hopTo Inc. - Quarter Report: 2021 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, 2021
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.) |
189 North Main Street, Suite 102
Concord, NH 03301
(Address of principal executive offices)
Registrant’s telephone number:
(800) 472-7466
(408) 688-2674
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 15, 2021, there were issued and outstanding shares of the registrant’s common stock, par value $0.0001.
Table of Contents
| PAGE | ||
| PART I. | FINANCIAL INFORMATION | |
| Item 1. | Financial Statements | 3 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 20 |
| Item 4. | Controls and Procedures | 20 |
| PART II. | OTHER INFORMATION | |
| Item 1. | Legal Proceedings | 20 |
| Item 1A. | Risk Factors | 20 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 20 |
| Item 3. | Defaults Upon Senior Securities | 20 |
| Item 4. | Mine Safety Disclosures | 20 |
| Item 5. | Other Information | 21 |
| Item 6. | Exhibits | 21 |
| Signatures | 22 |
| 2 |
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
hopTo Inc.
Consolidated Balance Sheets
(Unaudited)
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 4,560,000 | $ | 4,375,300 | ||||
| Marketable securities | 463,900 | |||||||
| Accounts receivable, net | 456,900 | 417,300 | ||||||
| Prepaid expenses and other current assets | 47,300 | 48,500 | ||||||
| Total current assets | 5,528,100 | 4,841,100 | ||||||
| Property and equipment, net | 2,600 | - | ||||||
| Other assets | 17,800 | 17,800 | ||||||
| Total assets | $ | 5,548,500 | $ | 4,858,900 | ||||
| Liabilities and Stockholders Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 218,300 | $ | 251,000 | ||||
| Accrued expenses | 59,900 | 82,000 | ||||||
| Accrued wages | 135,900 | 141,600 | ||||||
| Deferred revenue | 989,700 | 1,084,900 | ||||||
| Total current liabilities | 1,403,800 | 1,559,500 | ||||||
| Long-term liabilities | ||||||||
| Deferred revenue | 339,000 | 383,000 | ||||||
| Total liabilities | 1,742,800 | 1,942,500 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock, $ par value, shares authorized, shares issued and outstanding as of September 30, 2021 or December 31, 2020 | - | - | ||||||
| Common stock, $ par value, shares authorized, shares issued and outstanding for both periods ending September 30, 2021 and December 31, 2020 | 1,900 | 1,900 | ||||||
| Additional paid-in capital | 82,155,200 | 82,155,200 | ||||||
| Accumulated deficit | (78,351,400 | ) | (79,240,700 | ) | ||||
| Total stockholders’ equity | 3,805,700 | 2,916,400 | ||||||
| Total liabilities and stockholders’ equity | $ | 5,548,500 | $ | 4,858,900 | ||||
See accompanying notes to unaudited consolidated financial statements
| 3 |
hopTo Inc.
Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Revenues: | ||||||||||||||||
| Software licenses | $ | 167,600 | $ | 233,400 | $ | 541,800 | $ | 685,200 | ||||||||
| Software service fees | 730,100 | 639,600 | 2,072,100 | 1,825,500 | ||||||||||||
| Other | 21,700 | 21,600 | 64,800 | 294,600 | ||||||||||||
| Total revenue | 919,400 | 894,600 | 2,678,700 | 2,805,300 | ||||||||||||
| Cost of revenue: | ||||||||||||||||
| Software service costs | 13,500 | 13,200 | 40,500 | 39,500 | ||||||||||||
| Software product costs | 22,600 | 29,300 | 85,300 | 78,500 | ||||||||||||
| Total cost of revenue | 36,100 | 42,500 | 125,800 | 118,000 | ||||||||||||
| Gross profit | 883,300 | 852,100 | 2,552,900 | 2,687,300 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and marketing | 152,000 | 140,300 | 448,100 | 396,200 | ||||||||||||
| General and administrative | 162,400 | 196,100 | 576,800 | 664,600 | ||||||||||||
| Research and development | 354,300 | 355,700 | 1,081,900 | 1,076,600 | ||||||||||||
| Total operating expenses | 668,700 | 692,100 | 2,106,800 | 2,137,400 | ||||||||||||
| Income from operations | 214,600 | 160,000 | 446,100 | 549,900 | ||||||||||||
| Other income: | ||||||||||||||||
| Unrealized gain in marketable securities | 146,800 | - | 173,400 | - | ||||||||||||
| Other income | - | - | 269,800 | 46,900 | ||||||||||||
| Income before provision for income taxes | 361,400 | 160,000 | 889,300 | 596,800 | ||||||||||||
| Provision for income taxes | - | 2,500 | - | 7,500 | ||||||||||||
| Net income | $ | 361,400 | $ | 157,500 | $ | 889,300 | $ | 589,300 | ||||||||
| Net income per share, basic | $ | 0.02 | $ | 0.01 | $ | 0.05 | $ | 0.05 | ||||||||
| Net income per share, diluted | $ | 0.02 | $ | 0.01 | $ | 0.05 | $ | 0.05 | ||||||||
| Weighted average number of common shares outstanding | ||||||||||||||||
| Basic | 18,850,675 | 15,242,128 | 18,850,675 | 12,216,478 | ||||||||||||
| Diluted | 19,092,182 | 15,713,640 | 19,092,981 | 12,687,990 | ||||||||||||
See accompanying notes to unaudited consolidated financial statements
| 4 |
hopTo Inc.
