See accompanying notes to unaudited condensed consolidated financial statements

hopTo Inc.

Condensed Consolidated Statements of Operations

See accompanying notes to unaudited condensed consolidated financial statements

hopTo Inc.

Condensed Consolidated Statements of Stockholders’ Deficit

See accompanying notes to unaudited condensed consolidated financial statements

hopTo Inc.

Condensed Consolidated Statements of Cash Flows

See accompanying notes to unaudited condensed consolidated financial statements

hopTo Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. BasisOrganization

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

The unaudited condensed consolidated financial statements included herein reflect all adjustments, which include only normal, recurring adjustments, that are, in our opinion, necessary to state fairly the results for the periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016,2018 which was filed with the SEC on April 7, 20171, 2019 (“20162018 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, 20172019 or any future period.

2. Going Concern and Management’s Liquidity Plans

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

Although for the three and nine months ended September 30, 2017, respectively, the Company generated net profits of $253,600 and $87,400, respectively, historically we have incurred significant net losses since our inception. At September 30, 2017, the Company had an accumulated deficit of $82,362,400 and a working capital deficit of $2,311,200. We were unable to generate meaningful revenue from our hopTo Work business and our most recent estimation is that revenue from this product is unlikely in any reasonable time frame. We have, however, recently improved our revenue and operating results from our legacy GO-Global business. If this trend continues, subject to our contingent liabilities, we believe we would have sufficient capital resources to fund our GO-Global business (which is our only active business) for at least the next 12 months. However, due to the uncertainty at the current time about this trend and the outcome of our contingent liabilities, we have determined that our cash resources may not be sufficient to fund our business for at least the next 12 months. The Company’s ability to continue as a going concern is dependent on our ability to continue to generate revenue from our legacy GO-Global business and to raise additional capital through the issuance of new equity, debt financing, or from the sale of certain assets to meet short and long-term operating requirements.

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

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

In order to maintain operations, we previously implemented significant expense reductions, including a limited number of employee layoffs, and continue to implement further costs and employment reductions. During the three month period ended September 30, 2016, our CEO and CFO voluntarily agreed with our board of directors to defer 50% of their salary beginning September 1, 2016 until such time as the Company can reasonably pay such compensation upon approval by the board of directors. See Note 12 – Subsequent Events.

Although maintaining our SEC filing status is a significant expense, we currently intend to maintain such status; however, we consider all options to preserve value for shareholders, including potentially suspending or terminating our filing status.

We have worked extensively to explore additional sources of capital including the issuance of new shares, securing debt financing, and the sale of assets including certain software products and patents. Although this process is ongoing and we are in active discussions with multiple parties, there is no guarantee that they will result in transactions that are sufficient to provide the Company with the required liquidity to remove the substantial doubt as to our ability to continue as a going concern. See Note 12 – Subsequent Events. We are also in discussions with some parties about the possibility of other strategic transactions although there is no guarantee that these discussions will result in an actual transaction. The accompanying condensed consolidated financial statements do not include any adjustments that may result from the outcome of the uncertainties set forth above.

year presentation.

3. Significant Accounting Policies

Use of Estimates

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

Liquidity

The Company has incurred significant net losses since inception. As of June 30, 2019, we had an accumulated deficit of $80,237,500 and a working capital deficit of $425,300, which includes deferred revenue of $1,260,300. Our ability to continue to generate net income and positive cash flows from operations is dependent on our ability to continue to generate revenue from our legacy GO-Global business, which in turn is subject to a variety of risks. The Company believes its current cash balances coupled with anticipated cash flow from operating activities will be sufficient to meet its working capital requirements for at least one year from the date of the issuance of the accompanying financial statements. The Company continues to control its cash expenses as a percentage of expected revenue on an annual basis and thus may use its cash balances in the short-term to invest in revenue growth. Based on current internal projections, the Company believes it has and/or will generate sufficient cash for its operational needs, for at least one year from the date of issuance of the accompanying financial statements. Management is focused on growing the Company’s existing product offering, as well as its customer base, to increase its revenues. The Company cannot give assurance that it can increase its cash balances or limit its cash consumption and thus maintain sufficient cash balances for its planned operations or future acquisitions. Future business demands may lead to cash utilization at levels greater than recently experienced. The Company may need to raise additional capital in the future. However, the Company cannot assure that it will be able to raise additional capital on acceptable terms, or at all.

