10-Q 1 form10q.htm FORM 10-Q CounterPath Corporation - Form 10-Q - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2014

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission file number 000-50346

COUNTERPATH CORPORATION
(Exact name of registrant as specified in its charter)

Nevada 20-0004161
(State or other jurisdiction of incorporation or (IRS Employer Identification No.)
organization)  

Suite 300, One Bentall Centre, 505 Burrard Street, Vancouver, British Columbia, Canada V7X 1M3
(Address, including zip code, of principal executive offices)

(604) 320-3344
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]      No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]      No [   ]

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

Large accelerated filer [   ] Accelerated filer                   [   ]
   
Non-accelerated filer   [   ] (Do not check if a smaller reporting company) Smaller reporting company [X]

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


APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 42,555,077 shares of common stock issued and outstanding as of December 8, 2014.

2


COUNTERPATH CORPORATION
OCTOBER 31, 2014 QUARTERLY REPORT ON FORM 10-Q

INDEX

    Page
     
  PART I – FINANCIAL INFORMATION
     
Item 1. Financial Statements. 4
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 25
     
Item 4. Controls and Procedures. 35
     
  PART II – OTHER INFORMATION
     
Item 1. Legal Proceedings. 36
     
Item 1A. Risk Factors. 36
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 42
     
Item 3. Defaults Upon Senior Securities. 43
     
Item 5. Other Information. 43
     
Item 6. Exhibits. 43

3


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

It is the opinion of management that the interim consolidated financial statements for the quarter ended October 31, 2014 include all adjustments necessary in order to ensure that the interim consolidated financial statements are not misleading.

The interim consolidated financial statements are stated in United States dollars and are prepared in accordance with generally accepted accounting principles in the United States of America.

 

COUNTERPATH CORPORATION
INDEX TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2014
(Unaudited)
(Stated in U.S. Dollars)

  Page
   
Interim Consolidated Balance Sheets 5
   
Interim Consolidated Statements of Operations 6
   
Interim Consolidated Statements of Comprehensive Loss 6
   
Interim Consolidated Statements of Cash Flows 7
   
Interim Consolidated Statement of Changes in Stockholders’ Equity 8
   
Notes to the Interim Consolidated Financial Statements 9–24

4


COUNTERPATH CORPORATION
INTERIM CONSOLIDATED BALANCE SHEETS
(Stated in U.S. Dollars)

    October 31,     April 30,  
    2014     2014  
Assets   (Unaudited)        
   Current assets:            
       Cash and cash equivalents $  5,058,448   $  7,172,798  
       Accounts receivable (net of allowance for doubtful accounts of
       $338,649 and $240,681, respectively)
  2,997,114     3,401,491  
       Prepaid expenses and deposits   143,993     161,627  
           Total current assets   8,199,555     10,735,916  
             
   Deposits   116,697     125,267  
   Equipment   205,561     154,293  
   Goodwill – Note 2(e)   7,851,939     8,018,578  
   Other assets   122,881     102,836  
Total Assets $  16,496,633   $  19,136,890  
             
Liabilities and Stockholders’ Equity            
   Current liabilities:            
       Accounts payable and accrued liabilities $  2,464,453   $  2,326,763  
       Unearned revenue   1,605,998     1,625,826  
       Customer deposits   9,553     9,553  
       Accrued warranty   74,007     69,159  
           Total current liabilities   4,154,011     4,031,301  
             
   Deferred lease inducements   58,065      
   Unrecognized tax benefit   25,631     25,631  
           Total liabilities   4,237,707     4,056,932  
             
   Stockholders’ equity:            
   Preferred stock, $0.001 par value 
         Authorized: 100,000,000 
         Issued and outstanding: October 31, 2014 – nil; April 30, 2014 – nil
       
    Common stock, $0.001 par value – Note 5 
         Authorized: 100,000,000 
         Issued and outstanding: 
         October 31, 2014 – 42,524,467; April 30, 2014 – 42,599,869
  42,525     42,600  
         Treasury stock   (154 )   (16 )
   Additional paid-in capital   67,261,524     66,910,540  
   Accumulated deficit   (53,391,195 )   (50,889,038 )
   Accumulated other comprehensive loss – currency translation adjustment   (1,653,774 )   (984,128 )
           Total stockholders’ equity   12,258,926     15,079,958  
Liabilities and Stockholders’ Equity $  16,496,633   $  19,136,890  
             
Commitments – Note 7            

See accompanying notes to the interim consolidated financial statements

5


COUNTERPATH CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in U.S. Dollars)
(Unaudited)

    Three Months Ended     Six Months Ended  
    October 31,     October 31,  
    2014     2013     2014     2013  
Revenue – Note 6:                        
   Software $  1,720,742   $  1,451,475   $  3,594,690   $ 3,098,995  
   Service   1,130,366     1,095,335     2,283,589     2,307,302  
             Total revenue   2,851,108     2,546,810     5,878,279     5,406,297  
Operating expenses:                        
   Cost of sales (includes depreciation of $23,855 (2013 – $45,598))   586,455     571,857     1,204,509     1,129,312  
   Sales and marketing   1,225,776     1,315,421     2,363,544     2,528,904  
   Research and development   1,455,168     1,324,308     2,951,374     2,737,383  
   General and administrative   1,206,883     1,101,457     2,410,394     2,114,987  
             Total operating expenses   4,474,282     4,313,043     8,929,821     8,510,586  
Loss from operations   (1,623,174 )   (1,766,233 )   (3,051,542 )   (3,104,289 )
Interest and other income (expense), net:                        
   Interest and other income   3,674     56,989     11,718     84,474  
   Interest expense       (161 )   (350 )   (932 )
   Fair value adjustment on derivative instruments – Note 4       (12,574 )       73,413  
   Foreign exchange gain (loss)   180,716     (389,249 )   538,017     (389,185 )
Net loss for the period $  (1,438,784 ) $  (2,111,228 ) $  (2,502,157 ) $ (3,336,519 )
                         
Net loss per share:                        
   Basic and diluted – Note 8 $  (0.03 ) $  (0.05 ) $  (0.06 ) $ (0.08 )
                         
   Weighted average common shares outstanding:                        
         Basic and diluted – Note 8   42,552,576     42,007,439     42,572,713     41,971,160  

See accompanying notes to the interim consolidated financial statements

COUNTERPATH CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Stated in U.S. Dollars)
(Unaudited)

Net loss for the period $  (1,438,784 ) $  (2,111,228 ) $  (2,502,157 ) $  (3,336,519 )
Other comprehensive loss:                        
   Foreign currency translation adjustments   (435,502 )   (154,988 )   (669,646 )   (284,227 )
Comprehensive loss $  (1,874,286 ) $  (2,266,216 ) $  (3,171,803 ) $  (3,620,746 )

See accompanying notes to the interim consolidated financial statements

6


COUNTERPATH CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in U.S. Dollars)
(Unaudited)

    Six Months Ended  
    October 31,  
    2014     2013  
Cash flows from operating activities:            
Net loss for the period $  (2,502,157 ) $  (3,336,519 )
     Adjustments to reconcile net loss to net cash used in operating activities:        
           Depreciation and amortization   114,650     112,974  
           Stock-based compensation   570,121     637,043  
           Fair value adjustment on derivative instruments       (73,413 )
           Foreign exchange gain   (355,594 )   (1,382 )
     Changes in assets and liabilities:            
           Accounts receivable   404,377     1,064,192  
           Prepaid expenses and deposits   18,507     35,864  
           Other assets   (19,988 )   (15,925 )
           Accounts payable and accrued liabilities   109,244     (69,067 )
           Unearned revenue   (19,828 )   91,330  
           Deferred lease inducements   58,065     (15,540 )
           Accrued warranty   4,848     (13,930 )
Net cash used in operating activities   (1,617,755 )   (1,584,373 )
             
Cash flows from investing activities:            
             Purchase of equipment   (169,048 )   (63,870 )
             Deposits       (5,824 )
Net cash used in investing activities   (169,048 )   (69,694 )
             
Cash flows from financing activities:            
             Common stock issued       70,565  
             Common stock repurchased   (219,350 )   (162,737 )
Net cash used in financing activities   (219,350 )   (92,172 )
             
Foreign exchange effect on cash   (108,197 )   (59,583 )
             
Net decrease in cash   (2,114,350 )   (1,805,822 )
             
Cash, beginning of the period   7,172,798     11,229,595  
Cash, end of the period $  5,058,448   $  9,423,773  
             
Supplemental disclosure of cash flow information            
   Cash paid for:            
             Interest $  350   $  932  

See accompanying notes to the interim consolidated financial statements

7


COUNTERPATH CORPORATION
INTERIM CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
for the Six Months Ended October 31, 2014
(Stated in U.S. Dollars)
(Unaudited)

    Common Shares     Treasury Shares                          
                                        Accumulated        
    Number           Number           Additional           Other        
    of           of           Paid-in     Accumulated     Comprehensive        
    Shares     Par Value     Shares     Par Value     Capital     Deficit     Loss     Total  
                                                 
Balance, April 30, 2014   42,599,869   $  42,600     (16,200 ) $  (16 ) $  66,910,540   $  (50,889,038 ) $  (984,128 ) $  15,079,958  
                                                 
Shares issued:                                                
Exercise of stock options   1,598     2             (215 )           (213 )
Share repurchase plan           (215,170 )   (215 )   (218,922 )           (219,137 )
Cancellation of shares – Note 5   (77,000 )   (77 )   77,000     77                  
Stock-based compensation – Note 5                   570,121             570,121  
Net loss for the period                       (2,502,157 )       (2,502,157 )
Foreign currency translation adjustment                           (669,646 )   (669,646 )
                                                 
Balance, October 31, 2014 (unaudited)   42,524,467   $  42,525     (154,370 ) $  (154 ) $  67,261,524   $  (53,391,195 ) $  (1,653,774 ) $  12,258,926  

See accompanying notes to the interim consolidated financial statements

8


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2014
(Unaudited)

Note 1

Nature of Operations

   

CounterPath Corporation (the “Company”) was incorporated in the State of Nevada on April 18, 2003. The shares of the Company’s common stock are listed for trading on the NASDAQ Capital Market in the United States of America and on the Toronto Stock Exchange in Canada.