Consolidated Statements of Stockholders’ Equity
For the Nine Months Ended September 30, 2021 and 2020
(Unaudited)
| Common Stock | Additional Paid-In | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance at December 31, 2019 | 9,834,866 | $ | 1,000 | $ | 79,523,500 | $ | (79,934,400 | ) | $ | (409,900 | ) | |||||||||
| Shares issued for settlement of accrued expenses | 120,000 | - | 39,600 | - | 39,600 | |||||||||||||||
| Contributed services | - | - | 56,200 | - | 56,200 | |||||||||||||||
| Net income | - | - | - | 109,100 | 109,100 | |||||||||||||||
| Balance at March 31, 2020 (unaudited) | 9,954,866 | $ | 1,000 | $ | 79,619,300 | $ | (79,825,300 | ) | $ | (205,000 | ) | |||||||||
| Proceeds from rights offering | 1,600,638 | 100 | 480,000 | - | 480,100 | |||||||||||||||
| Issuance cost for rights offering | - | - | (119,400 | ) | - | (119,400 | ) | |||||||||||||
| Contributed services | - | - | 56,200 | - | 56,200 | |||||||||||||||
| Net income | - | - | - | 322,700 | 322,700 | |||||||||||||||
| Balance at June 30, 2020 (unaudited) | 11,555,504 | $ | 1,100 | $ | 80,036,100 | $ | (79,502,600 | ) | $ | 534,600 | ||||||||||
| Proceeds from rights offering | 7,066,030 | 800 | 2,119,100 | - | 2,119,900 | |||||||||||||||
| Net income | - | - | - | 157,500 | 157,500 | |||||||||||||||
| Balance at September 30, 2020 | 18,621,534 | $ | 1,900 | $ | 82,155,200 | $ | (79,345,100 | ) | $ | 2,812,000 | ||||||||||
| Balance at December 31, 2020 | 18,850,675 | $ | 1,900 | $ | 82,155,200 | $ | (79,240,700 | ) | $ | 2,916,400 | ||||||||||
| Net income | - | - | - | 379,200 | 379,200 | |||||||||||||||
| Balance at March 31, 2021 (unaudited) | 18,850,675 | $ | 1,900 | $ | 82,155,200 | $ | (78,861,500 | ) | $ | 3,295,600 | ||||||||||
| Net income | - | - | - | 148,700 | 148,700 | |||||||||||||||
| Balance at June 30, 2021 (unaudited) | 18,850,675 | $ | 1,900 | $ | 82,155,200 | $ | (78,712,800 | ) | $ | 3,444,300 | ||||||||||
| Net income | - | - | - | 361,400 | 361,400 | |||||||||||||||
| Balance at September 30, 2021 (unaudited) | 18,850,675 | $ | 1,900 | $ | 82,155,200 | $ | (78,351,400 | ) | $ | 3,805,700 | ||||||||||
See accompanying notes to unaudited consolidated financial statements
| 5 |
hopTo Inc.
Consolidated Statements of Cash Flows
| For the Nine Months Ended | ||||||||
| September 30, | September 30, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 889,300 | $ | 589,300 | ||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation | 800 | - | ||||||
| Contributed services | - | 112,400 | ||||||
| Changes in allowance for doubtful accounts | 5,400 | 1,600 | ||||||
| Gain on sale of patents | (269,800 | ) | - | |||||
| Unrealized gain from marketable securities | (173,400 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (45,000 | ) | (126,400 | ) | ||||
| Prepaid expenses and other current assets | 1,200 | 11,400 | ||||||
| Accounts payable and accrued expenses | (60,500 | ) | (7,800 | ) | ||||
| Deferred revenue | (139,200 | ) | (354,500 | ) | ||||
| Net cash provided by operating activities | 208,800 | 226,000 | ||||||
| Cash flows from investing activities | ||||||||
| Purchase of marketable securities | (290,500 | ) | - | |||||
| Proceeds from sale of patents | 269,800 | - | ||||||
| Purchase of property and equipment | (3,400 | ) | - | |||||
| Net cash used by investing activities | (24,100 | ) | - | |||||
| Cash flows from financing activities | ||||||||
| Proceeds from rights offering | - | 2,599,800 | ||||||
| Issuance cost for rights offering | - | (119,400 | ) | |||||
| Net cash provided by financing activities | - | 2,480,400 | ||||||
| Net change in cash | 184,700 | 2,706,400 | ||||||
| Cash, beginning of the period | 4,375,300 | 1,541,900 | ||||||
| Cash, end of the period | $ | 4,560,000 | $ | 4,248,300 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Income taxes paid | $ | $ | 7,500 | |||||
| Supplemental disclosure of non-cash investing and financing information: | ||||||||
| Non-cash financing activities: shares issued for settlement of accrued expenses | $ | $ | 39,600 | |||||
See accompanying notes to unaudited consolidated financial statements
| 6 |
hopTo Inc.
