hopTo Inc. - Quarter Report: 2016 September (Form 10-Q)

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 September 30, 2016

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.)

51 East Campbell Avenue, Suite 128

Campbell, CA 95008
(Address of principal executive offices)

Registrant’s telephone number:

(800) 472-7466

(408) 688-2674

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

Yes [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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

As of November 15, 2016, there were issued and outstanding 9,804,462 shares of the registrant’s common stock, par value $0.0001.

hopTo Inc.

FORM 10-Q

Table of Contents

PART I.	FINANCIAL INFORMATION	PAGE
Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	4
	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine-Month Periods Ended September 30, 2016 and 2015	5
	Unaudited Condensed Consolidated Statements of Stockholders’ Deficit for the Nine-Month Periods Ended September 30, 2016 and 2015	6
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2016 and 2015	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
	Signatures	36

Forward-Looking Information

This report includes, in addition to historical information, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. This act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact we make in this report are forward-looking statements. In particular, the statements regarding industry prospects and our future results of operations or financial position are forward-looking statements. Such statements are based on management’s current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ significantly from those described in the forward-looking statements. Factors that may cause such a difference include the following:

	●	the substantial doubt that exists as to our ability to continue as a going concern;

	●	the success of our new products depends on a number of factors including market acceptance and our ability to manage the risks associated with product introduction;

	●	local, regional, national and international economic conditions and events, and the impact they may have on us and our customers;

	●	our revenue could be adversely impacted if any of our significant customers reduces its order levels or fails to order during a reporting period; and

	●	other factors, including, but not limited to, those set forth under Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2016, the updated risk factor in our Quarterly Report on Form 10-Q which was filed with SEC on August 15, 2016, 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.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

hopTo Inc.

Condensed Consolidated Balance Sheets

	(Unaudited)
	September 30, 2016			December 31, 2015
Assets
Current Assets:
Cash	$	364,100		$	1,777,300
Accounts receivable, net		150,500			434,900
Prepaid expenses		98,300			139,200
Total Current Assets		612,900			2,351,400

Capitalized software development costs, net		—			20,800
Property and equipment, net		161,600			252,500
Other assets		109,000			109,000
Total Assets	$	883,500		$	2,733,700

Liabilities and Stockholders’ Deficit
Current Liabilities:
Accounts payable and accrued expenses	$	885,000		$	1,018,000
Deferred revenue		1,705,100			2,467,000
Deferred rent		61,600			21,000
Capital lease		9,000			8,400
Other current liabilities		392,900			—
Total Current Liabilities		3,053,600			3,514,400

Warrants liability		—			31,600
Deposit liability		81,400			81,400
Deferred revenue		1,704,600			1,465,800
Deferred rent		9,300			26,700
Capital lease		—			6,800
Total Liabilities		4,848,900			5,126,700

Commitments and contingencies

Stockholders’ Deficit:
Preferred stock, $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $0.0001 par value, 195,000,000 shares authorized, 9,804,462 and 9,731,233 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively		14,700			14,600
Additional paid-in capital		78,491,300			78,189,300
Accumulated deficit		(82,471,400	)		(80,596,900	)
Total Stockholders’ Deficit		(3,965,400	)		(2,393,000	)
Total Liabilities and Stockholders’ Deficit	$	883,500		$	2,733,700

See accompanying notes to unaudited condensed consolidated financial statements

hopTo Inc.

Condensed Consolidated Statements of Operations

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenue	$	898,500		$	1,128,800		$	2,864,400		$	3,958,700
Costs of revenue		8,300			108,900			129,500			319,200
Gross profit		890,200			1,019,900			2,734,900			3,639,500

Operating expenses:
Selling and marketing		93,900			419,800			664,600			1,373,500
General and administrative		821,600			773,300			2,114,600			2,452,400
Research and development		491,500			1,038,400			1,860,900			3,304,500
Total operating expenses		1,407,000			2,231,500			4,640,100			7,130,400

Loss from operations		(516,800	)		(1,211,600	)		(1,905,200	)		(3,490,900	)

Other income (expense):
Change in fair value of warrants liability		54,400			(2,400	)		29,300			126,900
Other income (expense), net		1,100			200			3,700			(100	)
Loss from operations before provision for income tax		(461,300	)		(1,213,800	)		(1,872,200	)		(3,364,100	)
Provision for income tax		700			700			2,300			3,300
Net Loss	$	(462,000	)	$	(1,214,500	)	$	(1,874,500	)	$	(3,367,400	)
Basic and diluted loss per share	$	(0.05	)	$	(0.14	)	$	(0.19	)	$	(0.42	)
Average weighted common shares outstanding – basic and diluted		9,784,163			8,937,264			9,763,111			8,006,689

See accompanying notes to unaudited condensed consolidated financial statements

hopTo Inc.

Condensed Consolidated Statements of Stockholders’ Deficit

	Nine Months Ended September 30,
	2016			2015
	(Unaudited)			(Unaudited)
Preferred stock – shares outstanding
Beginning balance		—			—
Ending balance		—			—
		—			—
Common stock – shares outstanding
Beginning balance		9,731,233			7,502,814
Private placement of stock and warrants		—			2,105,919
Employee stock option issuances		1,800			6,000
Vesting of restricted stock awards		71,429			99,819
Ending balance		9,804,462			9,714,552

Common stock – amount
Beginning balance	$	14,600		$	11,200
Par value of shares issued in private placement		—			3,200
Vesting of restricted stock awards		100			200
Ending balance		14,700		$	14,600

Additional paid-in capital
Beginning balance	$	78,189,300		$	74,600,700
Stock-based compensation expense		303,400			637,600
Company payment of employee taxes for stock-based compensation		(2,700	)		(11,900	)
Proceeds from exercise of employee stock options		1,500			4,900
Proceeds from private placement of common stock and warrants, net of par value of shares issued		—			2,547,300
Cost of private placement of common stock and warrants		—			(116,400	)
Reclassification of warrants liability to equity (2014 PIPE)		—			407,300
Other Rounding		(200	)		(100	)
Ending balance	$	78,491,300		$	78,069,400

Accumulated deficit
Beginning balance	$	(80,596,900	)	$	(76,205,800	)
Net loss		(1,874,500	)		(3,367,400	)
Ending balance	$	(82,471,400	)	$	(79,573,200	)
Total Stockholders’ Deficit	$	(3,965,400	)	$	(1,489,200	)

See accompanying notes to unaudited condensed consolidated financial statements

hopTo Inc.

