hopTo Inc. - FORM 10-Q - August 7, 2015

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EX-31.1 - EXHIBIT 31.1 - hopTo Inc.	ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - hopTo Inc.	ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - hopTo Inc.	ex32-1.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2015

Commission File Number: 0-21683

hopTo Inc.

(Exact name of registrant as specified in its charter)

Delaware	13-3899021
(State of incorporation)	(IRS Employer
	Identification No.)

1919 S. Bascom Avenue, Suite 600

Campbell, CA 95008
(Address of principal executive offices)

Registrant’s telephone number:

(800) 472-7466

(408) 688-2674

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	[ ]		Accelerated filer	[ ]
Non-accelerated filer	[ ]		Smaller reporting company	[X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No ☒

As of August 4, 2015, there were issued and outstanding 148,959,381 shares of the registrant’s common stock, par value $0.0001.

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hopTo Inc.

FORM 10-Q

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PART I.	FINANCIAL INFORMATION	PAGE
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014	2
	Unaudited Condensed Consolidated Statements of Operations for the Three and Six-Month Periods Ended June 30, 2015 and 2014	3
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Six-Month Periods Ended June 30, 2015 and 2014	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2015 and 2014	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30
	Signatures

Forward-Looking Information

This report includes, in addition to historical information, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. This act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. 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 future results of operations or financial position 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 our new 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; 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, 2014, which was filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2015, 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.

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

hopTo Inc.

Condensed Consolidated Balance Sheets

	(Unaudited)
	June 30, 2015			December 31, 2014
Assets
Current Assets:
Cash	$	1,179,600		$	1,557,100
Accounts receivable, net		481,500			2,211,300
Prepaid expenses		103,400			98,100
Total Current Assets		1,764,500			3,866,500

Capitalized software development costs, net		300,700			408,700
Property and equipment, net		305,300			362,500
Other assets		139,700			139,700
Total Assets	$	2,510,200		$	4,777,400

Liabilities and Stockholders’ Equity (Deficit)
Current Liabilities:
Accounts payable and accrued expenses	$	1,124,600		$	986,500
Deferred revenue		2,446,000			2,859,300
Deferred rent		51,300			44,500
Capital lease		8,000			7,700
Total Current Liabilities		3,629,900			3,898,000

Warrants liability		96,400			647,300
Deferred revenue		1,574,800			1,652,600
Deferred rent		130,900			158,200
Capital lease		11,100			15,200
Total Liabilities		5,443,100			6,371,300

Commitments and contingencies

Stockholders' Equity (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, 113,587,629 and 112,542,217 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively		11,400			11,200
Additional paid-in capital		75,414,400			74,600,700
Accumulated deficit		(78,358,700	)		(76,205,800	)
Total Stockholders' Deficit		(2,932,900	)		(1,593,900	)
Total Liabilities and Stockholders' Deficit	$	2,510,200		$	4,777,400

See accompanying notes to unaudited condensed consolidated financial statements

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hopTo Inc.

Condensed Consolidated Statements of Operations

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenue	$	1,358,800		$	1,406,700		$	2,829,900		$	2,746,900
Costs of revenue		105,800			113,900			210,300			248,700
Gross profit		1,253,000			1,292,800			2,619,600			2,498,200
Operating expenses:
Selling and marketing		453,600			583,100			953,700			1,233,600
General and administrative		771,300			838,200			1,679,100			1,849,800
Research and development		1,101,200			1,329,800			2,266,100			2,677,800
Total operating expenses		2,326,100			2,751,100			4,898,900			5,761,200
Loss from operations		(1,073,100	)		(1,458,300	)		(2,279,300	)		(3,263,000	)
Other income - change in fair value of warrants liability		184,400			477,500			129,300			1,611,200
Other income (expense), net		300			1,400			(300	)		1,200
Loss before provision for income tax		(888,400	)		(979,400	)		(2,150,300	)		(1,650,600	)
Provision for income tax		1,500			800			2,600			2,100
Net Loss	$	(889,900	)	$	(980,200	)	$	(2,152,900	)	$	(1,652,700	)
Basic and diluted loss per share	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.01	)
Average weighted common shares outstanding – basic and diluted		113,346,690			111,691,347			113,076,622			110,991,245

See accompanying notes to unaudited condensed consolidated financial statements

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hopTo Inc.

Condensed Consolidated Statements of Stockholders’ Equity

	Six Months Ended June 30,
	2015			2014
	(Unaudited)			(Unaudited)
Preferred stock – shares outstanding
Beginning balance		—			—
Ending balance		—			—
		—			—
Common stock – shares outstanding
Beginning balance		112,542,217			98,510,622
Private placement of stock and warrants		—			11,299,999
Employee stock option issuances		90,000			256,818
Exercise of warrants		—			1,000,000
Vesting of restricted stock awards		955,412			818,394
Ending balance		113,587,629			111,885,833

Common stock - amount
Beginning balance	$	11,200		$	9,800
Par value of shares issued in private placement		—			1,200
Exercise of warrants		—			100
Vesting of restricted stock awards		200			100
Ending balance	$	11,400		$	11,200

Additional paid-in capital
Beginning balance	$	74,600,700		$	71,697,300
Stock-based compensation expense		412,400			330,200
Company payment of employee taxes for stock-based compensation		(10,800	)		—
Proceeds from exercise of employee stock options		4,900			47,800
Proceeds from exercise of warrants, net of par value of shares issued		—			259,800
Proceeds from private placement of common stock and warrants, net of par value of shares issued		—			3,388,800
Cost of private placement of common stock and warrants		—			(20,000	)
Allocation of proceeds from common stock and warrants to warrants liability		—			(1,356,000	)
Accretion of compensation expense, net of forfeitures – consultant warrants		—			(3,600	)
Reclassification of warrants liability to equity (2014 PIPE)		407,300			—
Other Rounding		(100	)		—
Ending balance	$	75,414,400		$	74,344,300

Accumulated deficit
Beginning balance	$	(76,205,800	)	$	(72,611,900	)
Net loss		(2,152,900	)		(1,652,700	)
Ending balance	$	(78,358,700	)	$	(74,264,600	)
Total Stockholders’ Equity (Deficit)	$	(2,932,900	)	$	90,900

See accompanying notes to unaudited condensed consolidated financial statements

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hopTo Inc.

Condensed Consolidated Statements of Cash Flows

	Six Months Ended June 30,
	2015			2014
	(Unaudited)			(Unaudited)
Cash Flows Provided By (Used In) Operating Activities:
Net Loss	$	(2,152,900	)	$	(1,652,700	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		170,400			209,600
Stock-based compensation expense		412,400			330,200
Company payment of employee taxes for stock-based compensation		(10,800	)		—
Change in fair value of derivative instruments – warrants		(129,300	)		(1,611,200	)
Accretion of warrants liability for consulting services		(14,300	)		(66,000	)
Accretion of equity warrants for consulting services, net of forfeitures		—			(3,600	)
Changes in deferred rent		(20,500	)		(2,300	)
Changes to allowance of doubtful accounts		(16,700	)		(21,600	)
Revenue deferred to future periods		1,542,200			1,709,100
Recognition of deferred revenue		(2,033,300	)		(2,250,300	)
Changes in severance liability		—			(62,900	)
Interest accrued for capital lease		700			—
Changes in operating assets and liabilities:
Accounts receivable		1,746,500			266,900
Prepaid expenses		(5,300	)		(68,000	)
Accounts payable and accrued expenses		138,100			(57,300	)
Net Cash Used in Operating Activities		(372,800	)		(3,280,100	)

Cash Flows Used In Investing Activities:
Capital expenditures		(5,100	)		(40,800	)
Net Cash Used In Investing Activities		(5,100	)		(40,800	)

Cash Flows Provided By Financing Activities:
Payment for capital lease		(4,500	)		—
Proceeds from private placement of stock and warrants, net of issuance costs		—			3,370,000
Proceeds from exercise of warrants		—			260,000
Proceeds from exercise of employee stock options		4,900			47,800
Net Cash Provided By Financing Activities		400			3,677,800

Net Increase in Cash		(377,500	)		356,900
Cash - Beginning of Period		1,557,100			2,430,700
Cash - End of Period	$	1,179,600		$	2,787,600

See accompanying notes to unaudited condensed consolidated financial statements

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HOPTO INC.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of hopTo Inc. and its subsidiaries (collectively, “we”, “us” or “our”); significant intercompany accounts and transactions are eliminated upon consolidation. The unaudited condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) applicable to interim financial information and the rules and regulations promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, such unaudited condensed consolidated financial statements do not include all information and footnote disclosures required in annual financial statements.

The unaudited condensed consolidated financial statements included herein reflect all adjustments, which include only normal, recurring adjustments, that are, in our opinion, necessary to state fairly the results for the periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on March 31, 2015 (“2014 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, 2015 or any future period.