Notes to Unaudited Consolidated Financial Statements
1. Organization
hopTo Inc., a Delaware corporation, through its wholly-owned subsidiary GraphOn Corporation (collectively, “we”, “us,” “our” or the “Company”) are developers of application publishing software which includes application virtualization software and cloud computing software for multiple computer operating systems including Windows, UNIX and several Linux-based variants.
The Company sells a family of products under the brand name GO-Global, which is a software application publishing business and is the Company’s sole revenue source at this time. GO-Global is an application access solution for use and/or resale by independent software vendors, hosting service providers, corporate enterprises, governmental and educational institutions, and others, who wish to take advantage of cross-platform remote access and Web-enabled access to their existing software applications, as well as those who are deploying secure, private cloud environments.
2. Significant Accounting Policies
Basis of Presentation
The unaudited consolidated financial statements include the accounts of hopTo Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated upon consolidation. The unaudited 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 consolidated financial statements do not include all information and footnote disclosures required in annual financial statements.
The unaudited 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, 2020 which was filed with the SEC on March 31, 2021 (“2020 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, 2021 or any future period.
Certain prior year information has been reclassified to conform to current year presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Amounts could materially change in the future. These significant estimates include the valuation of stock-based compensation expense, the allowance for doubtful accounts, depreciation of long-lived assets, and accruals of liabilities.
| 7 |
Revenue Recognition
The Company markets and licenses its products indirectly through channel distributors, value-added resellers, independent software vendors (“ISVs”), hosting service providers, corporate enterprises, governmental and educational institutions and others. Our product licenses are perpetual. We also separately sell intellectual property licenses, maintenance contracts, which are comprised of license updates and customer service access, as well as other products and services.
The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers.” Revenues under ASC 606 are recognized when the promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or services.
Product Sales
All of our licenses are delivered to the customer electronically. The Company sends the license key to the customer to download the related software from Company portal. We recognize revenue upon delivery of these licenses.
Services Revenue
The Company has maintenance contracts that entitle customers to support and certain updates to the product. Revenue from maintenance contracts is recognized ratably over the related contract period, which generally ranges from one to five years.
Subscription Revenue
The Company sells subscription licenses that provide the customer with the right to use the software, maintenance and support and certain updates to the product. Subscription licenses are delivered electronically by either the Company’s cloud licensing server or by sending a term license key to the customer to download the related software from the Company portal. Revenue from subscription licenses is recognized ratably over the related contract period, which generally ranges from one month to one year.
The Company’s product sales by geographic area are presented in Note 5.
Cash and Cash Equivalents
The Company considers all highly liquid holdings with maturities of three months or less at the time of purchase to be cash equivalents. The Company had cash equivalents of $463,900 primarily in marketable securities as of September 30, 2021 (unaudited) and had no such cash equivalents at December 31, 2020.
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. As of September 30, 2021 and December 31, 2020, the allowance for doubtful accounts totaled $11,300 and $5,900, respectively.
| 8 |
Concentration of Credit Risk
For the three months ended September 30, 2021, the Company had three resellers comprising 24.5%,14.6%, and 13.5% of total sales. For the same periods ended September 30, 2020, the Company had three resellers comprising 15.9%, 13.6%, and 10.0% of total sales, and one direct customer representing 15.4% of total sales,
For the nine months ended September 30, 2021, the Company had three resellers comprising 13.5%, 12.1%, and 10.2% of total sales. For the same periods ended September 30, 2020, the Company had two resellers comprising 11.9% and 10.3% of total sales
As of September 30, 2021 and December 31, 2020, the Company has four resellers comprising 27.4%,18.2%, 12.8%, and 11.7%, and two resellers comprising 25.7% and 18.9%, respectively, of net accounts receivable.