Condensed Consolidated Statements of Cash Flows

	Nine Months Ended September 30,
	2016			2015
	(Unaudited)			(Unaudited)
Cash Flows Provided By (Used In) Operating Activities:
Net Loss	$	(1,874,500	)	$	(3,367,400	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		76,200			252,700
Write-down of capitalized purchased technology		15,500			—
Stock-based compensation expense		303,400			637,600
Company payment of employee taxes for stock-based compensation		(2,700	)		(11,900	)
Change in fair value of derivative instruments – warrants		(29,300	)		(126,900	)
Accretion of warrants liability for consulting services		(2,300	)		(12,300	)
Changes in severance liability		(5,900	)		14,800
Changes in deferred rent		23,200			(22,200	)
Changes to allowance for doubtful accounts		(12,000	)		(16,900	)
Revenue deferred to future periods		1,955,700			2,272,600
Recognition of deferred revenue		(2,478,800	)		(2,844,600	)
Gain on disposal of fixed assets		(3,200	)		—
Interest accrued for capital lease		800			1,400
Changes in operating assets and liabilities:
Accounts receivable		296,400			1,773,900
Prepaid expenses		40,900			(26,300	)
Accounts payable and accrued expenses		(127,300	)		47,500
Deposit liability		—			81,400
Other assets		—			(9,900	)
Other liabilities		392,900			—
Net Cash Used in Operating Activities		(1,431,000	)		(1,356,500	)

Cash Flows Provided By (Used In) Investing Activities:
Proceeds from sale of equipment		23,300			—
Capital expenditures		—			(5,100	)
Capitalized software development costs		—			(12,000	)
Net Cash Provided By (Used In) Investing Activities		23,300			(17,100	)

Cash Flows Provided By (Used In) Financing Activities:
Proceeds from exercise of employee stock options		1,500			4,900
Proceeds from private placement of common stock and warrants		—			2,550,500
Payment for capital lease		(7,000	)		(7,100	)
Net Cash Provided By (Used In) Financing Activities		(5,500	)		2,548,300

Net Increase (Decrease) in Cash		(1,413,200	)		1,174,700
Cash - Beginning of Period		1,777,300			1,557,100
Cash - End of Period	$	364,100		$	2,731,800

See accompanying notes to unaudited condensed consolidated financial statements

hopTo Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Basis of Presentation

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

The unaudited condensed consolidated financial statements included herein reflect all adjustments, which include only normal, recurring adjustments, that are, in our opinion, necessary to state fairly the results for the periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the SEC on March 30, 2016 (“2015 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, 2016 or any future period.

2. Going Concern and Management’s Liquidity Plans

The accompanying condensed consolidated financial statements have been prepared in conformity with GAAP, assuming we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Accordingly, the condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

We have incurred significant net losses since our inception. For the three and nine months ended September 30, 2016, respectively, the Company incurred losses from operations of $462,000 and $1,874,500. At September 30, 2016, the Company had an accumulated deficit of $82,078,500 and a working capital deficit of $2,440,700. Due to our inability to date to generate meaningful revenue from our hopTo Work business and our most recent estimation that revenue from this product is unlikely in any reasonable time frame, our cash resources will not be sufficient to fund our business for the next 12 months. The Company’s ability to continue as a going concern is dependent on our ability to continue to generate revenue from our legacy GO-Global business and to raise additional capital through the issuance of new equity, debt financing, or from the sale of certain assets to meet short and long-term operating requirements.

If the Company raises additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our current shareholders could be reduced, and such securities might have rights, preferences or privileges senior to the Company’s common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, the Company may not be able to take advantage of prospective business endeavors or opportunities, which could significantly and materially restrict our operations. We are continuing to pursue external financing alternatives to improve our working capital position. If the Company is unable to obtain the necessary capital, the Company may have to cease operations.

These factors raise substantial doubt about our ability to continue as a going concern.

In order to maintain operations, we previously implemented significant expense reductions, including a limited number of employee layoffs, and continue to implement further costs and employment reductions. 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.

Although maintaining our SEC filing status is a significant expense, we are considering all options to preserve value for shareholders, including potentially suspending or terminating our filing status, however we have not made any decision to do so.

We have worked extensively to explore additional sources of capital including the issuance of new shares, securing debt financing, and the sale of assets including certain software products and patents. Although this process is ongoing and we are in active discussions with multiple parties, there is no guarantee that they will result in transactions that are sufficient to provide the Company with the required liquidity to remove the substantial doubt as to our ability to continue as a going concern. We are also in discussions with some parties about the possibility of other strategic transactions although there is no guarantee that these discussions will result in an actual transaction. The accompanying condensed consolidated financial statements do not include any adjustments that may result from the outcome of the uncertainties set forth above.

3. Significant Accounting Policies

Use of Estimates

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

Revenue Recognition

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

Software license revenues are recognized when:

	●	Persuasive evidence of an arrangement exists, (i.e., when we sign a non-cancellable license agreement wherein the customer acknowledges an unconditional obligation to pay, or upon receipt of the customer’s purchase order), and

	●	Delivery has occurred or services have been rendered and there are no uncertainties surrounding product acceptance (i.e., when title and risk of loss have been transferred to the customer, which occurs when the media containing the licensed program(s) is provided to a common carrier or, in the case of electronic delivery, when the customer is given access to the licensed program(s)), and

	●	The price to the customer is fixed or determinable, as typically evidenced in a signed non-cancellable contract, or a customer’s purchase order, and

	●	Collectability is probable. If collectability is not considered probable, revenue is recognized when the fee is collected.

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

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

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

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

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

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

Deferred Rent

The leases for both the Company’s current office in Campbell, California and the subleased former office in Campbell, California contain free rent and predetermined fixed escalations in our minimum rent payments (See Note 13). 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 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.

Postemployment Benefits (Severance Liability)

Nonretirement postemployment benefits, including salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits and continuation of benefits such as health care benefits, are recognized as a liability and a loss when it is probable that the employee(s) will be entitled to such benefits and the amount can be reasonably estimated. An aggregate of $0 and $5,900 is reported as a severance liability, at September 30, 2016 and December 31, 2015, respectively.

Software Development Costs

We capitalize software development costs incurred from the time technological feasibility of the software is established until the software is available for general release, in accordance with GAAP. Such capitalized costs are subsequently amortized as costs of revenue over the shorter of three years or the remaining estimated useful life of the product. See discussion at Note 11 for an impairment charge taken during the nine month period ended September 30, 2016.

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

Long-Lived Assets

Long-lived assets are assessed for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable, whenever we have committed to a plan to dispose of the assets or, at a minimum, annually. Typically, for long-lived assets to be held and used, measurement of an impairment loss is based on the fair value of such assets, with fair value being determined based on appraisals, current market value, comparable sales value, and discounted future cash flows, among other variables, as appropriate. Assets to be held and used (which assets are affected by an impairment loss) are depreciated or amortized at their new carrying amount over their remaining estimated life; assets to be sold or otherwise disposed of are not subject to further depreciation or amortization. During the three month and nine month period ended September 30, 2016 respectively, we determined that an impairment of $0 and $15,500 existed with certain capitalized software development costs associated with our hopTo Work product and recognized that cost as part of cost of revenue. No such impairment charge was recorded during either of the three or nine-month periods ended September 30, 2015.

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 September 30, 2016 and 2015:

	Beginning Balance		Charge Offs		Recoveries		Provision			Ending Balance
2016	$	14,900	$	—	$	—	$	(9,600	)	$	5,300
2015		15,900		—		—		(200	)		15,700

The following table sets forth the details of the Allowance for Doubtful Accounts for the nine-month periods ended September 30, 2016 and 2015

	Beginning Balance		Charge Offs		Recoveries		Provision			Ending Balance
2016	$	17,300	$	—	$	—	$	(12,000	)	$	5,300
2015		32,600		—		—		16,900			15,700

Concentration of Credit Risk

For the three and nine-month periods ended September 30, 2016 and 2015 respectively, we considered the customers listed in the following tables to be our most significant customers. The tables set forth the percentage of sales attributable to each customer during the periods presented, and the respective customer’s ending accounts receivable balance as a percentage of reported accounts receivable, net, as of September 30, 2016 and 2015.