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; valuation of warrants; post-employment benefits, and accruals for liabilities. While we believe that such estimates are fair, actual results could differ materially from those estimates.

Revenue Recognition

We market and license our products indirectly through channel distributors, independent software vendors (“ISVs”), value-added resellers (“VARs”) (collectively, “resellers”) and directly to corporate enterprises, governmental and educational institutions and others. Our product licenses are perpetual. We also separately sell intellectual property licenses, maintenance contracts, which are comprised of license updates and customer service access, as well as other products and services.

Software license revenues are recognized when:

●	Persuasive evidence of an arrangement exists, (i.e., when we sign a non-cancellable license agreement wherein the customer acknowledges an unconditional obligation to pay, or upon receipt of the customer’s purchase order), and
●	Delivery has occurred or services have been rendered and there are no uncertainties surrounding product acceptance (i.e., when title and risk of loss have been transferred to the customer, which occurs when the media containing the licensed program(s) is provided to a common carrier or, in the case of electronic delivery, when the customer is given access to the licensed program(s)), and
●	The price to the customer is fixed or determinable, as typically evidenced in a signed non-cancellable contract, or a customer’s purchase order, and
●	Collectability is probable. If collectability is not considered probable, revenue is recognized when the fee is collected.

Revenue recognized on software arrangements involving multiple deliverables is allocated to each deliverable based on vendor-specific objective evidence (“VSOE”) or third party evidence of the fair values of each deliverable; such deliverables include licenses for software products, maintenance, private labeling fees, and customer training. We limit our assessment of VSOE for each deliverable to either the price charged when the same deliverable is sold separately or the price established by management having the relevant authority to do so, for a deliverable not yet sold separately.

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If sufficient VSOE of the fair value does not exist so as to permit the allocation of revenue to the various elements of the arrangement, all revenue from the arrangement is deferred until such evidence exists or until all elements are delivered. If VSOE of the fair value does not exist, and the only undelivered element is maintenance, then we recognize revenue on a ratable basis. If VSOE of the fair value of all undelivered elements exists but does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.

Certain resellers (“stocking resellers”) purchase product licenses that they hold in inventory until they are resold to the ultimate end user (an “inventory stocking order”). At the time that a stocking reseller places an inventory stocking order, no product licenses are shipped by us to the stocking reseller; rather, the stocking reseller’s inventory is credited with the number of licenses purchased and the stocking reseller can resell (issue) any number of licenses from their inventory at any time. Upon receipt of an order to issue a license(s) from a stocking reseller’s inventory (a “draw down order”), we will ship the license(s) in accordance with the draw down order’s instructions. We defer recognition of revenue from inventory stocking orders until the underlying licenses are sold and shipped to the end user, as evidenced by the receipt and fulfillment of the stocking reseller’s draw down order, assuming all other revenue recognition criteria have been met.

There are no rights of return granted to resellers or other purchasers of our software products.

Revenue from maintenance contracts is recognized ratably over the related contract period, which generally ranges from one to five years.

All of our software licenses are denominated in U.S. dollars.

Deferred Rent

The lease for our office in Campbell, California, as amended (See Note 6), contains free rent and predetermined fixed escalations in our minimum rent payments. We recognize rent expense related to this lease on a straight-line basis over the term of the lease. We record any difference between the straight-line rent amounts and amounts payable under the lease as part of deferred rent in current or long-term liabilities, as appropriate.

Incentives that we received upon entering into the lease agreement are recognized on a straight-line basis as a reduction to rent over the term of the lease. We record the unamortized portion of these incentives as a part of deferred rent in current or long-term liabilities, as appropriate.

Postemployment Benefits (Severance Liability)

Nonretirement postemployment benefits, including salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits and continuation of benefits such as health care benefits, are recognized as a liability and a loss when it is probable that the employee(s) will be entitled to such benefits and the amount can be reasonably estimated. The cost of termination benefits recognized as a liability and an expense includes the amount of any lump-sum payments and the present value of any expected future payments. There was no severance liability reported at June 30, 2015 or December 31, 2014.

Software Development Costs

We capitalize software development costs incurred from the time technological feasibility of the software is established until the software is available for general release, in accordance with GAAP. Such capitalized costs are subsequently amortized as costs of revenue over the shorter of three years or the remaining estimated useful life of the product.

Research and development costs and other computer software maintenance costs related to the software development are expensed as incurred.

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 six-month periods ended June 30, 2015 or 2014.

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Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts that reflects our best estimate of potentially uncollectible trade receivables. The allowance is based on assessments of the collectability of specific customer accounts and the general aging and size of the accounts receivable. We regularly review the adequacy of our allowance for doubtful accounts by considering such factors as historical experience, credit worthiness, and current economic conditions that may affect a customer’s ability to pay. We specifically reserve for those accounts deemed uncollectible. We also establish, and adjust, a general allowance for doubtful accounts based on our review of the aging and size of our accounts receivable.

The following table sets forth the details of the Allowance for Doubtful Accounts for the three-month periods ended June 30, 2015 and 2014:

	Beginning Balance		Charge Offs		Recoveries		Provision			Ending Balance
2015	$	22,900	$	—	$	—	$	(7,000	)	$	15,900
2014		23,100		—		—		(2,700	)		20,400

The following table sets forth the details of the Allowance for Doubtful Accounts for the six-month periods ended June 30, 2015 and 2014:

	Beginning Balance		Charge Offs		Recoveries		Provision			Ending Balance
2015	$	32,600	$	—	$	—	$	(16,700	)	$	15,900
2014		42,000		—		—		(21,600	)		20,400

Concentration of Credit Risk

For the three and six-month periods ended June 30, 2015 and 2014, 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 June 30, 2015 and 2014.

	Three Months Ended June 30, 2015			As of June 30, 2015			Three Months Ended June 30, 2014			As of June 30, 2014
Customer	Sales			Accounts Receivable			Sales			Accounts Receivable
Alcatel-Lucent		7.6	%		22.3	%		0.4	%		15.0	%
Centric		5.3	%		4.0	%		8.6	%		8.2	%
Elosoft		15.6	%		1.5	%		7.5	%		10.2	%
Ericsson		0.0	%		0.0	%		8.5	%		16.4	%
G E		1.4	%		4.2	%		12.1	%		23.1	%
Raytheon		19.4	%		28.8	%		1.1	%		0.0	%
Thermo LabSystems		2.2	%		3.6	%		5.0	%		8.6	%
Total		51.5	%		64.4	%		43.2	%		81.5	%

	Six Months Ended June 30, 2015			As of June 30, 2015			Six Months Ended June 30, 2014			As of June 30, 2014
Customer	Sales			Accounts Receivable			Sales			Accounts Receivable
Alcatel-Lucent		4.1	%		22.3	%		4.0	%		15.0	%
Centric		3.6	%		4.0	%		7.1	%		8.2	%
Elosoft		13.1	%		1.5	%		6.9	%		10.2	%
Ericsson		0.3	%		0.0	%		6.8	%		16.4	%
G E		1.6	%		4.2	%		12.5	%		23.1	%
IDS		3.3	%		0.0	%		5.6	%		0.0	%
Raytheon		16.6	%		28.8	%		0.0	%		0.0	%
Total		42.6	%		60.8	%		42.9	%		72.9	%

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Derivative Financial Instruments

We currently do not have a material exposure to either commodity prices or interest rates; accordingly, we do not currently use derivative instruments to manage such risks. We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. All derivative financial instruments are recognized in the balance sheet at fair value. Changes in fair value are recognized in earnings if they are not eligible for hedge accounting or in other comprehensive income if they qualify for cash flow hedge accounting.

Fair Value of Financial Instruments

The fair value of our accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the relative short maturities of these items.

The fair value of warrants at issuance and for those recorded as a liability at each reporting date are determined in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement,” which establishes a fair value hierarchy that prioritizes the assumptions (inputs) to valuation techniques used to price assets or liabilities that are measured at fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The guidance for fair value measurements requires that assets, liabilities and certain equity instruments measured at fair value be classified and disclosed in one of the following categories:

●

Level 1: Defined as observable inputs, such as quoted (unadjusted) prices in active markets for identical assets or liabilities.

●

Level 2: Defined as observable inputs other than quoted prices included in Level 1. This includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

●

Level 3: Defined as unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.

As of June 30, 2015, all of our $96,400 Warrants Liability reported at fair value was categorized as Level 3 inputs (See Note 4).

