Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This quarterly report, including the documents incorporated herein and therein by reference, contains forward-looking statements as that term is defined in Section 27A of the United States Securities Act of 1933 and Section 21E of the United States Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. Forward-looking statements in this quarterly report may include statements about:
-
any potential loss of or reductions in orders from certain significant customers;
-
our dependence on our customers to sell our applications or services using our applications;
-
our ability to protect our intellectual property;
-
competitive factors, including, but not limited to, industry consolidation, entry of new competitors into our market, and new product and marketing initiatives by our competitors;
-
our ability to predict our revenue, operating results and gross margin accurately;
-
uncertainties relating to the impact of COVID-19 on our business, operations and employees;
-
the length and unpredictability of our sales cycles;
-
our ability to expand or enhance our product offerings including in response to industry demands or market trends;
-
our ability to sell our products in certain markets;
-
our ability to manage growth;
-
the attraction and retention of qualified employees and key personnel;
-
the interoperability of our products with service provider networks; and
-
the quality of our products and services, including any undetected errors or bugs in our software.
These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled "Risk Factors", that may cause our company's or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including securities laws of the United States of America and Canada, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
References
In this quarterly report, (i) unless the context otherwise requires, references to "we", "our", "us", the "Company" or "CounterPath" mean CounterPath Corporation and its subsidiaries and (ii) all amounts are expressed in United States dollars, unless otherwise indicated.
Background
We were incorporated under the laws of the State of Nevada on April 18, 2003.
On August 2, 2007, we acquired all of the shares of NewHeights Software Corporation through the issuance of 768,017 shares of our common stock and 36,984 preferred shares issued from a subsidiary of our company, which preferred shares were exchangeable into 36,984 shares of common stock.
On February 1, 2008, we acquired all of the shares of FirstHand Technologies Inc. through the issuance of 590,001 shares of our common stock. On February 1, 2008, we acquired all of the issued and outstanding shares of BridgePort Networks, Inc. ("BridgePort Networks") by way of merger in consideration for the assumption of all of the assets and liabilities of BridgePort Networks.
Proposed Merger with Alianza, Inc.
On December 6, 2020, the Company, a Nevada corporation, Alianza, Inc., ("Alianza"), a Delaware corporation, and CounterPath Merger Sub, Inc. ("Merger Sub"), a Nevada corporation and a wholly-owned subsidiary of Alianza, entered into an Agreement and Plan of Merger (the "Merger Agreement"). The Merger Agreement provides that, among other things, Alianza will acquire the Company in exchange for cash. The Merger Agreement was unanimously adopted by a special committee of certain independent members of the board of directors of the Company (the "Board") as well as the full Board.
Under the Merger Agreement, Merger Sub will merge with and into the Company (the "Merger") with the Company continuing as the surviving corporation, which will be a wholly owned subsidiary of Alianza. At the effective time of the Merger (the "Effective Time"), by virtue of the Merger and without any further action on the part of the Company, Merger Sub, Alianza or any holder of shares of common stock of the Company or Merger Sub, each share of common stock of the Company issued and outstanding immediately prior to the Effective Time (other the dissenting shares and the shares held by the Company, Alianza or Merger Sub) will be converted into the right to receive $3.49 in cash, without interest (the "Merger Consideration") and net of any withholding.
The Merger is subject to customary closing conditions, including but not limited to (i) approval of the Merger Agreement by the holders of a majority of shares of common stock of the Company and by the holders of a majority of shares of common stock of the Company held by the minority stockholders as required by Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions adopted by certain Canadian securities regulators, (ii) there not being dissenting shares representing more than 4% of the outstanding shares of common stock of the Company and (iii) the amended and restated employment agreements between Alianza and certain key employees being in full force and effect.
Under the Merger Agreement, the Company may not solicit an alternative acquisition proposal or, subject to exceptions that permit the Company's directors to take actions required by their fiduciary duties, change the recommendation to the Company's stockholders to approve the Merger, or enter into any agreement relating to an alternative acquisition proposal.
The Merger Agreement may be terminated under certain specified circumstances, including (i) by either the Company or Alianza if the Merger is not consummated on or before May 31, 2021 (the "End Date"), provided that Alianza must pay the Company a termination fee of $1.5 million if the Merger Agreement is terminated solely due to Alianza's failure to pay the Merger Consideration in full by the End Date, (ii) by the Company in order for the Company to enter into an agreement with respect to a superior proposal, so long as the Company complies with certain notice and other requirements relating to an alternative acquisition proposal, in which case the Company must pay Alianza a termination fee of $1.5 million, and (iii) by Alianza due to a change of recommendation by the Board or if the Company commits a willful breach of certain notice and other requirements relating to an alternative acquisition proposal, in which case the Company must pay Alianza a termination fee of $1.5 million,.
Each of Alianza, Merger Sub and the Company has made customary representations and warranties and agreed to customary covenants in the Merger Agreement.
