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EX-23.1 - hopTo Inc.ex23-1.htm
EX-5.1 - hopTo Inc.ex5-1.htm

 

As filed with the Securities and Exchange Commission on August 17, 2018

 

Registration No. 333-

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

hopTo Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   6770   13-3899021
(State of
incorporation)
 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

6 Loudon Road, Suite 200

Concord, New Hampshire 03301

(800) 472-7466

(Address and telephone number of registrant’s principal executive offices)

 

Jean-Louis Casabonne

Chief Financial Officer and Interim Chief Executive Officer

hopTo Inc.

6 Loudon Road, Suite 200

Concord, New Hampshire 03301

(800) 472-7466

(Name, Address and Telephone Number of Agent for Service)

 

Copy to:

Ben D. Orlanski, Esq.

Katherine J. Blair, Esq.

Manatt, Phelps & Phillips, LLP

11355 West Olympic Boulevard

Los Angeles, CA 90064

(310) 312-4000

(310) 312-4224 – Facsimile

 

(Approximate date of commencement of proposed sale to the public) As soon as practicable after the effective date of this Registration Statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [X]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

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 (Check one):

 

Large accelerated filer   [  ]   Accelerated filer [  ]
Non-accelerated filer   [  ] (Do not check if a smaller reporting company)   Smaller reporting company  [X]

 

 

 

CALCULATION OF REGISTRATION FEE
Title of each class of securities to be registered (1)  Amount
to be
registered(1)
   Proposed maximum
offering price per share(1)(2)
   Proposed maximum aggregate offering price   Amount of registration fee 
Common Stock, $0.0001 par value per share (3)(4)   564,556   $0.3450   $194,771.82   $24.25 

  

(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended (the “Securities Act”), the securities being registered hereunder include such indeterminate number of additional shares of common stock as may be issued after the date hereof as a result of stock splits, stock dividends or similar transactions.
(2) Estimated in accordance with Rule 457(c) solely for purposes of calculating the registration fee. The maximum price per Security and the maximum aggregate offering price are based on the average of the $0.35 (bid) and $0.34 (ask) price of the Registrant’s common stock, as reported on the OTC on August 13, 2018, which date is within five business days prior to filing this Registration Statement.
(3) The number of shares of common stock consists of shares of common stock issuable upon exercise of outstanding warrants.
(4) Each share of common stock includes one preferred share purchase right under the Registrant’s stockholder rights plan.

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

 
 

 

The information contained in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and the selling stockholders are not soliciting offers to buy these securities in any state where the offer or sale of these securities is not permitted.

 

SUBJECT TO COMPLETION, DATED AUGUST 16, 2018

 

PRELIMINARY PROSPECTUS

 

HOPTO INC.

 

564,556 Shares of Common Stock

 

This prospectus relates to the sale or other disposition from time to time of up to an aggregate of 564,556 shares of our common stock by the persons described in this prospectus, whom we call the “selling stockholders,” identified in the section entitled “Selling Stockholders” in this prospectus, or their transferees. We are registering these shares as required by the terms of the registration rights agreements between the selling stockholders and us. Such registration does not mean that the selling stockholders will actually offer or sell any of these shares. We will not receive any proceeds from the sale or other disposition of the shares of common stock offered by the selling stockholders. We will, however, receive the exercise price of any warrants exercised for cash. To the extent that we receive cash upon exercise of any warrants, we expect to use that cash for working capital and general corporate purposes.

 

The selling stockholders or their transferees may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. For additional information, you should refer to the section entitled “Plan of Distribution” of this prospectus. We are contractually obligated to pay all expenses of registration incurred in connection with this offering, except any underwriting discounts and commissions incurred by the selling stockholders.

 

Our common stock is currently quoted on the OTC Markets under the symbol “HPTO.” The closing sales price of our common stock on August 15, 2018 was $0.34 per share.

 

This investment involves risks. You should refer to the discussion of risk factors, beginning on page 8 of this prospectus, and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017, attached hereto as Appendix A.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

This prospectus is dated                       2018

 

 
 

 

 

Table of Contents

 

  Page
ABOUT THIS PROSPECTUS ii
FORWARD-LOOKING INFORMATION iii
PROSPECTUS SUMMARY 1
OVERVIEW 1
PRIVATE PLACEMENTS 7
THE OFFERING 8
RISK FACTORS 9
USE OF PROCEEDS 15
PRICE RANGE OF OUR COMMON STOCK 15
DIVIDEND POLICY 15
PROPERTIES 15
LEGAL PROCEEDINGS 15
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 15
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 16
EXECUTIVE COMPENSATION 16
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 16
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE 16
SELLING STOCKHOLDERS 17
PLAN OF DISTRIBUTION 19
DESCRIPTION OF OUR SECURITIES 21
LEGAL MATTERS 23
EXPERTS 23
WHERE YOU CAN FIND MORE INFORMATION 23
   
APPENDIX A: ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017  

APPENDIX B: QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2018

 

 

i
 

 

ABOUT THIS PROSPECTUS

 

As permitted under the rules of the Securities and Exchange Commission, or the SEC, this prospectus includes important business information about hopTo Inc. that is also contained in documents that we file with the SEC. You may obtain copies of these documents, without charge, from the website maintained by the SEC at www.sec.gov, as well as other sources. See “Where You Can Find More Information” in this prospectus.

 

Before you invest in our securities, you should read carefully the registration statement (including the exhibits thereto) of which this prospectus forms a part, this prospectus, any accompanying prospectus supplement, our Annual Report on Form 10-K for the year ended December 31, 2017 (“Form 10-K”), filed with the SEC on April 17, 2018, attached as Appendix A to this prospectus and forming a part hereof, and our Quarterly Report on Form 10-Q for the period ended June 30, 2018 (“Form 10-Q,” and together with the Form 10-K, “SEC Reports”), filed with the SEC on August 14, 2018, attached as Appendix B to this prospectus and forming a part hereof. The SEC Reports attached in Appendix A and Appendix B are considered to be part of this prospectus. Any statement contained in this prospectus will be deemed to be modified or superseded for purposes of this prospectus to the extent that a statement contained in a later filed SEC Report modifies or replaces that statement. You should rely only on the information contained in this prospectus and our SEC Reports. We have not authorized anyone to provide you with additional or different information from that contained in this prospectus or our SEC Reports. You should assume that the information contained in this prospectus and our SEC Reports is accurate only as of any date on the front cover of this prospectus or the respective dates of our SEC Reports, as applicable, regardless of the time of delivery of this prospectus or any exercise of the subscription rights. Our business, financial condition, results of operations and prospects may have changed since those dates.

 

Unless otherwise indicated or unless the context requires otherwise, all references in this prospectus to the “Company,” “the registrant,” “we,” “us,” and “our” mean hopTo Inc., a Delaware corporation, together with our consolidated subsidiaries, including GraphOn Corporation, a Delaware corporation, unless the context otherwise requires.

 

hopTo® and GO-Global®, among others, are registered trademarks of hopTo Inc., or its subsidiaries.

 

ii
 

 

FORWARD-LOOKING INFORMATION

 

This prospectus includes, in addition to historical information, “forward-looking statements.” All statements other than statements of historical fact we make in this prospectus 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, but are not limited to, those discussed in Item 1A. “Risk Factors” in our Form 10-K, as well as those discussed elsewhere in this prospectus. Statements included in this prospectus are based upon information known to us as of the date that this prospectus is filed with the Securities and Exchange Commission (the “SEC”), and we assume no obligation to update or alter our forward-looking statements made in this prospectus, whether as a result of new information, future events or otherwise, except as otherwise required by applicable federal securities laws.

 

For further discussion of these and other factors see “Risk Factors” in this prospectus and the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in our Form 10-K (Part II, Item 7 and Part I, Item 1A, respectively) attached hereto as Appendix A, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in our Form 10-Q (Part I, Item 2 and Part II, Item 1A, respectively) attached hereto as Appendix B. This prospectus and all other written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in or referred to in this section.

 

iii
 

 

PROSPECTUS SUMMARY

 

This summary highlights information contained throughout this prospectus, in our Annual Report on Form 10-K for the year ended December 31, 2017 (“Form 10-K”), which is attached as Appendix A to this prospectus, and in our Quarterly Report on Form 10-Q for the period ended June 30, 2018 (“Form 10-Q,” and together with the Form 10-K, “SEC Reports”) , which is attached as Appendix B to this prospectus and forms a part hereof. This summary does not contain all of the information that should be considered before investing in our securities. Investors should read the entire prospectus carefully, including the more detailed information regarding our business, the risks of purchasing our securities discussed in this prospectus and in our SEC Reports. See “Risk Factors” beginning on page 8 of this prospectus and in Part I, Item 1A of our Form 10-K attached hereto as Appendix A.

 

OVERVIEW

 

Introduction

 

We are developers of application publishing software which includes application virtualization software and cloud computing software for multiple computer operating systems including Windows, UNIX and several Linux-based variants. Our application publishing software solutions are sold under the brand name GO-Global, which is our sole revenue source. GO-Global is an application access solution for use and/or resale by independent software vendors (“ISVs”), corporate enterprises, governmental and educational institutions, and others who wish to take advantage of cross-platform remote access and Web-enabled access to their existing software applications, as well as those who are deploying secure, private cloud environments.

 

Since 2012, we have also been developing several products in the field of software productivity for mobile devices such as tablets and smartphones, which have been marketed under the hopTo brand.

 

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.

 

Update on hopTo Plans

 

During Q4 2016, we have ceased all of our sales, marketing and development efforts for the hopTo products, and at this time we do not expect any meaningful revenues from these products in the foreseeable future.

 

Except for the sale of 7 patents sold to Salesforce.com during the fourth quarter of 2017, we own all hopTo-related IP including source-code, related patents, and the relevant trademarks. We continue to believe that we may be able to extract value from these assets and are currently working to do so at this time. For detailed information on the hopTo products and technologies, please refer to our Annual Report on form 10-K for the year ended December 31, 2017, which was filed with the SEC on April 17, 2018 as well as our other SEC filings which are available at www.sec.gov. Such filings are being noted for historical information only; unless expressly noted, they are not incorporated herein by reference.

 

There is no certainty as to timing or success of our efforts to extract value from our hopTo assets, and stockholders should not place any reliance on the outcome of such efforts unless and until definitive agreements are reached, which may include the sale of certain of our hopTo software products or additional sales of patents.

 

Recent Developments

 

Warrant Exchange Transaction

 

Consistent with our prior disclosures in our annual report on Form 10-K, on May 21, 2018, we entered into an Exchange Agreement (the “Exchange Agreement”) with certain holders (the “Holders”) of existing warrants originally issued on June 17, 2013 and January 7, 2014 (the “Existing Warrants”) to purchase shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”). The Existing Warrants were exercisable for an aggregate of 564,556 shares of the Company’s Common stock and have a weighted average exercise price of approximately $10.77.

 

1
 

 

Pursuant to the Exchange Agreement, the Company agreed to exchange the Existing Warrants held by the Holders for new warrants exercisable for an aggregate 564,556 shares of the Company’s Common Stock, having an exercise price of $0.01 per share and a five year term (the “New Warrants”). The Exchange Agreement provides for a full release of all claims by the Holders related to damages (including liquidated damages) related to alleged failures by the Company to file or maintain certain registration statements, and also includes representations and warranties, covenants and conditions customary in agreements of this type. The transactions contemplated by the Exchange Agreement closed on May 21, 2018. Accordingly, the Existing Warrants have been canceled and the New Warrants issued to the Holders.

 

Rights Agreement

 

As previously disclosed, on February 16, 2018, we entered into a Rights Agreement (the “Rights Agreement”) with American Stock Transfer & Trust Company, LLC, as rights agent (the “Rights Agent”). Details of the plan, including a copy of the Rights Agreement, can be found in the Form 8-A that the Company filed with the SEC on February 16, 2018.

 

In connection with the adoption of the Rights Agreement and pursuant to its terms, the Company’s Board of Directors (the “Board”) authorized and declared a dividend distribution of one right (a “Right”) for each outstanding share of the common stock, $0.0001 par value per share (the “Common Stock”), of the Company to stockholders of record at the close of business on February 26, 2018 (the “Record Date”). Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of the Series A Junior Participating Preferred Stock, $0.01 par value per share (the “Preferred Stock”), of the Company at an exercise price of $1.00 per one one-thousandth of a Preferred Share, subject to adjustment (the “Exercise Price”). The complete terms of the Rights are set forth in the Rights Agreement (the “Rights Agreement”).

 

Generally, the Rights Agreement works by imposing a significant penalty upon any person or group (including a group of persons that are acting in concert with each other) that acquires ten percent (10%) or more of the Common Shares without the approval of the Board. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult or discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Board. The Rights Agreement is not intended to interfere with any merger, tender or exchange offer or other business combination approved by the Board. Nor does the Rights Agreement prevent the Board from considering any offer that it considers to be in the best interest of its stockholders. The Rights expire at or prior to the earlier of (i) February 16, 2021 or (ii) the redemption or exchange of the Rights as provided for in the Rights Agreement.

 

Corporate Background

 

hopTo Inc., or the Company, is a Delaware corporation, founded in May 1996. Our headquarters are located at 6 Loudon Road, Suite 200, Concord, NH 03301, our toll-free phone number is 1-800-472-7466, and our phone number for local and international calls is 408-688-2674. We also 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 prospectus.

 

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 investor webpage at www.hopto.com/investors (click the “Financial Reporting” link and then the “SEC Filings” link) as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.

 

2
 

 

Our Intellectual Property

 

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

 

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

 

We also currently hold rights to patents but are not 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.

 

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. See the Exhibits referred to in Item 15 in Form 10-K attached hereto as Appendix A for further details on the ipCapital engagement agreement and amendments thereto.

 

As a result of ipCapital’s work under the engagement agreement, as amended, as of August 14, 2018, 173 new patent applications have been filed. Of these 173 applications, 53 patents have been granted by the United States Patent and Trademark Office (“USPTO”). Due to financial constraints on our operations, we have suspended patent prosecution activity other than to pay issuance fees for patents already approved by USPTO. We do not expect to file more applications in 2018.

 

ipCapital Licensing Company I, LLC

 

In February 2013, we entered into an IP Brokerage agreement with ipCapital Licensing Company I, LLC (“ipCLC”) (the “IP Brokerage Agreement”). At the time that we entered into this agreement, John Cronin was a partner at ipCLC. He is no longer affiliated with ipCLC. Pursuant to the IP Brokerage Agreement, we engaged ipCLC, on a no-retainer basis, to identify and present us with candidates who may be seeking to acquire a certain limited group of our patents unrelated to our current business strategy. In June 2016, we determined that the IP Brokerage Agreement is no longer in effect since ipCLC no longer exists as an entity.

 

The GO-Global Software Products

 

Our GO-Global product offerings 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 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 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.

 

3
 

 

  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.

 

Target Markets

 

The target market for our GO-Global products includes small to medium-sized companies, departments within large corporations, governmental and educational institutions, independent software vendors (ISVs) and value-added resellers (VARs). Our software enables these targeted organizations to move their existing applications to the public cloud and provide SaaS, or move them to a secure, private cloud environment. By using our software, organizations can give their remote users, partners and customers access to their native applications. Our software is designed to allow these organizations and enterprises to tailor the configuration of the end-user device for a particular purpose, rather than following a “one PC fits all” high-cost ownership model. We believe our opportunities are as follows:

 

 

ISVs. By Web-enabling their applications through use of our products, we believe that our ISV customers can accelerate their time to market without the risks and delays associated with rewriting applications or using other third-party software, thereby opening up additional revenue opportunities and securing greater satisfaction and loyalty from their customers.

 

Our technology integrates with their existing software applications without sacrificing the full-featured look and feel of such applications, thereby providing ISVs with out-of-the-box Web-enabled applications with their own branding for licensed, volume distribution to their enterprise customers. We further believe that ISVs that effectively address the Web computing needs of customers and the emerging application service provider market will have a competitive advantage in the marketplace.

     
  Enterprises Employing a Mix of UNIX, Linux, Macintosh and Windows. Small to medium-sized companies that utilize a mixed computing environment require cross-platform connectivity software, like GO-Global Host and/or GO-Global Gateway, which will allow users to access applications from different client devices. We believe that our server-based software products will significantly reduce the cost and complexity of connecting PCs to various applications.
     
  Enterprises with Remote Computer Users and/or Extended Markets. We believe that remote computer users and enterprises with extended markets comprise two of the faster growing market segments in the computing industry. Extended enterprises permit access to their computing resources by their customers, suppliers, distributors and other partners, thereby affording them manufacturing flexibility, increased speed-to-market, and enhanced customer satisfaction. For example, extended enterprises may maintain decreased inventory via just-in-time, vendor-managed inventory and related techniques, or they may license their proprietary software application on a “pay-per-use” model, based on actual time usage by the user. The early adoption of extended enterprise software may be driven in part by an organization’s need to exchange information over a wide variety of computing platforms. We believe that our server-based software products, along with our low-impact communications protocol, which has been designed to enable highly efficient low-bandwidth connections, are well positioned to provide extended enterprises with the necessary means to exchange information over a wide variety of computing platforms.
     
  VARs. The VAR channel presents an additional sales force for our products and services. In addition to creating broader awareness of our GO-Global products, VARs also provide integration and support services for our current and potential customers. Our products allow VARs to offer a cost-effective competitive alternative for server-based, or thin-client, computing. In addition, reselling our GO-Global products creates new revenue streams for our VARs.

 

4
 

 

Strategic Customer Relationships

 

We believe it is important to maintain our current strategic alliances and to seek suitable new alliances in order to enhance shareholder value, improve our technology and/or enhance our ability to penetrate relevant target markets. We also are focusing on strategic relationships that have immediate revenue generating potential, strengthen our position in the server-based software market, add complementary capabilities and/or raise awareness of our products and us. Our strategic relationships for all GO-Global products include the following:

 

  We are party to a non-exclusive distribution agreement with KitASP, a Japanese application service provider founded by companies within Japan’s electronics and infrastructure industries, including NTT DATA, Mitsubishi Electric, Omron, RICS, Toyo Engineering and Hitachi. Pursuant to this agreement, which was entered into in September 2011, KitASP has licensed our GO-Global product line for inclusion in their software products, primarily their server-bundled application service provider software solution. Either party may terminate the contract upon 60 days’ written notice to the other party.
     
  We are party to a non-exclusive channel partner agreement with Elosoft Informatica Ltda, a South American distributor of various technology products, including both hardware and software offerings, and related services. Under the terms of this agreement, Elosoft has licensed both our GO-Global Windows Host and GO-Global for UNIX software for deployment to their distribution network with both sub-distributors and end-users. Our agreement with Elosoft, which was originally entered into in February 2005, automatically renews annually. Either party may terminate the agreement upon 60 days’ written notice to the other party.
     
  We are party to a non-exclusive global purchasing agreement with Alcatel-Lucent, a telecommunications, network systems and services company. Pursuant to this relationship, which started in July 1999, Alcatel-Lucent has licensed our GO-Global for UNIX software for inclusion with their software products. Many of Alcatel-Lucent’s customers are using our server-based software to remote access Alcatel-Lucent’s Network Management Systems (“NMS”) applications. Our current agreement with Alcatel-Lucent expired in December 2012. Since December 2012 we have mutually agreed with Alcatel-Lucent to renew this contract each year for additional one-year with terms consistent with those set forth in the expired contract. The current renewal period expires in December 2018.
     
  We are party to a non-exclusive distribution agreement with GE Intelligent Platforms (“GE”), a U.S. based designer, manufacturer, and supplier of products for industrial control and automation. GE has licensed our GO-Global product line for inclusion in their automation and production management software products. Our agreement with GE, which was originally entered into in December 2002, automatically renews annually. Either party may terminate the contract upon 60 days’ written notice to the other party.
     
  In August 2011 we entered into an agreement with GAD eG (“GAD”), a Germany based provider of information technology, software development and data processing solutions for retail banks. GAD licensed our GO-Global for Windows software and embedded it in their banking applications. This agreement covered a one-time transaction of theirs with a large German bank. The installation of their software application generated significant product license sales for us in 2011 and 2012. We expect to have maintenance sales in future years; however we do not expect to have future product licensing sales to GAD comparable to the 2012 and 2011 levels.
     
  In January 2010, we entered into a non-exclusive reseller and distribution agreement with Information Delivery Systems, LLC (IDS), a U.S. based publisher and hosting solutions provider for churches and educational institutions. IDS has licensed our GO-Global for Windows software and has utilized it as the hosting engine for its cloud-based solutions. Our agreement with IDS automatically renews annually. Either party may terminate the contract upon 60 days’ written notice to the other party.

 

5
 

 

Sales, Marketing and Support

 

Sales and marketing efforts for our software products are directed at increasing product awareness and demand among ISVs, small to medium-sized enterprises, departments within larger corporations and VARs who have a vertical orientation or are focused on Windows, UNIX and/or Linux environments. Current marketing activities have been limited due to budget constraints but include Internet marketing, direct response, promotional materials, and maintaining an active Web presence for marketing and sales purposes.

 

For the year ended December 31, 2017 and 2016, our four most significant customers and partners accounted for approximately 35% and 25% of sales, respectively.

 

Many of our customers enter into, and periodically renew, maintenance contracts to ensure continued product updates and support. Currently, we offer maintenance contracts for one, two, three and five-year periods.

 

Operations

 

We perform all purchasing, order processing and shipping of products and accounting functions related to our operations. Although we generally ship products electronically, when a customer requires us to physically ship them a disc, production of the disc, printing of documentation and packaging are also accomplished through in-house means; however, since virtually all of our orders are currently being fulfilled electronically, we do not maintain any prepackaged inventory. Additionally, we have relatively little backlog at any given time; thus, we do not consider backlog a significant indicator of future performance.

 

Research and Development

 

Our 2017 research and development efforts focused on further enhancing the functionality, performance and reliability of existing products and developing new features. We invested $1,500,100 and $2,187,900 in research and development with respect to our software products in 2017 and 2016, respectively. During 2017 and 2016, we did not capitalize any additional development investments incurred. During the six months ended June 30, 2018 and 2017, research and development expenses were $786,500 and 740,100, respectively.

 

Competition

 

The software markets in which we participate are highly competitive. Competitive factors in our market space include price, product quality, functionality, product differentiation and the breadth and variety of product offerings and product features. We believe that our products offer certain advantages over our competitors, particularly in product performance and market positioning.

 

GO-Global competes with developers of conventional server-based software for the individual PC, as well as with other companies in the cloud computing software market and the application virtualization software market. We believe our principal competitors in the cloud computing software market include Citrix Systems, Inc., OpenText Communications, Ltd. and Microsoft Corporation. Citrix is an established leading vendor of virtualization software, OpenText is an established market leader for remote access to UNIX applications and Microsoft is an established leading vendor of Windows operating systems and services for servers.

 

Employees

 

As of June 30, 2018, we had a full-time equivalent of 14.0 total employees, including 3 in marketing, sales and support, 8.5 in research and development (which is inclusive of employees who may also perform customer service related activities), 2.0 in administration and finance and 0.5 in our patent group. We believe our relationship with our employees is good. None of our employees are covered by a collective bargaining agreement.

 

6
 

 

THE OFFERING

 

Common stock outstanding prior to this offering:   9,804,400 shares (1)
     
Common stock offered for sale by the selling stockholders:   564,556 shares (2)
     
Common stock to be outstanding after this offering:   9,804,400 shares (3)
     
Use of Proceeds:   We will not receive any proceeds from the sale or other disposition of the 564,556 shares of common stock offered by the selling stockholders under this prospectus. We will, however, receive up to $5,645.56 in the aggregate from the selling stockholders if they exercise, for cash, unexercised warrants to acquire 564,556 shares of our common stock. To the extent that we receive cash upon exercise of any warrants, we expect to use that cash for working capital and general corporate purposes.
     
Risk Factors:   See the section entitled “Risk Factors” beginning on page 8 and other information included in this prospectus and Part I, Item 1A of our Form 10-K attached hereto as Appendix A for a discussion of factors you should consider before making an investment decision.
     
OTC QB symbol:   HPTO

 

(1) As of June 30, 2018. This number excludes 697,119 shares issuable upon the exercise of warrants and (ii) 314,500 shares of our common stock, which are issuable upon exercise of our outstanding options. An additional 404,926 shares are reserved for future grants under our stock option plans.
   
(2) Represents 564,556 shares issuable upon the exercise of warrants held by the selling stockholders.
   
(3) Assumes shares of common stock outstanding following completion of this offering, based on (i) 9,804,400 shares of common stock outstanding as of June 30, 2018 and (ii) assumes no other shares of common stock are issued by the Company or exercised under other warrants or other options for common stock.

 

7
 

 

RISK FACTORS

 

The risks and uncertainties described below could materially and adversely affect our business, financial condition and results of operations and could cause actual results to differ materially from our expectations. The risk factors described below include the considerable risks associated with the current economic environment and the related potential adverse effects on our financial condition and results of operations. You should read these risk factors in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and our Consolidated Financial Statements and related notes in Item 8 in our Annual Report on Form 10-K for the year ended December 31, 2017. There also may be other factors that we cannot anticipate or that are not described in this report generally because we do not currently perceive them to be material. Those factors could cause results to differ materially from our expectations.

 

There have been no material changes in our risk factors from those set forth under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the Securities and Exchange Commission on April 17, 2018.

 

Risks Related to Our Business

 

We have a history of operating and net losses.

 

We have experienced significant operating and net losses since we began operations. Despite generating a modest net profit from operations before provision for income taxes and net income for the year ended December 31, 2017 after years of losses, this improved financial performance could reverse if our GO-Global business, our only source of revenue, declines or if we are unable to maintain control over our expenses.

 

Our revenue is typically generated from a limited number of significant customers.

 

A material portion of our revenue, all of which is currently derived from our GO-Global products, during any reporting period is typically generated from a limited number of significant customers, all of which are unrelated third parties. We categorize our customers into three broad categories for revenue recognition purposes: stocking resellers, non-stocking resellers and direct end users. If any of our significant non-stocking resellers or direct end users reduce their order level or fail to order during a reporting period, our revenue could be materially adversely impacted because we recognize revenue on sales to these customers upon product delivery, assuming all other revenue recognition criteria have been met.

 

Our significant stocking resellers are typically ISVs who have bundled our products with theirs to sell as Web-enabled versions of their products. These customers maintain inventories of our products for resale, and we do not recognize revenue until our products are resold to end users, assuming all other revenue recognition criteria have been met. If these customers decide to maintain a lower level of inventory in the future and/or they are unable to sell their inventory to end users as quickly as they have in the past, our revenue and business could be materially adversely impacted.

 

If we are unable to develop new products and enhancements to our existing products, our business, results of operations, financial condition, and cash flows could be materially adversely impacted.

 

The market for our products and services is characterized by:

 

  frequent new product and service introductions and enhancements;
     
  rapid technological change;
     
  evolving industry standards;
     
  fluctuations in customer demand; and
     
  changes in customer requirements.

 

8
 

 

Our future success depends on our ability to continually enhance our current products and develop and introduce new features and capabilities that our customers choose to buy. If we are unable to satisfy our customers’ demands and remain competitive with other products that could satisfy their needs by introducing new features, capabilities and enhancements, our business, results of operations, financial condition, and cash flows could be materially adversely impacted. Our future success could be hindered by, among other factors:

 

  the amount of cash we have available to fund investment in new products and enhancements;
     
  the reduced level of research and development resources that the we now have available in the Company to perform the work necessary to develop new features and capabilities
     
  delays in our introduction of new features, capabilities and/or enhancements of existing products;
     
  delays in market acceptance of new products and/or enhancements of existing products; and
     
  a competitor’s announcement of new products and/or product enhancements or technologies that could replace or shorten the life cycle of our existing products.

 

For example, sales of our GO-Global Windows Host software could be affected by the announcement from Microsoft of an intended release, and the subsequent actual release, of a new Windows-based operating system, or an upgrade to a previously released Windows-based operating system version. These new or upgraded systems may contain similar features to our products or they could contain architectural changes that would temporarily prevent our products from functioning properly within a Windows-based operating system environment.

 

Despite our generating net profit and positive cash flows from operations in fiscal 2017, we are subject to various liquidity risks.

 

We have incurred significant net losses since our inception. Despite making a net profit of $600,600 for the fiscal year ended December 31, 2017, as of that date we had an accumulated deficit of $81,849,200 and a working capital deficit of $1,947,800. Our ability to continue to generate net profits and positive cash flows from operations is dependent on our ability to continue to generate revenue from our legacy GO-Global business, which in turn is subject to a variety of risks, some of which are described in this prospectus. As a very small company, we have limited ability to deploy new revenue increasing opportunities, and limited flexibility to respond to unforeseen adverse developments, such as customer losses, adverse market developments or unanticipated expenses. Although our current operating plan does not call for the raising of new capital, if we need to raise new capital, our ability to do so is extremely limited given our very small market capitalization and the limited volume in the trading of our common stock.

 

If we do need to issue new equity, such issuances may be at a significant discount to market prices, 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 any execution of our operations will be available on a timely basis, on reasonable terms or at all.

 

Challenges to Develop New Business May Reverse the Improvements in Our Finances. Our management believes that any significant improvement in the Company’s cash flow must result from increases in revenues from existing sources and from new revenue sources. The Company’s ability to develop new revenues depends on many factors not in its control, or only partially in its control, including available capital resources which affect the extent of its marketing activities and its research and development activities, all of which are limited by the Company’s small size and revenue base. We cannot assure you that the resources that the Company can devote to marketing and to research and development will be sufficient to increase its revenues to levels that will enable it to maintain positive operating cash flow in the future.

 

9
 

 

Sales of products within our GO-Global product families are likely to be our only source of revenue during 2018.

 

Due to financial constraints we gradually suspended all development and sales of hopTo products over the course of the second half of 2016. Sales of products within our GO-Global product families, and related enhancements, were our only source of revenue during 2017 and will continue to be our only source of revenue during 2018. The success, if any, of our new GO-Global releases may depend on a number of factors, including market acceptance of the new GO-Global releases and our ability to manage the risks associated with introducing such releases. Declines in demand for our GO-Global products could occur as a result of, among other factors:

 

  lack of success with our strategic partners;
     
  new competitive product releases and updates to existing competitive products;
     
  decreasing or stagnant information technology spending levels;
     
  price competition;
     
  technological changes; or
     
  general economic conditions in the markets in which we operate.

 

If our customers do not continue to purchase GO-Global products as a result of these or other factors, our revenue would decrease and our results of operations, financial condition, and cash flows would be adversely affected.

 

Any growth in our business will come solely from GO-Global and our other assets, and not from the hopTo Work products. GO-Global is not a high growth business.

 

As of the fourth quarter of 2016, we effectively ceased all of our sales, marketing and R&D efforts for the hopTo products. hopTo Work was our primary growth initiative. We hope to maintain our GO-Global business at or near current levels, and we will evaluate opportunities for growing this business and for extracting value from our other assets as part of our business planning, but shareholders and prospective shareholders should clearly understand that the growth opportunity we previously anticipated in the hopTo product suite is not currently being pursued, and that our growth, if any, will be on a much lower scale.

 

Our operating results in one or more future periods are likely to fluctuate significantly and may fail to meet or exceed the expectations of investors.

 

Our operating results are likely to fluctuate significantly in the future on a quarterly and annual basis due to a number of factors, many of which are outside our control. Factors that could cause our operating results and therefore our revenues to fluctuate include the following, among other factors:

 

  our ability to maximize the revenue opportunities of our patents;
     
  variations in the size of orders by our customers;
     
  increased competition; and
     
  the proportion of overall revenues derived from different sales channels such as distributors, original equipment manufacturers (“OEMs”) and others.

 

In addition, our royalty and license revenues are impacted by fluctuations in OEM licensing activity from quarter to quarter, which may involve one-time orders from non-recurring customers, or customers who order infrequently. Our expense levels are based, in part, on expected future orders and sales; therefore, if orders and sales levels are below expectations, our operating results are likely to be materially adversely affected. Additionally, because significant portions of our expenses are fixed, a reduction in sales levels may disproportionately affect our net financial results. Also, we may reduce prices and/or increase spending in response to competition or to pursue new market opportunities. Because of these factors, our operating results in one or more future periods may fail to meet or exceed the expectations of investors. In that event, the trading price of our common stock would likely be adversely affected.

