UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31,June 30, 2019

Commission File Number: 0-21683

hopTo Inc.

(Exact name of registrant as specified in its charter)

6 Loudon Road, Suite 200

Concord, NH 03301
(Address of principal executive offices)

Registrant’s telephone number:

(800) 472-7466

(408) 688-2674

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

Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Emerging growth company [  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

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

As of May 15,August 14, 2019, there were issued and outstanding 9,804,4009,834,866 shares of the registrant’s common stock, par value $0.0001.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

hopTo Inc.

Consolidated Balance Sheets

See accompanying notes to unaudited consolidated financial statements

hopTo Inc.

Consolidated Statements of Operations

See accompanying notes to unaudited consolidated financial statements

hopTo Inc.

Consolidated Statements of Stockholders’ Deficit

See accompanying notes to unaudited consolidated financial statements

hopTo Inc.

Consolidated Statements of Cash Flows

See accompanying notes to unaudited consolidated financial statements

hopTo Inc.

Notes to Unaudited Consolidated Financial Statements

1. Organization

hopTo Inc., through subsidiaries (collectively, “we”, “us,” “our” or the “Company”) are developers of application publishing software which includes application virtualization software and cloud computing software for multiple computer operating systems including Windows, UNIX and several Linux-based variants.

The Company sells a family of products under the brand name GO-Global, which is a software application publishing business and is the Company’s sole revenue source at this time. GO-Global is an application access solution for use and/or resale by independent software vendors, corporate enterprises, governmental and educational institutions, and others, who wish to take advantage of cross-platform remote access and Web-enabled access to their existing software applications, as well as those who are deploying secure, private cloud environments.

2. Significant Accounting Policies

Basis of Presentation

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

The unaudited consolidated financial statements included herein reflect all adjustments, which include only normal, recurring adjustments, that are, in our opinion, necessary to state fairly the results for the periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018 which was filed with the SEC on April 1, 2019 (“2018 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, 2019 or any future period.

Certain prior year information has been reclassified to conform to current year presentation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Amounts could materially change in the future. These significant estimates include the valuation of stock-based compensation expense, the allowance for doubtful accounts depreciation of long-lived assets, and accruals of liabilities.

Liquidity

The Company has incurred significant net losses since inception. As of March 31,June 30, 2019, we had an accumulated deficit of $80,236,800$80,237,500 and a working capital deficit of $443,400,$425,300, which includes deferred revenue of $1,331,500.$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. Subject to the foregoing, management believes that the Company has sufficient capital and liquidity to fund its operations for at least one year from the date of issuance of the accompanying financial statements.

Revenue Recognition

The Company markets and licenses 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.

The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers.” Revenues under ASC 606 are recognized when the promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or services.

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

All of our licenses are delivered to the customer electronically. The Company sends the license key to the customer to download the related software from Company portal. We recognize revenue upon delivery of these licenses. For stocking resellers who purchase licenses through inventory stocking orders with the intent to resell to an end-user, revenue is recognized when the resellers’ accounts have been credited, at their discretion, for the number of licenses purchased.

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.

The Company’s product sales by geographic area are presented in Note 5.

Cash and Cash Equivalents

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

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts that reflects our best estimate of potentially uncollectible trade receivables. The allowance is based on assessments of the collectability of specific customer accounts and the general aging and size of the accounts receivable. We regularly review the adequacy of our allowance for doubtful accounts by considering such factors as historical experience, credit worthiness, and current economic conditions that may affect a customer’s ability to pay. We specifically reserve for those accounts deemed uncollectible. We also establish, and adjust, a general allowance for doubtful accounts based on our review of the aging and size of our accounts receivable. As of March 31,June 30, 2019 and December 31, 2018, the allowance for doubtful accounts totaled $18,600$6,800 and $3,600, respectively.

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. No such impairment charge was recorded during the three or six months ended June 30, 2019 or 2018.

Property and Equipment

Property and equipment are recorded at historical cost and depreciated on a straight-line basis over their estimated useful lives ranging from three to seven years.