As an inducement to the parties entering into the Merger Agreement, on December 6, 2020, certain stockholders of the Company, beneficially owning, in the aggregate, approximately 51.1% of the outstanding shares of common stock of the Company entered into a voting agreement, pursuant to which, among other things, such stockholders agreed to vote to approve the Merger Agreement and to take certain other actions in furtherance of the Merger.
Business of CounterPath
We design, develop and sell software and services that enable enterprises and telecommunication service providers to deliver Unified Communications & Collaborations (UCC) solutions to their end users. Our offerings include softphones that support HD voice/video calling, messaging, and presence from a wide range of call services and VoIP services, as well as hosted services for team voice, messaging, presence, video conferencing and screen sharing functionality, over Internet Protocol (IP) based networks. We are capitalizing upon several industry trends, including the rapid adoption of mobile technology, the proliferation of work-from-home programs, the growth of video conferencing, the increasing requirements for secure business communications, centralized cloud-based provisioning, and the migration towards all IP networks. We are also capitalizing on a trend where communication services such as Google Meet, Slack, Zoom, and WhatsApp are becoming more available over-the-top (OTT) of the incumbent operators' networks or enterprise networks (a.k.a. Internet OTT providers). We consolidate Internet OTT application capabilities into a single application that, we believe, provides more value at less than our competitors' cost. Our solutions are offered under perpetual license agreements that generate one-time license revenue and under subscription license agreements that generate recurring license revenue. Our solutions are available for sale through our online store, directly using our in-house sales team, original equipment manufacturers (OEM) partners, and through traditional value added reseller (VAR) and value added distributer (VAD) channel partners. Enterprises typically leverage our solutions to increase employee productivity and to reduce communication costs while leveraging, leading call servers provided by companies such as Cisco, Avaya, Sangoma, and others. Telecommunication service providers typically deploy our solutions to supplement and add value to their traditional services that compete directly with the Internet OTT providers. Our OEM and VAR customers typically integrate our solutions into their products and then sell a bundled solution to their end customers, which include both telecommunication service providers and enterprises.
COVID-19 Pandemic
On January 30, 2020, the World Health Organization ("WHO") announced a global health emergency because of a new strain of coronavirus, COVID-19 originating in Wuhan, China (and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of this Quarterly Report on Form 10-Q. As such, it is uncertain as to the full magnitude that the pandemic will have on our financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation and its impact on our financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, we are not able to estimate the effects that the COVID-19 outbreak will have on our results of operations, financial condition, or liquidity for fiscal year 2021. As of the date of this Quarterly Report on Form 10-Q, we have not experienced meaningful delays in securing new customers and related revenues, cancellations of existing contracts, or meaningful delays in payments from existing customers, however, the longer this pandemic continues there may be additional impacts. Although we cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on our results of future operations, financial position, liquidity, and capital resources, and those of the third parties on which we rely on in fiscal year 2021.
Revenue
Our total revenue consists of the following:
We generate software revenue primarily on a single fee per perpetual software license basis. We recognize software revenue for perpetual licenses when control has transferred to the customer, which is generally at the time of delivery, provided all revenue recognition criteria have been met. If the revenue recognition criteria have not been met, the revenue is deferred or not recognized. The number of software licenses purchased has a direct impact on the average selling price. Our software revenue may vary significantly from quarter to quarter as a result of long sales and deployment cycles, new product introductions and variations in customer ordering practices.
-
Subscription, support and maintenance
We generate recurring subscription revenue from subscriptions related to our software as a service offering. Recurring support and maintenance revenue is generated from annual software support and maintenance contracts for our perpetual software licenses. Both subscription revenue and support and maintenance revenue are typically billed annually in advance based on the terms of the arrangement.
Support and maintenance services include e-mail and telephone support, access to our technical assistance center, unspecified rights to bug fixes and product updates and upgrades and enhancements available on a when-and-if available basis, and are recognized rateably over the term of the service period, which is generally twelve months.
Professional services and other
We generate professional services and other revenue through services including product configuration and customization, implementation, dedicated engineering and training. The amount of product configuration and customization required by a customer typically increases as the order size increases from a given customer. Services and pricing may vary depending upon a customer's requirements for customization, implementation and training.
Operating Expenses
Operating expenses consist of cost of sales, sales and marketing, research and development, and general and administrative expenses. Personnel-related costs are the most significant component of each of these expense categories.
Cost of sales primarily consists of: (a) salaries and benefits related to personnel, (b) related overhead, (c) billable and non-billable travel, lodging, and other out-of-pocket expenses, (d) payments to third party vendors for development and hosted communication services and compression/decompression software known as codecs, (e) amortization of capitalized software that is implemented into our products and (f) warranty expense.
Sales and marketing expense consists primarily of: (a) salaries and related personnel costs including stock-based compensation, (b) commissions, (c) travel, lodging and other out-of-pocket expenses, (d) marketing programs such as advertising, promotions and trade shows and (e) other related overhead. Commissions are considered incremental and recoverable costs of acquiring customer contracts. These costs are capitalized and amortized on a systematic basis to sales and marketing expense, over the anticipated benefit period of up to 3.5 years depending on the products or services. Sales commissions on contracts with an anticipated benefit period of one year or less are expensed as incurred. We expect increases in sales and marketing expense for the foreseeable future as we further increase the number of sales professionals and increase our marketing activities with the intent to grow our revenue. We expect sales and marketing expense to decrease as a percentage of total revenue, however, as we leverage our current sales and marketing personnel as well as our distribution partnerships.
