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[March 31, 2014]
HOPTO INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) We are developers of software productivity products for mobile devices such as tablets and smartphones, and application publishing software solutions. Our newest product, which is called hopTo, will be marketed to both consumers and businesses. hopTo will provide mobile end-users with a productivity workspace for their mobile devices that will allow users to manage, share, view, and edit their documents, regardless of where they are stored. We launched the first public release of hopTo through Apple's App Store on April 15, 2013 and the first commercial version of hopTo on November 14, 2013. This release was targeted at Apple's tablet devices, the iPad and the iPad Mini. Future releases will be targeted at other devices such as Apple's iPhone, as well as competing devices such as those based on Google's Android platform.
In addition to hopTo, we also sell a family of products under the brand name GO-Global, which is a software application publishing business and is our sole revenue source at this time. GO-Global is an application access solution for use and/or resale by independent software vendors ("ISVs"), corporate enterprises, governmental and educational institutions, and others, who wish to take advantage of cross-platform remote access and Web-enabled access to their existing software applications, as well as those who are deploying secure, private cloud environments.
Over the years, we've also made significant investments in intellectual property ("IP"). We have filed many patents designed to protect the new technologies embedded in hopTo, and we plan to continue to aggressively invest in the creation and protection of new IP as we continue to develop hopTo and other products.
The following discussion should be read in conjunction with the consolidated financial statements and related notes provided in Item 8 "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.
Critical Accounting Policies.
Use of Estimates The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the period(s) being reported upon. Estimates are used for, but not limited to, the amount of stock-based compensation expense, the warrants liability, the amount of capitalized software development costs, the allowance for doubtful accounts, the estimated lives, valuation, and amortization of intangible assets (including capitalized software), depreciation of long-lived assets, post-employment benefits, and accruals for liabilities and taxes. While we believe that such estimates are fair, actual results could differ materially from those estimates.
Revenue Recognition We market and license our products indirectly through channel distributors, ISVs, VARs (collectively "resellers") and directly to corporate enterprises, governmental and educational institutions and others. Our product licenses are perpetual. We also separately sell maintenance contracts (which are comprised of license updates and customer service access), and other products and services.
Software license revenues are recognized when: ? Persuasive evidence of an arrangement exists (i.e., when we sign a non-cancelable license agreement wherein the customer acknowledges an unconditional obligation to pay, or upon receipt of the customer's purchase order), and ? Delivery has occurred or services have been rendered and there are no uncertainties surrounding product acceptance (i.e., when title and risk of loss have been transferred to the customer, which generally occurs when the media containing the licensed program(s) is provided to a common carrier or, in the case of electronic delivery, when the customer is given access to the licensed programs), and ? The price to the customer is fixed or determinable, as typically evidenced in a signed non-cancelable contract, or a customer's purchase order, and ? Collectability is probable. If collectability is not considered probable, revenue is recognized when the fee is collected.
Revenue recognized on software arrangements involving multiple deliverables is allocated to each deliverable based on vendor-specific objective evidence ("VSOE") or third party evidence of the fair values of each deliverable; such deliverables include licenses for software products, maintenance, private labeling fees, and customer training. We limit our assessment of VSOE for each deliverable to either the price charged when the same deliverable is sold separately, or the price established by management having the relevant authority to do so, for a deliverable not yet sold separately.
16 -------------------------------------------------------------------------------- If sufficient VSOE of fair value does not exist, so as to permit the allocation of revenue to the various elements of the arrangement, all revenue from the arrangement is deferred until such evidence exists or until all elements are delivered. If VSOE of the fair value does not exist, and the only undelivered element is maintenance, then we recognize revenue on a ratable basis. If VSOE of the fair value of all undelivered elements exists but does not exist for one or more delivered elements, then revenue is recognized using the residual method.
Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as 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, we do not ship any product licenses to them, rather, the stocking reseller's inventory is credited with the number of licenses purchased and the stocking reseller can resell (issue) any number of licenses from their inventory at any time. Upon receipt of an order to issue one or more licenses from a stocking reseller's inventory (a "draw down order"), we will ship the license(s) in accordance with the draw down order's instructions. We defer recognition of revenue from inventory stocking orders until the underlying licenses are sold and shipped to the end user, as evidenced by the receipt and fulfillment of the stocking reseller's draw down order, assuming all other revenue recognition criteria have been met.
