
%
Sales
|
|
|
%
Accounts
Receivable
|
|
|
%
Sales
|
|
|
%
Accounts
Receivable
|
|
Centric
System
|
|
|
9.5
|
%
|
|
|
3.2
|
%
|
|
|
6.9
|
%
|
|
|
12.6
|
%
|
Elosoft
|
|
|
10.4
|
%
|
|
|
32.1
|
%
|
|
|
16.9
|
%
|
|
|
56.2
|
%
|
GE
|
|
|
3.9
|
%
|
|
|
15.4
|
%
|
|
|
0.6
|
%
|
|
|
0.0
|
%
|
Thermo
LabSystems
|
|
|
4.1
|
%
|
|
|
10.8
|
%
|
|
|
2.9
|
%
|
|
|
4.9
|
%
|
Total
|
|
|
27.9
|
%
|
|
|
61.5
|
%
|
|
|
2
7.3
|
%
|
|
|
73.7
|
%
|
The
Company performs credit evaluations of customers’ financial condition whenever necessary, and does not require cash collateral
or other security to support customer receivables.
10.
Commitments and Contingencies
Operating
Leases
.
As
of December 31, 2018, the leases for both of our former offices at 51 E. Campbell, CA and 1919 Bascom Ave. Campbell, CA expired
on September 30, 2018, and October 31, 2018, respectively. Our current lease for the corporate headquarters in Concord, NH is
a month-to-month rent basis, requiring a six-month notice from the lessor to terminate. Rent on the corporate headquarters continues
at $4,000 per month.
Rent
expense aggregated approximately $28,600 and $67,600 for the years ended December 31, 2018 and 2017, 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, 2018.
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, 2018.
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, 2018.
11.
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 2018 and 2017, the Company
contributed a total of approximately $17,400 and $0, to the Plan, respectively.
12.
Supplemental Disclosure of Cash Flow Information
During
the twelve-month period ended December 31, 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 year ended December 31, 2018 and 2017, respectively.
We
disbursed $800 and $3,500 for the payment of income taxes during the year ended December 31, 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.
13.
Segment Information
The
Company’s operates under one segment. A single management team that reports to the CEO comprehensively manages the business
as the chief operating decision maker. Accordingly, the Company does not have separately reportable segments.
Revenue
by country for the years ended December 31, 2018 and 2017 was as follows:
|
|
Years
Ended December 31,
|
|
Revenue
by Country
|
|
2018
|
|
|
2017
|
|
United
States
|
|
$
|
1,188,500
|
|
|
$
|
1,239,300
|
|
Brazil
|
|
|
652,700
|
|
|
|
758,000
|
|
Japan
|
|
|
236,600
|
|
|
|
286,300
|
|
Germany
|
|
|
177,100
|
|
|
|
234,700
|
|
The
Netherlands
|
|
|
144,800
|
|
|
|
230,700
|
|
Other
Countries
|
|
|
726,1
00
|
|
|
|
1,140,500
|
|
Total
|
|
$
|
3,153,400
|
|
|
$
|
3,889,500
|
|
14.
Related Party Transactions
On
December 28, 2018, the Company entered into an agreement with an unaffiliated stockholder of the Company to acquire 450,000 shares
of the Company’s common stock and warrants to purchase an aggregate of 48,896 shares of the Company’s common stock
for an aggregate cash consideration of $149,700. The Company agreed to assign its right to purchase 450,000 shares of common stock
under the purchase agreement to a member of the Company’s board of directors and an entity controlled by a member of the
Company’s board of directors and an executive officer at the company.
A
member of our board of directors controls an entity that is a significant shareholder in the Company and also serves as the Chief
Executive Officer and Interim Chief Financial Officer of the Company. The related party has served in these executive roles providing
management services to the Company since September 4, 2018, however does not receive salary or other forms of cash compensation.
Management has estimated $75,000 as the market rate for the services rendered for the period from September 4, 2018 through December
31, 2018. The services have been recorded in the financial statements as a capital contribution.