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COUNTERPATH CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements
This quarterly report 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",
"intends", "expects", "plans", "anticipates", "believes", "estimates",
"predicts", "potential", or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks in the
section entitled "Risk Factors", which may cause our or our industry's actual
results, levels of activity or performance to be materially different from any
future results, levels of activity or performance 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 or performance. Except as required by applicable law, including the
securities laws of the United States, we do not intend to update any of the
forward-looking statements to conform these statements to actual results.
Our financial statements are stated in United States dollars and are
prepared in accordance with United States generally accepted accounting
principles. All references to "common shares" refer to our shares of common
stock. As used in this quarterly report, the terms "we", "us" and "our" means
CounterPath Corporation, unless otherwise indicated.
The following discussion and analysis should be read in conjunction with
the financial statements and related notes and the other financial information
appearing elsewhere in this quarterly report. This discussion and analysis
contains forward-looking statements that involve risk, uncertainties and
assumptions.
Background
We were incorporated under the laws of the State of Nevada on April 18,
2003.
On August 2, 2007, we completed the acquisition of all of the shares of
NewHeights Software Corporation through the issuance of 7,680,168 shares of
common stock and 369,836 preferred shares issued from a subsidiary of our
company, which preferred shares were exchangeable into 369,836 shares of our
common stock.
On February 1, 2008, we acquired FirstHand Technologies Inc., a private
Ontario, Canada corporation, through the issuance of 5.9 million shares of our
common stock.
On February 1, 2008, we acquired BridgePort Networks, Inc., a private
Delaware corporation, by way of merger in consideration for the assumption of
all of the assets and liabilities of BridgePort Networks.
On February 5, 2008, NewHeights and our subsidiary, CounterPath Solutions
R&D Inc., were amalgamated under the name CounterPath Technologies Inc.
On November 1, 2010, our wholly-owned subsidiary, FirstHand Technologies
Inc., was amalgamated with CounterPath Technologies Inc., under the name
CounterPath Technologies Inc.
Business of CounterPath
Our business focuses on the design, development, marketing and sales of
personal computer and mobile application software, server software and related
professional services, such as pre and post sales, technical support and
customization services. Our software products are sold into the
telecommunications sector, specifically the voice over Internet protocol (VoIP),
unified communications and fixed-mobile convergence markets. VoIP, unified
communications and fixed-mobile convergence are general terms for technologies
that use Internet or mobile protocols for the transmission of packets of data
which may include voice, video, text, fax, and other forms of information that
have traditionally been carried over the dedicated circuit-switched connections
of the public switched telephone network.
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Our strategy is to sell our software to our customers to allow such
customers to deliver session initiation protocol and voice over Internet
protocol (VoIP) services. Our customers include: (1) telecommunications service
providers and Internet telephony service providers, (2) original equipment
manufacturers serving the telecommunication market; (3) small, medium and large
sized businesses; and (4) end users. Our software enables voice, instant
messaging and video communication from the end user through the network to
another end user.
Revenue
We derive revenue from the sale of software licenses and software
customization and services associated with software such as technical support
services, implementation and training. We recognize software and services
revenue at the time of delivery, provided all other revenue recognition criteria
have been met.
Post contract customer support 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, and are recognized
rateably over the term of the service period, which is generally twelve months.
We offer our products and services directly through our sales force and
indirectly through distribution partners. Our distribution partners include
networking and telecommunications equipment vendors throughout the world.
The amount of product configuration and customization, which reflects the
requested features, determines the price for each sale. The number of software
licenses purchased has a direct impact on the average selling price. Services
may vary depending upon a customer's requirements for technical support,
implementation and training.
We believe that our revenue and results of operations may vary
significantly from quarter to quarter as a result of long sales and deployment
cycles, lack of control of channel partners and their timing of selling our
products, new product introductions and seasonal variations in customer ordering
patterns.
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, including stock-based compensation, (b) related overhead, (c)
amortization of intangible assets, (d) billable and non-billable travel,
lodging, and other out-of-pocket expenses, (e) payments to third party vendors
for compression/decompression software known as codecs, (f) amortization of
capitalized software that is implemented into our products, and (g) warranty
expense. Amortization of intangible assets consists of the amortization expense
related to the intangible assets acquired from NewHeights Software Corporation,
FirstHand Technologies Inc. and BridgePort Networks, Inc. comprising acquired
technologies and customer assets. The acquired technologies are amortized based
on their estimated useful life of four years and the customer assets are
amortized on the basis of management's estimate of the future cash flows from
this asset over approximately five years from acquisition, which is management's
estimate of the useful life of the customer asset.
Sales and marketing expense consists primarily of: (a) salaries and related
personnel costs including stock-based compensation, (b) payments to suppliers
for contracting services, (c) commissions, (d) travel, lodging and other
out-of-pocket expenses, (e) marketing programs such as trade shows, and (f)
other related overhead. Commissions are recorded as expense when earned by the
employee. 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.
