HOPTO INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
We are developers of software productivity products for mobile devices such as
tablets and smartphones, and application publishing software solutions. Our
newest product, which is called hopTo, will be marketed to both consumers and
businesses. hopTo will provide mobile end-users with a productivity workspace
for their mobile devices that will allow users to manage, share, view, and edit
their documents, regardless of where they are stored. We launched the first
public release of hopTo through Apple's App Store on April 15, 2013 and the
first commercial version of hopTo on November 14, 2013. This release was
targeted at Apple's tablet devices, the iPad and the iPad Mini. Future releases
will be targeted at other devices such as Apple's iPhone, as well as competing
devices such as those based on Google's Android platform.
In addition to hopTo, we also sell a family of products under the brand name
GO-Global, which is a software application publishing business and is our sole
revenue source at this time. GO-Global is an application access solution for use
and/or resale by independent software vendors ("ISVs"), corporate enterprises,
governmental and educational institutions, and others, who wish to take
advantage of cross-platform remote access and Web-enabled access to their
existing software applications, as well as those who are deploying secure,
private cloud environments.
Over the years, we've also made significant investments in intellectual property
("IP"). We have filed many patents designed to protect the new technologies
embedded in hopTo, and we plan to continue to aggressively invest in the
creation and protection of new IP as we continue to develop hopTo and other
The following discussion should be read in conjunction with the consolidated
financial statements and related notes provided in Item 8 "Financial Statements
and Supplementary Data" in this Annual Report on Form 10-K.
Critical Accounting Policies.
Use of Estimates
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make judgments, assumptions and estimates that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the period(s) being reported upon. Estimates are
used for, but not limited to, the amount of stock-based compensation expense,
the warrants liability, the amount of capitalized software development costs,
the allowance for doubtful accounts, the estimated lives, valuation, and
amortization of intangible assets (including capitalized software), depreciation
of long-lived assets, post-employment benefits, and accruals for liabilities and
taxes. While we believe that such estimates are fair, actual results could
differ materially from those estimates.
We market and license our products indirectly through channel distributors,
ISVs, VARs (collectively "resellers") and directly to corporate enterprises,
governmental and educational institutions and others. Our product licenses are
perpetual. We also separately sell maintenance contracts (which are comprised of
license updates and customer service access), and other products and services.
Software license revenues are recognized when:
? Persuasive evidence of an arrangement exists (i.e., when we sign a
non-cancelable license agreement wherein the customer acknowledges an unconditional obligation to pay, or upon receipt of the customer's purchase
? Delivery has occurred or services have been rendered and there are no uncertainties surrounding product acceptance (i.e., when title and risk of
loss have been transferred to the customer, which generally occurs when the
media containing the licensed program(s) is provided to a common carrier
or, in the case of electronic delivery, when the customer is given access
to the licensed programs), and
? The price to the customer is fixed or determinable, as typically evidenced
in a signed non-cancelable contract, or a customer's purchase order, and
? Collectability is probable. If collectability is not considered probable,
revenue is recognized when the fee is collected.
Revenue recognized on software arrangements involving multiple deliverables is
allocated to each deliverable based on vendor-specific objective evidence
("VSOE") or third party evidence of the fair values of each deliverable; such
deliverables include licenses for software products, maintenance, private
labeling fees, and customer training. We limit our assessment of VSOE for each
deliverable to either the price charged when the same deliverable is sold
separately, or the price established by management having the relevant authority
to do so, for a deliverable not yet sold separately.
If sufficient VSOE of fair value does not exist, so as to permit the allocation
of revenue to the various elements of the arrangement, all revenue from the
arrangement is deferred until such evidence exists or until all elements are
delivered. If VSOE of the fair value does not exist, and the only undelivered
element is maintenance, then we recognize revenue on a ratable basis. If VSOE of
the fair value of all undelivered elements exists but does not exist for one or
more delivered elements, then revenue is recognized using the residual method.
Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is recognized as
Certain resellers ("stocking resellers") purchase product licenses that they
hold in inventory until they are resold to the ultimate end user (an "inventory
stocking order"). At the time that a stocking reseller places an inventory
stocking order, we do not ship any product licenses to them, rather, the
stocking reseller's inventory is credited with the number of licenses purchased
and the stocking reseller can resell (issue) any number of licenses from their
inventory at any time. Upon receipt of an order to issue one or more licenses
from a stocking reseller's inventory (a "draw down order"), we will ship the
license(s) in accordance with the draw down order's instructions. We defer
recognition of revenue from inventory stocking orders until the underlying
licenses are sold and shipped to the end user, as evidenced by the receipt and
fulfillment of the stocking reseller's draw down order, assuming all other
revenue recognition criteria have been met.