Research and development expense consists primarily of: (a) salaries and related personnel costs including stock-based compensation, (b) payments to contractors for design and consulting services, (c) costs relating to the design and development of new products and enhancement of existing products, (d) quality assurance and testing and (e) other related overhead. To date, all of our research and development costs have been expensed as incurred.
General and administrative expense consists primarily of: (a) salaries and personnel costs including stock-based compensation related to our executive, finance, human resource and information technology functions, (b) accounting, legal, tax advisory and regulatory fees and (c) other related overhead.
Application of Critical Accounting Policies and Use of Estimates
Our interim consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires that we 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates under different assumptions or conditions. There have been no material changes to these estimates for the periods presented in this quarterly report.
There have been no significant changes to our critical accounting policies and estimates previously disclosed in our Form 10-K for the fiscal year ended April 30, 2020.
Results of Operations
Our operating activities during the three and six months ended October 31, 2020 consisted primarily of selling our IP telephony software and related services to telecom service providers, enterprises and channel partners serving the telecom and enterprise segments, and the continued development of our IP telephony software products.
We generate our revenue primarily in U.S. dollars and incur a majority of our expenses in Canadian dollars. As a result of the fluctuation in the Canadian dollar against the U.S. dollar over the three and six months ended October 31, 2020, we recorded increased (decreased) operating costs on translation of Canadian dollar costs as compared to the to the three and six months ended October 31, 2019 of approximately $450 and ($53,116).
Selected Consolidated Financial Information
The following tables set out selected consolidated unaudited financial information for the periods indicated. The selected consolidated financial information set out below for the three and six months ended October 31, 2020 and 2019 has been derived from the consolidated unaudited financial statements and accompanying notes for the three and six months ended October 31, 2020 and 2019 and the audited consolidated financial statements for the fiscal year ended April 30, 2020. Each investor should read the following information in conjunction with those statements and the related notes thereto.
Selected Consolidated Statements of Operations Data
|
|
|
|
|
|
Three Months Ended October 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Amount
|
|
|
Percent of
Total
Revenue
|
|
|
Amount
|
|
|
Percent
of Total
Revenue
|
|
Revenue
|
|
$3,611,849
|
|
|
100%
|
|
|
$2,700,922
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
(3,458,878
|
)
|
|
(96%)
|
|
|
(3,406,896
|
)
|
|
(126%
|
)
|
Income (loss) from operations
|
|
152,971
|
|
|
4%
|
|
|
(705,974
|
)
|
|
(26%
|
)
|
Interest expense
|
|
(43,089
|
)
|
|
(1%)
|
|
|
(82,217
|
)
|
|
(3%
|
)
|
Foreign exchange (loss) gain
|
|
(5,490
|
)
|
|
(0%)
|
|
|
(14,620
|
)
|
|
(1%
|
)
|
Change in fair value of derivative instruments
|
|
(27,944
|
)
|
|
(1%)
|
|
|
9,608
|
|
|
−%
|
|
Selected Consolidated Statements of Operations Data
|
|
|
|
|
|
Three Months Ended October 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Amount
|
|
|
Percent of
Total
Revenue
|
|
|
Amount
|
|
|
Percent
of Total
Revenue
|
|
Loss on lease termination
|
|
−
|
|
|
0%
|
|
|
(8,746
|
)
|
|
−%
|
|
Other income
|
|
−
|
|
|
0%
|
|
|
700
|
|
|
−%
|
|
Net income (loss)
|
|
$76,448
|
|
|
2%
|
|
|
($801,249
|
)
|
|
(30%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
-Basic
|
|
$0.01
|
|
|
|
|
|
($0.13
|
)
|
|
|
|
-Diluted
|
|
$0.01
|
|
|
|
|
|
($0.13
|
)
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
-Basic
|
|
6,418,388
|
|
|
|
|
|
5,955,954
|
|
|
|
|
-Diluted
|
|
7,472,070
|
|
|
|
|
|
5,955,954
|
|
|
|
|
Selected Consolidated Statements of Operations Data
|
|
|
|
|
|
Six Months Ended October 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Amount