   

The Company focuses on the design, development, marketing and sales of personal computer and mobile communications application software, gateway (server) software and related professional services, such as pre and post sales technical support and customization services. The Company’s products are sold into the Voice over Internet Protocol (VoIP) market primarily to telecom service providers, channel partners and businesses in North America, Latin America, Europe, Africa and Asia.

   
Note 2

Significant Accounting Policies

   

These interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America and are stated in U.S. dollars except where otherwise disclosed. Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for the period necessarily involves the use of estimates, which have been made using careful judgment. Actual results may vary from these estimates.

   

These interim consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities and commitments in the normal course of business.


  a)

Basis of Presentation

     
 

These interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, CounterPath Technologies Inc. (“CounterPath Technologies”), a company existing under the laws of the province of British Columbia, Canada, and BridgePort Networks, Inc. (“BridgePort”), incorporated under the laws of the state of Delaware. All inter- company transactions and balances have been eliminated.

     
  b)

Interim Reporting

     
 

The information presented in the accompanying interim consolidated financial statements is without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

9


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2014
(Unaudited)

Note 2 Significant Accounting Policies - (cont’d)

  b)

Interim Reporting (cont’d)

     
 

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 generally accepted accounting principles in the United States of America. Except where noted, these interim financial statements follow the same accounting policies and methods of their application as the Company’s April 30, 2014 annual audited consolidated financial statements. All adjustments are of a normal recurring nature. It is suggested that these interim financial statements be read in conjunction with the Company’s April 30, 2014 annual audited consolidated financial statements.

     
 

Operating results for the six months ended October 31, 2014 are not necessarily indicative of the results that can be expected for the year ending April 30, 2015.

     
  c)

New Accounting Pronouncements

     
 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-11, Balance Sheet (Topic 210), Disclosure About Offsetting Assets and Liabilities, that included new disclosure requirements that are intended to enhance current disclosures on offsetting financial assets and liabilities. The new disclosures require an entity to disclose both gross and net information about derivative instruments accounted for in accordance with the guidance on derivatives and hedging that are eligible for offset on the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. The Company adopted this standard as of May 1, 2014 and it did not materially impact the consolidated financial statements.

     
 

In May 2014, FASB issued ASU 2014-09, Revenue From Contracts With Customers (“Topic 606”). Topic 606 removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Topic 606 is effective for public entities with reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company has not yet evaluated the impact of the adoption of this new standard.

10


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2014
(Unaudited)

Note 2 Significant Accounting Policies - (cont’d)

  d)

Derivative Instruments

     
 

The Company accounts for derivative instruments, consisting of foreign currency forward contracts, pursuant to the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). ASC 815 requires the Company to measure derivative instruments at fair value and record them in the balance sheet as either an asset or liability and expands financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, results of operations and cash flows. The Company does not use derivative instruments for trading purposes. ASC 815 also requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. Following the guidance in ASC 815-40-15, the Company recorded the warrants issued as derivative instruments due to their exercise price being denominated in a currency other than the Company’s U.S. dollar functional currency initially at fair value. Subsequent changes in the fair value of the derivative instruments are recorded as a gain or loss in the Company’s consolidated statements of operations.

     
 

The Company also routinely enters into foreign currency forward contracts, not designated as hedging instruments, to protect the Company from fluctuations in exchange rates. Gains or losses arising out of marked to market fair value valuation of forward contracts, not designated as hedges, and are recognized in net income.

     
 

The Company records foreign currency forward contracts on its Consolidated Balance Sheets as derivative instruments assets or liabilities depending on whether the net fair value of such contracts is a net asset or net liability, respectively (see Note 4 “Derivative Financial Instruments and Risk Management,” of the Notes to the Consolidated Financial Statements). The Company did not enter any foreign currency derivatives designated as cash flow hedges in the three and six months ended October 31, 2014.

     
  e)

Goodwill

     
 

Goodwill represents the excess purchase price over the estimated fair value of net assets acquired as of the acquisition date. ASC Topic 350 (“ASC 350”) requires goodwill to be tested for impairment annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company's business enterprise below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. Recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit, which is measured based upon, among other factors, market multiples for comparable companies as well as a discounted cash flow analysis.

     
 

Management has determined that the Company currently has a single reporting unit which is CounterPath Corporation. If the recorded value of the assets, including goodwill, and liabilities (“net book value”) of the reporting unit exceeds its fair value, an impairment loss may be required.

11


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2014
(Unaudited)

Note 2 Significant Accounting Policies - (cont’d)

  e)

Goodwill (cont’d)

     
 

Goodwill of $6,339,717 (CDN$6,704,947) and $2,083,960 (CDN$2,083,752) was initially recorded as the Company was deemed to be the acquirer of NewHeights Software Corporation (“NewHeights”) on August 2, 2007 and FirstHand Technologies Inc. (“FirstHand”) on February 1, 2008, respectively. Translated to U.S. dollars using the period end rate, the goodwill balance at October 31, 2014 was $5,990,518 (CDN$6,704,947) (April 30, 2014 - $6,117,653) and $1,861,421 (CDN$2,083,414) (April 30, 2014 - $1,900,925). Management will perform its annual impairment test in its fiscal fourth quarter. No impairment charges were recorded for the six months ended October 31, 2014 and 2013.

     
  f)

Accounts receivable and allowance for doubtful accounts

     
 

Accounts receivable are presented net of an allowance for doubtful accounts.


      October 31,     April 30,  
      2014     2014  
  Balance of allowance for doubtful accounts, beginning of period/year $  240,681   $  456,051  
  Bad debt provision   326,063     415,448  
  Write-off of receivables   (228,095 )   (630,818 )
  Balance of allowance for doubtful accounts, end of period/year $  338,649   $  240,681  

 

The Company determines the allowance for doubtful accounts by considering a number of factors, including the length of time the accounts receivable are beyond the contractual payment terms, previous loss history, and the customer’s current ability to pay its obligation. When the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, the Company records a charge to the allowance to reduce the customer’s related accounts.

     
  g)

Basic and diluted loss per share

     
 

The Company computes net loss per share in accordance with ASC Topics 260 and ASC 260-10. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the consolidated statement of operations. Basic EPS is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted EPS gives effect to all dilutive potential common shares outstanding during the year including stock options and warrants using the treasury stock method. In computing diluted EPS, the average stock price for the year is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. For the six months ended October 31, 2014 and October 31, 2013, common share equivalents, consisting of common shares issuable, on exercise of options, warrants and deferred share units (“DSUs”) of 6,182,495 and 5,004,257, respectively, were not included in the computation of diluted EPS because the effect was anti- dilutive.

12


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2014
(Unaudited)

Note 3

Related Party Transactions

   

During the three and six months ended October 31, 2014, the Company through its wholly owned subsidiary, CounterPath Technologies, paid $23,073 and $46,147 (2013 - $17,226 and $34,452), respectively, to Kanata Research Park Corporation (“KRP”) for leased office space. KRP is controlled by the Chairman of the Company.

   

On November 21, 2013, the Company, through its wholly owned subsidiary, CounterPath Technologies, entered into an agreement with 8007004 (Canada) Inc. (“8007004”) to lease office space. 8007004 is controlled by a member of the board of directors of the Company. CounterPath Technologies, paid $8,040 and $16,079 (2013 - $nil and $nil) for the three and six months ended October 31, 2014.

   

The above transactions are in the normal course of operations and are recorded at amounts established and agreed to between the related parties.

   
Note 4

Derivative Financial Instruments and Risk Management

   

In the normal course of business, the Company is exposed to fluctuations in the exchange rates associated with foreign currencies. The Company’s primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk.

   
 

Foreign Currency Exchange Rate Risk

   

A majority of the Company’s revenue activities are transacted in U.S. dollars. However, the Company is exposed to foreign currency exchange rate risk inherent in conducting business globally in numerous currencies, of which the most significant to the Company’s operations for the three and six months ended October 31, 2014 is the Canadian dollar as a majority of the Company’s expenses are in Canadian dollars. The Company’s foreign currency risk management program includes foreign currency derivatives with cash flow hedge accounting designation that utilizes foreign currency forward contracts to hedge exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S. dollar-denominated cash flows. During the three and six months ended October 31, 2014, the Company did not enter into any cash flow hedges.

   

The Company also routinely enters into foreign currency forward contracts, not designated as hedging instruments, to protect it from fluctuations in exchange rates. During the three and six months ended October 31, 2014, the Company did not entered into any foreign currency forward contracts. During the three and six months ended October 31, 2013, the Company had $4,000,000 of notional value foreign currency forward contracts that matured through February 28, 2014. The fair value marked to market gain of those forward contracts as of October 31, 2013 was ($9,814).

13


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2014
(Unaudited)

Note 4 Derivative Financial Instruments and Risk Management (cont’d)
   
 

Fair Value Measurement

   

When available, the Company uses quoted market prices to determine fair value, and classifies such measurements within Level 1. In some cases where market prices are not available, the Company makes use of observable market–based inputs to calculate fair value, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market–based parameters such as interest rates, yield curves and currency rates. These measurements are classified within Level 3.

   

Fair value measurements are classified according to the lowest level input or value–driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.

   

Fair value measurement includes the consideration of non–performance risk. Non–performance risk refers to the risk that an obligation (either by a counterparty or the Company) will not be fulfilled. For financial assets traded in an active market (Level 1), the non–performance risk is included in the market price. For certain other financial assets and liabilities (Level 2 and 3), the Company’s fair value calculations have been adjusted accordingly.

   

The fair value of the derivative instrument is primarily based on the standard industry accepted binomial model (Note 5). The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of October 31, 2014 and April 30, 2014.