	Three Months Ended September 30, 2016			As of September 30, 2016			Three Months Ended September 30, 2015			As of September 30, 2015
Customer	Sales			Accounts Receivable			Sales			Accounts Receivable
Alcatel-Lucent		3.2	%		13.9	%		8.4	%		21.1	%
Elosoft		10.8	%		10.4	%		8.1	%		5.0	%
GE		5.8	%		16.0	%		2.0	%		4.3	%
IDS		6.6	%		0.0	%		13.5	%		0.0	%
Imagination Technology		1.7	%		8.4	%		1.0	%		2.5	%
KitASP		5.3	%		2.7	%		2.8	%		17.5	%
Raytheon		5.7	%		0.0	%		0.0	%		0.0	%
SAI SL		2.0	%		7.8	%		0.2	%		0.6	%
Thermo LabSystems		4.6	%		8.9	%		2.5	%		3.5	%
Uniface		6.0	%		16.5	%		1.3	%		2.9	%
Total		51.7	%		84.6	%		39.8	%		57.4	%

	Nine Months Ended September 30, 2016			As of September 30, 2016			Nine Months Ended September 30, 2015				As of September 30, 2015
Customer	Sales			Accounts Receivable			Sales			Accounts Receivable
Alcatel-Lucent		5.0	%		13.9	%		5.6	%		21.1	%
Centric		5.4	%		3.8	%		4.5	%		11.6	%
Elosoft		8.9	%		10.4	%		11.4	%		5.0	%
GE		4.6	%		16.0	%		1.9	%		4.3	%
Imagination Technology		0.5	%		8.4	%		0.3	%		2.5	%
SAI		1.0	%		7.8	%		0.6	%		0.6	%
Thermo LabSystems		5.4	%		8.9	%		2.6	%		3.5	%
Uniface		6.1	%		16.5	%		6.4	%		2.9	%
Total		36.9	%		85.7	%		33.3	%		51.5	%

Derivative Financial Instruments

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

Fair Value of Financial Instruments

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

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

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

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

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

As of September 30, 2016, all of our Warrants Liability reported at fair value was categorized as Level 3 inputs (See Note 5).

Recent Accounting Pronouncements

In August 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 clarifies whether eight specifically identified cash flow issues should be categorized as operating, investing or financing activities in the statement of cash flows. The guidance will be effective for the fiscal year beginning after December 15, 2017, including interim periods within that year. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to provide financial statement users with more useful information about expected credit losses on financial assets held by a reporting entity at each reporting date. The new standard replaces the existing incurred loss impairment methodology with a methodology that requires consideration of a broader range of reasonable and supportable forward-looking information to estimate all expected credit losses. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2019 and early adoption is permitted for fiscal years and interim periods within those years beginning after December 15, 2018. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

In May 2016, the FASB issued ASU 2016-12—Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments in ASU 2016-12 affect only some of the narrow aspects of Topic 606 including the collectability criterion, presentation of sales taxes and other similar taxes collected from customers, noncash consideration, and treatment of certain contract modifications at transition. Similar to ASU 2014-09, as discussed below, the effective date will be the first quarter of fiscal year 2018 with early adoption permitted in the first quarter of fiscal year 2017. We are currently evaluating the impact that adoption of this new standard will have on our consolidated financial statements.

In April 2016, the FASB issued ASU 2016-10—Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing to clarify certain aspects of ASU 2014-09. The amendments in ASU 2016-10 are expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services in contracts with customers and to improve the operability and understandability of licensing implementation guidance related to the entity’s intellectual property. Similar to ASU 2014-09, the effective date will be the first quarter of fiscal year 2018 with early adoption permitted in the first quarter of fiscal year 2017. We are currently evaluating the impact that adoption of this new standard will have on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09—Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees’ maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding purposes. This guidance is effective for annual reporting periods beginning after December 15, 2016 including interim periods within that reporting period. We are currently evaluating the impact on our consolidated financial statements upon the adoption of this guidance.

In March 2016, the FASB issued ASU 2016-08—Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This update seeks to further clarify the implementation guidance on principal versus agent considerations under the new revenue recognition standard, ASU 2014-09, Revenue from Contracts with Customers. Similar to ASU 2014-09, the effective date will be the first quarter of fiscal year 2018 with early adoption permitted in the first quarter of fiscal year 2017. We are currently evaluating the impact that adoption of this new standard will have on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We are currently evaluating the impact on our consolidated financial statements upon the adoption of this guidance.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). The ASU is part of the Board’s simplification initiative aimed at reducing complexity in accounting standards and requires companies to classify all deferred tax assets and liabilities, along with any related valuation allowance, as noncurrent on the balance sheet. Although ASU 2015-17 isn’t required for public companies to implement until fiscal years beginning after December 15, 2016 (and private companies until fiscal years beginning after December 15, 2017), early adoption is allowed. We have decided to adopt ASU 2015-17 early and have classified all of our deferred tax assets and liabilities as noncurrent on the balance sheet. We early adopted ASU 2015-17 as the Company considers this change an improvement in the usefulness of information provided to users of the Company’s financial statements. The Company applied the standard prospectively and did not retrospectively adjust any prior periods. Retrospective adjustments were immaterial to the Company’s total current assets and the adoption had no impact on our results of operation.

In August 2015, FASB issued ASU No. 2015-14 “Revenue from Contracts with Customers (Topic 606)” – Deferral of the Effective Date (“ASU 2015-14”). The purpose of this update is to defer the effective date of ASU 2014-09, detailed below, by one year. Therefore, ASU 2014-09 is now to be effective for annual reporting periods beginning after December 15, 2017, including interim periods within such annual period.

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

In August 2014, FASB issued ASU No. 2014-15 “Preparation of Financial Statements - Going Concern (Subtopic 205-40)”. Under U.S. GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements-Liquidation Basis of Accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in the update should be followed to determine whether to disclose information about the relevant conditions and events. The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Therefore ASU 2014-15 is now effective. We have evaluated the going concern considerations in this ASU and have determined that it is appropriate to provide additional disclosure to our financial statements (see Note 2).

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

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

	1.	Removes inconsistencies and weaknesses in revenue requirements.

	2.	Provides a more robust framework for addressing revenue issues.

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

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

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

The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within such annual period. Early adoption is not permitted. We are currently evaluating this ASU in order to determine whether or not its adoption will have a material impact on our results of operations, cash flows or financial position.

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

4. Property and Equipment

Property and equipment was:

	September 30, 2016		December 31, 2015
Equipment	$	258,700	$	313,700
Furniture		190,600		233,900
Leasehold improvements		167,600		167,600
		616,900		715,200
Less: accumulated depreciation and amortization		455,300		462,700
	$	161,600	$	252,500

Aggregate property and equipment depreciation and amortization expense was $21,200 and $70,800 during the three-month period and nine-month ended September 30, 2016, respectively. During the nine-month period ended September 30, 2016, we disposed of equipment and furniture with a combined net book value of $20,100.