For the purposes of this description, “sales” refers to the dollar value of orders received from these customers and partners in the period indicated. The sales values do not necessarily equal recognized revenue for these periods due to our revenue recognition policies which require deferral of revenue associated with prepaid software service fees. The loss of one of these resellers would not have a material impact as the Company could take over the end customer relationship.
In accordance with ASC 260, “Earnings Per Share,” the basic income per common share is computed by dividing the net income available to common stockholders by the weighted average common shares outstanding during the period. Diluted income per share reflects per share amounts that would have resulted if diluted potential common stock had been converted to common stock. Dilutive common share equivalents as of September 30, 2021, representing of outstanding in-the-money warrants, were included in the computation of diluted net income per share using the Treasury Stock Method. During the three and nine months ended September 30, 2021 and 2020, the Company had total common stock equivalents of and , respectively, which were excluded from the computation of net income per share because they are anti-dilutive.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses. The carrying amount of these financial instruments approximates fair value due to the nature of the accounts and marketable securities.
| 9 |
Recently Adopted Accounting Pronouncements
The FASB issues ASUs to amend the authoritative literature in ASC. There have been several ASUs to date, including those above, that amend the original text of ASC. Management believes that those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to us or (iv) are not expected to have a significant impact our financial statements.
3. Property and Equipment
Property and equipment consisted of the following.
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| Equipment | $ | 157,700 | $ | 154,300 | ||||
| Furniture and fixtures | 1,600 | 1,600 | ||||||
| 159,300 | 155,900 | |||||||
| Less: accumulated depreciation | (156,700 | ) | (155,900 | ) | ||||
| $ | 2,600 | $ | ||||||
Depreciation expense amounted to $800 and $, respectively for the nine months ended September 30, 2021 and 2020.
| 10 |
4. Stockholders’ Equity
Stock-Based Compensation Plans
| Weighted- | ||||||||||||
| Average | ||||||||||||
| Weighted- | Remaining | |||||||||||
| Average | Contractual | |||||||||||
| Exercise | Life | |||||||||||
| Options | Price | (Years) | ||||||||||
| Outstanding at December 31, 2020 | 93,076 | $ | 3.03 | 0.74 | ||||||||
| Granted | ||||||||||||
| Forfeited/cancelled | (27,859 | ) | ||||||||||
| Outstanding at September 30, 2021 | 65,217 | $ | 3.29 | 0.16 | ||||||||
| Vested and expected to vest at September 30, 2021 | 65,217 | $ | 3.29 | 0.16 | ||||||||
| Exercisable at September 30, 2021 | 65,217 | $ | 3.29 | 0.16 | ||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Weighted- | Weighted- | |||||||||||||||||||||
| Range of | Average | Average | Average | |||||||||||||||||||
| Exercise | Number | Remaining | Exercise | Number | Exercise | |||||||||||||||||
| Price | of Shares | Life (Years) | Price | of Shares | Price | |||||||||||||||||
| $ | - | 63,684 | $ | 2.71 | 63,684 | $ | 2.71 | |||||||||||||||
| - | 1,533 | 6.68 | 1,533 | 6.68 | ||||||||||||||||||
| 65,217 | 65,217 | |||||||||||||||||||||
| 11 |
Shares of Common Stock Issued
During the three and nine-month periods ending September 30, 2021, the Company did issue any shares of common stock. During the three-month period ending September 30,2020, the Company issued a total of shares of common stock. During the nine -month period ending September 30, 2020, the Company did issued a total of shares of common stock and shares of common stock were to two former members of our board of directors. The issuance of the shares of common stock settles a total of $39,600 of accrued expenses that was included in the Company’s balance sheet.
Warrants
As of September 30, 2021 and December 31, 2020, the Company had 248,216 warrants outstanding. The warrants outstanding at September 30, 2021 are all exercisable at $0.01 and have an expiration date of May 20, 2023.
5. Sales by Geographical Location
Revenue by country for the three and nine months ended September 30, 2021 and 2020 was as follows.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue by Country | ||||||||||||||||
| United States | $ | 379,300 | $ | 261,000 | $ | 1,091,500 | $ | 875,500 | ||||||||
| Brazil | 174,600 | 358,100 | 600,200 | 951,600 | ||||||||||||
| Japan | 115,800 | 104,900 | 298,700 | 270,800 | ||||||||||||
| Other Countries | 249,700 | 170,600 | 688,300 | 707,400 | ||||||||||||
| Total | $ | 919,400 | $ | 894,600 | 2,678,700 | 2,805,300 | ||||||||||
6. Commitments and Contingencies
Profit Sharing Plans
The Company has adopted a 401(k) plan to provide retirement benefits for employees under which the Company makes discretionary matching contributions During the three months ended September 30, 2021 and 2020, the Company contributed a total of $600 and $2,200, respectively. During the nine months ended September 30, 2021 and 2020, the Company contributed a total of $18,000 and $17,800, respectively.