 

10
 

 

We will encounter challenges in recruiting, hiring and retaining new personnel and/or replacements for any members of key management or other personnel who depart. Our chief executive and financial officer serves us on a part-time basis.

 

Our success and business strategy is dependent in large part on our ability to attract and retain key management and other personnel in certain areas of our business. If any of these employees were to leave, we would need to attract and retain replacements for them. We have lost employees, including at the officer level and in our new products engineering group, in the past. Without a successful replacement, the loss of the services of one or more key members of our management group and other key personnel could have a material adverse effect on our business.

 

With the exception of the employment agreement we entered into with our former Chief Executive Officer during 2013 which was terminated in July 2017, we do not have long-term employment agreements with any of our key personnel and any officer or other employee can terminate their relationship with us at any time. We may also need to add key personnel in the future in order to successfully implement our business strategies. The market for such qualified personnel is highly competitive and it includes other potential employers whose financial resources for such qualified personnel are more substantial than ours. Consequently, we could find it difficult to attract, assimilate or retain such qualified personnel in sufficient numbers to successfully implement our business strategies.

 

We have sought to match our expenses structure with business opportunities, but this creates risks. When we ceased our development and sales efforts associated with our hopTo Work products, we re-evaluated our management needs. As a result, our current Chief Executive Officer and Chief Financial Officer works for us on a part time basis. While we believe the smaller scale of our operations makes this arrangement workable, and has reduced our expense structure, the arrangement nevertheless makes it more difficult for the Company to evaluate and plan for growth opportunities. The Company has sought to address this challenge in various ways, including relying on the considerable expertise of our Board of Directors and the moderate use of professional advisors. Even though the Company has made considerable progress in the past fiscal year with a much reduced management staff, the Company and stockholders should recognize that this arrangement limits the Company’s ability to respond to challenges and develop opportunities. Should the Company revise its approach to management by hiring additional resources, this too, can create risks to the cost savings we have achieved, if any anticipated business opportunities are not realized, as has occurred in the past with hopTo Work.

 

Our failure to adequately protect our proprietary rights may adversely affect us.

 

Our commercial success is dependent, in large part, upon our ability to protect our proprietary rights. We rely on a combination of patent, copyright and trademark laws, as well as trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary rights. These measures afford only limited protection. We cannot assure you that measures we have taken or may take in the future will be adequate to protect us from misappropriation or infringement of our intellectual property. Despite our efforts to protect proprietary rights, it may be possible for unauthorized third parties to copy aspects of our products or obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our intellectual property or other proprietary rights as fully as do the laws of the United States. Furthermore, we cannot assure you that the existence of any proprietary rights will prevent the development of competitive products. The infringement upon, or loss of, any proprietary rights, or the development of competitive products despite such proprietary rights, could have a material adverse effect on our business.

 

Our business significantly benefits from strategic relationships and there can be no assurance that such relationships will continue in the future.

 

Our business and strategy relies to a significant extent on our strategic relationships with other companies. There is no assurance that we will be able to maintain or further develop any of these relationships or to replace them in the event any of these relationships are terminated. In addition, any failure to renew or extend any license between any third party and us may adversely affect our business.

 

11
 

 

We rely on indirect distribution channels for our products and may not be able to retain existing reseller relationships or develop new reseller relationships.

 

Our GO-Global products are primarily sold through several distribution channels. An integral part of our strategy is to strengthen our relationships with resellers such as OEMs, systems integrators, VARs, distributors and other vendors to encourage these parties to recommend or distribute our products and to add resellers both domestically and internationally. We currently invest, and intend to continue to invest, significant resources to expand our sales and marketing capabilities. We cannot assure you that we will be able to attract and/or retain resellers to market our products effectively. Our inability to attract resellers and the loss of any current reseller relationships could have a material adverse effect on our business, results of operations, financial condition, and cash flows. Additionally, we cannot assure you that resellers will devote enough resources to provide effective sales and marketing support to our products.

 

The markets in which we participate are highly competitive and have more established competitors.

 

The markets we participate in with GO-Global are intensely competitive, rapidly evolving and subject to continuous technological changes. We expect competition to increase in each of these markets as other companies introduce additional competitive products. In order to compete effectively, we must continually develop and market new and enhanced products and market those products at competitive prices. As markets for our products continue to develop, additional companies, including companies in the computer hardware, software and networking industries with significant market presence, may enter the markets in which we compete and further intensify competition. A number of our current and potential competitors have longer operating histories, greater name recognition and significantly greater financial, sales, technical, marketing and other resources than we do. We cannot give any assurance that our competitors will not develop and market competitive products that will offer superior price or performance features, or that new competitors will not enter our markets and offer such products. We believe that we will need to invest significant financial resources in research and development to remain competitive in the future in each of the markets in which we compete. Such financial resources may not be available to us at the time or times that we need them, or upon terms acceptable to us, or at all. We cannot assure you that we will be able to establish and maintain a significant market position in the face of our competition and our failure to do so would adversely affect our business.

 

Risks Related to Our Common Stock

 

Our stock is thinly traded and its price has been historically volatile.

 

Our stock is thinly traded. As such, holders of our stock are subject to a high risk of illiquidity, e.g., you may not be able to sell as many shares at the price you would like, or you may not be able to purchase as many shares at the price you would like, due to the low average daily trading volume of our stock. Additionally, the market price of our stock has historically been volatile; it has fluctuated significantly to date. The trading price of our stock is likely to continue to be highly volatile and subject to wide fluctuations. Your investment in our stock could lose some or all of its value.

 

Future sales of our common stock could adversely affect its price and our future capital-raising activities, and could involve the issuance of additional equity securities, which would dilute current shareholder investments in our common stock and could result in lowering the trading price of our common stock.

 

We may sell securities in the public or private equity markets if and when conditions are favorable. Sales of substantial amounts of common stock, or the perception that such sales could occur, could adversely affect the prevailing market price of our common stock and our ability to raise capital. We may issue additional common stock in future financing transactions or as incentive compensation for our management team and other key personnel, consultants and advisors. Issuing any equity securities would be dilutive to the equity interests represented by our then-outstanding shares of common stock. The market price for our common stock could decrease as the market takes into account the dilutive effect of any of these issuances. Furthermore, we may enter into financing transactions and issue securities with rights and preferences senior to the rights and preferences of our common stock, and we may issue securities at prices that represent a substantial discount to the market price of our common stock. A negative reaction by investors and securities analysts to any discounted sale of our equity securities could result in a decline in the trading price of our common stock.

 

12
 

 

We have a significant number of outstanding warrants and options, and future sales of these shares could adversely affect the market price of our common stock.

 

As of June 30, 2018, we had outstanding warrants for an aggregate of 697,119 shares of common stock, at a weighted average exercise price of $1.30, and outstanding options exercisable for an aggregate of 300,032 shares of common stock, at a weighted average exercise price of $2.44 per share. The holders may sell these shares exercisable under warrants or options in the public markets from time to time. In addition, if our stock price rises, more outstanding warrants and options will be “in-the-money” and the holders may exercise their warrants and options and sell a large number of shares. This could cause the market price of our common stock to decline.

 

Our common stock is quoted on the OTC Markets Group, Inc., which may have an unfavorable impact on our stock price and liquidity.

 

Our common stock is currently quoted under the symbol “HPTO” on the OTC Markets QB tier (“OTCQB”). The OTCQB is not a “national securities exchange,” and in general, is a significantly more limited market than the markets operated by the New York Stock Exchange and NASDAQ. The quotation of our shares on the OTCQB could result in a less liquid market being available for existing and potential stockholders to trade shares of our common stock, which could depress the trading price of our common stock and have a long-term adverse impact on our ability to raise capital in the future. Because of the limited trading market for our common stock, and because of the significant price volatility, investors may not be able to sell their shares of common stock when they want to do so.

 

Our stock may lose access to a viable trading market.

 

Given the increasing cost and resource demands of being a public company, we may decide to “go dark,” or cease filing with the SEC, by deregistering our securities, for a period of time until our assets and stockholder base are sufficient to warrant public trading again. During such time, there would be a substantial decrease in disclosure by us of our operations and prospects, and a substantial decrease in the liquidity in our common stock even though stockholders may still continue to trade our common stock in the OTC market or “pink sheets.” The market’s interpretation of a company’s motivation for “going dark” varies from cost savings, to negative changes in the firm’s prospects, to serving insider interests, which may affect the overall price and liquidity of a company’s securities.

 

We have never paid dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.

 

We have never declared or paid dividends on our common stock, nor do we anticipate paying any cash dividends for the foreseeable future. We currently intend to retain future earnings, if any, to finance the operations and expansion of our business. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon the earnings, financial condition, operating results, capital requirements and other factors as deemed necessary by our Board of Directors.

 

FINRA’s sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.

 

FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA’s requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

 

13
 

 

Provisions in our Amended and Restated Certificate of Incorporation and Second Amended and Restated Bylaws and our Rights Agreement may prevent or discourage third parties or our stockholders from attempting to replace our management or influencing significant decisions.

 

Provisions in our Amended and Restated Certificate of Incorporation and Second Amended and Restated Bylaws may have the effect of delaying or preventing a change in control of our company or our management, even if doing so would be beneficial to our stockholders. These provisions include, but are not limited to, authorizing our Board of Directors to issue preferred stock without stockholder approval and limiting the persons who may call special meetings of stockholders and providing that stockholders cannot take action by written consent in lieu of a meeting. In addition, as described above under “Recent Developments”, the Rights Agreement works by imposing a significant penalty upon any person or group (including a group of persons that are acting in concert with each other) that acquires ten percent (10%) or more of the Common Shares without the approval of the Board. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult or discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Board. The Rights Agreement is not intended to interfere with any merger, tender or exchange offer or other business combination approved by the Board. Nor does the Rights Agreement prevent the Board from considering any offer that it considers to be in the best interest of its stockholders. The Rights expire at or prior to the earlier of (i) February 16, 2021 or (ii) the redemption or exchange of the Rights as provided for in the Rights Agreement. Together, these charter and contractual provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.

 

14
 

 

USE OF PROCEEDS

 

We will not receive any proceeds from the sale or other disposition of the shares of common stock offered by the selling stockholders. We will, however, receive the exercise price of any warrants exercised for cash. To the extent that we receive cash upon exercise of any warrants, we expect to use that cash for working capital and general corporate purposes.

 

PRICE RANGE OF OUR COMMON STOCK

 

Our common stock is quoted on the OTCQB tier under the symbol “HPTO.”

 

The following table sets forth, for the periods indicated, the high and low reported sales price of our common stock. The amounts reflected in the following table are also adjusted to reflect the impact of the Reverse Stock Split, which became effective in the stock market upon commencement of trading on January 28, 2016.

 

   Fiscal 2018   Fiscal 2017 *   Fiscal 2016 * 
Quarter  High  Low   High   Low   High   Low 
First  $0.28   $0.16   $0.06   $0.02   $1.74   $0.71 
Second  $0.40   $0.20   $0.35   $0.02   $2.10   $0.83 
Third            $0.12   $0.04   $1.29   $0.03 
Fourth            $0.20   $0.03   $0.14   $0.02 

 

  * The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

As of June 30, 2018, there were approximately 122 holders of record of our common stock. On August 15, 2018, the closing price of our common stock was $0.34.

 

DIVIDEND POLICY

 

We have never declared or paid dividends on our common stock, nor do we anticipate paying any cash dividends for the foreseeable future. We currently intend to retain future earnings, if any, to finance the operations and expansion of our business. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon the earnings, financial condition, operating results, capital requirements and other factors as deemed necessary by the Board of Directors.

 

PROPERTIES

 

See Part I, Item 2 of our Form 10-K, which is attached as Appendix A to and forms a part of this prospectus.

 

 

legal proceedings

 

See Part I, Item 3 of our Form 10-K which is attached as Appendix A to and forms a part of this prospectus.

 

See Part II, Item 1 of our Form 10-Q which is attached as Appendix B to and form a part of this prospectus.

 

FINANCIAL STATEMENTS and supplementary data

 

See Part II, Item 8 of our Form 10-K which is attached as Appendix A to and forms a part of this prospectus. See Part I, Item 1 of our Form 10-Q which is attached as Appendix B to and form a part of this prospectus.

 

15
 

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

The objective of this section is to help investors understand our views on our financial condition and results of operations. You should read this discussion in conjunction with the audited consolidated financial statements and the related notes contained in our Form 10-K for the year ended December 31, 2017, which is attached as Appendix A to this prospectus and in our Form 10-Q for the period ended June 30, 2018, which is attached as Appendix B to this prospectus.

 

See Part II, Item 7 of our Form 10-K which is attached as Appendix A to and forms a part of this prospectus. See Part II, Item 2 of our Form 10-Q, which is attached as Appendix B to and forms a part of this prospectus.

 

Changes in Registrant’s Certifying Accountant

 

On May 8, 2018, the Company appointed Marcum LLP as the Company’s independent registered public accounting firm. This change in the Company’s independent registered public accounting firm was approved by the Audit Committee of the Company’s board of directors on May 8, 2018.

 

The Company’s prior independent registered public accounting firm Macias Gini & O’Connell LLP (“MGO”) notified the Company that MGO was resigning as the Company’s independent accountant on April 22, 2018. MGO audited the financial statements of the Company for the two years ended December 31, 2017. The report of MGO on such financial statements, dated April 17, 2018, did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles.

 

During the fiscal years ended December 31, 2016, and 2017, and the subsequent interim period through May 8, 2018, the Company had not consulted with Marcum regarding either (i) the application of accounting principles to a specific transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report or oral advice was provided to the Company that Marcum concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue, (ii) any matter that was the subject of a disagreement within the meaning of Item 304(a)(1)(iv) of Regulation S-K, or (iii) any reportable event within the meaning of Item 304(a)(1)(v) of Regulation S-K.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

See Part III, Item 10 “Directors, Executive Officers and Corporate Governance” of our Form 10-K, which is attached as Appendix A to and forms a part of this prospectus.

 

EXECUTIVE COMPENSATION

 

See Part III, Item 11 “Executive Compensation” of our Form 10-K, which is attached as Appendix A to and forms a part of this prospectus.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

See Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of our Form 10-K, which is attached as Appendix A to and forms a part of this prospectus.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

See Part III, Item 13 “Related Party Transactions” and “Director Independence” of our Form 10-K, which is attached as Appendix A to and forms a part of this prospectus.

 

16
 

 

SELLING STOCKHOLDERS

 

On May 21, 2018, we entered into an Exchange Agreement (the “Exchange Agreement”) with certain holders (the “Holders”) of existing warrants originally issued on June 17, 2013 and January 7, 2014 (the “Existing Warrants”) to purchase shares of the Company’s Common Stock. The Existing Warrants were exercisable for an aggregate of 564,556 shares of the Company’s Common stock and have a weighted average exercise price of approximately $10.77. Pursuant to the Exchange Agreement, the Company agreed to exchange the Existing Warrants held by the Holders for new warrants exercisable for an aggregate 564,556 shares of the Company’s Common stock, having an exercise price of $0.01 per share and a five year term (the “New Warrants”).

 

We are registering the resale or other disposition by the selling stockholders of the shares of common stock originally issuable upon exercise of the New Warrants issued to the Holders pursuant to the Exchange Agreement as required by the terms of registration rights agreements entered into between us and these selling stockholders. We have agreed to pay all expenses and costs to comply with our obligation to register the selling stockholders’ shares of common stock. We have also agreed to indemnify and hold harmless the selling stockholders against certain losses, claims, damages or liabilities, joint or several, arising under the Securities Act.

 

The information in the table and the footnotes to the table has been provided to us by the selling stockholders. The last column of this table assumes the sale of all of the shares of common stock offered by this prospectus. The registration of the offered shares does not mean that any or all of the selling stockholders will offer or sell any of these shares. Each selling stockholder’s percentage of ownership of our outstanding shares in the table below, calculated as of June 30, 2018, is based upon 9,804,400 shares of common stock outstanding and as further adjusted to give effect to the offering as noted in the footnotes in the table below. Except as set forth in the notes to this table, there is not nor has there been a material relationship between us and any of the selling stockholders within the past three years.

 

Name of Selling Stockholder 

Common
Stock
Offered by
Selling
Stockholder

  

Number of
Shares
Beneficially
Owned

   Shares Beneficially Owned
After Offering (1)
 
           Number   Percent 
Special Situations Technology Fund II, L.P. / AWM Investment Company (2)   132,269    761,023    628,754    6.3%
Special Situations Technology Fund, L.P. / AWM Investment Company (2)   21,208    151,634    130,426    1.3%
JMI Holdings, LLC (2011 Family Series) (3)   94,739    936,232    841,493    8.5%
David R. Wilmerding, III (4)   116,274    961,010    844,736    8.5%
Jon Christopher Baker Family, LLC (5)   116,845    894,378    777,533    7.8%
Neal Goldman (6)   30,466    305,466    275,000    2.8%
London Family Trust, Robert S. London Trustee (7)   48,896    320,175    271,279    2.8%
Wall Street Capital Partners, LLP (8)   3,859    3,859    -    - 

 

(1) Assumes shares of common stock outstanding following completion of this offering, based on (i) 9,804,400 shares of common stock outstanding as of June 30, 2018 and (ii) assumes no other shares of common stock are issued by the Company or exercised under other warrants or options for common stock.
   
(2) Based solely on information contained in a joint Schedule 13G/A filed by Austin Marxe, David Greenhouse and Adam Stettner on February 10, 2017 and the Exchange Agreement. Such stockholders share voting and dispositive power over these shares by virtue of being the controlling principals of AWM Investment Company, Inc. (“AWM”), and the members of SST Advisers, L.L.C. (“SST”). AWM acts as investment advisor to each of Special Situations Technology Fund, L.P. (“Tech Fund”) and Special Situations Technology Fund II, L.P. (“Tech Fund II”); SST is the general partner of each of Tech Fund and Tech Fund II. Tech Fund owns 130,426 shares of our common stock and holds warrants to purchase 21,208 shares of our common stock. Tech Fund II owns 628,754 shares of our common stock and holds warrants to purchase 132,269 shares of our common stock.

 

17
 

 

(3) Based solely on information known to us, Charles E. Noell, III, John J. Moores and Bryant W. Burke share voting and dispositive power over these shares by virtue of being members of El Camino Advisors, LLC, the manager of JMI Holdings, LLC (2011 Family Series). JMI Holdings, LLC (2011 Family Series) owns 841,493 shares of our common stock and warrants to purchase 94,739 shares of our common stock.
   
(4) Based on information contained in a Schedule 13G/A filed by David Wilmerding on February 1, 2017, and the Exchange Agreement , Mr. Wilmerding has sole voting and dispositive power with respect to 844,736 shares of our common stock and warrants to purchase 116,274 shares of our common stock.
   
(5) Based on information contained in a Schedule 13G/A filed by Jon C. Baker on January 30, 2017, and the Exchange Agreement, Mr. Baker has sole voting and dispositive power with respect to 777,533 shares of our common stock and warrants to purchase 116,845 shares of our common stock.
   
(6) Based solely on information known to us and the Exchange Agreement, Mr. Goldman has sole voting and dispositive power with respect to 275,000 shares of our common stock and warrants to purchase 30,466 shares of our common stock.
   
(7) Based solely on information known to us and the Exchange Agreement, Mr. London has sole voting and dispositive power with respect to 271,279 shares of our common stock and warrants to purchase 48,896 shares of our common stock.
   
(8) Based on the Exchange Agreement, Wall Street Capital Partners has sole voting and dispositive powers with respect to warrants to purchase 3,859 shares of our common stock.

 

18
 

 

PLAN OF DISTRIBUTION

 

The selling stockholders, which as used herein include donees, pledgees, transferees or other successors-in-interest selling shares of common stock or interests in shares of common stock received after the date of this prospectus from a selling stockholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.

 

The selling stockholders may use any one or more of the following methods when disposing of shares or interests therein:

 

  ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
     
  block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;
     
  purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
     
  an exchange distribution in accordance with the rules of the applicable exchange;
     
  privately negotiated transactions;
     
  short sales effected after the date the registration statement of which this Prospectus is a part is declared effective by the SEC;
     
  through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
     
  broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;
     
  a combination of any such methods of sale; and
     
  any other method permitted by applicable law.

 

The selling stockholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

 

In connection with the sale of our common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

 

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The aggregate proceeds to the selling stockholders from the sale of the common stock offered by them will be the purchase price of the common stock less discounts or commissions, if any. Each of the selling stockholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through agents. We will not receive any of the proceeds from this offering.

 

The selling stockholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act, provided that they meet the criteria and conform to the requirements of that rule.

 

The selling stockholders and any underwriters, broker-dealers or agents that participate in the sale of the common stock or interests therein may be “underwriters” within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Selling stockholders who are “underwriters” within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act.

 

To the extent required, the shares of our common stock to be sold, the names of the selling stockholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.

 

In order to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.

 

We have advised the selling stockholders that the anti-manipulation rules of Regulation M under the Securities Exchange Act of 1934 (the “Exchange Act”) may apply to sales of shares in the market and to the activities of the selling stockholders and their affiliates. In addition, to the extent applicable we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling stockholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling stockholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act.

 

We have agreed to indemnify the selling stockholders against liabilities, including liabilities under the Securities Act and state securities laws, relating to the registration of the shares offered by this prospectus.

 

We have agreed with the selling stockholders to keep the registration statement of which this prospectus constitutes a part effective until the earlier of (1) such time as all of the shares covered by this prospectus have been disposed of pursuant to and in accordance with the registration statement, Rule 144 under the 1933 Act, or otherwise in a transaction in which the transferee received unlegended securities, (2) the date on which all of the securities covered hereby are freely tradable without restriction and are replaced with certificates not bearing restrictive legends, or (3) May 21, 2023, which is the date on which the New Warrants are no longer exercisable.

 

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DESCRIPTION OF OUR SECURITIES

 

The following is a brief description of our capital stock. This summary does not purport to be complete in all respects. This description is subject to and qualified entirely by the terms of our amended and restated certificate of incorporation, as amended, or our certificate of incorporation, and our second amended and restated bylaws, or our bylaws, copies of which have been filed with the SEC and are also available upon request from us, and is also qualified by the General Corporation Law of the State of Delaware.

 

Common Stock

 

We are currently authorized to issue up to 195,000,000 shares of our common stock, $0.0001 par value, and 5,000,000 shares of preferred stock, $0.01 par value. As of June 30, 2018, 9,804,400 shares of our common stock were issued and outstanding, and held of record by approximately 122 persons, and no shares of preferred stock were issued and outstanding.

 

Holders of shares of our common stock are entitled to such dividends as may be declared from time to time by the board in its discretion, on a ratable basis, out of funds legally available therefrom, and to a pro rata share of all assets available for distribution upon liquidation, dissolution or other winding up of our affairs. All of the outstanding shares of our common stock are fully paid and non-assessable.

 

On January 27, 2016, we filed an amendment of our Amended and Restated Certificate of Incorporation, as amended, to effect a 1-for-15 reverse stock split of our common stock (the “Reverse Stock Split”). The Reverse Stock Split became effective in the stock market upon commencement of trading on January 28, 2016. As a result of the Reverse Stock Split, every 15 shares of our pre-Reverse Stock Split common stock were combined and reclassified into one share of our common stock. No fractional shares were issued in connection with the Reverse Stock Split, and cash paid to stockholders for potential fractional shares was insignificant. The number of shares of common stock subject to outstanding options, restricted stock units, warrants and convertible securities were also reduced by a factor of 15 as of January 27, 2016. All historical share and per share amounts reflected throughout this prospectus have been adjusted to reflect the Reverse Stock Split. The authorized number of shares and the par value per share of our common stock were not affected by the Reverse Stock Split.

 

Warrants

 

The material terms of the warrants issued by the Company are as follows:

 

  warrants to purchase an aggregate 111,111 shares of our common stock are exercisable at $6.00 per share and expire on January 7, 2019;
     
  warrants to purchase an aggregate 11,285 shares of our common stock are exercisable at $7.50 per share and expire on September 18, 2018;
     
  warrants to purchase an aggregate 10,167 shares of our common stock are exercisable at $15.00 per share and expire on August 9, 2018; and
     
  warrants to purchase an aggregate 564,556 shares of our common stock are exercisable at $0.01 per share and expire on May 21, 2023.

 

The exercise prices of the warrants are subject to adjustment upon the occurrence of certain events, such as a split- up or combination of our common stock and a reorganization or merger to which we are a party.

 

Preferred Stock

 

Our certificate of incorporation permits us to issue up to 5,000,000 shares of preferred stock in one or more series and with rights and preferences that may be fixed or designated by our board of directors without any further action by our stockholders. On February 16, 2018, in connection with the adoption of the Rights Agreement (as defined below), we filed a Certificate of Designation authorizing 500,000 shares of Series A Junior Participating Preferred Stock. We currently have no shares of preferred stock outstanding.

 

21
 

 

Subject to the limitations prescribed in our certificate of incorporation and under Delaware law, our certificate of incorporation authorizes the board of directors, from time to time by resolution and without further stockholder action, to provide for the issuance of shares of preferred stock, in one or more series, and to fix the designation, powers, preferences and other rights of the shares and to fix the qualifications, limitations and restrictions thereof. Although our board of directors has no present intention to issue any additional preferred stock, the issuance of preferred stock could adversely affect the rights of holders of our common stock, including with respect to voting, dividends and liquidation, by issuing shares of preferred stock with certain voting, conversion and/or redemption rights. Such issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control.

 

Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Charter Documents

 

The following is a summary of certain provisions of Delaware law, our certificate of incorporation and our bylaws. This summary does not purport to be complete and is qualified in its entirety by reference to the corporate law of Delaware and our certificate of incorporation and bylaws.

 

Classified Board of Directors; Removal. Pursuant to our certificate of incorporation, the number of directors is fixed by our board of directors. Our directors are divided into three classes, each class to serve a three-year term and to consist as nearly as possible of one third of the total number of directors. Vacancies on our board of directors may be filled by a majority of the remaining members of the board of directors, even if less than a quorum, and a director may only be removed from office by stockholders upon the approval of holders of at least 66 2/3% of the outstanding shares entitled to vote at an election of directors.

 

Stockholder Meetings; Bylaws. Our certificate of incorporation provides that any action taken by our stockholders must be effected at an annual or special meeting of stockholders and may not be taken by written consent instead of a meeting. In addition, our certificate of incorporation provides that a special meeting of stockholders may be called only by the board of directors or the holders of at least 50% of the outstanding shares of capital stock. Our bylaws may be amended either by the board of directors or the holders of at least 66 2/3% of the entitled to vote at an election of directors.

 

Rights Agreement. On February 16, 2018, the Company entered into a Rights Agreement with American Stock Transfer & Trust, LLC, as rights agent (the “Rights Agreement”). In connection with the adoption of the Rights Agreement, each stockholder of the Company as of February 26, 2018 received one right for each outstanding share of common stock, which entitles the stockholder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock (the “Preferred Stock”) at an exercise price of $1.00 per one one-thousandth of Preferred Stock. The Rights Agreement effectively imposes a significant penalty upon any person or group that acquires ten percent or more of the shares of Common Stock without the approval of the Board. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult or discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Board.

 

Limitation of Liability

 

As permitted by the General Corporation Law of the State of Delaware, our certificate of incorporation provides that our directors shall not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability:

 

  for any breach of the director’s duty of loyalty to us or our stockholders;
     
  for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
     
  under section 174 of the Delaware law, relating to unlawful payment of dividends or unlawful stock purchases or redemption of stock; and
     
  for any transaction from which the director derives an improper personal benefit.

 

22
 

 

As a result of this provision, we and our stockholders may be unable to obtain monetary damages from a director for breach of his or her duty of care.

 

Our certificate of incorporation provides for the indemnification of our directors and officers to the fullest extent authorized by, and subject to the conditions set forth in the Delaware law.

 

Transfer Agent

 

The transfer agent for our common stock is American Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New York 10038.

 

LEGAL MATTERS

 

The validity of the common stock being offered hereby has been passed upon by Manatt, Phelps & Phillips, LLP, Los Angeles, California. MPP Holdings, LLC, an affiliate of Manatt, Phelps & Phillips, LLP, holds 28,899 shares of common stock of the Company.

 

EXPERTS

 

The consolidated financial statements of the Company at December 31, 2017 and 2016, and for each of the years in the two-year period ended December 31, 2017, have been included herein in reliance upon the report of Macias Gini & O’Connell LLP, independent registered public accounting firm, appearing elsewhere herein, and upon authority of said firm as experts in accounting and auditing. The report contains an explanatory paragraph that the Company has incurred losses from operations, an accumulated deficit, a working capital deficit, and needs to raise additional funds to meet short and long-term operational requirements all of which raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that result from the outcome of this uncertainty.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We are subject to the informational requirements of the Securities Exchange Act of 1934 and, therefore, we file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. Copies of such periodic reports, proxy statements and other information are available for inspection without charge at the public reference room maintained by the SEC, located at 100 F Street, N.E., Washington, D.C. 20549, and copies of all or any part of these filings may be obtained from such offices upon the payment of the fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains an Internet web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is http://www.sec.gov.

 

These filings and other documents are available and may be accessed on our website at www.hopto.com/investors. You may request a copy of these filings at no cost, by writing or calling hopTo Inc., Attention: Secretary, 6 Loudon Road, Suite 200, Concord, NH 03301, 408.688.2674.

 

We make our website content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference in this prospectus.

 

23
 

 

APPENDIX A

 

ANNUAL REPORT ON FORM 10-K FOR THE

FISCAL YEAR ENDED DECEMBER 31, 2017

 

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2017

 

Commission File Number: 0-21683

 

 

hopTo Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware   13-3899021

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

6 Loudon Road, Suite 200

Concord, New Hampshire 03301

(Address of principal executive offices)

 

(800) 472-7466

(408) 688-2674

(Registrant’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Exchange Act: None

 

Securities registered pursuant to Section 12(g) of the Exchange Act: (1) Common Stock, $0.0001 par value; and (2) Preferred Stock Purchase Rights

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [  ] No [X]

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 [X] 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 [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.      [X]

 

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

 

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

[  ] Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.        [  ]

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [X]

 

As of June 30, 2017, the aggregate market value of the Registrant’s common stock held by non-affiliates was $939,577.

 

As of March 31, 2018, there were outstanding 9,804,400 shares of the Registrant’s common stock.

 

 

 

   
 

 

hopTo Inc.

 

ANNUAL REPORT ON FORM 10-K

 

TABLE OF CONTENTS

 

      Page
    PART I  
Item 1.   Business 3
Item 1A.   Risk Factors 10
Item 1B.   Unresolved Staff Comments 17
Item 2.   Properties 17
Item 3.   Legal Proceedings 17
Item 4.   Mine Safety Disclosures 17
    PART II  
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 18
Item 6.   Selected Financial Data 18
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk 29
Item 8.   Financial Statements and Supplementary Data 30
Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 53
Item 9A.   Controls and Procedures 53
Item 9B.   Other Information 53
    PART III  
Item 10.   Directors, Executive Officers and Corporate Governance 54
Item 11.   Executive Compensation 56
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 58
Item 13.   Certain Relationships and Related Transactions, and Director Independence 59
Item 14.   Principal Accounting Fees and Services 60
    PART IV  
Item 15.   Exhibits, Financial Statement Schedules 61
Item 16.   Form 10-K Summary 63

 

Forward-Looking Information

 

This report includes, in addition to historical information, “forward-looking statements”. All statements other than statements of historical fact we make in this report are forward-looking statements. In particular, the statements regarding industry prospects and our 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, but are not limited to, those discussed in Item 1A. “Risk Factors,” as well as those discussed elsewhere in this report. Statements included in this report are based upon information known to us as of the date that this report is filed with the Securities and Exchange Commission (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.