        Carrying           Fair Value        
  As at October 31, 2014     Amount     Fair Value     Levels     Reference  
  Cash   $  5,058,448   $  5,058,448     1     N/A  
  Accounts receivable   $  2,997,114   $  2,997,114     2     N/A  

        Carrying           Fair Value        
  As at April 30, 2014     Amount     Fair Value     Levels     Reference  
  Cash   $  7,172,798   $  7,172,798     1     N/A  
  Accounts receivable   $  3,401,491   $  3,401,491     2     N/A  

  Forward contracts   October 31,     April 30,  
      2014     2014  
  Opening balance at the beginning of the period/year $  −   $  9,830  
  Fair value of forward contract, at issuance        
  Change in fair value of forward contracts since issuance       180,396  
  Fair value of forward contracts settled during the period/year       (190,226 )
  Fair value of forward contracts at end of period/year $  −   $  −  

14


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2014
(Unaudited)

Note 5

Common Stock

   
 

Stock Options

   

The Company has a stock option plan (the “2010 Stock Option Plan”) under which options to purchase common shares of the Company’s common stock may be granted to employees, directors and consultants. Stock options entitle the holder to purchase common shares of the Company’s common stock at an exercise price determined by the board of directors (the “Board”) of the Company at the time of the grant. The options generally vest in the amount of 12.5% on the date which is six months from the date of grant and then beginning in the seventh month at 1/42 per month for 42 months, at which time the options are fully vested.

   

On September 9, 2014, the maximum number of common shares of common stock authorized by the stock holders and reserved for issuance by the Board under the 2010 Stock Option Plan was increased from 6,860,000 to 7,860,000.

   

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options granted. The Company applied an estimated forfeiture rate of 15% for the six months ended October 31, 2014 and 2013 in determining the expense recorded in the accompanying consolidated statement of operations.

   

For the majority of the stock options granted, the number of shares issued on the date the stock options are exercised is net of the minimum statutory withholding requirements that the Company pays in cash to the appropriate taxing authorities on behalf of its employees. Although these withheld shares are not issued or considered common stock repurchases under our authorized plan and are not included in the common stock repurchase totals in the preceding table, they are treated as common stock repurchases in our consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting.

15


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2014
(Unaudited)

Note 5 Common Stock – (cont’d)
   
  Stock Options (cont’d)
   

The weighted-average fair value of options granted during the three and six months ended October 31, 2014 and 2013 was $1.05 and $1.13, respectively and $0.78 and $0.89, respectively. The weighted- average assumptions utilized to determine such values are presented in the following table:


      Three Months Ended     Six Months Ended  
      October 31,     October 31,  
      2014     2013     2014     2013  
  Risk-free interest rate   1.83%     1.57%     1.68%     1.31%  
  Expected volatility   54.66%     73.28%     57.62%     78.94%  
  Expected term   3.7 years     3.7 years     3.7 years     3.7 years  
  Dividend yield   0%     0%     0%     0%  

The following is a summary of the status of the Company’s stock options as of October 31, 2014 and the stock option activity during the six months ended October 31, 2014:

      Weighted Average  
      Number of     Exercise Price  
      Options     per Share  
  Outstanding at April 30, 2014   3,705,539     $1.62  
  Granted   837,000     $1.13  
  Exercised(1)   (2,920 )   $0.47  
  Forfeited/Cancelled   (356,171 )   $1.47  
  Outstanding at October 31, 2014   4,183,448     $1.54  
               
  Exercisable at October 31, 2014   2,056,655     $1.61  
  Exercisable at April 30, 2014   1,767,621     $1.60  

  (1)

2,920 were cashlessly exercised upon which 1,598 common stock were issued.

16


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2014
(Unaudited)

Note 5 Common Stock – (cont’d)
   
  Stock Options (cont’d)
   
  The following table summarizes stock options outstanding as of October 31, 2014:

    Number of     Aggregate           Number of     Aggregate  
    Options     Intrinsic           Options     Intrinsic  
Exercise Price   Outstanding     Value     Expiry Date     Exercisable     Value  

$0.47


122,950


$

57,774


January 5, 2015 to
September 26, 2016



122,950


$

57,774

$0.60   358,373     121,811     December 14, 2014     358,373     121,811  
$1.05   137,000         September 12, 2019          
$1.15   700,000         July 11, 2019          
$1.23   100,000         January 13, 2019     18,750      
$1.31   600,000         December 12, 2018     125,000      
$1.41   100,000         October 1, 2018     25,000      
$1.70   650,000         December 14, 2016     460,416      
$1.88   13,125         December 13, 2017     13,125      

$1.90


845,000





December 14, 2015 to
July 25, 2018



509,479




$2.00 12,000 December 31, 2014 to
February 28, 2015
12,000
$2.15   240,000         September 7, 2016     240,000      
$2.90   305,000         July 19, 2017     171,562      
October 31, 2014   4,183,448   $  179,585           2,056,655   $  179,585  
April 30, 2014   3,705,539   $  353,637           1,767,621   $  332,137  

The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on the Company’s closing stock price of $0.94 per share as of October 31, 2014 (April 30, 2014 – $1.25), which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options vested and exercisable as of October 31, 2014 was 481,323 (April 30, 2014 – 485,726). The total intrinsic value of options exercised during the six months ended October 31, 2014 was $1,927 (2013 – $168,839). The grant date fair value of options vested during the three and six months ended October 31, 2014 and 2013 was $157,456 and $353,413, respectively and $160,286 and $280,074, respectively.

The following table summarizes non-vested stock purchase options outstanding as of October 31, 2014.

            Weighted  
      Number of     Average Grant  
      Options     Date Fair Value  
  Non-vested options at April 30, 2014   1,937,918     $0.87  
  Granted   837,000     $0.50  
  Vested   (384,375 )   $0.92  
  Cancelled/Forfeited   (263,750 )   $0.69  
  Non-vested options at October 31, 2014   2,126,793     $0.74  

17


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2014
(Unaudited)

Note 5 Common Stock – (cont’d)
   
  Stock Options – (cont’d)
   

As of October 31, 2014, there was $1,265,833 of total unrecognized compensation cost related to unvested share-based compensation awards. This unrecognized compensation cost is expected to be recognized over a weighted average period of 2.7 years.

   

Employee and non-employee stock-based compensation amounts classified in the Company’s consolidated statements of operations for the three and six months ended October 31, 2014 and 2013 are as follows:


      Three Months Ended     Six Months Ended  
      October 31,     October 31,  
      2014     2013     2014     2013  
  Cost of sales $  17,611   $  18,285   $  36,088   $  26,838  
  Sales and marketing   65,546     107,933     126,433     197,273  
  Research and development   14,467     15,851     30,013     24,537  
  General and administrative   59,830     37,083     121,021     70,570  
  Total stock-option based compensation   157,454   $  179,152   $  313,555   $  319,218  

Warrants

On June 14, 2011, the Company 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 the Company’s common stock and one-half of one common share purchase warrant, with each whole warrant entitling the holder to purchase one additional share of the Company’s common stock at an exercise price of CDN$2.25 per share until June 14, 2013. In connection with the offering, the Company issued an aggregate of 220,206 broker warrants, with each broker warrant entitling the holder thereof to purchase one common share of the Company at an exercise price of CDN$1.75 per share until December 14, 2012.

On June 19, 2012, the Company issued an aggregate of 1,465,000 units under a non-brokered private placement for aggregate gross proceeds of CDN$3,662,500 ($3,579,335) at a price of CDN$2.50 ($2.44) per unit, with each unit consisting of one share of the Company’s common stock and one-half of one common share purchase warrant, with each whole warrant entitling the holder to purchase one additional share of the Company’s common stock at an exercise price of $3.25 per share until June 19, 2014. The 732,500 warrants issued expired unexercised on June 20, 2014.

18


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2014
(Unaudited)

Note 5 Common Stock – (cont’d)
   
  Warrants – (cont’d)
   

Following the guidance in ASC 815-40-15, the Company recorded the warrants issued on June 19, 2012 as derivative instruments due to their exercise price being denominated in a currency other than the Company’s U.S. dollar functional currency. The fair value of the derivative instruments was revalued at the end of each reporting period, and the change in fair value of the derivative instruments was recorded as a gain or loss in the Company’s consolidated statements of operations.

   
  The warrant liability was accounted for at its fair value as follows:

      October 31,     April 30,  
      2014     2014  
  Opening balance at the beginning of the period/year $  –   $  93,057  
  Fair value of warrant liability, at issuance        
  Change in fair value of warrant liability       (93,057 )
  Fair value of warrants exercised during the period/year        
  Fair value of warrant liability at end of period/year $  –   $  –  

The Company used the Binomial Method to estimate the fair value of the warrants with the following assumptions:

            As at the date of
    As at   As at   issuance
    October 31, 2014   April 30, 2014   June 14, 2011
  Risk-free interest rate     1.60%
  Expected volatility     70%
  Expected term     1.5 years to 2 years
  Dividend yield     0%

The fair value of the warrants were classified as a derivative liability until such time as they were exercised or expired. The balance of unexercised warrants expired on June 14, 2013, and the balance in the liability account of $93,057 has been recorded as a gain in the Company’s consolidated statement of operations for the year ended April 30, 2014.

The following table summarizes warrants outstanding as of October 31, 2014:

      Number of     Weighted Average        
      Warrants     Exercise Price     Expiry Dates  
  Warrants at April 30, 2014   732,500   $ 3.25     June 19, 2014  
  Granted            
  Exercised            
  Expired   (732,500 ) $ 3.25      
  Warrants at October 31, 2014            

19


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2014
(Unaudited)

Note 5 Common Stock – (cont’d)
   
  Employee Stock Purchase Plan
   

Under the terms of the Employee Stock Purchase Plan (the “ESPP”) all regular salaried (non- probationary) employees can purchase up to 6% of their base salary in common shares of the Company at market price. The Company will match 50% of the shares purchased by issuing or purchasing in the market up to 3% of the respective employee’s base salary in shares. During the six months ended October 31, 2014, the Company matched $29,968 (2013 - $26,106) in shares purchased by employees under the ESPP. During the six months ended October 31, 2014, 84,813 shares (2013 – 48,222) were purchased on the open market under the ESPP.

   

A total of 700,000 shares have been reserved for issuance under the ESPP. As of October 31, 2014, a total of 556,401 shares were available for issuance under the ESPP.