Contingencies
During the ordinary course of business, the Company is subject to various potential claims and litigation. Management is not aware of any outstanding litigation which would have a significant impact on the Company’s financial statements.
| 12 |
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
This report includes, in addition to historical information, “forward-looking statements”. All statements other than statements of historical fact we make in this report are forward-looking statements. In particular, the statements regarding industry prospects and our expectations regarding future results of operations or financial position (including those described in this Management’s Discussion and Analysis of Financial Condition and Results of Operations) are forward-looking statements. Such statements are based on management’s current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ significantly from those described in the forward-looking statements. Factors that may cause such a difference include the following:
| ● | the success of products depends on a number of factors including market acceptance and our ability to manage the risks associated with product introduction; | |
| ● | local, regional, national and international economic conditions and events, and the impact they may have on us and our customers; | |
| ● | our revenue could be adversely impacted if any of our significant customers reduces its order levels or fails to order during a reporting period; customer demand is based on many factors out of our control; | |
| ● | as a result of the new revenue recognition standards, if any significant end user customer or reseller substantially changes its order level, or fails to order during the reporting period, our software licenses revenue could be materially impacted; and | |
| ● | other factors, including, but not limited to, those set forth under Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 which was filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2021, and in other documents we have filed with the SEC. |
Statements included in this report are based upon information known to us as of the date that this report is filed with the SEC, and we assume no obligation to update or alter our forward-looking statements made in this report, whether as a result of new information, future events or otherwise, except as otherwise required by applicable federal securities laws.
Introduction
hopTo, Inc., through its wholly owned subsidiary GraphOn Corporation (collectively, “we”, “us,” “our” or the “Company”), is a developer of application publishing software which includes application virtualization software and cloud computing software for multiple computer operating systems including Windows, UNIX and several Linux-based variants. Our application publishing software solutions are sold under the brand name GO-Global, which is our sole revenue source. GO-Global is an application access solution for use by independent software vendors (“ISVs”), hosting service providers, corporate enterprises, governmental and educational institutions, and others who wish to take advantage of cross-platform remote access and Web-enabled access to their existing software applications, as well as those who are deploying secure, private cloud environments.
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 when we make the estimates. Actual results may differ from these estimates. For a summary of our critical accounting policies, please refer to our 2020 Form 10-K Report Management’s Discussion ad Analysis of Operations and Note 2 to our unaudited consolidated financial Statements included under Item 1 – Financial Statements in this Form 10-Q.
| 13 |
Results of Operations for the Three-Month Periods Ended September 30, 2021 and 2020
The following are the results of our operations for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.
| For the Three Months Ended | ||||||||||||
| September 30, | September 30, | |||||||||||
| 2021 | 2020 | $ Change | ||||||||||
| (Unaudited) | (Unaudited) | |||||||||||
| Revenues | $ | 919,400 | $ | 894,600 | $ | 24,800 | ||||||
| Cost of revenues | 36,100 | 42,500 | (6,400 | ) | ||||||||
| Gross profit | 883,300 | 852,100 | 31,200 | |||||||||
| Operating expenses: | ||||||||||||
| Selling and marketing | 152,000 | 140,300 | 11,700 | |||||||||
| General and administrative | 162,400 | 196,100 | (33,700 | ) | ||||||||
| Research and development | 354,300 | 355,700 | (1,400 | ) | ||||||||
| Total operating expenses | 668,700 | 692,100 | (23,400 | ) | ||||||||
| Income from operations | 214,600 | 160,000 | 54,600 | |||||||||
| Other income: | ||||||||||||
| Unrealized gain on marketable securities | 146,800 | - | 146,800 | |||||||||
| Other income | - | - | - | |||||||||
| 146,800 | - | 146,800 | ||||||||||
| Income before provision for income taxes | 361,400 | 160,000 | 201,400 | |||||||||
| Provision for income taxes | - | 2,500 | (2,500 | ) | ||||||||
| Net income | $ | 361,400 | $ | 157,500 | $ | 203,900 | ||||||
Revenues
Our software revenue is entirely related to our GO-Global product line, and historically has been primarily derived from product licensing fees and service fees from maintenance contracts. The majority of revenue has been earned, and continues to be earned, from a limited number of direct customers and through a limited number of resellers.
When a software license is sold directly to an end user by us, or by one of our resellers, revenue is recognized immediately upon delivery of the license key, 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, our software licenses revenue could be materially impacted.