There are no rights of return granted to resellers or other purchasers of our software products.
We recognize revenue from maintenance contracts ratably over the related contract period, which generally ranges from one to five years.
All of our software licenses are sold in U.S. dollars.
Deferred Rent The lease for our office in Campbell, California, which includes the amendment for the new space we occupied on February 1, 2014, contains free rent and predetermined fixed escalations in our minimum rent payments. We recognize rent expense related to this lease on a straight-line basis over the term of the lease. We record any difference between the straight-line rent amounts and amounts payable under the lease as part of deferred rent in current or long-term liabilities, as appropriate.
Incentives that we received pursuant to the amended lease agreement are recognized on a straight-line basis as a reduction to rent over the term of the lease. We record the unamortized portion of these incentives as a part of deferred rent in current or long-term liabilities, as appropriate.
Post-employment Benefits (Severance Liability) Nonretirement postemployment benefits, including salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits and continuation of benefits such as health care benefits, are recognized as a liability and a loss when it is probable that the employee(s) will be entitled to such benefits and the amount can be reasonably estimated.
The cost of termination benefits recognized as a liability and an expense includes the amount of any lump-sum payments and the present value of any expected future payments. During the year ended December 31, 2012, we recorded $721,800 of severance expense, including stock compensation expense. Such liability was recorded as a result of a separation agreement and a release with Robert Dilworth in connection with Mr. Dilworth's resignation as our Chief Executive Officer and as a member of our board of directors. In addition, during 2013 we recorded an additional $75,700 of severance expense as a result of a separation and release agreement we entered into with a former vice president-level employee (See Note 6). An aggregate $62,900 and $262,400 is reported as a severance liability at December 31, 2013 and 2012, respectively.
Long-Lived Assets Long-lived assets, which consist primarily of capitalized software, are assessed for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable, whenever we have committed to a plan to dispose of the assets or, at a minimum, annually. Typically, for long-lived assets to be held and used, measurement of an impairment loss is based on the fair value of such assets, with fair value being determined based on appraisals, current market value, comparable sales value, and undiscounted future cash flows, among other variables, as appropriate. Assets to be held and used that are affected by an impairment loss are depreciated or amortized at their new carrying amount over their remaining estimated life; assets to be sold or otherwise disposed of are not subject to further depreciation or amortization.
17--------------------------------------------------------------------------------Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts that reflects our best estimate of potentially uncollectible trade receivables. The allowance is based on assessments of the collectability of specific customer accounts and the general aging and size of the accounts receivable. We regularly review the adequacy of our allowance for doubtful accounts by considering such factors as historical experience, credit worthiness, and current economic conditions that may affect a customer's ability to pay. We specifically reserve for those accounts deemed uncollectible. We also establish, and adjust, a general allowance for doubtful accounts based on our review of the aging and size of our accounts receivable.
The following table sets forth the details of the Allowance for Doubtful Accounts for the years ended December 31, 2013 and 2012: Beginning Charge Ending Balance Offs Recoveries Provision Balance 2013 $ 33,900 $ - $ - $ 8,100 $ 42,000 2012 25,000 - - 8,900 33,900 Software Development Costs We capitalize software development costs incurred from the time technological feasibility of the software is established until the time the software is available for general release, in accordance with accounting principles generally accepted in the United States ("GAAP"). Research and development costs and other computer software maintenance costs related to the software development are expensed as incurred. Upon the establishment of technological feasibility, related software development costs are capitalized. Such capitalized costs are subsequently amortized as costs of revenue over the shorter of three years or the remaining estimated useful life of the product.