|
|
|
Percent of
Total
Revenue
|
|
|
Amount
|
|
|
Percent
of Total
Revenue
|
|
Revenue
|
|
7,041,055
|
|
|
100%
|
|
|
$5,274,590
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
(6,607,797
|
)
|
|
94%
|
|
|
(6,665,410
|
)
|
|
(126%
|
)
|
Income (loss) from operations
|
|
433,258
|
|
|
6%
|
|
|
($1,390,820
|
)
|
|
(26%)
|
|
Interest and other expense, net
|
|
(114,297
|
)
|
|
(2%)
|
|
|
(152,790
|
)
|
|
(3%)
|
|
Foreign exchange (loss) gain
|
|
(351,884
|
)
|
|
(5%)
|
|
|
(189,510
|
)
|
|
(4%)
|
|
Change in fair value of derivative instruments
|
|
133,982
|
|
|
2%
|
|
|
10,194
|
|
|
−%
|
|
Loss on lease termination
|
|
−
|
|
|
−%
|
|
|
(8,746
|
)
|
|
−%
|
|
Other income
|
|
3
|
|
|
−%
|
|
|
700
|
|
|
−%
|
|
Net income (loss)
|
|
101,062
|
|
|
1%
|
|
|
(1,730,972
|
)
|
|
(33%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
-Basic
|
|
$0.02
|
|
|
|
|
|
($0.29
|
)
|
|
|
|
-Diluted
|
|
$0.01
|
|
|
|
|
|
($0.29
|
)
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
-Basic
|
|
6,346,110
|
|
|
|
|
|
5,954,038
|
|
|
|
|
_Diluted
|
|
7,425,554
|
|
|
|
|
|
5,954,038
|
|
|
|
|
Revenue
|
|
Three Months Ended October 31,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Period-to-Period Change
|
|
|
|
Amount
|
|
|
Percent
of Total
Revenue
|
|
|
Amount
|
|
|
Percent
of Total
Revenue
|
|
|
Amount
|
|
|
Percent
Increase /
(Decrease)
|
|
Revenue by Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
$875,504
|
|
|
24%
|
|
|
$1,042,208
|
|
|
38%
|
|
|
($166,704
|
)
|
|
(16%
|
)
|
Subscription, support and maintenance
|
|
2,305,236
|
|
|
64%
|
|
|
1,502,944
|
|
|
56%
|
|
|
802,292
|
|
|
53%
|
|
Professional services and other
|
|
431,109
|
|
|
12%
|
|
|
155,770
|
|
|
6%
|
|
|
275,339
|
|
|
177%
|
|
Total revenue
|
|
$3,611,849
|
|
|
100%
|
|
|
$2,700,922
|
|
|
100%
|
|
|
$910,927
|
|
|
34%
|
|
|
|
Three Months Ended October 31,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Period-to-Period Change
|
|
|
|
Amount
|
|
|
Percent
of Total
Revenue
|
|
|
Amount
|
|
|
Percent
of Total
Revenue
|
|
|
Amount
|
|
|
Percent
Increase /
(Decrease)
|
|
Revenue by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$2,647,136
|
|
|
73%
|
|
|
$1,739,961
|
|
|
64%
|
|
|
$907,175
|
|
|
52%
|
|
International
|
|
964,713
|
|
|
27%
|
|
|
960,961
|
|
|
36%
|
|
|
3,752
|
|
|
−%
|
|
Total revenue
|
|
$3,611,849
|
|
|
100%
|
|
|
$2,700,922
|
|
|
100%
|
|
|
$910,927
|
|
|
34%
|
|
For the three months ended October 31, 2020, we generated $3,611,849 in revenue compared to $2,700,922 for the three months ended October 31, 2019, representing an increase of $910,927 or 34%.
Software revenue decreased by $166,704 or 16% to $875,504 for the three months ended October 31, 2020 compared to $1,042,208 for the three months ended October 31, 2019. The decrease in software revenue was a result of decreased sales to enterprises, and channel partners purchasing perpetual software licenses.
Subscription, support and maintenance revenue increased by $802,292 or 53% to $2,305,236 for the three months ended October 31, 2020 compared to $1,502,944 for the three months ended October 31, 2019. The increase in subscription, support and maintenance revenue was a result of increased sales to enterprises, channel partners, and the company shifting its licensing model to subscription based licensing.
Professional services and other revenue increased by $275,339 or 177% to $431,109 for the three months ended October 31, 2020 compared to $155,770 for the three months ended October 31, 2019. The increase in professional services and other revenue was a result of increase in subscription support and maintenance service to channel partners.
North American revenue increased by $907,175 or 52% to $2,647,136 for the three months ended October 31, 2020 compared to $1,739,961 for the three months ended October 31, 2019, as a result of increased sales of service to enterprises, channel partners, and service providers. International revenue outside of North America marginally increased by $3,752 or -% to $964,713 for the three months ended October 31, 2020 compared to $960,961 for the three months ended October 31, 2019, as a result of higher sales of software and service to international channel partners, and service providers.