Recent Accounting Pronouncements

In April 2015, FASB issued Accounting Standards Update (“ASU”) No. 2015-05 “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU 2013-05”). The objective of ASU 2015-05 is to provide guidance to reporting entities in the accounting for fees paid in a cloud computing arrangement. Specifically, if a cloud computing arrangement includes a software license, then the entity should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract. The guidance will not change GAAP for an entity’s accounting for service contracts. The amendments in this ASU are effective for annual periods beginning after December 15, 2015, including interim periods within those annual periods. Early adoption is permitted. We are currently evaluating this ASU in order to determine whether or not its adoption will have a material impact on our results of operations, cash flows or financial position.

In August 2014, FASB issued ASU No. 2014-15 “Preparation of Financial Statements - Going Concern (Subtopic 205-40)”. Under U.S. GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity's liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity's liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements-Liquidation Basis of Accounting. Even when an entity's liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in the update should be followed to determine whether to disclose information about the relevant conditions and events. The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. We will evaluate the going concern considerations in this ASU, however, at the current period, we do not believe that the Company has met conditions which would subject its consolidated financial statements to additional disclosure.

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In June 2014, FASB issued ASU No. 2014-12 “Compensation – Stock Compensation (Topic 718)” (“ASU 2014-12”). The objective of ASU 2014-12 is to resolve the diverse accounting treatment being applied in practice by reporting entities in the accounting for share-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards, particularly those awards whose terms may provide that the performance target could be achieved after the employee completes the requisite service period. That is, the employee would be eligible to vest in the award regardless of whether the employee is rendering service on the date the performance target is achieved. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and earlier adoption is permitted. The share-based payment awards we currently have outstanding which have performance targets do not contain clauses wherein the performance target could be achieved after the employee completes the requisite service period; accordingly, adoption of ASU 2014-12 did not have a material impact on our results of operations, cash flows or financial position.

In May 2014, FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 is the end result of a joint project initiated by FASB and the International Accounting Standards Board (“IASB”). IASB is the body that sets International Financial Reporting Standards (“IFRS”). The goal of FASB’s and IASB’s joint project was to clarify the principles for recognizing revenue and to develop a common revenue standard for accounting principles generally accepted in the United States (“GAAP”) and under IFRS. Specifically, ASU 2014-09:

Removes inconsistencies and weaknesses in revenue requirements.

Provides a more robust framework for addressing revenue issues.

Improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.

Provides more useful information to users of financial statements through improved disclosure requirements.

Simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer.

The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within such annual period. Early adoption is not permitted. We are currently evaluating this ASU in order to determine whether or not its adoption will have a material impact on our results of operations, cash flows or financial position.

In April 2014, FASB issued ASU No. 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360)” (“ASU 2014-08”). The objective of ASU 2014-08 is to address issues in Subtopic 205-20, “Presentation of Financial Statements – Discontinued Operations”, that gave rise to complexity and difficulties in practice. Generally, ASU 2014-08 is effective for discontinued operations that occur within annual periods beginning on or after December 31, 2014, and interim periods within those years. Early adoption is permitted, but only for discontinued operations that have not been reported in financial statements previously issued or available for issuance. We currently have no discontinued operations to report; consequently, adoption of ASU 2014-08 did not have a material impact on our results of operations, cash flows or financial position.

3. Property and Equipment

Property and equipment was:

	June 30, 2015		December 31, 2014
Equipment	$	311,500	$	306,400
Furniture		233,900		233,900
Leasehold improvements		167,600		167,600
		713,000		707,900
Less: accumulated depreciation and amortization		407,700		345,400
	$	305,300		362,500

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Aggregate property and equipment depreciation and amortization expense was $29,900 during the three-month period ended June 30, 2015, and $62,400 during the six-month period ended June 30, 2015.

4. Liability Attributable to Warrants

On January 7, 2014, we entered into a securities purchase agreement (the “SPA”) with a limited number of institutional investors, pursuant to which we issued and sold for cash an aggregate 11,299,999 shares of our common stock at a purchase price of $0.30 per share (See Note 11) (the “2014 Transaction”). We also issued warrants to the investors for no additional consideration to purchase an aggregate 5,650,001 shares of our common stock at an exercise price of $0.40 per share from January 7, 2014 through January 7, 2019.

Under certain conditions of the SPA that were to expire no later than January 7, 2015, we could have been required to issue a variable number of additional warrants to the investors at a below-market value exercise price. Accordingly, we concluded that the warrants issued to the investors were not indexed to our common stock; therefore, the fair value of these warrants was recorded as a liability of $1,356,000 on January 7, 2014 on our Balance Sheet. Since these conditions did not occur as of January 7, 2015, we have reclassified the warrant from liability to equity.

Using a binomial pricing model, we calculated the fair value of the warrants issued to the investors on January 7, 2015 to be $407,300. We used the following assumptions in the binomial pricing model to derive the fair value: estimated volatility 113%; annualized forfeiture rate 0%; expected term 4.1 years; estimated exercise factor 3.5; risk free interest rate 1.20; and dividends 0.

Changes in fair value of the warrants liability are recognized in other income (expense), except for changes in the fair value of the warrants issued to ipCapital Group, Inc. (“ipCapital”), which are recognized as a component of general and administrative expense in the condensed consolidated statement of operations.

We used the exercise price of the warrants, as well as the fair market value of our common stock, to determine the fair value of our warrants. The exercise price for warrants issued in conjunction with the 2011 Transaction, including those issued to the placement agent, was either $0.20 or $0.26 per share, and was $0.26 per share for the warrants issued to ipCapital.

The fair market value of our common stock was $0.10 and $0.12 per share as of June 30, 2015 and 2014, respectively. We used a binomial pricing model to determine the fair value of our warrants liability as of June 30, 2015 and December 31, 2014, the balance sheet dates, using the following assumptions:

	Estimated Volatility			Annualized Forfeiture Rate		Expected Term (Years)		Estimated Exercise Factor		Risk-Free Interest Rate			Dividends
2011 Transaction
June 30, 2015		110	%		—		1.19		3.5		0.37	%		—
December 31, 2014		104	%		—		1.69		3.5		0.56	%		—
2014 Transaction
June 30, 2015		—			—		—		—		—			—
December 31, 2014		114	%		—		4.08		3.5		1.35	%		—
ipCapital
June 30, 2015		111	%		—		1.30		4.0		0.43	%		—
December 31, 2014		105	%		—		1.81		4.0		0.61	%		—

The following table is a reconciliation of the warrants liability measured at fair value using significant unobservable inputs (Level 3) for the six months ended June 30, 2015:

Warrants liability – December 31, 2014 fair value	$	647,300
Change in fair value of warrant liability recorded in other income		(129,300	)
Change in fair value of warrant liability recorded in general and administrative expense		(14,300	)
Reclassification of 2014 PIPE Warrant to Equity		(407,300	)
Warrants liability – June 30, 2015 fair value	$	96,400

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The following tables reconcile the total number of warrants outstanding for the periods indicated:

	For the Three-Month Period Ended June 30, 2015
	Beginning Outstanding		Issued		Exercised		Cancelled / Forfeited		Ending Outstanding
2011 Transaction		10,302,500		—		—		—		10,302,500
2014 Transaction		5,650,001		—		—		—		5,650,001
Exercise Agreement		4,500,000		—		—		—		4,500,000
ipCapital		400,000		—		—		—		400,000
Consultant Warrant (1)		169,273		—		—		—		169,273
Offer to Exercise		152,500		—		—		—		152,500
		21,174,274		—		—		—		21,174,274

	For the Three-Month Period Ended June 30, 2014
	Beginning Outstanding		Issued		Exercised		Cancelled / Forfeited			Ending Outstanding
2011 Transaction		10,302,500		—		—		—			10,302,500
2014 Transaction		5,650,001		—		—		—			5,650,001
ipCapital		400,000		—		—		—			400,000
Exercise Agreement		4,500,000		—		—		—			4,500,000
Consultant Warrant (1)		312,500		—		—		(143,227	)		169,273
Offer to Exercise		152,500		—		—		—			152,500
		21,317,501		—		—		(143,227	)		21,174,274

	For the Six-Month Period Ended June 30, 2015
	Beginning Outstanding		Issued		Exercised		Cancelled / Forfeited		Ending Outstanding
2011 Transaction		10,302,500		—		—		—		10,302,500
2014 Transaction		5,650,001		—		—		—		5,650,001
Exercise Agreement		4,500,000		—		—		—		4,500,000
ipCapital		400,000		—		—		—		400,000
Consultant Warrant (1)		169,273		—		—		—		169,273
Offer to Exercise		152,500		—		—		—		152,500
		21,174,274		—		—		—		21,174,274

	For the Six-Month Period Ended June 30, 2014
	Beginning Outstanding		Issued		Exercised			Cancelled / Forfeited			Ending Outstanding
2011 Transaction		11,302,500		—		(1,000,000	)		—			10,302,500
2014 Transaction		—		5,650,001		—			—			5,650,001
Exercise Agreement		4,500,000		—		—			—			4,500,000
ipCapital		400,000		—		—			—			400,000
Consultant Warrant (1)		312,500		—		—			(143,227	)		169,273
Offer to Exercise		152,500		—		—			—			152,500
		16,667,500		5,650,001		(1,000,000	)		(143,227	)		21,174,274

(1)

Effective April 11, 2014, we cancelled our consulting agreement with a former investor relations firm. Under the terms of the agreement, 169,273 of the warrants that had been issued to such firm had vested as of the effective cancellation date.