Concentration of Credit Risk

For the three months ended March 31,June 30, 2019, the Company had 3one customer and two customers comprising 24.9%14.5%, 14.6% and 11.0%10.3%, respectively, of total revenues. For the three months ended March 31,June 30, 2018, the Company had 2 customersone customer comprising 14.8% and 14.2%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. A lossFor the six months ended June 30, 2018, the Company had one customer comprising 15.7% of one of these customers could potentially have a significant negative impact on the Company’s financial statements.total revenues.

As of March 31,June 30, 2019, the Company has 2five customers comprising 56.5%23.6%, 18.5%, 14.9%, 11.4%, and 15.9%11.3%, respectively, of net accounts receivable. As of December 31, 2018, the Company has 3three customers comprising 32.1%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 opinion 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 common stockholders by the weighted average common shares outstanding during the 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 March 31,June 30, 2019, 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 threesix months ended March 31,June 30, 2019 and 2018, the Company had total common stock equivalents of 106,077 and 1,012,619,432,594, respectively, which were excluded from the computation of net income (loss) per share because they are anti-dilutive.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses. The carrying amount of these financial instruments approximates fair value due to the nature of the accounts and their short-term maturities.

Recently Adopted Accounting Pronouncements

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 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 2016-02 is to be applied using a modified retrospective method and was effective for the Company on January 1, 2019. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842),” which provides an optional transition method allowing entities to recognize a cumulative-effect adjustment to the opening balance of stockholders’ equity in the period of adoption, with no restatement of comparative prior periods required. The Company adopted the standard 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 March 31,June 30, 2019 and 2018, amounted to $12,000 and $12,000, respectively.

Rent expense for the six months ended June 30, 2019 and 2018, amounted to $24,000 and $24,000, respectively.

3. Property and Equipment

Property and equipment consisted of the following.

Depreciation expense amounted to $100$300 and $9,000$8,800 for the three months ended March 31,June 30, 2019 and 2018, respectively. Depreciation expense amounted to $400 and $17,800 for the six months ended June 30, 2019 and 2018, respectively.

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 March 31,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 threesix months ended March 31,June 30, 2019.

The following table summarizes information about options outstanding and exercisable as of March 31,June 30, 2019.

Warrants

During the six months ended June 30, 2019, the Company issued 30,466 shares of common stock for the exercise of warrants. As of March 31,June 30, 2019, and December 31, 2018, the Company had 511,801481,335 and 622,912 warrants outstanding, respectively. The warrants outstanding at March 31,June 30, 2019 are all exercisable at $0.01 and have an expiration date of May 20, 2023.

5. Sales by Geographical Location

Revenue by country for the three and six months ended March 31,June 30, 2019 and 2018 was as follows.

6. Commitments and Contingencies

Profit Sharing Plans

The Company has adopted a 401(k) plan to provide retirement benefits for employees under which the Company makes discretionary matching contributions. During the three months ended March 31,June 30, 2019 and 2018, the Company contributed a total of $12,200$1,900 in each year in the same period. During the six months ended June 30, 2019 and $13,400,2018, the Company contributed a total of $14,100 and $15,300, respectively.

Contingencies

During the ordinary course of business, the Company is subject to various potential claims and litigation. Management is not aware of any outstanding litigation which would have a significant impact on the Company’s financial statements.

7. 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 since September 2018, however, does not currently receive a salary or other forms of compensation. During the three and six months ended March 31,June 30, 2019, the Company has recorded an expense and contributed capital of $56,300$56,200 and $112,200, respectively, for contributed services based on the estimated market rate for these services.

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

Forward-Looking Information

This report includes, in addition to historical information, “forward-looking statements”. All statements other than statements of historical fact we make in this report are forward-looking statements. In particular, the statements regarding industry prospects and our expectations regarding future results of operations or financial position (including those described in this Management’s Discussion and Analysis of Financial Condition and Results of Operations) are forward-looking statements. Such statements are based on management’s current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ significantly from those described in the forward-looking statements. Factors that may cause such a difference include the following:

Statements included in this report are based upon information known to us as of the date that this report is filed with the SEC, and we assume no obligation to update or alter our forward-looking statements made in this report, whether as a result of new information, future events or otherwise, except as otherwise required by applicable federal securities laws.