There are no rights of return granted to resellers or other purchasers of our
We recognize revenue from maintenance contracts ratably over the related
contract period, which generally ranges from one to five years.
All of our software licenses are sold in U.S. dollars.
The lease for our office in Campbell, California, which includes the amendment
for the new space we occupied on February 1, 2014, contains free rent and
predetermined fixed escalations in our minimum rent payments. We recognize rent
expense related to this lease on a straight-line basis over the term of the
lease. We record any difference between the straight-line rent amounts and
amounts payable under the lease as part of deferred rent in current or long-term
liabilities, as appropriate.
Incentives that we received pursuant to the amended lease agreement are
recognized on a straight-line basis as a reduction to rent over the term of the
lease. We record the unamortized portion of these incentives as a part of
deferred rent in current or long-term liabilities, as appropriate.
Post-employment Benefits (Severance Liability)
Nonretirement postemployment benefits, including salary continuation,
supplemental unemployment benefits, severance benefits, disability-related
benefits and continuation of benefits such as health care benefits, are
recognized as a liability and a loss when it is probable that the employee(s)
will be entitled to such benefits and the amount can be reasonably estimated.
The cost of termination benefits recognized as a liability and an expense
includes the amount of any lump-sum payments and the present value of any
expected future payments. During the year ended December 31, 2012, we recorded
$721,800 of severance expense, including stock compensation expense. Such
liability was recorded as a result of a separation agreement and a release with
Robert Dilworth in connection with Mr. Dilworth's resignation as our Chief
Executive Officer and as a member of our board of directors. In addition, during
2013 we recorded an additional $75,700 of severance expense as a result of a
separation and release agreement we entered into with a former vice
president-level employee (See Note 6). An aggregate $62,900 and $262,400 is
reported as a severance liability at December 31, 2013 and 2012, respectively.
Long-lived assets, which consist primarily of capitalized software, are assessed
for possible impairment whenever events or changes in circumstances indicate
that the carrying amounts may not be recoverable, whenever we have committed to
a plan to dispose of the assets or, at a minimum, annually. Typically, for
long-lived assets to be held and used, measurement of an impairment loss is
based on the fair value of such assets, with fair value being determined based
on appraisals, current market value, comparable sales value, and undiscounted
future cash flows, among other variables, as appropriate. Assets to be held and
used that are affected by an impairment loss are depreciated or amortized at
their new carrying amount over their remaining estimated life; assets to be sold
or otherwise disposed of are not subject to further depreciation or
17--------------------------------------------------------------------------------Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts that reflects our best estimate
of potentially uncollectible trade receivables. The allowance is based on
assessments of the collectability of specific customer accounts and the general
aging and size of the accounts receivable. We regularly review the adequacy of
our allowance for doubtful accounts by considering such factors as historical
experience, credit worthiness, and current economic conditions that may affect a
customer's ability to pay. We specifically reserve for those accounts deemed
uncollectible. We also establish, and adjust, a general allowance for doubtful
accounts based on our review of the aging and size of our accounts receivable.
The following table sets forth the details of the Allowance for Doubtful
Accounts for the years ended December 31, 2013 and 2012:
Beginning Charge Ending
Balance Offs Recoveries Provision Balance
2013 $ 33,900 $ - $ - $ 8,100 $ 42,000
2012 25,000 - - 8,900 33,900
Software Development Costs
We capitalize software development costs incurred from the time technological
feasibility of the software is established until the time the software is
available for general release, in accordance with accounting principles
generally accepted in the United States ("GAAP"). Research and development costs
and other computer software maintenance costs related to the software
development are expensed as incurred. Upon the establishment of technological
feasibility, related software development costs are capitalized. Such
capitalized costs are subsequently amortized as costs of revenue over the
shorter of three years or the remaining estimated useful life of the product.
Software development costs, and amortization of such costs, are discussed
further under "- Results of Operations - Costs of Revenue."