The following is a summary of our revenues by category for the three months ended September 30, 2021 and 2020.
| For the Three Months Ended | ||||||||||||
| September 30, | September 30, | |||||||||||
| 2021 | 2020 | $ Change | ||||||||||
| Revenue | ||||||||||||
| Software Licenses | ||||||||||||
| Windows | $ | 151,700 | $ | 188,800 | $ | (37,100 | ) | |||||
| UNIX/Linux | 15,900 | 44,600 | (28,700 | ) | ||||||||
| Total | 167,600 | 233,400 | (65,800 | ) | ||||||||
| Software Service Fees | ||||||||||||
| Windows | 684,500 | 586,000 | 98,500 | |||||||||
| UNIX/Linux | 45,600 | 53,600 | (8,000 | ) | ||||||||
| Total | 730,100 | 639,600 | 90,500 | |||||||||
| Other | 21,700 | 21,600 | 100 | |||||||||
| $ | 919,400 | $ | 894,600 | $ | 24,800 | |||||||
Software Licenses
Windows software licenses revenue decreased by $37,100 or 19.7% to $151,700 during the three months ended September 30, 2021, from $188,800 for the same period in 2020. The decrease was due to lower revenue from standard order licenses in the period.
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Software licenses revenue from our UNIX/Linux products decreased by $28,700 or 64.3% to $15,900 for the three months ended September 30, 2021 from $44,600 for the same periods of 2020. The decrease was primarily due to lower revenue standard order licenses.
Software Service Fees
Service fees attributable to our Windows product service increased by $98,500 or 16.8% to $684,500 during three months ended September 30, 2021, from $586,000 for the same period in 2020. The increase was primarily due to higher revenues from subscription license orders and an increase in revenue recognized from deferred maintenance.
Service fees revenue attributable to our UNIX products decreased by $8,000 or 14.9% to $45,600 during the three months ended September 30, 2021, from $53,600 for the same period in 2020. The decrease was primarily the result of the expiration of a long-term maintenance contract.
Other
Other revenue consists of private labeling fees, professional services, and other non-recurring revenues. Other revenue increased by $100 or 0.5% for the three months ended September 30, 2021, compared to the same period in 2020.
Cost of Revenues
Cost of revenue is comprised primarily of software service costs, which represent the costs of customer service. Also included in cost of revenue are software product costs and costs associated with licenses to third party software included in our product offerings, and the required import tax withholdings from Brazil resellers. We incur no significant shipping or packaging costs as virtually all of our deliveries are made via electronic means over the Internet.
Cost of revenue for the three months ended September 30, 2021 decreased by $6,400, or 15.1%, to $36,100 for the three months ended September 30, 2021 from $42,500 for the same period in 2020. Cost of revenue was 3.9% and 4.8% of total revenue for the three months ended September 30, 2021 and 2020, respectively. The decrease was due to import tax withholdings associated with lower revenue from Brazil resellers for the three-month period ended September 30, 2021.
Selling and Marketing Expenses
Selling and marketing expenses primarily consisted of employee, outside services and travel and entertainment expenses.
Selling and marketing expenses increased by $11,700, or 8.3%, to $152,000 for the three months ended September 30, 2021 from $140,300 for the same period in 2020. Selling and marketing expenses represented approximately 16.5% and 15.7% of total revenue for the three months ended September 30, 2021 and 2020, respectively. The increase in selling and marketing expenses was due to increased spending on sales and marketing related initiatives.
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General and Administrative Expenses
General and administrative expenses primarily consist of employee costs, 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 debt expense.
General and administrative expenses decreased by $33,700, or 17.2%, to $162,400 for the three months ended September 30, 2021 from $196,100 for the same period in 2020. General and administrative expenses represented approximately 17.7% and 21.9% of total revenue for the three months ended September 30, 2021 and 2020, respectively. The decrease in general and administrative expense was primarily due to lower legal fees and patent maintenance fees.
Research and Development Expenses
Research and development expenses consist primarily of employee costs, payments to contract programmers, software subscriptions, travel and entertainment for our engineers, and all rent for our leased engineering facilities.
Research and development expenses decreased by $1,400, or 0.4% to $354,300for the three months ended September 30, 2021 from $355,700 for the same period in 2020. This represented approximately 38.5% and 39.8% of total revenue for the three months ended September 30, 2021 and 2020, respectively.
Other Income
Other income increased by $146,800 for the three months ended September 30, 2021, compared to the same periods in 2020. The increase was primarily related the unrealized gain from marketable securities for the three months ended September 30,2021.