|
|
Six Months Ended October 31,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Period-to-Period Change
|
|
|
|
Amount
|
|
|
Percent
of Total
Revenue
|
|
|
Amount
|
|
|
Percent
of Total
Revenue
|
|
|
Amount
|
|
|
Percent
Increase /
(Decrease)
|
|
Revenue by Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
$1,705,189
|
|
|
24%
|
|
|
$2,052,032
|
|
|
39%
|
|
|
($346,843
|
)
|
|
(17%
|
)
|
Subscription, support and maintenance
|
|
4,388,035
|
|
|
62%
|
|
|
2,924,806
|
|
|
55%
|
|
|
1,463,229
|
|
|
50%
|
|
Professional services and other
|
|
947,831
|
|
|
14%
|
|
|
297,752
|
|
|
6%
|
|
|
650,079
|
|
|
218%
|
|
Total revenue
|
|
$7,041,055
|
|
|
100%
|
|
|
$5,274,590
|
|
|
100%
|
|
|
$1,766,465
|
|
|
33%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$5,263,468
|
|
|
75%
|
|
|
$3,484,713
|
|
|
66%
|
|
|
$1,778,755
|
|
|
51%
|
|
International
|
|
1,777,587
|
|
|
25%
|
|
|
1,789,877
|
|
|
34%
|
|
|
($12,290
|
)
|
|
(1%
|
)
|
Total revenue
|
|
$7,041,055
|
|
|
100%
|
|
|
$5,274,590
|
|
|
100%
|
|
|
$1,766,465
|
|
|
33%
|
|
For the six months ended October 31, 2020, we generated $7,041,055 in revenue compared to $5,274,590 for the six months ended October 31, 2019, representing an increase of $1,766,465 or 33%.
Software revenue decreased by $346,843 or 17% to $1,705,189 for the six months ended October 31, 2020 compared to $2,052,032 for the six months ended October 31, 2019. The decrease in software revenue was a result of decreased sales to enterprises, and channel partners purchasing perpetual software licenses
Subscription, support and maintenance revenue increased by $1,463,229 or 50% to $4,388,035 for the six months ended October 31, 2020 compared to $2,924,806 for the six months ended October 31, 2019. The increase in subscription, support and maintenance revenue was a result of increased sales to enterprises, channel partners, and the company shifting its licensing model to subscription based licensing.
Professional services and other revenue increased by $650,079 or 218% to $947,831 for the six months ended October 31, 2020 compared to $297,752 for the six months ended October 31, 2019. The increase in professional services and other revenue was a result of increased sales to channel partners.
North American revenue increased by $1,778,755 or 51% to $5,263,468 for the six months ended October 31, 2020 compared to $3,484,713 for the six months ended October 31, 2019, as a result of increased sales of service to enterprises, channel partners, and service providers. International revenue outside of North America decreased by $12,290 or 1% to $1,777,587 for the six months ended October 31, 2020 compared to $1,789,877 for the six months ended October 31, 2019, as a result of lower sales of software and service to international enterprises, and service providers.
Operating Expenses
Cost of Sales
Cost of sales for the three months and six month ended October 31, 2020 and 2019 were as follows:
|
|
October 31, 2020
|
|
|
October 31, 2019
|
|
|
Period-to-Period Change
|
|
|
|
Amount
|
|
|
Percent
of Total
Revenue
|
|
|
Amount
|
|
|
Percent
of Total
Revenue
|
|
|
Amount
|
|
|
Percent
Increase /
(Decrease)
|
|
Three months ended
|
|
$589,552
|
|
|
16%
|
|
|
$562,619
|
|
|
21%
|
|
|
$26,933
|
|
|
5%
|
|
Six months ended
|
|
$1,145,441
|
|
|
16%
|
|
|
$1,073,979
|
|
|
20%
|
|
|
$71,462
|
|
|
7%
|
|
Cost of sales was $589,552 for the three months ended October 31, 2020 compared to $562,619 for the three months ended October 31, 2019. An increase of $26,933 or 7% was primarily attributable to an increase in costs related to software subscription fees of approximately $57,400, offset by a decrease in wages and benefits of approximately $30,400.
Cost of sales was $1,145,441 for the six months ended October 31, 2020 compared to $1,073,979 for the six months ended October 31, 2019. An increase of $71,462 or 7% was primarily attributable to an increase in costs related to license fees of approximately $68,000, an increase of software subscription costs of approximately $21,200, an increase in third-party service fees of approximately $3,400, an increase in warranty related costs of approximately $4,000, and an increase in other costs of approximately $3,900, offset by a decrease in wages and benefits of approximately $29,000.
Sales and Marketing
Sales and marketing expenses for the three months and six months ended October 31, 2020 and 2019 were as follows:
|
|
October 31, 2020
|
|
|
October 31, 2019
|
|
|
Period-to-Period Change
|
|
|
|
Amount
|
|
|
Percent
of Total
Revenue
|
|
|
Amount
|
|
|
Percent
of Total
Revenue
|
|
|
Amount
|
|
|
Percent
Increase /
(Decrease)
|
|
Three months ended
|
|
$1,015,803
|
|
|
28%
|
|
|
$955,010
|
|
|
35%
|
|
|
$60,793
|
|
|
6%
|
|
Six months ended
|
|
$1,868,777
|
|
|
27%
|
|
|
$1,925,603
|
|
|
37%
|
|
|
($56,826
|
)
|
|
(3%
|
)
|
Sales and marketing expenses were $1,015,803 for the three months ended October 31, 2020 compared to $955,010 for the three months ended October 31, 2019. The increase of $60,793 or 6% was primarily attributable to an increase in sales commission expense of approximately $159,000, increase in stock based compensation of approximately $4,000, offset by a decrease in wages and benefits expense of approximately $102,000.