Software development costs, and amortization of such costs, are discussed further under "- Results of Operations - Costs of Revenue." Stock-Based Compensation We apply the fair value recognition provisions of the Financial Accounting Standards Board (FASB) Codification Subtopic (ASC) 718-10, "Compensation - Stock Compensation." We estimated the fair value of each option grant made during the years ended December 31, 2013 and 2012 on the date of grant using a binomial model, with the assumptions set forth in the following table: 2013 2012 Estimated volatility 113% - 125% 70% - 174% Annualized forfeiture rate 5.34% - 10.02% 0.0% - 9.79% Expected option term (years) 10.00 0.25 - 10.00 Estimated exercise factor 6.5 - 15 5 - 15Approximate risk-free interest rate 2.71 - 2.74% 0.08% - 2.04% Expected dividend yield - - In estimating our stock price volatility for grants awarded during the years ended December 31, 2013 and 2012, we analyzed our historic volatility over a period of time equal in length to the expected option term for the option being issued. For grants made to newly hired employees the period of time over which we analyzed our historic volatility ended on the last day of the quarter during which the new employee was hired. We derived an annualized forfeiture rate by analyzing our historical forfeiture data, including consideration of the impact of certain non-recurring events, such as reductions in our work force. Our estimates of the expected option term and the estimated exercise factor were derived from our analysis of historical data and future projections. The approximate risk-free interest rate was based on the implied yield available on U. S. Treasury issues with remaining terms equivalent to our expected option term. We believe that each of these estimates is reasonable in light of the data we analyzed. However, as with any estimate, the ultimate accuracy of these estimates is only verifiable over time.
During 2013, we awarded 1,745,000 shares of restricted common stock to employees, and 122,500 to consultants. The valuation of the restricted common stock awards was based on the closing fair market value of our common stock on the grant date. For the awards made to employees, such fair market value ranged from $0.30 to $0.59 per share, and for the awards made to consultants, such fair market value ranged from $0.34 to $0.56 per share.
During 2013, we granted 700,000 options to purchase common stock to one of our directors at an exercise price of $0.37 per share, and 23,000 to an employee at an exercise price of $0.45 per share.
During 2012, we awarded 3,764,500 shares of restricted common stock to our officers and 393,000 shares of restricted common stock to various employees. The valuation of the restricted common stock awards was based on the closing fair market value of our common stock on the grant date. For the restricted common stock awarded to the officers, such fair market value was $0.18 per share, and for the restricted common stock awarded to the employees, such fair market value ranged from $0.22 to $0.26 per share.
18 -------------------------------------------------------------------------------- The following table illustrates the non-cash stock-based compensation expense recorded, net of amounts capitalized, during the years ended December 31, 2013 and 2012 by income statement classification: 2013 2012 Cost of revenue $ 5,300 $ 22,200Selling and marketing expense 180,600 128,900 General and administrative expense 331,300 478,700 Research and development expense 281,000 342,600 $ 798,200 $ 972,400 Fair Value of Financial Instruments The fair value of the Company's accounts receivable, accounts payable and other current liabilities approximate their carrying amounts due to the relative short maturities of these items.
The fair value of the Company's warrants are determined in accordance with FASB ASC 820, "Fair Value Measurement," which establishes a fair value hierarchy that prioritizes the assumptions (inputs) to valuation techniques used to price assets or liabilities that are measured at fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The guidance for fair value measurements requires that assets and liabilities measured at fair value be classified and disclosed in one of the following categories: ? Level 1: Defined as observable inputs, such as quoted (unadjusted) prices in active markets for identical assets or liabilities.
? Level 2: Defined as observable inputs other than quoted prices included in Level 1. This includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
? Level 3: Defined as unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
As of December 31, 2013 and 2012, all of the Company's $979,800 and $7,390,100 Warrants Liability reported at fair value, respectively, was categorized as Level 3 inputs (see Note 8).
Concentration of Credit Risk Financial instruments, which potentially subject us to concentration of credit risk, consist principally of cash and trade receivables. We place cash and, when applicable, cash equivalents, with high quality financial institutions and, by policy, limit the amount of credit exposure to any one financial institution. As of December 31, 2013, we had approximately $2,215,300 of cash with financial institutions in excess of FDIC insurance limits. As of December 31, 2012, the Company had approximately $3,511,300 of cash with financial institutions in excess of FDIC insurance limits.
