COUNTERPATH CORPORATION The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and the other financial information appearing elsewhere in this annual report.
Our consolidated financial statements are stated in
Overview
Background
We were incorporated under the laws of the
On
OnFebruary 1, 2008 , we acquired all of the shares ofFirstHand Technologies Inc. through the issuance of 590,001 shares of our common stock. OnFebruary 1, 2008 , we acquired all of the issued and outstanding shares ofBridgePort Networks, Inc. ("BridgePort Networks") by way of merger in consideration for the assumption of all of the assets and liabilities of BridgePort Networks.
Business of
We design, develop and sell software and services that enable enterprises and telecommunication service providers to deliverUnified 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
OnJanuary 30, 2020 , theWorld Health Organization ("WHO") announced a global health emergency because of a new strain of coronavirus, COVID-19 originating inWuhan, China (and the risks to the international community as the virus spread globally beyond its point of origin. InMarch 2020 , theWHO 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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K, 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. 25
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Revenue
Our total revenue consists of the following:
º Software
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.
º 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.
º 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.
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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 consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States . 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 annual report. We believe that of our significant accounting policies, which are described in Note 2 to our annual consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, the following policies are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition
OnMay 1, 2018 , we adopted the new accounting standard, ASC 606 "Revenue from Contracts with Customers" and all related amendments to the new accounting standard to contracts using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue recognition standard to contracts with open performance obligations as ofMay 1, 2018 , as an adjustment to the opening balance of retained earnings. Revenues from contracts with customers are recognized when control of promised goods and services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
We recognize revenue using the five-step model as prescribed by ASC 606:
1) Identification of the contract, or contracts, with a customer;
2) Identification of the performance obligations in the contract;
3) Determination of the transaction price;
4) Allocation of the transaction price to the performance obligations in the contract; and
5) Recognition of revenue when or as, we satisfy a performance obligation.
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When a contract with a customer is signed, we assess whether collection of the
fees under the arrangement is probable. We estimate the amount to reserve for
uncollectible amounts at the end of each reporting period based on the aging of
the contract balance, current and historical customer trends, and communications
with its customers. These reserves are recorded against the related accounts
receivable.
The transaction price is the consideration that we expect to receive from our
customers in exchange for our products and services. In determining the
allocation of the transaction price, we identify performance obligations in
contracts with customers, which may include products, subscriptions to software
and services, support, professional services and training. We allocate the
transaction price to each performance obligation on a relative standalone
selling price basis. The standalone selling price (SSP) is the price at which we
would sell a promised product or service separately to a customer. We determine
the SSP using information that may include market conditions or other observable
inputs. In certain cases, we are able to establish a SSP based on observable
prices for products or services sold separately. In these instances, we would
use a single amount to estimate a SSP. If a SSP is not directly observable, for
example when pricing is variable, we will use a range of SSP.
In certain circumstances, we may estimate SSP for a product or service by
applying the residual approach. This approach has been most commonly used when
certain perpetual software licenses are only sold bundled with one year of
post-contract support or other services and a price has not been established for
the software.
Significant judgement is used to determine SSP and to determine whether there is
a variance that needs to be allocated based on the relative SSP of the various
products and services. Estimating SSP is a formal process that includes review
and approval by management.
In practice, we do not offer extended payment terms beyond one year to customers. As such, we do not adjust our consideration for financing arrangements.
We recognize software revenue for perpetual licenses when control has transferred to the customer, which is generally at the time of delivery when the customer has the ability to deploy the licenses, provided all revenue recognition criteria have been met. If the revenue recognition criteria has not been met, the revenue is deferred or not recognized. We recognize revenue from subscriptions related to our software as a service offering ratably over the contractual subscription term as control of the goods or services is transferred to the customer, beginning on the date that the subscription is made available to the customer. Support and maintenance revenue is generated from recurring annual software support and maintenance contracts for our perpetual software licenses and is recognized ratably over the term of the service period, which is generally twelve months. Support and maintenance services include e-mail and telephone support, unspecified rights to bug fixes and product updates and upgrades and enhancements available on a when-and-if available basis. Both subscription revenue and support and maintenance revenue are typically billed annually in advance based on the terms of the arrangement. We recognize revenue from professional services and other revenue when control has transferred to the customer, which is generally at the time of delivery, and all other revenue recognition criteria have been met. For contracts with elements related to customized network solutions and certain network build-outs or software systems that require significant modification or customization, we will recognize revenue using the percentage-of-completion method. In using the percentage-of-completion method, revenues are generally recorded based on completion of milestones as described in the agreement. Profit estimates on long-term contracts are revised periodically based on changes in circumstances and any losses on contracts are recognized in the period that such losses become known. Depending on the services to be provided, revenue from professional services and other revenue is generally recognized at the time of delivery when the services have been completed and control has been transferred to the customer.