Revenue Recognition

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

Software license revenuesThe Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers.” Revenues under ASC 606 are recognized when: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.

The following is a summary of how the Company recognizes revenue for its different products and services.

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

If sufficient VSOE of the fair value does not exist so as to permit the allocation of revenueare delivered to the various elements ofcustomer electronically. The Company sends the arrangement, all revenuelicense key to the customer to download the related software 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 weCompany portal. We recognize revenue on a ratable basis. If VSOEupon delivery of these licenses. For stocking resellers who purchase licenses through inventory stocking orders with the fair value of all undelivered elements exists but does not exist for one or more delivered elements, thenintent to resell to an end-user, revenue is recognized usingwhen the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.

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

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

The Company has maintenance contracts with certain of its customers. Revenue from maintenance contracts is recognized ratably over the related contract period, which generally ranges from one to five years.

All of our software licensesThe Company’s product sales by geographic area are denominatedpresented in U.S. dollars.Note 5.

Deferred RentCash and Cash Equivalents

The leasesCompany considers all highly liquid holdings with maturities of three months or less at the time of purchase to be cash equivalents. The Company had no cash equivalents as of June 30, 2019 (unaudited) or December 31, 2018.

Allowance for bothDoubtful 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 Company’s subleased former offices in Campbell, California contain free rentcollectability of specific customer accounts and predetermined fixed escalations in our minimum rent payments. Rent expense related to these leases is recognized on a straight-line basis over the termsgeneral aging and size of the leases. Any difference betweenaccounts receivable. We regularly review the straight-line rent amountsadequacy of our allowance for doubtful accounts by considering such factors as historical experience, credit worthiness, and amounts payable under the leases is recorded as part of deferred rent in current or long-term liabilities, as appropriate. The monthly rent payments dueeconomic conditions that may affect a customer’s ability to the Companypay. We specifically reserve for the subleasethose accounts deemed uncollectible. We also establish, and adjust, a general allowance for doubtful accounts based on our review of the office at 1919 S. Bascom Avenue fully offset the rent payments due under the Company’s lease for that space. The monthly rent payments due to the Company for the subleaseaging and size of the office at 51 East Campbell Avenue will offset approximately 62% of the monthly rent payments due to the landlord under the Company’s lease for that space. During the three-month period ended September 30, 2017, the Company recorded a loss of $62,900 representing the total of the shortfall of monthly rent payments over the life of this sublease.our accounts receivable. As of SeptemberJune 30, 2017, $24,900 remains on2019 and December 31, 2018, the balance sheet as a lease liability to be amortized over the remaining 12 months of the sublease.allowance for doubtful accounts totaled $6,800 and $3,600, respectively.

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

Long-Lived Assets

Long-lived assets are assessed for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable, whenever we have committed to a plan to dispose of the assets or, at a minimum, annually. Typically, for long-lived assets to be held and used, measurement of an impairment loss is based on the fair value of such assets, with fair value being determined based on appraisals, current market value, comparable sales value, and discounted future cash flows, among other variables, as appropriate. Assets to be held and used (which assets are affected by an impairment loss) are depreciated or amortized at their new carrying amount over their remaining estimated life; assets to be sold or otherwise disposed of are not subject to further depreciation or amortization. During the three month and nine month period ended September 30, 2016 we determined that an impairment of $0 and $15,500, respectively, existed with certain capitalized software development costs associated with our hopTo Work product and recognized that cost as part of cost of revenue. No such impairment charge was recorded during either of the three or nine-month periodssix months ended SeptemberJune 30, 2017.

2019 or 2018.

Allowance for Doubtful AccountsProperty and Equipment

We maintain an allowance for doubtful accounts that reflects our best estimate of potentially uncollectible trade receivables. The allowance is basedProperty and equipment are recorded at historical cost and depreciated 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 abilitystraight-line basis over their estimated useful lives ranging from three 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.seven years.