   
 

Normal Course Issuer Bid Plan

   

Pursuant to a normal course issuer bid (“NCIB”) commencing on March 19, 2013 (expiring March 18, 2014), the Company was authorized to purchase 2,462,365 of its common shares through the facilities of the Toronto Stock Exchange (the “TSX”) and other Canadian or US marketplaces. The NCIB was renewed on March 19, 2014 (expiring March 18, 2015) and the Company was authorized to purchase 2,458,153 of its common shares. During the period from March 19, 2013 to March 18, 2014, the Company repurchased 180,870 common shares at an average price of $1.53 (CDN$1.61) for a total of $276,731 and during the period from March 19, 2014 to October 31, 2014, the Company repurchased 237,370 common shares at an average price of $1.06 (CDN$1.17) for a total of $250,966. As of October 31, 2014, a total of 365,958 shares have been cancelled and the remaining 154,370 repurchased shares are in the process of being cancelled since the NCIB was initiated.

   
 

Deferred Share Unit Plan

   

Under the terms of the Deferred Share Unit Plan (the “DSUP”), each deferred share unit (“DSU”) is equivalent to one common share. The maximum number of common shares that may be reserved for issuance to any one participant pursuant to DSUs granted under the DSUP and any share compensation arrangement is 5% of the number of common shares of the Company outstanding at the time of reservation. A DSU granted to a participant who is a director of the Company shall vest immediately on the award date. A DSU granted to a participant other than a director will generally vest as to one-third (1/3) of the number of DSUs granted on the first, second and third anniversaries of the award date. Fair value of the DSUs, which is based on the closing price of the Company’s common shares on the date of grant, is recorded as compensation expense over the vesting period.

   

On September 9, 2014, the common shares reserved for issuance under the DSUP plan was increased from 2,500,000 to 3,000,000. During the six months ended October 31, 2014, 326,613 (2013 – 172,201) DSUs were issued under the DSUP, of which 145,161 were granted to officers or employees and 181,452 were granted to non-employee directors. As of October 31, 2014, a total of 760,814 common shares were available for issuance under the DSUP.

20


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2014
(Unaudited)

Note 5 Common Stock – (cont’d)
   
  Deferred Share Unit Plan – (cont’d)
   

The following table summarizes the Company’s outstanding DSU awards as of October 31, 2014, and changes during the period then ended:


            Weighted  
            Average Grant  
            Date Fair  
      Number of DSU’s     Value Per Unit  
  DSUs outstanding at April 30, 2014   1,672,434     $1.09  
  Granted   326,613     $1.17  
  Conversions        
  DSUs outstanding at October 31, 2014   1,999,047     $1.10  

The following table summarizes information regarding the non-vested DSUs outstanding as of October 31, 2014:

            Weighted  
            Average Grant  
            Date Fair  
      Number of DSU’s     Value Per Unit  
  Non-vested DSUs at April 30, 2014   156,778     $2.16  
  Granted   326,613     $1.17  
  Vested   (231,701 )   $1.52  
  Non-vested DSUs at October 31, 2014   251,690     $1.47  

As of October 31, 2014, there was $315,365 (2013 – $297,160) of total unrecognized compensation cost related to unvested DSU awards. This unrecognized compensation cost is expected to be recognized over a weighted average period of 1.47 years (2013 – 1.94 years).

Employee and non-employee DSU based compensation amounts classified in the Company’s consolidated statements of operations for the three and six months ended October 31, 2014 and 2013 are as follows:

      Three Months Ended     Six Months Ended  
      October 31,     October 31,  
      2014     2013     2014     2013  
  Sales and marketing $  –   $  6,667   $  1,667   $  13,334  
  Research and development   2,082     2,082     4,164     4,164  
  General and administrative   41,974     74,592     250,736     300,327  
  Total DSU-based compensation $  44,056   $  83,341   $  256,567   $  317,825  

21


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2014
(Unaudited)

Note 6 Segmented Information
   

The Company’s chief operating decision maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. Accordingly, the Company has concluded that it has one reportable operating segment.

   

Revenues are based on the country in which the customer is located. The following is a summary of total revenues by geographic area for the three and six months ended October 31, 2014 and 2013:


      Three Months Ended     Six Months Ended  
      October 31,     October 31,  
      2014     2013     2014     2013  
  North America $  1,795,720   $  1,880,466   $  4,118,229   $  3,774,573  
  Europe   529,697     286,103     919,146     711,134  
  Asia and Africa   412,517     232,382     646,450     504,502  
  Latin America   113,174     147,859     194,454     416,088  
    $  2,851,108   $  2,546,810   $  5,878,279   $  5,406,297  

Contained within the results of North America for the three and six months ended October 31, 2014 are revenues from the United States of $1,410,153 and $3,429,554 (2013 - $1,491,481 and $2,700,339), respectively, and from Canada of $385,567 and $688,675 (2013 - $388,985 and $1,074,234), respectively.

Contained within the results of Europe for the three and six months ended October 31, 2014 are revenues from the United Kingdom of $221,992 and $339,175 (2013 - $48,502 and $210,642), respectively, from Germany of $52,499 and $102,260 (2013 - $50,963 and $98,124), respectively, from Ireland of $52,468 and $95,869 (2013- $1,099 and $60,443), respectively, from Norway of $46,290 and $61,644 (2013 - $19,470 and $33,077), respectively, and from Switzerland of $27,491 and $51,865 (2013 - $14,146 and $23,466), respectively.

Contained within the results of Asia and Africa for the three and six months ended October 31, 2014 are revenues from the United Arab Emirates of $267,682 and $273,812 (2013 - $25,025 and $25,907), respectively, from Japan of $45,881 and $148,290 (2013 - $42,640 and $197,308), respectively, from Australia of $24,799 and $52,018 (2013 - $25,906 and $51,196), respectively, from South Africa of $14,713 and $23,100 (2013 - $18,028 and $38,717), respectively, and from China of $8,471 and $16,267 (2013 - $17,859 and $42,213), respectively.

Contained within the results of Latin America for the three and six months ended October 31, 2014 are revenues from Mexico of $69,574 and $87,268 (2013 - $33,995 and $185,843), respectively, from Colombia of $11,961 and $29,484 (2013 - $78,950 and $137,010), respectively, from Brazil of $11,806 and $28,729 (2013 - $17,506 and $39,756), respectively, from Chile of $8,008 and $22,921 (2013 - $5,427 and $24,264), respectively, and from Costa Rica of $2,674 and $6,839 (2013 - $nil and $nil), respectively.

22


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2014
(Unaudited)

Note 6 Segmented Information – (cont’d)
   

All of the Company’s long-lived assets, which include equipment, intangible assets, goodwill and other assets, are located in Canada and the United States as follows:


      As at  
      October 31, 2014     April 30, 2014  
  Canada $  8,071,269   $  8,230,891  
  United States   109,112     44,816  
    $  8,180,381   $  8,275,707  

Note 7 Commitments

  a)

On November 27, 2013, the Company entered into an extension of an existing lease agreement, which commenced on October 1, 2014 and expires on September 30, 2019. The monthly lease payment under the extension agreement is $23,038 plus $21,656 in operating costs.

     
  b)

On December 9, 2011, the Company signed a fifth amendment to an existing lease agreement to extend the lease for the period May 1, 2012 to April 30, 2014. The monthly lease payment under the lease extension is $5,368 (CDN$6,009). On November 4, 2013, the Company entered into an extension of this lease agreement, which commenced on January 1, 2014 and expires on April 30, 2019. The monthly lease payment under the extension agreement is $3,982 plus $3,709 in operating costs. This lease expense is a related party transaction as it was incurred with a company with a director in common with the Company.

     
  c)

From March 2013 to April 2014, the Company entered into various lease agreements with commencement dates between April 2013 and May 2014 and that expire between May 2016 and May 2017. The combined monthly lease payments are $9,829 plus $495 in operating expenses.

Total payable over the term of the agreements for the years ended April 30 are as follows:

      Office Leases –     Office Leases –     Total Office  
      Related Party     Unrelated Party     Leases  
  2015 $  46,147   $  302,610   $  348,757  
  2016   92,293     628,585     720,878  
  2017   92,293     577,376     669,669  
  2018   92,293     556,276     648,569  
  2019   92,293     558,437     650,730  
  2020       232,682     232,682  
    $  415,319   $  2,855,966   $  3,271,285  

23


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2014
(Unaudited)

Note 8 Earnings (loss) per common share (“EPS”)
   
  Computation of basic and diluted EPS:

      Three Months Ended     Six Months Ended  
      October 31,     October 31,  
      2014     2013     2014     2013  
  Net loss $ (1,438,784 ) $  (2,111,228 ) $  (2,502,157 ) $  (3,336,519 )
  Weighted average common shares outstanding – basic and diluted   42,552,576     42,007,439     42,572,713     41,971,160  
  Basic and diluted EPS $ (0.03 ) $  (0.05 ) $  (0.06 ) $  (0.08 )

As at October 31, 2014 and October 31, 2013, common share equivalents, consisting of common shares issuable, on exercise of options, warrants and DSUs of 6,182,495 and 5,004,257, respectively, were not included in the computation of diluted EPS because the effect was anti-dilutive.

24


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

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 acquired all of the shares of NewHeights Software Corporation (“NewHeights”) through the issuance of 7,680,168 shares of our 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 all of the shares of FirstHand Technologies Inc. (“FirstHand”) through the issuance of 5.9 million 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.

Business of CounterPath

            We design, develop and sell software and services that enable enterprises and telecommunication service providers to deliver Unified Communications (UC) services, including voice, video, messaging and collaboration functionality, over their Internet Protocol, or IP, based networks. We are capitalizing upon numerous industry trends, including the rapid adoption of mobile technology, the proliferation of bring-your-own-device to work programs, the need for secure business communications, the need for centralized provisioning, the migration towards cloud-based services and the migration towards all IP networks. We are also capitalizing on a trend where communication services such as Skype and WhatsApp are becoming more available over-the-top (OTT) of the incumbent operators’ networks or enterprise networks. Enterprises typically leverage our Enterprise OTT solutions to increase employee productivity and to reduce certain costs. Telecommunication service providers typically deploy our Operator OTT solutions as part of a broad strategy to defend their subscriber base from competitive threats by offering innovative new services. Our original equipment manufacturers and value added resellers typically integrate our solutions into their products and then sell a bundled solution to their end customers, which include telecommunication service providers and enterprises.