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Research and development expense consists primarily of: (a) salaries and
related personnel costs including stock-based compensation, (b) payments to
suppliers for design and contracting 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 in the United States. The preparation
of these 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 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.
We believe that of our significant accounting policies, which are described
in Note 2 to our interim and annual 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.
Basis of Presentation
The consolidated financial statements include the accounts of our company
and our wholly-owned subsidiaries, CounterPath Technologies Inc., a company
existing under the laws of the province of British Columbia, Canada, and
BridgePort Networks, Inc. incorporated under the laws of the state of Delaware.
All inter-company transactions and balances have been eliminated.
Interim Reporting
The information presented in the accompanying interim consolidated
financial statements is without audit pursuant to the rules and regulations of
the SEC. Certain information and footnote disclosures normally included in the
interim consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although we believe that the disclosures are adequate to
make the information presented not misleading.
These statements reflect all adjustments, which are, in the opinion of
management, necessary to present fairly the financial position, results of
operations and cash flows for the interim periods presented in accordance with
accounting principles generally accepted in the United States of America. Except
where noted, the interim consolidated financial statements follow the same
accounting policies and methods of their application as our April 30, 2012
annual consolidated financial statements. All adjustments are of a normal
recurring nature. It is suggested that these interim consolidated financial
statements be read in conjunction with our April 30, 2012 annual consolidated
financial statements.
Operating results for the nine months ended January 31, 2013 are not
necessarily indicative of the results that can be expected for the year ending
April 30, 2013.
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Revenue Recognition
We recognize revenue in accordance with the American Institute of Certified
Public Accountants (AICPA) ASC 985-605, "Software Revenue Recognition", as
amended by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition
with Respect to Certain Transactions".
In all of our arrangements, we do not recognize any revenue until we can
determine that persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and we deem collection to be
probable. For distribution and reseller arrangements, fees are fixed or
determinable and collection probable when there are no rights to exchange or
return and fees are not dependable upon payment from the end-user. If any of
these criteria are not met, revenue is deferred until such time that all
criteria have been met.
A substantial percentage of our revenue is generated by multiple-element
arrangements, such as products, maintenance and support, professional services
and training. When arrangements include multiple elements, we allocate the total
fee among the various elements using the residual method. Under the residual
method, revenue is recognized when vendor-specific objective evidence, or VSOE,
of fair value exists for all of the undelivered elements of the arrangement, but
does not exist for one or more of the delivered elements of the arrangement.
Each arrangement requires us to analyze the individual elements in the
transaction and to estimate the fair value of each undelivered element, which
typically includes maintenance and services. Revenue is allocated to each of the
undelivered elements based on its respective fair value, with the fair value
determined by the price charged when that element is sold separately.
For contracts with elements related to customized network solutions and
certain network build-outs, we apply FASB Emerging Issues Task Force Issue ASC
605-25, "Revenue Arrangements with Multiple Deliverables" and revenues are
recognized under ASC 605-35, "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts", generally using the
percentage-of-completion method.
In using the percentage-of-completion method, revenues are generally
recorded based on a 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.
Post contract customer support (PCS) 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, and are recognized
rateably over the term of the service period, which is generally twelve months.
PCS service revenue generally is deferred until the related product has
been accepted and all other revenue recognition criteria have been met.
Professional services and training revenue is recognized as the related service
is performed.
We have a bad debt and a warranty provision in the amount of 2% and 1%,
respectively, of software sales, which is amortized over a twelve-month term. We
recognize this deferred revenue evenly over a twelve-month period from the date
of the sale.
Stock-Based Compensation
Stock options granted are accounted for under ASC 718 (prior authoritative
literature: SFAS No. 123R) "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 replaces existing
requirements under FAS 123 and APB 25, and 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.
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The expected volatility of options granted has been determined using the
volatility of our company's stock. The expected life of options granted after
April 30, 2006 has been determined utilizing the "simplified" method as
prescribed by the SEC's Staff Accounting Bulletin ("SAB") No. 107, Share-Based
Payment. 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 nine months ended January 31, 2013 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 nine months ended January 31,
2013, we recorded an expense of $812,108 in connection with share-based payment
awards. A future expense of non-vested options of $1,138, 360 is expected to be
recognized over a weighted-average period of 2.79 years. A future expense of
non-vested deferred share units of $306,780 is expected to be recognized over a
weighted-average period of 1.83 years.
Research and Development Expense for Software Products
Research and development expense includes costs incurred to develop
intellectual property. The costs for the development of new software and
substantial enhancements to existing software are expensed as incurred until
technological feasibility has been established, at which time any additional
costs would be capitalized. We have determined that technological feasibility is
established at the time a working model of software is completed. Because we
believe our current process for developing software will be essentially
completed concurrently with the establishment of technological feasibility, no
costs have been capitalized to date.
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 accounts
are periodically reviewed for collectability on an individual basis.