 

2
 

 

PART I

 

ITEM 1. BUSINESS

 

Introduction

 

We are developers of application publishing software which includes application virtualization software and cloud computing software for multiple computer operating systems including Windows, UNIX and several Linux-based variants. Our application publishing software solutions are sold under the brand name GO-Global, which is our sole revenue source. GO-Global is an application access solution for use and/or resale by independent software vendors (“ISVs”), corporate enterprises, governmental and educational institutions, and others who wish to take advantage of cross-platform remote access and Web-enabled access to their existing software applications, as well as those who are deploying secure, private cloud environments.

 

Since 2012 we have also been developing several products in the field of software productivity for mobile devices such as tablets and smartphones, which have been marketed under the hopTo brand. However, as of Q4 2016, we have effectively ceased all of our sales, marketing and R&D efforts for the hopTo products, and at this time we do not expect any meaningful revenues from these products in the foreseeable future.

 

Except for the sale of 7 patents sold to Salesforce.com during the fourth quarter of 2017, we own all hopTo-related IP including source-code, related patents, and the relevant trademarks. We continue to believe that we may be able to extract value from these assets and are currently working to do so at this time. For detailed information on the hopTo products and technologies, please refer to our Annual Report on form 10-K for the year ended December 31, 2015, which was filed with the SEC on March 30, 2016 as well as our other SEC filings which are available at www.sec.gov. Such filings are being noted for historical information only; unless expressly noted, they are not incorporated herein by reference.

 

The hopTo products were originally marketed to consumers and were later also marketed to small and medium sized businesses and enterprise level customers under the name hopTo Work. hopTo Work allows customers to instantly transform their legacy applications to become touch friendly on modern mobile devices. During 2015 and 2016 we also worked to integrate hopTo Work with certain software products offered by Citrix Systems.

 

Over the years, we have also made significant investments in intellectual property (“IP”). We have filed many patents designed to protect the new technologies embedded in hopTo, although we are not currently pursuing additional patents.

 

Recent Developments

 

Rights Agreement

 

As previously disclosed, on February 16, 2018, we entered into a Rights Agreement (the “Rights Agreement”) with American Stock Transfer & Trust Company, LLC, as rights agent (the “Rights Agent”). Details of the plan, including a copy of the Rights Agreement, can be found in the Form 8-A that the Company filed with the SEC on February 16, 2018.

 

In connection with the adoption of the Rights Agreement and pursuant to its terms, the Company’s Board of Directors (the “Board”) authorized and declared a dividend distribution of one right (a “Right”) for each outstanding share of the common stock, $0.0001 par value per share (the “Common Stock”), of the Company to stockholders of record at the close of business on February 26, 2018 (the “Record Date”). Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of the Series A Junior Participating Preferred Stock, $0.01 par value per share (the “Preferred Stock”), of the Company at an exercise price of $1.00 per one one-thousandth of a Preferred Share, subject to adjustment (the “Exercise Price”). The complete terms of the Rights are set forth in the Rights Agreement (the “Rights Agreement”).

 

3
 

 

Generally, the Rights Agreement works by imposing a significant penalty upon any person or group (including a group of persons that are acting in concert with each other) that acquires ten percent (10%) or more of the Common Shares without the approval of the Board. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult or discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Board. The Rights Agreement is not intended to interfere with any merger, tender or exchange offer or other business combination approved by the Board. Nor does the Rights Agreement prevent the Board from considering any offer that it considers to be in the best interest of its stockholders. The Rights expire at or prior to the earlier of (i) February 16, 2021 or (ii) the redemption or exchange of the Rights as provided for in the Rights Agreement.

 

Proposed Liquidated Damages Settlement

 

On March 27, 2018, the Company entered a non-binding term sheet for the settlement of certain potential liquidated damages resulting from delays in filing registration statements for shares of our common stock and shares of our common stock underlying warrants for certain private placements that the Company closed in 2013 and 2015. We refer to this as the Proposed Settlement. The Proposed Settlement involves no cash payments or cash commitments by the Company but is expected to include the issuance of new, five year, penny exercise, common stock warrants in exchange for existing warrants currently held by the affected shareholders. The Proposed Settlement, if it becomes final, will not result in an increase in the total number of warrants held by these shareholders or the total number of warrants outstanding. Although subject to completion of final definitive documentation and there is no guarantee of any agreement being reached, the Company believes that this transaction will be completed in the next 45 days.

 

Corporate Background

 

hopTo Inc., or the Company, is a Delaware corporation, founded in May 1996. Our headquarters are located at 6 Loudon Road, Suite 200, Concord, NH 03301, our toll-free phone number is 1-800-472-7466, and our phone number for local and international calls is 408-688-2674. We also 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 Annual Report on Form 10-K.

 

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 investor webpage at www.hopto.com/investors (click the “Financial Reporting” link and then the “SEC Filings” link) as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.

 

Our Intellectual Property

 

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

 

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

 

We also currently hold rights to patents but are not currently pursuing additional patent applications.

 

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

 

ipCapital Group, Inc.

 

On October 11, 2011, we engaged ipCapital Group, Inc. (“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. See the Exhibits referred to in Item 15 in this Form 10-K for further details on the ipCapital engagement agreement and amendments thereto.

 

As a result of ipCapital’s work under the engagement agreement, as amended, as of March 31, 2018, 173 new patent applications have been filed. Of these 173 applications, 53 patents have been granted by the United States Patent and Trademark Office (“USPTO”). Due to financial constraints on our operations, we have suspended patent prosecution activity other than to pay issuance and maintenance fees for patents already approved by the USPTO. We do not expect to file more applications in 2018.

 

ipCapital Licensing Company I, LLC

 

In February 2013, we entered into an IP Brokerage agreement with ipCapital Licensing Company I, LLC (“ipCLC”) (the “IP Brokerage Agreement”). At the time that we entered into this agreement, John Cronin was a partner at ipCLC. He is no longer affiliated with ipCLC. Pursuant to the IP Brokerage Agreement, we engaged ipCLC, on a no-retainer basis, to identify and present us with candidates who may be seeking to acquire a certain limited group of our patents unrelated to our current business strategy. In June 2016, we determined that the IP Brokerage Agreement is no longer in effect since ipCLC no longer exists as an entity.

 

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The GO-Global Software Products

 

Our GO-Global product offerings 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 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 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.

 

Target Markets

 

The target market for our GO-Global products includes small to medium-sized companies, departments within large corporations, governmental and educational institutions, independent software vendors (ISVs) and value-added resellers (VARs). Our software enables these targeted organizations to move their existing applications to the public cloud and provide SaaS, or move them to a secure, private cloud environment. By using our software, organizations can give their remote users, partners and customers access to their native applications. Our software is designed to allow these organizations and enterprises to tailor the configuration of the end-user device for a particular purpose, rather than following a “one PC fits all” high-cost ownership model. We believe our opportunities are as follows:

 

  ISVs. By Web-enabling their applications through use of our products, we believe that our ISV customers can accelerate their time to market without the risks and delays associated with rewriting applications or using other third-party software, thereby opening up additional revenue opportunities and securing greater satisfaction and loyalty from their customers.
     
    Our technology integrates with their existing software applications without sacrificing the full-featured look and feel of such applications, thereby providing ISVs with out-of-the-box Web-enabled applications with their own branding for licensed, volume distribution to their enterprise customers. We further believe that ISVs that effectively address the Web computing needs of customers and the emerging application service provider market will have a competitive advantage in the marketplace.
     
  Enterprises Employing a Mix of UNIX, Linux, Macintosh and Windows. Small to medium-sized companies that utilize a mixed computing environment require cross-platform connectivity software, like GO-Global Host and/or GO-Global Gateway, which will allow users to access applications from different client devices. We believe that our server-based software products will significantly reduce the cost and complexity of connecting PCs to various applications.
     
  Enterprises with Remote Computer Users and/or Extended Markets. We believe that remote computer users and enterprises with extended markets comprise two of the faster growing market segments in the computing industry. Extended enterprises permit access to their computing resources by their customers, suppliers, distributors and other partners, thereby affording them manufacturing flexibility, increased speed-to-market, and enhanced customer satisfaction. For example, extended enterprises may maintain decreased inventory via just-in-time, vendor-managed inventory and related techniques, or they may license their proprietary software application on a “pay-per-use” model, based on actual time usage by the user. The early adoption of extended enterprise software may be driven in part by an organization’s need to exchange information over a wide variety of computing platforms. We believe that our server-based software products, along with our low-impact communications protocol, which has been designed to enable highly efficient low-bandwidth connections, are well positioned to provide extended enterprises with the necessary means to exchange information over a wide variety of computing platforms.

 

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  VARs. The VAR channel presents an additional sales force for our products and services. In addition to creating broader awareness of our GO-Global products, VARs also provide integration and support services for our current and potential customers. Our products allow VARs to offer a cost-effective competitive alternative for server-based, or thin-client, computing. In addition, reselling our GO-Global products creates new revenue streams for our VARs.

 

Strategic Customer Relationships

 

We believe it is important to maintain our current strategic alliances and to seek suitable new alliances in order to enhance shareholder value, improve our technology and/or enhance our ability to penetrate relevant target markets. We also are focusing on strategic relationships that have immediate revenue generating potential, strengthen our position in the server-based software market, add complementary capabilities and/or raise awareness of our products and us. Our strategic relationships for all GO-Global products include the following:

 

  We are party to a non-exclusive distribution agreement with KitASP, a Japanese application service provider founded by companies within Japan’s electronics and infrastructure industries, including NTT DATA, Mitsubishi Electric, Omron, RICS, Toyo Engineering and Hitachi. Pursuant to this agreement, which was entered into in September 2011, KitASP has licensed our GO-Global product line for inclusion in their software products, primarily their server-bundled application service provider software solution. Either party may terminate the contract upon 60 days’ written notice to the other party.
     
  We are party to a non-exclusive channel partner agreement with Elosoft Informatica Ltda, a South American distributor of various technology products, including both hardware and software offerings, and related services. Under the terms of this agreement, Elosoft has licensed both our GO-Global Windows Host and GO-Global for UNIX software for deployment to their distribution network with both sub-distributors and end-users. Our agreement with Elosoft, which was originally entered into in February 2005, automatically renews annually. Either party may terminate the agreement upon 60 days’ written notice to the other party.
     
  We are party to a non-exclusive global purchasing agreement with Alcatel-Lucent, a telecommunications, network systems and services company. Pursuant to this relationship, which started in July 1999, Alcatel-Lucent has licensed our GO-Global for UNIX software for inclusion with their software products. Many of Alcatel-Lucent’s customers are using our server-based software to remote access Alcatel-Lucent’s Network Management Systems applications. Our current agreement with Alcatel-Lucent expired in December 2012. Since December 2012 we have mutually agreed with Alcatel-Lucent to renew this contract each year for additional one-year with terms consistent with those set forth in the expired contract. The current renewal period expires in December 2018.
     
  We are party to a non-exclusive distribution agreement with GE Intelligent Platforms (“GE”), a U.S. based designer, manufacturer, and supplier of products for industrial control and automation. GE has licensed our GO-Global product line for inclusion in their automation and production management software products. Our agreement with GE, which was originally entered into in December 2002, automatically renews annually. Either party may terminate the contract upon 60 days’ written notice to the other party.
     
  In August 2011 we entered into an agreement with GAD eG (“GAD”), a Germany based provider of information technology, software development and data processing solutions for retail banks. GAD licensed our GO-Global for Windows software and embedded it in their banking applications. This agreement covered a one-time transaction of theirs with a large German bank. The installation of their software application generated significant product license sales for us in 2011 and 2012. We expect to have maintenance sales in future years; however we do not expect to have future product licensing sales to GAD comparable to the 2012 and 2011 levels.

 

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  In January 2010, we entered into a non-exclusive reseller and distribution agreement with Information Delivery Systems, LLC (IDS), a U.S. based publisher and hosting solutions provider for churches and educational institutions. IDS has licensed our GO-Global for Windows software and has utilized it as the hosting engine for its cloud-based solutions. Our agreement with IDS automatically renews annually. Either party may terminate the contract upon 60 days’ written notice to the other party.

 

Sales, Marketing and Support

 

Sales and marketing efforts for our software products are directed at increasing product awareness and demand among ISVs, small to medium-sized enterprises, departments within larger corporations and VARs who have a vertical orientation or are focused on Windows, UNIX and/or Linux environments. Current marketing activities have been limited due to budget constraints but include Internet marketing, direct response, promotional materials, and maintaining an active Web presence for marketing and sales purposes.

 

We currently consider the following to be our most significant customers and partners. For the purposes of this table, “Sales” refers to the dollar value of orders received from these customers and partners in the period indicated. These Sales values do not necessarily equal recognized revenue for these periods due to our revenue recognition policies which require deferral of revenue associated with stocking orders of software licenses and prepaid software service fees.

 

   2017   2016 
Customer  % Sales   % Sales 
Centric System   6.9%   5.0%
Elosoft   16.9%   11.0%
IDS   5.5%   3.6%
Uniface   6.5%   6.1%
Total   35.8%   25.7%

 

Many of our customers enter into, and periodically renew, maintenance contracts to ensure continued product updates and support. Currently, we offer maintenance contracts for one, two, three and five-year periods.

 

Operations

 

We perform all purchasing, order processing and shipping of products and accounting functions related to our operations. Although we generally ship products electronically, when a customer requires us to physically ship them a disc, production of the disc, printing of documentation and packaging are also accomplished through in-house means; however, since virtually all of our orders are currently being fulfilled electronically, we do not maintain any prepackaged inventory. Additionally, we have relatively little backlog at any given time; thus, we do not consider backlog a significant indicator of future performance.

 

Research and Development

 

Our 2017 research and development efforts focused on further enhancing the functionality, performance and reliability of existing products and developing new features. We invested $1,500,100 and $2,187,900 in research and development with respect to our software products in 2017 and 2016, respectively. During 2017 and 2016, we did not capitalize any additional development investments incurred. During 2017 and 2016, we determined that an impairment of $0 and $15,500, respectively, existed with certain capitalized software development costs associated with our hopTo consumer product and recognized that cost as part of cost of revenue.

 

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Competition

 

The software markets in which we participate are highly competitive. Competitive factors in our market space include price, product quality, functionality, product differentiation and the breadth and variety of product offerings and product features. We believe that our products offer certain advantages over our competitors, particularly in product performance and market positioning.

 

GO-Global competes with developers of conventional server-based software for the individual PC, as well as with other companies in the cloud computing software market and the application virtualization software market. We believe our principal competitors in the cloud computing software market include Citrix Systems, Inc., OpenText Communications, Ltd. and Microsoft Corporation. Citrix is an established leading vendor of virtualization software, OpenText is an established market leader for remote access to UNIX applications and Microsoft is an established leading vendor of Windows operating systems and services for servers.

 

Employees

 

As of March 31, 2018, we had a full-time equivalent of 14.0 total employees, including 3 in marketing, sales and support, 8.5 in research and development (which is inclusive of employees who may also perform customer service related activities), 2.0 in administration and finance and 0.5 in our patent group. We believe our relationship with our employees is good. None of our employees are covered by a collective bargaining agreement.

 

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Item 1A. Risk Factors

 

The risks and uncertainties described below could materially and adversely affect our business, financial condition and results of operations and could cause actual results to differ materially from our expectations. The risk factors described below include the considerable risks associated with the current economic environment and the related potential adverse effects on our financial condition and results of operations. You should read these risk factors in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and our Consolidated Financial Statements and related notes in Item 8. There also may be other factors that we cannot anticipate or that are not described in this report generally because we do not currently perceive them to be material. Those factors could cause results to differ materially from our expectations.

 

Risks Related to Our Business

 

We have a history of operating and net losses.

 

We have experienced significant operating and net losses since we began operations. Despite generating a modest net profit from operations before provision for income taxes and net income for the year ended December 31, 2017 after years of losses, this improved financial performance could reverse if our GO-Global business, our only source of revenue, declines or if we are unable to maintain control over our expenses.

 

Our revenue is typically generated from a limited number of significant customers.

 

A material portion of our revenue, all of which is currently derived from our GO-Global products, during any reporting period is typically generated from a limited number of significant customers, all of which are unrelated third parties. We categorize our customers into three broad categories for revenue recognition purposes: stocking resellers, non-stocking resellers and direct end users. If any of our significant non-stocking resellers or direct end users reduce their order level or fail to order during a reporting period, our revenue could be materially adversely impacted because we recognize revenue on sales to these customers upon product delivery, assuming all other revenue recognition criteria have been met.

 

Our significant stocking resellers are typically ISVs who have bundled our products with theirs to sell as Web-enabled versions of their products. These customers maintain inventories of our products for resale, and we do not recognize revenue until our products are resold to end users, assuming all other revenue recognition criteria have been met. If these customers decide to maintain a lower level of inventory in the future and/or they are unable to sell their inventory to end users as quickly as they have in the past, our revenue and business could be materially adversely impacted.

 

If we are unable to develop new products and enhancements to our existing products, our business, results of operations, financial condition, and cash flows could be materially adversely impacted.

 

The market for our products and services is characterized by:

 

  frequent new product and service introductions and enhancements;
     
  rapid technological change;
     
  evolving industry standards;
     
  fluctuations in customer demand; and
     
  changes in customer requirements.

 

Our future success depends on our ability to continually enhance our current products and develop and introduce new features and capabilities that our customers choose to buy. If we are unable to satisfy our customers’ demands and remain competitive with other products that could satisfy their needs by introducing new features, capabilities and enhancements, our business, results of operations, financial condition, and cash flows could be materially adversely impacted. Our future success could be hindered by, among other factors:

 

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  the amount of cash we have available to fund investment in new products and enhancements;
     
  the reduced level of research and development resources that the we now have available in the Company to perform the work necessary to develop new features and capabilities
     
  delays in our introduction of new features, capabilities and/or enhancements of existing products;
     
  delays in market acceptance of new products and/or enhancements of existing products; and
     
  a competitor’s announcement of new products and/or product enhancements or technologies that could replace or shorten the life cycle of our existing products.

 

For example, sales of our GO-Global Windows Host software could be affected by the announcement from Microsoft of an intended release, and the subsequent actual release, of a new Windows-based operating system, or an upgrade to a previously released Windows-based operating system version. These new or upgraded systems may contain similar features to our products or they could contain architectural changes that would temporarily prevent our products from functioning properly within a Windows-based operating system environment.

 

Despite our generating net profit and positive cash flows from operations in fiscal 2017, we are subject to various liquidity risks.

 

We have incurred significant net losses since our inception. Despite making a net profit of $600,600 for the fiscal year ended December 21, 2017, as of that date we had an accumulated deficit of $81,849,200 and a working capital deficit of $1,947,800. Our ability to continue to generate net profits and positive cash flows from operations is dependent on our ability to continue to generate revenue from our legacy GO-Global business, which in turn is subject to a variety of risks, some of which are described in this Annual Report on Form 10-K. As a very small company, we have limited ability to deploy new revenue increasing opportunities, and limited flexibility to respond to unforeseen adverse developments, such as customer losses, adverse market developments or unanticipated expenses. Although our current operating plan does not call for the raising of new capital, if we need to raise new capital, our ability to do so is extremely limited given our very small market capitalization and the limited volume in the trading of our common stock.

 

If we do need to issue new equity, such issuances may be at a significant discount to market prices, 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 any execution of our operations will be available on a timely basis, on reasonable terms or at all.

 

Challenges to Develop New Business May Reverse the Improvements in Our Finances. Our management believes that any significant improvement in the Company’s cash flow must result from increases in revenues from existing sources and from new revenue sources. The Company’s ability to develop new revenues depends on many factors not in its control, or only partially in its control, including available capital resources which affect the extent of its marketing activities and its research and development activities, all of which are limited by the Company’s small size and revenue base. We cannot assure you that the resources that the Company can devote to marketing and to research and development will be sufficient to increase its revenues to levels that will enable it to maintain positive operating cash flow in the future.

 

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Sales of products within our GO-Global product families are likely to be our only source of revenue during 2018.

 

Due to financial constraints we gradually suspended all development and sales of hopTo products over the course of the second half of 2016. Sales of products within our GO-Global product families, and related enhancements, were our only source of revenue during 2017 and will continue to be our only source of revenue during 2018. The success, if any, of our new GO-Global releases may depend on a number of factors, including market acceptance of the new GO-Global releases and our ability to manage the risks associated with introducing such releases. Declines in demand for our GO-Global products could occur as a result of, among other factors:

 

  lack of success with our strategic partners;
     
  new competitive product releases and updates to existing competitive products;
     
  decreasing or stagnant information technology spending levels;
     
  price competition;
     
  technological changes; or
     
  general economic conditions in the markets in which we operate.

 

If our customers do not continue to purchase GO-Global products as a result of these or other factors, our revenue would decrease and our results of operations, financial condition, and cash flows would be adversely affected.

 

Any growth in our business will come solely from GO-Global and our other assets, and not from the hopTo Work products. GO-Global is not a high growth business.

 

As of the fourth quarter of 2016, we effectively ceased all of our sales, marketing and R&D efforts for the hopTo products. hopTo Work was our primary growth initiative. We hope to maintain our GO-Global business at or near current levels, and we will evaluate opportunities for growing this business and for extracting value from our other assets as part of our business planning, but shareholders and prospective shareholders should clearly understand that the growth opportunity we previously anticipated in the hopTo product suite is not currently being pursued, and that our growth, if any, will be on a much lower scale.

 

Our operating results in one or more future periods are likely to fluctuate significantly and may fail to meet or exceed the expectations of investors.

 

Our operating results are likely to fluctuate significantly in the future on a quarterly and annual basis due to a number of factors, many of which are outside our control. Factors that could cause our operating results and therefore our revenues to fluctuate include the following, among other factors:

 

  our ability to maximize the revenue opportunities of our patents;
     
  variations in the size of orders by our customers;
     
  increased competition; and
     
  the proportion of overall revenues derived from different sales channels such as distributors, original equipment manufacturers (“OEMs”) and others.

 

In addition, our royalty and license revenues are impacted by fluctuations in OEM licensing activity from quarter to quarter, which may involve one-time orders from non-recurring customers, or customers who order infrequently. Our expense levels are based, in part, on expected future orders and sales; therefore, if orders and sales levels are below expectations, our operating results are likely to be materially adversely affected. Additionally, because significant portions of our expenses are fixed, a reduction in sales levels may disproportionately affect our net financial results . Also, we may reduce prices and/or increase spending in response to competition or to pursue new market opportunities. Because of these factors, our operating results in one or more future periods may fail to meet or exceed the expectations of investors. In that event, the trading price of our common stock would likely be adversely affected.

 

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We will encounter challenges in recruiting, hiring and retaining new personnel and/or replacements for any members of key management or other personnel who depart. Our chief executive and financial officer serves us on a part-time basis.

 

Our success and business strategy is dependent in large part on our ability to attract and retain key management and other personnel in certain areas of our business. If any of these employees were to leave, we would need to attract and retain replacements for them. We have lost employees, including at the officer level and in our new products engineering group, in the past. Without a successful replacement, the loss of the services of one or more key members of our management group and other key personnel could have a material adverse effect on our business.

 

With the exception of the employment agreement we entered into with our former Chief Executive Officer during 2013 which was terminated in July 2017, we do not have long-term employment agreements with any of our key personnel and any officer or other employee can terminate their relationship with us at any time. We may also need to add key personnel in the future in order to successfully implement our business strategies. The market for such qualified personnel is highly competitive and it includes other potential employers whose financial resources for such qualified personnel are more substantial than ours. Consequently, we could find it difficult to attract, assimilate or retain such qualified personnel in sufficient numbers to successfully implement our business strategies.

 

We have sought to match our expenses structure with business opportunities, but this creates risks. When we ceased our development and sales efforts associated with our hopTo Work products, we re-evaluated our management needs. As a result, our current Chief Executive Officer and Chief Financial Officer works for us on a part time basis. While we believe the smaller scale of our operations makes this arrangement workable, and has reduced our expense structure, the arrangement nevertheless makes it more difficult for the Company to evaluate and plan for growth opportunities. The Company has sought to address this challenge in various ways, including relying on the considerable expertise of our Board of Directors and the moderate use of professional advisors. Even though the Company has made considerable progress in the past fiscal year with a much reduced management staff, the Company and stockholders should recognize that this arrangement limits the Company’s ability to respond to challenges and develop opportunities. Should the Company revise its approach to management by hiring additional resources, this too, can create risks to the cost savings we have achieved, if any anticipated business opportunities are not realized, as has occurred in the past with hopTo Work.

 

Our failure to adequately protect our proprietary rights may adversely affect us.

 

Our commercial success is dependent, in large part, upon our ability to protect our proprietary rights. We rely on a combination of patent, copyright and trademark laws, as well as trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary rights. These measures afford only limited protection. We cannot assure you that measures we have taken or may take in the future will be adequate to protect us from misappropriation or infringement of our intellectual property. Despite our efforts to protect proprietary rights, it may be possible for unauthorized third parties to copy aspects of our products or obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our intellectual property or other proprietary rights as fully as do the laws of the United States. Furthermore, we cannot assure you that the existence of any proprietary rights will prevent the development of competitive products. The infringement upon, or loss of, any proprietary rights, or the development of competitive products despite such proprietary rights, could have a material adverse effect on our business.

 

Our business significantly benefits from strategic relationships and there can be no assurance that such relationships will continue in the future.

 

Our business and strategy relies to a significant extent on our strategic relationships with other companies. There is no assurance that we will be able to maintain or further develop any of these relationships or to replace them in the event any of these relationships are terminated. In addition, any failure to renew or extend any license between any third party and us may adversely affect our business.

 

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We rely on indirect distribution channels for our products and may not be able to retain existing reseller relationships or develop new reseller relationships.

 

Our GO-Global products are primarily sold through several distribution channels. An integral part of our strategy is to strengthen our relationships with resellers such as OEMs, systems integrators, VARs, distributors and other vendors to encourage these parties to recommend or distribute our products and to add resellers both domestically and internationally. We currently invest, and intend to continue to invest, significant resources to expand our sales and marketing capabilities. We cannot assure you that we will be able to attract and/or retain resellers to market our products effectively. Our inability to attract resellers and the loss of any current reseller relationships could have a material adverse effect on our business, results of operations, financial condition, and cash flows. Additionally, we cannot assure you that resellers will devote enough resources to provide effective sales and marketing support to our products.

 

The markets in which we participate are highly competitive and have more established competitors.

 

The markets we participate in with GO-Global are intensely competitive, rapidly evolving and subject to continuous technological changes. We expect competition to increase in each of these markets as other companies introduce additional competitive products. In order to compete effectively, we must continually develop and market new and enhanced products and market those products at competitive prices. As markets for our products continue to develop, additional companies, including companies in the computer hardware, software and networking industries with significant market presence, may enter the markets in which we compete and further intensify competition. A number of our current and potential competitors have longer operating histories, greater name recognition and significantly greater financial, sales, technical, marketing and other resources than we do. We cannot give any assurance that our competitors will not develop and market competitive products that will offer superior price or performance features, or that new competitors will not enter our markets and offer such products. We believe that we will need to invest significant financial resources in research and development to remain competitive in the future in each of the markets in which we compete. Such financial resources may not be available to us at the time or times that we need them, or upon terms acceptable to us, or at all. We cannot assure you that we will be able to establish and maintain a significant market position in the face of our competition and our failure to do so would adversely affect our business.

 

Risks Related to Our Common Stock

 

Our stock is thinly traded and its price has been historically volatile.

 

Our stock is thinly traded. As such, holders of our stock are subject to a high risk of illiquidity, e.g., you may not be able to sell as many shares at the price you would like, or you may not be able to purchase as many shares at the price you would like, due to the low average daily trading volume of our stock. Additionally, the market price of our stock has historically been volatile; it has fluctuated significantly to date. The trading price of our stock is likely to continue to be highly volatile and subject to wide fluctuations. Your investment in our stock could lose some or all of its value.

 

Future sales of our common stock could adversely affect its price and our future capital-raising activities, and could involve the issuance of additional equity securities, which would dilute current shareholder investments in our common stock and could result in lowering the trading price of our common stock.

 

We may sell securities in the public or private equity markets if and when conditions are favorable. Sales of substantial amounts of common stock, or the perception that such sales could occur, could adversely affect the prevailing market price of our common stock and our ability to raise capital. We may issue additional common stock in future financing transactions or as incentive compensation for our management team and other key personnel, consultants and advisors. Issuing any equity securities would be dilutive to the equity interests represented by our then-outstanding shares of common stock. The market price for our common stock could decrease as the market takes into account the dilutive effect of any of these issuances. Furthermore, we may enter into financing transactions and issue securities with rights and preferences senior to the rights and preferences of our common stock, and we may issue securities at prices that represent a substantial discount to the market price of our common stock. A negative reaction by investors and securities analysts to any discounted sale of our equity securities could result in a decline in the trading price of our common stock.

 

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We have a significant number of outstanding warrants and options, and future sales of these shares could adversely affect the market price of our common stock.

 

As of December 31, 2017 and December 31, 2016, we had outstanding warrants for an aggregate of 698,119 shares of common stock, at a weighted average exercise price of $10.02. As of December 31, 2017 and December 31, 2016, we had outstanding options exercisable for an aggregate of 455,168 and 684,722 shares of common stock, respectively, at weighted average exercise prices of $2.30 and $2.64 per share, respectively. The holders may sell these shares exercisable under warrants or options in the public markets from time to time. In addition, if our stock price rises, more outstanding warrants and options will be “in-the-money” and the holders may exercise their warrants and options and sell a large number of shares. This could cause the market price of our common stock to decline.

 

In addition, if our Proposed Settlement becomes final, then the exercise price of approximately 565,553 outstanding warrants included in the above amounts, currently at a weighted average price of $10.77, will be reduced to $0.01 per share, and the duration of such warrants, which are currently expiring between June 17, 2018 and January 7, 2019, will be extended to 5 years from the issuance date. If such warrants were to be exercised, as we expect they would, that would result in dilution to existing shareholders who do hold such warrants.

 

Our common stock is quoted on the FINRA OTC Bulletin Board, which may have an unfavorable impact on our stock price and liquidity.

 

Our common stock is currently quoted under the symbol “HPTO” on the OTC Bulletin Board market (“OTCBB”) operated by FINRA (Financial Industry Regulatory Authority) and on the OTC Markets Group QB tier (“OTCQB”). Neither the OTCBB nor the OTCQB is a “national securities exchange,” and in general, each is a significantly more limited market than the markets operated by the New York Stock Exchange and NASDAQ. The quotation of our shares on the OTCBB and the OTCQB could result in a less liquid market being available for existing and potential stockholders to trade shares of our common stock, which could depress the trading price of our common stock and have a long-term adverse impact on our ability to raise capital in the future. Because of the limited trading market for our common stock, and because of the significant price volatility, investors may not be able to sell their shares of common stock when they want to do so.

 

Our stock may lose access to a viable trading market.

 

Given the increasing cost and resource demands of being a public company, we may decide to “go dark,” or cease filing with the SEC, by deregistering our securities, for a period of time until our assets and stockholder base are sufficient to warrant public trading again. During such time, there would be a substantial decrease in disclosure by us of our operations and prospects, and a substantial decrease in the liquidity in our common stock even though stockholders may still continue to trade our common stock in the OTC market or “pink sheets.” The market’s interpretation of a company’s motivation for “going dark” varies from cost savings, to negative changes in the firm’s prospects, to serving insider interests, which may affect the overall price and liquidity of a company’s securities.

 

We have never paid dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.

 

We have never declared or paid dividends on our common stock, nor do we anticipate paying any cash dividends for the foreseeable future. We currently intend to retain future earnings, if any, to finance the operations and expansion of our business. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon the earnings, financial condition, operating results, capital requirements and other factors as deemed necessary by our Board of Directors.

 

15
 

 

FINRA’s sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.

 

FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA’s requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

 

Provisions in our Amended and Restated Certificate of Incorporation and Second Amended and Restated Bylaws and our Rights Agreement may prevent or discourage third parties or our stockholders from attempting to replace our management or influencing significant decisions.