5. 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 723,333 shares of our common stock at a purchase price of $4.50 per share (See Note 12) (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 were not indexed to our common stock; therefore, the fair value of these warrants was recorded as a liability of $1,356,000 on January 7, 2014 on our Balance Sheet. Since these conditions did not occur as of January 7, 2015, we have reclassified the warrant from liability to equity.

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

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

We used the exercise price of the warrants, as well as the fair market value of our common stock, to determine the fair value of our warrants. The exercise price for warrants issued in conjunction with 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 Private Placement (Note 12) 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. During the three-month period ended September 30, 2016, the liability warrants for the 2011 transaction expired.

The fair market value of our common stock was $0.08 and $0.10 per share as of September 30, 2016 and 2015, respectively. We used a binomial pricing model to determine the fair value of our warrants liability at September 30, 2016 and December 31, 2015, using the following assumptions:

	Estimated Volatility			Annualized Forfeiture Rate		Expected Term (Years)		Estimated Exercise Factor		Risk-Free Interest Rate			Dividends
ipCapital
September 30, 2016		378	%		—		0.09		1.1		0.20	%		—
December 31, 2015		127	%		—		0.79		4.0		0.61	%		—

The following table is a reconciliation of the warrants liability measured at fair value using significant unobservable inputs (Level 3) for the nine months ended September 30, 2016:

Warrants liability – December 31, 2015 fair value	$	31,600
Change in fair value of warrant liability recorded in other income		(29,400	)
Change in fair value of warrant liability recorded in general and administrative expense		(2,300	)
Warrants liability – September 30, 2016 fair value	$	—

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

	For the Three-Month Period Ended September 30, 2016
	Beginning Outstanding		Issued		Exercised		Cancelled / Forfeited		Ending Outstanding
2011 Transaction		686,833		—		—		686,833		—
2014 Transaction		376,667		—		—		—		376,667
Exercise Agreement		300,000		—		—		—		300,000
ipCapital		26,667		—		—		—		26,667
Consultant Warrant		11,285		—		—		—		11,285
Offer to Exercise		10,167		—		—		—		10,167
		1,411,619		—		—		686,833		724,786

	For the Three-Month Period Ended September 30, 2015
	Beginning Outstanding		Issued		Exercised		Cancelled / Forfeited		Ending Outstanding
2011 Transaction		686,833		—		—		—		686,833
2014 Transaction		376,667		—		—		—		376,667
Exercise Agreement		300,000		—		—		—		300,000
ipCapital		26,667		—		—		—		26,667
Consultant Warrant		11,285		—		—		—		11,285
Offer to Exercise		10,167		—		—		—		10,167
		1,411,619		—		—		—		1,411,619

	For the Nine-Month Period Ended September 30, 2016
	Beginning Outstanding		Issued		Exercised		Cancelled / Forfeited		Ending Outstanding
2011 Transaction		686,833		—		—		686,833		—
2014 Transaction		376,667		—		—		—		376,667
Exercise Agreement		300,000		—		—		—		300,000
ipCapital		26,667		—		—		—		26,667
Consultant Warrant)		11,285		—		—		—		11,285
Offer to Exercise		10,167		—		—		—		10,167
		1,411,619		—		—		686,833		724,786

	For the Nine-Month Period Ended September 30, 2015
	Beginning Outstanding		Issued		Exercised		Cancelled / Forfeited		Ending Outstanding
2011 Transaction		686,833		—		—		—		686,833
2014 Transaction		376,667		—		—		—		376,667
Exercise Agreement		300,000		—		—		—		300,000
ipCapital		26,667		—		—		—		26,667
Consultant Warrant		11,285		—		—		—		11,285
Offer to Exercise		10,167		—		—		—		10,167
		1,411,619		—		—		—		1,411,619

6. Severance Liability

In August of 2015 we agreed to provide a terminated employee a lump sum payment of $15,000 and six months of medical coverage payments which ended on March 2, 2016.

As of September 30, 2016 and December 31, 2015, an aggregate of $0 and $5,900, respectively, remained outstanding associated with the severance liabilities. During the nine-month period ended September 30, 2016 and 2015, we made total payments of $5,900 and $0, respectively, to individuals whom these severance amounts were due.

7. Deferred Rent

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

On August 11, 2015, we entered into a sublease agreement to sublease the entirety of the South Bascom office space to a third party. The term of the sublease extends through the end of our office lease term for that space and the monthly rent payments due to hopTo fully offset the monthly rent payments due to the landlord under hopTo’s lease for that space.

On August 24, 2015, we entered into a new office lease for our corporate headquarters in Campbell, California which became effective on October 1, 2015, is better suited to our California operations and results in significant monthly savings. We were required to pre-pay a portion of the lease commitment in the form of a deposit which was recorded as deferred rent during 2015.

As of September 30, 2016 deferred rent was:

Component	Current Liabilities		Long-Term Liabilities			Total
Deferred rent expense	$	21,900	$	(33,700	)	$	(11,800	)
Deferred rent benefit		39,700		43,000			82,700
	$	61,600	$	9,300		$	70,900

As of December 31, 2015 deferred rent was:

Component	Current Liabilities			Long-Term Liabilities			Total
Deferred rent expense	$	(18,700	)	$	(46,100	)	$	(64,800	)
Deferred rent benefit		39,700			72,800			112,500
	$	21,000		$	26,700		$	47,700

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

8. Stock-Based Compensation

The following table summarizes the stock-based compensation expense, net of amounts capitalized, we recorded in our Unaudited Condensed Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2016 and 2015, respectively, by classification:

	Three Months Ended September 30,				Nine Months Ended September 30,
Statement of Operations Classification	2016		2015		2016		2015
Costs of revenue	$	2,200	$	2,100	$	5,400	$	7,100
Selling and marketing expense		4,600		75,600		69,000		134,400
General and administrative expense		40,500		121,700		135,500		420,300
Research and development expense		26,400		25,800		93,500		75,800
	$	73,700	$	225,200	$	303,400	$	637,600

The following table presents summaries of the status and activity of our stock option awards for the three-month period ended September 30, 2016.

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Terms (Years)		Aggregate Intrinsic Value
Outstanding – June 30, 2016		696,189		$	2.63
Granted		—
Exercised		(1,800	)		0.81
Forfeited or expired		(6,667	)		2.7
Outstanding – September 30, 2016		687,722		$	2.63		6.22		—

The following table presents summaries of the status and activity of our stock option awards for the nine-month period ended September 30, 2016.

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Terms (Years)		Aggregate Intrinsic Value
Outstanding – December 31, 2015		705,990		$	2.63
Granted		—
Exercised		(1,800	)		0.81
Forfeited or expired		(16,468	)		2.81
Outstanding – September 30, 2016		687,722		$	2.63		6.22		—

Of the options outstanding as of September 30, 2016, 574,154 were vested, 113,290 were estimated to vest in future periods and 278 were estimated to be forfeited prior to their vesting. As of September 30, 2016, there was approximately $26,100 of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options. Such cost is expected to be recognized over a weighted-average period of approximately nine months.

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

The following table presents summaries of the status and activity of our restricted stock awards for the three-month period ended September 30, 2016. We include the common stock underlying the restricted stock award in shares outstanding once such common stock has vested and the restriction has been removed (“releases” or “released”). The common stock vests ratably, over a 33-month period commencing in the fourth month after the award date.