We apply the fair value recognition provisions of the Financial Accounting
Standards Board (FASB) Codification Subtopic (ASC) 718-10, "Compensation - Stock
Compensation." We estimated the fair value of each option grant made during the
years ended December 31, 2013 and 2012 on the date of grant using a binomial
model, with the assumptions set forth in the following table:
Estimated volatility 113% - 125% 70% - 174%
Annualized forfeiture rate 5.34% - 10.02% 0.0% - 9.79%
Expected option term (years) 10.00 0.25 - 10.00
Estimated exercise factor 6.5 - 15 5 - 15Approximate risk-free interest rate 2.71 - 2.74% 0.08% - 2.04%
Expected dividend yield
In estimating our stock price volatility for grants awarded during the years
ended December 31, 2013 and 2012, we analyzed our historic volatility over a
period of time equal in length to the expected option term for the option being
issued. For grants made to newly hired employees the period of time over which
we analyzed our historic volatility ended on the last day of the quarter during
which the new employee was hired. We derived an annualized forfeiture rate by
analyzing our historical forfeiture data, including consideration of the impact
of certain non-recurring events, such as reductions in our work force. Our
estimates of the expected option term and the estimated exercise factor were
derived from our analysis of historical data and future projections. The
approximate risk-free interest rate was based on the implied yield available on
U. S. Treasury issues with remaining terms equivalent to our expected option
term. We believe that each of these estimates is reasonable in light of the data
we analyzed. However, as with any estimate, the ultimate accuracy of these
estimates is only verifiable over time.
During 2013, we awarded 1,745,000 shares of restricted common stock to
employees, and 122,500 to consultants. The valuation of the restricted common
stock awards was based on the closing fair market value of our common stock on
the grant date. For the awards made to employees, such fair market value ranged
from $0.30 to $0.59 per share, and for the awards made to consultants, such fair
market value ranged from $0.34 to $0.56 per share.
During 2013, we granted 700,000 options to purchase common stock to one of our
directors at an exercise price of $0.37 per share, and 23,000 to an employee at
an exercise price of $0.45 per share.
During 2012, we awarded 3,764,500 shares of restricted common stock to our
officers and 393,000 shares of restricted common stock to various employees. The
valuation of the restricted common stock awards was based on the closing fair
market value of our common stock on the grant date. For the restricted common
stock awarded to the officers, such fair market value was $0.18 per share, and
for the restricted common stock awarded to the employees, such fair market value
ranged from $0.22 to $0.26 per share.
The following table illustrates the non-cash stock-based compensation expense
recorded, net of amounts capitalized, during the years ended December 31, 2013
and 2012 by income statement classification:
Cost of revenue $ 5,300 $ 22,200Selling and marketing expense 180,600 128,900
General and administrative expense 331,300 478,700
Research and development expense 281,000 342,600
$ 798,200 $ 972,400
Fair Value of Financial Instruments
The fair value of the Company's accounts receivable, accounts payable and other
current liabilities approximate their carrying amounts due to the relative short
maturities of these items.
The fair value of the Company's warrants are determined in accordance with FASB
ASC 820, "Fair Value Measurement," which establishes a fair value hierarchy that
prioritizes the assumptions (inputs) to valuation techniques used to price
assets or liabilities that are measured at fair value. The hierarchy, as defined
below, gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities and the lowest priority to unobservable
inputs. The guidance for fair value measurements requires that assets and
liabilities measured at fair value be classified and disclosed in one of the
? Level 1: Defined as observable inputs, such as quoted (unadjusted) prices in
active markets for identical assets or liabilities.
? Level 2: Defined as observable inputs other than quoted prices included in
Level 1. This includes quoted prices for similar assets or liabilities in
active markets, quoted prices for identical or similar assets and liabilities
in markets that are not active, or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.
? Level 3: Defined as unobservable inputs to the valuation methodology that are
supported by little or no market activity and that are significant to the
measurement of the fair value of the assets or liabilities. Level 3 assets and
liabilities include those whose fair value measurements are determined using
pricing models, discounted cash flow methodologies or similar valuation
techniques, as well as significant management judgment or estimation.
As of December 31, 2013 and 2012, all of the Company's $979,800 and $7,390,100
Warrants Liability reported at fair value, respectively, was categorized as
Level 3 inputs (see Note 8).
Concentration of Credit Risk
Financial instruments, which potentially subject us to concentration of credit
risk, consist principally of cash and trade receivables. We place cash and, when
applicable, cash equivalents, with high quality financial institutions and, by
policy, limit the amount of credit exposure to any one financial institution. As
of December 31, 2013, we had approximately $2,215,300 of cash with financial
institutions in excess of FDIC insurance limits. As of December 31, 2012, the
Company had approximately $3,511,300 of cash with financial institutions in
excess of FDIC insurance limits.
