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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2021

 

Commission File Number: 0-21683

 

Z:\2021 OPERATIONS\2021 EDGAR\11 November\HOPTO INC\11-10-2021\Form 10-Q\Draft\Production

 

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 18,850,675 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, $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding as of September 30, 2021 or December 31, 2020   -    - 
Common stock, $0.0001 par value, 195,000,000 shares authorized, 18,850,675 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.

 

Basic and Diluted Earnings Per Share

 

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 242,306 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 65,217 and 93,076, 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 $0, respectively for the nine months ended September 30, 2021 and 2020.

 

10

 

 

4. Stockholders’ Equity

 

Stock-Based Compensation Plans

 

The following summarizes the stock option activity for the nine months ended September 30, 2021.

 

           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 

 

The following table summarizes information about options outstanding and exercisable as of September 30, 2021.

 

    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 
                      
$2.00 - 4.00    63,684    0.12   $2.71    63,684   $2.71 
 4.20 - 6.68    1,533    1.94    6.68    1,533    6.68 
      65,217              65,217      

 

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Shares of Common Stock Issued

 

During the three and nine-month periods ending September 30, 2021, the Company did not issue any shares of common stock. During the three-month period ending September 30,2020, the Company issued a total of 7,066,030 shares of common stock. During the nine -month period ending September 30, 2020, the Company did issued a total of 8,786,667 shares of common stock and 120,000 shares of common stock were to two former members of our board of directors. The issuance of the 120,000 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.

 

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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.

 

14

 

 

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.

 

15

 

 

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.

 

18

 

 

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

 

20

 

 

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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