Sales and marketing expenses were $1,868,777 for the six months ended October 31, 2020 compared to $1,925,603 for the six months ended October 31, 2019. The decrease of $56,826 or 3% was primarily attributable to decreases in travel and trade show expenses of approximately $67,000, decreases in wages and benefits expenses of approximately $181,700, decrease in rent expense of approximately $38,000, decrease in license and permits expenses of approximately $68,000, decrease in marketing related costs of approximately $12,000, decrease in communication related costs of approximately $6,000, offset by an increase in sales commission expense of $126,000, an increase in consulting expense of $139,000, increase in dues and subscriptions of $26,000, and an increase in marketing expenses of approximately $26,000.
Research and Development
Research and development expenses for the three months and six months ended October 31, 2020 and 2019 were as follows:
|
|
October 31, 2020
|
|
|
October 31, 2019
|
|
|
Period-to-Period Change
|
|
|
|
Amount
|
|
|
Percent
of Total
Revenue
|
|
|
Amount
|
|
|
Percent
of Total
Revenue
|
|
|
Amount
|
|
|
Percent
Increase /
(Decrease)
|
|
Three months ended
|
|
$1,060,721
|
|
|
29%
|
|
|
$1,233,994
|
|
|
46%
|
|
|
($173,273
|
)
|
|
(14%)
|
|
Six months ended
|
|
$2,090,857
|
|
|
30%
|
|
|
$2,365,842
|
|
|
45%
|
|
|
($274,985
|
)
|
|
(12%)
|
|
Research and development expenses were $1,060,721 for the three months ended October 31, 2020 compared to $1,233,994 for the three months ended October 31, 2019. The decrease of $173,273 or 14% was primarily attributable to the overall reduction in costs which resulted in decreases in wages and benefits of approximately $196,000, offset by an increase in other expenses of approximately $23,000.
Research and development expenses were $2,090,857 for the six months ended October 31, 2020 compared to $2,365,842 for the six months ended October 31, 2019. The decrease of $274,985 or 12% was primarily attributable to the overall reduction in costs which resulted in decreases in wages and benefits of approximately $270,000, and a decrease in other expenses of approximately $5,000.
General and Administrative
General and administrative expenses for the three months and six months ended October 31, 2020 and 2019 were as follows:
|
|
October 31, 2020
|
|
|
October 31, 2019
|
|
|
Period-to-Period Change
|
|
|
|
Amount
|
|
|
Percent
of Total
Revenue
|
|
|
Amount
|
|
|
Percent
of Total
Revenue
|
|
|
Amount
|
|
|
Percent
Increase /
(Decrease)
|
|
Three months ended
|
|
$792,802
|
|
|
22%
|
|
|
$655,273
|
|
|
24%
|
|
|
$137,529
|
|
|
21%
|
|
Six months ended
|
|
$1,502,722
|
|
|
21%
|
|
|
$1,299,986
|
|
|
25%
|
|
|
$202,736
|
|
|
16%
|
|
General and administrative expenses were $792,802 for the three months ended October 31, 2020 compared to $655,273 for the three months ended October 31, 2019. The increase of $137,529 or 21% in general and administrative expenses was primarily attributable to increases in professional fees of approximately $71,000 , an increase in stock based compensation of approximately $50,000, and an increase in directors expense of approximately $23,000. This increase was offset by a decrease in other expenses of approximately $6,000.
General and administrative expenses were $1,502,722 for the six months ended October 31, 2020 compared to $1,299,986 for the six months ended October 31, 2019. The increase of $202,736 or 16% in general and administrative expenses was primarily attributable to increases in legal expenses of approximately $65,000, increase in bad debts expense of approximately $35,000, increase in professional fees of approximately $40,000, an increase in directors expense of approximately $44,000 and an increase in wages and benefits expense of approximately $32,000. This increase was offset by a decrease in patent costs of approximately $14,000.
Interest and Other (Expense) Income, Net
Interest and other (expense) income, net was ($76,523) for the three months ended October 31, 2020, compared to ($95,275) for the same period in the prior year. The change of $18,752 or (20%) is primarily due to decrease in interest expense of approximately $39,000, a decrease in foreign exchange loss of approximately $9,200, and a decrease in loss due to lease termination of approximately $8,000. This decrease is offset by an increase in costs due to changes in fair value of derivative liability of approximately $37,500.
Interest and other (expense) income, net was ($332,196) for the six months ended October 31, 2020, compared to ($340,152) for the same period in the prior year. The change of $7,956 or (2%) is primarily due to decrease in interest expense of approximately $38,500, an increase in gain due to changes in fair value of derivative liability of approximately $124,000, and a decrease in loss due to lease termination of approximately $8,000. This gain is offset by an increase in foreign exchange loss of approximately $162,500.