For the years ended December 31, 2013 and December 31, 2012, the Company
considered the following to be its most significant customers
% Accounts % Accounts
Customer % Sales Receivable % Sales Receivable
GAD eG 5.1 % 0.0 % 8.3 % 0.0 %
Ericsson 6.2 % 3.4 % 8.2 % 19.0 %
GE 7.6 % 14.2 % 8.2 % 13.6 %
KitASP 2.6 % 0.0 % 7.8 % 0.0 %
IDS LLC 5.9 % 5.2 % 4.5 % 1.6
Alcatel-Lucent 8.5 % 19.9 % 5.8 % 15.6 %
Elosoft 6.7 % 13.3 % 5.6 % 8.6 %
Total 42.6 % 56.0 % 48.4 % 58.4 %
Results of Operations
Set forth below is statement of operations data for the years ended December 31,
2013 and 2012 along with the dollar and percentage changes from 2012 to 2013 in
the respective line items.
Year Ended December 31, Increase (Decrease)
2013 2012 Dollars Percentage
Software licenses $ 2,969,300 $ 3,704,900 $ (735,600 ) (19.9 )%
Software service fees 2,874,700 2,730,000 144,700 5.3 %
Other 45,000 106,400 (61,400 ) (57.7 )%
Total Revenue 5,889,000 6,541,300 (652,300 ) (10.0 )%
Cost of revenue
Software service costs 301,600 344,400 (42,800 ) (12.4 )%
Software product costs 207,000 257,100 (50,100 ) (19.5 )%
Total Cost of revenue 508,600 601,500 (92,900 ) (15.4 )%
Gross profit 5,380,400 5,939,800 (559,400 ) (9.4 )%
Selling and marketing 2,441,400 2,403,400 38,000 1.6 %
General and administrative 3,083,200 3,759,000 (675,800 ) (18.0 )%
Research and development 4,999,900 3,870,900 1,129,000 29.2 %
Total Operating expenses 10,524,500 10,033,300 491,200 4.9 %
Loss from operations (5,144,100 ) (4,093,500 ) 1,050,600 25.7 %
Other income (expense)
Change in fair value of warrants
liability 1,406,000 (3,616,600 ) 5,022,600 138.9 %
Interest and other income 1,900 5,300 (3,400 ) (64.2 )%
Interest and other expense (2,000 ) - (2,000 ) NM
Total other income (expense) 1,405,900 (3,611,300 ) 5,017,200 138.9 %
Loss from continuing operations before
provision for income tax (3,738,200 ) (7,704,800 ) (3,966,600 ) (51.5 )%
Provision for income taxes 7,800 3,500 4,300 122.9 %
Net loss from continuing operations (3,746,000 ) (7,708,300 )
(3,962,300 ) (51.4 )%
Loss from discontinued operations - (468,400 ) (468,400 ) NM
Net loss $ (3,746,000 ) $ (8,176,700 ) $ (4,430,700 ) (54.2 )%
NM - not meaningful
The table that follows summarizes software licenses revenue for the years ended
December 31, 2013 and 2012, and calculates the change in dollars and percentage
from 2012 to 2013 in the respective line item.
Year Ended December 31, Increase (Decrease)
Software licenses 2013 2012 Dollars Percentage
Windows $ 2,131,400 $ 2,667,100 $ (535,700 ) (20.1 )%
UNIX/Linux 837,900 1,037,800 (199,900 ) (19.3 )
Total $ 2,969,300 $ 3,704,900 $ (735,600 ) (19.9 )
Our software revenue is currently entirely related to our GO-Global product
line, and historically has been primarily derived from product licensing fees
and service fees from maintenance contracts. The majority of this revenue has
been earned, and continues to be earned, from a limited number of significant
customers, most of whom are resellers. Many of our resellers purchase software
licenses that they hold in inventory until they are resold to the ultimate end
user (a "stocking reseller"). We defer recognition of revenue from these sales
(on our Consolidated Balance Sheet under the caption "Deferred Revenue") until
the stocking reseller sells the underlying software licenses to the ultimate end
user. Consequently, if any of our significant stocking resellers materially
change the rate at which they resell our software licenses to the ultimate end
user, our software licenses revenue could be materially impacted.