For the years ended December 31, 2013 and December 31, 2012, the Company considered the following to be its most significant customers 2013 2012 % Accounts % Accounts Customer % Sales Receivable % Sales Receivable GAD eG 5.1 % 0.0 % 8.3 % 0.0 % Ericsson 6.2 % 3.4 % 8.2 % 19.0 % GE 7.6 % 14.2 % 8.2 % 13.6 % KitASP 2.6 % 0.0 % 7.8 % 0.0 % IDS LLC 5.9 % 5.2 % 4.5 % 1.6 Alcatel-Lucent 8.5 % 19.9 % 5.8 % 15.6 % Elosoft 6.7 % 13.3 % 5.6 % 8.6 % Total 42.6 % 56.0 % 48.4 % 58.4 % 19-------------------------------------------------------------------------------- Results of Operations Set forth below is statement of operations data for the years ended December 31, 2013 and 2012 along with the dollar and percentage changes from 2012 to 2013 in the respective line items.
Year Ended December 31, Increase (Decrease) 2013 2012 Dollars Percentage Revenue Software licenses $ 2,969,300 $ 3,704,900 $ (735,600 ) (19.9 )% Software service fees 2,874,700 2,730,000 144,700 5.3 % Other 45,000 106,400 (61,400 ) (57.7 )% Total Revenue 5,889,000 6,541,300 (652,300 ) (10.0 )% Cost of revenue Software service costs 301,600 344,400 (42,800 ) (12.4 )% Software product costs 207,000 257,100 (50,100 ) (19.5 )% Total Cost of revenue 508,600 601,500 (92,900 ) (15.4 )% Gross profit 5,380,400 5,939,800 (559,400 ) (9.4 )% Operating expenses Selling and marketing 2,441,400 2,403,400 38,000 1.6 % General and administrative 3,083,200 3,759,000 (675,800 ) (18.0 )% Research and development 4,999,900 3,870,900 1,129,000 29.2 % Total Operating expenses 10,524,500 10,033,300 491,200 4.9 % Loss from operations (5,144,100 ) (4,093,500 ) 1,050,600 25.7 % Other income (expense) Change in fair value of warrants liability 1,406,000 (3,616,600 ) 5,022,600 138.9 % Interest and other income 1,900 5,300 (3,400 ) (64.2 )% Interest and other expense (2,000 ) - (2,000 ) NM Total other income (expense) 1,405,900 (3,611,300 ) 5,017,200 138.9 % Loss from continuing operations before provision for income tax (3,738,200 ) (7,704,800 ) (3,966,600 ) (51.5 )% Provision for income taxes 7,800 3,500 4,300 122.9 % Net loss from continuing operations (3,746,000 ) (7,708,300 ) (3,962,300 ) (51.4 )% Loss from discontinued operations - (468,400 ) (468,400 ) NM Net loss $ (3,746,000 ) $ (8,176,700 ) $ (4,430,700 ) (54.2 )% NM - not meaningful 20-------------------------------------------------------------------------------- Revenue.
Software Licenses The table that follows summarizes software licenses revenue for the years ended December 31, 2013 and 2012, and calculates the change in dollars and percentage from 2012 to 2013 in the respective line item.
Year Ended December 31, Increase (Decrease) Software licenses 2013 2012 Dollars Percentage Windows $ 2,131,400 $ 2,667,100 $ (535,700 ) (20.1 )% UNIX/Linux 837,900 1,037,800 (199,900 ) (19.3 ) Total $ 2,969,300 $ 3,704,900 $ (735,600 ) (19.9 ) Our software revenue is currently entirely related to our GO-Global product line, and historically has been primarily derived from product licensing fees and service fees from maintenance contracts. The majority of this revenue has been earned, and continues to be earned, from a limited number of significant customers, most of whom are resellers. Many of our resellers purchase software licenses that they hold in inventory until they are resold to the ultimate end user (a "stocking reseller"). We defer recognition of revenue from these sales (on our Consolidated Balance Sheet under the caption "Deferred Revenue") until the stocking reseller sells the underlying software licenses to the ultimate end user. Consequently, if any of our significant stocking resellers materially change the rate at which they resell our software licenses to the ultimate end user, our software licenses revenue could be materially impacted.
When a software license is sold directly to an end user by us, or by one of our resellers who does not stock licenses into inventory, revenue is recognized immediately upon shipment, assuming all other criteria for revenue recognition are met. Consequently, if any significant end user customer substantially changes its order level, or fails to order during the reporting period, whether the order is placed directly with us or through one of our non-stocking resellers, our software licenses revenue could be materially impacted.
