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, 2018

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 001-35592

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 every Interactive Data File required to be submitted 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 such files).
Yes [X] No [   ]

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

Large accelerated filer [   ] Accelerated filer [   ]
Non-accelerated filer [   ] Smaller reporting company [X]
    Emerging growth company [   ]

1


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 5,945,115 shares of common stock issued and outstanding as of December 7, 2018.

2


COUNTERPATH CORPORATION
OCTOBER 31, 2018 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. 24
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 35
     
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. 44
     
Item 3. Defaults Upon Senior Securities. 45
     
Item 4. Mine Safety Disclosures. 45
     
Item 5. Other Information. 45
     
Item 6. Exhibits. 45

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, 2018 include all adjustments necessary in order to ensure that the interim consolidated financial statements are not misleading.

In the interim consolidated financial statements for the quarter ended October 31, 2018, all amounts are expressed in United States dollars, unless otherwise indicated. The interim consolidated financial statements for the quarter ended October 31, 2018 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, 2018
(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

4


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

    October 31,     April 30,  
    2018     2018  
             
Assets            
 Current assets:            
     Cash $  1,848,630   $  2,348,883  
     Accounts receivable (net of allowance for doubtful accounts of $1,071,383 (2018 - $322,638))   2,241,779     3,509,010  
   Deferred sales commission costs – current – Note 4   103,292      
   Derivative assets   3,457      
   Prepaid expenses and deposits   177,585     191,245  
       Total current assets   4,374,743     6,049,138  
             
   Deposits   96,706     98,633  
   Deferred sales commission costs – non-current – Note 4   62,253      
   Equipment   94,631     121,819  
   Goodwill   6,690,425     6,843,575  
   Intangibles and other assets   220,638     221,062  
Total Assets $  11,539,396   $  13,334,227  
             
Liabilities and Stockholders’ Equity            
 Current liabilities:            
   Accounts payable and accrued liabilities $  2,514,742   $  2,437,733  
   Derivative liability   13,719      
   Unearned revenue   2,597,465     2,565,876  
   Customer deposits   3,137     2,200  
   Accrued warranty   56,208     63,130  
Total current liabilities   5,185,271     5,068,939  
             
   Deferred lease inducements   9,071     14,339  
   Loan payable – Note 7   1,000,000      
   Unrecognized tax liability   9,763     9,763  
       Total liabilities   6,204,105     5,093,041  
             
 Stockholders’ equity:            
 Preferred stock, $0.001 par value
   Authorized: 100,000,000
   Issued and outstanding: October 31, 2018 – nil; April 30, 2018 – nil
       
 Common stock, $0.001 par value – Note 8
   Authorized: 100,000,000
   Issued:
   October 31, 2018 – 5,943,082; April 30, 2018 – 5,930,468
  5,943     5,931  
 Additional paid-in capital   75,520,205     75,170,181  
 Accumulated deficit – Note 4   (66,642,356 )   (63,701,685 )
 Accumulated other comprehensive loss – currency translation adjustment   (3,548,501 )   (3,233,241 )
     Total stockholders’ equity   5,335,291     8,241,186  
Liabilities and Stockholders’ Equity $  11,539,396   $  13,334,227  
             
Commitments – Note 11            
Contingencies – Note 12            
Going concern – Note 2            

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,  
    2018     2017     2018     2017  
Revenue – Note 10:                        
   Software $  923,416   $  1,816,867   $  2,279,418   $  3,515,760  
   Subscription, support and maintenance   1,319,840     981,619     2,570,860     1,948,681  
   Professional services and other   198,005     612,079     478,813     1,058,930  
             Total revenue   2,441,261     3,410,565     5,329,091     6,523,371  
Operating expenses:                        
   Cost of sales (includes depreciation of $528 (2017 – $3,168))   623,811     380,822     1,219,367     769,065  
   Sales and marketing   967,689     1,031,227     1,962,649     2,035,511  
   Research and development   1,391,737     1,329,437     2,794,693     2,690,910  
   General and administrative   1,550,101     714,598     2,541,739     1,607,185  
             Total operating expenses   4,533,338     3,456,084     8,518,448     7,102,671  
Loss from operations   (2,092,077 )   (45,519 )   (3,189,357 )   (579,300 )
Interest and other income (expense), net:                        
   Interest and other income                        
   Interest expense   (4,661 )   (162 )   (4,666 )   (215 )
   Foreign exchange gain (loss)   43,535     204,515     124,471     (414,184 )
   Change in fair value of derivative instruments   (10,554 )       (5,152 )    
             Total interest and other income (expense), net   28,320     204,353     114,653     (414,399 )
Net income (loss) for the period $  (2,063,757 ) $  158,834   $  (3,074,704 ) $  (993,699 )
                         
Net income (loss) per share – Note 13:                        
   Basic $  (0.35 ) $  0.03   $  (0.52 ) $  (0.19 )
   Diluted $  (0.35 ) $  0.03   $  (0.52 ) $  (0.19 )
                         
Weighted average common shares outstanding:                        
   Basic   5,941,812     5,487,765     5,937,115     5,262,359  
   Diluted   5,941,812     5,892,580     5,937,115     5,262,359  

See accompanying notes to the interim consolidated financial statements

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

    Three Months Ended     Six Months Ended  
    October 31,     October 31,  
    2018     2017     2018     2017  
Net income (loss) for the period $  (2,063,757 ) $  158,834   $  (3,074,704 ) $  (993,699 )
Other comprehensive loss:                        
   Foreign currency translation adjustments   (112,295 )   (425,942 )   (315,260 )   770,611  
Comprehensive loss $  (2,176,052 ) $  (267,108 ) $  (3,389,964 ) $  (223,088 )

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,  
    2018     2017  
             
Cash flows from operating activities:            
 Net loss for the period $  (3,074,704 ) $  (993,699 )
 Adjustments to reconcile net loss to net cash used in operating activities:            
     Deferred lease inducements   (4,947 )   (5,057 )
     Depreciation and amortization   47,309     55,869  
     Unrealized foreign exchange (gain) loss   (171,975 )   383,154  
     Stock-based compensation – Note 8   339,597     406,959  
     Issuance of common stock for services       2,776  
     Change in fair value of derivative instruments   10,262      
             
 Changes in assets and liabilities:            
     Accounts payable and accrued liabilities   98,933     38,392  
     Accounts receivable   1,267,223     (1,685,153 )
     Deferred sales commission costs – Note 4   (31,512 )    
     Accrued warranty   (6,922 )   6,295  
     Customer deposits   937     (3,831 )
     Prepaid expenses and deposits   12,887     29,060  
     Unearned revenue – Note 4   31,589     237,611  
Net cash used in operating activities   (1,481,323 )   (1,527,624 )
             
Cash flows from investing activities:            
 Purchases of equipment   (17,969 )   (51,818 )
 Purchases of intangibles   (3,314 )   (10,585 )
Net cash used in investing activities   (21,283 )   (62,403 )
             