 

Provisions in our Amended and Restated Certificate of Incorporation and Second Amended and Restated Bylaws may have the effect of delaying or preventing a change in control of our company or our management, even if doing so would be beneficial to our stockholders. These provisions include, but are not limited to, authorizing our Board of Directors to issue preferred stock without stockholder approval and limiting the persons who may call special meetings of stockholders and providing that stockholders cannot take action by written consent in lieu of a meeting. In addition, as described above under “Recent Developments”, the Rights Agreement works by imposing a significant penalty upon any person or group (including a group of persons that are acting in concert with each other) that acquires ten percent (10%) or more of the Common Shares without the approval of the Board. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult or discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Board. The Rights Agreement is not intended to interfere with any merger, tender or exchange offer or other business combination approved by the Board. Nor does the Rights Agreement prevent the Board from considering any offer that it considers to be in the best interest of its stockholders. The Rights expire at or prior to the earlier of (i) February 16, 2021 or (ii) the redemption or exchange of the Rights as provided for in the Rights Agreement. Together, these charter and contractual provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.

 

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Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

Our corporate headquarters currently occupies approximately 2,527 square feet of office space in Concord, New Hampshire, under a lease that expired in August 2016. On August 31, 2016, we signed an amendment to extend the lease on a month-to-month basis and requiring a six-month notice from the lessor to terminate. Rent on the corporate headquarters continues at $4,000 per month for the current extension of the lease.

 

Our former corporate headquarters at 51 E. Campbell Ave in Campbell, California is comprised of approximately 2,514 square feet of office space under a lease that will expire in October 1, 2018. Rental of these premises will average approximately $9,200 per month over the remaining term of the lease. On April 28, 2017 we entered into a sublease agreement to sublease the entirety of the leased space at 51 E. Campbell Avenue to a third party. The term of the sublease began on June 1, 2017 and extends through the end of our office lease term for that space. The monthly rent payments due to hopTo will offset approximately 62% of the monthly rent payments due to the landlord under hopTo’s lease for that space.

 

Our other former corporate headquarters at 1919 S. Bascom Ave in Campbell, California is comprised of approximately 10,667 square feet of office space under a lease that will expire on October 31, 2018. Rental of these premises for the remaining term averages $39,600 per month. On August 11, 2015 we entered into a sublease agreement to sublease the entirety of the leased space at 1919 S. Bascom Avenue to a third party for the remainder of the master lease term. The monthly rent payments due to hopTo fully offsets the rent payments due under the Company’s lease for that space.

 

We believe our current facilities will be adequate to accommodate our needs for the foreseeable future.

 

Item 3. Legal Proceedings

 

From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. We are not currently a party to any legal proceedings that we believe would reasonably be expected to have a materially adverse effect on our business, financial condition or results of operations.

 

Item 4. Mine safety disclosures

 

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

The following table sets forth, for the periods indicated, the high and low reported sales price of our common stock. Since March 27, 2003 our common stock has been quoted on the Over-the-Counter Bulletin Board. Our common stock is quoted under the symbol “HPTO.” The amounts reflected in the following table are also adjusted to reflect the impact of the Reverse Stock Split, which became effective in the stock market upon commencement of trading on January 28, 2016.

 

   Fiscal 2017 *   Fiscal 2016 * 
Quarter  High   Low   High   Low 
First  $0.06   $0.02   $1.74   $0.71 
Second  $0.35   $0.02   $2.10   $0.83 
Third  $0.12   $0.04   $1.29   $0.03 
Fourth  $0.20   $0.03   $0.14   $0.02 

 

  * The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

On March 26, 2018 there were approximately 122 holders of record of our common stock. Between January 1, 2018 and March 30, 2018 the high and low reported sales price of our common stock was $0.17 and $0.25, respectively, and on March 30, 2018 the closing price of our common stock was $0.20.

 

Dividends

 

We have never declared or paid dividends on our common stock, nor do we anticipate paying any cash dividends for the foreseeable future. We currently intend to retain future earnings, if any, to finance the operations and expansion of our business. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon the earnings, financial condition, operating results, capital requirements and other factors as deemed necessary by the Board of Directors.

 

Unregistered Sales of Equity Securities

 

None.

 

Item 6. Selected Financial Data

 

Not applicable for smaller reporting companies.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Update on HopTo Plans

 

During Q4 2016, we effectively ceased all of our sales, marketing and development efforts for the hopTo products, and at this time we do not expect any meaningful revenues from these products in the foreseeable future. Our sole revenues are from our GO-Global business.

 

Except for the sale of 7 patents sold to Salesforce.com during the fourth quarter of 2017, we own all hopTo-related intellectual property including source-code, related patents, and the relevant trademarks. We continue to believe that we may be able to extract value from these assets and continue working to do so at this time. For detailed information on the hopTo products and technologies, please refer to our Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the SEC on March 30, 2016 as well as our other SEC filings which are available at www.sec.gov. Such filings are being noted for historical information only; unless expressly noted, they are not incorporated herein by reference.

 

Although there is no certainty as to timing or success of our efforts to extract value from our hopTo assets, and stockholders should not place any significant reliance on the outcome of such efforts unless and until definitive agreements are reached, this may include the sale of certain of our hopTo software products or additional sales of patents.

 

Introduction

 

We are developers of application publishing software which includes application virtualization software and cloud computing software for multiple computer operating systems including Windows, UNIX and several Linux-based variants. Our application publishing software solutions are sold under the brand name GO-Global, which is our sole revenue source at this time. GO-Global is an application access solution for use and/or resale by independent software vendors (“ISVs”), corporate enterprises, governmental and educational institutions, and others who wish to take advantage of cross-platform remote access and Web-enabled access to their existing software applications, as well as those who are deploying secure, private cloud environments.

 

Since 2012 we have also been developing several products in the field of software productivity for mobile devices such as tablets and smartphones, which have been marketed under the hopTo brand.

 

The hopTo products were originally marketed to consumers and were later also marketed to small and medium sized businesses and enterprise level customers under the name hopTo Work. hopTo Work allows customers to instantly transform their legacy applications to become touch friendly on modern mobile devices. During 2015 and 2016 we also worked to integrate hopTo Work with certain software products offered by Citrix Systems.

 

Over the years, we have also made significant investments in intellectual property (“IP”). We have filed many patents designed to protect the new technologies embedded in hopTo. However, we do not expect to file for additional patents during 2018.

 

The following discussion should be read in conjunction with the consolidated financial statements and related notes provided in Item 8 “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

 

Critical Accounting Policies

 

Use of Estimates

 

The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted (“GAAP”) in the United States requires management to make judgments, assumptions and estimates 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 period(s) being reported upon. Estimates are used for, but not limited to, the amount of stock-based compensation expense, the warrants liability, the amount of capitalized software development costs, the allowance for doubtful accounts, the estimated lives, valuation, and amortization of intangible assets (including capitalized software), depreciation of long-lived assets, post-employment benefits, and accruals for liabilities and taxes. While we believe that such estimates are fair, actual results could differ materially from those estimates.

 

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Revenue Recognition

 

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

 

For the years ended December 31, 2017 and 2016, software license revenues were recognized when:

 

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

 

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

 

If sufficient VSOE of 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, we do not ship any product licenses to them, rather, the stocking reseller’s inventory is credited with the number of licenses purchased and the stocking reseller can resell (issue) any number of licenses from their inventory at any time. Upon receipt of an order to issue one or more licenses from a stocking reseller’s inventory (a “draw down order”), 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.

 

20
 

 

Effective January 1, 2018, ASC 606, “Revenue from Contracts with Customers,” changed the recognition of revenue standards for reporting periods beginning after December 31, 2017.

 

In May 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). Subsequently FASB has released several updates to ASU 2014-09 including ASU 2016- 20, ASU 2016-12, ASU-2016-10, ASU-2016-08, and ASU-2015-14. The effective date for ASU 2014-09 is January 1, 2018. The new standard supersedes nearly all existing revenue recognition standards. The Company expects to adopt this standard using the modified retrospective approach. The Company has substantially completed its assessment of the new standard, but is continuing to assess potential impacts primarily related to upgrade rights held by a limited number of customers. We believe the most significant change to the timing and amount of revenue recognition under the new standard is related to our stocking orders. Under the current standard, we defer substantially all of the licensing revenue associated with stocking orders until delivery to the end user. Under the new standard, substantially all licensing revenue from stocking orders will be recognized at the time the licenses are delivered to our customers, who are generally resellers or distributors. Based upon our agreements with our customers, we believe that under the new standard, the ownership rights and rewards of the software licenses have been transferred. Due to this change, we anticipate that we will record substantially all of our deferred licensing revenue to retained earnings under the modified retrospective approach in Q1 2018.

 

As a result of the adoption of ASU NO. 2014-09 we expect our annual and quarterly revenues to be subject to greater variability.

 

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

 

We recognize revenue from maintenance contracts ratably over the related contract period, which generally ranges from one to five years.

 

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

 

Deferred Rent

 

The lease for our office at 1919 S. Bascom Avenue in Campbell, California, as amended, (See Note 7) contains free rent and predetermined fixed escalations in our minimum rent payments. On August 11, 2015 we entered into a sublease agreement to sublease the entirety of the leased space at 1919 S. Bascom Avenue to a third party (See Note 7).

 

On August 24, 2015 we entered into a lease agreement for office space at 51 E. Campbell Avenue in Campbell, California, which became effective on October 1, 2015 (See Note 7).

 

The leases for both of the Company’s subleased former offices in Campbell, California contain free rent and predetermined fixed escalations in our minimum rent payments (See Notes 7 and 12). Rent expense related to these leases is recognized on a straight-line basis over the terms of the leases. Any difference between the straight-line rent amounts and amounts payable under the leases is recorded as part of deferred rent in current or long-term liabilities, as appropriate. The monthly rent payments due to the Company for the sublease of the office at 1919 S. Bascom Avenue fully offsets the rent payments due under the Company’s lease for that space.

 

Incentives that we received pursuant to the amended lease agreement for 1919 S. Bascom Avenue 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.

 

21
 

 

Long-Lived Assets

 

Long-lived assets, which consist primarily of capitalized software, 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 undiscounted future cash flows, among other variables, as appropriate. Assets to be held and used that are affected by an impairment loss are depreciated or amortized at their new carrying amount over their remaining estimated life; assets to be sold or otherwise disposed of are not subject to further depreciation or amortization. During 2017 and 2016, we determined that an impairment of $0 and $15,500, respectively, existed with certain capitalized software development costs associated with our hopTo Work product and recognized that cost as part of cost of revenue.

 

Software Development Costs

 

We capitalize software development costs incurred from the time technological feasibility of the software is established until the time the software is available for general release, in accordance with GAAP. Research and development costs and other computer software maintenance costs related to the software development are expensed as incurred. Upon the establishment of technological feasibility, related software development costs are capitalized. 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. Software development costs, and amortization of such costs, are discussed further under “Results of Operations – Costs of Revenue.”

 

We make ongoing evaluations of the recoverability of its capitalized software projects by comparing the net amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, we will write off the amount by which the unamortized software development costs exceed net realizable value.

 

During 2017 and 2016, we determined that certain capitalized software development costs associated with the hopTo consumer product totaling $0 and $15,500, respectively, should be written off as we do not anticipate monetization of that particular product during the time fame that the costs were scheduled to be amortized.

 

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 years ended December 31, 2017 and 2016:

 

   Beginning
Balance
   Charge Offs   Recoveries   Provision   Ending
Balance
 
2017  $7,700           $100   $7,800 
2016   17,300    (3,700)       (5,900)   7,700 

 

Stock-Based Compensation

 

We apply the fair value recognition provisions of the Financial Accounting Standards Board (FASB) Codification Subtopic (ASC) 718-10, “Compensation – Stock Compensation.” We estimate the fair value of each option grant on the date of grant using the binomial model. Stock-based compensation is estimated using our stock price volatility for grants awarded by analyzed historic volatility over a period of time equal in length to the expected option term for the period being issued. For grants made to newly hired employees the period of time over which we analyzed our historic volatility ended on the last day of the quarter during which the new employee was hired. We derived an annualized forfeiture rate by analyzing our historical forfeiture data, including consideration of the impact of certain non-recurring events, such as reductions in our work force. Our estimates of the expected option term and the estimated exercise factor are derived from an analysis of historical data and future projections. The approximate risk-free interest rate is based on the implied yield available on U.S. Treasury issues with remaining terms equivalent to our expected option term. We believe that each of these estimates is reasonable in light of the data we analyzed. However, as with any estimate, the ultimate accuracy of these estimates is only verifiable over time. During the years ended December 31, 2017 and 2016, we did not issue any stock options.

 

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During 2016, we awarded 0 and 35,000 shares of restricted common stock to employees and the board of advisors, respectively. The valuation of the restricted common stock awards was based on the closing fair market value of our common stock on the grant date. For the awards made to the board of advisors, such fair market value was $1.65 per share. We later canceled the remaining total of 26,250 of unvested shares from these board of advisors in the three-month period ending September 30, 2016 as a result of our termination agreement entered with the members of the board of advisors. Total stock-based compensation expense for these unvested shares was $38,500.

 

During 2016, we accelerated the vesting of all 34,100 remaining unvested shares of restricted common stock granted to employees resulting in $77,000 of stock-based compensation expense which is included in the table below. The following table illustrates the non-cash stock-based compensation expense recorded, net of amounts capitalized, during the years ended December 31, 2017 and 2016 by income statement classification:

 

   2017   2016 
Cost of revenue  $100   $5,500 
Selling and marketing expense   200    69,200 
General and administrative expense   13,000    156,100 
Research and development expense   100    93,600 
   $13,400   $324,400 

 

Concentration of Credit Risk

 

Financial instruments, which potentially subject us to concentration of credit risk, consist principally of cash and trade receivables. We place cash and, when applicable, cash equivalents, with high quality financial institutions and, by policy, limit the amount of credit exposure to any one financial institution. As of December 31, 2017, we had approximately $765,400 of cash with financial institutions in excess of FDIC insurance limits. As of December 31, 2016, the Company had approximately $330,400 of cash with financial institutions in excess of FDIC insurance limits.

 

For the years ended December 31, 2017 and December 31, 2016, the Company considered the following to be its most significant customers:

 

   2017   2016 
Customer  % Sales   % Accounts
Receivable
   % Sales   % Accounts
Receivable
 
Centric System   6.9%   12.6%   5.0%   11.5%
Elosoft   16.9%   56.2%   11.0%   18.8%
IDS   5.5%   0.0%   3.6%   0.0%
Uniface   6.5%   0.8%   6.1%   10.9%
Total   35.8%   69.6%   25.7%   41.2%

 

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Results of Operations

 

Set forth below is statement of operations data for the years ended December 31, 2017 and 2016 along with the dollar and percentage changes from 2016 to 2017 in the respective line items.

 

   Year Ended December 31,   Increase (Decrease) 
   2017   2016   Dollars   Percentage 
Revenue                
Software licenses  $1,530,800   $1,446,600   $84,200    5.8%
Software service fees   2,297,700    2,413,700    (116,000)   (4.8)%
Other   61,000    141,000    (80,000)   (56.7)%
Total Revenue   3,889,500    4,001,300    (111,800)   (2.8)%
                     
Cost of revenue                    
Software service costs   57,000    109,100    (52,100)   (47.8)%
Software product costs   11,300    38,000    (26,700)   (70.3)%
Write-down of capitalized software development costs       15,500    (15,500)   (100.0)%
Total Cost of revenue   68,300    162,600    (94,300)   (58.0)%
Gross profit   3,821,200    3,838,700    (17,500)   (0.5)%
                     
Operating expenses                    
Selling and marketing   355,300    774,400    (419,100)   (54.1)%
General and administrative   1,558,400    2,759,200    (1,200,800)   (43.5)%
Research and development   1,500,100    2,187,900    (687,800)   (31.4)%
Total Operating expenses   3,413,800    5,721,500    (2,307,700)   (40.3)%
Income/(loss) from operations   407,400    (1,882,800)   2,290,200    (121.6)%
                     
Other income (expense)                    
Change in fair value of warrants liability       29,300    (29,300)   (100.0)%
Interest and other income   197,000    3,700    193,300    5224.3%
Interest and other expense   (500)   (300)   (200)   66.7%
Total other income (expense)   196,500    32,700    163,800    500.9%
Loss from operations before provision for income tax   603,900    (1,850,100)   2,454,400    (132.60)%
Provision for income taxes   3,300    2,800    43,900    17.9%
Net income / (loss)  $600,600   $(1,852,900)  $2,453,500    (132.4.)%

 

Revenue

 

Software Licenses

 

The table that follows summarizes software licenses revenue for the years ended December 31, 2017 and 2016, and calculates the change in dollars and percentage from 2016 to 2017 in the respective line item.

 

   Year Ended December 31,   Increase (Decrease) 
Software licenses  2017   2016   Dollars   Percentage 
Windows  $1,255,200   $1,161,100   $94,100    8.1%
UNIX/Linux   275,600    285,500    (9,900)   (3.5)%
Total  $1,530,800   $1,446,600   $84,200    5.8%

 

Our software revenue is entirely related to our GO-Global product line, and historically has been primarily derived from product licensing fees and service fees from maintenance contracts. The majority of this revenue has been earned, and continues to be earned, from a limited number of significant customers, most of whom are resellers. Many of our resellers purchase software licenses that they hold in inventory until they are resold to the ultimate end user (a “stocking reseller”). We defer recognition of revenue from these sales (on our 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.

 

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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.

 

The increase in Windows software licenses revenue for the year ended December 31, 2017, as compared with the prior year, was primarily due to higher license purchases from certain OEM partners and international distributors during 2017.

 

Software licenses revenue from our UNIX/Linux products during 2017 is lower than during 2016 due to lower revenue from certain of our European telecommunications customers, partially offset by higher revenue from certain end users and other resellers.

 

We expect aggregate GO-Global software license revenue in 2018 to be approximately the same to modestly lower than 2017 levels as we are observing a mix of both lower and higher aggregate revenue from our stocking resellers. At the same time, we continue to work to maintain or improve cash flow from the GO-Global business through cost control and other measures.

 

Software Service Fees

 

The table that follows summarizes revenue recognized derived from software service fees for the years ended December 31, 2017 and 2016, and calculates the changes in dollars and percentage from 2016 to 2017 in the respective line item.

 

   Year Ended December 31,   Increase (Decrease) 
Software service fees  2017   2016   Dollars   Percentage 
Windows  $1,769,200   $1,802,500   $(33,300)   (1.8)%
UNIX/Linux   528,500    611,200    (82,700)   (13.5)%
Total  $2,297,700   $2,413,700   $(116,000)   (4.8)%

 

The decrease in software service fees revenue attributable to our Windows products during 2017, as compared with 2016, was primarily due to the expiration of maintenance contracts from one of our OEM partners. The aggregate of all other software service fees attributable to our Windows products were slightly higher during 2017 as compared to 2016.

 

The decrease in service fees revenue attributable to our UNIX products for 2017, as compared with 2016, was primarily the result of the lower level of UNIX product sales throughout the prior year and an expiration of certain long term maintenance contracts. The majority of this decrease was attributable to our European telecommunications customers, as discussed above.

 

We expect that software service fees for 2018 will be modestly lower than those for 2017.

 

25
 

 

Other

 

The decrease in other revenue for 2017, as compared with 2016, was primarily due to a decrease in professional services associated with a large project completed for one customer in 2016, partially offset by an increase in private labeling fees associated with certain of our GO-Global ISV Partners.

 

Costs of Revenue

 

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

 

Research and development costs for new product development, after technological feasibility is established, are recorded as “capitalized software” on our Consolidated Balance Sheet. Such capitalized costs are subsequently amortized to cost of revenue as a component of software product costs over the shorter of three years or the remaining estimated life of the products so capitalized. We capitalized $0 of software development costs during 2017 and 2016. Amortization related to capitalized software development costs charged to costs of revenue was approximately $0 and $5,400 during 2017 and 2016, respectively. This amortization was separate from the impairment costs detailed below.

 

Cost of revenue for the year ended December 31, 2017 decreased by $94,300, or 58.0%, to $68,300 from $162,600 for 2016. Cost of revenue represented 1.8% and 4.1% of total revenue for the years ended December 31, 2017 and 2016, respectively.

 

Software Service Costs - Software service costs decreased during 2017, as compared with 2016, due to lower customer support costs associated with GoGlobal. We expect software service costs for 2018 to approximately the same as 2017 as we have been able to reduce headcount costs in this area due to a lower level of effort required.

 

Software Product Costs - The decrease in software product costs for 2017, as compared with 2016, was due to all capitalized software development being fully amortized.

 

Write-Down of Capitalized Software Development Cost - During 2017 and 2016, the Company wrote down the capitalized software development costs of $0 and $15,500, respectively. These costs were associated solely with the hopTo consumer product which we do not anticipate to monetize during the period in which these costs were scheduled to be amortized. These impairment costs are in addition to the amortization costs detailed above.

 

For the reasons outlined above, we expect 2018 costs of revenue to be approximately the same as 2017 levels.

 

Selling and Marketing Expenses. Selling and marketing expenses primarily consist of employee costs (inclusive of non-cash stock-based compensation expense), outside services and travel and entertainment expenses.

 

Selling and marketing expenses for the year ended December 31, 2017 decreased by $419,100, or 54.1%, to $355,300 from $774,400 in 2016. Selling and marketing expenses for the years ended December 31, 2017 and 2016 represented approximately 9.1% and 19.4% of total revenue, respectively. The decrease in selling and marketing expenses during 2017, compared to 2016, was due to a combination of lower headcount and a decrease in advertising and promotional costs associated with hopTo Work as we have suspended sales and marketing activity for that product.

 

We expect 2018 sales and marketing expenses to be slightly higher than 2017 levels as we make some modest investment into marketing activity for the GO-Global products.

 

General and Administrative Expenses. General and administrative expenses primarily consist of employee, amortization and depreciation, 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.

 

26
 

 

General and administrative expenses for the year ended December 31, 2017 decreased by $1,200,800, or 43.5%, to $1,558,400 from $2,759,200 for 2016. General and administrative expenses for the years ended December 31, 2017 and 2016 represented approximately 40.1% and 69.0% of total revenue, respectively.

 

The decrease in general and administrative expense in 2017 was due to a combination of decreased rent expense associated with lower net operating leases for the sublease of our Campbell office, decreased executive compensation associated with the part-time arrangement for CEO and CFO positions, decreased legal expenses associated with activity related to our patents, lower stock compensation expense associated with the decrease of the stock price, other lower costs associated with investor relations, and lower accruals for potential liquidated damages resulting from delays in filing registration statements for shares of common stock and shares of common stock underlying warrants for certain of the private placements that the Company closed in prior periods.

 

In 2018, we intend to continue cost controls and to benefit from lower rent expense associated with consolidation of our headquarters location to Concord, NH. We also intend maintain our general and administrative headcount and use of legal service to a level consistent with the second half of 2017 and our financial resources. We therefore expect that our 2018 general and administrative costs will be lower than those for 2017.

 

Research and Development Expenses. Research and development expenses consist primarily of employee costs, payments to contract programmers, travel and entertainment for our engineers, and all rent for our leased engineering facilities.

 

Research and development expenses, net of amounts capitalized, decreased by $687,800, or 31.4%, to $1,500,100 for the year ended December 31, 2017 from $2,187,900 in the prior year. Research and development expenses for the years ended December 31, 2017 and 2016 represented approximately 38.6% and 54.7% of total revenue, respectively.

 

During both 2017 and 2016, we capitalized $0 of software development costs.

 

The decrease in research and development expense is primarily due to our suspension of development activity for hopTo products, resulting in lower employee costs associated with lower headcount, lower payments to contract programmers, and lower operating rent expense.

 

In 2018, we expect to make some modest targeted investments in research and development resources associated with our GO-Global products based on market feedback. We therefore expect 2018 research and development expenses, net of capitalized software developments costs to be slightly higher than 2017 levels.

 

Change in Fair Value of Warrants Liability. During 2017 and 2016, we recognized a net change of $0 and $29,300 respectively, in the aggregate fair value of the warrant liability (See Note 8 to Notes to Consolidated Financial Statements). The change in fair value of warrants liability was approximately 0.0% and 0.7% of total revenues for the years ended December 31, 2017 and 2016, respectively. Such amounts resulted 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 8 to the Notes to Consolidated Financial Statements.

 

Income Taxes. For the years ended December 31, 2017 and 2016, we recorded a current tax provision for a foreign subsidiary of approximately $3,300 and $2,800, respectively. At December 31, 2017, we had approximately $62.3 million of federal net operating loss carryforwards, which will begin to expire in 2018. Also at December 31, 2017, we had approximately $6.9 million of California state net operating loss carryforwards available to reduce future taxable income, which begin to expire in 2017. During the years ended December 31, 2017 and 2016, we utilized $193,376 federal and no California net operating losses and have recorded a full valuation allowance against each of them.

 

At December 31, 2017, we had approximately $1.0 million of federal research and development tax credits, for which a full valuation allowance has been provided. Such tax credits will begin to expire in 2018.

 

27
 

 

Net Income/ (Loss). As a result of the foregoing items, we reported a net income of $600,600 for the year ended December 31, 2017, as compared with a net loss of $1,852,900 for 2016.

 

Liquidity and Capital Resources

 

Our reported net income of $600,600 in 2017 included two significant non-cash items: depreciation and amortization of $51,200 and stock-based compensation expense of $13,400.

 

We did not invest in capital expenditures or capitalized software development cost during 2017.

 

We sold seven patents in the fourth quarter of 2017 with $0 net book value for net proceeds after expenses of $320,000 and some expensed equipment for $900.

 

During fiscal 2017: (1) we reduced our operating expense from approximately $1.3 million per quarter to less than $0.8 million; (2) we have improved the operating results from our GO-Global business and have reasonable confidence in its ability to generate cash for at least the next 12 months; (3) sold several patents for cash; and (4) we increased our cash position from a low of $300 thousand in August of 2016 to $1.0 million at December 31, 2017.

 

In addition, for the reasons described above, we expect our results from operations and capital resources will be sufficient to fund our operations for at least the next 12 months from the date of the filing of this Annual Report on Form 10-K however, we do not expect these funds and resources to be sufficient for material new investments in our GO-Global business.

 

In order to achieve the expense controls in the past fiscal year, we implemented significant expense reductions, including (1) a limited number of employee layoffs primarily related to the hopTo product; (2) during the three month period ended September 30, 2016, our CEO and CFO voluntarily agreed with our board of directors to defer 50% of their salary beginning September 1, 2016 until such time as the Company can reasonably pay such compensation upon approval by the board of directors; (and on October 25, 2017, the board of directors of the Company determined that the financial status of the Company had improved and accordingly, determined that it was reasonable for the Company to pay 50% of this deferred salary and such payments were made to the CFO and CEO on October 30, 2017) and (3) undertook other expense reduction initiatives related to related to patent maintenance, real estate and use of professionals.

 

We no longer are considering potentially suspending or terminating our SEC filing status, although we reserve the right to do so subject to applicable law.

 

We have had, and as a regular part of our business from time to time continue to have, discussions with various parties about the possibility of strategic transactions.

 

Cash

 

As of December 31, 2017, cash was $1,015,400 as compared with $546,200 as of December 31, 2016, an increase of $469,200, or 85.9%. The increase primarily resulted from the cash generated by our operations and the net proceeds from the sale of 7 patents in October 2017.

 

Accounts Receivable, net

 

At December 31, 2017 and 2016, we had $426,800 and $355,300, respectively, in accounts receivable, net of allowances totaling $7,800 and $7,700, respectively. The increase in net accounts receivable was primarily due to higher sales during the three-month period ended December 31, 2017, as compared with same period ended December 31, 2016. We collect the significant majority of our quarter-end accounts receivable during the subsequent quarter; accordingly, increases or decreases in accounts receivable from one period to the next tends to be indicative of the trend in our sales from one period to the next. From time to time, we could have individually significant accounts receivable balances due us from one or more of our significant customers. If the financial condition of any of these significant customers should deteriorate, our operating results could be materially affected.

 

28
 

 

Working Capital

 

As of December 31, 2017, we had current assets of $1,555,100 and current liabilities of $3,502,900, which netted to a working capital deficit of $(1,947,800). Included in current liabilities was the current portion of deferred revenue of $1,409,700 and an accrual for potential liquidated damages of $855,100 (see Note 12).

 

Commitments and Contingencies

 

The following table discloses our contractual commitments for future periods, which consist entirely of leases for office space and is inclusive of our contractual commitments for our Campbell, California office, including the commitments under the lease amendment for 1919 S. Bascom Avenue. The table assumes that we will occupy all currently leased facilities for the full term of each respective lease:

 

   Lease
Payments
   Sublease Receipts   Total 
2018   475,400    (420,800)   54,600 

 

Rent expense aggregated approximately $67,600 and $141,700 for the years ended December 31, 2017 and 2016, respectively.

 

Recent Accounting Pronouncements

 

In May 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). Subsequently FASB has released several updates to ASU 2014-09 including ASU 2016- 20, ASU 2016-12, ASU-2016-10, ASU-2016-08, and ASU-2015-14. The effective date for ASU 2014-09 is January 1, 2018. The new standard supersedes nearly all existing revenue recognition standards. The Company expects to adopt this standard using the modified retrospective approach. The Company has substantially completed its assessment of the new standard, but is continuing to assess potential impacts primarily related to upgrade rights held by a limited number of customers. We believe the most significant change to the timing and amount of revenue recognition under the new standard is related to our stocking orders. Under the current standard, we defer substantially all of the licensing revenue associated with stocking orders until delivery to the end user. Under the new standard, substantially all licensing revenue from stocking orders will be recognized at the time the licenses are delivered to our customers, who are generally resellers or distributors. Based upon our agreements with our customers, we believe that under the new standard, the ownership rights and rewards of the software licenses have been transferred. Due to this change, we anticipate that we will record substantially all of our deferred licensing revenue to retained earnings under the modified retrospective approach in Q1 2018.

 

As a result of the adoption of ASU NO. 2014-09 we expect our annual and quarterly revenues to be subject to greater variability.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable for smaller reporting companies.

 

29
 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Index to Consolidated Financial Statements

 

  Page
Report of Independent Registered Public Accounting Firm 31
   
Consolidated Balance Sheets as of December 31, 2017 and 2016 32
   
Consolidated Statements of Operations for the Years Ended December 31, 2017 and 2016 33
   
Consolidated Statements of Shareholders’ Equity (Deficit) for the Years Ended December 31, 2017 and 2016 34
   
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017 and 2016 35
   
Notes to Consolidated Financial Statements 36

 

30
 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of hopTo Inc.

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of hopTo Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two year period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the two year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Accounting Company Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Macias Gini & O’Connell LLP  

 

We have served as the Company’s auditor since 2008.

 

Sacramento, California

April 17, 2018

 

31
 

 

hopTo Inc.

Consolidated Balance Sheets

 

   As of December 31, 
   2017   2016 
Assets          
Current Assets:          
Cash  $1,015,400   $546,200 
Accounts receivable, net of allowance for doubtful accounts of $7,800 and $7,700, respectively   426,800    355,300 
Prepaid expenses and other current assets   112,900    38,700 
Total Current Assets   1,555,100    940,200 
           
Property and equipment, net   30,800    143,300 
Other assets   17,800    109,000 
Total Assets  $1,603,700   $1,192,500 
           
Liabilities and Shareholders’ Equity (Deficit)          
Current Liabilities:          
Accounts payable  $251,700   $575,500 
Accrued expenses   107,700    87,400 
Accrued wages   275,700    312,900 
Deferred rent   74,100    24,100 
Capital lease       6,800 
Deposit liability   93,500     
Deferred revenue   1,845,100    1,759,000 
Other current liabilities   855,100    571,100 
Total Current Liabilities   3,502,900    3,336,800 
           
Long Term Liabilities:          
Deferred revenue   1,409,700    1,694,600 
Deposit liability       81,400 
Deferred rent       2,600 
Total Liabilities   4,912,600    5,115,400 
           
Commitments and contingencies (Note 12)          
           
Shareholders’ 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, 9,804,400 shares issued and outstanding, respectively  $14,700   $14,700 
Additional paid-in capital   78,525,600    78,512,200 
Accumulated deficit   (81,849,200)   (82,449,800)
Total Shareholders’ Deficit   (3,308,900)   (3,922,900)
Total Liabilities and Shareholders’ Deficit  $1,603,700   $1,192,500 

 

See accompanying notes to consolidated financial statements

 

32
 

 

hopTo Inc.