When a software license is sold directly to an end user by us, or by one of our
resellers who does not stock licenses into inventory, revenue is recognized
immediately upon shipment, assuming all other criteria for revenue recognition
are met. Consequently, if any significant end user customer substantially
changes its order level, or fails to order during the reporting period, whether
the order is placed directly with us or through one of our non-stocking
resellers, our software licenses revenue could be materially impacted.
Almost all stocking resellers maintain inventories of our Windows products; few
stocking resellers maintain inventories of our UNIX products.
The decrease in Windows software licenses revenue for the year ended December
31, 2013, as compared with the prior year, was primarily due to lower aggregate
revenue derived from our stocking resellers and a significant sale of licenses
to GAD eG that occurred during 2012, in conjunction with a GO-Global
implementation that began in 2011 and culminated in 2012. These decreases were
partially offset by higher license sales to other end user customers.
Software licenses revenue from our UNIX/Linux products decreased during 2013, as
compared with 2012, primarily due to lower aggregate revenue from our resellers
and end users, particularly our European telecommunications customers. During
the second half of 2013, we learned that one of our significant European
telecommunications customers, Ericsson, would no longer be ordering product or
new maintenance contracts from us as current technology would no longer utilize
GO-Global. We anticipate receiving a small amount of maintenance renewals from
them while their customers ultimately upgrade from their legacy products to
their new technology. Ericsson accounted for 6.2% and 8.2% of our revenues in
2013 and 2012, respectively.
We expect aggregate software license revenue in 2014 to be lower than 2013
levels due to lower aggregate revenue from our stocking resellers and our
European telecommunications customers. At the same time, we will seek to improve
cash flow from the GO-Global business through cost control and other measures.
Software Service Fees
The table that follows summarizes revenue recognized derived from software
service fees for the years ended December 31, 2013 and 2012, and calculates the
changes in dollars and percentage from 2012 to 2013 in the respective line item.
Year Ended December 31, Increase (Decrease)
Software service fees 2013 2012 Dollars Percentage
Windows $ 1,981,000 $ 1,786,300 $ 194,700 10.9 %
UNIX/Linux 893,700 943,700 (50,000 ) (5.3 )%
Total $ 2,874,700 $ 2,730,000 $ 144,700 5.3 %
The increase in software service fees revenue attributable to our Windows
products during 2013, as compared with 2012, was the result of the continued
growth of revenue recognized from the number of Windows maintenance contracts
purchased by our end-user customers on new license installations and the renewal
of maintenance contracts on currently installed software licenses.
The decrease in service fees revenue attributable to our UNIX products for 2013,
as compared with 2012, was primarily the result of the low level of our UNIX
product sales throughout the current and prior year and a decrease in
maintenance contract renewals. We believe that these decreases reflect the
continued economic malaise and the competitive challenges facing the
telecommunications industry, particularly in Europe. The majority of this
decrease was attributable to our European telecommunications customers,
including Ericsson, as discussed above.
We expect that software service fees for 2014 will modestly increase over those
for 2013, as we expect to see continued strength in the sale and renewal of
Windows maintenance contracts.
The decrease in other revenue for 2013, as compared with 2012, was primarily due
to a decrease in private labeling fees. We typically recognize private labeling
fees revenue only when such services are requested by a new stocking reseller;
they sign a contract with us, simultaneously place their first stocking order
and ultimately, when they sell through their entire first stocking order, we
recognize the private labeling fees revenue. Private labeling fees do not
comprise a material portion of our revenue streams, and they can vary from
period to period. We do not expect to generate significant revenue from private
labeling fees during 2014.
Costs of Revenue
Cost of revenue is comprised primarily of software service costs, which
represent the costs of customer service. Also included in cost of revenue are
software product costs, which are primarily comprised of the amortization of
capitalized software development costs and costs associated with licenses to
third party software included in our product offerings. We incur no significant
shipping or packaging costs as virtually all of our deliveries are made via
electronic means over the Internet.
Research and development costs for new product development, after technological
feasibility is established, are recorded as "capitalized software" on our
Consolidated Balance Sheet. Such capitalized costs are subsequently amortized to
cost of revenue as a component of software product costs over the shorter of
three years or the remaining estimated life of the products so capitalized. We
capitalized $546,300 and $85,400 of software development costs during 2013 and
2012, respectively. Such costs were incurred in the development of hopTo, and
were primarily comprised of employee costs and the cost of licenses to third
party software used by hopTo. Amortization related to capitalized software
development costs charged to costs of revenue was approximately $150,000 and
$166,100 during 2013 and 2012, respectively.