Introduction

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. 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.

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

We have made investments in intellectual property (“IP”) and filed many patents designed to protect the technologies embedded in the hopTo products. We are currently marketing for sale 49 patents and related source code developed from our hopTo development 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 2018 10-K Report and Note 2 to our unaudited consolidated financial Statementsstatements included under Item 1 – Financial Statements in this Form 10-Q.

Results of Operations for the Three-Month PeriodsThree Months Ended March 31,June 30, 2019 and 2018

The following are the results of our operations for the three months ended March 31,June 30, 2019 as compared to the three months ended March 31,June 30, 2018.

Revenues

Our software revenue is entirely related to our GO-Global product line, and historically has been primarily derived from product licensing fees and service fees from maintenance contracts. The majority of 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”).

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

Windows software licenses revenue increaseddecreased by $130,400$29,300 or 63.6%16.1% to $335,500$152,800 during the three months ended March 31,June 30, 2019, from $205,100$182,100 for the same period in 2018. The increasedecrease was primarily due to lower purchase in stocking orders licenses from a certain partner that purchased a large order of Window licenses from the Company during theBrazil reseller for three months ended March 31,June 30, 2019.

Software licenses revenue from our UNIX/Linux products decreased by $4,700$48,000 or 25.7%95.2% to $13,600$2,400 for the three months ended March 31,June 30, 2019 from $18,300$50,400 for the same periods ofperiod in 2018. The decrease was primarily due to lower revenue from lower stocking order licenses.

We expect aggregate GO-Global total software license revenue in 2019 to be in-line with 2018 levels as we are observing a mix of both higher and lower aggregate revenue from our various customers.

Software Service Fees

Service fees attributable to our Windows product service increaseddecreased by $132,100$19,300 or 28.4%3.8% to $597,700$484,300 during three months ended March 31,June 30, 2019, from $465,600$503,600 for the same period in 2018. The increasedecrease was primarily due to a combinationlower of large renewals of maintenance support from OEM partners and an increase of new license orders stated above.above, offset by higher of Windows subscription licenses.

Service fees revenue attributable to our UNIX products decreased by $25,600$31,200 or 23.3%31.0% to $84,100$69,500 during the three months ended March 31,June 30, 2019, from $109,700$100,700 for the same period in 2018. The decrease was primarily the result of the lower level of UNIX product sales throughout the prior year and an expiration of certain long-term maintenance contracts. The majority of this decrease was attributable to our European telecommunications customers.

We expect thatOther

Other revenue consists of private labeling fees and professional services. Other revenue decreased by $6,200 or 21.2% for the three months ended June 30, 2019, compared to the same period in 2018.

Cost of Revenues

Cost of revenue is comprised primarily of software service feescosts, which represent the costs of customer service. Also included in cost of revenue are software product costs, which is primarily the required import tax withholdings from Brazil resellers. We incur no significant shipping or packaging costs as virtually all of our deliveries are made via electronic means over the Internet.

Cost of revenue for the three months ended June 30, 2019 will approximateincreased by $1,900, or 5.0%, to $39,600 for the three months ended June 30, 2019 from $37,700 for the same period in 2018. Cost of revenue represented 5.4% and 4.4% of total revenue for the three months ended June 30, 2019 and 2018, respectively.

Selling and Marketing Expenses

Selling and marketing expenses primarily consisted of employee, outside services and travel and entertainment expenses.

Selling and marketing expenses increased by $2,100, or 1.9%, to $110,600 for the three months ended June 30, 2019 from $108,500 for the same period in 2018. Selling and marketing expenses represented approximately 15.1% and 12.5% of total revenue for the three months ended June 30, 2019 and 2018, respectively. Selling and marketing expenses increased slightly during 2019 due to consulting services and benefit costs and represented a higher percentage of overall total revenue due to the decrease in revenue in the same 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 debt expense.