	Number of Shares			Weighted Average Grant Date Fair Value		Weighted Average Remaining Recognition Period (Years)		Unrecognized Compensation Cost Remaining
Unreleased – June 30, 2016		106,901		$	2.06
Awarded		-			-
Released		(40,880	)		2.24
Forfeited		(66,021	)		1.91
Outstanding – September 30, 2016		—			—		—		—

The following table presents summaries of the status and activity of our restricted stock awards for the nine-month period ended September 30, 2016.

	Number of Shares			Weighted Average Grant Date Fair Value		Weighted Average Remaining Recognition Period (Years)		Unrecognized Compensation Cost Remaining
Unreleased – December 31, 2015		106,586		$	2.31
Awarded		35,000			1.65
Released		(71,429	)		2.31
Forfeited		(70,157	)		1.91
Outstanding – September 30, 2016		—			—		—		—

As of September 30, 2016, there was no unrecognized compensation cost, net of estimated forfeitures, related to unreleased restricted stock awards. All unvested shares were accelerated and released to employees during the three month period ended September 30, 2016.

9. Revenue

Revenue for the three-month periods ended September 30, 2016 and 2015 was:

					2016 Over (Under) 2015
Revenue	2016		2015		Dollars			Percent
Software Licenses
Windows	$	222,500	$	373,500	$	(151,000	)		-40.4	%
UNIX/Linux		64,000		86,700		(22,700	)		-26.2	%
		286,500		460,200		(173,700	)		-37.7	%
Software Service Fees
Windows		444,700		484,000		(39,300	)		-8.1	%
UNIX/Linux		149,400		175,000		(25,600	)		-14.6	%
		594,100		659,000		(64,900	)		-9.8	%
Other		17,900		9,600		8,300			86.5	%
Total Revenue	$	898,500	$	1,128,800	$	(230,300	)		-20.4	%

Revenue for the nine-month periods ended September 30, 2016 and 2015 was:


					2016 Over (Under) 2015
Revenue	2016		2015		Dollars			Percent
Software Licenses
Windows	$	774,200	$	1,429,800	$	(665,600	)		-45.9	%
UNIX/Linux		209,200		500,800		(291,600	)		-58.2	%
		983,400		1,930,600		(947,200	)		-49.1	%
Software Service Fees
Windows		1,367,200		1,452,000		(84,800	)		-5.8	%
UNIX/Linux		473,700		542,200		(68,500	)		-12.6	%
		1,840,900		1,994,200		(153,300	)		-7.7	%
Other		40,100		33,900		6,200			18.3	%
Total Revenue	$	2,864,400	$	3,958,700	$	(1,094,300	)		-27.6	%

10. Cost of Revenue

Cost of revenue for the three-month periods ended September 30, 2016 and 2015 was:

					2016 Over (Under) 2015
	2016		2015		Dollars			Percent
Software service costs	$	2,100	$	43,900	$	(41,800	)		-95.2	%
Software product costs		6,200		65,000		(58,800	)		-90.5	%
	$	8,300	$	108,900	$	(100,600	)		-92.4	%

Cost of revenue for the nine-month periods ended September 30, 2016 and 2015 was:

					2016 Over (Under) 2015
	2016		2015		Dollars			Percent
Software service costs	$	78,100	$	128,500	$	(50,400	)		-39.2	%
Software product costs		51,400		190,700		(139,300	)		-73.0	%
	$	129,500	$	319,200	$	(189,700	)		-59.4	%

11. Capitalized Software Development Costs

Capitalized software development costs consisted of the following:

	September 30, 2016			December 31, 2015
Software development costs	$	490,400		$	518,800
Accumulated amortization		(490,400	)		(498,000	)
		-		$	20,800

Amortization of capitalized software development costs is a component of costs of revenue. Capitalized software development costs amortization aggregated $200 and $5,300 during the three and nine-month periods ended September 30, 2016, respectively, and $54,400 and $162,400 during the three and nine-month periods ended September 30, 2015, respectively.

We did not record any capitalized software development costs during the three and nine-month period ended September 30, 2016. We recorded capitalized software development costs of $12,000 during the three and nine-month periods ended September 30, 2015, respectively.

During the three and nine month period ended September 30, 2016, we determined that an impairment of $0 and $15,500, respectively, existed with certain capitalized software development cost associated with hopTo Work which may not be monetized during the period in which these costs were scheduled to be amortized. These impairment costs are in addition to the amortization costs detailed above.

12. Stockholders’ Equity

2015 Private Placement

On July 24, 2015 we entered into a securities purchase agreement and subscription agreement, pursuant to which we issued and sold for cash an aggregate of 2,105,919 shares of our common stock at a purchase price of $1.21 per share. We derived gross proceeds of $2,550,500 from this placement.

2014 Transaction

During the three-month period ended March 31, 2014, we issued and sold for cash an aggregate 753,333 shares of our common stock at a purchase price of $4.50 per share in the 2014 Transaction that resulted in gross proceeds of $3,390,000 (See Note 5).

The 2014 Transaction was recorded into the financial statements as follows:

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

In conjunction with the 2014 Transaction, we recorded a warrants liability of $1,356,000 as of January 7, 2014 on our Balance Sheet. Certain conditions under the SPA which expired on January 7, 2015 would have required us to issue additional warrants at below-market value exercise price (see Note 5). These conditions did not occur and ended as of January 7, 2015. Therefore, we have reclassified the related liability to equity as of January 7, 2015 on our Balance Sheet.

13. Commitments and Contingencies

On February 1, 2014, we relocated our corporate offices to a larger suite within our landlord’s office complex on South Bascom Avenue in Campbell, California. We are currently leasing 10,659 square feet under a five-year lease that, unless renewed, will expire in October 2018.

On August 11, 2015 we entered into a sublease agreement to sublease the entirety of the South Bascom office space to a third party. The term of the sublease extends from November 1, 2015 through the end of our office lease term for that space in October, 2018. The monthly rent payments due to hopTo under this sublease fully offset the monthly rent payments due to the landlord under hopTo’s lease for that space.

On August 24, 2015, we entered into a new office lease for our corporate headquarters in Campbell, California which is better suited to our California operations and results in significant monthly savings. The term of this lease is from October 1, 2015 through September 30, 2018.

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

Year	Amount
Remainder of 2016	$	28,400
2017		114,300
2018		68,300
	$	211,000

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. There is currently no definitive schedule for such payments. The deferred salaries are recorded as a component of accounts payable and accrued expenses on the Condensed Consolidated Balance Sheet.

During the three and nine-month periods ended September 30, 2016, we reported non-cash expense of $392,900 related to potential liquidated damages resulting from delays in filing registration statements for shares and shares underlying warrants for certain of the private placements that the company closed in prior periods. There were no such expenses recorded in the comparable prior year period. We are in the process of seeking waivers from shareholders for such liquidated damages. The potential liquidated damages is reported as other current liabilities on the condensed consolidated balance sheet and as a component of general and administrative expense on the condensed consolidated statements of operations.

14. Supplemental Disclosure of Cash Flow Information

We disbursed $800 and $1,400 for the payment of interest expense during the nine-month periods ended September 30, 2016 and 2015, respectively.

We disbursed $2,300 and $3,600 for the payment of income taxes during the nine-month periods ended September 30, 2016 and 2015, respectively. Such disbursement was made for the payment of foreign income taxes related to the operation of our Israeli subsidiary, GraphOn Research Labs Ltd.