The following table sets forth the details of the Allowance for Doubtful Accounts for the three-month periods ended September 30, 2017 and 2016:

The following table sets forth the details of the Allowance for Doubtful Accounts for the nine-month periods ended September 30, 2017 and 2016

Concentration of Credit Risk

For the three months ended June 30, 2019, the Company had one customer and nine-month periodstwo customers comprising 14.5%, and 10.3%, respectively, of total revenues. For the three months ended SeptemberJune 30, 20172018, the Company had one customer comprising 17.1% of total revenues.

For the six months ended June 30, 2019, the Company had one customer comprising 20.9%, respectively, of total revenues. For the six months ended June 30, 2018, the Company had one customer comprising 15.7% of total revenues.

As of June 30, 2019, the Company has five customers comprising 23.6%, 18.5%, 14.9%, 11.4%, and 201611.3%, respectively, we consideredof net accounts receivable. As of December 31, 2018, the Company has three customers listedcomprising 32.18%, 15.4% and 10.8%, respectively, of net accounts receivable.

Income Taxes

The Company accounts for income taxes in accordance with ASC 740, “Income Taxes,” using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets are reduced by a valuation allowance when, in the following tablesopinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Basic and Diluted Earnings Per Share

In accordance with ASC 260, “Earnings Per Share,” the basic income (loss) per common share is computed by dividing the net income (loss) available to be our most significant customers. The tables set forthcommon stockholders by the percentage of sales attributable to each customerweighted average common shares outstanding during the periods presented, and the respective customer’s ending accounts receivable balance as a percentage of reported accounts receivable, net,period. Diluted income (loss) per share reflect per share amounts that would have resulted if diluted potential common stock had been converted to common stock. Dilutive common share equivalents as of SeptemberJune 30, 20172019, representing 511,801 of outstanding in-the-money warrants, were included in the computation of diluted net income (loss) per share using the Treasury Stock Method. During the six months ended June 30, 2019 and 2016.2018, the Company had total common stock equivalents of 106,077 and 432,594, respectively, which excluded from the computation of net income per share because they are anti-dilutive.

Fair Value of Financial Instruments

The fair valueCompany’s financial instruments consist of ourcash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate theirexpenses. The carrying amountsamount of these financial instruments approximates fair value due to the relative short maturitiesnature of these items.the accounts and their short-term maturities.

The fair value of warrants at issuance and for those recorded as a liability at each reporting date are determined in accordance withRecently Adopted Accounting Pronouncements

Leases

In February 2016, the Financial Accounting Standards Board’sBoard (“FASB”) Accounting Standards Codification (“ASC”) 820,“Fair Value Measurement,” which establishes a fair value hierarchy that prioritizes the assumptions (inputs) to valuation techniques used to price assets or liabilities that are measured at fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The guidance for fair value measurements requires that assets, liabilities and certain equity instruments measured at fair value be classified and disclosed in one of the following categories:

Recent Accounting Pronouncements

In May 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers2016-02, “Leases (Topic 606)842),” (“which requires lessees to recognize a right-of-use asset and a lease liability for most leases on the balance sheet as well as other qualitative and quantitative disclosures. ASU 2014-09”). Subsequently2016-02 is to be applied using a modified retrospective method and was effective for the Company on January 1, 2019. In July 2018, the FASB has released several updatesissued ASU 2018-11, “Leases (Topic 842),” which provides an optional transition method allowing entities to ASU 2014-09 including ASU 2016- 20, ASU 2016-12, ASU-2016-10, ASU-2016-08, and ASU-2015-14. The effective date for ASU 2014-09 will berecognize a cumulative-effect adjustment to the first quarteropening balance of fiscal year 2018 with early adoption permittedstockholders’ equity in the first quarterperiod of fiscal year 2017. Duringadoption, with no restatement of comparative prior periods required. The Company adopted the three-month periodstandard using this optional transition method. The Company also made an accounting policy to exclude leases with an initial term of 12 months or less from the balance sheet as permitted under the new guidance.