Consolidated Statements of Operations

 

   For the Years Ended December 31, 
   2017   2016 
Revenue          
Software licenses  $1,530,800   $1,446,600 
Software service fees   2,297,700    2,413,700 
Other   61,000    141,000 
Total Revenue   3,889,500    4,001,300 
           
Cost of Revenue          
Software service costs   57,000    109,100 
Software product costs   11,300    38,000 
Write-down of capitalized software development costs       15,500 
Total Cost of Revenue   68,300    162,600 
           
Gross Profit   3,821,200    3,838,700 
           
Operating Expenses          
Selling and marketing   355,300    774,400 
General and administrative   1,558,400    2,759,200 
Research and development   1,500,100    2,187,900 
Total Operating Expenses   3,413,800    5,721,500 
           
Profit / (loss) from Operations   407,400    (1,882,800)
           
Other Income (Expense)          
Change in fair value of warrants liability       29,300 
Interest and other income   197,000    3,700 
Interest and other expense   (500)   (300)
Total Other Income (Expense)   196,500    32,700 
Profit / (loss) from operations before provision for income tax   603,900    (1,850,100)
Provision for income tax   3,300    2,800 
           
Net Income / (Loss)  $600,600   $(1,852,900)
Earnings / (loss) per share – basic and diluted  $0.06   $(0.19)
Weighted Average Common Shares Outstanding – Basic and Diluted   9,804,400    9,770,076 

 

See accompanying notes to consolidated financial statements

 

33
 

 

hopTo Inc.

Consolidated Statements of Shareholders’ Equity (Deficit)

 

   For the Years Ended
December 31,
 
   2017   2016 
Preferred stock - shares outstanding          
Beginning balance        
Ending balance        
Common stock - shares outstanding          
Beginning balance   9,804,462    9,731,233 
Employee stock option issuances       1,800 
Reconciling variance   (62)    
Vesting of restricted stock awards       71,429 
Ending balance   9,804,400    9,804,462 
Common stock – amount          
Beginning balance  $14,700   $14,600 
Vesting of restricted stock awards       100 
           
Ending balance  $14,700   $14,700 
Additional paid-in capital          
Beginning balance  $78,512,200   $78,189,300 
Stock-based compensation expense   13,400    324,400 
Company payment of employee taxes for stock-based compensation       (2,700)
Proceeds from exercise of employee stock options       1,500 
Other rounding       (300)
Ending balance  $78,525,600   $78,512,200 
Accumulated deficit          
Beginning balance  $(82,449,800)  $(80,596,900)
Net Income (Loss)   600,600    (1,852,900)
Ending balance  $(81,849,200)  $(82,449,800)
           
Total Shareholders’ Deficit  $(3,308,900)  $(3,922,900)

 

See accompanying notes to consolidated financial statements

 

34
 

 

hopTo Inc.

Consolidated Statements Of Cash Flows

 

   For the Years Ended
December 31,
 
   2017   2016 
Cash Flows Provided By (Used In) Operating Activities:          
Net profit / (loss)  $600,600   $(1,852,900)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   51,200    94,600 
Write-down of capitalized software development costs   -    15,500 
Stock based compensation expense   13,400    324,400 
Company payments of employee taxes for stock-based compensation   -    (2,700)
Revenue deferred to future periods   2,752,600    2,944,800 
Recognition of deferred revenue   (2,951,400)   (3,424,000)
Change in allowance for doubtful accounts   100    (9,600)
Change in fair value of derivative instruments - warrants   -    (29,300)
Accretion of warrants liability for consulting services   -    (2,300)
Loss /(gain) on disposal of fixed assets   60,400    (3,300)
Loss on sublease   63,100    - 
Net gain on sale of patents   (320,000)   - 
Interest accrued for capital lease   200    800 
Changes in severance liability   -    (5,900)
Changes in deferred rent   (15,700)   (21,000)
Changes in operating assets and liabilities:          
Accounts receivable   (71,600)   89,200 
Prepaid expenses and other current assets   (74,200)   100,500 
Other assets (LT)   91,200    - 
Accounts payable   (323,800)   190,300 
Accrued expenses   20,300    17,700 
Accrued wages   (37,200)   (244,400)
Deposit liability   12,100    - 
Other current liabilities   284,000    571,100 
Net Cash Provided By (Used In) Operating Activities   155,300    (1,246,500)
Cash Flows Provided By (Used In) Investing Activities:          
Proceeds from sale of fixed assets   900    23,300 
Proceeds from sale of patents   320,000    - 
Net Cash Provided By Investing Activities   320,900    23,300 
Cash Flows Provided By (Used In) Financing Activities:          
Proceeds from exercise of employee stock options   -    1,500 
Payments for capital lease   (7,000)   (9,400)
Net Cash Used In Financing Activities   (7,000)   (7,900)
Net Increase/ (Decrease) in Cash   469,200    (1,231,100)
Cash, beginning of year   546,200    1,777,300 
Cash, end of year  $1,015,400   $546,200 

 

See accompanying notes to consolidated financial statements

 

35
 

 

Notes to Consolidated Financial Statements

 

1. Basis of Presentation

 

The Company. Our Board of Directors adopted an amendment to our Certificate of Incorporation changing our name from GraphOn Corporation to hopTo Inc. effective September 9, 2013. A Certificate of Amendment of Incorporation was filed with the Delaware Secretary of State implementing the name change. The amendment had been previously approved by our stockholders. Our headquarters are in Concord, NH.

 

hopTo Inc., and its subsidiaries are developers of application publishing software which includes application virtualization software and cloud computing software for multiple computer operating systems including Windows, UNIX and several Linux-based variants.

 

The Company sells a family of products under the brand name GO-Global, which is a software application publishing business and is the Company’s sole revenue source at this time. GO-Global is an application access solution for use and/or resale by independent software vendors (“ISVs”), corporate enterprises, governmental and educational institutions, and others, who wish to take advantage of cross-platform remote access and Web-enabled access to their existing software applications, as well as those who are deploying secure, private cloud environments.

 

Since 2012 we have also been developing several products in the field of software productivity for mobile devices such as tablets and smartphones, which have been marketed under the hopTo brand. The hopTo products were originally marketed to consumers and were later also marketed to small and medium sized businesses and enterprise level customers under the name hopTo Work. hopTo Work allows customers to instantly transform their legacy applications to become touch friendly on modern mobile devices. During 2016, we also worked to integrate hopTo Work with certain software products offered by Citrix Systems.

 

As of Q4 2016, we have effectively ceased all of our sales, marketing and R&D efforts for the hopTo products, and at this time we do not expect any meaningful revenues from these products in the foreseeable future.

 

We continue to own all hopTo-related IP including source-code, related patents, and the relevant trademarks, other than seven patents we sold to Salesforce.com in 2017. We continue to believe that we may be able to extract value from these assets and are currently working to do so at this time.

 

Over the years, the Company has also made significant investments in intellectual property (“IP”). It has filed many patents designed to protect the new technologies embedded in hopTo. As of March 31, 2018, 53 patents have been granted by the USPTO. Due to financial constraints on our operations, we have suspended patent prosecution activity other than to pay maintenance or issuance fees for patents already approved by USPTO.

 

On January 27, 2016, we filed an amendment of our Amended and Restated Certificate of Incorporation, as amended, to effect a 1-for-15 reverse stock split of our common stock (the “Reverse Stock Split”). The Reverse Stock Split became effective in the stock market upon commencement of trading on January 28, 2016. As a result of the Reverse Stock Split, every fifteen shares of our pre-Reverse Stock Split common stock were combined and reclassified into one share of our common stock. No fractional shares were issued in connection with the Reverse Stock Split, and cash paid to stockholders for potential fractional shares was insignificant. The number of shares of common stock subject to outstanding options, restricted stock units, warrants and convertible securities were also reduced by a factor of fifteen as of January 27, 2016. All historical share and per share amounts reflected throughout this report have been adjusted to reflect the Reverse Stock Split. The authorized number of shares and the par value per share of our common stock were not affected by the Reverse Stock Split.

 

36
 

 

2. Significant Accounting Policies

 

Basis of Presentation and Use of Estimates. The consolidated financial statements include the accounts of hopTo Inc. and its subsidiaries (collectively, “we”, “us”, “our”, or “Company”); significant intercompany accounts and transactions are eliminated upon consolidation. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include: the amount of stock-based compensation expense; the allowance for doubtful accounts; the estimated lives of property of equipment, valuation and amortization of intangible assets (including capitalized software); depreciation of long-lived assets; valuation of warrants; post-employment benefits; and accruals for liabilities and taxes. While the Company believes that such estimates are fair, actual results could differ materially from those estimates.

 

Property and Equipment. Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, between three and seven years. Amortization of leasehold improvements is calculated using the straight-line method over the lesser of the lease term or useful lives of the respective assets, between three and seven years.

 

Shipping and Handling. Shipping and handling costs are included in cost of revenue for all periods presented.

 

Software Development Costs. Under the criteria set forth in Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 985-20, “Costs of Software to be Sold, Leased or Marketed,” development costs incurred in the research and development of new software products are expensed as incurred until technological feasibility, in the form of a working model, has been established, at which time such costs are capitalized until the product is available for general release to customers. The Company did not capitalize any software development costs during 2017 or 2016. The Company makes ongoing evaluations of the recoverability of its capitalized software projects by comparing the net amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, the Company writes off the amount by which the unamortized software development costs exceed net realizable value (see Note 3).

 

Revenue Recognition. The Company markets and licenses products indirectly through channel distributors, independent software vendors (“ISVs”), value-added resellers (“VARs”) (collectively “resellers”) and directly to corporate enterprises, governmental and educational institutions and others. Its product licenses are perpetual. The Company also separately sells intellectual property licenses, maintenance contracts (which are comprised of license updates and customer service access), and other products and services.

 

For the years ended December 31, 2016 and 2017, software license revenues were recognized when:

 

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

 

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

 

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

 

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

 

There are no rights of return granted to purchasers of the Company’s software products.

 

Effective January 1, 2018, ASC 606, Revenue from Contracts with Customers, changed the recognition of revenue standards for reporting periods beginning after December 31, 2017.

 

In May 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). Subsequently FASB has released several updates to ASU 2014-09 including ASU 2016- 20, ASU 2016-12, ASU-2016-10, ASU-2016-08, and ASU-2015-14. The effective date for ASU 2014-09 is January 1, 2018. The new standard supersedes nearly all existing revenue recognition standards. The Company expects to adopt this standard using the modified retrospective approach. The Company has substantially completed its assessment of the new standard, but is continuing to assess potential impacts primarily related to upgrade rights held by a limited number of customers. We believe the most significant change to the timing and amount of revenue recognition under the new standard is related to our stocking orders. Under the current standard, we defer substantially all of the licensing revenue associated with stocking orders until delivery to the end user. Under the new standard, substantially all licensing revenue from stocking orders will be recognized at the time the licenses are delivered to our customers, who are generally resellers or distributors. Based upon our agreements with our customers, we believe that under the new standard, the ownership rights and rewards of the software licenses have been transferred. Due to this change, we anticipate that we will record substantially all of our deferred licensing revenue to retained earnings under the modified retrospective approach in Q1 2018.

 

As a result of the adoption of ASU NO. 2014-09 we expect our annual and quarterly revenues to be subject to greater variability.

 

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

 

All of the Company’s software licenses are denominated in U.S. dollars.

 

Deferred Rent. The leases for both of the Company’s subleased former offices in Campbell, California contain free rent and predetermined fixed escalations in our minimum rent payments (See Notes 7 and 12). Rent expense related to these leases is recognized on a straight-line basis over the terms of the leases. Any difference between the straight-line rent amounts and amounts payable under the leases is recorded as part of deferred rent in current or long-term liabilities, as appropriate. The monthly rent payments due to the Company for the sublease of the office at 1919 S. Bascom Avenue fully offsets the rent payments due under the Company’s lease for that space.

 

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

 

Allowance for Doubtful Accounts. The Company maintains an allowance for doubtful accounts that reflects our best estimate of potentially uncollectible trade receivables. Such allowance is based on assessments of the collectability of specific customer accounts and the general aging and size of the accounts receivable. We regularly review the adequacy of our allowance for doubtful accounts by considering such factors as historical experience, credit worthiness, and current economic conditions that may affect a customer’s ability to pay. We specifically reserve for those accounts deemed uncollectible. We also establish, and adjust, a general allowance for doubtful accounts based on our review of the aging and size of our accounts receivable. The following table illustrates the details of the Allowance for Doubtful Accounts for the years ended December 31, 2017 and 2016:

 

   Beginning
Balance
   Charge Offs   Recoveries   Provision   Ending
Balance
 
2017  $7,700   $   $   $100   $7,800 
2016  $17,300   $(3,700)  $   $(5,900)  $7,700 

 

Income Taxes. In accordance with FASB ASC 740-10-05, “Income Taxes,” the Company performed a comprehensive review of uncertain tax positions as of December 31, 2017. In this regard, an uncertain tax position represents the expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes.

 

The Company and one or more of its subsidiaries are subject to United States federal income taxes, as well as income taxes of multiple state and foreign jurisdictions. The Company and its subsidiaries are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2011. There are no tax examinations currently underway for any of the Company’s or its subsidiaries’ tax returns for years subsequent to 2010.

 

The Company’s policy for deducting interest and penalties is to treat interest as interest expense and penalties as taxes. The Company had not accrued any amount for the payment of interest or penalties related to any uncertain tax positions at either December 31, 2017 or 2016, as its review of such positions indicated that such potential positions were minimal.

 

Under FASB ASC 740-10-05, “Income Taxes,” deferred income taxes are recognized for the tax consequences of temporary differences between the financial statement and income tax bases of assets, liabilities and net loss carryforwards using enacted tax rates. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not expected to be realized. Realization is dependent upon future pre-tax earnings, the reversal of temporary differences between book and tax income, and the expected tax rates in effect in future periods.

 

Fair Value of Financial Instruments. The fair value of the Company’s accounts receivable, accounts payable and other current liabilities approximate their carrying amounts due to the relative short maturities of these items.

 

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

 

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

 

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  Level 2: Defined as observable inputs other than quoted prices included in Level 1. This includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
     
  Level 3: Defined as unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.

 

As of December 31, 2017 and 2016, the Company did not have any Warrants Liability reported.

 

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

 

Long-Lived Assets. Long-lived assets are assessed for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable, whenever the Company has committed to a plan to dispose of the assets or, at a minimum, annually. Typically, for long-lived assets to be held and used, measurement of an impairment loss is based on the fair value of such assets, with fair value being determined based on appraisals, current market value, comparable sales value, and undiscounted future cash flows, among other variables, as appropriate. Assets to be held and used affected by an impairment loss are depreciated or amortized at their new carrying amount over their remaining estimated life; assets to be sold or otherwise disposed of are not subject to further depreciation or amortization. During 2017 and 2016, we determined that there was an impairment of $0 and $15,500, respectively, associated with certain capitalized software development expense (see Note 3).

 

Loss Contingencies. The Company is subject to the possibility of various loss contingencies arising in the ordinary course of business. The Company considers the likelihood of the loss or impairment of an asset or the incurrence of a liability as well as its ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of the loss can be reasonably estimated. The Company regularly evaluates current information available to it to determine whether such accruals should be adjusted. No such loss contingency was recorded during the years ended December 31, 2017 and 2016.

 

Stock-Based Compensation. The Company applies the fair value recognition provisions of FASB ASC 718-10, “Compensation – Stock Compensation.

 

Valuation and Expense Information Under FASB ASC 718-10

 

The Company recorded stock-based compensation expense of $13,400 and $324,400 in the years ended December 31, 2017 and 2016, respectively. No expense was capitalized related to software development. As required by FASB ASC 718-10, the Company estimates forfeitures of employee stock-based awards and recognizes compensation cost only for those awards expected to vest. Forfeiture rates are estimated based on an analysis of historical experience and are adjusted to actual forfeiture experience as needed.

 

During 2016, we awarded 35,000 shares of restricted common stock to seven members of our board of advisors. The valuation of the restricted common stock awards was based on the closing fair market value of our common stock on the grant date. For these awards, such fair market value was $1.65 per share. These shares were canceled in the three month period ended September 2016.

 

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For stock options granted, the Company set the exercise price equal to the closing fair market value of the Company’s common stock as of the grant date. No options were issued during the years ended December 31 2017 and 2016.

 

The following table illustrates the non-cash stock-based compensation expense recorded during the years ended December 31, 2017 and 2016 by income statement classification:

 

   2017   2016 
Cost of revenue  $100   $5,600 
Selling and marketing expense   200    69,200 
General and administrative expense   13,000    156,000 
Research and development expense   100    93,600 
   $13,400   $324,400 

 

Estimated compensation expense is based on the estimated fair value of each option granted on the date of grant using a binomial model, using the estimated annualized forfeiture rate based on an analysis of historical data and considered the impact of events such as work force reductions we carried out in previous years. The expected term of our stock-based awards was based on historical award holder exercise patterns and considered the market performance of our common stock and other items. The estimated exercise factor was based on an analysis of historical data; historical exercise patterns; and a comparison of historical and current share prices. The approximate risk free interest rate was based on the implied yield available on U.S. Treasury issues with remaining terms equivalent to our expected term on our stock-based awards.

 

The Company used the average historical volatility of its daily closing price for a period of time equal in length to the expected option term for the option being issued. The period of time over which historical volatility was measured ended on the last day of the quarterly reporting period during which the stock-based award was made.

 

The Company does not anticipate paying dividends on its common stock for the foreseeable future.

 

Earnings Per Share of Common Stock. FASB ASC 260-10, “Earnings Per Share,” provides for the calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income or loss attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities by adding other common stock equivalents, including common stock options, warrants, and unreleased (unvested) restricted stock awards in the weighted average number of common shares outstanding for a period, if dilutive. Potentially dilutive securities are excluded from the computation if their effect is antidilutive. For the year ended December 31, 2017 and 2016, 1,153,287 and 1,382,841, respectively, common shares equivalents were excluded in the computation of diluted earnings per share since its effect would be antidilutive.

 

Comprehensive Loss. FASB ASC 220-10, “Reporting Comprehensive Income,” establishes standards for reporting comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during the period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gain/loss of available-for-sale securities. The individual components of comprehensive income (loss) are reflected in the consolidated statement of operations. For the years ended December 31, 2017 and 2016, there were no changes in equity (net assets) from non-owner sources.

 

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Recent Accounting Pronouncements.

 

In May 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). Subsequently FASB has released several updates to ASU 2014-09 including ASU 2017-17, ASU 2017-13, ASU 2016- 20, ASU 2016-12, ASU-2016-10, ASU-2016-08, and ASU-2015-14. The effective date for ASU 2014-09 is January 1, 2018. See discussion of the impact of this new standard in the Revenue Recognition section of this note above.

 

3. Capitalized Software Development Costs

 

As of December 31, 2017 and 2016, the Company’s total capitalized software development costs of $490,440 were fully amortized. There was no amortization expense in either 2017 or 2016.

 

During 2017 and 2016, we did not capitalize any software development costs associated with hopTo. Such costs were the cost of licenses to third party software used by hopTo.

 

Amortization of capitalized software development costs is a component of costs of revenue. Capitalized software development costs amortization aggregated $0 and $5,400 during the years ended December 31, 2017 and 2016, respectively.

 

During 2017 and 2016, we determined that an impairment of $0 and $15,500, respectively, existed with certain capitalized software development costs associated with our hopTo consumer product and recognized that cost as part of cost of revenue.

 

4. Property and Equipment

 

Property and equipment as of December 31, 2017 and 2016 consisted of the following:

 

   2017   2016 
Equipment  $184,600   $258,700 
Furniture & fixture   3,600    190,600 
Leasehold improvements   167,600    167,600 
    355,800    616,900 
Less: accumulated depreciation and amortization   325,000    473,600 
   $30,800   $143,300 

 

Aggregate property and equipment depreciation expense for the years ended December 31, 2017 and 2016 was $51,200 and $89,200 respectively. During 2017 and 2016, we did not capitalize any property and equipment. During 2017, we retired equipment with costs of $74,100 and furniture and fixtures with costs of $187,000. During 2016, we retired equipment with costs of $55,000 and furniture and fixtures with costs of $43,300. The $261,100 and $98,300 total in assets retired in 2017 and 2016, respectively, had total remaining book value of $61,300 and $20,000.

 

5. Accrued Expenses

 

Accrued expenses as of December 31, 2017 and 2016 consisted of the following:

 

   2017   2016 
Consulting services  $20,500   $35,000 
Franchise tax   900    1,500 
Software and subscription fees   100    2,300 
Board of director fees   64,000    23,000 
Royalty fees   5,400    10,800 
Other   16,800    14,800 
   $107,700   $87,400 

 

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6. Severance Liability

 

In August of 2015 we agreed to provide a terminated employee a lump sum payment $15,000 and six months of medical coverage payments which ended on March 2, 2016. As of December 31, 2017 and 2016, the Company had no outstanding severance liability.

 

7. Deferred Rent

 

The leases for both of the Company’s subleased former offices in Campbell, California contain free rent and predetermined fixed escalations in our minimum rent payments. Rent expense related to these leases is recognized on a straight-line basis over the terms of the leases. Any difference between the straight-line rent amounts and amounts payable under the leases is recorded as part of deferred rent in current or long-term liabilities, as appropriate. The monthly rent payments due to the Company for the sublease of the office at 1919 S. Bascom Avenue fully offset the rent payments due under the Company’s lease for that space. The monthly rent payments due to the Company for the sublease of the office at 51 East Campbell Avenue will offset approximately 62% of the monthly rent payments due to the landlord under the Company’s lease for that space. During the three-month period ended September 30, 2017, the Company recorded a loss of $62,900 representing the total of the shortfall of monthly rent payments over the life of this sublease. As of December 31, 2017, $13,800 remains on the balance sheet as a lease liability to be amortized over the remaining 10 months of the sublease.

 

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

 

As of December 31, 2017 deferred rent was:

 

Component  Current
Liabilities
   Long-Term
Liabilities
   Total 
Lease liability - ST  $13,800   $   $13,800 
Deferred rent expense   27,200        27,200 
Deferred rent benefit   33,100        33,100 
   $74,100   $   $74,100 

 

As of December 31, 2016 deferred rent was:

 

Component   Current
Liabilities
    Long-Term
Liabilities
    Total  
Deferred rent expense   $ (15,600 )   $ (30,500 )   $ (46,100 )
Deferred rent benefit     39,700       33,100       72,800  
    $ 24,100     $ 2,600     $ 26,700  

 

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

 

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8. Liability Attributable to Warrants

 

On January 7, 2014, we entered into a securities purchase agreement (the “SPA”) with a limited number of institutional investors, pursuant to which we issued and sold for cash an aggregate 753,333 shares of our common stock at a purchase price of $4.50 per share (the “2014 Transaction”). We also issued warrants to the investors for no additional consideration to purchase an aggregate 376,667 shares of our common stock at an exercise price of $6.00 per share from January 7, 2014 through January 7, 2019.

 

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

 

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

 

We used the exercise price of the warrants, as well as the fair market value of our common stock, to determine the fair value of our warrants. The exercise price for warrants issued in conjunction with a 2011 transaction, including those issued to the placement agent, was either $3.00 or $3.90 per share, and was $3.90 per share for the warrants issued to ipCapital. The warrants issued to the placement agent included anti-dilution provisions for repricing of the warrants in the event that future issuances of stock by hopTo met certain conditions. The 2015 Transaction (Note 10) met those conditions and resulted in the placement agent warrants being repriced from $3.00 and $3.90 to $2.55 and $3.30, respectively. On September 1, 2016, the liability warrants for the 2011 transaction expired.

 

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

 

   For the Year Ended December 31, 2017 
   Beginning
Outstanding
   Issued   Exercised   Cancelled /
Forfeited
   Ending
Outstanding
 
2014 Transaction   376,667                376,667 
Exercise Agreement   300,000                300,000 
Consultant Warrant   11,285                11,285 
Offer to Exercise   10,167                10,167 
    698,119                698,119 

 

   For the Year Ended December 31, 2016 
   Beginning
Outstanding
   Issued   Exercised   Cancelled /
Forfeited
   Ending
Outstanding
 
2011 Transaction   686,833            (686,833)    
2014 Transaction   376,667                376,667 
ipCapital   26,667            (26,667)    
Exercise Agreement   300,000                300,000 
Consultant Warrant   11,285                11,285 
Offer to Exercise   10,167                10,167 
    1,411,619            (713,500)   698,119 

 

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9. Stockholders’ Equity

 

Common Stock

 

The Company did not issue any stock or pay any dividends during the years ended December 31, 2017 and 2016. During 2016, we awarded 35,000 shares of restricted common stock to seven members of our board of advisors. The valuation of the restricted common stock awards was based on the closing fair market value of our common stock on the grant date. For the awards made to board of advisors, such fair market value was $1.65 per share. These shares were canceled in the three-month period ended September 2016 and we did not recognize additional stock compensation expense on the unvested awards upon cancellation.

 

Stock-Based Compensation Plans

 

Active Plans

 

2012 Equity Incentive Plan. In November 2012, the Company’s 2012 Equity Incentive Plan (the “12 Plan”) was approved by the stockholders. Pursuant to the terms of the 12 Plan, stock options, stock appreciation rights, restricted stock and restricted stock units (sometimes referred to individually or collectively as “awards”) may be granted to officers and other employees, non-employee directors and independent consultants and advisors who render services to the Company. The Company is authorized to issue options to purchase up to 643,797 shares of common stock, stock appreciation rights, or restricted stock in accordance with the terms of the 12 Plan.

 

In the case of a restricted stock award, the entire number of shares subject to such award would be issued at the time of the grant and subject to vesting provisions based on time or other conditions specified by the Board or an authorized committee of the Board. For awards based on time, should the grantee’s service to the Company end before full vesting occurred, all unvested shares would be forfeited and returned to the Company. In the case of awards granted with vesting provisions based on specific performance conditions, if those conditions were not met, then all shares would be forfeited and returned to the Company. Until forfeited, all shares issued under a restricted stock award would be considered outstanding for dividend, voting and other purposes.

 

Under the 12 Plan, the exercise price of non-qualified stock options granted is to be no less than 100% of the fair market value of the Company’s common stock on the date the option is granted. The exercise price of incentive stock options granted is to be no less than 100% of the fair market value of the Company’s common stock on the date the option is granted provided, however, that if the recipient of the incentive stock option owns greater than 10% of the voting power of all shares of the Company’s capital stock then the exercise price will be no less than 110% of the fair market value of the Company’s common stock on the date the option is granted. The purchase price of the restricted stock issued under the 12 Plan shall also not be less than 100% of the fair market value of the Company’s common stock on the date the restricted stock is granted.

 

All options granted under the 12 Plan are immediately exercisable by the optionee; however, there is a vesting period for the options. The options (and the shares of common stock issuable upon exercise of such options) vest, ratably, over a 33-month period; however, no options (and the underlying shares of common stock) vest until after three months from the date of the option grant. The exercise price is immediately due upon exercise of the option. The maximum term of options issued under the 12 Plan is ten years. Shares issued upon exercise of options are subject to the Company’s repurchase, which right lapses as the shares vest. The 12 Plan will terminate no later than November 7, 2022.

 

During the years ended December 31, 2017 and 2016, no options were granted under the 12 Plan. There were 35,000 shares of restricted common stock, with a weighted average grant date fair value of $1.65, granted, no options had been exercised and 404,926 shares of common stock remained available for issuance under the 12 Plan.

 

No options previously issued under the 12 Plan were exercised during the years ended December 31, 2017 and December 31, 2016.

 

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Inactive Plans

 

The following table summarizes options outstanding as of December 31, 2017 and 2016 that were granted from stock based compensation plans that are inactive. As of December 31, 2017 no options can be granted under these plans.

 

       Options Outstanding 
   Year   Beginning
of
Year
   Granted   Exercised   Cancelled   End of Year 
2008 Stock Option Plan   2017    380,611            (186,666)   193,945 
2005 Equity Incentive Plan   2017    7,666            (6,999)   667 
Supplemental Stock Option Agreement   2017    333            (333)    
         388,610            (193,998)   194,612 
                               
2008 Stock Option Plan   2016    395,545        (1,800)   (13,134)   380,611 
2005 Equity Incentive Plan   2016    14,000            (6,334)   7,666 
Supplemental Stock Option Agreement   2016    333                333 
         409,878        (1,800)   (19,468)   388,610 

 

Summary – All Plans

 

A summary of the status of all of the options outstanding under all of the Company’s stock option plans, and non-plan grants to consultants, as of December 31, 2017 and 2016, and changes during the years then ended, is presented in the following table:

 

   2017   2016 
   Shares   Weighted
Average
Exercise
Price
   Shares   Weighted
Average
Exercise
Price
 
Beginning   684,722   $2.64    705,990   $2.63 
Granted      $       $ 
Exercised      $    (1,800)  $0.81 
Forfeited or expired   (369,555)  $     (19,468)  $2.74 
Ending   315,167   $2.46    684,722   $2.64 
Exercisable at year-end   315,167   $2.46    684,722   $2.64 
Vested or expected to vest at year-end   315,167   $2.46    684,571   $2.64 
Weighted average fair value of options granted during the period                 $2.64 

 

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As of December 31, 2017 and 2016, of the options exercisable, 315,167 and 684,571 were vested, respectively.

 

The following table summarizes information about stock options outstanding as of December 31, 2017:

 

   Options Outstanding 
Range of Exercise
Price
  Number
Outstanding/Exercisable
   Weighted
Average
Remaining
Contractual
Life (Years)
   Weighted
Average
Outstanding/Exercise
Price
 
$0.75-$1.80   99,843    3.19   $1.38 
$1.83-$2.40   23,334    6.85   $2.28 
$2.49-$2.54   31,112    7.93   $2.54 
$2.55-$3.00   74,001    5.07   $2.71 
$3.01-$3.30   37,602    4.81   $3.08 
$3.31-$3.45   33,749    4.81   $3.45 
$3.46-$4.20   13,333    4.69   $4.20 
$4.21-$6.88   2,193    3.85   $6.38 
$0.75-$6.88   315,167    4.02   $2.46 

 

As of December 31, 2017, there were outstanding options to purchase 315,167 shares of common stock with a weighted average exercise price of $2.46 per share, a weighted average remaining contractual term of 4 years and an aggregate intrinsic value of $0. All of the options outstanding as of December 31, are fully vested and 0 were estimated to be forfeited or to expire in future periods.

 

As of December 31, 2017, there was no unrecognized compensation cost, net of estimated forfeitures, related to unvested options.

 

During 2016, the Company awarded 35,000 shares of restricted common stock, which vest ratably, over a 12-month period; however, these shares were canceled in the three-month period ended September 30, 2016. The Company includes the common stock underlying the restricted stock award in shares outstanding once the common stock underlying the restricted stock award has vested and the restriction has been removed (“releases” or “released”).

 

During the year ended 2016, we accelerated and released all of the remaining employee unvested restricted award shares and there was no unreleased restricted stock awards as of December 31, 2017 and 2016.

 

As of December 31, 2017, there was $0 of total unrecognized compensation cost, net of estimated forfeitures, related to unreleased restricted stock awards.