During the nine-month period ended September 30, 2016, we reduced our warrants liability by $31,600, which was recorded in the Condensed Consolidated Statement of Operations. Such reduction reflected the aggregate fair value adjustments we recorded during such period and in addition to reclassified our 2014 PIPE warrant to equity. No cash was disbursed in conjunction with these items (See Note 5).

15. 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 nine-month periods ended September 30, 2016 and for the three and nine-month periods ended September 30, 2015, 1,412,508 and 33,871,874 shares of common stock equivalents, respectively, were excluded from the computation of dilutive loss per share since their effect would be anti-dilutive.

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 three-month and nine-month periods ended September 30, 2016 and 2015 was as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
Revenue by Country	2016		2015		2016		2015
United States	$	370,800	$	616,800	$	1,158,100	$	1,368,300
Brazil		122,900		246,100		418,100		415,600
Other Countries		404,800		265,900		1,288,200		2,174,800
Total	$	898,500	$	1,128,800	$	2,864,400	$	3,958,700

17. Related Party Transactions

ipCapital Group, Inc.

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

For the three and nine-month periods ended September 30, 2016 and 2015 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 vesting installments occurred on October 11, 2012, October 11, 2013 and October 11, 2014, respectively. 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 performing substantially similar services.

The exercise price of the warrant issued to ipCapital could be reset to below-market value. Consequently, we have concluded that such warrant is not indexed to our common stock and should be recorded as a liability. We recognize the warrants liability over their vesting period, and in accordance with the liability method of accounting, we re-measure the fair value of the accrued warrants at each balance sheet date and recognize the change in fair value as general and administrative compensation expense (See Note 5). We recognized $(5,800) and $2,000 as a component of general and administrative expense during the three-month periods ended September 30, 2016 and 2015, respectively, and $(2,300) and $12,300 during the nine-month periods ended September 30, 2016 and 2015, respectively, resulting from the change in fair value.

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.

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

Update on HopTo Plans

We have been developing our hopTo family of products since 2012 and have released several versions of hopTo Work. We believe that we have provided a unique solution for a problem that has been acknowledged as a significant market opportunity, and we have received acknowledgment from independent industry experts, prospective customers and partners that our solution to the problem is unique and has value.

However, the market for products such as hopTo Work is still in its early stages and despite our best efforts to date with our limited resources we have not been able to gain sufficient market traction to generate meaningful revenue from our hopTo products. We have determined that given our capital constraints, it is unlikely that we will realize meaningful revenue from our hopTo products in the foreseeable future. As we previously disclosed, we sought a business opportunity with Citrix Systems, which would have been material to us. However, to date such opportunity, and other opportunities we were pursuing, have not materialized, and based on our most recent contact with these potential partners, we believe it is not likely that these opportunities will occur in any reasonable time frame. On the other hand, we have also determined, based on discussions to date, that we may be able to extract value from the technology, intellectual property and software that we have built and are currently working to do so at this time. Although there is no certainty as to timing or success of these efforts, and shareholders 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, the sale of patents, and the monetization of the GO-Global business or some combinations of these transactions. (See Note 2 to our Notes to Unaudited Condensed Consolidated Financial Statements).

The following description of our business and business opportunities is expressly qualified by the preceding statement and the going concern disclosure in Note 2 to our Unaudited Condensed Consolidated Financial Statements.

Introduction

We are developers of software productivity products for mobile devices such as tablets and smartphones, and application publishing software solutions. Our newest product line, which is called hopTo, was originally marketed to consumers and is now also marketed to small and medium sized businesses and enterprise level customers under the name hopTo Work, which is now our primary focus in the hopTo product line.

hopTo provides mobile end-users with a productivity workspace for their mobile devices that allows them to manage, share, view, and edit their documents, regardless of where they are stored. We launched the first commercial version of hopTo through Apple’s App Store on November 14, 2013. This version was targeted at Apple’s tablet devices, the iPad and the iPad Mini. From the initial launch through 2015, we made hopTo available for free.

On November 10, 2014, we launched the first version of hopTo Work, a version of the hopTo workspace made available to businesses for a fee. hopTo Work expands upon the core capabilities of hopTo by providing mobile access to applications that businesses rely on for their daily operations.

During 2015, we announced several major enhancements to hopTo Work, including the introduction of the MAX (Mobile App eXperience) feature set, which allows customers to instantly transform their legacy applications to become touch friendly on modern mobile devices. We also worked to integrate our hopTo Work product with certain software products offered by Citrix Systems and on November 12, 2015 we launched hopTo Work for Citrix through Apple’s App Store.

On March 30, 2016, we released hopTo MAX for GO-Global, a new product which delivers the hopTo MAX feature set to customers of our GO-Global for Windows product. This new product included clients available for both iOS and Android devices.

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.

Corporate Background

We are a Delaware corporation, founded in May 1996. Our headquarters are located at 51 East Campbell Avenue, Suite 128, Campbell, California, 95008 and our phone number is 1-800-472-7466, and our phone number for local and international calls is 408-688-2674. We also have an office in Concord, New Hampshire. Additionally, we have remote employees located in various states, as well as internationally in the United Kingdom and Israel. Our corporate Internet Website is http://www.hopto.com. The information on our website is not part of this quarterly report.

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

The hopTo Opportunity

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

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

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

The hopTo Work Product

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

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

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

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

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

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

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

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

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

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

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

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

hopTo Target Markets

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

The hopTo Consumer Product

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

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

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

Our Intellectual Property

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

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

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

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

As a result of ipCapital’s work under the engagement agreement, as amended, as of November 10, 2016, 173 new patent applications have been filed. Of these 173 applications, 50 patents have been granted by the USPTO. We have also received notice from the USPTO that 2 additional patent applications have been allowed and will ultimately issue as US patents in the next 60-90 days. We do not expect to file more applications in 2016.

ipCapital Licensing Company I, LLC

In February 2013, we entered into an IP Brokerage agreement with ipCapital Licensing Company I, LLC (“ipCLC”). At the time that we entered into this agreement John Cronin was a partner at ipCLC. Mr. Cronin is no longer affiliated with ipCLC. Pursuant to the 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.

Our GO-Global Software Products

Our GO-Global product offerings, which currently are our only revenue source, can be categorized into product families as follows:

●

GO-Global for Windows: Allows access to Windows-based applications from remote locations and a variety of connections, including the Internet and dial-up connections. The Windows applications run on a central computer server along with GO-Global Windows Host software. This allows the applications to be accessed remotely via GO-Global Client software, or a Web browser, over many types of data connections, regardless of the bandwidth or operating system. Web-enabling is achieved without modifying the underlying application’s code or requiring costly add-ons.

	●	GO-Global for UNIX: Allows access to UNIX and Linux-based applications from remote locations and a variety of connections, including the Internet and dial-up connections. The UNIX/Linux applications run on a central computer server along with the GO-Global for UNIX Host software. This allows the applications to be accessed and run remotely via GO-Global Client software or a Web browser without having to modify the application’s code or requiring costly add-ons.

	●	GO-Global Client: We offer a range of GO-Global Client software that allows remote application access from a wide variety of local, remote and mobile platforms, including Windows, Linux, UNIX, Apple OS X and iOS, and Google Android. We plan to continue to develop GO-Global Client software for new portable and mobile devices.