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5. Severance Liability

During 2012, we entered into a separation agreement and a release with our former Chief Executive Officer and member of our board of directors, and in 2013 we entered into a separation agreement and a release with a former vice president level employee. Under the terms of these agreements and releases, we agreed to provide each individual with salary continuation and medical coverage payments for predetermined lengths of time. In addition, we agreed to provide the former Chief Executive Officer with certain stock option benefits including the grant of an additional stock option, accelerated vesting of all then-outstanding options previously granted to him, and an extension of the post-employment exercise period for all of his options, including the newly granted one. All costs associated with the modification of his options and the costs of the new option grant were immediately recognized upon his separation.

In July of 2014 we agreed to provide a terminated employee a lump sum salary payment and 4 months of medical coverage payments which ended December 31, 2014.

As of December 31, 2014 and June 30, 2015, $0 remained outstanding associated with the severance liabilities. During the six-month period ended June 30, 2014, we made total payments of $64,600 to individuals whom these severance amounts were due.

6. Deferred Rent

We amended our office lease during 2013. On February 1, 2014, we moved our corporate offices to a different building within the same office complex owned and operated by our landlord in Campbell, California, where our corporate offices had been located prior to February 1, 2014. Since the new space is controlled by the same landlord, we considered the lease amendment to be a modification to our preexisting lease; accordingly, we are amortizing the remaining balance in deferred rent immediately prior to February 1, 2014 over the remaining term of the modified amended lease. Additionally, our landlord provided us with $106,600 of leasehold improvements on the new space that we are amortizing over the remaining term of the amended lease. All of the prior leasehold improvements that had not been previously amortized were accelerated and recognized in their entirety from the time of the amendment through January 2014, prior to the move.

As of June 30, 2015 deferred rent was:

Component	Current Liabilities		Long-Term Liabilities		Total
Deferred rent expense	$	11,600	$	38,200	$	49,800
Deferred rent benefit		39,700		92,700		132,400
	$	51,300	$	130,900	$	182,200

As of December 31, 2014 deferred rent was:

Component	Current Liabilities		Long-Term Liabilities		Total
Deferred rent expense	$	4,800	$	45,700	$	50,500
Deferred rent benefit		39,700		112,500		152,200
	$	44,500	$	158,200	$	202,700

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Deferred rent expense represents the remaining balance of the aggregate free rent we received from our landlord and escalations that are being recognized over the life of the lease as a component of rent expense. Deferred rent benefit relates to the unamortized portion of the leasehold improvements provided to us by our landlord (i.e., incentives) that we are recognizing on a straight-line basis as a reduction to rent expense over the term of the lease.

7. 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 six-month periods ended June 30, 2015 and 2014, respectively, by classification:

	Three Months Ended June 30,				Six Months Ended June 30,
Statement of Operations Classification	2015		2014		2015		2014
Costs of revenue	$	2,000	$	3,700	$	5,000	$	3,100
Selling and marketing expense		29,500		21,000		58,800		26,900
General and administrative expense		130,500		109,200		298,600		246,400
Research and development expense		28,100		26,600		50,000		53,800
	$	190,100	$	160,500	$	412,400	$	330,200

The following table presents summaries of the status and activity of our stock option awards for the three-month period ended June 30, 2015.

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Terms (Years)		Aggregate Intrinsic Value
Outstanding – March 31, 2015		10,210,499		$	0.18
Granted		—			—
Exercised		(12,500	)		0.06
Forfeited or expired		(476,818	)		0.22
Outstanding – June 30, 2015		9,721,181		$	0.18		7.17	$	32,200

The following table presents summaries of the status and activity of our stock option awards for the six-month period ended June 30, 2015.

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Terms (Years)		Aggregate Intrinsic Value
Outstanding – December 31, 2014		10,287,999		$	0.18
Granted		—			—
Exercised		(90,000	)		0.05
Forfeited or expired		(476,818	)		0.22
Outstanding – June 30, 2015		9,721,181		$	0.18		7.17	$	32,200

Of the options outstanding as of June 30, 2015, 6,757,047 were vested, 2,928,793 were estimated to vest in future periods and 35,341 were estimated to be forfeited prior to their vesting. As of June 30, 2015, there was approximately $244,200 of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options. Such cost is expected to be recognized over a weighted-average period of approximately nine months.

All options are exercisable immediately upon grant. Options vest ratably, generally over a 33-month period commencing in the fourth month after the grant date. We have the right to repurchase common stock issued upon the exercise of an option upon an optionee’s termination of service to us prior to full vesting at the option’s exercise price.

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The following table presents summaries of the status and activity of our restricted stock awards for the three-month period ended June 30, 2015. We include the common stock underlying the restricted stock award in shares outstanding once such common stock has vested and the restriction has been removed (“releases” or “released”). The common stock vests ratably, generally over a 33-month period commencing in the fourth month after the award date.

	Number of Shares			Weighted Average Grant Date Fair Value		Weighted Average Remaining Recognition Period (Years)		Unrecognized Compensation Cost Remaining
Unreleased – March 31, 2015		4,022,184		$	0.17
Awarded		—			—
Released		(517,834	)		0.19
Forfeited		(59,970	)		0.17
Unreleased – June 30, 2015		3,444,380		$	0.17		2.10	$	498,100

The following table presents summaries of the status and activity of our restricted stock awards for the six-month period ended June 30, 2015.

	Number of Shares			Weighted Average Grant Date Fair Value		Weighted Average Remaining Recognition Period (Years)		Unrecognized Compensation Cost Remaining
Unreleased – December 31, 2014		4,314,983		$	0.18
Awarded		225,000			0.16
Released		(955,412	)		0.19
Forfeited		(140,191	)		0.17
Unreleased – June 30, 2015		3,444,380		$	0.17		2.10	$	498,100

As of June 30, 2015, there was approximately $498,100 of total unrecognized compensation cost, net of estimated forfeitures, related to unreleased restricted stock awards. That cost is expected to be recognized over a weighted-average period of approximately twenty-four months.

8. Revenue

Revenue for the three-month periods ended June 30, 2015 and 2014 was:

					2015 Over (Under) 2014
Revenue	2015		2014		Dollars			Percent
Software Licenses
Windows	$	442,300	$	595,800	$	(153,500	)		-25.8	%
UNIX/Linux		244,100		139,400		104,700			75.1	%
		686,400		735,200		(48,800	)		-6.6	%
Software Service Fees
Windows		482,200		468,000		14,200			3.0	%
UNIX/Linux		178,900		193,300		(14,400	)		-7.4	%
		661,100		661,300		(200	)		0.0	%
Other		11,300		10,200		1,100			10.8	%
Total Revenue	$	1,358,800	$	1,406,700	$	(47,900	)		-3.4	%

Revenue for the six-month periods ended June 30, 2015 and 2014 was:

					2015 Over (Under) 2014
Revenue	2015		2014		Dollars			Percent
Software Licenses
Windows	$	1,056,300	$	1,105,900	$	(49,600	)		-4.5	%
UNIX/Linux		414,100		243,400		170,700			70.1	%
		1,470,400		1,349,300		121,100			9.0	%
Software Service Fees
Windows		968,000		979,800		(11,800	)		-1.2	%
UNIX/Linux		367,200		391,500		(24,300	)		-6.2	%
		1,335,200		1,371,300		(36,100	)		-2.6	%
Other		24,300		26,300		(2,000	)		-7.6	%
Total Revenue	$	2,829,900	$	2,746,900	$	83,000			3.0	%

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9. Costs of Revenue

Costs of revenue for the three-month periods ended June 30, 2015 and 2014 were:

					2015 Over (Under) 2014
	2015		2014		Dollars			Percent
Software service costs	$	42,900	$	49,600	$	(6,700	)		-13.5	%
Software product costs		62,900		64,300		(1,400	)		-2.2	%
	$	105,800	$	113,900	$	(8,100	)		-7.1	%

Costs of revenue for the six-month periods ended June 30, 2015 and 2014 were:

					2015 Over (Under) 2014
	2015		2014		Dollars			Percent
Software service costs	$	84,600	$	110,100	$	(25,500	)		-23.2	%
Software product costs		125,700		138,600		(12,900	)		-9.3	%
	$	210,300	$	248,700	$	(38,400	)		-15.4	%

10. Capitalized Software Development Costs

Capitalized software development costs consisted of the following:

	June 30, 2015			December 31, 2014
Software development costs	$	1,135,900		$	1,135,900
Accumulated amortization		(835,200	)		(727,200	)
	$	300,700		$	408,700

Amortization of capitalized software development costs is reported as a component of costs of revenue. Capitalized software development costs amortization aggregated $54,000 and $52,600 during the three-month periods ended June 30, 2015 and 2014, respectively, and $108,000 and $120,600 during the six-month periods ended June 30, 2015, and 2014, respectively.