The Company assessed the impact that the new lease recognition standard had on its consolidated financial statements. As of the adoption date of January 1, 2019, the Company has only one lease, which was for its office space it leases under a month-to-month arrangement for a monthly amount of $4,000, which can be cancelled at any time by either party with a six-month advance notice. As management has elected a policy to exclude leases with an initial term of 12 months of less from the balance sheet presentation required under Topic 842, the office lease has been excluded from balance sheet presentation as it has an original term of 12 months or less. The rent associated with the lease continues to be expensed as incurred. Rent expense for the three months ended June 30, 2017,2019 and 2018, amounted to $12,000 and $12,000, respectively. Rent expense for the Company completed a detailed review of the Topic 606 standard relativesix months ended June 30, 2019 and 2018, amounted to our revenue recognition policies$24,000 and practice. That review is still in process and the Company expects that it will be completed by November 30, 2017. However, the Company continues to believe that adoption of this standard will not have a material effect on either our historical financial results or future financial results.$24,000, respectively.

4.3. Property and Equipment

Property and equipment was:consisted of the following.

Aggregate propertyDepreciation expense amounted to $300 and equipment depreciation$8,800 for the three months ended June 30, 2019 and amortization2018, respectively. Depreciation expense was $8,900amounted to $400 and $42,200 during$17,800 for the three-month periodsix months ended June 30, 2019 and nine-month ended September 30, 2017, respectively, and $21,200 and $70,800 during the same periods ended September 30, 2016. During the nine-month periods ended September 30, 2017 and 2016, we disposed of equipment and furniture with a combined net book value of $61,300 and $20,100,2018, respectively.

5. 4. Stockholders’ Equity

Stock-Based Compensation Plans

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

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

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

All options granted under the 12 Plan are immediately exercisable by the optionee; however, there is a vesting period for the options. The options (and the shares of common stock issuable upon exercise of such options) vest, ratably, over a 33-month period; however, no options (and the underlying shares of common stock) vest until after three months from the date of the option grant. The exercise price is immediately due upon exercise of the option. The maximum term of options issued under the 12 Plan is ten years. Shares issued upon exercise of options are subject to the Company’s repurchase, which right lapses as the shares vest. The 12 Plan will terminate no later than November 7, 2022. As of June 30, 2019, 411,593 shares of common stock remained available for issuance under the 12 Plan.

The following summarizes the stock option activity for the six months ended June 30, 2019.

The following table summarizes the stock-based compensation expense, netinformation about options outstanding and exercisable as of amounts capitalized, we recorded in our Unaudited Condensed Consolidated Statements of Operations for the three and nine-month periods ended SeptemberJune 30, 2017 and 2016, respectively, by classification:2019.

6. RevenueWarrants

Revenue for the three-month periods ended September 30, 2017 and 2016 was:

Revenue for the nine-month periods ended September 30, 2017 and 2016 was:

7. Cost of Revenue

Cost of revenue for the three-month periods ended September 30, 2017 and 2016 was:

Cost of revenue for the nine-month periods ended September 30, 2017 and 2016 was:

8. Commitments and Contingencies

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

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

On August 24, 2015, we entered into a new office lease for our corporate headquarters at 51 East Campbell Avenue in Campbell, California which was better suited to our California operations and resulted in significant monthly savings. The term of this lease is from October 1, 2015 through September 30, 2018.

On April 28, 2017 we entered into a sublease agreement to sublease the entirety of the leased space at 51 East Campbell Avenue to a third party. The term of the sublease began on June 1, 2017 and extends through the end of our office lease term for that space. The monthly rent payments due to hopTo will offset approximately 62% of the monthly rent payments due to the landlord under hopTo’s lease for that space. (See Deferred Rent section of Note 3.)

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

During the three-month period ended September 30, 2016, our CEO and CFO voluntarily agreed with our board of directors to defer 50% of their salary beginning September 1, 2016 until such time as the Company can reasonably pay such compensation upon approval by the board of directors. The deferred salaries are recorded as a component of accounts payable and accrued expenses on the Condensed Consolidated Balance Sheet. See Note 12 – Subsequent Events.