Cost of revenue for the year ended December 31, 2013 decreased by $92,900, or
15.4%, to $508,600 from $601,500 for 2012. Cost of revenue for the years ended
December 31, 2013 and 2012 represented approximately 8.6% and 9.2% of total
Software Service Costs - Software service costs decreased during 2013, as
compared with 2012, as less time was spent on customer service issues, primarily
due to the mature state of our GO-Global products. We anticipate that customer
service costs will increase in 2014, as compared with 2013, as we release
further commercial versions of hopTo and new versions of products within the
The decrease in software product costs for 2013, as compared with 2012, was due
to a decrease in costs associated with third party software we license into our
GO-Global products, which were partially offset by costs associated with third
party software licensed into hopTo that we began to occur upon its commercial
release in November 2014. We expect to incur these costs throughout 2014.
For the reasons outlined above, we expect 2014 costs of revenue to exceed 2013
Selling and Marketing Expenses. Selling and marketing expenses primarily consist
of employee costs (inclusive of non-cash stock-based compensation expense),
outside services and travel and entertainment expenses.
Selling and marketing expenses for the year ended December 31, 2013 approximated
those for the year ended December 31, 2012. Such costs increased by $38,000, or
1.6%, to $2,441,400 in 2013 from $2,403,400 in 2012. Selling and marketing
expenses for the years ended December 31, 2013 and 2012 represented
approximately 41.5% and 36.8% of total revenue, respectively. During 2013, we
enacted several measures aimed at aligning the costs associated of selling and
marketing our GO-Global products with the revenues being generated from their
sales. We reinvested such cost savings into sales and marketing efforts for
We expect to increase our sales and marketing efforts in 2014 for hopTo, and for
anticipated GO-Global releases; accordingly, we expect 2014 sales and marketing
expenses to exceed 2013 levels.
General and Administrative Expenses. General and administrative expenses
primarily consist of employee costs (inclusive of non-cash stock-based
compensation expense), amortization and depreciation, legal, accounting, other
professional services, rent, travel and entertainment and insurance. Certain
costs associated with being a publicly-held corporation are also included in
general and administrative expenses, as well as bad debts expense.
General and administrative expenses for the year ended December 31, 2013
decreased by $675,800, or 18.0%, to $3,083,200 from $3,759,000 for 2012. General
and administrative expenses for the years ended December 31, 2013 and 2012
represented approximately 52.4 % and 57.5 % of total revenue, respectively.
The decrease in general and administrative expenses for 2013, as compared with
2012, was primarily a result of the costs incurred in 2012 associated with the
one-time separation agreement and release entered into with Robert Dilworth in
connection with Mr. Dilworth's resignation as our Chief Executive Officer and as
a member of our board of directors. See Note 6 to Notes to Consolidated
Financial Statements for details. The decrease was also attributed to other
costs we incurred in connection with the separation agreement, which included
one-time legal fees.
Partially offsetting the decrease outlined above was increased costs associated
with consultants hired to provide additional resources for our administrative,
finance and patent activities, particularly those activities associated with
hopTo. We expect that certain of these consultants will continue to be utilized
during 2014. Additionally, we experienced an increase in depreciation and
amortization expense as we accelerated the amortization of the leasehold
improvements associated with our office in California that we moved out of on
February 1, 2014 so that they would be fully amortized at such time.
We expect that our 2014 general and administrative costs will exceed those for
2013 based on the items discussed above and anticipated investments in personnel
and equipment as we gear up for the anticipated release of future versions of
Research and Development Expenses. Research and development expenses consist
primarily of employee costs (inclusive of non-cash stock-based compensation
expense), payments to contract programmers, all costs of our Israeli subsidiary
(GraphOn Research Labs Limited), travel and entertainment for all our engineers,
and all rent for our leased engineering facilities.
Research and development expenses, net of amounts capitalized, increased by
$1,129,000, or 29.2%, to $4,999,900 for the year ended December 31, 2013 from
$3,870,900 in the prior year. Research and development expenses for the years
ended December 31, 2013 and 2012 represented approximately 84.9% and 59.2% of
total revenue, respectively.