We record $0 capitalized software development costs during the three-month and six-month periods ended June 30, 2015 and 2014, respectively.

11. Stockholders’ Equity

2014 Private Placement

During the three-month period ended March 31, 2014, we issued and sold for cash an aggregate 11,299,999 shares of our common stock at a purchase price of $0.30 per share in the 2014 private placement that resulted in gross proceeds of $3,390,000 (See Note 4).

The 2014 private placement was recorded into the financial statements as follows:

Gross cash proceeds	$	3,390,000
Less: gross proceeds allocated to warrants liability – investors		(1,356,000	)
Gross proceeds allocated to additional paid-in capital and common stock		2,034,000
Less: cash issuance costs – legal fees		(20,000	)
Recorded in additional paid-in capital and common stock	$	2,014,000

In conjunction with the 2014 private placement, we recorded a warrants liability of $1,356,000 as of January 7, 2014 on our Balance Sheet. Certain conditions under the SPA which expired on January 7, 2015 would have required us to issue additional warrants at below-market value exercise price (see Note 4). These conditions did not occur and ended as of January 7, 2015. Therefore, we have reclassified the related liability to equity as of January 7, 2015 on our Balance Sheet.

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Accounting fees associated with the 2014 private placement, which aggregated approximately $9,600, were deemed immaterial and were charged to operating expense during the three-month period ended March 31, 2014.

Stock Repurchase Program

During each of the three and six-month periods ended June 30, 2015 and 2014, we did not repurchase any of our common stock under the terms of our Board-approved $1,000,000 stock repurchase program (“stock repurchase program”). As of June 30, 2015, approximately $782,600 remained available for future purchases under this program. We are not obligated to repurchase any specific number of shares and the stock repurchase program may be suspended or terminated at our discretion.

12. Commitments and Contingencies

On February 1, 2014, we relocated our corporate offices to a larger suite within our landlord’s office complex in Campbell, California. We are currently leasing 10,659 square feet under a five-year lease that, unless renewed, will expire in October 2018. The following table sets forth the minimum lease payments we will be required to make throughout the remainder of the lease:

Year	Amount
Remainder of 2015	$	227,000
2016		464,200
2017		478,100
2018		366,600
	$	1,535,900

13. Supplemental Disclosure of Cash Flow Information

We disbursed $700 and $0 for the payment of interest expense during the six-month periods ended June 30, 2015 or 2014, respectively.

We disbursed $2,100 and $2,000 for the payment of income taxes during the six-month periods ended June 30, 2015 and 2014, respectively. Such disbursement was made for the payment of foreign income taxes related to the operation of our Israeli subsidiary, GraphOn Research Labs, Ltd.

During the six-month period ended June 30, 2015 we reduced our warrants liability by $129,300 which was recorded in the Condensed Consolidated Statement of Operations. Such reduction reflected the aggregate fair value adjustments we recorded during such period and in addition to reclassified our 2014 PIPE warrant to equity. No cash was disbursed in conjunction with these items (See Note 4).

14. 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 June 30, 2015 and 2014, 34,339,835 and 36,087,285 shares of common stock equivalents, respectively, were excluded from the computation of dilutive loss per share since their effect would be anti-dilutive.

For the six-month periods ended June 30, 2015 and 2014, 34,339,835 and 36,087,285 shares of common stock equivalents, respectively, were excluded from the computation of dilutive loss per share since their effect would be anti-dilutive.

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15. Segment Information

The Company’s operations have historically been conducted and reported in two segments, GO-Global and hopTo, each representing a specific product line and dedicated operating resources. During the fourth quarter of 2014, the Company developed its hopTo Work product and go to market strategy, and beginning in January of 2015, it reorganized to a functional organization structure with consolidated decision authority over engineering, product management, sales and marketing resources. Resources in these functional departments are now shared for the development, sales and support of both the GO-Global and hopTo products. The GO-Global and hopTo Work products also have similar target customers, distribution channels, and common reseller partners.

Beginning with the three-month period ended March 31, 2015, the Company will no longer report financial results in two segments. Software revenue and services revenue for the hopTo Work product will be included in the Windows software and Windows services revenue, respectively.

Revenue by country for the three-month and six-month periods ended June 30, 2015 and 2014 was as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
United States	$	616,800	$	593,200	$	1,368,300	$	1,144,200
Brazil		246,100		198,300		415,600		355,400
Other countries		495,900		615,200		1,046,000		1,247,300
	$	1,358,800	$	1,406,700	$	2,829,900	$	2,746,900

16. Related Party Transactions

ipCapital Group, Inc.

On October 11, 2011, we engaged ipCapital Group, Inc. (“ipCapital”), an affiliate of John Cronin, who is one of our directors, to assist us in the execution of our strategic decision to significantly strengthen, grow and commercially exploit our intellectual property assets. Our engagement agreement with ipCapital, which has been amended three times, affords us the right to request ipCapital to perform a number of diverse services, employing its proprietary processes and methodologies, to facilitate our ability to identify and extract from our current intellectual property base new inventions, potential patent applications, and marketing and licensing opportunities.

For the three and six-month periods ended June 30, 2015 and 2014, there were no services performed, additional charges incurred or payments made to ipCapital under the agreement.

In addition to the fees we agreed to pay ipCapital for its services, we issued ipCapital a five-year warrant to purchase up to 400,000 shares of our common stock at an initial price of $0.26 per share. Half of the warrant (200,000 shares) has a time-based vesting condition, with such vesting to occur in three equal annual installments. The vesting installments occurred on October 11, 2012 and October 11, 2013, and October 11, 2014, respectively. The remaining 200,000 shares became fully vested upon the completion to our satisfaction of all services that we requested from ipCapital under the engagement agreement, prior to the signing of the amendments. Such performance was deemed satisfactory during 2012. We believe that these fees, together with the issuance of the warrant, constitute no greater compensation than we would be required to pay an unaffiliated person for performing substantially similar services.

The exercise price of the warrant issued to ipCapital could be reset to below-market value. Consequently, we have concluded that such warrant is not indexed to our common stock and should be recorded as a liability. We recognize the warrants liability over their vesting period, and in accordance with the liability method of accounting, we re-measure the fair value of the accrued warrants at each balance sheet date and recognize the change in fair value as general and administrative compensation expense. (See Note 4). We recognized $13,900 and $16,200 as a component of general and administrative expense during the three-month periods ended June 30, 2015 and 2014, respectively, and $14,200 and $66,000 during the six-month periods ended June 30, 2015 and 2014, respectively, resulting from the change in fair value.

ipCapital Licensing Company I, LLC

On February 4, 2013, we entered into an IP Brokerage agreement with ipCapital Licensing Company I, LLC (“ipCLC”). John Cronin was a partner at ipCLC until December 31, 2014. Pursuant to the agreement, we have engaged ipCLC, on a no-retainer basis, to identify and present us with candidates who may be seeking to acquire a certain limited group of our patents unrelated to our current business strategy. If during the applicable term we enter into an agreement with any candidate presented by ipCLC to acquire or otherwise exploit the covered patents, we will pay ipCLC a fee of ten percent (10%) of the royalties, fees, and other consideration paid over the life of the agreement.

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The agreement is effective as of February 4, 2013, and will end 18 months after we or ipCLC serve 60 days written notice of termination to the other party (with earlier termination possible in the event of a material breach). The agreement provides for customary confidentiality undertakings, limitations on ipCLC’s total liability and mutual indemnification provisions.

We paid no compensation to ipCLC under the terms of the IP Brokerage Agreement for the periods ending June 30, 2015 and 2014, respectively and no amounts were due ipCLC under its terms as of June 30, 2015.

We believe the terms of the agreement are fair and reasonable to us and are at least as favorable as those that could be obtained on an arms’ length basis.