During the three and nine-month periodssix months ended SeptemberJune 30, 2017, respectively, we reported non-cash expense of $0 and $284,000, respectively, related to potential liquidated damages resulting from delays in filing registration statements for shares and shares underlying warrants for certain of the private placements that2019, the Company closed in prior periods. There were no such expenses recorded in the comparable prior year period. We are in the process of seeking waivers from shareholders for such liquidated damages. The potential liquidated damages is reported as other current liabilities on the condensed consolidated balance sheet and as a component of general and administrative expense on the condensed consolidated statements of operations.

9. Supplemental Disclosure of Cash Flow Information

We disbursed $200 and $800 for the payment of interest expense during the nine-month periods ended September 30, 2017 and 2016, respectively.

We disbursed $2,800 and $2,300 for the payment of foreign income taxes associated with the operation of our Israeli subsidiary during the nine-month periods ended September 30, 2017 and 2016, respectively.

10. Earnings (Loss) Per Share

Earnings or loss per share is calculated by dividing the net income or loss for the period by the weighted average number ofissued 30,466 shares of common stock outstanding during the period. Diluted earnings or loss per share (“Diluted EPS”) is calculated by dividing the net income or loss for the period by the total of the weighted average number of shares of common stock outstanding during the period plus the effects of any dilutive securities. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of such potential shares of common stock would have an anti-dilutive effect. During all periods presented in our Condensed Consolidated Statements of Operations, potentially dilutive securities included shares of common stock potentially issuable upon exercise of stock options, release of unvested restricted stock awards and exercise of warrants. Diluted EPS excludesAs of June 30, 2019, and December 31, 2018, the impactCompany had 481,335 and 622,912 warrants outstanding, respectively. The warrants outstanding at June 30, 2019 are all exercisable at $0.01 and have an expiration date of potential issuance of shares of common stock related to our stock options in periods in which the exercise price of the stock option is greater than the average market price of our common stock during such periods.

For the three and nine-month periods ended September 30, 2017 and for the three and nine-month periods ended September 30, 2016, 1,375,509 and 1,412,507 shares of common stock equivalents, respectively, were excluded from the computation of dilutive loss per share since their effect would be anti-dilutive.May 20, 2023.

11. Segment Information5. Sales by Geographical Location

Revenue by country for the three-monththree and nine-month periodssix months ended SeptemberJune 30, 20172019 and 20162018 was as follows:follows.

12. Subsequent Events6. Commitments and Contingencies

On October 10, 2017, theProfit Sharing Plans

The Company and salesforce.com entered intohas adopted a Patent Purchase Agreement (effective as of October 5, 2017), pursuant401(k) plan to provide retirement benefits for employees under which the Company sold sevenmakes discretionary matching contributions. During the three months ended June 30, 2019 and 2018, the Company contributed a total of its patents for an aggregate consideration$1,900 in each year in the same period. During the six months ended June 30, 2019 and 2018, the Company contributed a total of $400,000,$14,100 and also received,$15,300, respectively.

Contingencies

During the ordinary course of business, the Company is subject to various terms, conditionspotential claims and limitations,litigation. Management is not aware of any outstanding litigation which would have a license back of those patents. The patents sold were U.S. Patent numbers: 9395826, 9398111, 9419848, 8745280, 8892782, 8738814 and 8856907.significant impact on the Company’s financial statements.

On October 25, 2017, the board of directors of7. Related Party Transactions

The Company’s Chief Executive Officer and Interim Chief Financial Officer has served in these executive roles providing management services to the Company determined thatsince September 2018, however, does not currently receive a salary or other forms of compensation. During the financial status ofthree and six months ended June 30, 2019, the Company had improved fromhas recorded an expense and contributed capital of $56,200 and $112,200, respectively, for contributed services based on the financial status of the Company during the three month period ended September 30, 2016, when the Company’s CEO and CFO voluntarily agreed with the board of directors to defer 50% of their salary beginning September 1, 2016 until such time as the Company could reasonably pay such compensation upon approval by the board of directors. Accordingly, the board of directors determined that it was reasonableestimated market rate for the Company to pay 50% of this deferred salary and such payments were made to the CFO and CEO on October 30, 2017.these services.