We intend to continue to operate Go-Global, as it remains a viable stand-alone business.

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 2015 10-K Report and Note 3 to our Notes to Unaudited Condensed Consolidated Financial Statements.

Results of Operations for the Three and Nine-Month Periods Ended September 30, 2016 and 2015

The following operating results should be read in conjunction with our critical accounting policies. See Note 3 to our Notes to Unaudited and Condensed Consolidated Financial Statements.

Revenue

Revenue for the three-month periods ended September 30, 2016 and 2015 was:

					2016 Over (Under) 2015
Revenue	2016		2015		Dollars			Percent
Software Licenses
Windows	$	222,500	$	373,500	$	(151,000	)		-40.4	%
UNIX/Linux		64,000		86,700		(22,700	)		-26.2	%
		286,500		460,200		(173,700	)		-37.7	%
Software Service Fees
Windows		444,700		484,000		(39,300	)		-8.1	%
UNIX/Linux		149,400		175,000		(25,600	)		-14.6	%
		594,100		659,000		(64,900	)		-9.8	%
Other		17,900		9,600		8,300			86.5	%
Total Revenue	$	898,500	$	1,128,800	$	(230,300	)		-20.4	%

Revenue for the nine-month periods ended September 30, 2016 and 2015 was:

					2016 Over (Under) 2015
Revenue	2016		2015		Dollars			Percent
Software Licenses
Windows	$	774,200	$	1,429,800	$	(665,600	)		-45.9	%
UNIX/Linux		209,200		500,800		(291,600	)		-58.2	%
		983,400		1,930,600		(947,200	)		-49.1	%
Software Service Fees
Windows		1,367,200		1,452,000		(84,800	)		-5.8	%
UNIX/Linux		473,700		542,200		(68,500	)		-12.6	%
		1,840,900		1,994,200		(153,300	)		-7.7	%
Other		40,100		33,900		6,200			18.3	%
Total Revenue	$	2,864,400	$	3,958,700	$	(1,094,300	)		-27.6	%

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

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

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

Software Licenses

Software licenses revenue from our Windows products decreased for the three and nine-month periods ended September 30, 2016, as compared with the same periods of the prior year primarily due to lower license purchases from certain of our OEM partners during the three and nine-month period September 30, 2016. Certain of these OEM partners had placed unique large orders during same periods in the prior year.

Software licenses revenue from our UNIX/Linux products decreased during the three and nine-month periods ended September 30, 2016, as compared with the same periods of the prior year, primarily due to lower revenue from certain of our U.S. government customers which placed unique large orders during the prior year period and lower aggregate revenue from our resellers and end users, particularly our European telecommunications customers.

We expect aggregate GO-Global software license revenue in 2016 to be lower than 2015 levels due to lower aggregate revenue from our stocking resellers and our European telecommunications customers. At the same time, we will seek to improve cash flow from the GO-Global business through cost control and other measures.

Software Service Fees

The decrease in software service fees revenue attributable to our Windows products during the three and nine-month periods ended September 30, 2016, as compared to the same period of the prior year, was primarily due to the timing of customer renewals of maintenance contacts.

The decrease in service fees revenue attributable to our UNIX products for the three and nine-month periods ended September 30, 2016, as compared with the same period 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 2016 will be modestly lower than those for 2015 and will not decrease to the same extent as GO-Global software license revenue.

Other

The increase in other revenue for the three and nine-month periods ended September 30, 2016, as compared with the same period of the prior year was primarily due to increase in professional services and private labeling fees.

Costs of Revenue

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

Under U.S. Generally Accepted Accounting Principles, development costs for new product development, after technological feasibility is established, are recorded as “capitalized software” on our Condensed Consolidated Balance Sheet. Such capitalized costs are subsequently amortized as cost of revenue (software product costs) over the shorter of three years or the remaining estimated life of the product. During the three-month and nine-months periods ended September 30, 2016 and 2015, we capitalized $0 and $12,000 of software development costs, respectively. All of such capitalized costs were incurred in the development of hopTo Work.

Amortization of capitalized software development costs was $200 and $54,400 during the three-month periods ended September 30, 2016 and 2015, respectively, and $5,300 and $162,400 during the nine-month periods ended September 30, 2016 and 2015, respectively.

Cost of revenue was 0.9% and 9.6% of total revenue for the three months ended September 30, 2016 and 2015, respectively, and 4.5% and 8.1% of total revenue for the nine months ended September 30, 2016 and 2015, respectively.

Cost of revenue for the three-month periods ended September 30, 2016 and 2015 was:

					2016 Over (Under) 2015
	2016		2015		Dollars			Percent
Software service costs	$	2,100	$	43,900	$	(41,800	)		-95.2	%
Software product costs		6,200		65,000		(58,800	)		-90.5	%
	$	8,300	$	108,900	$	(100,600	)		-92.4	%

Cost of revenue for the nine-month periods ended September 30, 2016 and 2015 was:

					2016 Over (Under) 2015
	2016		2015		Dollars			Percent
Software service costs	$	78,100	$	128,500	$	(50,400	)		-39.2	%
Software product costs		51,400		190,700		(139,300	)		-73.0	%
	$	129,500	$	319,200	$	(189,700	)		-59.4	%

The decrease in software service costs for the three and nine-month period ended September 30, 2016, as compared with the same periods of the prior year was primarily due to lower customer support costs associated with GoGlobal. Upon release of the commercial versions of hopTo and hopTo Work, we began charging costs associated with supporting the products to costs of revenue. We expect software service costs for 2016 to be lower than those for 2015 as we have been able to reduce headcount costs in this area due to a lower level of effort required.

The decreases in software product costs for the three-month and nine-month periods ended September 30, 2016, as compared with the same periods of the prior year, were primarily due to the impairment and resultant write-off of certain capitalized software development costs in Q4 2015 and Q2 2016.

We expect that software costs of revenue for 2016 will be lower than 2015 levels, due to these items.

Selling and Marketing Expenses

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

Selling and marketing expenses for the three-month periods ended September 30, 2016 decreased by $325,900, or 77.6%, to $93,900, from $419,800 for the same period of 2015, which represented approximately 10.5% and 37.2% of revenue during these periods, respectively. Selling and marketing expenses for the nine-month period ended September 30, 2016 decreased by $708,900 or 51.6% to $664,600 from $1,373,500 for the same period in 2015, which represented approximately 23.2% and 34.7% of revenue during those periods, respectively.

The decrease in selling and marketing expenses during the three-month and nine-month periods ended September 30, 2016, as compared with the same periods of the prior year, was primarily due to a combination of lower headcount and a decrease in advertising and promotional costs associated with hopTo Work as we have focused primarily on our joint marketing efforts with Citrix Systems. As noted above, we consider it unlikely that we will make progress on our Citrix Systems efforts in any reasonable time frame.

We expect to essentially eliminate our sales and marketing efforts in 2016 for hopTo Work, and we expect to further reduce our sales and marketing efforts in 2016 for GO-Global releases to a level that is consistent with our financial resources; accordingly, we expect 2016 sales and marketing expenses to be lower than 2015 levels.