Unearned Revenue
Unearned revenue represents billings or payments received in advance of revenue recognition and is recognized upon transfer of control. Balances consist primarily of annual support and subscription services and professional and training services not yet provided as of the balance sheet date.
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Costs to Obtain a Customer Contract
Sales commissions and related expenses are considered incremental and recoverable costs of acquiring customer contracts. These costs are capitalized and amortized on a systematic basis to match the timing of revenue recognition over the anticipated benefit period of up to 3.5 years depending on the products and services. The anticipated benefit period was estimated using management judgment after reviewing customer contracts from fiscal years 2004 - 2018, and is based on the average length of applicable customer contracts and includes the contract term and any anticipated renewal periods. This amortization expense is recorded in sales and marketing expense within our consolidated statement of operations. We have elected to apply a practical expedient that permits our company to expense costs to obtain a contract as incurred, if the anticipated benefit period is one year or less. From time to time, management will revisit the estimates used in recognizing the costs to obtain customer contracts.
Costs to Fulfill a Customer Contract
Certain contract costs incurred to fulfill obligations under a contract are capitalized when such costs generate or enhance resources to be used in satisfying future performance obligations and the costs are deemed recoverable. Judgement is used in determining whether certain contract costs can be capitalized. These costs are capitalized and amortized on a systematic basis to match the timing of revenue recognition over the anticipated benefit period of up to 3.5 years, depending on the products and services. The anticipated benefit period was estimated based on the average length of applicable customer contracts and includes the contract term and any anticipated renewal periods. This amortization expense is recorded in cost of sales in our consolidated statement of operations. From time to time, management will review the capitalized costs for impairment and will also revisit the estimates used in recognizing the costs to fulfill customer contracts.
Stock-Based Compensation
Stock options granted are accounted for under ASC 718 "Share-Based Payment" and are recognized at the fair value of the options as determined by an option pricing model as the related services are provided and the options earned. ASC 718 requires public companies to recognize the cost of employee services received in exchange for equity instruments, based on the fair value of those instruments on the measurement date which generally is the grant date, with limited exceptions. Stock-based compensation represents the cost related to stock-based awards granted to employees and non-employee consultants. We measure stock-based compensation cost at measurement date, based on the estimated fair value of the award, and generally recognize the cost as expense on a straight-line basis (net of estimated forfeitures) over the employee requisite service period or the period during which the related services are provided by the non-employee consultants and the options are earned. We estimate the fair value of stock options using a Black-Scholes option valuation model. The expected volatility of options granted has been determined using the volatility of our company's stock. The expected life of options granted afterApril 30, 2006 has been determined based on analysis of historical data. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero. In addition, ASC 718 requires companies to utilize an estimated forfeiture rate when calculating the expense for the period. We applied an estimated forfeiture rate of 15.0% in the year endedApril 30, 2020 in determining the expense recorded in our consolidated statement of operations. Cost of sales and operating expenses include stock-based compensation expense, and deferred share unit plan expense. For the year endedApril 30, 2020 , we recorded an expense of$382,584 in connection with share-based payment awards. A future expense of non-vested options of$271,728 is expected to be recognized over a weighted-average period of 2.3 years. A future expense of non-vested deferred share units of$233,058 is expected to be recognized over a weighted-average period of 2.1 years.
Accounts Receivable and Allowance for Doubtful Accounts
We extend credit to our customers based on evaluation of an individual
customer's financial condition and collateral is generally not required.
Accounts outstanding beyond the contractual payment terms are considered past
due. We determine our allowance for doubtful accounts by considering a number of
factors, including the length of time accounts receivable are beyond the
contractual payment terms, our previous loss history, and a customer's current
ability to pay its obligation to us. We write-off accounts receivable when they
are identified as uncollectible. All outstanding accounts receivable are
periodically reviewed for collectability on an individual basis.
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We have goodwill related to the acquisitions ofNewHeights Software Corporation andFirstHand Technologies Inc. The determination of the net carrying value of goodwill and the extent to which, if any, there is impairment, are dependent on material estimates and judgments on our part, including the estimate of the value of future net cash flows, which are based upon further estimates of future revenues, expenses and operating margins.