General and administrative expenses decreased by $128,200, or 39.1%, to $199,600 for 2018 asthe three months ended June 30, 2019 from $327,800 for the same period in 2018. The decrease in general and administrative expense was due to lower legal and accounting costs.

Research and Development Expenses

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

Research and development expenses decreased by $29,000, or 3.7% to $757,500 for the three months ended June 30, 2019 from $786,500 for the same period in 2018. The research and development costs overall remained consistent, although we havehad an increase in research and development expenses during the second quarter of 2019 from higher consulting fees associated with completing the new releases of our GO-Global products, which was offset by lower expenses in the first quarter of 2019.

Other Income

Other income for the three months ended June 30, 2018 primarily related to the settlement and reversal of an accrual for potential liquidated damages that resulted in other income of $155,700, offset by other expenses. There was no such activity in 2019.

Results of Operations for the Six Months Ended June 30, 2019 and 2018

The following are the results of our operations for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.

Revenues

Our software revenue is entirely related to our GO-Global product line, and historically has been primarily derived from product licensing fees and service fees from maintenance contracts. The majority of 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”).

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 six months ended June 30, 2019 and 2018.

Software Licenses

Windows software licenses revenue increased by $84,900 or 21.9% to $472,100 during the six months ended June 30, 2019, from $387,200 for the same period in 2018. The increase was primarily due to a certain partner that purchased a large order of Window licenses from the Company during the first quarter of 2019,

Software licenses revenue from our UNIX/Linux products decreased by $52,700 or 76.7% to $16,000 for the six months ended June 30, 2019 from $68,700 for the same period in 2018. The decrease was primarily due to lower revenue from lower stocking order licenses.

Software Service Fees

Service fees attributable to our Windows product service increased by $129,000 or 13.3% to $1,098,200 during the six months ended June 30, 2019, from $969,200 for the same period in 2018. The increase was primarily due to a combination of large renewals of maintenance support from OEM partners and an increase of new license orders stated above.

Service fees revenue attributable to our UNIX products decreased by $56,900 or 27.0% to $153,500 during the six months ended June 30, 2019, from $210,400 for the three-month periods ended March 31, 2019.same period in 2018. The decrease was primarily the result of the lower level of UNIX product sales throughout the prior year and an expiration of certain long-term maintenance contracts. The majority of this decrease was attributable to our European telecommunications customers.

Other

Other revenue consists of private labeling fees and professional services. Other revenue decreased by $600$6,800 or 2%12.9% to $46,000 for the threesix months ended March 31,June 30, 2019, comparedfrom $52,800compared to the same period in 2018.

Cost of Revenues

Cost of revenue is comprised primarily of software service costs, which represent the costs of customer service. Also included in cost of revenue are software product costs, which are primarily comprised of the amortization of capitalized software development costs and costs associated with licenses to third party software included in our product offerings, and the required import tax withholdings from Brazil resellers. We incur no significant shipping or packaging costs as virtually all of our deliveries are made via electronic means over the Internet.

Cost of revenue for the threesix months ended March 31,June 30, 2019 increased by $400,$2,300, or 1.4%3.5%, to $29,200$68,800 for the threesix months ended March 31,June 30, 2019 from $28,800$66,500 for the same period in 2018. Cost of revenue represented 2.8% and 3.5% of total revenue3.9% for both the threesix months ended March 31,June 30, 2019 and 2018, respectively.

We expect 2019 cost of revenue to be approximately the same as 2018 levels.

2018.

Selling and Marketing Expenses

Selling and marketing expenses primarily consisted of employee, outside services and travel and entertainment expenses.

Selling and marketing expenses increased by $15,400,$17,500, or 15.2%8.3%, to $117,000$227,600 for the threesix months ended March 31,June 30, 2019 from $101,600$210,100 for the same period in 2018. Selling and marketing expenses represented approximately 11.1%12.7% and 12.4% of total revenue for the threesix months ended MarchJune 30, 2019 and 2018, respectively. The increase in sellingSelling and marketing expenses wasincreased during 2019 due increasedto consulting services and benefit costs.

We expect to maintain our sales and marketing efforts in 2019 for anticipated GO-Global releases with select targeted modest investments in promotional activity; accordingly, for this reason, we expect 2019 sales and marketing expenses to be slightly higher than 2018 levels.