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

Update on HopTo PlansForward-Looking Information

AsThis report includes, in addition to historical information, “forward-looking statements”. All statements other than statements of Q4 2016,historical fact we have effectively ceased allmake in this report are forward-looking statements. In particular, the statements regarding industry prospects and our expectations regarding future results of our sales, marketingoperations or financial position (including those described in this Management’s Discussion and development efforts for the hopTo products,Analysis of Financial Condition and at this time we do not expect any meaningful revenuesResults 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 these productsthose described in the foreseeable future.forward-looking statements. Factors that may cause such a difference include the following:

We continue to actively operate our GO-Global business and we are currently evaluating ways to enhance its performance.

Other than recent salesStatements included in this report are based upon information known to us as of selected patents (see Note 12 to our Notes to Unaudited Condensed Consolidated Financial Statements), we continue to own all hopTo-related and GO-Global related intellectual property including source-code, related patents, and the relevant trademarks. We continue to believedate that we may be able to extract value from these assets and are currently working to do so at this time. For detailed information on the hopTo products and technologies, please refer to our Annual Report on Form 10-K for the year ended December 31, 2016, which wasreport is filed with the SEC, on April 7, 2017and we assume no obligation to update or alter our forward-looking statements made in this report, whether as wella result of new information, future events or otherwise, except as our other SEC filings which are available at www.sec.gov.

Although there is no certainty as to timing or success of these efforts to extract value from these assets, and stockholders should not place any significant reliance on the outcome of such efforts unless and until definitive agreements are reached, this may include additional sale of certain of our hopTo software products, the sale of patents, and the monetization of the GO-Global business or some combinations of these transactions. (See Notes 2 and 12 to our Notes to Unaudited Condensed Consolidated Financial Statements).

The following description of our business and business opportunities is expressly qualifiedotherwise required by the preceding statement and the going concern disclosure in Note 2 to our Unaudited Condensed Consolidated Financial Statements.applicable federal securities laws.

Introduction

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

SinceBeginning in 2012, we have also been developingdeveloped and marketed several products in the field of software productivity for mobile devices such as tablets and smartphones which have been marketed under the hopTo brand. We ceased all our sales, marketing and development for the hopTo products in 2016.

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

Over the years, weWe have also made significant investments in intellectual property (“IP”). We have and filed many patents designed to protect the new technologies embedded in hopTo.

Corporate Background

the hopTo products. We are a Delaware corporation, founded in May 1996. Our headquarters are located at 6 Loudon Road, Suite 200, Concord, New Hampshire, 03301currently marketing for sale 49 patents and our phone number is 1-800-472-7466. Our phone number for local and international calls is 408-688-2674. Additionally, we have remote employees located in various states, as well as internationally in the United Kingdom and Israel. Our corporate Internet Website is http://www.hopto.com. The information on our website is not part of this quarterly report.

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

Our Intellectual Property

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

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

We also currently hold rights to patents. We occasionally file patent applications to protect innovations arisingrelated source code developed from our research,hopTo development and design.

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

ipCapital Group, Inc.

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

As a result of ipCapital’s work under the engagement agreement, as amended, as of November 14, 2017, 173 patent applications have been filed. Of these 173 applications, 53 patents have been granted by the United States Patent and Trademark Office (“USPTO”). Due to financial constraints on our operations, we have suspended patent prosecution activity other than to pay issuance fees for patents already approved by USPTO. As of November 14, 2017 there are no patent applications that remain pending with the USPTO. We do not expect to file more applications in 2017.

Our GO-Global Software Products

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

We intend to continue to operate Go-Global, as it remains a viable stand-alone business and our sole revenue source at this time.efforts.

Critical Accounting Policies

We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as “critical” because these specific areas require us to make judgments and estimates about matters that are uncertain at the time we make the estimates. Actual results may differ from these estimates. For a summary of our critical accounting policies, please refer to our 20162018 10-K Report and Note 32 to our Notes to Unaudited Condensed Consolidatedunaudited consolidated financial statements included under Item 1 – Financial Statements.

Statements in this Form 10-Q.

Results of Operations for the Three Months Ended June 30, 2019 and Nine-Month Periods Ended September 30, 2017 and 20162018

The following operatingare the results should be read in conjunction withof our critical accounting policies. See Note 3operations for the three months ended June 30, 2019 as compared to our Notes to Unaudited Condensed Consolidated Financial Statements.the three months ended June 30, 2018.