Cash flows from financing activities:            
 Net proceeds from issuance of common stock   10,439     1,195,776  
 Repurchases of common stock       (33,220 )
 Proceeds received from loan payable – Note 7   1,000,000      
Net cash provided by financing activities   1,010,439     1,162,556  
             
Foreign exchange effect on cash   (8,086 )   38,584  
             
Decrease in cash   (500,253 )   (388,887 )
             
Cash, beginning of the period   2,348,883     2,071,019  
Cash, end of the period $  1,848,630   $  1,682,132  
             
Supplemental disclosure of cash flow information            
 Cash paid for:            
     Interest $  –   $  162  
     Taxes $  –   $  –  
             
 Non cash transactions – Note 8            

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, 2018
(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, 2017   5,005,245   $  5,005     (59,900 ) $  (60 ) $  71,680,575   $  (60,481,015 ) $ (4,025,196 ) $  7,179,309  
                                                 
Shares issued – Note 8:                                                
Private placement, net of share issuance costs   539,240     540             1,165,956             1,166,496  
Issuance of common stock for services   14,000     14                 33,303                 33,317  
Share repurchase plan           (13,600 )   (14 )   (33,630 )           (33,644 )
Cancellation of shares   (71,500 )   (72 )   71,500     72     425             425  
Stock-based compensation                   406,959             406,959  
Employee share purchase program   12,165     12             29,268             29,280  
Net loss for the period                       (993,699 )       (993,699 )
Foreign currency translation adjustment                           770,611     770,611  
Balance, October 31, 2017   5,499,150   $  5,499     (2,000 ) $  (2 ) $  73,282,856   $  (61,474,714 ) $ (3,254,585 ) $  8,559,054  
                                                 
                                                 
Balance, April 30, 2018   5,930,468   $  5,931       $  –   $  75,170,181   $  (63,701,685 ) $ (3,233,241 ) $  8,241,186  
Adoption of ASC 606 – Note 4                       134,033         134,033  
Balance, May 1, 2018   5,930,468   $  5,931       $  –   $  75,170,181   $  (63,567,652 ) $ (3,233,241 ) $  8,375,219  
                                                 
Shares issued – Note 8:                                                
Stock-based compensation                   339,597             339,597  
Employee share purchase program   5,656     5             12,813             12,818  
Exercise of stock options   6,958     7             (2,386 )           (2,379 )
Net loss for the period                       (3,074,704 )       (3,074,704 )
Foreign currency translation adjustment                           (315,260 )   (315,260 )
Balance, October 31, 2018   5,943,082   $  5,943       $  –   $  75,520,205   $  (66,642,356 ) $ (3,548,501 ) $  5,335,291  

See accompanying notes to the interim consolidated financial statements

8


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2018
(Unaudited)

Note 1 Nature of Operations
   

CounterPath Corporation (the “Company”) was incorporated in the State of Nevada on April 18, 2003. The Company focuses on the design, development, marketing and sales of software applications and related services, such as pre and post sales technical support and customization 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. The Company’s products are sold either directly or through channel partners, to small, medium and large businesses (“enterprises”) and telecom service providers, in North America, and in Europe, Middle East, Africa (collectively “EMEA”), Asia Pacific and Latin America.

   
Note 2

Basis of Presentation and Principles of Consolidation

   

The accompanying interim consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) and are stated in U.S. dollars, except where otherwise disclosed.

   

These interim consolidated financial statements include the accounts of the Company and its wholly- owned subsidiaries, CounterPath Technologies Inc., a company existing under the laws of the province of British Columbia, Canada, BridgePort Networks, Inc. (“BridgePort”), a company incorporated under the laws of the state of Delaware and CounterPath LLC, a company formed on August 27, 2018, under the laws of the state of Delaware. The results of NewHeights Software Corporation (“NewHeights”), which subsequently was amalgamated with another subsidiary to become CounterPath Technologies Inc., are included from August 2, 2007, the date of acquisition. The results of FirstHand Technologies Inc. (“FirstHand”), which subsequently was amalgamated with CounterPath Technologies Inc., and BridgePort are included from February 1, 2008, the date of acquisition. All inter-company transactions and balances have been eliminated.

   

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.

   
 

Going Concern

   

The Company has experienced recurring losses and has an accumulated deficit of $66,642,356 as of October 31, 2018, as a result of flat to declining revenues resulting from a number of factors including its buildout of a cloud based subscription platform concurrent with the change of its licensing model to subscription based licensing and has not reached profitable operations which raises substantial doubt about its ability to continue operating as a going concern within one year of the date of issuance of the financial statements.

   

To alleviate this situation, the Company has plans in place to improve its financial position and liquidity, while executing on its growth strategy, by managing and or reducing costs that is not expected to have an adverse impact on the ability to generate cash flows, as the transition to its software as a service platform and subscription licensing continues.

   

The Company has historically been able to manage liquidity requirements through cost management and cost reduction measures, supplemented with raising additional financing. During the quarter ended October 31, 2018, the Company entered into a loan agreement for an aggregate principal amount of up to $3,000,000. See Note 7 – Loan Payable for further detail. As of October 31, 2018, the Company has no other commitments to raise funds.

9


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2018
(Unaudited)

 

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 (“SEC”). Certain information and footnote disclosures normally included in the consolidated 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.

   

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, 2018 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, 2018 annual audited consolidated financial statements.

   

Operating results for the three and six months ended October 31, 2018 are not necessarily indicative of the results that can be expected for the year ending April 30, 2019.

   
Note 3

Summary of Significant Accounting Policies

   

The significant accounting policies used in preparation of these interim consolidated financial statements are disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018 filed with the Securities Exchange Commission on July 25, 2018, and there have been no changes to the Company's significant accounting policies during the three and six months ended October 31, 2018, except for the revenue recognition policy, described in Note 4 – Revenue Recognition under ASC 606, that was updated as a result of adopting Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09 or ASC 606). ASU 2014-09 also included Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers. All amounts and disclosures set forth herein are in compliance with these standards.

   
 

Concentrations of Credit Risk

   

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company has exposure to credit risk to the extent cash balances exceed amounts covered by federal deposit insurance; however, the Company believes that its credit risk on cash balances is immaterial. The Company is also subject to concentrations of credit risk in its accounts receivable. The Company monitors and actively manages its receivables, and from time to time will insure certain receivables with higher credit risk and may require collateral or other securities to support its accounts receivable.