Almost all stocking resellers maintain inventories of our Windows products; few stocking resellers maintain inventories of our UNIX products.
The decrease in Windows software licenses revenue for the year ended December 31, 2013, as compared with the prior year, was primarily due to lower aggregate revenue derived from our stocking resellers and a significant sale of licenses to GAD eG that occurred during 2012, in conjunction with a GO-Global implementation that began in 2011 and culminated in 2012. These decreases were partially offset by higher license sales to other end user customers.
Software licenses revenue from our UNIX/Linux products decreased during 2013, as compared with 2012, primarily due to lower aggregate revenue from our resellers and end users, particularly our European telecommunications customers. During the second half of 2013, we learned that one of our significant European telecommunications customers, Ericsson, would no longer be ordering product or new maintenance contracts from us as current technology would no longer utilize GO-Global. We anticipate receiving a small amount of maintenance renewals from them while their customers ultimately upgrade from their legacy products to their new technology. Ericsson accounted for 6.2% and 8.2% of our revenues in 2013 and 2012, respectively.
We expect aggregate software license revenue in 2014 to be lower than 2013 levels due to lower aggregate revenue from our stocking resellers and our European telecommunications customers. At the same time, we will seek to improve cash flow from the GO-Global business through cost control and other measures.
Software Service Fees The table that follows summarizes revenue recognized derived from software service fees for the years ended December 31, 2013 and 2012, and calculates the changes in dollars and percentage from 2012 to 2013 in the respective line item.
Year Ended December 31, Increase (Decrease) Software service fees 2013 2012 Dollars Percentage Windows $ 1,981,000 $ 1,786,300 $ 194,700 10.9 % UNIX/Linux 893,700 943,700 (50,000 ) (5.3 )% Total $ 2,874,700 $ 2,730,000 $ 144,700 5.3 % The increase in software service fees revenue attributable to our Windows products during 2013, as compared with 2012, was the result of the continued growth of revenue recognized from the number of Windows maintenance contracts purchased by our end-user customers on new license installations and the renewal of maintenance contracts on currently installed software licenses.
21 -------------------------------------------------------------------------------- The decrease in service fees revenue attributable to our UNIX products for 2013, as compared with 2012, was primarily the result of the low level of our UNIX product sales throughout the current and prior year and a decrease in maintenance contract renewals. We believe that these decreases reflect the continued economic malaise and the competitive challenges facing the telecommunications industry, particularly in Europe. The majority of this decrease was attributable to our European telecommunications customers, including Ericsson, as discussed above.
We expect that software service fees for 2014 will modestly increase over those for 2013, as we expect to see continued strength in the sale and renewal of Windows maintenance contracts.
Other The decrease in other revenue for 2013, as compared with 2012, was primarily due to a decrease in private labeling fees. We typically recognize private labeling fees revenue only when such services are requested by a new stocking reseller; they sign a contract with us, simultaneously place their first stocking order and ultimately, when they sell through their entire first stocking order, we recognize the private labeling fees revenue. Private labeling fees do not comprise a material portion of our revenue streams, and they can vary from period to period. We do not expect to generate significant revenue from private labeling fees during 2014.
Costs of Revenue Cost of revenue is comprised primarily of software service costs, which represent the costs of customer service. Also included in cost of revenue are software product costs, which are primarily comprised of the amortization of capitalized software development costs and costs associated with licenses to third party software included in our product offerings. We incur no significant shipping or packaging costs as virtually all of our deliveries are made via electronic means over the Internet.
Research and development costs for new product development, after technological feasibility is established, are recorded as "capitalized software" on our Consolidated Balance Sheet. Such capitalized costs are subsequently amortized to cost of revenue as a component of software product costs over the shorter of three years or the remaining estimated life of the products so capitalized. We capitalized $546,300 and $85,400 of software development costs during 2013 and 2012, respectively. Such costs were incurred in the development of hopTo, and were primarily comprised of employee costs and the cost of licenses to third party software used by hopTo. Amortization related to capitalized software development costs charged to costs of revenue was approximately $150,000 and $166,100 during 2013 and 2012, respectively.