Goodwill-Impairment Assessments
We review goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable in accordance with FASB ASC 350,Goodwill and Other Intangible Assets ("ASC 350"). The provisions of ASC 350 require that a two-step impairment test be performed on goodwill. In the first step, we compare the fair value of our reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not considered impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit's goodwill. If the carrying value of our reporting unit's goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference. In September of 2011, FASB issued Accounting Standards Update 2011-08, "Intangibles-Goodwill and Other (Topic 350)". Under the amendments of this update, an entity may first assess certain qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. Determining the fair value of our reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. Our most recent annual goodwill impairment analysis, which was performed at the end of the fourth quarter of fiscal 2020, did not result in an impairment charge for fiscal year 2020, nor did we record any goodwill impairment in fiscal 2019.
Leases
InFebruary 2016 , the FASB issued ASU 2016-02, Leases, as amended by subsequent standards updates, which requires lessees to recognize right-of-use (ROU) assets and lease liabilities for all leases, with the exception of short term leases, at the commencement date of each lease. A ROU asset represents our right to use an identified asset for the lease term and lease liability represents our obligation to make payments as set forth in the lease arrangement. We adopted the new standard effectiveMay 1, 2019 using a modified retrospective approach and did not restate comparative periods. As a result, we recorded$1,708,129 of ROU assets and operating lease liabilities onMay 1, 2019 . There was no cumulative-effect adjustment for the adoption and the adoption did not have a significant impact on our consolidated statements of operations. Management has elected to apply the practical expedient to not reassess initial direct costs related to leases, whether any expired or existing contracts contained leases and to carryforward historical lease classification. As a result, all leases identified by management will continue to be classified as operating leases. In addition, management elected to not record short-term leases with an initial term of 12 months or less on its consolidated balance sheets. See Note 14- Leases for more information. We determine if an arrangement is a lease at contract inception by evaluating if the contract conveys the right to control the use of an identified asset during the period of use. A right-of-use (ROU) asset represents our right to use an identified asset for the lease term and lease liability represents our obligation to make payments as set forth in the lease arrangement. ROU assets and lease liabilities are included on our consolidated balance sheets beginningMay 1, 2019 and are recognized based on the present value of the future minimum lease payments at lease commencement date. The interest rate used to determine the present value of the future lease payments is our estimated incremental borrowing rate, because the interest rate implicit in the lease is generally not readily determinable. A ROU asset initially equals the lease liability, adjusted for any lease payments made prior to lease commencement and any lease incentives. All leases are recorded on the consolidated balance sheets except for leases with an initial term of less than 12 months. All of the our leases are operating leases. 30
-------------------------------------------------------------------------------- We have lease agreements with lease and non-lease components. The lease component is comprised of minimum lease payments which includes base rent and estimated property taxes and insurance. Non-lease components primarily include payments for maintenance and are expensed as incurred.
Derivative Instruments
We periodically enter into foreign currency forward contracts, not designated as hedging instruments, to protect us from fluctuations in exchange rates. During the year, we had two foreign currency option contracts with an aggregate notional value of$1,000,000 and three foreign currency forward contracts with an aggregate notional value of$1,300,667 , all maturing in the period endingJuly 31, 2020 . We also had two foreign currency forward contracts with an aggregate notional value of$900,000 , maturing in the period endingOctober 31, 2020 . Notional amounts do not quantify risk or represent assets or liabilities of our company, but are used in the calculation of cash settlements under the contracts. During the year endedApril 30, 2020 we recognized a loss of$132,377 as a result of the change in fair value of derivative instruments.
Results of Operations
Our operating activities during the year endedApril 30, 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 inU.S. dollars and incur a majority of our expenses in Canadian dollars. As a result of the fluctuation in the Canadian dollar against theU.S. dollar over the twelve months endedApril 30, 2020 , we recorded a decrease in operating costs on translation of Canadian dollar costs as compared to the twelve months endedApril 30, 2019 of approximately$98,300 .