   

Revenue from significant customers for the three and six months ended October 31, 2018 and 2017 is summarized below:


                                                                                                      Three Months Ended     Six Months Ended  
      October 31,     October 31,  
    2018       2017     2018     2017  
  Customer A   14%     10%     8%     6%  

10


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2018
(Unaudited)

The table below presents significant customers who accounted for greater than 10% of total accounts receivable as of October 31, 2018 and April 30, 2018:

      October 31,     April 30,  
      2018     2018  
  Customer B   10%     2%  
  Customer C   10%     6%  
  Customer D   2%     13%  
  Customer E   –%     18%  

Accounts Receivable and Allowance for Doubtful Accounts

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

      October 31,     April 30,  
      2018     2018  
  Balance of allowance for doubtful accounts, beginning of period $  322,638   $  80,232  
  Bad debt provision   748,745     578,024  
  Write-off of receivables       (335,618 )
  Balance of allowance for doubtful accounts, end of period $  1,071,383   $  322,638  

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.

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.

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 non-designated forward contracts are recognized in net income.

The Company records foreign currency option and forward contracts on its Consolidated Balance Sheets as derivative assets or liabilities depending on whether the fair value of such contracts is a net asset or net liability, respectively. See Note 5 - Derivative Instruments for further detail. The Company did not enter any foreign currency derivatives designated as cash flow hedges in the three and six months ended October 31, 2018.

11


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2018
(Unaudited)

  Recently Adopted Accounting Pronouncements
   

In May 2014, FASB issued ASU 2014-09, Revenue From Contracts With Customers (“Topic 606”) which supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (“Topic 605”) and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. The Company adopted ASU 2014-09 as of May 1, 2018 using the modified retrospective transition method. See Note 4 – Revenue Recognition under ASC 606 for further details.

   
 

Recently Issued Accounting Pronouncements

   

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends the presentation and disclosure requirements and changes how companies assess effectiveness. The amendments are intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. This amendment is effective for annual periods beginning after December 15, 2018, including interim periods within those periods. Early application is permitted. The Company is currently assessing the future impact of this update on its consolidated financial statements and related disclosures.

   

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment, which amends the guidance to eliminate Step 2 from the goodwill impairment test. Instead, under the amendments in the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The amendments will be effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is evaluating the impact of this amendment on its consolidated financial statements and related disclosures.

   

In June 2016, the FASB issued ASU 2016-13, Financial Instruments: Measurement of Credit Losses on Financial Instruments which amends the guidance on measuring credit losses on financial assets held at amortized cost. The amendment is intended to address the issue that the previous “incurred loss” methodology was restrictive for a company’s ability to record credit losses based on not yet meeting the “probable” threshold. The new language will require these assets to be valued at amortized cost presented at the net amount expected to be collected will a valuation provision. The amendments will be effective for fiscal years beginning after December 15, 2019. The Company is evaluating the impact of this amendment on our consolidated financial statements and related disclosures.

   

In February 2016, FASB issued ASU 2016-02, Leases. The guidance would require lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right -of-use assets. The guidance is effective for annual and interim reporting periods beginning on or after December 15, 2018. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements.

   
Note 4

Revenue Recognition under ASC 606

   

On May 1, 2018, the Company adopted the new accounting standard, ASC 606 “Revenue from Contracts with Customers” and all related amendments to the new accounting standard to contracts using the modified retrospective method. The Company recognized the cumulative effect of initially applying the new revenue recognition standard to contracts with open performance obligations as of May 1, 2018, as an adjustment to the opening balance of retained earnings. Results of the reporting period beginning May 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic accounting under ASC 605.

12


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2018
(Unaudited)

Revenues from contracts with customers are recognized when control of promised goods and services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

The Company recognizes revenue using the five-step model as prescribed by ASC 606:

  1)

Identification of the contract, or contracts, with a customer;

  2)

Identification of the performance obligations in the contract;

  3)

Determination of the transaction price;

  4)

Allocation of the transaction price to the performance obligations in the contract; and

  5)

Recognition of revenue when or as, the Company satisfies a performance obligation.

When a contract with a customer is signed, the Company assesses whether collection of the fees under the arrangement is probable. The Company estimates the amount to reserve for uncollectible amounts at the end of each reporting period based on the aging of the contract balance, current and historical customer trends, and communications with its customers. These reserves are recorded against the related accounts receivable.

The transaction price is the consideration that the Company expects to receive from its customers in exchange for its products or services. In determining the allocation of the transaction price, the Company identifies performance obligations in contracts with customers, which may include products, subscriptions to software and services, support, professional services and training. The Company allocates the transaction price to each performance obligation on a relative standalone selling price basis. The standalone selling price (SSP) is the price at which the Company would sell a promised product or service separately to a customer. The Company determines the SSP using information that may include market conditions or other observable inputs. In certain cases, the Company is able to establish a SSP based on observable prices for products or services sold separately. In these instances, the Company would use a single amount to estimate a SSP. If a SSP is not directly observable, for example when pricing is variable, the Company will use a range of SSP.

In certain circumstances, the Company may estimate SSP for a product or service by applying the residual approach. This approach has been most commonly used when certain perpetual software licenses are only sold bundled with one year of post-contract support or other services, and a price has not been established for the software.

Significant judgement is used to determine SSP and to determine whether there is a variance that needs to be allocated based on the relative SSP of the various products and services. Estimating SSP is a formal process that includes review and approval by the Company’s management.

Software Revenue

The Company generates software revenue primarily on a single fee per perpetual software license basis. The Company recognizes software revenue for perpetual licenses when control has transferred to the customer, which is generally at the time of delivery when the customer has the ability to deploy the licenses, provided all revenue recognition criteria have been met. If the revenue recognition criteria has not been met, the revenue is deferred or not recognized.

Subscription, support and maintenance

Revenue from the Company’s recurring subscription revenue from subscriptions related to our software as a service offering is recognized ratably over the contractual subscription term as control of the goods or services is transferred to the customer, beginning on the date that the subscription is made available to the customer. Support and maintenance revenue is generated from recurring annual software support and maintenance contracts for our perpetual software licenses and is recognized ratably over the term of the service period, which is generally twelve months. Support and maintenance services include e-mail and telephone support, unspecified rights to bug fixes and product updates and upgrades and enhancements available on a when-and-if available basis. Both subscription revenue and support and maintenance revenue are typically billed annually in advance based on the terms of the arrangement.

13


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2018
(Unaudited)

Professional services and other

Professional services and other revenue is generated through services including product configuration and customization, implementation, dedicated engineering and training. The amount of product configuration and customization required by a customer typically increases as the order size increases from a given customer. Services and pricing may vary depending upon a customer’s requirements for customization, implementation and training. Depending on the services to be provided, revenue from professional services and other is generally recognized at the time of delivery when the services have been completed and control has been transferred.

For contracts with elements related to customized network solutions and certain network build-outs or software systems that require significant modification or customization, the Company will recognize revenue using the percentage-of-completion method. In using the percentage-of-completion method, revenues are generally recorded based on completion of milestones as described in the agreement. Profit estimates on long-term contracts are revised periodically based on changes in circumstances and any losses on contracts are recognized in the period that such losses become known.

Unearned Revenue

Unearned revenue represent billings or payments received in advance of revenue recognition and is recognized upon transfer of control. Balances consist primarily of annual support and subscription services and professional services not yet provided as of the balance sheet date.