During 2013 and 2012, we capitalized $546,300 and $85,400 of software
development costs associated with the development of hopTo, respectively, which,
had they not met the criteria for capitalization, would have otherwise been
The increase in research and development expenses in 2013, as compared with
2012, resulted from the continued growth of engineering costs associated with
hopTo, including employee costs, recruitment fees, consultants, equipment and
facilities. We expect to hire several new employees and to continue to utilize
consultants throughout 2014, primarily in support of our planned hopTo
As a result of these items, we expect 2014 research and development expenses,
net of capitalized software developments costs, to significantly exceed 2013
levels. The main driver of the increased costs will be the costs associated with
our new products development team, which will be primarily comprised of employee
costs, recruitment fees, rent, equipment and supplies for the team.
Change in Fair Value of Warrants Liability. During 2013 and 2012, we recognized
a net change of $1,406,000 and ($3,616,600), respectively, in the aggregate fair
value of the warrant liability, net of amounts reclassified to equity (See Note
8 to Notes to Consolidated Financial Statements).
The change in fair value of warrants liability was approximately 23.9% and 55.3%
of total revenues for the years ended December 31, 2013 and 2012, respectively.
Income Taxes. For the years ended December 31, 2013 and 2012, we recorded a
current tax provision of approximately $7,800 and $3,500, respectively. At
December 31, 2013, we had approximately $52.7 million of federal net operating
loss carryforwards, which will begin to expire in 2018. Also at December 31,
2013, we had approximately $8.7 million of California state net operating loss
carryforwards available to reduce future taxable income, which will begin to
expire in 2014. During the years ended December 31, 2013 and 2012, we did not
utilize any of our federal and California net operating losses and have recorded
a full valuation allowance against each of them.
At December 31, 2013, we had approximately $1.0 million of federal research and
development tax credits, for which a full valuation allowance has been provided.
Such tax credits will begin to expire in 2018.
Net Loss from Continuing Operations. As a result of the foregoing items, we
reported a net loss from continuing operations of $3,746,000 for the year ended
December 31, 2013, as compared with a net loss from continuing operations of
$7,708,300 for 2012.
Loss from Discontinued Operations. During 2012, we reached settlement and
licensing agreements that effectively ended all of our then on-going
intellectual property litigation. Having been approached by the respective
counter-parties to each of our lawsuits, and in consultation with our board of
directors, we determined that it was in our best long-term strategic interests
to settle each lawsuit in order to move forward and shift our focus to our
software products, including our new product initiatives. As a result of such
determination, we paid $311,000 in aggregate settlement fees. We do not intend
to pursue intellectual property litigation as an integral part of our strategy
to fund our future operations. Accordingly, for all periods presented, the
results of operations and cash flows related to our former intellectual property
segment have been segregated and reported as "Discontinued Operations". See Note
17 to our Notes to Consolidated Financial Statements.
As a result of this decision, we reported a loss from discontinued operations,
of $0 and $468,400, for 2013 and 2012, respectively.
Liquidity and Capital Resources
Our reported net loss of $3,746,000 in 2013 included three significant non-cash
items: depreciation and amortization of $330,600, which was primarily related to
amortization of our capitalized software development costs; stock-based
compensation expense of $798,200; and a gain in the change in value of our
warrants liability of $1,406,000.
We invested $107,400 in capital expenditures during 2013, primarily related to
our new products development team, located in our office in Campbell,
California. We also invested $509,600 in our hopTo product, net of $36,700
non-cash stock-based compensation costs, which we capitalized as software
development costs during 2013.
We are aggressively looking at ways to improve our revenue stream through the
development, marketing and sale of new products. We are also aggressively
looking at ways to streamline our GO-Global operations in order to align its
cost structure with its sales. Should business combination opportunities present
themselves to us, and should such opportunities appear to make financial sense
and add value for our shareholders, we will consider those opportunities.
We believe that as a result of the expected introduction of new products slated
for 2014, our revenue will increase. During 2014, we expect to continue to
prioritize the investment of our resources into the development of various new
products, and we expect that certain of these investments will ultimately be
capitalized as software development costs. Further, due to our expected
investments in new products and continued investments in intellectual property,
we expect our cash outflow from operations to increase. Based on our cash on
hand as of December 31, 2013, the cash received in January 2014 from the sale of
stock and warrants, and the anticipation of increased revenue from our legacy
GO-Global business, we believe that we will have sufficient resources to support
our operational plans for the next twelve months; however; full implementation
of our business plans for the next twelve months will require capital from
issuances of debt or equity, or new revenue from our recently launched hopTo
There can be no assurance of new revenue from new or exisiting product lines or
additional capital from debt or equity issuances. In addition, issuances of new
capital stock would dilute existing stockholders and may give the purchasers of
new capital stock additional rights, preferences and privileges relative to
existing stockholders. There can be no assurance that additional capital
necessary for full execution of our hopTo business strategy will be available on
a timely basis, on reasonable terms or at all.