Selected Consolidated Financial Information
The following tables set out selected consolidated audited financial information for the periods indicated. The selected consolidated financial information set out below for the fiscal years endedApril 30, 2020 and 2019, and as atApril 30, 2020 andApril 30, 2019 , has been derived from the consolidated financial statements and accompanying notes for the fiscal years endedApril 30, 2020 and 2019. Each investor should read the following information in conjunction with those statements and the related notes thereto. Selected Consolidated Balance Sheet Data April 30, 2020 April 30, 2019 Cash$ 2,433,266 $ 1,862,458 Current assets$ 5,450,228 $ 4,126,387 Total assets$ 13,655,953 $ 11,124,786 Current liabilities$ 10,499,343 $ 4,885,095 Total liabilities$ 11,611,636 $ 7,898,889 31
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Selected Consolidated Statements
of Operations Data Years Ended April 30,
2020 2019
Percent Percent
of Total of Total
Amount Revenue Amount Revenue
Revenue $ 12,101,326 100% $ 10,764,904 100%
Operating expenses $ 12,900,893 107% 15,931,665 148%
Loss from operations ($799,567 ) (7% ) ($5,166,761 ) (48% )
Interest and other income
(expense), net (465,584 ) (4% ) (103,443 ) (1% )
Foreign exchange gain 168,586 2% 256,765 2%
Net loss ($1,096,565 ) (9% ) ($5,013,439 ) (47% )
Net loss per share
-Basic and diluted ($0.18 ) ($0.84 )
Weighted average common shares
outstanding
-Basic and diluted (1) 6,010,006 5,942,096
(1) As at April 30, 2020 and 2019 common share equivalents of 1,371,469 and
1,249,940, respectively, were not included in the computation of diluted
weighted average common shares as the effect was anti-dilutive.
Revenue
Revenues for the year ended
Twelve Months Ended April 30,
2020 2019 Period-to-Period Change
Percent Percent Percent
of Total of Total Increase /
Amount Revenue Amount Revenue Amount (Decrease)
Revenue by Type
Software $ 5,154,513 42% $ 4,660,660 43% $ 493,853 11%
Subscription,
support and
maintenance $ 6,257,854 52% $ 5,366,290 50% $ 891,564 17%
Professional
services and
other $ 688,959 6% $ 737,954 7% ($48,995 ) (7% )
Total revenue $ 12,101,326 100% $ 10,764,904 100% $ 1,336,422 12%
Revenue by
Region
North America $ 8,391,465 69% $ 6,768,821 63% $ 1,622,644 24%
International $ 3,709,861 31% $ 3,996,083 37% ($286,222 ) (7% )
Total revenue $ 12,101,326 100% $ 10,764,904 100% $ 1,336,422 12%
For the year ended April 30, 2020 , we generated $12,101,326 in revenue compared
to $10,764,904 for the year ended April 30, 2019 , representing an increase of
$1,336,422 or 12%.
Software revenue increased by $493,853 or 11% to $5,154,513 for the year ended
April 30, 2020 compared to $4,660,660 for the year ended April 30, 2019 . The
increase in software revenue was primarily a result of increased sales to
enterprises and channel partners.
Subscription, support and maintenance revenue increased by $891,564 or 17% to
$6,257,854 for the year ended April 30, 2020 compared to $5,366,290 for the year
ended April 30, 2019 . The increase in subscription, support and maintenance
revenue was a result of increased sales to channel partners, service providers,
and enterprises.
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-------------------------------------------------------------------------------- Professional services and other revenue decreased by$48,995 or 7% to$688,959 for the year endedApril 30, 2020 compared to$737,954 for the year endedApril 30, 2019 . The decrease in professional services and other revenue was a result of decreased sales to service providers and enterprises. North American revenue increased by$1,622,644 or 24% to$8,391,465 for the year endedApril 30, 2020 compared to$6,768,821 for the year endedApril 30, 2019 , as a result of higher sales of software and services to North American enterprises, service providers, and channel partners. International revenue outside ofNorth America decreased by$286,222 or 7% to$3,709,861 for the year endedApril 30, 2020 compared to$3,996,083 for the year endedApril 30, 2019 , as a result of lower sales of software and services to international service providers, slightly offset by increased sales of software and service to international channel partners and enterprises.
Operating Expenses
Cost of Sales
Cost of sales for the year ended
April 30, 2020 April 30, 2019
Period-to-Period Change
Percent Percent Percent
of of Increase /
Amount Revenue Amount Revenue Amount (Decrease)
Year ended $ 2,124,948 18% $ 2,223,984 21% ($99,036 ) (4% )
Cost of sales was $2,124,948 for the year ended April 30, 2020 compared to
$2,223,984 for the year ended April 30, 2019 . The decrease of $99,036 , or 4%,
was primarily due to decreases of approximately $153,200 in wages and benefits
and approximately $347,500 in consulting fees, offset by increases of
approximately $204,900 in communication services expenses, approximately
$184,400 in licenses and permits and approximately $12,300 in other expenses.