The foreign exchange gain (loss) represents the gain (loss) on account of translation of the intercompany accounts of our subsidiary which maintains their records in Canadian dollars and transactional gains and losses. The foreign exchange gain (loss) includes the translation of quarterly intercompany transfer pricing invoices from our Canadian subsidiary to us.
Liquidity and Capital Resources
The following is a summary of selected financial information as at the dates indicated:
Selected Consolidated Balance Sheet Data
|
October 31, 2020
|
|
April 30, 2020
|
Cash
|
$2,480,174
|
|
$2,433,266
|
Current assets
|
$5,100,470
|
|
$5,450,228
|
Total assets
|
$13,534,572
|
|
$13,655,953
|
Current liabilities
|
$8,444,807
|
|
$10,499,343
|
Total liabilities
|
$9,506,167
|
|
$11,611,636
|
As of October 31, 2020, we had $2,480,174 in cash compared to $2,433,266 as of April 30, 2020, representing an increase of $46,908. Our working capital deficit was $3,344,337 at October 31, 2020 compared to working capital deficit of $5,049,115 at April 30, 2020, representing a decrease of $1,704,778.
We have experienced recurring losses and have an accumulated deficit of $69,576,594 as of October 31, 2020, as a result of revenues being historically lower than expenses, resulting from a number of factors including our buildout of a cloud based subscription platform concurrent with the change of our licensing model to subscription based licensing and have not reached profitable operations on a consistent basis. However, during the quarter ended October 31, 2020, revenue has increased by approximately 34% compared to the quarter ended October 31, 2019 Further, due to the recent and ongoing outbreak of COVID-19, the spread of COVID-19 has severely impacted many economies around the world, including those in which our customers operate. Management has taken steps to help mitigate any potential negative impact on operations including having reduced operating costs and obtaining financial assistance made available from the US government under the Paycheck Protection Program; however, we are unable to determine the future impact on our financial position and operating results. Together, these factors raise substantial doubt about our ability to continue operating as a going concern within one year of the date of issuance of the consolidated financial statements.
To alleviate this situation, we have plans in place to improve our financial position and liquidity through additional financing, while executing on our growth strategy, and by managing and or reducing costs that are not expected to have an adverse impact on the ability to generate cash flows, as the transition to our software as a service platform and subscription licensing continues. During the quarter ended October 31, 2020, recurring revenue as a percentage of total revenue increased from 55% in the prior year to 62% of total revenue. We believe that increasing recurring revenue will stabilize the volatility of revenue over time, and enable our company to grow revenue from our extensive customer base. To increase our recurring revenue, we introduced Bria Solo and Bria Teams which are subscription based unified communication services. In addition, we advanced our Channel Partner Program which enables us to leverage our sales force in regions outside of North America. The Channel Partner Program is administered through a partner portal enabling our partners to order and manage their customers and end users in an automated and scalable fashion. Software sold through the Channel Partner Program is extensively licensed on a subscription basis.
We have historically been able to manage liquidity requirements through cost management and cost reduction measures, supplemented with raising additional financing. In October 2018, we entered into a loan agreement for an aggregate principal amount of up to $3,000,000, which was subsequently increased to $5,000,000 on July 10, 2019. As of October 31, 2020, the principal balance of the related party loan payable was $1,000,000 and total interest payable on the loan was $172,612. The unused portion of the loan principal to $4,000,000. See Notes to the Consolidated Financial Statements - Note 7 - Related Party Loan Payable for more information.
On May 1, 2020, through our subsidiary, CounterPath LLC, we entered into a promissory note with Bank of America for a term loan in the amount of $209,035 (the "Loan"). The Loan is made pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The Loan is forgivable if used to retain workers and maintain payroll or to make lease payments and utility payments as specified under the Paycheck Protection Rule. The remaining loan balance that is not forgiven will bear interest at a rate of 1% per annum after a six-month deferment period, with a maturity date of two years from the funding date of the loan. We expect the loan to be fully forgiven during the fiscal year ended April 30, 2021. On October 13, 2020, the Company submitted an application for forgiveness of the Loan, which is under review by the U.S. Small Business Administration (SBA) as of the date of this report.
In addition, on June 10, 2020, we issued an aggregate of 284,902 shares of common stock under a non-brokered private placement at a price of $3.51 per share for total gross proceeds of $1,000,006.
Our company has $1,786,998 in cash held outside of the United States, and there is no intent to repatriate such cash at this time.