General and Administrative Expenses

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

General and administrative expenses decreased by $10,200,$138,400, or 3.3%21.9%, to $295,000$494,600 for the threesix months ended March 31,June 30, 2019 from $305,200$633,000 for the same period in 2018. General and administrative expenses represented approximately 28% and 37.1% of total revenue for the three months ended March 31, 2019 and 2018, respectively.

The decrease in general and administrative expense was due to lower legal costs, partially offset by higherand accounting fees due to the timing of expenses.

In 2019, we anticipate a reduction in accounting fees and legal fees compared to 2018 levels due to changes in service providers and improved cost controls by management. We therefore expect that our 2019 general and administrative costs will be slightly lower than those for 2018.costs.

Research and Development Expenses

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

Research and development expenses decreased by $54,000,$29,000, or 12.6%3.7% to $374,500$757,500 for the threesix months ended March 31,June 30, 2019 from $428,500$786,500 for the same period in 2018. This represented approximately 35.5% and 52.1% of total revenue for the three months ended March 31, 2019 and 2018, respectively.

The decreaseincrease in research and development expense was primarily due to decreasesincreased consulting fees associated with completing the new releases of our GO-Global products.

In 2019, we expectOther Income

Other income for the six months ended June 30, 2018 primarily related to continue our investmentsthe settlement and reversal of an accrual for potential liquidated damages that resulted in research and development resources associated with our GO-Global products based on market feedback. We therefore expect 2019 research and development expenses to be slightly higher than 2018 levels.other income of $155,700, offset by other expenses. There was no such activity in 2019.

Liquidity and Capital Resources

As of March 31,June 30, 2019, we had cash of $1,002,700$1,120,300 and a working capital deficit of $443,400$425,300 as compared to cash of $892,500 and a working capital deficit of $716,200 at December 31, 2018. The increase in cash as of March 31,June 30, 2019 was primarily the result of cash provided by operations during the period due to increased profitability. We expect our results from operations and capital resources will be sufficient to fund our operations for at least the next 12 months from the date of the filing of this quarterly report on Form 10-Q.

The following is a summary of our cash flows from operating, investing and financing activities for the threesix months ended March 31,June 30, 2019 and 2018.

Net cash flows provided by operating activities for the threesix months ended March 31,June 30, 2019 amounted to $110,200,$227,500, compared to cash flows used in operating activities of $143,600$21,200 for the threesix months ended March 31,June 30, 2018. During the threesix months ended March 31,June 30, 2019, our operating cash flow used of $110,200$227,500 was primarily the result of our net income for the period of $251,900,$251,200, offset by a decrease in cash resulting from an increasea decrease in accounts receivablespayable and accrued expenses of $199,500.$80,700 and a decrease in deferred revenue of $113,500, offset by non-cash expenses of $112,500 for contributed services. During the threesix months ended March 31,June 30, 2018, our cash flow fromflows used in operations of $143,600$21,200 was primarily the result of a decrease in ourcash resulting from a decrease in accounts receivable during the periodpayable and accrued expenses of $195,200,$153,100 and a decrease in deferred revenue of $176,000, offset by a net lossincome for the period of $43,600.$121,000.

We had no cash flow activity relating to investing or financing activities for the threesix months ended March 31,June 30, 2019 or 2018. Our cash flows provided by financing activities amounted to $300 during the six months ended June 30, 2019 due to proceeds from the exercise of warrants. There was no cash flow activity related to financing activities during the six months ended June 30, 2018.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

ITEM 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31,June 30, 2019.

There has not been any change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31,June 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

Not applicable

ITEM 1A. Risk Factors

There have been no material changes in our risk factors from those set forth under Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission on April 1, 2019.

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

We did not sell any unregistered securities during the quarter ended March 31,June 30, 2019.

ITEM 3. Defaults Upon Senior Securities

Not applicable

ITEM 4. Mine Safety Disclosures

Not applicable

ITEM 5. Other Information

Not applicable

ITEM 6. Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.