RevenueRevenues

Revenue for the three-month periods ended September 30, 2017 and 2016 was:

Revenue for the nine-month periods ended September 30, 2017 and 2016 was:

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

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 following is a summary of our revenues by category for the three months ended June 30, 2019 and 2018.

Software Licenses

Software licenseWindows software licenses revenue decreased by $29,300 or 16.1% to $152,800 during the three months ended June 30, 2019, from our Windows products increased$182,100 for the three and nine-month periods ended September 30, 2017, as compared with the same periods of the prior yearperiod in 2018. The decrease was primarily due to higher license purchaseslower purchase in stocking orders licenses from a certain of our OEM partners and stocking resellers.Brazil reseller for three months ended June 30, 2019.

Software license revenue from our UNIX/Linux products increased during the three-month period ended September 30, 2017, as compared with the same period of the prior year, primarily due to higher revenue from certain of our telecommunications customers. Software licenses revenue from our UNIX/Linux products increased duringdecreased by $48,000 or 95.2% to $2,400 for the nine-month periodthree months ended SeptemberJune 30, 2017, as compared with2019 from $50,400 for the same period of the prior year,in 2018. The decrease was primarily due to higherlower revenue from certain U.S. government customers.

We expect aggregate GO-Global software license revenue for both Windows and UNIX in 2017 to be approximately the same as the license revenue levels for 2016.

lower stocking order licenses.

Software Service Fees

The decrease in software serviceService fees revenue attributable to our Windows products,product service decreased by $19,300 or 3.8% to $484,300 during the nine-month periodthree months ended SeptemberJune 30, 2017, as compared to2019, from $503,600 for the same period of the prior year,in 2018. The decrease was primarily due to the timinga lower of customer renewalslicense orders stated above, offset by higher of maintenance contacts.Windows subscription licenses.

The decrease in serviceService fees revenue attributable to our UNIX products fordecreased by $31,200 or 31.0% to $69,500 during the three and nine-month periodsmonths ended SeptemberJune 30, 2017, as compared with2019, from $100,700 for the same period of the prior year,in 2018. The decrease was primarily the result of the lower level of our UNIX product sales duringthroughout the prior yearsyear and a resultant decrease inan expiration of certain long-term maintenance contract renewals.contracts. The majority of this decrease was attributable to our European telecommunications customers.

Due to the trends mentioned above we expect that software service fees for 2017 will be modestly lower than those for 2016.

Other

The increase in otherOther revenue consists of private labeling fees and professional services. Other revenue decreased by $6,200 or 21.2% for the three and nine-month periodsmonths ended SeptemberJune 30, 2017, as2019, compared withto the same period of the prior year was primarily due to increase in professional services and private labeling fees.2018.

CostsCost of RevenueRevenues

CostsCost of revenue areis comprised primarily of software service costs, which represent the costs of customer service, andservice. Also included in cost of revenue are software product costs, which areis primarily comprised of the amortization of capitalized software development costs, and costs associated with licenses for third party software included in our product offerings.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.

Under GAAP, development costs for new product development, after technological feasibility is established, are recorded as “capitalized software” on our Condensed Consolidated Balance Sheet. Such capitalized costs are subsequently amortized as costCost of revenue (software product costs) overfor the shorter of three years or the remaining estimated life of the product. During the three-month and nine-month periods ended September 30, 2017 we did not capitalize or impair any software development costs. During the three-month and nine-month periods ended September 30, 2016, we capitalized $0 software development costs and impaired $15,000 associated with the hopTo Work product during the three-month periodmonths ended June 30, 2016.

Amortization of capitalized software development costs was $0 and $200 during2019 increased by $1,900, or 5.0%, to $39,600 for the three-month periodsthree months ended SeptemberJune 30, 2017 and 2016, respectively, and $0 and $5,300 during2019 from $37,700 for the nine-month periods ended September 30, 2017 and 2016, respectively.

same period in 2018. Cost of revenue was 1.5%represented 5.4% and 0.9%4.4% of total revenue for the three months ended SeptemberJune 30, 20172019 and 2016, respectively, and 1.8% and 4.5% of total revenue for the nine months ended September 30, 2017 and 2016,2018, respectively.