As of December 31, 2013, cash was $2,430,700 as compared with $3,960,600 as of
December 31, 2012. The main reason for the decrease in cash was the loss from
continuing operations of $3,746,000, which primarily included the costs
resulting from the growth of our new products development team, including
employee costs, recruitment fees, consultants, equipment and facilities.
Accounts Receivable, net
At December 31, 2013 and 2012, we had $811,700 and $865,900, respectively, in
accounts receivable, net of allowances totaling $42,000 and $33,900,
respectively. The decrease in net accounts receivable was a result of decreased
sales in 2013 as compared to 2012. From time to time we could have individually
significant accounts receivable balances due us from one or more of our
significant customers. If the financial condition of any of these significant
customers should deteriorate, our operating results could be materially
Stock Repurchase Program
During January 2008, our Board of Directors approved a stock repurchase program.
Under this program, up to $1,000,000 may be used in repurchasing our stock;
however, we are not obligated to repurchase any specific number of shares and
the program may be suspended or terminated at our discretion. We did not
repurchase any shares under this plan during either 2013 or 2012, and as of
December 31, 2013, $782,500 remains available for stock repurchases.
As of December 31, 2013, we had current assets of $3,285,500 and current
liabilities of $3,711,100, which netted to a working capital deficit of
($425,600). Included in current liabilities was the current portion of deferred
revenue of $2,772,900.
Commitments and contingencies
The following table discloses our contractual commitments for future periods,
which consist entirely of leases for office space and is inclusive of our
contractual commitments for our Campbell, California office, including the
commitments under the lease amendment. The table assumes that we will occupy all
currently leased facilities for the full term of each respective lease:
Year Ending December 31,
2014 $ 405,700
Rent expense aggregated approximately $288,000 and $260,700 for the years ended
December 31, 2013 and 2012, respectively.
Recent Accounting Pronouncements
In July 2013, FASB issued ASU No. 2013-11 "Income Taxes (Topic 740)" (ASU
2013-11). The objective of ASU 2013-11 is to provide explicit guidance on the
financial statement presentation of an unrecognized tax benefit when a net
operating loss carryforward, a similar tax loss, or a tax credit carryforward
exists. FASB recognized that there was inconsistency in how previous guidance in
this topic was applied in practice, thus; the objective of ASU 2013-11 is to
eliminate the diversity of how previous guidance was applied. As the amendments
in ASU 2013-11 do not require new recurring disclosures, rather, they are aimed
at creating consistency in how previous guidance is applied, we do not believe
that adoption of ASU 2013-11, which will become effective for fiscal years, and
interim periods within those years, beginning after December 15, 2013, will have
a material impact on our results of operations, cash flows or financial
In February 2013, FASB issued ASU No. 2013-02 "Other Comprehensive Income" (ASU
2013-02). The objective of ASU 2013-02 is to improve the reporting of
reclassifications out of other comprehensive income. This objective is reached
by requiring an entity to report the effect of significant reclassifications out
of accumulated other comprehensive income on the respective line items in net
income if the amount being reclassified is required under GAAP to be
reclassified in its entirety to net income. ASU 2013-02 is effective and is to
be applied prospectively to reporting periods beginning after December 15, 2012.
We currently have no amounts that meet the criteria to be reclassified;
accordingly, the adoption of ASU 2013-02 did not have any impact on our results
of operations, cash flows or financial position. Comprehensive loss equals net
loss for each of the years ended December 31, 2013 and 2012, respectively.
In July 2012, FASB issued ASU No. 2012-02 "Intangibles - Goodwill and Other"
(ASU 2012-02). The objective of ASU 2012-02 is to reduce the cost and complexity
of performing an impairment test for indefinite-lived intangible assets by
simplifying how an entity tests those assets for impairment and to improve
consistency in impairment testing guidance among long-lived asset categories.
ASU 2012-02 is effective for fiscal years beginning after September 15, 2012.
Early adoption is permitted. We currently have no goodwill or material
indefinite-lived intangible assets; accordingly, the adoption of ASU 2012-02 did
not have any impact on our results of operations, cash flows or financial
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