17. Subsequent Event

Private Placement

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

We are developers of software productivity products for mobile devices such as tablets and smartphones, and application publishing software solutions. Our newest product, which is called hopTo, will be marketed to both consumers and businesses. hopTo provides mobile end users with a productivity workspace for their mobile devices that allows them to manage, share, view, and edit their documents, regardless of where they are stored. We launched the first public release of hopTo through Apple’s App Store on April 15, 2013 and the first commercial version of hopTo on November 14, 2013. This release was targeted at Apple’s tablet devices, the iPad and the iPad Mini. Future releases will be targeted at other devices such as Apple’s iPhone, as well as competing devices such as those based on Google’s Android platform. From the initial launch through 2014, we made hopTo available for free. On November 10, 2014, we launched the first version of hopTo Work, a version of the hopTo workspace made available to businesses for a fee. hopTo Work expands upon the core capabilities of hopTo by providing mobile access to applications that businesses rely on for their daily operations. On March 24, 2015, we launched version 2.0 of hopTo Work which included availability of the product on Google’s Android Platform.

In addition to hopTo, we also sell a family of products under the brand name GO-Global, which is a software application publishing business and 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. On May 28, 2015 we launched version 5.0 of GO-Global for Windows.

Over the years, we have also made significant investments in intellectual property (IP). We have filed many patents designed to protect the new technologies embedded in hopTo, and we plan to continue to aggressively invest in the creation and protection of new IP as we continue to develop hopTo and other products.

Corporate Background

We are a Delaware corporation, founded in May 1996. Our headquarters are located at 1919 S. Bascom Avenue, Suite 600, Campbell, California, 95008, our toll-free phone number is 1-800-472-7466, and our phone number for local and international calls is 408-688-2674. We have an office in Concord, New Hampshire, and we have remote employees located in various states, as well as internationally in the United Kingdom and Israel. Our corporate Internet Website is http://www.hopto.com. The information on our website is not part of this quarterly report.

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports filed with or furnished to the SEC under sections 13(a) or 15(d) of the Securities Exchange Act of 1934 are made available free of charge on our corporate Internet Website (click the “Investors” on our home page and then click “SEC Filings”) as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.

The hopTo Opportunity

The adoption of mobile devices, such as smartphones and tablets, in the workplace has revealed the need for a mobile application and content access platform that addresses a range of mobile productivity challenges for professional/consumer users (“prosumers”), small and home offices (“SOHO”), small- to medium-sized businesses (“SMB” or “SMBs”), and Enterprise organizations. We believe a mobile platform that addresses this need will become a critical asset for any size organization, IT department, and for the most productive end user experience.

Focusing more specifically on the larger SMB/Enterprise business markets, adoption of mobile devices is reshaping how organizations deliver, secure, and manage applications and content on these devices. This has also introduced challenges for organizations to integrate the devices into daily workflows and manage security on both company-owned and employee-owned devices.

From a workflow standpoint, we believe business users want mobile solutions that enable them to replace or extend their traditional desktop PC environment with mobile devices, which is often easier said than done. PC users have enjoyed a rich ecosystem of applications and technologies that has been growing for over 30 years, and have come to expect an exceptional level of power and flexibility to get their work done. Many solutions have been developed to meet this challenge but generally have failed, in particular for the iOS and Android devices that dominate both the consumer and business markets.

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The hopTo Work Product

In March, 2014, we announced our hopTo Work product which was subsequently released on November 11, 2014. hopTo Work builds upon the hopTo product (discussed below), bringing its core mobile productivity features to SMB/Enterprise users, with additional security and manageability functions. It targets Information Technology (“IT”) departments that are concerned with protecting and managing access to sensitive data, controlling access to business applications, compliance with internal policies and, in some cases, government regulations.

With hopTo Work, IT departments will be able to more easily and safely address these concerns while integrating mobile technology into their networks and user workflows. The initial version of hopTo Work leverages a customer’s existing Microsoft RDS infrastructure – a significant portion of Microsoft’s on-premise customer base – which enables an IT department to have a mobile access for end users in minutes.

It will further enable business users to make a smooth and simple transition from PCs to mobile devices for all or part of their work. As with the original prosumer/SOHO version of hopTo, the premise of hopTo Work is that mobile users in SMB/Enterprise businesses using devices such as the Apple iPad would like to travel with just their tablets but still have the benefits of secure access and editing capabilities for documents in their corporate cloud or network storage, personal cloud storage, and on their Windows computers. In addition, hopTo Work delivers the capability to mobilize Windows applications that businesses and organizations rely on for their daily operation.

hopTo Work is designed not only to assist users in performing operations on their iPads that typically require a Mac or Windows PC, but to do so within the data protection and access control policies of their IT organizations. Our view is that current solutions are limited because of the need to install special applications and procedures that are a hindrance to user productivity. We address these issues with the following features:

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The ability to access and manage all of the user’s files and documents, no matter where they are stored. This includes enterprise document management systems, enterprise-class network servers and cloud storage services, or the user’s PC.

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The ability to view, create, edit, manage, and share files through a native touch-screen mobile device interface rather than apps designed for legacy PC desktops with keyboards and mice.

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The ability to access Windows applications and use them in a touch-friendly manner consistent with end user expectations for mobile devices.

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The ability to multitask, which means working with multiple documents and applications at the same time, side-by-side. The iPad is inherently a single document environment, which we believe is a major shortcoming for most users.

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The ability to view, create, and edit Microsoft Office documents that are 100% compatible with Microsoft Office, thus allowing users to collaborate with other users who are using Microsoft Office on a Mac or a Windows PC.

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The ability to address the problems of document sprawl, giving users easy access to manage, search, and browse the data they need across storage devices and cloud services, but without allowing sensitive documents to leave the corporate network undetected.

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The ability for IT departments to implement a “bring-your-own-device” (BYOD) solution that integrates mobile device use into daily workflows and enhances user productivity without compromising security, requiring additional server infrastructure, or putting an additional burden on the user experience.

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The ability for IT departments to grant and revoke access to anyone for any data anywhere. Employees must have the ability to access corporate internal data (documents, file and applications) efficiently but without jeopardizing security.

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hopTo Target Markets

We view hopTo Work, with its additional application mobilization, security and manageability features, as a product that appeals to the SMB and Enterprise markets. We expect sales strategies for the hopTo Work versions of the product to involve a combination of strategic partnerships with various relevant enterprise software companies, a sales partner channel, and a direct sales team, just to name a few. hopTo Work is a paid offering that is currently sold on a perpetual license plus maintenance model. Other models such as subscription based pricing might be made available in the future based on market requirements.

The hopTo Consumer Product

hopTo also offers a comprehensive productivity workspace for mobile devices (currently for the Apple iPad) that empowers mobile users by offering them functionalities similar to what they’ve come to expect from their PCs. For example, hopTo aggregates files and documents from multiple storage silos (such as Box, Dropbox, Google Drive, Microsoft OneDrive, or the user’s PC) into a single touch-friendly workspace. From within this workspace, users are able to search for documents in the workspace (which includes their cloud storage silos and their PC), view, edit, and share their documents, and import photos from their iPad camera roll or Google Image from Web.

hopTo provides powerful document editing capabilities that leverage legacy Windows applications, such as Microsoft Office, to give users a rich, native editing feature set. Its high degree of compatibility with Microsoft Office enables easy collaboration with other users running Microsoft Office on Mac or Windows PCs. hopTo is unique in that it both leverages legacy applications for document editing and provides a touch-friendly user experience that, in our view, none of our competitors have achieved, and which mobile users will view as highly desirable.

The first commercially available version of hopTo was released on November 14, 2013, through the Apple App Store. hopTo currently runs on the Apple iPad family of devices, and we may make it available for other devices, such as the Apple iPhone and for devices based on the Google Android platform. This product is targeted at users who are transitioning from PC to mobile—to provide access to their content regardless of where it’s stored, along with rich document editing capabilities, multitasking, file management, and more. The hopTo product is currently offered free of charge. Based on usage patterns and market acceptance we may, at some point in the future, decide to charge fees for this offering.

Our Intellectual Property

We believe that intellectual property (IP) is a business tool that potentially maximizes our competitive advantages and product differentiation, grows revenue opportunities, encourages collaboration with key business partners, and protects our long-term growth opportunities. Strategic IP development is therefore a critical component of our overall business strategy. It is a business function that consistently interacts with our research and development, product development, and marketing initiatives to generate further value from those operations.

We rely primarily on patents, trade secret protection, copyright law, confidentiality, and proprietary information agreements to protect our proprietary technology and registered trademarks. Despite our precautions, it may be possible for unauthorized third parties to copy portions of our products, or to obtain information we regard as proprietary. The loss of any material trade secret, trademark, trade name or copyright could have a material adverse effect on our results of operations and financial condition. We intend to defend our proprietary technology rights; however, we cannot give any assurance that our efforts to protect our proprietary technology rights will be successful.

We also currently hold rights to patents. We regularly file patent applications to protect innovations arising from our research, development and design, and are currently pursuing additional patent applications.