Cost of revenue for the year ended December 31, 2013 decreased by $92,900, or 15.4%, to $508,600 from $601,500 for 2012. Cost of revenue for the years ended December 31, 2013 and 2012 represented approximately 8.6% and 9.2% of total revenue, respectively.
Software Service Costs - Software service costs decreased during 2013, as compared with 2012, as less time was spent on customer service issues, primarily due to the mature state of our GO-Global products. We anticipate that customer service costs will increase in 2014, as compared with 2013, as we release further commercial versions of hopTo and new versions of products within the GO-Global family.
The decrease in software product costs for 2013, as compared with 2012, was due to a decrease in costs associated with third party software we license into our GO-Global products, which were partially offset by costs associated with third party software licensed into hopTo that we began to occur upon its commercial release in November 2014. We expect to incur these costs throughout 2014.
For the reasons outlined above, we expect 2014 costs of revenue to exceed 2013 levels.
Selling and Marketing Expenses. Selling and marketing expenses primarily consist of employee costs (inclusive of non-cash stock-based compensation expense), outside services and travel and entertainment expenses.
Selling and marketing expenses for the year ended December 31, 2013 approximated those for the year ended December 31, 2012. Such costs increased by $38,000, or 1.6%, to $2,441,400 in 2013 from $2,403,400 in 2012. Selling and marketing expenses for the years ended December 31, 2013 and 2012 represented approximately 41.5% and 36.8% of total revenue, respectively. During 2013, we enacted several measures aimed at aligning the costs associated of selling and marketing our GO-Global products with the revenues being generated from their sales. We reinvested such cost savings into sales and marketing efforts for hopTo.
We expect to increase our sales and marketing efforts in 2014 for hopTo, and for anticipated GO-Global releases; accordingly, we expect 2014 sales and marketing expenses to exceed 2013 levels.
22 -------------------------------------------------------------------------------- General and Administrative Expenses. General and administrative expenses primarily consist of employee costs (inclusive of non-cash stock-based compensation expense), amortization and depreciation, legal, accounting, other professional services, rent, travel and entertainment and insurance. Certain costs associated with being a publicly-held corporation are also included in general and administrative expenses, as well as bad debts expense.
General and administrative expenses for the year ended December 31, 2013 decreased by $675,800, or 18.0%, to $3,083,200 from $3,759,000 for 2012. General and administrative expenses for the years ended December 31, 2013 and 2012 represented approximately 52.4 % and 57.5 % of total revenue, respectively.
The decrease in general and administrative expenses for 2013, as compared with 2012, was primarily a result of the costs incurred in 2012 associated with the one-time separation agreement and release entered into with Robert Dilworth in connection with Mr. Dilworth's resignation as our Chief Executive Officer and as a member of our board of directors. See Note 6 to Notes to Consolidated Financial Statements for details. The decrease was also attributed to other costs we incurred in connection with the separation agreement, which included one-time legal fees.
Partially offsetting the decrease outlined above was increased costs associated with consultants hired to provide additional resources for our administrative, finance and patent activities, particularly those activities associated with hopTo. We expect that certain of these consultants will continue to be utilized during 2014. Additionally, we experienced an increase in depreciation and amortization expense as we accelerated the amortization of the leasehold improvements associated with our office in California that we moved out of on February 1, 2014 so that they would be fully amortized at such time.
We expect that our 2014 general and administrative costs will exceed those for 2013 based on the items discussed above and anticipated investments in personnel and equipment as we gear up for the anticipated release of future versions of hopTo.
Research and Development Expenses. Research and development expenses consist primarily of employee costs (inclusive of non-cash stock-based compensation expense), payments to contract programmers, all costs of our Israeli subsidiary (GraphOn Research Labs Limited), travel and entertainment for all our engineers, and all rent for our leased engineering facilities.
Research and development expenses, net of amounts capitalized, increased by $1,129,000, or 29.2%, to $4,999,900 for the year ended December 31, 2013 from $3,870,900 in the prior year. Research and development expenses for the years ended December 31, 2013 and 2012 represented approximately 84.9% and 59.2% of total revenue, respectively.