25


Revenue

            We derive revenue from the sale of software licenses, software customization services, technical support services associated with the software licenses, implementation services, training services, and cloud based services. 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 solutions under perpetual license agreements that generate one time license revenue and under subscription license agreements that generate recurring license revenue. We sell our solutions through our own online store, through third-party online stores, directly using our in-house sales team and through channel partners. Our channel partners include original equipment manufacturers, value added distributers and value added resellers.

            The amount of product configuration and customization required by a customer generally increases as the size of the customer’s deployment of software increases. The number of software licenses purchased has a direct impact on the average selling price. Services and pricing 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 and uncertain sales and deployment cycles, new product introductions and 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, (b) related overhead, (c) billable and non-billable travel, lodging, and other out-of-pocket expenses, (d) payments to third party vendors for 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 trade shows and (e) other related overhead. Commissions are recorded as an 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.

            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.

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Application of Critical Accounting Policies and Use of Estimates

            Our interim consolidated financial statements are prepared in accordance with generally accepted accounting principles 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, 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 interim consolidated financial statements include the accounts of our company and our wholly-owned subsidiaries, CounterPath Technologies, a company existing under the laws of the province of British Columbia, Canada, and BridgePort Networks, a company 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 in the United States 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 generally accepted accounting principles in the United States. Except where noted, the interim consolidated financial statements follow the same accounting policies and methods of their application as our April 30, 2014 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, 2014 annual audited consolidated financial statements.

            Operating results for the three and six months ended October 31, 2014 are not necessarily indicative of the results that can be expected for the year ending April 30, 2015.

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 dependent 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.

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            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.

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 after April 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% for the six months ended October 31, 2014 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 six months ended October 31, 2014, we recorded an expense of $570,121 in connection with share-based payment awards. A future expense of non-vested options of $1,265,833 is expected to be recognized over a weighted-average period of 2.7 years. A future expense of non-vested deferred share units of $315,436 is expected to be recognized over a weighted-average period of 2.2 years.

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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 are periodically reviewed for collectability on an individual basis.

Goodwill

            We have goodwill on our balance sheet related to the acquisitions of NewHeights and FirstHand. Goodwill is carried and reported at acquisition cost. The determination of the net carrying value of goodwill and the extent to which, if any, there is impairment, is dependent on material estimates and judgments on our part, including the estimates 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. 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. Our most recent annual goodwill impairment analysis, which was performed at the end of the fourth quarter of fiscal 2014, did not result in an impairment charge, nor did we record any goodwill impairment for the three and six months ending October 31, 2014.

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 October 31, 2014, we had no foreign currency forward contracts. 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.

Use of Estimates

            The preparation of our financial statements in conformity with generally accepted accounting principles in the United States requires our management to make estimates and assumptions which affect the amounts reported in our interim consolidated financial statements, the notes thereto, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

Results of Operations

            Our operating activities during the six months ended October 31, 2014 consisted primarily of selling our IP telephony software and related services to telecom service provider enterprises and channel partners serving the telecom and enterprise segments, on-line sales, 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 as at October 31, 2014 and April 30, 2014 and for the three and six months ended October 31, 2014 and 2013 has been derived from the consolidated unaudited financial statements and accompanying notes for the six months ended October 31, 2014 and 2013 and the audited consolidated financial statements for the fiscal year ended April 30, 2014. Each investor should read the following information in conjunction with those statements and the related notes thereto.

Selected Consolidated Balance Sheet Data   October 31, 2014     April 30, 2014  
Cash and cash equivalents $ 5,058,448   $ 7,172,798  
Current assets $ 8,199,555   $ 10,735,916  
Current liabilities $ 4,154,011   $ 4,031,301  
Total liabilities $ 4,237,707   $ 4,056,932  
Total assets $ 16,496,633   $ 19,136,890  

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    Three Months Ended October 31,  
Selected Consolidated Statements of Operations Data   2014     2013  
          Percent of           Percent  
          Total           of Total  
    Amount     Revenue     Amount     Revenue  
Revenue $ 2,851,108     100%   $ 2,546,810     100%  
                         
Operating expenses $ 4,474,282     157%   $ 4,313,043     169%  
Loss from operations   ($1,623,174 )   (57% )   ($1,766,233 )   (69% )
Interest and other income, net $ 3,674     −%   $ 56,828     2%  
Fair value adjustment on derivative instrument       −%     ($12,574 )   −%  
Foreign exchange gain (loss) $ 180,716     6%     ($389,249 )   (16% )
Net loss before income taxes   ($1,438,784 )   (50% )   ($2,111,228 )   (83% )
                         
Net loss per share                        
-Basic and diluted   ($0.03 )         ($0.05 )      
                         
Weighted average common shares outstanding                        
-Basic and diluted   42,552,576           42,007,439        

    Six Months Ended October 31,  
Selected Consolidated Statements of Operations Data   2014     2013  
          Percent of           Percent  
          Total           of Total  
    Amount     Revenue     Amount     Revenue  
Revenue $ 5,878,279     100%   $ 5,406,297     100%  
                         
Operating expenses $ 8,929,821     (152% ) $ 8,510,586     (158% )
Loss from operations   ($3,051,542 )   (52% )   ($3,104,289 )   (58% )
Interest and other income, net $ 11,368     −%   $ 83,542     2%  
Fair value adjustment on derivative instrument       −%   $ 73,413     1%  
Foreign exchange gain (loss) $ 538,017     9%     ($389,185 )   (7% )
Net loss before income taxes   ($2,502,157 )   (43% )   ($3,336,519 )   (62% )
                         
Net loss per share                        
-Basic and diluted   ($0.06 )         ($0.08 )      
                         
Weighted average common shares outstanding                        
-Basic and diluted   42,572,713           41,971,160        

Revenue

     Three Months Ended October 31,               
    2014     2013     Period-to-Period Change  
          Percent           Percent           Percent  
          of Total           of Total           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Revenue by Type                                    
 Software $ 1,720,742     60%   $ 1,451,475     57%   $ 269,267     19%  
 Service $ 1,130,366     40%   $ 1,095,335     43%   $ 35,031     3%  
Total revenue $ 2,851,108     100%   $ 2,546,810     100%   $ 304,298     12%  
                                     
Revenue by Region                                    
 International $ 1,055,388     37%   $ 666,343     26%   $ 389,045     58%  
 North America $ 1,795,720     63%   $ 1,880,467     74%     ($84,747 )   (5% )
Total revenue $ 2,851,108     100%   $ 2,546,810     100%   $  304,298     12%  

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            For the three months ended October 31, 2014, we generated $2,851,108 in revenue compared to $2,546,810 for the three months ended October 31, 2013, representing an increase of $304,298 or 12%. Software revenue increased $269,267 or 19% to $1,720,742 for the three months ended October 31, 2014 compared to $1,451,475 for the three months ended October 31, 2013. The increase in software revenue was primarily a result of an increase in sales to sales providers and enterprises partially offset by a decrease in sales to channel partners. Service revenue for the three months ended October 31, 2014 was $1,130,366 compared to $1,095,335 for the three months ended October 31, 2013. The increase of $35,031 or 3% in service revenue was primarily a result of an increase in service sales to sales providers and enterprises partially offset by a decrease in service sales to channel partners. North American revenue decreased by 5% compared to the three months ended October 31, 2013, primarily as a result of lower sales of software and services to channel partners and service providers partially offset by stronger sales to enterprises. International revenue outside of North America increased by 58% during the three months ended October 31, 2014 compared to the three months ended October 31, 2013, primarily due to higher sales to service providers in Europe and Asia.

      Six Months Ended October 31,                
    2014     2013     Period-to-Period Change  
          Percent           Percent           Percent  
          of Total           of Total           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Revenue by Type                                    
 Software $ 3,594,690     61%   $ 3,098,995     57%   $ 495,695     16%  
 Service $ 2,283,589     39%   $ 2,307,302     43%     ($23,713 )   (1% )
Total revenue $ 5,878,279     100%   $ 5,406,297     100%   $ 471,982     9%  
Revenue by Region                                    
 International $ 1,760,050     30%   $ 1,631,724     31%   $ 128,326     8%  
 North America $  4,118,229     70%   $ 3,774,573     69%   $ 343,656     9%  
Total revenue $ 5,878,279     100%   $ 5,406,297     100%   $ 471,982     9%  

            For the six months ended October 31, 2014, we generated $5,878,279 in revenue compared to $5,406,297 for the six months ended October 31, 2013. This represents an increase of $471,982 or 9% from the same period last year. We generated $3,594,690 in software revenue for the six months ended October 31, 2014 compared to $3,098,995 for the six months ended October 31, 2013, representing an increase of $495,695 or 16%. The increase in software revenue for the six months ended October 31, 2014 was primarily a result of an increase in sales to enterprises and service providers. For the six months ended October 31, 2014, service revenue was $2,283,589 compared to $2,307,302 for the six months ended October 31, 2013. The decrease of $23,713 or 1% in service revenue was primarily a result of a decrease in sales to service providers partially offset by an increase in sales to enterprises. International revenue outside of North America increased by 8% during the six months ended October 31, 2014 compared to the six months ended October 31, 2013, as a result of increased sales to service providers in Asia and channel partners in Europe. North American revenue increased by 9%, compared to the six months ended October 31, 2013, due primarily to an increase in sales of software and services to North American enterprises partially offset by lower sales to channel partners and service providers.

Operating Expenses

Cost of Sales

           Cost of sales for the three and six months ended October 31, 2014 and 2013 were as follows:

    October 31, 2014     October 31, 2013     Period-to-Period Change  
          Percent           Percent           Percent  
          of           of           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 586,455     21%   $ 571,857     22%   $ 14,598     3%  
Six months ended $ 1,204,509     21%   $ 1,129,312     21%   $ 75,197     7%  

            Cost of sales was $586,455 for the three months ended October 31, 2014 compared to $571,857 for the three months ended October 31, 2013. The increase of $14,598 was primarily attributable to an increase in wages, benefits and consulting fees of approximately $12,500, an increase in licenses and permits of approximately $7,800 due to higher sales of those licenses and an increase in other expenses of approximately $11,800. The increase in cost of sales was offset by a decrease in depreciation expenses of approximately $17,500.