We do not believe our products infringe on the rights of any third parties, but we can give no assurance that third parties will not assert infringement claims against us in the future, or that any such assertion will not result in costly litigation or require us to obtain a license to proprietary technology rights of such parties.

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ipCapital Group, Inc.

On October 11, 2011, we engaged ipCapital Group, Inc., (“ipCapital”) an affiliate of John Cronin, who is one of our directors, to assist us in the execution of our strategic decision to significantly strengthen, grow and commercially exploit our intellectual property assets. Our engagement agreement with ipCapital, which has been amended three times, affords us the right to request ipCapital to perform a number of diverse services, employing its proprietary processes and methodologies, to facilitate our ability to identify and extract from our current intellectual property base new inventions, potential patent applications, and marketing and licensing opportunities.

As a result of ipCapital’s work under the engagement agreement, as amended, as of August 3, 2015, 173 new patent applications have been filed. Of these 173 applications, 22 patents have been granted by the USPTO. We have also received notice from the USPTO that 6 additional patent applications have been allowed and will ultimately issue as US patents in the next 60-90 days. We expect to file more applications in 2015.

ipCapital Licensing Company I, LLC

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 2014 10-K Report and Note 2 to our Notes to Unaudited Condensed Consolidated Financial Statements.

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Results of Operations for the Three and Six-Month Periods Ended June 30, 2015 and 2014

The following operating results should be read in conjunction with our critical accounting policies.

Revenue

Revenue for the three-month periods ended June 30, 2015 and 2014 was:

					2015 Over (Under) 2014
Revenue	2015		2014		Dollars			Percent
Software Licenses
Windows	$	442,300	$	595,800	$	(153,500	)		-25.8	%
UNIX/Linux		244,100		139,400		104,700			75.1	%
		686,400		735,200		(48,800	)		-6.6	%
Software Service Fees
Windows		482,200		468,000		14,200			3.0	%
UNIX/Linux		178,900		193,300		(14,400	)		-7.4	%
		661,100		661,300		(200	)		0.0	%
Other		11,300		10,200		1,100			10.8	%
Total Revenue	$	1,358,800	$	1,406,700	$	(47,900	)		-3.4	%

Revenue for the six-month periods ended June 30, 2015 and 2014 was:

					2015 Over (Under) 2014
Revenue	2015		2014		Dollars			Percent
Software Licenses
Windows	$	1,056,300	$	1,105,900	$	(49,600	)		-4.5	%
UNIX/Linux		414,100		243,400		170,700			70.1	%
		1,470,400		1,349,300		121,100			9.0	%
Software Service Fees
Windows		968,000		979,800		(11,800	)		-1.2	%
UNIX/Linux		367,200		391,500		(24,300	)		-6.2	%
		1,335,200		1,371,300		(36,100	)		-2.6	%
Other		24,300		26,300		(2,000	)		-7.6	%
Total Revenue	$	2,829,900	$	2,746,900	$	83,000			3.0	%

Our software revenue is currently almost entirely related to our GO-Global product line, and historically has been primarily derived from product licensing fees and service fees from maintenance contracts. The majority of this revenue has been earned, and continues to be earned, from a limited number of significant customers, most of whom are resellers. Many of our resellers (a “stocking reseller”) purchase software licenses that they hold in inventory until they are resold to the ultimate end user. We defer recognition of revenue from these sales (on our Condensed Consolidated Balance Sheet under the caption “Deferred Revenue”) until the stocking reseller sells the underlying software licenses to the ultimate end user. Consequently, if any of our significant stocking resellers materially change the rate at which they resell our software licenses to the ultimate end user, our software licenses revenue could be materially impacted.

When a software license is sold directly to an end user by us, or by one of our resellers who does not stock licenses into inventory, revenue is recognized immediately upon shipment, assuming all other criteria for revenue recognition are met. Consequently, if any significant end user customer substantially changes its order level, or fails to order during the reporting period, whether the order is placed directly with us or through one of our non-stocking resellers, our software licenses revenue could be materially impacted.

Almost all stocking resellers maintain inventories of our Windows products; few stocking resellers maintain inventories of our UNIX products.

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Software Licenses

Software license revenue from Windows products decreased in both three-month period and six-month periods ended June 30, 2015, as compared with the same period of the prior year, primarily due to lower sell through to end users by stocking resellers as the resellers adjusted their pricing to absorb the weakening of their respective currencies versus the US dollar.

Software licenses revenue from our UNIX/Linux products increased during three and six-month periods ended June 30, 2015, as compared with the same periods of the prior year, primarily due to increased revenue from certain of our U.S. government customers which was partially offset by lower aggregate revenue from our resellers and end users, particularly our European telecommunications customers.

We have implemented plans to stabilize our GO-Global revenue, we anticipate that revenue in 2015 from GO-Global product licenses will approximate that of 2014. We anticipate to continue to generate revenue from hopTo during 2015.

Software Service Fees

Net software service fees revenue for the three-month period ended June 30, 2015 were mostly unchanged as compared to the same for period of the prior year, as a result of an increase in service revenue fee from Window’s products, partially offset by a decrease in service revenue fee from UNIX products.

Software service fees revenue decreased slightly during the six-month period ended June 30, 2015, compared to the same period of prior year. The decrease attributed to the Windows product, was primarily due to the timing of customer renewal of maintenance contracts. The decrease attributed to the UNIX products was primarily due to lower maintenance contract renewals from European telecommunications customers.

We expect that software service fees for 2015 will approximate those for 2014, as we anticipate that revenue from Windows maintenance contracts for the full year will offset the anticipated decline in revenue from UNIX maintenance contracts.

Other

Other revenue slightly increased in the three-month period ended June 30, 2015, compared to the same period in the prior year primarily due to an increase in labeling fees, partially offset by decrease in professional services. Other revenue decreased slightly in the six-month period ended June 30, 2015, compared to the same period in the prior year primarily due to lower professional service revenue. Private labeling fees and professional services fees do not comprise a material portion of our revenue streams, nor do we anticipate that they will, and they can vary from period to period.

Costs of Revenue

Costs of revenue are comprised primarily of software service costs, which represent the costs of customer service, and software product costs, which are primarily comprised of the amortization of capitalized software development costs, and costs associated with licenses for third party software included in our product offerings. We incur no shipping or packaging costs as all of our deliveries are made via electronic means over the Internet.

Under GAAP, development costs for new product development, after technological feasibility is established, are recorded as “capitalized software” on our Condensed Consolidated Balance Sheet. Such capitalized costs are subsequently amortized as cost of revenue (software product costs) over the shorter of three years or the remaining estimated life of the product. During the three-month and six-month periods ended June 30, 2015 and 2014, we did not capitalize any software development costs. Amortization of capitalized software development costs was $54,000 and $52,600 during the three-month periods ended June 30, 2015 and 2014, respectively, and $108,000 and $120,600 during the six-month periods ended June 30, 2015 and 2014, respectively.

Costs of revenue were 7.8% and 8.1% of total revenue for the three-month periods ended June 30, 2015 and 2014, respectively, and 7.4% and 9.1% of total revenue for the six-month periods ended June 30, 2015 and 2014, respectively.

Costs of revenue for the three-month periods ended June 30, 2015 and 2014 were:

					2015 Over (Under) 2014
	2015		2014		Dollars			Percent
Software service costs	$	42,900	$	49,600	$	(6,700	)		-13.5	%
Software product costs		62,900		64,300		(1,400	)		-2.2	%
	$	105,800	$	113,900	$	(8,100	)		-7.1	%

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Costs of revenue for the six-month periods ended June 30, 2015 and 2014 were:

					2015 Over (Under) 2014
	2015		2014		Dollars			Percent
Software service costs	$	84,600	$	110,100	$	(25,500	)		-23.2	%
Software product costs		125,700		138,600		(12,900	)		-9.3	%
	$	210,300	$	248,700	$	(38,400	)		-15.4	%

The decrease in software service costs for the three and six-month periods ended June 30, 2015, as compared with the same periods of the prior year, was primarily due to lower customer support costs associated with GoGlobal. Upon release of the commercial versions of hopTo and hopTo Work, we began charging costs associated with supporting the products to costs of revenue. We expect software service costs for 2015 to be slightly lower than those for 2014 as expected increases in the level of effort required to support the hopTo Work product as the customer base grows will be offset by continued reductions in the cost required to support the GoGlobal products.

The decreases in software product costs for the three-month and six-month periods ended June 30, 2015, as compared with the same periods of the prior year, were primarily due to level of amortization of software development cost in Go Global. Upon release of the commercial version of hopTo in late 2013, we began charging certain costs associated with it, including amortization of capitalized software development costs, and the costs of third party software we have licensed into hopTo, to cost of revenue.