Cost of sales expressed as a percent of revenue was 18% of revenue for the year
ended April 30, 2020 compared to 21% for the year ended April 30, 2019 . The
decrease in cost of sales as a percentage of revenue is primarily due to the
decrease in headcount in our effort to reduce costs.
Sales and Marketing
Sales and marketing expenses for the year ended
April 30, 2020 April 30, 2019 Period-to-Period Change
Percent Percent Percent
of of Increase /
Amount Revenue Amount Revenue Amount (Decrease)
Year ended $ 3,831,866 32% $ 4,061,921 38% ($230,055 ) (6% )
Sales and marketing expenses were $3,831,866 for the year ended April 30, 2020
compared to $4,061,921 for the year ended April 30, 2019 . The decrease of
$230,055 , or 6%, was primarily attributable to decreases of approximately
$164,500 in wages, benefits and commissions expenses, approximately $77,900 in
consulting fees and approximately $6,500 in marketing and travel expenses,
offset by an increase of approximately $18,900 in other expenses.
Research and Development
Research and development expenses for the year ended
April 30, 2020 April 30, 2019 Period-to-Period Change
Percent Percent Percent
of of Increase /
Amount Revenue Amount Revenue Amount (Decrease)
Year ended $ 4,398,814 36% $ 5,547,587 52% ($1,148,773 ) (21% )
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-------------------------------------------------------------------------------- Research and development expenses were$4,398,814 for the year endedApril 30, 2020 compared to$5,547,587 for the year endedApril 30, 2019 . The decrease of$1,148,773 , or 21%, resulted primarily from decreases of approximately$648,200 in wages and benefits expenses due to the decrease in headcount in our effort to reduce costs, approximately$454,700 in consulting expenses and approximately$45,800 in other expenses. General and Administrative
General and administrative expenses for the years ended
April 30, 2020 April 30, 2019 Period-to-Period Change
Percent Percent Percent
of of Increase /
Amount Revenue Amount Revenue Amount (Decrease)
Year ended $ 2,545,265 21% $ 4,098,173 38% ($1,552,908 ) (38% )
General and administrative expenses for the year ended April 30, 2020 were
$2,545,265 compared to $4,098,173 for the year ended April 30, 2019 . The
decrease of $1,552,908 , or 38%, in general and administrative expenses was
primarily attributable to decreases of approximately $933,000 in the allowance
for bad debts provision as a result of one time provisions recorded for several
customer accounts in the prior year. In addition, we recorded a decrease of
approximately $396,600 in wages and benefits expenses, primarily related to a
one time accrual of $321,000 recorded in the prior year, associated with the
departure of our former chief executive officer, a decrease of approximately
$226,100 in legal and professional charges and a decrease of approximately
$49,100 in consulting expenses. This decrease was offset by an increase of
approximately $51,500 in other expenses.
Interest and Other Income (Expense), Net
Interest and other income (expense), net for the year endedApril 30, 2020 was ($296,998 ) compared to$153,322 for the year endedApril 30, 2019 . The change of ($450,320 ) or (294%) was primarily due to an increase in interest expense related to the related party loan payable of approximately$228,000 , a loss resulting from the change in fair value of derivative instruments of approximately$134,100 and an increase in the foreign exchange loss in the current year of approximately$88,200 as result of the weakening of the Canadian dollar against theU.S. dollar during the year endedApril 30, 2020 . 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. This also includes the translation of quarterly intercompany transfer pricing invoices from our Canadian subsidiary to us.