On August 28, 2020, we entered into a sales agreement with A.G.P./Alliance Global Partners, as sales agent, pursuant to which we may offer and sell, from time to time, through or to A.G.P./Alliance Global Partners, as sales agent and/or principal, up to $5,000,000 in shares of our common stock. Subject to the terms and conditions of the sales agreement, A.G.P./Alliance Global Partners agreed to use its commercially reasonable efforts to sell the shares from time to time, based upon our instructions. Under the sales agreement, A.G.P./Alliance Global Partners may sell the shares by any method permitted by law deemed to be an "at the market offering" as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. We have no obligation to sell any of the shares, and may at any time suspend offers under the sales agreement. The offering will terminate upon (a) the election of A.G.P./Alliance Global Partners upon the occurrence of certain adverse events, (b) ten business days' advance notice from one party to the other, or (c) the sale of all of the shares. Under the terms of the sales agreement, A.G.P./Alliance Global Partners will be entitled to a commission at a fixed rate of 3.0% of the gross proceeds from each sale of shares under the sales agreement. We will also reimburse A.G.P./Alliance Global Partners for certain expenses incurred in connection with the sales agreement, and agreed to provide indemnification and contribution to A.G.P./Alliance Global Partners with respect to certain liabilities, including liabilities under the Securities Act and the Securities Exchange Act of 1934, as amended.
During the three and six months ended October 31, 2020, the Company sold 26,529 and 26,529, shares of common stock under the "At the market offering" agreement for gross proceeds of $83,172, and after deducting commissions, net proceeds were $80,457 (2019 - $nil).
Cash Flows
Our cash flows for the three months and six months ended October 31, 2020 and 2019 are as follows:
|
|
Six months ended
October 31, 2020
|
|
|
Six months ended
October, 2019
|
|
Net cash provided by (used in) operating activities
|
|
$1,766,237
|
|
|
($970,719
|
)
|
Net cash used in investing activities
|
|
($51,423
|
)
|
|
($43,706
|
)
|
Net cash (used in) provided by financing activities
|
|
($1,709,145
|
)
|
|
$1,010,656
|
|
Net increase (decrease) in cash
|
|
$46,908
|
|
|
($9,242
|
)
|
Operating Activities
Our operating activities resulted in a net cash inflow of $1,766,237 for the six months ended October 31, 2020 compared to a net cash outflow of $970,719 for the same period in the prior year, representing an increase in net cash provided in operating activities of $2,736,956. The increase in net cash provided in operating activities for the six months ended October 31, 2020 was primarily due to an increase in net income of approximately $1,832,000, an increase to the change in unearned revenue of approximately $528,000, an increase to the change in accounts payable and accrued liabilities of approximately $327,000, an increase in stock based compensation of approximately $65,000, an increase in depreciation expense of approximately $5,000, an increase in non-cash foreign exchange losses by approximately $158,000, an increase in deferred sales commission costs of approximately $50,000, a decrease in operating lease liabilities of approximately $108,000 and an increase in the provision for bad debts of approximately $35,000. This increase was primarily offset by the gain resulting from the change in fair value of derivative instruments of approximately $126,000, a reduction in the change in accounts receivable of approximately $103,000, a reduction in prepaid expenses and deposits of approximately $30,000, and a decrease in operating lease expense, net of accretion of approximately $120,000.
Investing Activities
Investing activities resulted in a net cash outflow of $51,423 for the six months ended October 31, 2020, compared to $43,706 for the same period in the prior year. The increase in net cash outflow from investing activities was primarily a result of an increase in investments in computer equipment. At October 31, 2020, we did not have any material commitments for future capital expenditures.
Financing Activities
Financing activities resulted in a net cash outflow of $1,709,145 for the six months ended October 31, 2020 compared to a net cash inflow of $1,010,656 for the six months ended October 31, 2019. The decrease in cash inflow from financing activities was primarily due to a decrease of the related party loan of $4,000,000, offset by cash inflows of approximately $1,070,000 related to the private placement completed on June 11, 2020, sale of common stock under the "At the market" offering, and an increase in the loan payable of $209,305.
Off-Balance Sheet Arrangements
We do not have, and do not have any present plans to implement, any off-balance sheet arrangements.
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds, and modifies certain disclosure requirements for fair value measurements under ASC 820. This ASU is to be applied on a prospective basis for certain modified or new disclosure requirements, and all other amendments in the standard are to be applied on a retrospective basis. We adopted the new standard effective May 1, 2020 and have concluded that there is no material impact on our consolidated interim financial statements and related disclosures.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which modifies and eliminates certain exceptions to the general principles of ASC 740, Income taxes. The new standard is effective for interim and annual periods beginning after December 15, 2020, and early adoption is permitted. We are currently evaluating the impact of the adoption on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which amends the guidance to eliminate Step 2 from the goodwill impairment test. Instead, under the amendments in the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. As a smaller reporting company, the amendment is effective for interim and annual periods beginning after December 15, 2021, and early adoption is permitted. We are currently evaluating the impact of this amendment on our consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments: Measurement of Credit Losses on Financial Instruments, which amends the guidance on measuring credit losses on financial assets held at amortized cost. The amendment is intended to address the issue that the previous "incurred loss" methodology was restrictive for a company's ability to record credit losses based on not yet meeting the "probable" threshold. The new language will require these assets to be valued at amortized cost presented at the net amount expected to be collected with a valuation provision. As a smaller reporting company, ASU 2016-13 and its subsequent updates are effective for fiscal years beginning after December 15, 2022. We are currently evaluating the impact of this amendment on our consolidated financial statements and related disclosures.