During the three and six months ended October 31, 2018, the Company recognized $708,052 and $1,655,852 in revenue, respectively, in its consolidated statements of operations that was previously recognized as unearned revenue in the consolidated balance sheets at May 1, 2018.

Costs to Obtain a Customer Contract

Sales commissions and related expenses are considered incremental and recoverable costs of acquiring customer contracts. These costs are capitalized and amortized on a systematic basis, consistent with the timing of revenue recognition over the anticipated benefit period of up to 3.5 years, depending on the products and services. The anticipated benefit period was estimated based on the average length of applicable customer contracts and includes the contract term and any anticipated renewal periods. This amortization expense is recorded in sales and marketing expense within the Company's consolidated statement of operations. The Company has elected to apply a practical expedient that permits the Company to expense costs to obtain a contract as incurred, if the anticipated benefit period is one year or less. From time to time, management will revisit the estimates used in recognizing the costs to obtain customer contracts.

During the three and six months ended October 31, 2018, the Company capitalized approximately $277,332 and $319,132, respectively, of costs to obtain revenue contracts and amortized approximately $59,595 and $113,695 of commissions during those same periods to sales and marketing expense. Capitalized costs to obtain a revenue contract on the Company's condensed consolidated balance sheets totaled approximately $165,545 at October 31, 2018.

14


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2018
(Unaudited)

Costs to Fulfill a Customer Contract

Certain contract costs incurred to fulfill obligations under a contract are capitalized when such costs generate or enhance resources to be used in satisfying future performance obligations and the costs are deemed recoverable. Judgement is used in determining whether certain contract costs can be capitalized. These costs are capitalized and amortized on a systematic basis to match the timing of revenue recognition over the anticipated benefit period of up to 3.5 years, depending on the products and services. The anticipated benefit period was estimated based on the average length of applicable customer contracts and includes the contract term and any anticipated renewal periods. This amortization expense is recorded in cost of sales in the Company’s consolidated statement of operations. From time to time, management will review the capitalized costs for impairment and will also revisit the estimates used in recognizing the costs to fulfill customer contracts.

Adoption Impact of ASC 606

The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to retained earnings in the condensed consolidated balance sheet as of May 1, 2018:

      Balance at     ASC 606     Balance at  
      April 30, 2018     Adjustments     May 1, 2018  
  Current assets:                  
       Deferred sales commissions costs $  –   $  70,248   $  70,248  
  Non-current assets:                  
       Deferred sales commissions costs $  –   $  63,785   $  63,785  
  Stockholders’ equity:                  
       Accumulated deficit $  (63,701,685 ) $  134,033   $  (63,567,652 )

The following tables summarize the adoption impact of ASC 606 on the Company's condensed consolidated financial statements for the three and six months ended October 31, 2018.

Selected Condensed Consolidated Income Statement Line Items:

      Three Months Ended October 31, 2018  
            ASC 606     (As Reported)  
      ASC 605     Adjustments     ASC 606  
  Revenue:                  
     Software $  935,217   $  (11,801 ) $  923,416  
     Subscription, support and maintenance   1,321,250     (1,410 )   1,319,840  
     Professional services and other   183,564     14,441     198,005  
         Total revenue $  2,440,031   $  1,230   $  2,441,261  
                     
  Operating expenses:                  
     Sales and marketing $  973,263   $  (5,574 ) $  967,689  
  Loss from operations $  (2,098,881 ) $ 6,804   $  (2,092,077 )
                     
  Net loss per share:                  
     Basic and diluted $  (0.35 ) $  –   $  (0.35 )

15


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2018
(Unaudited)

      Six Months Ended October 31, 2018  
            ASC 606     (As Reported)  
      ASC 605     Adjustments     ASC 606  
  Revenue:                  
     Software $  2,311,460   $  (32,042 ) $  2,279,418  
     Subscription, support and maintenance   2,572,447     (1,587 )   2,570,860  
     Professional services and other   438,492     40,321     478,813  
         Total revenue $  5,322,399   $  6,692   $  5,329,091  
                     
  Operating expenses:                  
     Sales and marketing $  1,992,205   $  (29,556 ) $  1,962,649  
  Loss from operations $  (3,225,605 ) $ 36,248   $  (3,189,357 )
                     
  Net loss per share:                  
     Basic and diluted $  (0.52 ) $  –   $  (0.52 )

Selected Condensed Consolidated Balance Line Items:

            October 31, 2018        
            ASC 606     (As Reported)  
      ASC 605     Adjustments     ASC 606  
  Current assets:                  
     Deferred sales commissions costs $  –   $  103,292   $  103,292  
  Current liabilities:                  
     Unearned revenue $  2,604,157   $  (6,692 ) $  2,597,465  
  Non-current assets:                  
     Deferred sales commissions costs $  –   $  62,253   $  62,253  
  Stockholders’ equity:                  
     Accumulated deficit $  (66,801,209 ) $  158,853   $  (66,642,356 )

Selected Condensed Consolidated Statement of Cash Flows Line Items:

      Six Months Ended October 31, 2018  
      ASC 606 (As Reported)  
      ASC 605 Adjustments ASC 606  
  Net loss $  (3,110,952 ) $  36,248   $  (3,074,704 )
  Deferred sales commissions costs $  –   $  (31,512 ) $  (31,512 )
  Unearned revenue $  38,281   $  (6,692 ) $  31,589  
  Unrealized foreign exchange (gain) loss $  (173,931 ) $  1,956   $  (171,975 )
  Net cash provided by operating activities $  (1,481,323 ) $  –   $  (1,481,323 )

Disaggregation of Revenue

The Company disaggregates its revenue by geographic region. See Note 10 – Segmented Information for more information.

16


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2018
(Unaudited)


Note 5 Derivative Instruments
   

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 multiple currencies, primarily from its business operations in Canada.

   

The Company’s foreign currency risk management program includes entering into foreign currency derivatives at various times to mitigate the currency exchange rate risk on Canadian dollar denominated cash flows. These foreign currency forward and option contracts are considered non-designated derivative instruments and are not used for trading or speculative purposes. The changes in fair value and settlements are recorded in change in fair value of derivative instruments, net in the consolidated statement of operations.

   

During the three and six months ended October 31, 2018 and 2017, the Company did not enter into any designated cash flow hedge contracts.

   

The following table summarizes the notional amounts of the Company’s outstanding derivative instruments:


        October 31,     April 30,  
  Fair value of Undesignated Derivatives     2018     2018  
  Foreign currency option contracts   $  2,000,000   $         –  
  Foreign currency forward contracts   $  500,000   $               –  
      $  2,500,000   $            –  

The following table presents the fair values of the Company’s derivative instruments on a gross basis as reflected on the Company’s consolidated balance sheets. The Company did not have any outstanding derivative contracts as of April 30, 2018.