Liquidity and Capital Resources
As atApril 30, 2020 , we had$2,433,266 in cash compared to$1,862,458 atApril 30, 2019 , representing an increase of$570,808 . As ofApril 30, 2020 , we had a working capital deficit of$5,049,115 compared to working capital deficit of$758,708 atApril 30, 2019 , representing a decrease of$4,290,407 . Management anticipates that future capital requirements of our company will be funded through cash flows generated from operations and from working capital for the next twelve months and we may seek additional funding to meet ongoing operating expenses. We have experienced recurring losses and have an accumulated deficit of$69,677,656 as ofApril 30, 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 year endedApril 30, 2020 , revenue has increased by approximately 12% compared to the year endedApril 30, 2019 . Despite the increase in revenue, we saw an increase in current liabilities primarily related to the reclassification of the related party loan payable of$4,000,000 outstanding as ofApril 30, 2020 , from long-term liabilities, which is due onApril 11, 2021 . It is uncertain whether we would be able to maintain sufficient cash flows to meet our current obligations. 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 through fiscal year endedApril 30, 2020 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. 34 -------------------------------------------------------------------------------- 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 fiscal 2020, recurring revenue as a percentage of total revenue increased from 50% in the prior year to 52% 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 introducedBria 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 ofNorth 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. In addition, as a result of managements efforts to reduce costs, operating expenses decreased by approximately 19% to$12,900,893 during the year endedApril 30, 2020 , compared to$15,931,665 in the prior year. We have historically been able to manage liquidity requirements through cost management and cost reduction measures, supplemented with raising additional financing. InOctober 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 onJuly 10, 2019 . As ofApril 30, 2020 , the principal balance of the related party loan payable was$4,000,000 and interest payable on the loan was$79,459 . Subsequent to year end, onJune 15, 2020 , we repaid$2,000,000 of the outstanding loan balance to our Lenders, increasing the unused portion of the loan principal to$3,000,000 . See Notes to the Consolidated Financial Statements - Note 9 - Related Party Loan Payable for more information. OnMay 1, 2020 , through our subsidiary,CounterPath LLC , we entered into a promissory note withBank 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 forgiveable 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 endedApril 30, 2021 .
In addition, on
As atApril 30, 2020 we had$1,267,712 in cash held outside ofthe United States , and there is no intent to repatriate at this time. Should we decide to repatriate in the future, taxes would need to be accrued and paid. The 2017 Tax Cuts and Jobs Act incorporated changes to certain international tax provisions, including the implementation of a territorial tax system that imposes a one-time tax on foreign unremitted earnings. We do not anticipate that the foreign provisions would have an impact on our taxes.
Operating Activities
Our operating activities resulted in a net cash outflow of$310,116 for the year endedApril 30, 2020 , compared to a net cash outflow of$3,443,379 for the year endedApril 30, 2019 , representing a decrease of$3,113,263 . This decrease is primarily due to a decrease in the net loss by approximately$3,916,900 , an increase in the change in unearned revenue of approximately$1,160,800 , an increase in operating lease expenses of approximately$514,600 related to the adoption of the new lease accounting standard, an increase in the loss resulting from the change in fair value of derivative instruments of approximately$127,400 , an increase to the change in accounts payable and accrued liabilities of approximately$192,700 , a decrease in non-cash foreign exchange losses of approximately$72,000 and a decrease in the change in deferred sales commissions costs of approximately$44,400 . This is offset by an increase in the change in accounts receivable of approximately$1,376,000 , a decrease in non-cash bad debts expense of approximately$933,000 , the adoption of the new lease accounting standard resulting in operating lease liabilities of approximately$498,700 , a decrease in non-cash stock-based compensation expense of approximately$92,100 and a decrease in non-cash depreciation and amortization of approximately$32,500 . 35
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Investing Activities
Investing activities resulted in a net cash outflow of$125,842 for the year endedApril 30, 2020 , compared to a net cash outflow of$49,732 for the year endedApril 30, 2019 , representing an increase of$76,110 . This decrease is primarily due to an increase of approximately$80,300 in purchases of equipment, offset by a decrease of$4,200 in costs related to our trademarks. AtApril 30, 2020 , we did not have any material commitments for future capital expenditures.
Financing Activities
Financing activities resulted in a net cash inflow of$1,016,967 for the year endedApril 30, 2020 compared to a net cash inflow of$3,022,645 for the year endedApril 30, 2019 , representing a decrease of$2,005,678 . The decrease was primarily due to proceeds of$3,000,000 received under the loan agreement during the year endedApril 30, 2019 compared to proceeds of 1,000,000 in the current year. In addition, proceeds received related to shares issued pursuant to our employee stock purchase plan decreased by approximately$5,700 .
Off-Balance Sheet Arrangements
We do not have, and do not have any present plans to implement, any off-balance sheet arrangements.
Recently Issued Accounting Pronouncements
InAugust 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. The new standard is effective for interim and annual periods beginning afterDecember 15, 2019 , with early adoption permitted. We are currently evaluating the impact of adoption on our consolidated financial statements. InJanuary 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. The amendments will be effective for annual or any interim goodwill impairment tests in fiscal years beginning afterDecember 15, 2019 . We do not expect a significant impact on our consolidated financial statements and related disclosures resulting from the pending adoption of this amendment. InJune 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 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 will a valuation provision. The amendments will be effective for fiscal years beginning afterDecember 15, 2022 . We do not expect a significant impact on our consolidated financial statements and related disclosures resulting from the pending adoption of this amendment. 36
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