Results of Operations for the Nine-Month Periods Ended September 30, 2021 and 2020
| For the Nine Months Ended | ||||||||||||
| September 30, | September 30, | |||||||||||
| 2021 | 2020 | $ Change | ||||||||||
| (Unaudited) | (Unaudited) | |||||||||||
| Revenues | $ | 2,678,700 | $ | 2,805,300 | $ | (126,600 | ) | |||||
| Cost of revenues | 125,800 | 118,000 | 7,800 | |||||||||
| Gross profit | 2,552,900 | 2,687,300 | (134,400 | ) | ||||||||
| Operating expenses: | ||||||||||||
| Selling and marketing | 448,100 | 396,200 | 51,900 | |||||||||
| General and administrative | 576,800 | 664,600 | (87,800 | ) | ||||||||
| Research and development | 1,081,900 | 1,076,600 | 5,300 | |||||||||
| Total operating expenses | 2,106,800 | 2,137,400 | (30,600 | ) | ||||||||
| Income from operations | 446,100 | 549,900 | (103,800 | ) | ||||||||
| Other income: | ||||||||||||
| Unrealized gain on marketable securities | 173,400 | - | 173,400 | |||||||||
| Other income | 269,800 | 46,900 | 222,900 | |||||||||
| 443,200 | 46,900 | 396,300 | ||||||||||
| Income before provision for income taxes | 889,300 | 596,800 | 292,500 | |||||||||
| Provision for income taxes | - | 7,500 | (7,500 | ) | ||||||||
| Net income | $ | 889,300 | $ | 589,300 | $ | 300,000 | ||||||
Revenues
The following is a summary of our revenues by category for the nine months ended September 30, 2021 and 2020.
| For the Nine Months Ended | ||||||||||||
| September 30, | September 30, | |||||||||||
| 2021 | 2020 | $ Change | ||||||||||
| Revenue | ||||||||||||
| Software Licenses | ||||||||||||
| Windows | $ | 502,900 | $ | 585,700 | $ | (82,800 | ) | |||||
| UNIX/Linux | 38,900 | 99,500 | (60,600 | ) | ||||||||
| Total | 541,800 | 685,200 | (143,400 | ) | ||||||||
| Software Service Fees | ||||||||||||
| Windows | 1,932,400 | 1,650,100 | 282,300 | |||||||||
| UNIX/Linux | 139,700 | 175,400 | (35,700 | ) | ||||||||
| Total | 2,072,100 | 1,825,500 | 246,600 | |||||||||
| Other | 64,800 | 294,600 | (229,800 | ) | ||||||||
| $ | 2,678,700 | $ | 2,805,300 | $ | (126,600 | ) | ||||||
Software Licenses
Windows software licenses revenue decreased by $82,800 or 14.1% to $502,900 during the nine months ended September 30, 2021, from $585,700 for the same period in 2020. The decrease for the nine months ended September 30,2021 was due to lower revenue from standard license orders following elevated license order activity in the prior year period related to the onset of the COVID-19 pandemic.
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Software licenses revenue from our UNIX/Linux products decreased by $60,600 or 60.9% to $38,900 for the nine months ended September 30, 2021 from $99,500 for the same periods of 2020. The decrease was primarily due to lower revenue from standard order licenses as we continue to focus primarily on our Windows products.
Software Service Fees
Service fees attributable to our Windows product service increased by $282,300 or 17.1% to $1,932,400 during the nine months ended September 30, 2021, from $1,650,100 for the same period in 2020. The increase was primarily due to higher revenue in Windows subscription license orders and higher revenue recognized deferred maintenance.
Service fees revenue attributable to our UNIX products decreased by $35,700 or 20.4% to $139,700 during the nine months ended September 30, 2021, from $175,400 for the same period in 2020. The decrease was primarily the result of an expiration of certain long-term maintenance contracts.
Other
Other revenue consists of private labeling fees, professional services, and other non-recurring revenues. Other revenue decreased by $229,800 or 78.0% for the nine months ended September 30, 2021, compared to the same period in 2020. The primary decrease was related to revenue recognized from a one-time, non-recurring a license agreement with an existing customer for the use of our license.
Cost of Revenues
Cost of revenue is comprised primarily of software service costs, which represent the costs of customer service. Also included in cost of revenue are software product costs, which are primarily comprised of the amortization of capitalized software development costs and costs associated with licenses to third party software included in our product offerings, and the required import tax withholdings from Brazil resellers. We incur no significant shipping or packaging costs as virtually all of our deliveries are made via electronic means over the Internet.
Cost of revenue for the nine months ended September 30, 2021 increased by $7,800, or 6.6%, to $125,800 for the nine months ended September 30, 2021 from $118,000 for the same period in 2020. Cost of revenue represented 4.7% and 4.2% of total revenue for the nine months ended September 30, 2021 and 2020, respectively. The primarily increase was due to increase import tax withholdings associated with higher revenue from Brazil resellers for the nine-month period ended September 30, 2021.
Selling and Marketing Expenses
Selling and marketing expenses primarily consisted of employee, outside services and travel and entertainment expenses.