        October 31, 2018  
        Derivative     Derivative  
  Fair value of Undesignated Derivatives     Assets     Liabilities  
  Foreign currency option contracts   $  3,457   $ 13,073  
  Foreign currency forward contracts   $  –   $  646  
      $  3,457   $ 13,719  

During the three and six months ended October 31, 2018, the Company recorded losses of $10,554 and $5,152 in change in fair value of derivative instruments. No such losses were recorded in the prior year as the Company did not enter into any forward and option contracts.
   
Note 6 Fair Value Measurements
   

Assets and liabilities recorded at fair value in the consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to valuation of these assets or liabilities are set forth below. Transfers between levels are recognized at the end of each quarter. The Company did not recognize any transfers between levels during the periods presented.

   
  Level 1—Inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities.

17


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2018
(Unaudited)

Level 2—Inputs (other than quoted prices included in Level 1) are observable for the asset or liability, either directly or indirectly such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.

Level 3— unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The carrying values of financial instruments classified as current assets and current liabilities approximates their fair values, based on the nature and short maturity of these instruments, and are presented in the Company’s financial statements at carrying cost.

Financial Instruments Measured at Fair value

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of October 31, 2018 and April 30, 2018.

        Carrying           Fair Value        
  As at October 31, 2018     Amount     Fair Value     Levels     Reference  
  Assets                          
  Cash   $  1,848,630   $  1,848,630     1     N/A  
  Foreign currency option contracts     3,457     3,457     2     Note 5  
      $  1,852,087   $  1,852,087              
                             
  Liabilities                          
  Foreign currency forward and                          
  option contracts   $  13,719   $  13,719     2     Note 5  

        Carrying           Fair Value        
  As at April 30, 2018     Amount     Fair Value     Levels     Reference  
  Cash   $  2,348,883   $  2,348,883     1     N/A  

Financial Instruments Not Measured at Fair Value

The following table presents the Company’s liability that is not measured at fair value as of October 31, 2018, but for which fair value is available:

        Carrying           Fair Value        
  As at October 31, 2018     Amount     Fair Value     Levels     Reference  
  Loan payable   $  1,000,000   $  1,063,688     2     Note 7  

Loan payable is presented on the consolidated balance sheets at carrying cost. The fair value of the fixed interest rate loan is estimated based on observable market prices or inputs. Where observable prices or inputs are not available, valuation models are applied using the net present value of cash flow streams over the term, using estimated market rates for similar instruments and remaining terms.

   
Note 7

Loan Payable

   

On October 10, 2018, the Company entered into a loan agreement (the “Loan Agreement”) with Wesley Clover International Corporation and KMB Trac Two Holdings Ltd for an aggregate principal amount of up to $3,000,000. Pursuant to the terms of the Loan Agreement, the loan is unsecured and will be made available in multiple advances at the discretion of the Company and will bear interest at a rate of 8% per year, payable monthly. The outstanding principal and any accrued interest may be prepaid without penalty and is to be fully repaid on the second anniversary of the first advance.

18


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2018
(Unaudited)


As of October 31, 2018, the principal balance of the loan payable was $1,000,000. This balance is to be repaid on or before October 11, 2020. During the three and six months ended October 31, 2018, the Company recognized $4,603 and $4,603, respectively, in interest expense in the consolidated statement of operations. See Note 9 – Related Party Transactions.

   
Note 8

Common Stock

   
 

Private Placement

   

On July 20, 2017, the Company issued an aggregate of 539,240 shares of common stock under a non- brokered private placement at a price of $2.20 per share for total gross proceeds of $1,186,328 less issuance costs of $19,832. There were no private placements during the six months ended October 31, 2018.

   
 

Shares Issued for Services

   

On October 16, 2017, the Company entered into an agreement to issue 14,000 shares of the Company’s common stock in exchange for investor relation services. The agreement was terminated on April 8, 2018 as the services were no longer required. Pursuant to the terms of the agreement, upon termination, 7,211 shares of common stock were returned to the Company.

   
 

Stock Options

   

During the six months ended October 31, 2018, the Company granted 7,500 stock options to an employee of the Company. No stock options were granted in the same period in the prior year. The weighted-average fair value of options granted during the six months ended October 31, 2018 was $1.41. The weighted-average assumptions utilized to determine such value is presented in the following table:


    Six Months Ended
    October 31, 2018
  Risk-free interest rate 2.86%
  Expected volatility 76.3%
  Expected term 3.7 years
  Dividend yield 0%

During the six months ended October 31, 2018, the Company issued 6,958 shares pursuant to cashless exercises of 35,500 stock options and remitted employee tax withholdings of approximately $2,386 on the behalf of its employees. No stock options were exercised in the same periods in the prior year. The following is a summary of the status of the Company’s stock options as of October 31, 2018 and the stock option activity during the three and six months ended October 31, 2018:

      Weighted Average  
      Number of     Exercise Price  
      Options     per Share  
  Outstanding at April 30, 2018   675,042   $  2.66  
  Granted   7,500   $  2.51  
  Forfeited/Cancelled   (109,770 ) $  2.78  
  Expired   (11,000 ) $  2.50  
  Exercised   (35,500 ) $  2.50  
  Outstanding at October 31, 2018   526,272   $  2.65  
               
  Exercisable at October 31, 2018   294,335   $  2.56  
  Exercisable at April 30, 2018   256,555   $  2.47  

19


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2018
(Unaudited)

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, 2018 and 2017 are as follows:

      Three Months Ended     Six Months Ended  
      October 31,     October 31,  
      2018     2017     2018     2017  
  Cost of sales $  11,001   $  8,505   $  25,570   $  27,855  
  Sales and marketing   16,278     15,944     38,760     41,674  
  Research and development   10,983     11,527     26,014     31,927  
  General and administrative   18,076     36,099     44,723     72,348  
  Total stock-option based compensation   56,338   $  72,075   $  135,067   $  173,804  

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 shares of the Company’s common stock at market price. The Company matches 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, 2018, the Company matched $14,951 (2017 - $14,971) in shares purchased by employees under the ESPP. During the six months ended October 31, 2018, 12,984 shares (2017 – nil shares) were purchased on the open market and 5,656 shares (2017 – 12,165) were issued from treasury under the ESPP.

A total of 220,000 shares have been reserved for issuance under the ESPP. As of October 31, 2018, a total of 59,332 shares were available for issuance under the ESPP.

Deferred Share Unit Plan

During the three and six months ended October 31, 2018, 136,981 (2017 — 113,252) deferred stock units (DSUs) were issued under the Deferred Stock Unit Plan (DSUP), of which 68,491 were granted to officers or employees and 68,490 were granted to non-employee directors. As of October 31, 2018, a total of 142,496 shares were available for issuance under the DSUP.