During 2013 and 2012, we capitalized $546,300 and $85,400 of software development costs associated with the development of hopTo, respectively, which, had they not met the criteria for capitalization, would have otherwise been expensed.
The increase in research and development expenses in 2013, as compared with 2012, resulted from the continued growth of engineering costs associated with hopTo, including employee costs, recruitment fees, consultants, equipment and facilities. We expect to hire several new employees and to continue to utilize consultants throughout 2014, primarily in support of our planned hopTo activities.
As a result of these items, we expect 2014 research and development expenses, net of capitalized software developments costs, to significantly exceed 2013 levels. The main driver of the increased costs will be the costs associated with our new products development team, which will be primarily comprised of employee costs, recruitment fees, rent, equipment and supplies for the team.
Change in Fair Value of Warrants Liability. During 2013 and 2012, we recognized a net change of $1,406,000 and ($3,616,600), respectively, in the aggregate fair value of the warrant liability, net of amounts reclassified to equity (See Note 8 to Notes to Consolidated Financial Statements).
The change in fair value of warrants liability was approximately 23.9% and 55.3% of total revenues for the years ended December 31, 2013 and 2012, respectively.
Income Taxes. For the years ended December 31, 2013 and 2012, we recorded a current tax provision of approximately $7,800 and $3,500, respectively. At December 31, 2013, we had approximately $52.7 million of federal net operating loss carryforwards, which will begin to expire in 2018. Also at December 31, 2013, we had approximately $8.7 million of California state net operating loss carryforwards available to reduce future taxable income, which will begin to expire in 2014. During the years ended December 31, 2013 and 2012, we did not utilize any of our federal and California net operating losses and have recorded a full valuation allowance against each of them.
23 -------------------------------------------------------------------------------- At December 31, 2013, we had approximately $1.0 million of federal research and development tax credits, for which a full valuation allowance has been provided.
Such tax credits will begin to expire in 2018.
Net Loss from Continuing Operations. As a result of the foregoing items, we reported a net loss from continuing operations of $3,746,000 for the year ended December 31, 2013, as compared with a net loss from continuing operations of $7,708,300 for 2012.
Loss from Discontinued Operations. During 2012, we reached settlement and licensing agreements that effectively ended all of our then on-going intellectual property litigation. Having been approached by the respective counter-parties to each of our lawsuits, and in consultation with our board of directors, we determined that it was in our best long-term strategic interests to settle each lawsuit in order to move forward and shift our focus to our software products, including our new product initiatives. As a result of such determination, we paid $311,000 in aggregate settlement fees. We do not intend to pursue intellectual property litigation as an integral part of our strategy to fund our future operations. Accordingly, for all periods presented, the results of operations and cash flows related to our former intellectual property segment have been segregated and reported as "Discontinued Operations". See Note 17 to our Notes to Consolidated Financial Statements.
As a result of this decision, we reported a loss from discontinued operations, of $0 and $468,400, for 2013 and 2012, respectively.
Liquidity and Capital Resources Our reported net loss of $3,746,000 in 2013 included three significant non-cash items: depreciation and amortization of $330,600, which was primarily related to amortization of our capitalized software development costs; stock-based compensation expense of $798,200; and a gain in the change in value of our warrants liability of $1,406,000.
We invested $107,400 in capital expenditures during 2013, primarily related to our new products development team, located in our office in Campbell, California. We also invested $509,600 in our hopTo product, net of $36,700 non-cash stock-based compensation costs, which we capitalized as software development costs during 2013.
We are aggressively looking at ways to improve our revenue stream through the development, marketing and sale of new products. We are also aggressively looking at ways to streamline our GO-Global operations in order to align its cost structure with its sales. Should business combination opportunities present themselves to us, and should such opportunities appear to make financial sense and add value for our shareholders, we will consider those opportunities.
We believe that as a result of the expected introduction of new products slated for 2014, our revenue will increase. During 2014, we expect to continue to prioritize the investment of our resources into the development of various new products, and we expect that certain of these investments will ultimately be capitalized as software development costs. Further, due to our expected investments in new products and continued investments in intellectual property, we expect our cash outflow from operations to increase. Based on our cash on hand as of December 31, 2013, the cash received in January 2014 from the sale of stock and warrants, and the anticipation of increased revenue from our legacy GO-Global business, we believe that we will have sufficient resources to support our operational plans for the next twelve months; however; full implementation of our business plans for the next twelve months will require capital from issuances of debt or equity, or new revenue from our recently launched hopTo product.