Selling and marketing expenses increased by $51,900, or 13.1%, to $448,100 for the nine months ended September 30, 2021 from $396,200 for the same period in 2020. Selling and marketing expenses represented approximately 16.7% and 14.1% of total revenue for the nine months ended September 2021 and 2020, respectively. The increase in selling and marketing expenses was due to an increase spend on sales and marketing initiatives.
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General and Administrative Expenses
General and administrative expenses primarily consist of employee costs, legal, accounting, board fees, 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 debt expense.
General and administrative expenses decreased by $87,800, or 13.2%, to $576,800 for the nine months ended September 30, 2021 from $664,600 for the same period in 2020. General and administrative expenses represented approximately 21.5% and 23.7% of total revenue for the nine months ended September 30, 2021 and 2020, respectively. The decrease in general and administrative expense was due to no board member service fees being incurred versus the prior year and lower patent maintenance fees, partially offset by higher corporate legal and payroll related fees.
Research and Development Expenses
Research and development expenses consist primarily of employee costs, payments to contract programmers, software subscriptions, travel and entertainment for our engineers, and all rent for our leased engineering facilities.
Research and development expenses increased by $5,300, or 0.5% to $1,081,900 for the nine months ended September 30, 2021 from $1,076,600 for the same period in 2020. This represented approximately 40.4% and 38.4% of total revenue for the nine months ended September 30, 2021 and 2020, respectively.
Other Income
Other income increased by $396,300 for the nine months ended September 30, 2021, compare to the same periods in 2020 was primarily related the sale of certain patents and unrealized gain of marketable securities.
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Liquidity and Capital Resources
As of September 30, 2021, we had cash of $4,560,000 and a working capital position of $4,124,300 as compared to cash of $4,375,300 and a working capital position of 3,281,600 at December 31, 2020. The increase in cash as of September 30, 2021 was primarily the result of cash provided by operations during the period.
The following is a summary of our cash flows from operating, investing and financing activities for the six months ended September 30, 2021 and 2020.
| For the Nine Months Ended | ||||||||
| September 30, | September 30, | |||||||
| 2021 | 2020 | |||||||
| Cash flows provided by operating activities | $ | 208,800 | $ | 226,000 | ||||
| Cash flows used by investing activities | $ | (24,100 | ) | $ | - | |||
| Cash flows provided by financing activities | $ | - | $ | 2,480,400 | ||||
Net cash flows provided by operating activities for the nine months ended September 30, 2021 amounted to $208,800, compared to cash flows provided by operating activities of $226,000 for the nine months ended September 30, 2020. The decrease in cash flows provided by operating activities is primarily due the elimination of contributed services and gain on sale of patents and unrealized gain from marketable securities, lower in deferred revenue recognition, offset by to the result of higher net income related to a one-time settlement income from a particular during the prior year for the same periods.
Net cash flows used by investing activities for the nine months ended September 30, 2021 amount to $24,100 due to net, purchase of marketable securities investments and property equipment, offset by cash receipt from sale of patents. The Company had no cash related to investing activities for the same periods of prior year.
We did not have cash flow from financing activities for the nine months ended September 30,2021. Net cash provided by financing activities for the nine months ended September 30, 2020 amounted to $2,480,400. We received gross proceeds of $2,599,800 from the Rights Offering and paid $119,400 of issuance costs for the nine months ended September 30, 2020.
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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, 2021.
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, 2021 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, 2020, which was filed with the Securities and Exchange Commission on March 31, 2021.
The coronavirus pandemic could adversely affect our results of operations.
The recent coronavirus pandemic throughout the United States and the world has resulted in the United States and other countries halting or sharply curtailing the movement of people, goods and services. All of this has caused extended shutdowns of businesses and the prolonged economic impact remains uncertain. At this point, we believe the conditions will have a material adverse effect on our business but given the rapidly changing developments we cannot accurately predict what effects these conditions will have on our business, which will depend on, among other factors, the ultimate geographic spread of the virus, the duration of the outbreak and travel restrictions and business closures imposed by the United States and various other governments.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Mine Safety Disclosures
Not applicable
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ITEM 5. Other Information
The Company anticipates it will undertake a 1-for-20 reverse stock split effective November 16, 2021. The financial statements and other sections included in this Form 10-Q have not been retrospectively adjusted to reflect for the reverse stock split.
ITEM 6. Exhibits
| Exhibit Number | Exhibit Description | |
| 31 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| hopTo Inc. | ||
| (Registrant) | ||
| Date: | November 15, 2021 | |
| By: | /s/ Jonathon R. Skeels | |
| Jonathon R. Skeels | ||
| Chief Executive Officer (Principal Executive Officer) and | ||
| Interim Chief Financial Officer | ||
| (Principal Financial Officer and | ||
| Principal Accounting Officer) | ||
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