The following table summarizes the Company’s outstanding DSU awards as of October 31, 2018, and changes during the period then ended:

            Weighted  
            Average Grant  
            Date Fair  
      Number of DSUs     Value Per DSU  
  DSUs outstanding at April 30, 2018   465,390   $  6.40  
  Granted   136,981   $  2.51  
  Cancelled   (68,880 ) $  2.42  
  DSUs outstanding at October 31, 2018   533,491   $  5.51  

20


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2018
(Unaudited)

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, 2018 and 2017 are as follows:

      Three Months Ended     Six Months Ended  
      October 31,     October 31,  
      2018     2017     2018     2017  
  General and administrative $  15,848   $ 38,552   $  204,530   $ 233,155  

  Normal Course Issuer Bid Plan
   

Pursuant to a normal course issuer bid (“NCIB”) commencing on March 29, 2017 and expired March 28, 2018, the Company was authorized to purchase 258,613 shares of the Company’s common stock through the facilities of the Toronto Stock Exchange (the “TSX”) and other Canadian marketplaces or U.S. marketplaces. During the period March 29, 2017 to October 31, 2017, the Company repurchased 73,500 common shares at an average price of $2.17 (CDN$2.81) for a total of $159,495. As of October 31, 2017, a total of 71,500 shares had been cancelled and another 2,000 repurchased shares were in the process of being cancelled.

   

On March 27, 2018, the Company filed another normal course issuer bid commencing on March 29, 2018 and expiring March 28, 2019. Under this normal course issuer bid, the Company is authorized to purchase up to 284,278 shares of its common stock through the facilities of the TSX and other Canadian marketplaces or U.S. marketplaces. During the three and six months ended October 31, 2018, no shares were repurchased under the NCIB.

   
Note 9

Related Party Transactions

   

On October 10, 2018, the Company entered into a loan agreement (the “Loan Agreement”) with Wesley Clover International Corporation, a company controlled by the Chairman of the Company, and KMB Trac Two Holdings Ltd., a company owned by the spouse of a director of the Company. As of October 31, 2018, the principal balance of the loan payable was $1,000,000. During the three and six months ended October 31, 2018, the Company recognized $4,603 and $4,603, respectively, in interest expense in the consolidated statement of operations. See Note 7 – Loan Payable for more information.

   

During the three and six months ended October 31, 2018, the Company through its wholly owned subsidiary, CounterPath Technologies, paid $20,947 and $42,065 (2017 - $20,078 and $40,156), respectively, to KRP Properties (“KRP”) (previously known as Kanata Research Park Corporation) 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 $7,734 and $15,530 (2017 - $7,907 and $15,836) for the three and six months ended October 31, 2018, respectively.

   

On July 20, 2017, our Company issued an aggregate of 539,240 shares of common stock under a non- brokered private placement at a price of $2.20 per share for total gross proceeds of $1,186,328 less issuance costs of $19,832. In connection with this private placement, Wesley Clover International Corporation purchased 144,357 shares, KMB Trac Two Holdings Ltd., purchased 180,446 shares, the chief executive officer and a director of the Company, purchased 11,368 shares, the chief financial officer of the Company, purchased 4,511 shares, and the executive vice president, sales and marketing of the Company, purchased 4,545 shares.

   

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

21


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2018
(Unaudited)


Note 10 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 categorized 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, 2018 and 2017:


      Three Months Ended     Six Months Ended  
      October 31,     October 31,  
      2018     2017     2018     2017  
  North America $  1,642,703   $  1,755,522   $  3,381,006   $  3,509,598  
  EMEA   570,487     1,239,538     1,212,481     2,183,667  
  Asia Pacific   135,635     223,512     551,660     521,895  
  Latin America   92,436     191,993     183,944     308,211  
    $  2,441,261   $  3,410,565   $  5,329,091   $  6,523,371  

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

      October 31,     April 30,  
      2018     2018  
  Canada   6,969,958     7,150,537  
  United States   35,736     35,919  
  $ 7,005,694   $ 7,186,456  

Note 11 Commitments
   
  Total payable over the term of the agreements for the period ended are as follows:

      Office     Office           Voice        
      Leases –     Leases –     Total     Platform     Software  
      Related     Unrelated     Office     Service     Development  
      Party     Party     Leases     Contract     Contract  
  2019 $  56,078   $  290,364   $  346,442   $  110,000   $  132,750  
  2020   5,156     305,178     310,334     240,000      
  2021       41,331     41,331     220,000      
  2022       24,110     24,110          
    $  61,234   $  660,983   $  722,217   $  570,000   $  132,750  

Note 12 Contingencies
   

The Company is party to legal claims from time to time which arise in the normal course of business. These claims are not expected to have a material adverse effect on the financial position, results of operations or cash flows of the Company.

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COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2018
(Unaudited)


Note 13 Loss per share
   
  The following table shows the computation of basic and diluted loss per share:

      Three Months Ended     Six Months Ended  
      October 31,     October 31,  
      2018     2017     2018     2017  
  Numerator                        
     Net income (loss) $  (2,063,757 ) $  158,834   $  (3,074,704 ) $ (993,699 )
                           
  Denominator                        
     Weighted average shares outstanding   5,941,812     5,487,765     5,937,115     5,262,359  
     Effect of dilutive securities       404,815          
      5,941,812     5,892,580     5,937,115     5,262,359  
                           
  Basic and diluted loss per share $  (0.35 ) $  0.03   $  (0.52 ) $ (0.19 )

For the three months ended October 31, 2018, common share equivalents consisting of stock options and DSUs totaling 1,059,763 were not included in the computation of diluted EPS because the effect was anti-dilutive. For the three months ended October 31, 2017, common share equivalents consisting of 3,677 options and 401,138 DSUs were included in the computation of diluted EPS because the effect was dilutive. For the six months ended October 31, 2018 and 2017, common share equivalents consisting of stock options and DSUs totaling 1,059,763 and 820,886, respectively, were not included in the computation of diluted EPS because the effect was anti-dilutive.

23


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

Forward-Looking Statements

            This quarterly report, including the documents incorporated herein and therein by reference, contains forward-looking statements as that term is defined in Section 27A of the United States Securities Act of 1933 and Section 21E of the United States Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. Forward-looking statements in this quarterly report may include statements about:

  • any potential loss of or reductions in orders from certain significant customers;

  • our dependence on our customers to sell our applications or services using our applications;

  • our ability to protect our intellectual property;

  • competitive factors, including, but not limited to, industry consolidation, entry of new competitors into our market, and new product and marketing initiatives by our competitors;

  • our ability to predict our revenue, operating results and gross margin accurately;

  • the length and unpredictability of our sales cycles;

  • our ability to expand or enhance our product offerings including in response to industry demands or market trends;

  • our ability to sell our products in certain markets;

  • our ability to manage growth;

  • the attraction and retention of qualified employees and key personnel;

  • the interoperability of our products with service provider networks; and

  • the quality of our products and services, including any undetected errors or bugs in our software.