We expect that software costs of revenue for 2015 will be lower than 2014 levels, due to these items.

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 June 30, 2015 decreased by $129,500, or 22.2%, to $453,600, from $583,100 for the same period of 2014, and represented approximately 33.4% and 41.5% of revenue during these periods, respectively. Selling and marketing expenses for the six-month period ended June 30, 2015 decreased by $279,900, or 22.7%, to $953,700, from $1,233,600 for the same period of 2014, and represented approximately 33.7% and 44.9% of revenue during these periods, respectively.

The decreases in selling and marketing expenses were mainly due a decrease in advertising and promotional costs associated with our hopTo products as we have transitioned from consumer oriented product to a product targeted at businesses. We currently expect our full-year 2015 selling and marketing expenses to be lower than those for 2014 as we continue to invest advertising and promotional resources in specifically targeted programs for both our hopTo and GO-Global product lines.

General and Administrative Expenses

General and administrative expenses primarily consist of employee costs, depreciation and amortization, legal, accounting, other professional services (including those related to our patents), rent, travel and entertainment and insurance. Certain costs associated with being a publicly held corporation are also included in general and administrative expenses, as well as bad debts expense.

General and administrative expenses decreased by $66,900, or 8.0%, to $771,300, for the three-month period ended June 30, 2015, from $838,200 for the same period of 2014, and represented approximately 56.8% and 59.6% of revenue during these periods, respectively. General and administrative expenses decreased by $170,700, or 9.2%, to $1,679,100, for the six-month period ended June 30, 2015, from $1,849,800 for the same period of 2014, and represented approximately 59.3% and 67.3% of revenue during these periods, respectively.

The decrease in general and administrative expense was primarily due to decreased legal expenses associated with activity related to our patents and other administrative matters.

We expect that general and administrative expense for 2015 will be lower than 2014 levels due to our expectation that the trends mentioned above will continue for the balance of 2015.

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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 $228,600, or 17.2%, to $1,01,200, for the three-month period ended June 30, 2015, from $1,329,800 for the same period of 2014, and represented approximately 81.0% and 94.5% of revenue for these periods, respectively. Research and development expenses decreased by $411,700, or 15.4%, to $2,266,100, for the six-month period ended June 30, 2015, from $2,677,800 for the same period of 2014, and represented approximately 80.1% and 97.5% of revenue for these periods, respectively.

The decrease in research and development expense is primarily due to lower employee costs associated with lower headcount as a result of reorganization of our hopTo team which was implemented during the three-month period ended June 30, 2014.

Although we anticipate adding additional staff to our product development team during 2015 in order to fully execute our hopTo development plan however we anticipate that 2015 research and development expenses will be lower those for 2014.

Other Income - Change in Fair Value of Warrants Liability

During the three and six-month periods ended June 30, 2015 we reported non-cash income related to the change in fair value of our Warrants Liability of $184,400 and $ 129,300, respectively, and during the same periods of the prior year, we reported non-cash income of $477,500 and $1,611,200, respectively. Such amounts result from price changes in the market value for our common stock and can vary from period to period due to the exercise and/or issuance of warrants accounted for under the liability method. For further information regarding our Warrants Liability, see Note 4 to the Notes to Unaudited Condensed Consolidated Financial Statements.

Net Loss

Based on the foregoing, we reported a net loss of $889,900 and $980,200 for the three-month period ended June 30, 2015 and 2014, respectively. Additionally, we reported net losses of $2,152,900 and $1,652,700 for the six-month periods ended June 30, 2015 and 2014, respectively.

Liquidity and Capital Resources

Our reported net loss for the six-month period ended June 30, 2015 of $2,152,900 included three significant non-cash items: depreciation and amortization of $170,400, which was primarily related to amortization of our capitalized software development costs; stock-based compensation expense of $412,400; and a gain in the change in value of our warrants liability of $129,300.

We invested $5,100 in capital expenditures during the six-month period ended June 30, 2015, primarily related to our new products development team, located in our office in Campbell, California.

We are aggressively looking at ways to improve our revenue stream through the development, marketing and sale of new products. We have also streamlined our GO-Global operations in order to align its cost structure with its sales. Should business combination opportunities present themselves to us, and should such opportunities appear to make financial sense and add value for our shareholders, we will consider those opportunities.

We raised $2,550,500 on July 28, 2015 in a private placement. See “Item 2—Unregistered Sales of Equity Securities and Use of Proceeds”

We believe that as a result of the expected introduction of new products slated for 2015, our revenue will increase. During 2015, we expect to continue to prioritize the investment of our resources into the development of various new products, and we expect that certain of these investments may ultimately be capitalized as software development costs. Further, due to our expected investments in new products and continued investments in intellectual property, we expect our cash outflow from operations to continue. Based on our cash on hand as of June 30, 2015, the anticipation of continued revenue from our legacy GO-Global business and the anticipation of revenue from our hopTo Work product, and the $2,550,500 that we raised from the sale of shares of our common stock, we believe that we will have sufficient capital resources to support our operational plans for the next twelve months. However, implementation of expansion plans for hopTo Work may require significant revenue from our hopTo Work product or capital from issuances of debt or equity.

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There can be no assurance of new revenue from new or existing product lines or additional capital from debt or equity issuances. In addition, issuances of new capital stock would dilute existing stockholders and may give the purchasers of new capital stock additional rights, preferences and privileges relative to existing stockholders. There can be no assurance that additional capital necessary for full execution of our hopTo business strategy will be available on a timely basis, on reasonable terms or at all.

Cash

As of June 30, 2015, our cash balance was $1,179,600, as compared with $1,557,100 as of December 31, 2014, a decrease of $377,500, or 24.2%. The decrease primarily resulted from the cash we used in our operations, offset by the cash provided by the payments received for a $1.5 million stocking order from one of our Go-Global ISV resellers.

Accounts Receivable, net

At June 30, 2015 and December 31, 2014, we reported accounts receivable, net, of $481,500 and $ 2,211,300, respectively. Such amounts were reported net of the allowance for doubtful accounts, which allowances totaled $15,900 and $32,600 at June 30, 2015 and December 31, 2014, respectively. The decrease in accounts receivable, net, was mainly due to lower sales during the three-month period ended June 30, 2015, as compared with the three-month period ended December 31, 2014. 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.

Stock Repurchase Program

As of June 30, 2015, we had purchased 1,424,000 shares of our common stock for $217,400 under terms of our Board-approved stock repurchase program, which was established on January 8, 2008. Under this program, the Board approved up to $1,000,000 to be used in repurchasing our stock; however, we are not obligated to repurchase any specific number of shares and the program may be suspended or terminated at our discretion. During each of the three and six-month periods ended June 30, 2015 and 2014, no repurchases were made. As of June 30, 2015, $782,600 remains available for stock purchases under this program.

Working Capital

As of June 30, 2015, we had current assets $1,764,500 and current liabilities of $3,629,900, which netted to working capital deficit of $1,865,400. Included in current liabilities was the current portion of deferred revenue of $2,446,000.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

ITEM 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2015.

There has not been any change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

Not Applicable.

ITEM 1A. Risk Factors

There have been no material changes in our risk factors from those set forth under Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the Securities and Exchange Commission on March 31, 2015.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

We did not sell any unregistered securities during the quarter ended June 30, 2015.

On July 24, 2015 we entered into a securities purchase agreement and subscription agreement (the “Agreements”), pursuant to which we issued and sold for cash an aggregate of 31,588,791 shares of our common stock at a purchase price of $0.08074 per share. We derived gross proceeds of $2,550,500 from this placement. This offering was made pursuant to the exemptions from registration afforded by Section 4(a)(2) under the Securities Act of 1933 and Regulation D thereunder, involving an offering solely to accredited investors. Members of our board and management participated in this offering by purchasing a total of $220,000 of the shares issued at the same price as the other investors. The proceeds of this offering will be used for general corporate purposes and to advance our hopTo Work product initiative.

ITEM 3. Defaults Upon Senior Securities

Not applicable.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

Not applicable.

ITEM 6. Exhibits

Exhibit Number	Exhibit Description
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
101*	The following financial information from hopTo Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014, (ii) Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014, (iii) Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2015 and 2014, (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014, (v) Notes to Unaudited Condensed Consolidated Financial Statements.

* Furnished, not filed

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		hopTo Inc.
		(Registrant)

Date:	August 7, 2015		Date:	August 7, 2015

By:	/s/ Eldad Eilam		By:	/s/ Jean-Louis Casabonne
	Eldad Eilam			Jean-Louis Casabonne
	Chief Executive Officer			Chief Financial Officer
	(Principal Executive Officer)			(Principal Financial Officer and
				Principal Accounting Officer)

hopTo Inc. - FORM 10-Q - August 7, 2015

Attached files

hopTo Inc. Reports