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            Cost of sales was $1,204,509 for the six months ended October 31, 2014 compared to $1,129,312 for the six months ended October 31, 2013. The increase of $75,197 was primarily attributable to an increase in wages, benefits and consulting fees of approximately $55,000, and an increase in other expenses of approximately $36,600. The increase in cost of sales was offset by a decrease in depreciation expense of approximately $16,500.

Sales and Marketing

            Sales and marketing expenses for the three and six months ended October 31, 2014 and 2013 were as follows:

    October 31, 2014     October 31, 2013     Period-to-Period Change  
          Percent           Percent           Percent  
          of           of           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 1,225,776     45%   $ 1,315,421     52%     ($89,645 )   (7% )
Six months ended $ 2,363,544     41%   $ 2,528,904     47%     ($165,360 )   (7% )

            Sales and marketing expenses were $1,225,776 for the three months ended October 31, 2014 compared to $1,315,421 for the three months ended October 31, 2013. The decrease of $89,645 was primarily attributable to a decrease in travel and trade show expenses of approximately $80,200, a decrease in stock based compensation of approximately $49,100 and a decrease in other expenses of approximately $12,200. The decrease in sales and marketing expense was offset by an increase in wages, benefits and consulting fees of approximately $51,800.

            Sales and marketing expenses were $2,363,544 for the six months ended October 31, 2014 compared to $2,528,904 for the six months ended October 31, 2013. The decrease of $165,360 was primarily attributable to a decrease travel and trade show expenses of approximately $118,100, a decrease in stock based compensation of approximately $82,500 and a decrease in other expenses of approximately $13,900. The decrease in sales and marketing expense was offset by an increase in wages, benefits and consulting fees of approximately $49,100.

Research and Development

            Research and development expenses for the three and six months ended October 31, 2014 and 2013 were as follows:

    October 31, 2014     October 31, 2013     Period-to-Period Change  
          Percent           Percent           Percent  
          of           of           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 1,455,168     53%   $ 1,324,308     52%   $ 130,860     10%  
Six months ended $ 2,951,374     51%   $ 2,737,383     51%   $ 213,991     8%  

            Research and development expenses were $1,455,168 for the three months ended October 31, 2014 compared to $1,324,308 for the three months ended October 31, 2013. The increase of $130,860 was primarily attributable to an increase in wages, benefits and consulting fees of approximately $114,900 and an increase in other expenses of approximately $16,000.

            Research and development expenses were $2,951,374 for the six months ended October 31, 2014 compared to $2,737,383 for the six months ended October 31, 2013. The increase of $213,991 was primarily attributable to an increase in wages, benefits and consulting fees of approximately $205,300 and an increase in other expense of approximately $8,700.

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General and Administrative

            General and administrative expenses for the three and six months ended October 31, 2014 and 2013 were as follows:

    October 31, 2014     October 31, 2013     Period-to-Period Change  
          Percent           Percent           Percent  
          of           of           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 1,206,883     44%   $ 1,101,457     43%   $ 105,426     10%  
Six months ended $ 2,410,394     42%   $ 2,114,987     39%   $ 295,407     14%  

            General and administrative expenses were $1,206,883 for the three months ended October 31, 2014 compared to $1,101,457 for the three months ended October 31, 2013. The increase of $105,426 in general and administrative expenses was primarily attributable to an increase in consulting and directors fees of approximately $55,500, an increase in legal, audit and professional expenses of approximately $43,900 and an increase in other expenses of approximately $37,500. The increase in general and administrative expenses was offset by a decrease in bad debts reserve of approximately $31,500.

            General and administrative expenses were $2,410,394 for the six months ended October 31, 2014 compared to $2,114,987 for the six months ended October 31, 2013. The increase of $295,407 in general and administrative expenses was primarily attributable to an increase in wages, benefits, consulting and directors fees of approximately $106,100, an increase in legal, audit and professional expenses of approximately $74,100, an increase in patent costs of approximately $70,300, an increase in filing fees of approximately $27,600, an increase in rent expenses of approximately $22,600 and an increase in other expenses of approximately $15,200. The increase in general and administrative expenses was offset by a decrease in bad debts reserve of approximately $20,500.

Interest and Other Income

            Interest income for the three and six months ended October 31, 2014 was $3,674 and $11,718, respectively, compared to $56,989 and $84,474, respectively, for the three and six months ended October 31, 2013. Interest expense for the three and six months ended October 31, 2014 was $nil and $350, respectively, compared to $161 and $932, respectively, for the three and six months ended October 31, 2013.

            Foreign exchange gain (loss) for the three and six months ended October 31, 2014 was $180,716 and $538,017, respectively, compared to ($389,249) and ($389,185), respectively, for the three and six months ended October 31, 2013. The foreign exchange gain (loss) represents the gain (loss) on account of translation of the intercompany accounts of our subsidiaries which maintain their records in currencies other than U.S. dollars and transactional losses and gains. As well, the foreign exchange gain (loss) includes the translation of quarterly intercompany transfer pricing invoices between us and our subsidiary invoiced in other than U.S. dollars and funds held in the parent company in currencies other than U.S. dollars.

Liquidity and Capital Resources

           As of October 31, 2014, we had $5,058,448 in cash and cash equivalents compared to $7,172,798 as of April 30, 2014, representing a decrease of $2,114,350. Our working capital was $4,045,544 at October 31, 2014 compared to $6,704,615 at April 30, 2014, representing a decrease of $2,659,071. Management anticipates that the future capital requirements of our company will be primarily funded through cash flows generated from operations and from working capital, and we may seek additional funding to meet ongoing operating expenses.

            Our company has $4,371,696 in cash held outside of the 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.

34


Operating Activities

            Our operating activities resulted in a net cash outflow of $1,617,755 for the six months ended October 31, 2014. This compares to a net cash outflow of $1,584,373 for the same period last year representing an increase of $33,382 in cash outflow from operations compared to the same period last year. The net cash outflow from operating activities for the six months ended October 31, 2014 was primarily a result of a net loss of $2,205,157 and a non-cash foreign exchange gain of $355,594. The net cash outflow was offset by a decrease in accounts receivable of $404,377, an increase in accounts payable of $109,244 and by adjustment for non-cash expenses including $570,121 for stock based compensation and $114,650 of depreciation and amortization.

Investing Activities

            Investing activities resulted in a net cash outflow of $169,048, for the six months ended October 31, 2014 primarily for purchases of computer equipment and website development costs. This compares with a net cash outflow from investing activities of $69,694 for the same period last year primarily for purchases of computer equipment. At October 31, 2014, we did not have any material commitments for future capital expenditures.

Financing Activities

            Financing activities resulted in a net cash outflow of $219,350 for the six months ended October 31, 2014 compared to a net cash outflow of $92,172 for the six months ended October 31, 2013. The net cash outflow was primarily a result of repurchasing 215,170 shares of common stock at an average price of $1.02 per share for $219,137.

Off-Balance Sheet Arrangements

            We do not have, and do not have any present plans to implement, any off-balance sheet arrangements.

New Accounting Pronouncements

            In May 2014, FASB issued ASU 2014-09, Revenue From Contracts With Customers (“Topic 606”). Topic 606 removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Topic 606 is effective for public entities with reporting periods beginning after December 15, 2016. Early adoption is not permitted. We have not yet evaluated the impact of the adoption of this new standard.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

            Disclosure controls and procedures and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

35


            In connection with this quarterly report, as required by Rule 13a-15 under the Securities Exchange Act of 1934, we have carried out an evaluation of the effectiveness of the design and operation of our company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our company's management, including our company's Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our company's Chief Executive Officer and Chief Financial Officer concluded that as of October 31, 2014, our disclosure controls and procedures are effective as at the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

            There were no changes in our internal control over financial reporting that occurred during the quarter ended October 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

            None.

Item 1A. Risk Factors.

            Much of the information included in this quarterly report includes or is based upon estimates, projections or other “forward looking statements”. Such forward looking statements include any projections or estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumption or other future performance suggested herein.

            Such estimates, projections or other “forward looking statements” involve various risks and uncertainties as outlined below. We caution the reader that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other “forward looking statements”.

Risks Associated with our Business and Industry

            Our revenue, operating results and gross margin can fluctuate significantly and unpredictably from quarter-to-quarter and from year-to-year, and we expect that they will continue to do so, which could have a material adverse effect on our operating results.

            The rate at which our customers order our products, and the size of these orders, are highly variable and difficult to predict. In the past, we have experienced significant variability in our customer purchasing practices on a quarterly and annual basis, and we expect that this variability will continue, as a result of a number of factors, many of which are beyond our control, including:

  demand for our products and the timing and size of customer orders;
     
  length of sales cycles, which may be extended by selling our products through channel partners;
     
  length of time of deployment of our products by our customers;
     
  customers’ budgetary constraints;
     
  competitive pressures; and
     
  general economic conditions.

36


            As a result of this volatility in our customers’ purchasing practices, our revenue has historically fluctuated unpredictably on a quarterly and annual basis and we expect this to continue for the foreseeable future. Our budgeted expense levels depend in part on our expectations of future revenue. Because any substantial adjustment to expenses to account for lower levels of revenue is difficult and takes time, if our revenue declines, our operating expenses and general overhead would likely be high relative to revenue, which could have a material adverse effect on our operating margin and operating results.

            If we are not able to manage our operating expenses, then our financial condition may be adversely affected.

            Operating expenses increased to $4,474,282 for the three months ended October 31, 2014 from $4,313,043 for the three months ended October 31, 2013 while our revenue only increased to $2,851,108 for the three months ended October 31, 2014 from $2,546,810 for the three months ended October 31, 2013. Our ability to reach and maintain profitability is conditional upon our ability to manage our operating expenses. There is a risk that we will have to increase our operating expenses in the future. Factors that could cause our operating expenses to increase include our determination to spend more on sales and marketing in order to increase product sales or our determination that more research and development expenditures are required in order to keep our current software products competitive or in order to develop new products for the market. To the extent that our operating expenses increase without a corresponding increase in revenue, our financial condition would be adversely impacted.