            These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors”, that may cause our company's or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

            Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including securities laws of the United States of America and Canada, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

References

            In this quarterly report, (i) unless the context otherwise requires, references to “we”, “our”, “us”, the “Company” or “CounterPath” mean CounterPath Corporation and its subsidiaries and (ii) all amounts are expressed in United States dollars, unless otherwise indicated.

Background

                We were incorporated under the laws of the State of Nevada on April 18, 2003.

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            On August 2, 2007, we acquired all of the shares of NewHeights Software Corporation through the issuance of 768,017 shares of our common stock and 36,984 preferred shares issued from a subsidiary of our company, which preferred shares were exchangeable into 36,984 shares of common stock.

            On February 1, 2008, we acquired all of the shares of FirstHand Technologies Inc. through the issuance of 590,001 shares of our common stock. On February 1, 2008, we acquired all of the issued and outstanding shares of BridgePort Networks, Inc. (“BridgePort Networks”) by way of merger in consideration for the assumption of all of the assets and liabilities of BridgePort Networks.

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 (a.k.a. Internet OTT providers). 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. 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 both telecommunication service providers and enterprises.

Revenue

            Our total revenue consists of the following:

  • Software

    We generate software revenue primarily on a single fee per perpetual software license basis. We recognize software revenue for perpetual licenses when control has transferred to the customer, which is generally at the time of delivery, provided all revenue recognition criteria have been met. If the revenue recognition criteria have not been met, the revenue is deferred or not recognized. The number of software licenses purchased has a direct impact on the average selling price. Our software revenue may vary significantly from quarter to quarter as a result of long sales and deployment cycles, new product introductions and variations in customer ordering practices.

  • Subscription, support and maintenance

    We generate recurring subscription revenue from subscriptions related to our software as a service offering. Recurring support and maintenance revenue is generated from annual software support and maintenance contracts for our perpetual software licenses. Support and maintenance revenue is typically billed annually in advance based on the terms of the arrangement, while subscription revenue is typically billed annually or monthly in advance based on the terms of the agreement.

    Support and maintenance services include e-mail and telephone support, unspecified rights to bug fixes and product updates and upgrades and enhancements available on a when-and-if available basis, and are recognized rateably over the term of the service period, which is generally twelve months.

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  • Professional services and other

    We generate professional services and other revenue through services including product configuration and customization, implementation, dedicated engineering and training. The amount of product configuration and customization required by a customer typically increases as the order size increases from a given customer. Services and pricing may vary depending upon a customer's requirements for customization, implementation and training.

Operating Expenses

            Operating expenses consist of cost of sales, sales and marketing, research and development, and general and administrative expenses. Personnel-related costs are the most significant component of each of these expense categories.

            Cost of sales primarily consists of: (a) salaries and benefits related to personnel, (b) related overhead, (c) billable and non-billable travel, lodging, and other out-of-pocket expenses, (d) payments to third party vendors for development and hosted services and compression/decompression software known as codecs, (e) amortization of capitalized software that is implemented into our products and (f) warranty expense.

            Sales and marketing expense consists primarily of: (a) salaries and related personnel costs including stock-based compensation, (b) commissions, (c) travel, lodging and other out-of-pocket expenses, (d) marketing programs such as advertising, promotions and trade shows and (e) other related overhead. Commissions are considered incremental and recoverable costs of acquiring customer contracts. These costs are capitalized and amortized on a systematic basis to sales and marketing expense, over the anticipated benefit period of up to 3.5 years depending on the products or services. Sales commissions on contracts with an anticipated benefit period of one year or less are expensed as incurred. We expect increases in sales and marketing expense for the foreseeable future as we further increase the number of sales professionals and increase our marketing activities with the intent to grow our revenue. We expect sales and marketing expense to decrease as a percentage of total revenue, however, as we leverage our current sales and marketing personnel as well as our distribution partnerships.

            Research and development expense consists primarily of: (a) salaries and related personnel costs including stock-based compensation, (b) payments to contractors for design and consulting services, (c) costs relating to the design and development of new products and enhancement of existing products, (d) quality assurance and testing and (e) other related overhead. To date, all of our research and development costs have been expensed as incurred.

            General and administrative expense consists primarily of: (a) salaries and personnel costs including stock-based compensation related to our executive, finance, human resource and information technology functions, (b) accounting, legal, tax advisory and regulatory fees and (c) other related overhead.

Application of Critical Accounting Policies and Use of Estimates

            Our interim consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these 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.

            There have been no significant changes to our critical accounting policies and estimates previously disclosed in our Form 10-K for the fiscal year ended April 30, 2018, during the six months ended October 31, 2018 except for our adoption of ASC 606 as described below:

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Revenue Recognition

            On May 1, 2018, we adopted the new accounting standard, ASC 606 “Revenue from Contracts with Customers” and all related amendments to the new accounting standard to contracts using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue recognition standard to contracts with open performance obligations as of May 1, 2018, as an adjustment to the opening balance of retained earnings. Results of the reporting period beginning May 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605.

            Revenues from contracts with customers are recognized when control of promised goods and services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

            We recognize revenue using the five-step model as prescribed by ASC 606:

  1)

Identification of the contract, or contracts, with a customer;

  2)

Identification of the performance obligations in the contract;

  3)

Determination of the transaction price;

  4)

Allocation of the transaction price to the performance obligations in the contract; and

  5)

Recognition of revenue when or as, we satisfy a performance obligation.

            When a contract with a customer is signed, we assess whether collection of the fees under the arrangement is probable. We estimate the amount to reserve for uncollectible amounts at the end of each reporting period based on the aging of the contract balance, current and historical customer trends, and communications with its customers. These reserves are recorded against the related accounts receivable.

            The transaction price is the consideration that we expect to receive from our customers in exchange for our products and services. In determining the allocation of the transaction price, we identify performance obligations in contracts with customers, which may include products, subscriptions to software and services, support, professional services and training. We allocate the transaction price to each performance obligation on a relative standalone selling price basis. The standalone selling price (SSP) is the price at which we would sell a promised product or service separately to a customer. We determine the SSP using information that may include market conditions or other observable inputs. In certain cases, we are able to establish a SSP based on observable prices for products or services sold separately. In these instances, we would use a single amount to estimate a SSP. If a SSP is not directly observable, for example when pricing is variable, we will use a range of SSP.

            In certain circumstances, we may estimate SSP for a product or service by applying the residual approach. This approach has been most commonly used when certain perpetual software licenses are only sold bundled with one year of post-contract support or other services and a price has not been established for the software.

            Significant judgement is used to determine SSP and to determine whether there is a variance that needs to be allocated based on the relative SSP of the various products and services. Estimating SSP is a formal process that includes review and approval by management.

            We recognize software revenue for perpetual licenses when control has transferred to the customer, which is generally at the time of delivery when the customer has the ability to deploy the licenses, provided all revenue recognition criteria have been met. If the revenue recognition criteria has not been met, the revenue is deferred or not recognized.