Goodwill and Intangible Assets
We have goodwill and intangible assets on our balance sheet related to the
acquisitions of NewHeights Software Corporation, FirstHand Technologies Inc. and
BridgePort Networks, Inc. Intangible assets are carried and reported at
acquisition cost, net of accumulated amortization subsequent to acquisition. The
intangible assets acquired are comprised of acquired technologies and customer
assets relating to customer relationships. The acquired technologies are
amortized based on their estimated useful life of four years and the customer
asset is amortized on the basis of management's estimate of the future cash
flows from this asset over approximately five years, which is management's
estimate of the useful life of the customer assets. The intangible assets are
reviewed for impairment whenever events or circumstances indicate impairment
might exist in accordance with ASC 360, "Accounting for the Impairment or
Disposal of Long-Lived Assets." Projected undiscounted net cash flows expected
to be derived from the use of those assets are compared to the respective net
carrying amounts to determine whether any impairment exists. Impairment, if any,
is based on the excess of the carrying amount over the fair value of those
assets. The determination of the net carrying value of goodwill and intangible
assets and the extent to which, if any, there is impairment, are dependent on
material estimates and judgments on our part, including the useful life over
which the intangible assets are to be amortized and the estimates of the value
of future net cash flows, which are based upon further estimates of future
revenues, expenses and operating margins.
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Goodwill and Intangible Assets-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. 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.
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. In addition, we make certain judgments
and assumptions in allocating shared assets and liabilities to determine the
carrying values for our reporting unit. Our most recent annual goodwill
impairment analysis, which was performed at the end of the fourth quarter of
fiscal 2012, did not result in an impairment charge, nor did we record any
goodwill impairment for the nine months ending January 31, 2013.
We make judgments about the recoverability of purchased intangible assets
whenever events or changes in circumstances indicate that an other- than-
temporary impairment may exist. Each period we evaluate the estimated remaining
useful lives of purchased intangible assets and whether events or changes in
circumstances warrant a revision to the remaining periods of amortization. In
accordance with ASC 360, Accounting for the Impairment or Disposal of Long-Lived
Assets, recoverability of these assets is measured by comparison of the carrying
amount of the asset to the future undiscounted cash flows the asset is expected
to generate. If the asset is considered to be impaired, the amount of any
impairment is measured as the difference between the carrying value and the fair
value of the impaired asset.
Assumptions and estimates about future values and remaining useful lives of
our intangible and other long-lived assets are complex and subjective. They can
be affected by a variety of factors, including external factors such as industry
and economic trends, and internal factors such as changes in our business
strategy and our internal forecasts. These estimates and assumptions include
revenue growth rates and operating margins used to calculate projected future
cash flows and risk adjusted discounted rates and future economic and market
conditions. Our updated long-term financial forecast represents the best
estimate that our management has at this time and we believe that its underlying
assumptions are reasonable. As a result of our review of the recoverability of
intangibles assets there was no impairment charge for the nine months ending
January 31, 2013 (2012 - $nil).
Derivative Instruments
On June 14, 2011, we issued an aggregate of 3,145,800 units under a
brokered private placement for aggregate gross proceeds of $5,636,170
(CDN$5,505,150) at a price of $1.79 (CDN$1.75) per unit, with each unit
consisting of one share of our common stock and one-half of one common share
purchase warrant, with each whole warrant entitling the holder to purchase one
additional share of our common stock at an exercise price of CDN$2.25 per share
until June 14, 2013. In connection with the offering, we issued an aggregate of
220,206 broker warrants, with each broker warrant entitling the holder thereof
to purchase one share of our common stock at an exercise price of CDN$1.75 per
share until December 14, 2012. We follow the guidance in ASC 815-40-15, and
record the warrants issued as derivative instruments due to their exercise price
being denominated in a currency other than our U.S. Dollar functional currency.
The fair value of the derivative instruments is revalued at the end of each
reporting period using the Binomial method, and the change in fair value of the
derivative liability is recorded as a gain or loss in our consolidated
statements of operations.
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We periodically enter into foreign currency forward contracts, not
designated as hedging instruments, to protect us from fluctuations in exchange
rates. As of January 31, 2013, we had $4,000,000 of notional value foreign
currency forward contracts maturing through June 3, 2013. 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. The fair value
marked to market gain (loss) of forward contracts as of January 31, 2013 is
$78,435.
Results of Operations
Our operating activities during the three and nine months ended January 31,
2013 consisted primarily of selling our IP telephony software and related
services to telecom service providers and original equipment manufacturers
serving the telecom industry, and the continued development of our IP telephony
software products.
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 nine months ended January 31, 2013
and 2012, and as at January 31, 2013 and April 30, 2012 has been derived from
the consolidated unaudited financial statements and accompanying notes for the
three and nine months ended January 31, 2013 and 2012 and fiscal year ended
April 30, 2012. Each investor should read the following information in
conjunction with those statements and the related notes thereto. We believe the
presentation of non-GAAP operating expenses provides useful information to our
investors. In particular, we disclose that we utilize non-GAAP operating
expenses to internally measure our operating performance and also present such
measure to allow investors to analyze our operating performance utilizing the
same measure as used by our management.
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