 

10. Income Taxes

 

The components of the provision (benefit) for income taxes for the years ended December 31, 2017 and 2016 consisted of the following:

 

   2017   2016 
Current          
Federal  $   $ 
State        
Foreign   3,300    2,800 
   $3,300   $2,800 
Deferred          
Federal  $   $ 
State        
Foreign        
         
Total  $3,300   $2,800 

 

47
 

 

The following table summarizes the differences between income tax expense and the amount computed applying the federal income tax rate of 34% for the years ended December 31, 2017 and 2016:

 

    2017     2016  
Federal income tax (benefit) at statutory rate   $ 205,300     $ (629,000 )
State income tax (benefit) at statutory rate     800       (3,700 )
Foreign tax rate differential     (600 )     (300 )
IRC 965 Subpart F Income     21,000        
Compensation from exercise of non-qualified stock options and restricted stock awards           2,100  
SBC – NQ cancellations     235,900       163,100  
Change in valuation allowance     (439,700 )     434,000  
Warrant liability           (10,000 )
Meals and entertainment (50%)     700       2,500  
Tax rate changes           (800 )
Other items     (20,100 )     44,900  
Provision (benefit) for income tax   $ 3,300     $ 2,800  

 

Deferred income taxes and benefits result from temporary timing differences in the recognition of certain expense and income items for tax and financial reporting purposes. The following table sets forth those differences as of December 31, 2017 and 2016:

 

   2017   2016 
Net operating loss carryforwards  $13,566,000   $21,808,000 
Tax credit carryforwards   1,047,000    1,047,000 
Compensation expense – non-qualified stock options   238,000    620,000 
Deferred revenue and maintenance service contracts   691,000    1,181,000 
Reserves and other   108,000    73,000 
Total deferred tax assets   15,650,000    24,729,000 
Deferred tax liability – depreciation, amortization and capitalized software   (7,000)   (7,000)
Net deferred tax asset   15,643,000    24,722,000 
Valuation allowance   (15,643,000)   (24,722,000)
Net deferred tax asset  $   $ 

 

For financial reporting purposes, with the exception of the year ended December 31, 2017, the Company has incurred a loss in each year since inception. Based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company has provided a full valuation allowance against its net deferred tax assets at December 31, 2017 and 2016. The net change in the valuation allowance was $9,079,000 and $(434,000) for the years ended December 31, 2017 and 2016, respectively.

 

At December 31, 2017, the Company had approximately $62.3 million of federal net operating loss carryforwards and approximately $6.9 million of California state net operating loss carryforwards available to reduce future taxable income. The federal loss carryforwards will begin to expire in 2018 and the California state loss carry forwards began to expire in 2015. During the year ended December 31, 2017, the Company utilized $193,376 federal and no California net operating losses. Under the Tax Reform Act of 1986, the amounts of benefits from net operating loss carryforwards may be impaired or limited if the Company incurs a cumulative ownership change of more than 50%, as defined, over a three-year period.

 

At December 31, 2017, the Company had approximately $1 million of federal research and development tax credits that will begin to expire in 2018.

 

48
 

 

11. Concentration of Credit Risk

 

Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and trade receivables. The Company places cash and, when applicable, cash equivalents, with high quality financial institutions and, by policy, limits the amount of credit exposure to any one financial institution. As of December 31, 2017, the Company had approximately $765,400 of cash with financial institutions in excess of FDIC insurance limits. As of December 31, 2016, the Company had approximately $330,400 of cash with financial institutions in excess of FDIC insurance limits.

 

For the years ended December 31, 2017 and December 31, 2016, the Company considered the following to be its most significant customers:

 

   2017   2016 
Customer  % Sales   % Accounts
Receivable
   % Sales   % Accounts
Receivable
 
Centric Systems   6.9%   12.6%   5.0%   11.5%
Elosoft   16.9%   56.2%   11.0%   18.8%
IDS   5.5%   0.0%   3.6%   0.0%
Uniface   6.5%   0.8%   6.1%   10.9%
                     
Total   35.80%   69.60%   25.7%   41.2%

 

The Company performs credit evaluations of customers’ financial condition whenever necessary, and does not require cash collateral or other security to support customer receivables.

 

12. Commitments and Contingencies

 

Operating Leases.

 

The leases for both of the Company’s subleased former offices in Campbell, California contain free rent and predetermined fixed escalations in our minimum rent payments. Rent expense related to these leases is recognized on a straight-line basis over the terms of the leases. Any difference between the straight-line rent amounts and amounts payable under the leases is recorded as part of deferred rent in current or long-term liabilities, as appropriate. The monthly rent payments due to the Company for the sublease of the office at 1919 S. Bascom Avenue fully offset the rent payments due under the Company’s lease for that space. The monthly rent payments due to the Company for the sublease of the office at 51 East Campbell Avenue will offset approximately 62% of the monthly rent payments due to the landlord under the Company’s lease for that space. During the three-month period ended September 30, 2017, the Company recorded a loss of $62,900 representing the total of the shortfall of monthly rent payments over the life of this sublease. As of December 31, 2017, $13,800 remains on the balance sheet as a lease liability to be amortized over the remaining 12 months of the sublease.

 

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

 

The following table sets forth the net minimum lease payments we will be required to make throughout the remainder of these leases:

 

Year ended December 31, 2017

   Lease
Payments
   Sublease Receipts   Total 
2018   475,400    (461,600)   13,800 

 

Rent expense aggregated approximately $67,600 and $141,700 for the years ended December 31, 2017 and 2016, respectively.

 

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Contingencies. Under its Amended and Restated Certificate of Incorporation and Second Amended and Restated Bylaws and certain agreements with officers and directors, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer’s or director’s serving in such capacity. Generally, the term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is limited as the Company currently has a directors and officers liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of December 31, 2017.

 

The Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, including contractors and customers and (ii) its agreements with investors. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by the Company with regard to intellectual property rights, and often survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2017.

 

The Company’s software license agreements also generally include a performance guarantee that the Company’s software products will operate substantially as described in the applicable program documentation for a period of 90 days after delivery. The Company also generally warrants that services that the Company performs will be provided in a manner consistent with reasonably applicable industry standards. To date, the Company has not incurred any material costs associated with these warranties and has no liabilities recorded for these agreements as of December 31, 2017.

 

During the year ended December 31, 2017 and 2016, we reported non-cash expense of $284,000 and $571,100, respectively, related to potential liquidated damages resulting from delays in filing registration statements for shares and shares underlying warrants for certain private placements that the Company closed in prior periods. While we believe that the applicable agreements, in most cases, provide exceptions or defenses to liquidated damages that may result in the reduction or non-payment of such damages, we have chosen to accrue to the full extent potentially required by the registration rights agreements that contained liquidated damages provisions due to uncertainty of such matters. The potential liquidated damages is reported as other current liabilities on the consolidated balance sheet and as a component of general and administrative expense on the consolidated statements of operations.

 

During the three-month period ended September 30, 2016, our CEO and CFO voluntarily agreed with our board of directors to defer 50% of their salaries beginning September 1, 2016 until such time as the Company can reasonably pay such compensation, upon approval by the board of directors. In the fourth quarter of 2017, the Company paid out $63,000 to CEO and $32,800 to CFO. During the year ended December 31, 2017, total deferred salaries remaining for the CEO and CFO was $63,000 and $32,800, respectively. There is currently no definitive schedule for the remaining portion of the accrued payments although the Company remains obligated to pay these amounts and intends to do so in the near future, subject to liquidity requirements. The deferred salaries are recorded as a component of accounts payable and accrued expenses on the consolidated balance sheet.

 

Employment Agreement – Eldad Eilam

 

On August 21, 2013, our Board of Directors and Compensation Committee approved a new employment agreement for Eldad Eilam, our President and Chief Executive Officer. Under the employment agreement, Mr. Eilam received an annual base salary of $275,000 and was eligible for a performance-based bonus in the discretion of our Compensation Committee. The employment agreement included other elements related to restricted shares, stock options and insurance. Mr. Eilam resigned as our President and CEO on July 28, 2017 and this agreement is no longer in effect.

 

50
 

 

During the three month period ended September 30, 2016, Mr. Eilam voluntarily agreed with our board of directors to defer 50% of his salary beginning September 1, 2016. On October 25, 2017, the board of directors of the Company determined that the financial status of the Company had improved and accordingly, determined that it was reasonable for the Company to pay 50% of this deferred salary and such payments were made to the CFO and CEO on October 30, 2017.

 

13. Employee 401(k) Plan

 

In December 1998, the Company adopted a 401(k) Plan (the “Plan”), to provide retirement benefits for employees. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary deductions for eligible employees. Employees may contribute up to 15% of their annual compensation to the Plan, limited to a maximum annual amount as set periodically by the Internal Revenue Service. In addition, the Company may make discretionary/matching contributions. During 2017 and 2016, the Company contributed a total of approximately $0 and $39,100, to the Plan, respectively.

 

14. Supplemental Disclosure of Cash Flow Information

 

The following table presents supplemental disclosure information for the statements of cash flows for the years ended December 31, 2017 and 2016:

 

   2017   2016 
Cash Paid:          
Income Taxes (1)  $3,500   $2,900 
Interest        

 

  (1) All such disbursements were for the payment of foreign income taxes.

 

During 2017 and 2016, we incurred $0 and $15,500, respectively, of impairment loss from writing down certain capitalized software development cost that were associated with our consumer products.

 

15. Related Party Transactions

 

ipCapital Group, Inc.

 

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

 

For the years ended December 31, 2017 and 2016, there were no services performed, additional charges incurred or payments made to ipCapital under the agreement.

 

In addition to the fees we agreed to pay ipCapital for its services, we issued ipCapital a five-year warrant to purchase up to 26,667 shares of our common stock at an initial price of $3.90 per share. Half of the warrant (13,333 shares) has a time-based vesting condition, with such vesting to occur in three equal annual installments. The first, second, and third vesting installments occurred on October 11, 2012, 2013, and 2014. The remaining 13,333 shares became fully vested upon the completion to our satisfaction of all services that we requested from ipCapital under the engagement agreement, prior to the signing of the amendments. Such performance was deemed satisfactory during 2012. We believe that these fees, together with the issuance of the warrant, constitute no greater compensation than we would be required to pay an unaffiliated person for substantially similar services.

 

51
 

 

The exercise price of the warrant issued to ipCapital could be reset to below-market value. Consequently, we have concluded that such warrant is not indexed to our common stock; thus, we will accrete the fair value of the warrant as a liability over the anticipated service period. Additionally, in accordance with the liability method of accounting, we will re-measure the fair value of the then-outstanding warrant at each future balance sheet date and recognize the change in fair value as general and administrative compensation expense. (See Note 8) We recognized $0 and $(2,300) as a component of general and administrative expense during the years ended December 31, 2017 and 2016, respectively, resulting from the change in fair value.

 

The warrants expired on October 11, 2016.

 

ipCapital Licensing Company I, LLC

 

In February 2013, we entered into an IP Brokerage agreement with ipCapital Licensing Company I, LLC (“ipCLC”) (the “IP Brokerage Agreement”). At the time that we entered into this agreement, John Cronin was a partner at ipCLC. He is no longer affiliated with ipCLC. Pursuant to the IP Brokerage Agreement, we engaged ipCLC, on a no-retainer basis, to identify and present us with candidates who may be seeking to acquire a certain limited group of our patents unrelated to our current business strategy. In June 2016, we determined that the IP Brokerage Agreement is no longer in effect since ipCLC no longer exists as an entity.

 

16. Segment Information

 

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

 

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

 

Revenue by country for the years ended December 31, 2017 and 2016 was as follows:

 

   Years Ended December 31, 
Revenue by Country  2017   2016 
United States  $1,239,300   $1,554,800 
Brazil   758,000    606,600 
Other Countries   1,892,200    1,839,900 
Total  $3,889,500   $4,001,300 

 

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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

Item 9A. CONTROLS AND PROCEDURES

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible 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 the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) 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 December 31, 2017.

 

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 December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States and includes those policies and procedures that:

 

  pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; and
     
  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
     
  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material impact on the financial statements.

 

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our evaluation of internal control over financial reporting includes using the criteria in Internal Control-Integrated Framework (1992), an integrated framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, for the evaluation of internal control to identify the risks and control objectives related to the evaluation of our control environment.

 

Based on our evaluation under the framework described above, our management has concluded that our internal control over financial reporting was effective as of December 31, 2017.

 

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.

 

Item 9B. Other Information

 

Not applicable.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The following table sets forth certain information regarding those individuals currently serving as our directors and executive officers as of March 31, 2018:

 

Name   Age   Position
Jean-Louis Casabonne   60   Interim Chief Executive Officer, Chief Financial Officer, Secretary
Michael A. Brochu (2,3)   63   Director
John Cronin (1,2,3)   63   Director
Eldad Eilam (3)   40   Director

 

(1) Chairman of Board and Chairman of our Audit Committee
(2) Member of our Compensation Committee
(3) Member of our Audit Committee

 

Directors

 

Michael A. Brochu has served as a director since April 2012. From November 1997 until its acquisition in November 2004 by Art Technology Group, Inc., Mr. Brochu served as president, chief executive officer and chairman of the board of directors of Primus Knowledge Solutions, Inc. Mr. Brochu was a member of the board of directors of Art Technology Group, Inc. from November 2004 until its acquisition by Oracle Corporation in January 2011. Beginning in December 2003, Mr. Brochu served as a director of Loudeye Corp., and from February 2005 until October 2006, as its president and chief executive officer. In October 2006, Loudeye Corp. was acquired by Nokia Corp. Mr. Brochu left Nokia Corp. in December 2006. From June 2007 until its acquisition in September 2011 by WPP PLC, Mr. Brochu served as president, chief executive officer and a director of Global Market Insite, Inc. Our Board has determined that Mr. Brochu is qualified to serve on our Board because of his more than 20 years’ of senior-level experience as a veteran operational executive in a variety of technology companies. Mr. Brochu is currently a member of the board of directors for Centro Digital Media, Vines of Mendoza and Zotec Partners (each privately held). He is also a member of the Operating Committee of BelHealth Investment Partners, a private equity firm specializing in healthcare, and is on the advisory board of Seattle-based venture capital firm Voyager Capital. Mr. Brochu holds a BBA in Finance/Accounting from the University of Texas at El Paso.

 

John Cronin has served as a director since August 2011. Mr. Cronin is the founder, managing director and chairman of ipCapital Group, Inc., an intellectual property consulting firm, with which we have formed an alliance to deploy a range of strategic invention and intellectual tactics aimed at accelerating the growth and commercialization of our IP portfolio. We also have relationships with certain related parties to ipCapital Group, Inc. and Mr. Cronin as described below under “Related-Party Transactions”. Prior to founding ipCapital Group, Inc. in 1998, Mr. Cronin was an inventor at IBM for 17 years where he patented 100 inventions, published over 150 technical papers and received IBM’s “Most Distinguished Inventor Award.” Our Board has determined that Mr. Cronin is qualified to serve on our Board because of his over 30 years’ experience developing and consulting with the development of high-tech intellectual property and his extensive knowledge and understanding of the high-tech industry. Mr. Cronin serves on the board of directors of Imageware, which is a publicly-held company. He holds a BS in Electrical Engineering, an MS in Electrical Engineering and a BA in Psychology from the University of Vermont.

 

Eldad Eilam has been a member of our Board since March 2012 and previously served as our Chief Executive Officer from August 2012 through July 2017 and as our President from January 2012 through July 2017. Mr. Eilam currently is Senior Software Engineering Manager for Apple Inc. Previously, Mr. Eilam served as our Acting Chief Executive Officer between March 2012 and April 2012, as our Interim Chief Executive Officer between April 2012 and August 2012, as our Chief Operating Officer from January 2012 to August 2012, and as our Chief Technology Officer from July 2011 to January 2012. In 2004, Mr. Eilam founded Elgix, Limited, a consulting firm to the high-tech industry, and served as its initial president until his appointment as our Chief Technology Officer. From July 2006 to March 2009, Mr. Eilam was president of GraphOn Research Labs, Limited, our Israeli subsidiary. From April 2009 to July 2011, in his role as President of Elgix, Limited, Mr. Eilam served as a consultant to the high-tech industry, including as a consultant to us since June 2010. Mr. Eilam is a technology expert in the Windows operating system, mobile user interfaces and advanced software technology development, and is the author of the book Reversing: Secrets of Reverse Engineering. Our Board has determined that Mr. Eilam is qualified to serve on our Board because of his experience advising high-tech companies at similar stages of development as our Company, and his technological expertise in the Windows operating system and mobile user interfaces.

 

54
 

 

Executive Officers

 

Jean-Louis Casabonne has served as our Chief Financial Officer since May 2014, as our Secretary since May 2014 and as our Interim Chief Executive Officer since August 2017. Since July of 2017 he has served on a part-time basis. Mr. Casabonne is currently the Chief Financial Officer of Kobie Marketing, Inc., a privately held technology company since July 2017. Previously from 2002 to 2011, Mr. Casabonne has served as the Chief Financial Officer of Quova, Inc., a venture backed company which he guided to profitability prior to its successful sale to Neustar, Inc. (NYSE:NSR). Following the sale of Quova to Neustar, Mr. Casabonne continued with Neustar from 2011 to 2014 as a strategic evangelist and director of business development managing strategic relationships with key partners. From 1996 to 2002, Mr. Casabonne was a founder and controller for Inxight Software, a spin-out from Xerox Corporation. He became CFO and VP of Operations for Inxight in 1999, managing finance, administration, legal affairs, information technology and customer support. From 1992 to 1996, Mr. Casabonne served in a number of senior financial positions for Xerox Corporation’s XSoft Division. Mr. Casabonne received his MBA and BS from Santa Clara University.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires our officers and directors, as well as those persons who own more than 10% of our common stock, to file reports of ownership and changes in ownership with the SEC. These persons are required by SEC rule to furnish us with copies of all Section 16(a) forms they file.

 

Based solely on a review of copies of reports filed with the SEC and submitted to us and on written representations by certain of our directors and executive officers, we believe that all of our directors and executive officers complied on a timely basis during the fiscal year ended December 31, 2017 with the reporting requirements of Section 16(a) of the Exchange Act.

 

Code of Ethics

 

We have a code of ethics that applies to all of our employees, including our Chief Executive Officer and Chief Financial Officer. Our code of ethics is made available at our website at: http://hopto.com/investors/corp-governance (click “Corporate Governance” and then click “Code of Conduct”).

 

Stockholder Nominations and Bylaw Procedures

 

Our bylaws establish procedures pursuant to which a stockholder may nominate a person for election to our Board. Our bylaws are available at our website at: http://hopto.com/investors/corp-governance (click “Code of Conduct”).

 

To nominate a person for election to our Board, a stockholder must set forth all information relating to the nominee that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act. Such notice must also contain information specified in the bylaws as to the director nominee, information about the stockholder making the nomination and the beneficial owner, if any, on behalf of whom the nomination is made, including name and address, class and number of shares owned, and representations regarding the intention to make such a nomination and to solicit proxies in support of it. We may require any proposed nominee to furnish information concerning his or her eligibility to serve as an independent director or that could be material to a reasonable stockholder’s understanding of the independence of the nominee.

 

55
 

 

Audit Committee

 

The current members of our Audit Committee are John Cronin (Chairman), Michael Brochu and Eldad Eilam. Our Audit Committee held four meetings during 2017. Our Board determined that each of our Audit Committee members is “independent” for audit committee purposes under the Nasdaq and SEC definitions, except that Mr. Eilam would not be considered independent under the Nasdaq independence rules due to the fact that he served as our CEO within the last 3 years. Nasdaq’s rules require 3 independent directors on the Audit Committee; therefore, due to Mr. Eilam’s status as a prior officer, the Audit Committee of the Company would not meet the Nasdaq rules. The Board has determined that none of the Audit Committee members can be classified as an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K. The Board believes that attracting and retaining board members that could be classified as an “audit committee financial expert” is unlikely due to the high cost of such director candidates.

 

ITEM 11. EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table sets forth the compensation we paid to our executive officers for the fiscal years ended December 31, 2017 and 2016:

 

Name and
Principal Position
  Year   Salary $   Bonus $   Stock Awards $   Option Awards $   All Other Compensation $   Total $ 
Eldad Eilam, (1)   2017    179,366(5)               916(3)   180,282 
CEO, President   2016    275,000(5)               3,470(3)   278,470 
Jean-Louis Casabonne (2)   2017    163,662(5)               903(4)   164,565 
Interim CEO, CFO, Secretary   2016    225,000(5)               2,903(4)   227,903 

 

(1) Mr. Eilam served as our President since January 2012 and as our Acting Chief Executive Officer between March 2012 and April 2012 when he was appointed Interim Chief Executive Officer. Mr. Eilam became Chief Executive Officer on August 15, 2012. Mr. Eilam served as our Chief Operating Officer from January 2012 to April 2012 and as our Chief Technology Officer from July 2011 to January 2012. Mr. Eilam resigned as our President and CEO in July 2017. He continues to serve as a member of our board of directors.
   
(2) Mr. Casabonne was hired and appointed Chief Financial Officer on May 3, 2014. Since August 2017 he has served as our interim Chief Executive Officer.
   
(3) Represents group life insurance premiums ($1,470 in 2016 and $916 in 2017), and our contribution to the 401(k) plan ($2,000 in 2016 and $0 in 2017).
   
(4) Represents group life insurance premiums ($903 in each of 2016 and 2017), and our contribution to the 401(k) plan ($2,000 in 2016 and $0 in 2017).
   
(5) During the three month period ended September 30, 2016, Messrs. Eilam and Casabonne voluntarily agreed with our board of directors to defer 50% of their salary beginning September 1, 2016 until such time as the Company can reasonably pay such compensation upon approval by the board of directors. The 2016 salary for Mr. Eilam and Mr. Casabonne includes deferred salary of $46,011 and $37,644, respectively. The 2017 salary for Mr. Eilam and Mr. Casabonne includes deferred salary of $80,208 and $28,125, respectively. (See Note 12 to the consolidated financial statements).

 

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Mr. Casabonne has been employed since May, 2014 and continues to be employed on an at-will, part time, basis. Mr. Casabonne will receive an annual base salary of $225,000 and is eligible for an annual performance-based bonus up to 30% of his annual base salary that is based on goals and achievements mutually set by Mr. Casabonne and management. In 2014, Mr. Casabonne was awarded equity compensation equivalent to 66,667 shares of hopTo Inc. common stock.

 

Outstanding Equity Awards at Fiscal Year-End

 

Outstanding Equity Awards at December 31, 2017
   Option Awards     
Name  Number of Underlying Securities (1)  

Number of Underlying Securities

unvested

   Number of Underlying Securities unearned   Option Exercise Price $   Option Expiration Date 
Jean-Louis Casabonne   57,911(2)   15,108    15,108    1.800    8/04/2025 
Interim CEO, CFO, Secretary                    

 

(1) All options are immediately exercisable upon grant and vest in 33 equal monthly installments beginning in the fourth month after their respective date of grant. We have the right to repurchase exercised unvested options at the exercise price of the respective option upon the optionee’s cessation of service to our Company.
   
(2) On August 5, 2015, Mr. Casabonne was granted stock options to purchase 57,911 shares of common stock which vests monthly. This option grant was offered as an exchange for forfeiting 44,445 of unreleased restricted stock award that was originally awarded in May 2014.

 

Compensation of Directors

 

During the fiscal year ended December 31, 2017 our non-employee directors were eligible to be compensated at the rate of $1,000 for attendance at each meeting of our Board, $500 if their attendance was via telephone, $500 for attendance at each meeting of a Board committee, and a $1,500 quarterly retainer. As of December 31, 2017, $64,000 of the board fees earned were accrued and not yet paid (see Note 5 to our Notes to Consolidated Financial Statements).

 

Name  Year   Fees Earned or Paid in Cash   Option Awards   All Other Compensation   Total 
Michael A. Brochu   2017   $10,000   $   $   $10,000 
John Cronin   2017   $10,000   $   $   $10,000 
Eldad Eilam   2017   $6,000   $   $   $6,000 

 

Compensation Committee Interlocks and Insider Participation

 

During the year ended December 31, 2017, the Compensation Committee was comprised of Michael A. Brochu and John Cronin, each of whom is a non-employee director. See Item 13 for a summary of transactions with entities controlled by Mr. Cronin.

 

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth the beneficial ownership of our common stock as of March 31, 2018, by (i) each of our directors and nominees; (ii) each person known by us to beneficially own 5% or more of our common stock (based upon review of the most recent Schedule 13D and 13G filings as of March 31, 2018); (iii) each executive officer named in the summary compensation table; and (iv) all directors and executive officers as a group. Unless otherwise indicated, the address for each of the following stockholders is c/o hopTo Inc., 6 Loudon Road, Suite 200, Concord, NH 03301.

 

Name and Address  Number of Shares of Common Stock Beneficially Owned (1)(2)   Percent of Class (%) 
Eldad Eilam   231,194    2.4 
Michael A. Brochu (3)   144,791    1.5 
John Cronin (3)   82,864    * 
Jean-Louis Casabonne (3)   82,525    * 
           
All current executive officers and directors as a group (4 persons)(3)   541,374    5.5 
JMI Holdings, LLC (2011 Family Series) (4)   952,604    9.6 
David R. Wilmerding, III (5)
2 Hamill Road, Suite 272
Baltimore, MD 21117
   938,071    9.4 
Jon C. Baker (6)
101 St. Johns Road
Baltimore, MD 21210
   860,866    8.7 
Austin Marxe, David Greenhouse and Adam C. Stettner (7)
527 Madison Avenue, Suite 2600
New York, NY 10022
   850,847    8.6 

Novelty Capital Partners LP (8)

520 Newport Center Drive, 12th Floor

Newport Beach, CA 92660

   975,711    9.9 

 

* Less than 1%.

 

(1) As used in this table, beneficial ownership means the sole or shared power to vote, or direct the voting of, a security, or the sole or shared power to invest or dispose, or direct the investment or disposition, of a security. Except as otherwise indicated, based on information provided by the named individuals, all persons named herein have sole voting power and investment power with respect to their respective shares of our common stock, except to the extent that authority is shared by spouses under applicable law, and record and beneficial ownership with respect to their respective shares of our common stock. With respect to each stockholder, any shares issuable upon exercise of options and warrants held by such stockholder that are currently exercisable or will become exercisable within 60 days of March 31, 2018 are deemed outstanding for computing the percentage of the person holding such options, but are not deemed outstanding for computing the percentage of any other person.
(2) Percentage ownership of our common stock is based on 9,804,400 shares of common stock outstanding as of March 31, 2018.
(3) Includes the following shares of common stock issuable upon exercise of outstanding stock options: 57,911 stock options held by Mr. Casabonne; and 62,200 stock options held by each of Messrs. Brochu and Cronin.
(4) Based solely on information known to us, Charles E. Noell, III, John J. Moores and Bryant W. Burke share voting and dispositive power over these shares by virtue of being members of El Camino Advisors, LLC, the manager of JMI Holdings, LLC (2011 Family Series). JMI Holdings, LLC (2011 Family Series) owns 841,493 shares of our common stock and warrants to purchase 111,111 shares of our common stock.
(5) Based on information contained in a Schedule 13G/A filed by David Wilmerding on February 1, 2017, and information known to us, Mr. Wilmerding has sole voting and dispositive power with respect to 844,736 shares of our common stock and warrants to purchase 99,999 shares of our common stock.
(6) Based on information contained in a Schedule 13G/A filed by Jon C. Baker on January 30, 2017, and information known to us, Mr. Baker has sole voting and dispositive power with respect to 777,533 shares of our common stock and warrants to purchase 83,333 shares of our common stock.

 

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(7) Based solely on information contained in a joint Schedule 13G/A filed by Austin Marxe, David Greenhouse and Adam Stettner on February 13, 2018. Such stockholders share voting and dispositive power over these shares by virtue of being the controlling principals of AWM Investment Company, Inc. (“AWM”), and the members of SST Advisers, L.L.C. (“SST”). AWM acts as investment advisor to each of Special Situations Technology Fund, L.P. (“Tech Fund”) and Special Situations Technology Fund II, L.P. (“Tech Fund II”); SST is the general partner of each of Tech Fund and Tech Fund II. Tech Fund owns 130,426 shares of our common stock and holds warrants to purchase 12,667 shares of our common stock. Tech Fund II owns 628,754 shares of our common stock and holds warrants to purchase 79,000 shares of our common stock.
(8) Based on information contained in Schedule 13D filed on March 23,2018, by Novelty Capital, LLC, Jonathon R.Skeels as the sole general partner of Novelty Capital has sole voting and dispositive power with respect to 975,711 shares of our common stock.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Related-Party Transactions

 

John Cronin

 

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 years ended December 31, 2017 and 2016, there were no services performed, additional charges incurred or payments made to ipCapital under the agreement.

 

In addition to the fees we agreed to pay ipCapital for its services, we issued ipCapital a five-year warrant to purchase up to 26,667 shares of our common stock at an initial price of $3.90 per share. Half of the warrant (13,333 shares) has a time-based vesting condition, with such vesting to occur in three equal annual installments. The first, second, and third vesting installments occurred on October 11, 2012, 2013, and 2014. The remaining 13,333 shares became fully vested upon the completion to our satisfaction of all services that we requested from ipCapital under the engagement agreement, prior to the signing of the amendments. Such performance was deemed satisfactory during 2012. We believe that these fees, together with the issuance of the warrant, constitute no greater compensation than we would be required to pay an unaffiliated person for substantially similar services.

 

The exercise price of the warrant issued to ipCapital could be reset to below-market value. Consequently, we have concluded that such warrant is not indexed to our common stock; thus, we will accrete the fair value of the warrant as a liability over the anticipated service period. Additionally, in accordance with the liability method of accounting, we will re-measure the fair value of the then-outstanding warrant at each future balance sheet date and recognize the change in fair value as general and administrative compensation expense. (See Note 8) We recognized $(2,300) and $(18,100) as a component of general and administrative expense during the years ended December 31, 2016 and 2015, respectively, resulting from the change in fair value.

 

The warrants expired on October 11, 2016.

 

ipCapital Licensing Company I, LLC

 

In February 2013, we entered into an IP Brokerage agreement with ipCapital Licensing Company I, LLC (“ipCLC”) (the “IP Brokerage Agreement”). At the time that we entered into this agreement, John Cronin was a partner at ipCLC. He is no longer affiliated with ipCLC. Pursuant to the IP Brokerage Agreement, we engaged ipCLC, on a no-retainer basis, to identify and present us with candidates who may be seeking to acquire a certain limited group of our patents unrelated to our current business strategy. In June 2016, we determined that the IP Brokerage Agreement is no longer in effect since ipCLC no longer exists as an entity.

 

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Director Independence

 

Our Board of Directors has determined that each of our non-employee directors (John Cronin and Michael A. Brochu), who collectively constitute a majority of our Board, meets the general independence criteria set forth in the NASDAQ Marketplace rules. As noted above, Mr. Eilam would not be independent under NASDAQ rules due to his status as a prior officer. Our Board has made a subjective determination as to each of the foregoing individuals that no relationships exist (including the relationship with ipCapital, that is described above under “Related-Party Transactions”) that, in the opinion of our Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Fees for professional services provided by Macias Gini & O’Connell LLP for the fiscal years ended December 31, 2017 and 2016 were as follows:

 

Category  2017   2016 
Audit fees  $131,600   $147,500 
Audit – related fees   8,000     
Tax fees   10,000    11,800 
All Other fees        
Totals  $149,600   $159,300 

 

Audit fees include fees associated with our annual audit, the reviews of our quarterly reports on Form 10-Q, and assistance with and review of documents filed with the Securities and Exchange Commission. Audit-related fees include consultations regarding revenue recognition and new accounting pronouncements as they related to the financial reporting of certain transactions. Tax fees included tax compliance and tax consultations.

 

The audit committee has adopted a policy that requires advance approval of all audit, audit-related, tax services and other services performed by our independent registered public accounting firm. The policy provides for pre-approval by the audit committee of specifically defined audit and non-audit services. Unless the specific service has been previously pre-approved with respect to that fiscal year, the audit committee must approve the permitted service before the independent registered public accounting firm is engaged to perform it.

 

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PART IV

 

Item 15. Exhibits, Financial Statement Schedules

 

(a) Financial Statements

 

Our financial statements as set forth in the Index to Consolidated Financial Statements under Part II, Item 8 of this Annual Report on Form 10-K are hereby incorporated by reference.