            We face larger and better-financed competitors, which may affect our ability to achieve or maintain profitability.

            Management is aware of similar products which compete directly with our products and some of the companies developing these similar products are larger and better-financed than us and may develop products superior to those of our company. In addition to price competition, increased competition may result in other aggressive business tactics from our competitors, such as:

 

emphasizing their own size and perceived stability against our smaller size and narrower recognition;

     
 

providing customers “one-stop shopping” options for the purchase of network equipment and application software;

     
 

offering customers financing assistance;

     
 

making early announcements of competing products and employing extensive marketing efforts; and

     
 

asserting infringement of their intellectual property rights.

            Our inability to compete successfully in our markets would harm our operating results and negatively affect our profitability.

            A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our operations.

            A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital, or a delisting from a stock exchange on which our common stock trades. For example, we will be noncompliant with NASDAQ continued listing requirements if our common stock trades for 30 consecutive business days below the $1.00 minimum closing bid price requirement. Because our operations have been partially financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our continued operations. Any reduction in our ability to raise equity capital in the future would force us to reallocate funds from other planned uses and would have a significant negative effect on our business plans and operations, including our ability to develop new products and continue our current operations. If our stock price declines, there can be no assurance that we can raise additional capital or generate funds from operations sufficient to meet our obligations.

37


            The majority of our directors and officers are located outside the United States, with the result that it may be difficult for investors to enforce within the United States any judgments obtained against us or some of our directors or officers.

            The majority of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons' assets are located outside the United States. As a result, it may be difficult for investors to enforce within the United States any judgments obtained against us or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Consequently, investors may be effectively prevented from pursuing remedies under United States federal securities laws against some of our directors or officers.

            We may in the future be subject to damaging and disruptive intellectual property litigation that could materially and adversely affect our business, results of operations and financial condition, as well as the continued viability of our company.

            We may be unaware of filed patent applications and issued patents that could relate to our products and services. Intellectual property litigation, if determined against us, could:

 

result in the loss of a substantial number of existing customers or prohibit the acquisition of new customers;

     
 

cause us to lose access to key distribution channels;

     
 

result in substantial employee layoffs or risk the permanent loss of highly-valued employees;

     
 

materially and adversely affect our brand in the market place and cause a substantial loss of goodwill;

     
 

affect our ability to raise additional capital;

     
 

cause our stock price to decline significantly; and

     
 

lead to the bankruptcy or liquidation of our company.

            Parties making claims of infringement may be able to obtain injunctive or other equitable relief that could effectively block our ability to provide our products or services and could cause us to pay substantial royalties, licensing fees or damages. The defense of any lawsuit could result in time-consuming and expensive litigation, regardless of the merits of such claims.

            We could lose our competitive advantages if we are not able to protect any proprietary technology and intellectual property rights against infringement, and any related litigation could be time-consuming and costly.

            Our success and ability to compete depends to a significant degree on our proprietary technology incorporated in our software. If any of our competitors' copy or otherwise gain access to our proprietary technology or develops similar technologies independently, we would not be able to compete as effectively. We also consider our family of registered and unregistered trademarks including CounterPath, Bria, eyebeam, X-Lite, and Softphone.com invaluable to our ability to continue to develop and maintain the goodwill and recognition associated with our brand. The measures we take to protect the proprietary technology software, and other intellectual property rights, which presently are based upon a combination of patents, patents pending, copyright, trade secret and trademark laws, may not be adequate to prevent their unauthorized use. Further, the laws of foreign countries may provide inadequate protection of such intellectual property rights.

38


            We may need to bring legal claims to enforce or protect such intellectual property rights. Any litigation, whether successful or unsuccessful, could result in substantial costs and divert resources from intended uses. In addition, notwithstanding any rights we have secured in our intellectual property, other persons may bring claims against us that we have infringed on their intellectual property rights, including claims based upon the content we license from third parties or claims that our intellectual property right interests are not valid. Any claims against us, with or without merit, could be time consuming and costly to defend or litigate, divert our attention and resources, result in the loss of goodwill associated with our service marks or require us to make changes to our website or other of our technologies.

            Our products may become obsolete and unmarketable if we are unable to respond adequately to rapidly changing technology and customer demands.

            Our industry is characterized by rapid changes in technology and customer demands. As a result, our products may quickly become obsolete and unmarketable. Our future success will depend on our ability to adapt to technological advances, anticipate customer demands, develop new products and enhance our current products on a timely and cost-effective basis. Further, our products must remain competitive with those of other companies with substantially greater resources. We may experience technical or other difficulties that could delay or prevent the development, introduction or marketing of new products or enhanced versions of existing products. Also, we may not be able to adapt new or enhanced services to emerging industry standards, and our new products may not be favorably received.

            Unless we can establish broad market acceptance of our current products, our potential revenues may be significantly reduced.

            We expect that a substantial portion of our future revenue will be derived from the sale of our software products. We expect that these product offerings and their extensions and derivatives will account for a majority of our revenue for the foreseeable future. Broad market acceptance of our software products is, therefore, critical to our future success and our ability to continue to generate revenues. Failure to achieve broad market acceptance of our software products as a result of competition, technological change, or otherwise, would significantly harm our business. Our future financial performance will depend primarily on the continued market acceptance of our current software product offerings and on the development, introduction and market acceptance of any future enhancements. There can be no assurance that we will be successful in marketing our current product offerings or any new product offerings, applications or enhancements, and any failure to do so would significantly harm our business.

            We may not successfully sell our products in certain geographic markets or develop and manage new sales channels in accordance with our business plan.

            We expect to continue to sell our products in certain geographic markets where we do not have significant current business and to a broader customer base. To succeed in certain of these markets, we believe we will need to develop and manage new sales channels and distribution arrangements. Because we have limited experience in developing and managing such channels, we may not be successful in further penetrating certain geographic regions or reaching a broader customer base. Failure to develop or manage additional sales channels effectively would limit our ability to succeed in these markets and could adversely affect our ability to grow our customer base and revenue.

            Our use of open source software could impose limitations on our ability to commercialize our products.

            We incorporate open source software into our products. Although we closely monitor our use of open source software, the terms of many open source software licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to sell our products. In such event, we could be required to make our proprietary software generally available to third parties, including competitors, at no cost, to seek licenses from third parties to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis or at all, any of which could adversely affect our revenues and operating expenses.

39


            We may not be able to obtain necessary licenses of third-party technology on acceptable terms, or at all, which could delay product sales and development and adversely impact product quality.

            We have incorporated third-party licensed technology into our current products. We anticipate that we are also likely to need to license additional technology from third-parties to develop new products or product enhancements in the future. Third-party licenses may not be available or continue to be available to us on commercially reasonable terms. The inability to retain any third-party licenses required in our current products or to obtain any new third-party licenses to develop new products and product enhancements could require us to obtain substitute technology of lower quality or performance standards or at greater cost, and delay or prevent us from making these products or enhancements, any of which could seriously harm the competitive position of our products.

            Our products must interoperate with many different networks, software applications and hardware products, and this interoperability will depend on the continued prevalence of open standards.

            Our products are designed to interoperate with our customers’ existing and planned networks, which have varied and complex specifications, utilize multiple protocol standards, software applications and products from numerous vendors and contain multiple products that have been added over time. As a result, we must attempt to ensure that our products interoperate effectively with these existing and planned networks. To meet these requirements, we have and must continue to undertake development and testing efforts that require significant capital and employee resources. We may not accomplish these development efforts quickly or cost-effectively, or at all. If our products do not interoperate effectively, installations could be delayed or orders for our products could be cancelled, which would harm our revenue, gross margins and our reputation, potentially resulting in the loss of existing and potential customers. The failure of our products to interoperate effectively with our customers’ networks may result in significant warranty, support and repair costs, divert the attention of our engineering personnel from our software development efforts and cause significant customer relations problems.

            Additionally, the interoperability of our products with multiple different networks is significantly dependent on the continued prevalence of standards for IP multimedia services, such as SIP or Session Initiation Protocol. Some of our existing and potential competitors are network equipment providers who could potentially benefit from the deployment of their own proprietary non-standards-based architectures. If resistance to open standards by network equipment providers becomes prevalent, it could make it more difficult for our products to interoperate with our customers’ networks, which would have a material adverse effect on our ability to sell our products to service providers.

            We are subject to the credit risk of our customers, which could have a material adverse effect on our financial condition, results of operations and liquidity.

            We are subject to the credit risk of our customers. Businesses that are good credit risks at the time of sale may become bad credit risks over time. In the course of our sales to customers, we may encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible accounts receivable. Economic conditions may impact some of our customers’ ability to pay their accounts payable. In times of economic recession, the number of our customers who default on payments owed to us tends to increase. If we fail to adequately assess and monitor our credit risks, we could experience longer payment cycles, increased collection costs and higher bad debt expense. While we attempt to monitor these situations carefully and attempt to take appropriate measures to collect accounts receivable balances, we have written down accounts receivable and written off doubtful accounts in prior periods and may be unable to avoid accounts receivable write-downs or write-offs of doubtful accounts in the future. Such write-downs or write-offs could negatively affect our operating results for the period in which they occur and could harm our operating results.

            We are exposed to fluctuations in interest rates and exchange rates associated with foreign currencies. 

            A majority of our revenue activities are transacted in U.S. dollars. However, we are exposed to foreign currency exchange rate risk inherent in conducting business globally in numerous currencies, of which the most significant to our operations for the six months ended October 31, 2014 is the Canadian dollar. We are primarily exposed to a fluctuating Canadian dollar as our operating expenses are primarily denominated in Canadian dollars while our revenues are primarily denominated in U.S. dollars. Our company’s foreign currency risk management program includes foreign currency derivatives with cash flow hedge accounting designation that utilizes foreign currency forward contracts to hedge exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S. dollar-denominated cash flows. These instruments generally have a maturity of less than one year. For these derivatives, our company reports the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss) in stockholders’ equity and reclassifies it into earnings in the same period in which the hedged transaction affects earnings, and within the same line item on the consolidated statements of operations as the impact of the hedged transaction. There can be no assurance that our hedging program will not result in a negative impact on our earnings and earnings per share.