There can be no assurance of new revenue from new or exisiting product lines or additional capital from debt or equity issuances. In addition, issuances of new capital stock would dilute existing stockholders and may give the purchasers of new capital stock additional rights, preferences and privileges relative to existing stockholders. There can be no assurance that additional capital necessary for full execution of our hopTo business strategy will be available on a timely basis, on reasonable terms or at all.
Cash As of December 31, 2013, cash was $2,430,700 as compared with $3,960,600 as of December 31, 2012. The main reason for the decrease in cash was the loss from continuing operations of $3,746,000, which primarily included the costs resulting from the growth of our new products development team, including employee costs, recruitment fees, consultants, equipment and facilities.
Accounts Receivable, net At December 31, 2013 and 2012, we had $811,700 and $865,900, respectively, in accounts receivable, net of allowances totaling $42,000 and $33,900, respectively. The decrease in net accounts receivable was a result of decreased sales in 2013 as compared to 2012. From time to time we could have individually significant accounts receivable balances due us from one or more of our significant customers. If the financial condition of any of these significant customers should deteriorate, our operating results could be materially affected.
24-------------------------------------------------------------------------------- Stock Repurchase Program During January 2008, our Board of Directors approved a stock repurchase program.
Under this program, up to $1,000,000 may be used in repurchasing our stock; however, we are not obligated to repurchase any specific number of shares and the program may be suspended or terminated at our discretion. We did not repurchase any shares under this plan during either 2013 or 2012, and as of December 31, 2013, $782,500 remains available for stock repurchases.
Working Capital As of December 31, 2013, we had current assets of $3,285,500 and current liabilities of $3,711,100, which netted to a working capital deficit of ($425,600). Included in current liabilities was the current portion of deferred revenue of $2,772,900.
Commitments and contingencies The following table discloses our contractual commitments for future periods, which consist entirely of leases for office space and is inclusive of our contractual commitments for our Campbell, California office, including the commitments under the lease amendment. The table assumes that we will occupy all currently leased facilities for the full term of each respective lease: Year Ending December 31, 2014 $ 405,700 2015 497,500 2016 495,000 2017 476,900 2018 407,300 $ 2,282,400 Rent expense aggregated approximately $288,000 and $260,700 for the years ended December 31, 2013 and 2012, respectively.
Recent Accounting Pronouncements In July 2013, FASB issued ASU No. 2013-11 "Income Taxes (Topic 740)" (ASU 2013-11). The objective of ASU 2013-11 is to provide explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. FASB recognized that there was inconsistency in how previous guidance in this topic was applied in practice, thus; the objective of ASU 2013-11 is to eliminate the diversity of how previous guidance was applied. As the amendments in ASU 2013-11 do not require new recurring disclosures, rather, they are aimed at creating consistency in how previous guidance is applied, we do not believe that adoption of ASU 2013-11, which will become effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, will have a material impact on our results of operations, cash flows or financial position.
In February 2013, FASB issued ASU No. 2013-02 "Other Comprehensive Income" (ASU 2013-02). The objective of ASU 2013-02 is to improve the reporting of reclassifications out of other comprehensive income. This objective is reached by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. ASU 2013-02 is effective and is to be applied prospectively to reporting periods beginning after December 15, 2012.
We currently have no amounts that meet the criteria to be reclassified; accordingly, the adoption of ASU 2013-02 did not have any impact on our results of operations, cash flows or financial position. Comprehensive loss equals net loss for each of the years ended December 31, 2013 and 2012, respectively.
In July 2012, FASB issued ASU No. 2012-02 "Intangibles - Goodwill and Other" (ASU 2012-02). The objective of ASU 2012-02 is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories.
ASU 2012-02 is effective for fiscal years beginning after September 15, 2012.
Early adoption is permitted. We currently have no goodwill or material indefinite-lived intangible assets; accordingly, the adoption of ASU 2012-02 did not have any impact on our results of operations, cash flows or financial position.
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