 

(b) Exhibits

 

The following exhibits, which are numbered in accordance with Item 601 of Regulation S-K, are filed as part of this Annual Report on Form 10-K or, as noted, incorporated by reference herein:

 

Exhibit

Number

  Exhibit Description
     
3.1   Amended and Restated Certificate of Incorporation of Registrant, as amended (1)
3.2   Certificate of Amendment of Amended and Restated Certificate of Incorporation of GraphOn Corporation (19)
3.3   Certificate of Amendment of Amended and Restated Certificate of Incorporation of hopTo Inc. (28)

3.4

 

Certificate of Designation of Series A Junior Participating Preferred Stock of hopTo Inc. (31)

3.5   Second Amended and Restated Bylaws of Registrant (2)
4.1   Form of certificate evidencing shares of common stock of Registrant (3)
4.2   Form of Warrant issued on September 1, 2011 (4)
4.3   Warrant to Purchase Common Stock, dated October 11, 2011 (5)
4.4   Exercise Agreement, dated June 17, 2013 (including Allonge to 2011 warrants) (20)
4.5   Form of New Warrant issued on June 17, 2013 (20)
4.6   Registration Rights Agreement, dated June 17, 2013 (20)
4.7   Form of Warrant issued on January 7, 2014 (21)

4.8

  Registration Rights Agreement, dated January 7, 2014 (21)
4.9   Rights Agreement, dated as of February 16, 2018, by and between hopTo Inc. and American Stock Transfer & Trust Company, LLC, as rights agent (31)
10.1*   Restricted Stock Agreement (1 of 2) with Eldad Eilam dated August 15, 2012 (15)
10.2*   Restricted Stock Agreement (2 of 2) with Eldad Eilam dated August 15, 2012 (15)
10.3*   Restricted Stock Agreement with Christoph Berlin dated August 15, 2012 (15)
10.4*   Restricted Stock Agreement with Robert Dixon dated August 15, 2012 (15)
10.5   Separation Agreement, dated April 12, 2012, between Registrant and Robert Dilworth (14)
10.6   Release, dated April 12, 2012, between Registrant and Robert Dilworth (14)
10.7   1998 Stock Option/Stock Issuance Plan of Registrant (7)
10.8   Supplemental Stock Option Agreement, dated as of June 23, 2000 (7)
10.9   2005 Equity Incentive Plan (8)
10.10   2008 Equity Incentive Plan, as Amended (9)
10.11*   Employment Agreement, dated August 21, 2013, by and between Registrant and Eldad Eilam (16)
10.12*   Director Severance Plan (11)
10.13*   Key Employee Severance Plan (11)
10.14   Securities Purchase Agreement, dated September 1, 2011 (4)
10.15   Form of Registration Rights Agreement, dated September 1, 2011 (4)
10.16(a)*   Engagement Agreement, dated October 11, 2011, by and between Registrant and ipCapital Group, Inc. (5)
10.16(b)*   First Addendum to the Engagement Agreement by and between Registrant and ipCapital Group, Inc., dated as of November 7, 2011 (12)
10.16(c)*   Second Addendum to the Engagement Agreement by and between Registrant and ipCapital Group, Inc., dated as of November 14, 2011 (12)
10.16(d)*   Third Addendum to the Engagement Agreement by and between Registrant and ipCapital Group, Inc., dated as of January 20, 2012 (13)
10.17   First Amendment to Office Lease between Registrant and CA-Pruneyard Limited Partnership, dated as of October 7, 2013 (27)

 

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10.18   Consulting Agreement, dated February 1, 2012, by and between Registrant and Steven Ledger/Tamalpais Partners LLC (22)
10.19   Amendment to Consulting Agreement, by and between Registrant and Steven Ledger/Tamalpais Partners, LLC, dated August 1, 2013 (16)
10.20   Intellectual Property Brokerage Agreement by and between Registrant and ipCapital Licensing Company I, LLC, dated as of February 4, 2013 (17)
10.21*   Consulting Agreement, dated March 29, 2013, by and between Registrant and Gordon Watson (23)
10.22*   Consulting Agreement, dated November 18, 2013, by and between Registrant and ipCreate, Inc. (24)
10.23   Securities Purchase Agreement, dated January 7, 2014 (21)
10.24*   Consulting Agreement, dated March 17, 2014, by and between Registrant and Steven Ledger (25)
10.25   Separation Agreement, dated March 12, 2014, by and between Registrant and Christoph Berlin (25)
10.26   Employment Letter dated April 30, 2014 and executed May 5, 2014 between Registrant and Jean-Louis Casabonne (26)
10.27  

Sublease dated August 11, 2015, by and between Registrant and CDNetworks (32)

10.28   Securities Purchase Agreement, dated as of July 24, 2015 (29)
10.29   Registration Rights Agreement, dated as of July 28, 2015 (29)
10.30   Lease Agreement effective October 1, 2015 between the Registrant and Heritage Village Offices (30)
10.31   Patent Purchase Agreement dated October 10, 2017
14.1   Code of Ethics (6)
21.1   Subsidiaries of Registrant
23.1   Consent of Macias Gini & O’Connell LLP
31   Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (furnished, not filed)
101   The following financial information from Registrant’s Annual Report on Form 10-K for the year ended December 31, 2017, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of December 31, 2017 and 2016, (ii) Consolidated Statements of Operations for the years ended December 31, 2017 and 2016, (iii) Consolidated Statements of Shareholders’ Equity (Deficit) for the years ended December 31, 2017 and 2016, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016, (v) Notes to Consolidated Financial Statements (18)

 

*Management or compensatory plan or arrangement

 

  (1) Filed on April 2, 2007 as an exhibit to Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2006, and incorporated herein by reference. (File number 000-21683)
  (2) Filed on March 31, 2010 as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009, and incorporated herein by reference. (File number 000-21683)
  (3) Filed on September 19, 1996 as an exhibit to the Registrant’s Registration Statement on Form S-1 and incorporated herein by reference. (File No. 333-11165)
, (4) Filed on September 8, 2011 as an exhibit to Registrant’s Current Report on Form 8-K and incorporated herein by reference. (File number 000-21683)
  (5) Filed on October 13, 2011 as an exhibit to Registrant’s Current Report on Form 8-K and incorporated herein by reference. (File number 000-21683)
  (6) Filed on March 30, 2004 as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by reference. (File number 000-21683)
  (7) Filed on June 23, 2000 as an exhibit to the Registrant’s Registration Statement on Form S-8, and incorporated herein by reference. (File number 333-40174)
  (8) Filed on November 25, 2005 as an exhibit to the Registrant’s definitive Proxy Statement for the Registrant’s 2005 Annual Meeting, and incorporated herein by reference. (File number 000-21683)

 

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  (9) Filed on September 29, 2011 as an exhibit to the Registrant’s Registration Statement on Form S-8 and incorporated herein by reference. (File No. 333-177069)
  (10) Reserved.
  (11) Filed on November 14, 2011 as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, and incorporated herein by reference. (File number 000-21683)
  (12) Filed on November 23, 2011 as an exhibit to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, and incorporated herein by reference. (File number 333-177073)
  (13) Filed on February 14, 2012 as an exhibit to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. (File number 000-21683)
  (14) Filed on May 21, 2012 as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012, and incorporated herein by reference. (File number 000-21683)
  (15) Filed on November 14, 2012 as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly reporting period ended September 30, 2012, and incorporated herein by reference. (File number 000-21683)
  (16) Filed on August 27, 2013 as an exhibit to the Registrant’s Current Report on Form 8-K, dated August 21, 2013, and incorporated herein by reference. (File number 000-21683)
  (17) Filed on February 19, 2013 as an exhibit to the Registrant’s Current Report on Form 8-K, and incorporated herein by reference. (File number 000-21683)
  (18) Submitted electronically with the original Form 10-K.
  (19) Filed on September 10, 2013 as an exhibit to the Registrant’s Current Report on Form 8-K, dated September 9, 2013, and incorporated herein by reference. (File number 000-21683)
  (20) Filed on June 24, 2013 as an exhibit to the Registrant’s Current Report on Form 8-K, dated June 17, 2013, and incorporated herein by reference. (File number 000-21683)
  (21) Filed on January 13, 2014 as an exhibit to the Registrant’s Current Report on Form 8-K, dated January 7, 2014, and incorporated herein by reference. (File number 000-21683)
  (22) Filed on April 16, 2012 as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011, and incorporated herein by reference. (File number 000-21683)
  (23) Filed on April 3, 2013 as an exhibit to the Registrant’s Current Report on Form 8-K, dated March 29, 2013, and incorporated herein by reference. (File number 000-21683)
  (24) Filed on December 12, 2013 as an exhibit to the Registrant’s Current Report on Form 8-K, dated December 11, 2013, and incorporated herein by reference. (File number 000-21683)
  (25) Filed on March 18, 2014 as an exhibit to the Registrant’s Current Report on Form 8-K, dated March 12, 2014, and incorporated herein by reference. (File number 000-21683)
  (26) Filed on May 12, 2014 as an exhibit to the Registrant’s Current Report on Form 8-K, dated March 9, 2014, and incorporated herein by reference. (File number 000-21683)
  (27) Filed on March 31, 2014 as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013, and incorporated herein by reference. (File number 000-21683)
  (28) Filed on February 1, 2016 as an exhibit to the Registrant’s Current Report on Form 8-K, dated January 27, 2016, and incorporated herein by reference. (File number 000-21683)
  (29) Filed on July 30, 2015 as an exhibit to the Registrant’s Current Report on Form 8-K, dated July 24, 2015, and incorporated herein by reference. (File number 000-21683)
 

(30)

 

(31)

Filed on September 10, 2015 as an exhibit to the Registrant’s Registration Statement on Form S-1 and incorporated herein by reference. (File No. 333-206861)

Filed on February 16, 2018 as an exhibit to the Registrant’s Current Report on Form 8-K, dated February 16, 2018 and incorporated herein by reference. (File number 000-21683)

  (32) Filed on March 30, 2016 as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015 and incorporated herein by reference. (File number 000-21683)

 

(c) Financial Statement Schedule

 

Not applicable for smaller reporting companies.

 

ITEM 16. FORM 10-K SUMMARY.

 

None.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  hopTo Inc.
     
April 17, 2018 By: /s/ Jean-Louis Casabonne
    Jean-Louis Casabonne
    Interim Chief Executive Officer, Chief Financial Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Jean-Louis Casabonne   Interim Chief Executive Officer, Chief Financial Officer   April 17, 2018
Jean-Louis Casabonne   (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)    
         
/s/ Michael A. Brochu   Director   April 17, 2018
Michael A. Brochu        
         
 /s/ John Cronin   Director   April 17, 2018
John Cronin        
         
/s/ Eldad Eilam   Director   April 17, 2018
Eldad Eilam        

 

64
 

  

APPENDIX B

 

QUARTERLY REPORT ON FORM 10-Q FOR THE

PERIOD ENDED JUNE 30, 2018

 

 

 

 

 

 

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, 2018

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.)

 

6 Loudon Road, Suite 200

Concord, NH 03301

(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 [X] 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[X] No [  ]

 

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

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

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

 

As of August 10, 2018, there were 9,804,400 issued and outstanding shares of the registrant’s common stock, par value $0.0001.

 

 

 

 

 

 

hopTo Inc.

FORM 10-Q

Table of Contents

 

        PAGE
PART I.   FINANCIAL INFORMATION  
Item 1.   Financial Statements   3
    Condensed Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017   3
    Unaudited Condensed Consolidated Statements of Operations for the Three and Six-Month Periods Ended June 30, 2018 and 2017   4
    Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Six-Month Periods Ended June 30, 2018 and 2017   5
    Unaudited Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2018 and 2017   6
    Notes to Unaudited Condensed Consolidated Financial Statements   7
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   13
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   21
Item 4.   Controls and Procedures   21
         
PART II.   OTHER INFORMATION   22
Item 1.   Legal Proceedings   22
Item 1A.   Risk Factors   22
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   22
Item 3.   Defaults Upon Senior Securities   22
Item 4.   Mine Safety Disclosures   22
Item 5.   Other Information   22
Item 6.   Exhibits   22
    Signatures   23

 

2

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

hopTo Inc.

Condensed Consolidated Balance Sheets

 

   (Unaudited)     
   June 30, 2018   December 31, 2017 
Assets          
Current Assets:          
Cash  $994,200   $1,015,400 
Accounts receivable, net   207,100    426,800 
Prepaid expenses   148,400    112,900 
Total Current Assets   1,349,700    1,555,100 
           
Property and equipment, net   12,300    30,800 
Other assets   17,800    17,800 
Total Assets  $1,379,800   $1,603,700 
           
Liabilities and Stockholders’ Equity (Deficit)          
Current Liabilities:          
Accounts payable and accrued expenses  $637,700   $635,100 
Deferred rent   58,300    74,100 
Deposit liability   93,500    93,500 
Deferred revenue   1,143,000    1,845,100 
Other current liabilities       855,100 
Total Current Liabilities   1,932,500    3,502,900 
           
Deferred revenue   543,900    1,409,700 
Total Liabilities   2,476,400    4,912,600 
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, 9,804,400 shares issued and outstanding at June 30, 2018 and December 31, 2017   1,000    1,000 
Additional paid-in capital   79,238,700    78,539,300 
Accumulated deficit   (80,336,300)   (81,849,200)
Total Stockholders’ Equity (Deficit)   (1,096,600)   (3,308,900)
Total Liabilities and Stockholders’ Equity (Deficit)  $1,379,800   $1,603,700 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

3

 

 

hopTo Inc.

Condensed Consolidated Statements of Operations

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2018   2017   2018   2017 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Revenue  $866,000   $924,800   $1,688,300   $1,907,300 
Costs of revenue   37,700    18,300    66,500    37,100 
Gross profit   828,300    906,500    1,621,800    1,870,200 
Operating expenses:                    
Selling and marketing   108,500    82,100    210,100    172,000 
General and administrative   327,800    421,100    633,000    1,062,200 
Research and development   358,000    355,100    786,500    740,100 
Total operating expenses   794,300    858,300    1,629,600    1,974,300 
Income / (loss) from operations   34,000    48,200    (7,800)   (104,100)
Other income (expense), net   130,500    (59,600)   129,700    (60,100)
Income / (loss) before provision for income tax   164,500    (11,400)   121,900    (164,200)
Provision for income tax   (100)   1,100    900    2,000 
Net income / (loss)  $164,600   $(12,500)  $121,000   $(166,200)
Basic and diluted income (loss) per share  $0.02   $(0.00)  $0.01   $(0.02)
Average weighted common shares outstanding – basic   9,804,400    9,804,400    9,804,400    9,804,400 
Average weighted common shares outstanding – diluted   10,368,956    9,804,400    10,368,956    9,804,400 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

4

 

 

hopTo Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

 

   Six Months Ended June 30, 
   2018   2017 
   (Unaudited)   (Unaudited) 
Preferred stock – shares outstanding          
Beginning balance        
Ending balance        
           
Common stock – shares outstanding          
Beginning balance   9,804,400    9,804,400 
Ending balance   9,804,400    9,804,400 
           
Common stock - amount          
Beginning balance  $1,000   $1,000 
Ending balance  $1,000   $1,000 
           
Additional paid-in capital          
Beginning balance  $78,539,300   $78,525,900 
Stock-based compensation expense       18,500 
Issuance of new warrants and settlement of liquidated damage   699,400     
Ending balance  $79,238,700   $78,544,400 
           
Accumulated deficit          
Beginning balance  $(81,849,200)  $(82,449,800)
Cumulative effect from change of accounting principal   1,391,900     
Net income (loss)   121,000    (166,200)
Ending balance  $(80,336,300)  $(82,616,000)
Total Stockholders’ Equity (Deficit)  $(1,096,600)  $(4,070,600)

 

See accompanying notes to unaudited condensed consolidated financial statements

 

5

 

 

hopTo Inc.

Condensed Consolidated Statements of Cash Flows

 

   Six Months Ended June 30, 
   2018   2017 
   (Unaudited)   (Unaudited) 
Cash Flows Provided By (Used In) Operating Activities:          
Net income (loss)  $121,000   $(166,200)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
Depreciation and amortization   17,800    33,200 
Stock-based compensation expense       18,500 
Changes in deferred rent   (15,800)   (19,200)
Changes to allowance for doubtful accounts   (3,700)   7,600 
Loss / (gain) on disposal of fixed assets   700    60,400 
Interest accrued for capital lease       300 
Changes in operating assets and liabilities:          
Accounts receivable   223,400    (99,300)
Prepaid expenses   (35,500)   1,300 
Deposit liability       12,100 
Deferred revenue   (176,000)   (85,400)
Accounts payable and accrued expenses   2,600    (34,900)
Other current liabilities   (155,700)   284,000 
Net Cash Provided By (Used In) Operating Activities   (21,200)   12,400 
           
Cash Flows Provided By Investing Activities:          
Proceeds from sale of expensed equipment       900 
Net Cash Provided By Investing Activities       900 
           
Cash Flows Used In Financing Activities:          
Payment for capital lease       (4,700)
Net Cash Used In Financing Activities       (4,700)
           
Net Increase (Decrease) in Cash   (21,200)   8,600 
Cash - Beginning of Period   1,015,400    546,200 
Cash - End of Period  $994,200   $554,800 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

6

 

 

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, the “Company”, “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, 2017, which was filed with the SEC on April 17, 2018 (“2017 10-K Report”). The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year ending December 31, 2018 or any future period.

 

Certain prior year information has been reclassified to conform to current year presentation.

 

2. Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates include: the amount of stock-based compensation expense; the allowance for doubtful accounts; the estimated lives, valuation, and amortization of intangible assets (including capitalized software); depreciation of long-lived assets; valuation of warrants; post-employment benefits; and accruals for liabilities. While we believe that such estimates are fair, actual results could differ materially from those estimates.

 

Revenue Recognition

 

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

 

Effective January 1, 2018, the Company adopted guidance ASC 606. For further details, see below “Recently Adopted Accounting Pronouncements”.

 

For the year ended December 31, 2017 including interim periods therein, the Company recognized revenue under ASC 605. Under ASC 605 software license revenues were recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price to the customer is fixed or determinable, as typically evidenced in a signed non-cancellable contract, or a customer’s purchase order, and collectability is probable. For additional detail on the Company’s revenue recognition policies in prior periods, please see Note 2 of Notes to Consolidated Financial Statements in the 2017 10-K Report.

 

7

 

 

The impact of the adoption of ASC 606 is the effect on revenue treatment of certain resellers (“stocking resellers”) who purchase product licenses that they hold in inventory until they are resold to the ultimate end user (an “inventory stocking order”). At the time that a stocking reseller places an inventory stocking order, no product licenses are shipped by us to the stocking reseller; rather, the stocking reseller’s inventory is credited with the number of licenses purchased and the stocking reseller can resell (issue) any number of licenses from their inventory at any time. Upon receipt of an order to issue a license(s) from a stocking reseller’s inventory (a “draw down order”), we will ship the license(s) in accordance with the draw down order’s instructions.

 

Under ASC 605, we would defer recognition of revenue from inventory stocking orders until the underlying licenses were sold and shipped to the end user, as evidenced by the receipt and fulfillment of the stocking reseller’s draw down order, assuming all other revenue recognition criteria have been met. Under ASC 606, we recognize revenue at the time that the stocking reseller places an inventory stocking order and their account is credited with available licenses because at that time control over the licenses has been transferred to the reseller and there are no remaining performance obligations for the Company other than the administrative task of electronic transfer of license keys.

 

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

 

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

 

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

 

Long-Lived Assets

 

Long-lived assets are assessed for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable, whenever we have committed to a plan to dispose of the assets or, at a minimum, annually. Typically, for long-lived assets to be held and used, measurement of an impairment loss is based on the fair value of such assets, with fair value being determined based on appraisals, current market value, comparable sales value, and discounted future cash flows, among other variables, as appropriate. Assets to be held and used (which assets are affected by an impairment loss) are depreciated or amortized at their new carrying amount over their remaining estimated life; assets to be sold or otherwise disposed of are not subject to further depreciation or amortization. No such impairment charge was recorded during either of the three or six-month periods ended June 30, 2018 or 2017.

 

Allowance for Doubtful Accounts

 

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

 

The following table sets forth the details of the Allowance for Doubtful Accounts for the three-month periods ended June 30, 2018 and 2017:

 

   Beginning
Balance
   Charge Offs   Recoveries   Provision   Ending Balance 
2018  $3,400   $   $   $700   $4,100 
2017   5,000            10,300    15,300 

 

8

 

 

The following table sets forth the details of the Allowance for Doubtful Accounts for the six-month periods ended June 30, 2018 and 2017:

 

   Beginning Balance   Charge Offs   Recoveries   Provision   Ending Balance 
2018  $7,800   $   $   $(3,700)  $4,100 
2017   7,700            7,600    15,300 

 

Concentration of Credit Risk

 

For the three and six-month periods ended June 30, 2018 and 2017, respectively, we considered the customers listed in the following tables to be our most significant customers. The tables set forth the percentage of sales attributable to each customer during the periods presented, and the respective customer’s ending accounts receivable balance as a percentage of reported accounts receivable, net, as of June 30, 2018 and 2017.

 

   Three Months
Ended
June 30, 2018
   As of
June 30, 2018
   Three Months Ended
June 30, 2017
   As of
June 30, 2017
 
Customer  Sales   Accounts Receivable   Sales   Accounts Receivable 
Alcatel-Lucent   1.3%   5.9%   9.1%   20.0%
Centric   17.1%   20.8%   4.9%   10.1%
ESO Solutions   6.3%   2.3%   9.2%   20.2%
Elosoft   7.6%   20.2%   17.3%   4.2%
Siae microelettronica   3.8%   13.6%   2.8%   6.2%
Total   36.1%   62.8%   43.3%   60.7%

 

   Six Months Ended
June 30, 2018
   As of June 30, 2018   Six Months Ended
 June 30, 2017
   As of June 30, 2017 
Customer  Sales   Accounts Receivable   Sales   Accounts Receivable 
Alcatel-Lucent   0.8%   5.9%   5.5%   20.0%
Centric   15.7%   20.8%   4.9%   10.1%
ESO Solutions   4.5%   2.3%   5.1%   20.2%
Elosoft   5.9%   20.2%   13.8%   4.2%
Siae microelettronica   1.9%   13.6%   1.6%   6.2%
Total   28.8%   62.8%   30.9%   60.7%

 

Reclassification

 

Certain reclassifications have been made to the 2017 financial statements to conform to the 2018 presentation.

 

9

 

 

Recently Adopted Accounting Pronouncements

 

Revenue

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (ASC 606). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers (ASC 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to reporting periods beginning after December 15, 2017, with early adoption permitted for reporting periods beginning after December 15, 2016. Subsequently, FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09, including: ASU 2016-08, Revenue from Contracts with Customers (ASC 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations; ASU 2016-10, Revenue from Contracts with Customers (ASC 606): Identifying Performance Obligations and Licensing, which is intended to clarify two aspects of ASC 606: identifying performance obligations and the licensing implementation guidance; and ASU 2016-12, Revenue from Contracts with Customers (ASC 606): Narrow-Scope Improvements and Practical Expedients, which contains certain practical expedients in response to identified implementation issues. The Company elected to adopt ASC 606 under the Modified Retrospective approach. Under the Modified Retrospective approach, only contracts with customers for which there were remaining unsatisfied performance obligations (open contracts) at the beginning of initial year of adoption must be restated to apply retrospectively the guidance under ASC 606. Any resulting impact for such contracts prior to the beginning of the initial year of adoption are made as an adjustment to opening accumulated deficit for such year.

 

On January 1, 2018, the Company adopted ASC 606 using the Modified Retrospective method. This method required retrospective application of the new accounting standard to those contracts which were not completed as of January 1, 2018. Results for the reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605.

 

The change to the current revenue policy is the timing of revenue recognition for software licenses purchased by stocking resellers. Under the guidance ASC 605, the Company recognized revenue upon the delivery of licenses to end users when they were purchased from the stocking reseller. Under the guidance ASC 606, license revenue is recognized upon placement of the stocking order by the stocking reseller. During the three-month and six-month periods ended June 30, 2018, this change in revenue policy resulted in lower license revenue of $96,400. This lower license revenue had the same impact on gross profit, loss from operations and net income.

 

The Company recorded $1,391,900 to opening accumulated deficit as of January 1, 2018 due to the cumulative impact of adopting ASC 606, with the impact primarily related to reversal of deferred license revenue associated with stocking orders placed in prior periods which had not been sold through to end users as of December 31, 2017.

 

The cumulative effect of the changes made to our condensed consolidated balance sheet as of January 1, 2018 under current assets, deferred revenue and accumulated deficit for the adoption ASU 2014-09, Revenue - Revenue from Contracts with Customers were as follows:

 

Balance Sheet 

Balance at

December 31, 2017

   Adjustments due to ASC 606   Balance at
January 1, 2018
 
             
Current Assets               
Deferred COGS  $   $20,000   $20,000 
                
Liabilities and Stockholders’ Equity               
Accumulated Deficit  $(81,849,200)  $1,391,900   $(80,457,300)
                
Current Liabilities               
Deferred Revenue  $1,845,100   $(609,700)  $1,235,400 
Long Term Liabilities               
Deferred Revenue  $1,409,700   $(802,200)  $607,500 

 

10

 

 

Income Taxes

 

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Among these new taxes on certain foreign sourced earnings, the Act created a new category of income inclusion: the global intangible low-taxed income (“GILTI”). The objective of GILTI is to deter U.S. corporations from transferring intangible property to non-U.S. low-tax jurisdictions by subjecting the non-U.S. income to current U.S. taxation. The Act also adds a provision for a deduction to offset the GILTI inclusion for C corporations only, which is 50 percent (37.5 percent after 2025) of the GILTI inclusion. The GILTI deduction is subject to limitation based mainly on the taxpayer’s taxable income.

 

In addition to GILTI, the Act also introduced the foreign-derived intangible income (“FDII”) category. FDII is eligible income derived in connection with property sold or services provided by the U.S. taxpayer to a non-U.S. person. The taxpayer must establish that the property is foreign use property, and, in the case of services, the taxpayer must provide that the services are rendered to a non-U.S. person who is located outside of the United States. C corporations receive a deduction equal to 37.5 percent (21.875 percent after 2025) of foreign-derived intangible income (FDII). Similar to the GILTI deduction, the FDII deduction is subject to limitation.

 

The Act significantly changes how the U.S. taxes corporations. The Act requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the Act, estimates in calculations, and preparation and analysis of information not previously relevant or regularly produced. As of June 30, 2018, the Company has not completed the accounting for all of the tax effects of the Act; however, preliminary calculations for the two new aforementioned provisions of the Act, GILTI and FDII, provide that the impact of the provisions are immaterial to the provision for income taxes.

 

As the Company completes its analysis of the Act, collects and prepares necessary data, and interprets any additional guidance set forth by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company may alter its assessment if it determines that the Act has a material impact on the provision for income taxes.

 

3. Property and Equipment

 

Property and equipment was:

 

   June 30, 2018   December 31,2017 
Equipment  $179,900   $184,600 
Furniture   1,600    3,600 
Leasehold improvements   167,600    167,600 
    349,100    355,800 
Less: accumulated depreciation and amortization   336,800    325,000 
   $12,300   $30,800 

 

Aggregate property and equipment depreciation and amortization expense was $8,800 during the three-month period ended June 30, 2018, and $17,800 during the six-month period ended June 30, 2018. During the six-month period ended June 30, 2018, we had disposed of equipment and furniture with a combined net book value of $700.

 

4. Stock-Based Compensation

 

The following table summarizes the stock-based compensation expense, for the three and six-month periods ended June 30, 2018 and 2017, respectively, by classification:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
Statement of Operations Classification  2018   2017   2018   2017 
Selling and marketing expense       100        200 
General and administrative expense       3,100        18,100 
Research and development expense       100        200 
   $   $3,300   $   $18,500 

 

11

 

 

5. Supplemental Disclosure of Cash Flow Information

 

During the three-month period ended June 30, 2018, we reversed an accrual for potential liquidated damages of $855,100, crediting APIC for $699,400 and other income for $155,700 pursuant to an agreement to issue warrants to purchase 564,556 shares of the Company’s Common stock as disclosed in the Current Report on Form 8-K, which was filed with the SEC on May 30, 2018.

 

We disbursed $0 and $300 for the payment of interest expense during the six-month periods ended June 30, 2018 and 2017, respectively.

 

We disbursed $800 and $1,300 for the payment of income taxes during the six-month periods ended June 30, 2018 and 2017, respectively. Such disbursement was made for the payment of foreign income taxes related to the operation of our Israeli subsidiary, GraphOn Research Labs, Ltd.

 

6. Earnings (Loss) Per Share

 

Earnings or loss per share is calculated by dividing the net income or loss for the period by the weighted average number of shares of common stock outstanding during the period. Diluted earnings or loss per share (“Diluted EPS”) is calculated by dividing the net income or loss for the period by the total of the weighted average number of shares of common stock outstanding during the period plus the effects of any dilutive securities. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of such potential shares of common stock would have an anti-dilutive effect. During all periods presented in our Condensed Consolidated Statements of Operations, potentially dilutive securities included shares of common stock potentially issuable upon exercise of stock options, release of unvested restricted stock awards and exercise of warrants. Diluted EPS excludes the impact of potential issuance of shares of common stock related to our stock options in periods in which the exercise price of the stock option is greater than the average market price of our common stock during such periods.

 

For the three and six-month period ended June 30, 2018, we included 564,556 shares of common stock equivalents in the computation of dilutive earnings per share. Additionally, 432,594 shares of common stock equivalents were excluded from the computation of dilutive loss per share for the current three and six-month period because their effect would be anti-dilutive. For the three and six-month period ended June 30, 2017, 1,375,509 shares of common stock equivalents were excluded from the computation of dilutive loss per share since their effect would be anti-dilutive.

 

7. Segment Information

 

Revenue by country for the three-month and six-month periods ended June 30, 2018 and 2017 was as follows:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2018   2017   2018   2017 
United States  $288,300   $275,100   $597,500   $624,900 
Brazil   186,100    234,000    357,900    362,400 
Other countries   391,600    415,700    732,900    920,000 
   $866,000   $924,800   $1,688,300   $1,907,300 

 

12

 

 

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

 

Forward-Looking Information

 

This report includes, in addition to historical information, “forward-looking statements”. All statements other than statements of historical fact we make in this report are forward-looking statements. In particular, the statements regarding industry prospects and our expectations regarding future results of operations or financial position (including those described in this Management’s Discussion and Analysis of Financial Condition and Results of Operations) are forward-looking statements. Such statements are based on management’s current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ significantly from those described in the forward-looking statements. Factors that may cause such a difference include the following:

 

  the success of products depends on a number of factors including market acceptance and our ability to manage the risks associated with product introduction;
  local, regional, national and international economic conditions and events, and the impact they may have on us and our customers;
  our revenue could be adversely impacted if any of our significant customers reduces its order levels or fails to order during a reporting period; customer demand is based on many factors out of our control;
  as a result of the new revenue recognition standards, if any significant end user customer or reseller substantially changes its order level, or fails to order during the reporting period, whether the order is placed directly with us or through one of our non-stocking resellers, our software licenses revenue could be materially impacted; and
  other factors, including, but not limited to, those set forth under Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 which was filed with the Securities and Exchange Commission (the “SEC”) on April 17, 2018, and in other documents we have filed with the SEC.

 

Statements included in this report are based upon information known to us as of the date that this report is filed with the SEC, and we assume no obligation to update or alter our forward-looking statements made in this report, whether as a result of new information, future events or otherwise, except as otherwise required by applicable federal securities laws.

 

Introduction

 

We are developers of application publishing software which includes application virtualization software and cloud computing software for multiple computer operating systems including Windows, UNIX and several Linux-based variants. Our application publishing software solutions are sold under the brand name GO-Global, which is our sole revenue source at this time. GO-Global is an application access solution for use and/or resale by independent software vendors (“ISVs”), corporate enterprises, governmental and educational institutions, and others who wish to take advantage of cross-platform remote access and Web-enabled access to their existing software applications, as well as those who are deploying secure, private cloud environments.

 

Since 2012 we have also been developing several products in the field of software productivity for mobile devices such as tablets and smartphones, which have been marketed under the hopTo brand.