40


Risks Associated with our Common Stock

            Our directors control a substantial number of shares of our common stock, decreasing your influence on stockholder decisions.

            Based on the 42,524,467 shares of common stock that were issued and outstanding as of October 31, 2014, our directors owned approximately 27% of our outstanding common stock. As a result, our directors as a group could have a significant influence in delaying, deferring or preventing any potential change in control of our company; they will be able to strongly influence the actions of our board of directors even if they were to cease being directors of our company and can effectively control the outcome of actions brought to our stockholders for approval. Such a high level of ownership may adversely affect the exercise of your voting and other stockholder rights.

            We do not expect to pay dividends in the foreseeable future.

            We do not intend to declare dividends for the foreseeable future, as we anticipate that we will reinvest any future earnings in the development and growth of our business. Therefore, investors will not receive any funds unless they sell their common stock, and stockholders may be unable to sell their shares on favorable terms. We cannot assure you of a positive return on investment or that you will not lose the entire amount of your investment in our common stock.

            The exercise of all or any number of outstanding stock options or the issuance of other stock-based awards or any issuance of shares to raise funds may dilute your holding of shares of our common stock.

            If the holders of outstanding stock options and deferred share units exercise or convert all of their vested stock options and deferred share units as at October 31, 2014, then we would be required to issue an additional 3,804,012 shares of our common stock, which would represent approximately 9% of our issued and outstanding common stock after such issuances. The exercise of any or all outstanding stock options that are exercisable below market price will result in dilution to the interests of other holders of our common stock.

            We may in the future grant to certain or all of our directors, officers, insiders and key employees stock options to purchase the shares of our common stock, bonus shares and other stock based compensation as non-cash incentives to such persons. Subject to applicable stock exchange rules, if any, we may grant these stock options and other stock based compensation at exercise prices equal to or less than market prices, and we may grant them when the market for our securities is depressed. The issuance of any additional shares of common stock or securities convertible into common stock will cause our existing shareholders to experience dilution of their holding of our common stock.

            In addition, shareholders could suffer dilution in their net book value per share depending on the price at which such securities are sold. Such issuance may cause a reduction in the proportionate ownership and voting power of all other shareholders. The dilution may result in a decline in the price of our shares of common stock or a change in the control of our company.

            We may be considered a “Penny stock.” Penny stock rules will limit the ability of our stockholders to sell their shares of common stock.

41


            The SEC has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. In addition, since our common stock commenced trading on the NASDAQ Capital Market below the $4.00 minimum bid price per share requirement, our common stock would be considered a penny stock if we fail to satisfy the net tangible assets and revenue tests in Rule 3a51-1 under the Securities Exchange Act of 1934. Our securities may be covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation.

            In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.

            The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements, which may limit a stockholder's ability to buy and/or sell shares of our common stock.

            The FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for its shares.

            Securities analysts may not publish favorable research or reports about our business or may publish no information which could cause our stock price or trading volume to decline.

            The trading market for our common stock will be influenced by the research and reports that industry or financial analysts publish about us and our business. We do not control these analyst reports. As a relatively small public company, we may be slow to attract research coverage and the analysts who publish information about our common stock will have had relatively little experience with our company, which could affect their ability to accurately forecast our results and make it more likely that we fail to meet their estimates. If any of the analysts who cover us issue an adverse opinion regarding our stock price, our stock price may decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports covering us, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.

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

Recent Sales of Unregistered Securities

            On September 12, 2014, we granted 137,000 stock options pursuant to our 2010 Stock Option Plan to four employees and one consultant. Each stock option entitles the holder thereof the right to purchase one share of common stock at a price equal to $1.05. The options vest in the amount of 12.5% on the date which is six months from the date of grant and then beginning in the seventh month at 1/42 per month for 42 months, at which time the options are fully vested. We issued 62,000 stock options to non-U.S. persons (as that term is defined in Regulation S of the Securities Act of 1933) in an offshore transaction(s) relying on Regulation S and/or Section 4(2) of the Securities Act of 1933. We issued 75,000 of stock options to U.S. persons (as that term is defined in Regulation S of the Securities Act of 1933) in reliance upon Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933, as applicable.

42


Purchases of Equity Securities by the Issuer and Affiliated Purchasers









Total number
of shares
purchased


Average price
paid per share
(Canadian
dollars)

Total number of
shares purchased
as part of publicly
announced plans
or programs
Maximum
number of shares
that may yet be
purchased under
the plans or
programs
August 1, 2014 to August 31, 2014(1) 15,000 $1.14 15,000 2,374,153
September 1, 2014 to
September 30, 2014(1)
78,048 $1.12 78,048 2,296,105
October 1, 2014 to October 31, 2014(1) 75,322 $1.05  75,322 2,220,783
Total 168,370     $1.09(2)      168,370    2,220,783

  (1)

Pursuant to a normal course issuer bid, announced on March 17, 2014, which commenced on March 19, 2014 and expires on March 18, 2015, to purchase up to 2,458,153 shares of our common stock.

     
  (2)

Weighted average price.

Item 3. Defaults Upon Senior Securities.

            None.

Item 5. Other Information.

            None.

Item 6. Exhibits.

Exhibits required by Item 601 of Regulation S-B

(3) Articles of Incorporation and By-laws
   
3.1

Articles of Incorporation (incorporated by reference from our Registration Statement on Form SB-2 filed on July 16, 2003).

   
3.2

Bylaws (incorporated by reference from our Registration Statement on Form SB-2 filed on July 16, 2003).

   
3.3

Amended Bylaws (incorporated by reference from our Registration Statement on Form SB-2/A filed on September 3, 2003).

43



3.4

Articles of Merger (incorporated by reference from our Current Report on Form 8-K filed on September 15, 2005).

   
3.5

Amended Bylaws (incorporated by reference from our Current Report on Form 8-K filed on April 28, 2006).

   
3.6

Amended Bylaws (incorporated by reference from our Current Report on Form 8-K filed on April 22, 2008).

   
3.7

Amended Bylaws (incorporated by reference from our Current Report on Form 8-K filed on July 2, 2012).

   
3.8

Certificate of Amendment to Articles of Incorporation (incorporated by reference from our Quarterly Report in the Form 10-Q filed on December 12, 2013).

   
(4)

Instruments defining the rights of security holders, including indentures

   
4.1

2004 Stock Option Plan effective May 18, 2004 (incorporated by reference from our Registration Statement on Form S-8 filed on June 14, 2005).

   
4.2

Form of Stock Option Agreement for 2004 Stock Option Plan (incorporated by reference from our Registration Statement on Form S-8 filed on June 14, 2005).

   
4.3

2005 Stock Option Plan effective March 4, 2005 (incorporated by reference from our Registration Statement on Form S-8 filed on June 14, 2005).

   
4.4

Form of Stock Option Agreement for 2005 Stock Option Plan (incorporated by reference from our Registration Statement on Form S-8 filed on June 14, 2005).

   
4.5

Form of Amended & Restated Stock Option and Subscription Agreement (Canadian) (incorporated by reference from our Current Report on Form 8-K filed On October 14, 2005).

   
4.6

Form of Amended & Restated Stock Option and Subscription Agreement (US) (incorporated by reference from our Current Report on Form 8-K filed On October 14, 2005).

   
4.7

2010 Stock Option Plan effective September 27, 2010 (incorporated by reference from our Definitive Proxy Statement filed on August 31, 2010).

   
4.8

Employee Share Purchase Plan adopted October 1, 2008, and amended November 6, 2008 (incorporated by reference from our Registration Statement on Form S-8 filed on January 30, 2009).

   
4.9

Amended Deferred Share Unit Plan effective September 25, 2013 (incorporated by reference from our Quarterly Report in the Form 10-Q filed on December 12, 2013).

   
4.10

Amended 2010 Stock Option Plan effective July 10, 2014 (filed herewith).

   
4.11

Amended Employee share Purchase Plan effective July 29, 2014 (filed herewith).

   
(10)

Material Contracts

   
10.1

Employment Agreement between CounterPath Solutions, Inc. and David Karp dated September 11, 2006 (incorporated by reference from our Quarterly Report on Form 10-QSB filed on September 14, 2006).

44



10.2

Piggyback Registrations Rights Agreement among our company and various shareholders, dated as of August 2, 2007 (incorporated by reference from our Current Report on Form 8-K filed on August 8, 2007).

   
10.3

Amended Employment Agreement between Donovan Jones and CounterPath Solutions R&D Inc., a wholly owned subsidiary of CounterPath Solutions, Inc. dated September 13, 2007 (incorporated by reference from our Quarterly Report on Form 10-QSB filed on September 14, 2007).

   
10.4

Form of Subscription Agreement dated October 29, 2009 between our company and various investors (incorporated by reference from our Current Report on Form 8-K filed on November 4, 2009).

   
(14)

Code of Ethics

   
14.1

Code of Business Conduct and Ethics (incorporated by reference from our Annual Report on Form 10- KSB filed on July 29, 2004).

   
14.2

Code of Business Conduct and Ethics and Compliance Program (incorporated by reference from our Quarterly Report on Form 10-QSB filed on September 15, 2008).

   
(21)

Subsidiaries of CounterPath Corporation

   
 

CounterPath Technologies Inc. (incorporated in the Province of British Columbia, Canada)

   
 

BridgePort Networks, Inc. (incorporated in the state of Delaware)

   
(31)

Section 302 Certifications

   
31.1

Section 302 Certification of Donovan Jones (filed herewith).

   
31.2

Section 302 Certification of David Karp (filed herewith).

   
(32)

Section 906 Certifications

   
32.1

Section 906 Certification of Donovan Jones (filed herewith).

   
32.2

Section 906 Certification of David Karp (filed herewith).

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SIGNATURES

            In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

COUNTERPATH CORPORATION

 

By: /s/ Donovan Jones  
  Donovan Jones  
  President, Chief Executive Officer and Director  
  (Principal Executive Officer)  
     
  Date: December 11, 2014  
     
     
  /s/ David Karp  
  David Karp  
  Chief Financial Officer, Treasurer and Secretary  
  (Principal Financial Officer, Principal Accounting Officer)  
     
  Date: December 11, 2014  

46