Cost of revenue for the three-month periods ended September 30, 2017 and 2016 was:

Cost of revenue for the nine-month periods ended September 30, 2017 and 2016 was:

The increase in software service costs for the three-month period ended September 30, 2017 was due to a reclassification of $15,500 of customer supports costs that was allocated from Selling and Marketing expense to software service costs until three-month period ended December 31, 2016, partially offset by a decrease of $4,600 from lower customer support costs, as compared to the same periods of the prior year. The decrease in software service costs in the nine-month period ended September 30, 2017, as compared with the same periods of the prior year was primarily due to lower customer support costs associated with GoGlobal. Upon release of the commercial versions of hopTo and hopTo Work, we began charging costs associated with supporting the products to costs of revenue. We expect software service costs for 2017 to be lower than those for 2016 as we have been able to reduce headcount costs in this area due to a lower level of effort required.

The decreases in software product costs for the three-month and nine-month periods ended September 30, 2017, as compared with the same periods of the prior year, was almost entirely due to decreased amortization of capitalized software development costs. We expect that software costs of revenue for 2017 will be lower than 2016 levels.

Selling and Marketing Expenses

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

Selling and marketing expenses increased by $2,100, or 1.9%, to $110,600 for the three-month periodthree months ended SeptemberJune 30, 2017 decreased by $6,500, or 6.9%, to $87,400,2019 from $93,900$108,500 for the same period of 2016, whichin 2018. Selling and marketing expenses represented approximately 8.5%15.1% and 10.5%12.5% of total revenue during these periods,for the three months ended June 30, 2019 and 2018, respectively. Selling and marketing expenses forincreased slightly during 2019 due to consulting services and benefit costs and represented a higher percentage of overall total revenue due to the nine-month period ended September 30, 2017 decreased by $405,200 or 61.0% to $259,400 from $664,600 fordecrease in revenue in the same period in 2016, which represented approximately 8.8% and 23.2% of revenue during those periods, respectively.

The decreases in selling and marketing expenses was due to a combination of lower headcount and a decrease in headcount and promotional costs associated with hopTo Work as we have suspended all sales and marketing activity for that product.

We expect to maintain our sales and marketing efforts in 2017 for anticipated GO-Global releases at a level consistent with the second half of 2016; accordingly, we expect 2017 sales and marketing expenses to be lower than 2016.period.

General and Administrative Expenses

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

General and administrative expenses decreased by $614,900,$128,200, or 74.8%39.1%, to $206,700,$199,600 for the three-month periodthree months ended SeptemberJune 30, 2017,2019 from $821,600$327,800 for the same period of 2016, which represented approximately 20.1% and 91.4% of revenue during these periods, respectively.

General and administrative expenses decreased by $845,700, or 40%, to $1,268,900 for the nine-month period ended September 30, 2017, from $2,114,600 for the same period of 2016, which represented approximately 43.3% and 73.8% of revenue during these periods, respectively.

in 2018. The decreasesdecrease in general and administrative expense in the three-month and nine-month period ended September 30, 2017, as compared with the same periods of the prior year, werewas due to a combination of lower administrative salary expense associated with part-time status of our Chief Financial Officer effective April 1, 2017legal and the resignation of our Chief Executive Officer in August 2017, combined with the elimination of accruals for potential liquidated damages that had been made in the prior year periods due to delays in filing registration statements for shares and shares underlying warrants for certain of the private placements that the Company closed in prior periods. There were no such liquidated damages accruals recorded in the comparable current year periods as the Company filed the necessary registration statement in May 2017 eliminating the further need for such accruals. These lower expenses were also due to a combination of decreased rent expense associated with lower net operating leases, decreased legal expenses associated with activity related to our patents, lower stock compensation expense associated with the termination of headcount and other lower costs associated with investor relations, and decreased outside services expense.

In 2017, we intend to continue cost controls and therefore expect that our 2017 general and administrative costs will be lower than those for 2016.accounting costs.