 

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.

 

Update on hopTo Plans

 

During Q4 2016, we have ceased all of our sales, marketing and development efforts for the hopTo products, and at this time we do not expect any meaningful revenues from these products in the foreseeable future.

 

13

 

 

Except for the sale of 7 patents sold to Salesforce.com during the fourth quarter of 2017, we own all hopTo-related intellectual property including source-code, related patents, and the relevant trademarks. We believe these assets have value and are continuously evaluating opportunities to maximize such potential benefits from these assets. For detailed information on the hopTo products and technologies, please refer to our previously filed Annual Reports on Form 10-K and other SEC filings which are available at www.sec.gov. Such filings are being noted for historical information only; unless expressly noted, they are not incorporated herein by reference.

 

There is no certainty as to timing or success of our efforts to extract value from our hopTo assets, and stockholders should not place any reliance on the outcome of such efforts unless and until definitive agreements are reached, which may include the sale of certain of our hopTo software products or additional sales of patents.

 

Corporate Background

 

We are a Delaware corporation, founded in May 1996. Our headquarters are located at 6 Loudon Road, Suite 200, Concord, New Hampshire, 03301, our toll-free phone number is 1-800-472-7466, and our phone number for local and international calls is 408-688-2674. We have remote employees located in various states, as well as internationally in the United Kingdom. Our corporate Internet Website is http://www.hopto.com. The information on our website is not part of this quarterly report.

 

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

 

Our Intellectual Property

 

We believe that 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 but are not 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.

 

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.

 

14

 

 

As a result of ipCapital’s work under the engagement agreement, as amended, as of August 14, 2018, 173 new patent applications have been filed. Of these 173 applications, 53 patents have been granted by the United States Patent and Trademark Office (“USPTO”). Due to financial constraints on our operations, we have suspended patent prosecution activity other than to pay issuance fees for patents already approved by USPTO. We do not expect to file more applications in 2018.

 

The 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 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 connections. The UNIX/Linux applications run on a central computer server along with the GO-Global for UNIX Host software. This allows the applications to be accessed and run remotely via GO-Global Client software or a Web browser without having to modify the application’s code or requiring costly add-ons.
     
  GO-Global Client: We offer a range of GO-Global Client software that allows remote application access from a wide variety of local, remote and mobile platforms, including Windows, Linux, UNIX, Apple OS X and iOS, and Google Android. We plan to continue to develop GO-Global Client software for new portable and mobile devices.

 

Critical Accounting Policies

 

We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as “critical” because these specific areas require us to make judgments and estimates about matters that are uncertain at the time we make the estimates. Actual results may differ from these estimates. For a summary of our critical accounting policies, please refer to our 2017 10-K Report and Note 2 to our Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

Results of Operations for the Three and Six-Month Periods Ended June 30, 2018 and 2017

 

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

 

Revenue

 

Revenue for the three-month periods ended June 30, 2018 and 2017 was:

 

       2018 Over (Under) 2017 
Revenue  2018   2017   Dollars   Percent 
Software Licenses                    
Windows  $182,100   $296,500   $(114,400)   -38.6%
UNIX/Linux   50,400    44,100    6,300    14.3%
    232,500    340,600    (108,100)   -31.7%
Software Service Fees                    
Windows   503,600    434,900    68,700    15.8%
UNIX/Linux   100,700    135,000    (34,300)   -25.4%
    604,300    569,900    34,400    6.0%
Other   29,200    14,300    14,900    104.2%
Total Revenue  $866,000   $924,800   $(58,800)   -6.4%

 

15

 

 

Revenue for the six-month periods ended June 30, 2018 and 2017 was:

 

       2018 Over (Under) 2017 
Revenue  2018   2017   Dollars   Percent 
Software Licenses                    
Windows  $387,200   $579,500   $(192,300)   -33.2%
UNIX/Linux   68,700    152,100    (83,400)   -54.8%
    455,900    731,600    (275,700)   -37.7%
Software Service Fees                    
Windows   969,200    879,100    90,100    10.2%
UNIX/Linux   210,400    271,800    (61,400)   -22.6%
    1,179,600    1,150,900    28,700    2.5%
Other   52,800    24,800    28,000    112.9%
Total Revenue  $1,688,300   $1,907,300   $(219,000)   -11.5%

 

Our software revenue is entirely related to our GO-Global product line, and historically has been primarily derived from product licensing fees and service fees from maintenance contracts. The majority of this revenue has been earned, and continues to be earned, from a limited number of significant customers, most of whom are resellers. Many of our resellers (a “stocking reseller”) purchase software licenses that they hold in inventory until they are resold to the ultimate end user. During the three and six-month periods ended June 30, 2017, we deferred recognition of revenue from these sales (on our Condensed Consolidated Balance Sheet under the caption “Deferred Revenue”) until the stocking reseller sells the underlying software licenses to the ultimate end user. As of January 1, 2018, we have adopted the new revenue recognition policies and guidance ASC 606 and as a result, during the three and six-month periods ended June 30, 2018, all software licenses either sold directly by us to an end user, to a stocking reseller, or to a reseller who does not stock licenses is immediately recognized upon shipment (see Note 2 to the Financial Statements).

 

Consequently, if any significant end user customer or reseller substantially changes its order level, or fails to order during the reporting period, whether the order is placed directly with us or through one of our non-stocking resellers, our software licenses revenue could be materially impacted.

 

Software Licenses

 

The decrease in Windows software licenses revenue for both the three and six-month periods ended June 30, 2018 was primarily due to our adoption of ASC 606 effective January 1, 2018. Under the old standard, Windows software license revenue for the three and six-month periods ended June 30, 2018 would have been $244,700 and $548,000 respectively, which is $51,800 or 17.5% lower than the prior year three-month period and $31,800 or 5.5% lower than the prior year six-month period.

 

Software licenses revenue from our UNIX/Linux products increased slightly in the three-month period ended June 30, 2018 primarily due to our adoption of the new revenue recognition standard. For the six-month period ended June 30, 2018, UNIX/Linux software license revenue is lower primarily due to the fact that during the prior year period we received a larger than typical order from one of our U.S. government customers.

 

Although we expect aggregate orders for software licenses during 2018 to approximate the levels of 2017, we expect that GO-Global software license revenue in 2018 will be slightly lower than 2017 levels due to the impact of adoption of ASC 606.

 

16

 

 

Software Service Fees

 

The increase in software service fees revenue attributable to our Windows products during the three-month and six-month period ended June 30, 2018, as compared to the same periods of the prior year, was primarily due to the increased license sales that we reported during fiscal year 2017.

 

The decrease in service fees revenue attributable to our UNIX products for the three-month and six-month period ended June 30, 2018, as compared with the same periods of the prior year, was primarily the result of the low level of our UNIX product sales throughout the current and prior year and a resultant decrease in maintenance contract renewals. The majority of this decrease was attributable to our European telecommunications customers.

 

We expect that software service fees for 2018 for our Windows products will be modestly higher than those for 2017 and software service fees for our UNIX products will be lower than those for 2017.

 

Other

 

The increase in other revenue during the three-month and six-month periods ended June 30, 2018, as compared to the same periods in the prior year was primarily due to an increase in private labeling fees resulting from changes to our OEM partner programs that were implemented during 2017. Private labeling fees do not comprise a material portion of our revenue streams, but as a result of the new program we expect these fees to be slightly higher in 2018 than in 2017.

 

Costs of Revenue

 

Costs of revenue are comprised primarily of software service costs, which represent the costs of customer service, and software product costs, which are primarily costs associated with licenses for third party software included in our product offerings and certain taxes that our Brazilian resellers are required to pay for importation of our software. We incur no shipping or packaging costs as all of our deliveries are made via electronic means over the Internet.

 

Costs of revenue were 4.4% and 2.0% of total revenue for the three-month periods ended June 30, 2018 and 2017, respectively, and 3.9% and 1.9% of total revenue for the six-month periods ended June 30, 2018 and 2017, respectively.

 

Costs of revenue for the three-month periods ended June 30, 2018 and 2017 were:

 

       2018 Over (Under) 2017 
   2018   2017   Dollars   Percent 
Software service costs  $12,900   $15,500   $(2,600)   -16.8%
Software product costs   24,800    2,800    22,000    785.7%
   $37,700   $18,300   $19,400    106.0%

 

Costs of revenue for the six-month periods ended June 30, 2018 and 2017 were:

 

       2018 Over (Under) 2017 
   2018   2017   Dollars   Percent 
Software service costs  $25,900   $31,000   $(5,100)   -16.5%
Software product costs   40,600    6,100    34,500    565.6%
   $66,500   $37,100   $29,400    79.2%

 

17

 

 

The decrease in software service costs for the three and six-month periods ended June 30, 2018, as compared with the same periods of the prior year, was primarily due to less time being required for customer service issues. We expect software service costs for 2018 to be lower than those for 2017.

 

The increases in software product costs for the three-month and six-month periods ended June 30, 2018, as compared with the same periods of the prior year, was almost entirely due certain taxes that our Brazilian resellers are required to pay for importation of our software.

 

We expect that software costs of revenue for 2018 will be slightly higher than 2017.

 

Selling and Marketing Expenses

 

Selling and marketing expenses primarily consist of employee costs, outside services, advertising, public relations and travel and entertainment expense.

 

Selling and marketing expenses for the three-month period ended June 30, 2018 increased by $26,400, or 32.2%, to $108,500, from $82,100 for the same period of 2017, and represented approximately 12.5% and 8.9% of revenue during these periods, respectively. Selling and marketing expenses for the six-month period ended June 30, 2018 increased by $38,100, or 22.2%, to $210,000, from $172,000 for the same period of 2017, and represented approximately 12.4% and 9.0% of revenue during these periods, respectively.

 

The increase in selling and marketing expenses was due to combination of investment in an updated website for the GO-Global products and higher wages for our sales and marketing employees.

 

We expect to maintain our sales and marketing efforts in 2018 for anticipated GO-Global releases with select targeted modest investments in promotional activity; accordingly, we expect 2018 sales and marketing expenses to be slightly higher than 2017 levels.

 

General and Administrative Expenses

 

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

 

General and administrative expenses decreased by 93,300, or 22.2%, to $327,800 for the three-month period ended June 30, 2018, from $421,100 for the same period of 2017, and represented approximately 37.9% and 45.5% of revenue during these periods, respectively. General and administrative expenses decreased by $429,200, or 40.4%, to $633,000 for the six-month period ended June 30, 2018, from $1,062,200 for the same period of 2017, and represented approximately 37.5% and 55.7% of revenue during these periods, respectively.

 

The decrease in general and administrative expense was primarily due to a combination of decreased executive compensation associated with the part-time arrangement for our CEO and CFO positions, decreased rent expense associated with lower net operating leases for the sublease of our Campbell office, and the elimination of accruals for potential liquidated damages resulting from delays in filing registration statements for shares of common stock and shares of common stock underlying warrants for certain of the private placements that the Company closed in prior periods.

 

In 2018, we intend to continue these cost controls. We therefore expect that our 2018 general and administrative costs will be lower than those for 2017.

 

Research and Development Expenses

 

Research and development expenses consist primarily of employee costs, payments to contract programmers, travel and entertainment for all our engineers, and all rent for our leased engineering facilities.

 

18

 

 

Research and development expenses increased by $2,900 or 0.8%, to $358,000 for the three-month period ended June 30, 2018, from $355,100 for the same period of 2017, and represented approximately 41.3% and 38.4% of revenue for these periods, respectively. Research and development expenses increased by $46,400, or 6.3%, to $786,500, for the six-month period ended June 30, 2018, from $740,100 for the same period of 2017, and represented approximately 46.6% and 38.8% of revenue for these periods, respectively.

 

The increase in research and development expense is primarily due to higher employee costs associated with increased wages for our research and development employees and certain contract labor associated with the GO-Global products.

 

In 2018, we expect to maintain a level of research and development resource consistent with the levels of 2017 with targeted investments in the GO-Global products. We therefore expect 2018 research and development expenses to be slightly higher than 2017 levels.

 

Other Income

 

During the three-month and six-month periods ended June 30, 2018, we reversed an accrual for potential liquidated damages of $855,100, crediting APIC for $699,400 and other income for $155,700 pursuant to an agreement to issue warrants to purchase 564,556 shares of the Company’s Common stock as disclosed in the Current Report on Form 8-K, which was filed with the SEC on May 30, 2018.

 

Net Income / Loss

 

Based on the foregoing, we reported net income of $164,600 for the three-month period ended June 30, 2018 and a net loss of $12,500 for the three-month period ended June 30, 2017. Additionally, we reported net income of $121,000 for the six-month period ended June 30, 2018 and a net loss of $166,200 for the six-month period ended June 30, 2017.

 

Liquidity and Capital Resources

 

Our reported net income for the six-month period ended June 30, 2018 of $121,000 included three non-cash items: changes in deferred rent liability of $15,800 and allowance for doubtful accounts of $3,700, and depreciation and amortization of $17,800, which was primarily comprised of depreciation of fixed assets.

 

Except for the year ended December 31, 2017 and the three and six-month periods ended June 30, 2018, we have incurred significant net losses since our inception. At June 30, 2018, the Company had an accumulated deficit of $80,336,300 and a working capital deficit of $582,800.

 

During fiscal 2017: (1) we reduced our operating expense from approximately $1.3 million per quarter to an average of $0.8 million per quarter; (2) we have improved the operating results from our GO-Global business and have reasonable confidence in its ability to generate cash for at least the next 12 months; (3) sold several patents for cash; and (4) we increased our cash position from a low of $300 thousand in August of 2016 to $1.0 million at December 31, 2017. During fiscal 2018 we have continued to carefully manage our operating expense.

 

In addition, for the reasons described above, we expect our results from operations and capital resources will be sufficient to fund our operations for at least the next 12 months from the date of the filing of this quarterly report on Form 10-Q however, we do not expect these funds and resources to be sufficient for material new investments in our GO-Global business.

 

In order to achieve the expense controls in the past fiscal year, we implemented significant expense reductions, including (1) a limited number of employee layoffs primarily related to the hopTo product; (2) during the three month period ended September 30, 2016, our former CEO and CFO voluntarily agreed with our board of directors to defer 50% of their salary beginning September 1, 2016 until such time as the Company can reasonably pay such compensation upon approval by the board of directors (such amounts have been paid as of April 25, 2018; see Note 8, Subsequent Events, in the Notes to Financial Statements in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, which was filed with the SEC on May 21, 2018) and (3) undertook other expense reduction initiatives related to related to patent maintenance, real estate and use of professionals.

 

We no longer are considering potentially suspending or terminating our SEC filing status, although we reserve the right to do so subject to applicable law.

 

19

 

 

We have had, and as a regular part of our business from time to time continue to have, discussions with various parties about the possibility of strategic transactions.

 

Cash

 

As of June 30, 2018, our cash balance was $994,200, as compared with $1,015,400 as of December 31, 2017, a decrease of $21,200, or 2.1%. The slight decrease primarily resulted from our continued cash management efforts.

 

Accounts Receivable, net

 

At June 30, 2018 and December 31, 2017, we reported accounts receivable, net, of $207,100 and $426,800, respectively. Such amounts were reported net of the allowance for doubtful accounts, which allowances totaled $4,100 and $7,800 at June 30, 2018 and December 31, 2017, respectively. The decrease in accounts receivable, net, was mainly due to lower sales during the three and six-month period ended June 30, 2018, as compared to the same periods ended December 31, 2017. We collect the significant majority of our quarter-end accounts receivable during the subsequent quarter; accordingly, increases or decreases in accounts receivable from one period to the next tends to be indicative of the trend in our sales from one period to the next. From time to time, we could have individually significant accounts receivable balances due us from one or more of our significant customers. If the financial condition of any of these significant customers should deteriorate, our operating results could be materially affected.

 

Working Capital

 

As of June 30, 2018, we had current assets of $1,349,700 and current liabilities of $1,932,500, which netted to a working capital deficit of $582,800. Included in current liabilities was the current portion of deferred revenue of $1,143,000.

 

20

 

 

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, 2018.

 

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, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

21

 

 

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, 2017, which was filed with the Securities and Exchange Commission on April 17, 2018.

 

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

 

Except as disclosed in the Current Report on Form 8-K, which was filed with the SEC on May 30, 2018, we did not sell any unregistered securities during the quarter ended June 30, 2018.

 

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
     
     
4.1  

Form of Warrant (1)

 

4.2  

Registration Rights Agreement, dated May 21, 2018, by and among hopTo Inc. and the holders named therein (1)

 

10.1   Exchange Agreement, dated May 21, 2018, by and among hopTo Inc. and the holders named therein (1)
     
31   Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32   Certification 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, 2018, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017, (ii) Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017, (iii) Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Six Months Ended June 30, 2018 and 2017 (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017, (v) Notes to Unaudited Condensed Consolidated Financial Statements.

 

* Furnished, not filed

 

(1) Filed on May 30, 2018 as an exhibit to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. (File number 000-21683)

 

22

 

 

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 14, 2018
   
  By: /s/ Jean-Louis Casabonne
  Jean-Louis Casabonne
 

Interim Chief Executive Officer

(Principal Executive Officer)

  Chief Financial Officer
  (Principal Financial Officer and
    Principal Accounting Officer)

 

23

 

 

HOPTO INC.

 

PROSPECTUS

 

564,556 shares of

Common Stock

 

        , 2018

 

   
 

 

PART II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution

 

The following table sets forth various expenses that will be incurred in connection with this offering as it relates to this Registration Statement:

 

SEC Filing Fee  $24.25+ 
State Securities Filing Fees   n/a*
Legal Fees and Expenses   10,000*
Accounting Fees and Expenses   3,000*
Printing Expenses   n/a*
Miscellaneous Expenses   975.75*
Total  $14,000.00*

 

* Estimated
+ Paid herewith

 

Item 14. Indemnification of Directors and Officers

 

Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee of or agent of such corporation. The statute provides that it is not exclusive of other rights to which those seeking indemnification may be entitled under any by-law, agreement, or vote of stockholders or disinterested directors or otherwise. Our certificate of incorporation and bylaws provide for the indemnification of our directors and officers to the fullest extent authorized by, and subject to the conditions set forth in the Delaware law.

 

Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation for certain limitations on a director being personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. The Company’s certificate of incorporation provides for such elimination of liability to provide that the Company’s directors shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability:

 

  for any breach of the director’s duty of loyalty to the Company or its stockholders;
     
  for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
     
  under section 174 of the Delaware law, relating to unlawful payment of dividends or unlawful stock purchases or redemption of stock; and
     
  for any transaction from which the director derives an improper personal benefit.

 

As a result of this provision, the Company and its stockholders may be unable to obtain monetary damages from a director for breach of his or her duty of care. The Company maintains directors and officers liability insurance.

 

II-1
 

 

Item 15. Recent Sales of Unregistered Securities

 

On July 28, 2015, we sold an aggregate of 1,924,266 shares of common stock to certain accredited investors at a purchase price of $1.21 per share. In addition, on that date, we sold an additional 181,653 shares of common stock at the same price to our former CEO and current director, Eldad Eilam, and CFO, Jean-Louis Casabonne, current directors Michael Brochu, and John Cronin, and former directors Sam Auriemma and Jeremy Verba. The shares of common stock sold in the 2015 Private Placement were offered and sold without registration under the Securities Act pursuant to Section 4(a)(2) thereof and in reliance on Rule 506 of Regulation D promulgated thereunder.

 

During the year ended December 31, 2015, we made restricted stock awards for an aggregate 15,000 shares of common stock. The valuation of the restricted stock awards was based on the closing fair market value of our common stock on the grant date. For the awards made to employees, such fair market value ranged from $1.95 to $2.40 per share. During the year ended December 31, 2014, restricted stock awards for an aggregate 291,467 shares of common stock, at a weighted average award date fair market value of $2.40 per share, were awarded. The grant of such restricted stock awards was not registered under the Securities Act because the restricted stock awards were offered and sold in a transaction not involving a public offering, exempt from registration under the Securities Act pursuant to section 4(2).

 

On May 21, 2018, we entered into an Exchange Agreement (the “Exchange Agreement”) with certain holders (the “Holders”) of existing warrants originally issued on June 17, 2013 and January 7, 2014 (the “Existing Warrants”) to purchase shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”). The Existing Warrants were exercisable for an aggregate of 564,556 shares of the Company’s Common stock and have a weighted average exercise price of approximately $10.77. Pursuant to the Exchange Agreement, the Company agreed to exchange the Existing Warrants held by the Holders for new warrants exercisable for an aggregate 564,556 shares of the Company’s Common Stock, having an exercise price of $0.01 per share and a five year term.

 

Item 16. Exhibits and Financial Statement Schedules

 

  (a) Exhibits. The exhibits are incorporated by reference from the Exhibit Index attached hereto.
     
  (b) Financial Statements. The financial statements set forth in (i) the Index to Consolidated Financial Statements under Part II, Item 8 of our Form 10-K which is attached as Appendix A and (ii) the Index to Financial Statements under Part I, Item 1 of our Form 10-Q which is attached as Appendix B to and forms a part of the prospectus , are hereby incorporated by reference.

 

Item 17. Undertakings

 

The undersigned registrant hereby undertakes:

 

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

  (a) To include any prospectus required by Section 10(a)(3) of the Securities Act;
     
  (b) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
     
  (c) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

 

II-2
 

 

(2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

(4) That each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede of modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue

 

II-3
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Concord, State of New Hampshire, on the 16th day of August, 2018.

 

  HOPTO INC.
     
  By: /s/ Jean Louis-Casabonne
    Jean Louis-Casabonne
    Chief Financial Officer and Interim Chief Executive Officer

 

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.

 

SIGNATURE   TITLE   DATE
         

/s/ Jean Louis-Casabonne

  Interim Chief Executive Officer, Chief Financial Officer, and Director   August 16, 2018
Jean-Louis Casabonne   (Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer)    
         
/s/ Eldad Eilam   Director   August 16, 2018
Eldad Eilam        
         
/s/ Michael A. Brochu   Director   August 16, 2018
Mike Brochu        
         
/s/ John Cronin   Director   August 16, 2018
John Cronin        

 

   
 

 

EXHIBIT INDEX

 

Exhibit

Number

  Exhibit Description
     
3.1   Amended and Restated Certificate of Incorporation of Registrant, as amended (1)
3.2   Certificate of Amendment of Amended and Restated Certificate of Incorporation of GraphOn Corporation (19)
3.3   Certificate of Amendment of Amended and Restated Certificate of Incorporation of hopTo Inc. (28)
3.4   Certificate of Designation of Series A Junior Participating Preferred Stock of hopTo Inc. (31)
3.5   Second Amended and Restated Bylaws of Registrant (2)
4.1   Form of certificate evidencing shares of common stock of Registrant (3)
4.2   Warrant to Purchase Common Stock, dated October 11, 2011 (5)
4.7   Form of Warrant issued on January 7, 2014 (21)
4.8   Registration Rights Agreement, dated January 7, 2014 (21)
4.3   Rights Agreement, dated as of February 16, 2018, by and between hopTo Inc. and American Stock Transfer & Trust Company, LLC, as rights agent (31)
4.4   Form of Warrant issued on May 21, 2018 (34)
4.5   Registration Rights Agreement, dated May 21, 2018, by and among hopTo Inc. and the holders named therein (34)
5.1 +   Legal Opinion of Manatt, Phelps & Phillips, LLP
10.1*   Restricted Stock Agreement (1 of 2) with Eldad Eilam dated August 15, 2012 (15)
10.2*   Restricted Stock Agreement (2 of 2) with Eldad Eilam dated August 15, 2012 (15)
10.3*   Restricted Stock Agreement with Christoph Berlin dated August 15, 2012 (15)
10.4*   Restricted Stock Agreement with Robert Dixon dated August 15, 2012 (15)
10.5   Separation Agreement, dated April 12, 2012, between Registrant and Robert Dilworth (14)
10.6   Release, dated April 12, 2012, between Registrant and Robert Dilworth (14)
10.7   1998 Stock Option/Stock Issuance Plan of Registrant (7)
10.8   Supplemental Stock Option Agreement, dated as of June 23, 2000 (7)
10.9   2005 Equity Incentive Plan (8)
10.10   2008 Equity Incentive Plan, as Amended (9)
10.11*   Employment Agreement, dated August 21, 2013, by and between Registrant and Eldad Eilam (16)
10.12*   Director Severance Plan (11)
10.13*   Key Employee Severance Plan (11)
10.14(a)*   Engagement Agreement, dated October 11, 2011, by and between Registrant and ipCapital Group, Inc. (5)
10.14(b)*   First Addendum to the Engagement Agreement by and between Registrant and ipCapital Group, Inc., dated as of November 7, 2011 (12)
10.14I*   Second Addendum to the Engagement Agreement by and between Registrant and ipCapital Group, Inc., dated as of November 14, 2011 (12)
10.14(d)*   Third Addendum to the Engagement Agreement by and between Registrant and ipCapital Group, Inc., dated as of January 20, 2012 (13)
10.15   First Amendment to Office Lease between Registrant and CA-Pruneyard Limited Partnership, dated as of October 7, 2013 (27)
10.16   Consulting Agreement, dated February 1, 2012, by and between Registrant and Steven Ledger/Tamalpais Partners LLC (22)
10.17   Amendment to Consulting Agreement, by and between Registrant and Steven Ledger/Tamalpais Partners, LLC, dated August 1, 2013 (16)
10.18   Intellectual Property Brokerage Agreement by and between Registrant and ipCapital Licensing Company I, LLC, dated as of February 4, 2013 (17)
10.19*   Consulting Agreement, dated March 29, 2013, by and between Registrant and Gordon Watson (23)
10.20*   Consulting Agreement, dated November 18, 2013, by and between Registrant and ipCreate, Inc. (24)
10.23   Securities Purchase Agreement, dated January 7, 2014 (21)
10.21*   Consulting Agreement, dated March 17, 2014, by and between Registrant and Steven Ledger (25)
10.22   Separation Agreement, dated March 12, 2014, by and between Registrant and Christoph Berlin (25)

 

   
 

 

10.23   Employment Letter dated April 30, 2014 and executed May 5, 2014 between Registrant and Jean-Louis Casabonne (26)
10.24   Sublease dated August 11, 2015, by and between Registrant and CDNetworks (32)
10.25   Securities Purchase Agreement, dated as of July 24, 2015 (29)
10.26   Registration Rights Agreement, dated as of July 28, 2015 (29)
10.27   Lease Agreement effective October 1, 2015 between the Registrant and Heritage Village Offices (30)
10.28   Patent Purchase Agreement dated October 10, 2017 (33)
10.29   Exchange Agreement, dated May 21, 2018, by and among hopTo Inc. and the holders named therein (34)
16.1   Letter to SEC from Macias Gini & O’Connell LLP dated April 26, 2018 (35)
21.1   Subsidiaries of Registrant (33)
23.1 +   Consent of Macias Gini & O’Connell LLP
101   The following financial information from Registrant’s Annual Report on Form 10-K for the year ended December 31, 2017, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of December 31, 2017 and 2016, (ii) Consolidated Statements of Operations for the years ended December 31, 2017 and 2016, (iii) Consolidated Statements of Shareholders’ Equity (Deficit) for the years ended December 31, 2017 and 2016, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016, (v) Notes to Consolidated Financial Statements (18)

 

+ Being filed herewith.

*Management or compensatory plan or arrangement

 

  (1) Filed on April 2, 2007 as an exhibit to Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2006, and incorporated herein by reference. (File number 000-21683)
  (2) Filed on March 31, 2010 as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009, and incorporated herein by reference. (File number 000-21683)
  (3) Filed on September 19, 1996 as an exhibit to the Registrant’s Registration Statement on Form S-1 and incorporated herein by reference. (File No. 333-11165)
(4)  Reserved.
  (5) Filed on October 13, 2011 as an exhibit to Registrant’s Current Report on Form 8-K and incorporated herein by reference. (File number 000-21683)
  (6) Filed on March 30, 2004 as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by reference. (File number 000-21683)
  (7) Filed on June 23, 2000 as an exhibit to the Registrant’s Registration Statement on Form S-8, and incorporated herein by reference. (File number 333-40174)
  (8) Filed on November 25, 2005 as an exhibit to the Registrant’s definitive Proxy Statement for the Registrant’s 2005 Annual Meeting, and incorporated herein by reference. (File number 000-21683)
  (9) Filed on September 29, 2011 as an exhibit to the Registrant’s Registration Statement on Form S-8 and incorporated herein by reference. (File No. 333-177069)
  (10) Reserved.
  (11) Filed on November 14, 2011 as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, and incorporated herein by reference. (File number 000-21683)
  (12) Filed on November 23, 2011 as an exhibit to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, and incorporated herein by reference. (File number 333-177073)
  (13) Filed on February 14, 2012 as an exhibit to the Registrant’s Current Report on Form 8-K and incorporated herein by reference. (File number 000-21683)
  (14) Filed on May 21, 2012 as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012, and incorporated herein by reference. (File number 000-21683)
  (15) Filed on November 14, 2012 as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly reporting period ended September 30, 2012, and incorporated herein by reference. (File number 000-21683)

 

   
 

 

  (16) Filed on August 27, 2013 as an exhibit to the Registrant’s Current Report on Form 8-K, dated August 21, 2013, and incorporated herein by reference. (File number 000-21683)
  (17) Filed on February 19, 2013 as an exhibit to the Registrant’s Current Report on Form 8-K, and incorporated herein by reference. (File number 000-21683)
  (18) Submitted electronically with the original Form 10-K.
  (19) Filed on September 10, 2013 as an exhibit to the Registrant’s Current Report on Form 8-K, dated September 9, 2013, and incorporated herein by reference. (File number 000-21683)
  (20)  Reserved.
  (21)  Filed on January 13, 2014 as an exhibit to the Registrant’s Current Report on Form 8-K, dated January 7, 2014, and incorporated herein by reference. (File number 000-21683)
  (22) Filed on April 16, 2012 as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011, and incorporated herein by reference. (File number 000-21683)
  (23) Filed on April 3, 2013 as an exhibit to the Registrant’s Current Report on Form 8-K, dated March 29, 2013, and incorporated herein by reference. (File number 000-21683)
  (24) Filed on December 12, 2013 as an exhibit to the Registrant’s Current Report on Form 8-K, dated December 11, 2013, and incorporated herein by reference. (File number 000-21683)
  (25) Filed on March 18, 2014 as an exhibit to the Registrant’s Current Report on Form 8-K, dated March 12, 2014, and incorporated herein by reference. (File number 000-21683)
  (26) Filed on May 12, 2014 as an exhibit to the Registrant’s Current Report on Form 8-K, dated March 9, 2014, and incorporated herein by reference. (File number 000-21683)
  (27) Filed on March 31, 2014 as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013, and incorporated herein by reference. (File number 000-21683)
  (28) Filed on February 1, 2016 as an exhibit to the Registrant’s Current Report on Form 8-K, dated January 27, 2016, and incorporated herein by reference. (File number 000-21683)
  (29) Filed on July 30, 2015 as an exhibit to the Registrant’s Current Report on Form 8-K, dated July 24, 2015, and incorporated herein by reference. (File number 000-21683)
 

(30)

 

(31)

Filed on September 10, 2015 as an exhibit to the Registrant’s Registration Statement on Form S-1 and incorporated herein by reference. (File No. 333-206861)

Filed on February 16, 2018 as an exhibit to the Registrant’s Current Report on Form 8-K, dated February 16, 2018 and incorporated herein by reference. (File number 000-21683)

  (32) Filed on March 30, 2016 as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015 and incorporated herein by reference. (File number 000-21683)
  (33) Filed on April 17, 2018 as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2017 and incorporated herein by reference. (File number 000-21683)
  (34) Filed on May 30, 2018 as an exhibit to the Registrant’s Current Report on Form 8-K, dated May 21, 2018, and incorporated herein by reference. (File number 000-21683)
  (35) Filed on April 26, 2018 as an exhibit to the Registrant’s Current Report on Form 8-K, dated April 22, 2018, and incorporated herein by reference. (File number 000-21683)