General and Administrative Expenses

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

General and administrative expenses increased by $48,300, or 6.2%, to $821,600, for the three-month period ended September 30, 2016, from $773,300 for the same period of 2015, which represented approximately 91.4% and 68.5% of revenue during these periods, respectively.

General and administrative expenses decreased by $337,800, or 13.8%, to $2,114,600 for the nine-month period ended September 30, 2016, from $2,452,400 for the same period of 2015, which represented approximately 73.8% and 61.9% of revenue during these periods, respectively.

The changes in general and administrative expense in the three-month and nine-month period ended September 30, 2016, as compared with the same periods of the prior year, were due to an accrual for potential liquidated damages resulting from delays in filing registration statements for shares and shares underlying warrants for certain of the private placements that the Company closed in prior periods. There were no such expenses recorded in the comparable prior year periods. These higher expenses were partially offset by a combination of decreased rent expense associated with lower net operating leases, decreased legal expenses associated with activity related to our patents, lower stock compensation expense associated with the decrease of the stock price, and other lower costs associated with investor relations, and decreased outside services expense. Also, 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.

In 2016, we intend to continue cost controls and to benefit from lower rent expense associated with our new headquarters location. We also intend to further reduce our general and administrative headcount and use of legal service to a level consistent with our financial resources. We therefore expect that our 2016 general and administrative costs will be lower than those for 2015.

Research and Development Expenses

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

Research and development expenses decreased by $546,900, or 52.7%, to $491,500, for the three-month period ended September 30, 2016, from $1,038,400 for the same period of 2015, which represented approximately 54.7% and 92.% of revenue for these periods, respectively.

Research and development expenses decreased by $1,443,600, or 43.7%, to $1,860,900, for the nine-month period ended September 30, 2016, from $3,304,500 which represented approximately 65.0% and 83.5% of revenue for these periods, respectively.

The decrease in research and development expense is primarily due to lower employee costs associated with lower headcount, lower payments to contract programmers, and lower operating rent expense.

In 2016, we expect to maintain a level of research and development resource lower than the second half of 2015 and continue to benefit from the lower rent expense associated with our new headquarters location. We therefore expect 2016 research and development expenses, net of capitalized software developments costs, to be lower than 2015 levels.

Other Income (Expense) - Change in Fair Value of Warrants Liability

During the three-month periods and nine-months period ended September 30, 2016 respectively we reported non-cash income related to the change in fair value of our Warrants Liability of $54,400 and 29,300. Respectively, during the same periods of the prior year, we reported non-cash income and loss to the change in fair value of our Warrants Liability of $(2,400) and $126,900. Such changes 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 5 to the Notes to Unaudited Condensed Consolidated Financial Statements.

Net Loss

Based on the foregoing, we reported net losses of $462,000 and $1,214,500 for the three-month periods ended September 30, 2016, and 2015 respectively. Additionally, we reported net losses of $1,874,500 and $3,367,400 for the nine-month periods ended September 30, 2016 and 2015, respectively.

Liquidity and Capital Resources

Our reported net loss for the nine-month period ended September 30, 2016 of $1,874,500 included four significant non-cash items: depreciation and amortization of $76,200 which was primarily related to amortization of capitalized software development costs; impairment of capitalized software development cost of $15,500; stock-based compensation expense of $303,400; and a gain in the change in value of our warrants liability of $31,500.

We sold a combination of equipment and furniture with a net book value of $20,100 for $23,300 for the nine-month period ended September 30, 2016.

See the Update on HopTo Plans at the beginning of this section for a discussion of our plans.

We have incurred significant net losses since our inception. For the three and nine-months ended September 30, 2016, the Company incurred losses from operations of $462,000 and $1,874,500. At September 30, 2016, the Company had an accumulated deficit of $82,078,500 and a working capital deficit of $2,440,700. Due to our inability to date to generate meaningful revenue from our hopTo Work business and our most recent estimation that revenue from this product is unlikely in any reasonable time frame, our cash resources will not be sufficient to fund our business for the next 12 months. The Company’s ability to continue as a going concern is dependent on our ability to continue to generate revenue from our legacy GO-Global business and to raise additional capital through the issuance of new equity, debt financing, or from the sale of certain assets to meet short and long-term operating requirements.

These factors raise substantial doubt about our ability to continue as a going concern. (See Note 2 to our Notes to Unaudited Condensed Consolidated Financial Statements).

In order to maintain operations, we previously implemented significant expense reductions, including a limited number of employee layoffs, and have decided to implement further cost cuts and employment reductions. 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.

We have worked extensively to explore additional sources of capital including the issuance of new shares, securing debt financing, and the sale of assets including certain of our software products and patents. Although this process is ongoing and we are in active discussions with multiple parties, there is no guarantee that they will result in transactions that are sufficient to provide the Company with the required liquidity to remove the substantial doubt as to our ability to continue as a going concern. We are also in discussions with some parties about the possibility of other strategic transactions although there is no guarantee that these discussions will result in an actual transaction.

We have streamlined our GO-Global operations in order to align its cost structure with its sales. We also pursue and evaluate strategic partnerships and other opportunities. Should business investment or combination opportunities present themselves to us, and should such opportunities appear to make financial sense and add value for our shareholders, we will consider those opportunities.

For the remainder of 2016, we expect to prioritize the investment of our resources into the maintenance of our existing products and the pursuit of the potential strategic opportunities noted at the beginning of this section. Even with these limited investments, we expect our cash outflow from operations to continue.

Cash

As of September 30, 2016, our cash balance was $364,100, as compared with $1,777,300 as of December 31, 2015, a decrease of $1,413,200, or 79.5%. The decrease primarily resulted from the cash we used in our operations.

Accounts Receivable, net

At September 30, 2016 and December 31, 2015, we reported accounts receivable, net, of $150,500 and $434,900, respectively. Such amounts were reported net of the allowance for doubtful accounts, which allowances totaled $5,300 and $139,200 at September 30, 2016 and December 31, 2015, respectively. The decrease in accounts receivable, net, was mainly due to lower sales during the three-month period ended September 30, 2016, as compared with the three-month 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.

Working Capital

As of September 30, 2016, we had current assets of $612,900 and current liabilities of $3,053,600, which netted to working capital deficit of $2,440,700. Included in current liabilities was the current portion of deferred revenue of $1,705,100.

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 September 30, 2016.

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 September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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, 2015, which was filed with the Securities and Exchange Commission on March 30, 2016, as supplemented by Item 1A of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016, which was filed with the Securities and Exchange Commission on August 15, 2016. We are not aware of any material changes to those risk factors.

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

We did not sell any unregistered securities during the quarter ended September 30, 2016.

ITEM 3. Defaults Upon Senior Securities

Not applicable

ITEM 4. Mine Safety Disclosures

Not applicable

ITEM 5. Other Information

Not applicable.

ITEM 6. Exhibits

Exhibit Number		Exhibit Description

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished, not filed)

32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished, not filed)

101*		The following financial information from hopTo Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015, (ii) Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2016 and 2015, (iii) Unaudited Condensed Consolidated Statements of Stockholders’ Deficit for the Nine Months ended September 30, 2016 and 2015, (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2016 and 2015, (v) Notes to Unaudited Condensed Consolidated Financial Statements.

* Furnished, not filed

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:	November 21, 2016	Date:	November 21, 2016

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