            We recognize revenue from subscriptions related to our software as a service offering ratably over the contractual subscription term as control of the goods or services is transferred to the customer, beginning on the date that the subscription is made available to the customer. Support and maintenance revenue is generated from recurring annual software support and maintenance contracts for our perpetual software licenses and is recognized ratably over the term of the service period, which is generally twelve months. Support and maintenance services include e-mail and telephone support, unspecified rights to bug fixes and product updates and upgrades and enhancements available on a when-and-if available basis. Both subscription revenue and support and maintenance revenue are typically billed annually in advance based on the terms of the arrangement.

27


            We recognize revenue from professional services and other revenue when control has transferred to the customer, which is generally at the time of delivery, and all other revenue recognition criteria have been met. For contracts with elements related to customized network solutions and certain network build-outs or software systems that require significant modification or customization, we will recognize revenue using the percentage-of-completion method. In using the percentage-of-completion method, revenues are generally recorded based on completion of milestones as described in the agreement. Profit estimates on long-term contracts are revised periodically based on changes in circumstances and any losses on contracts are recognized in the period that such losses become known. Depending on the services to be provided, revenue from professional services and other is generally recognized at the time of delivery when the services have been completed and control has been transferred to the customer.

Unearned Revenue

            Unearned revenue represent billings or payments received in advance of revenue recognition and is recognized upon transfer of control. Balances consist primarily of annual support and subscription services and professional and training services not yet provided as of the balance sheet date.

Costs to Obtain a Customer Contract

            Sales commissions and related expenses are considered incremental and recoverable costs of acquiring customer contracts. These costs are capitalized and amortized on a systematic basis to match the timing of revenue recognition over the anticipated benefit period of up to 3.5 years depending on the products and services. The anticipated benefit period was estimated based on the average length of applicable customer contracts and includes the contract term and any anticipated renewal periods. This amortization expense is recorded in sales and marketing expense within the Company's consolidated statement of operations. The Company has elected to apply a practical expedient that permits the Company to expense costs to obtain a contract as incurred, if the anticipated benefit period is one year or less. From time to time, management will revisit the estimates used in recognizing the costs to obtain customer contracts.

Costs to Fulfill a Customer Contract

Certain contract costs incurred to fulfill obligations under a contract are capitalized when such costs generate or enhance resources to be used in satisfying future performance obligations and the costs are deemed recoverable. Judgement is used in determining whether certain contract costs can be capitalized. These costs are capitalized and amortized on a systematic basis to match the timing of revenue recognition over the anticipated benefit period of up to 3.5 years, depending on the products and services. The anticipated benefit period was estimated based on the average length of applicable customer contracts and includes the contract term and any anticipated renewal periods. This amortization expense is recorded in cost of sales in the Company’s consolidated statement of operations. From time to time, management will review the capitalized costs for impairment and will also revisit the estimates used in recognizing the costs to fulfill customer contracts.

Results of Operations

            Our operating activities during the three and six months ended October 31, 2018 consisted primarily of selling our IP telephony software and related services to telecom service providers, enterprises and channel partners serving the telecom and enterprise segments, and the continued development of our IP telephony software products.

            We generate our revenue primarily in U.S. dollars and incur a majority of our expenses in Canadian dollars. As a result of the fluctuation in the Canadian dollar against the U.S. dollar over the three and six months ended October 31, 2018, we recorded decrease operating costs on translation of Canadian dollar costs as compared to the three and six months ended October 31, 2017 of approximately $59,400 and $86,300, respectively.

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Selected Consolidated Financial Information

            The following tables set out selected consolidated unaudited financial information for the periods indicated. The selected consolidated financial information set out below for the three and six months ended October 31, 2018 and 2017 has been derived from the consolidated unaudited financial statements and accompanying notes for the three and six months ended October 31, 2018 and 2017 and the audited consolidated financial statements for the fiscal year ended April 30, 2018. Each investor should read the following information in conjunction with those statements and the related notes thereto.

Selected Consolidated Statements of Operations Data

    Three Months Ended October 31,  
    2018     2017  
          Percent of           Percent  
          Total           of Total  
    Amount     Revenue     Amount     Revenue  
Revenue $ 2,441,261     100%   $ 3,410,565     100%  
                         
Operating expenses   4,533,338     186%     3,456,084     101%  
Loss from operations   ($2,092,077 )   (86% )   ($45,519 )   (1% )
Interest and other income, net   (4,661 )   −%     (162 )   −%  
Foreign exchange gain (loss)   43,535     1%     204,515     6%  
Loss on change in fair value of derivative instruments   (10,554 )   −%         −%  
Net income (loss)   ($2,063,757 )   (85% ) $ 158,834     5%  
                         
Net income (loss) per share                        
-Basic   ($0.35 )       $ 0.03        
-Diluted   ($0.35 )       $ 0.03        
Weighted average common shares outstanding                        
-Basic   5,941,812           5,487,765        
-Diluted   5,941,812           5,892,580        

Selected Consolidated Statements of Operations Data

    Six Months Ended October 31,  
    2018     2017  
          Percent of           Percent  
          Total           of Total  
    Amount     Revenue     Amount     Revenue  
Revenue $ 5,329,091     100%   $ 6,523,371     100%  
                         
Operating expenses   8,518,448     160%     7,102,671     109%  
Loss from operations   ($3,189,357 )   (60% )   ($579,300 )   (9% )
Interest and other income, net   (4,666 )   −%     (215 )   −%  
Foreign exchange gain (loss)   124,471     2%     (414,184 )   (6% )
Loss on change in fair value of derivative instruments   (5,152 )   −%         −%  
Net loss   ($3,074,704 )   (58% )   ($993,699 )   (15% )
                         
Net loss per share                        
-Basic and diluted   ($0.52 )         ($0.19 )      
Weighted average common shares outstanding                        
-Basic and diluted   5,937,115           5,262,359        

29



Revenue                                    
                                     
  Three Months Ended October 31,                   
    2018     2017     Period-to-Period Change  
          Percent           Percent           Percent  
          of Total           of Total           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
 Revenue by Type                                    
 Software $ 923,416     38%   $ 1,816,867     53%     ($893,451 )   (49% )
 Subscription, support and maintenance   1,319,840     54%     981,619     29%     338,221     34%  
 Professional services and other   198,005     8%     612,079     18%     (414,074 )   (68% )
 Total revenue $ 2,441,261     100%   $ 3,410,565     100%     ($969,304 )   (28% )
                                     
 Revenue by Region                                    
   North America $ 1,642,703     67%   $ 1,755,522     51%     ($112,819 )   (6% )
   International   798,558     33%     1,655,043     49%     (856,485 )   (52% )
 Total revenue $ 2,441,261     100%   $ 3,410,565     100%     ($969,304 )   (28% )

            For the three months ended October 31, 2018, we generated $2,441,261 in revenue compared to $3,410,565 for the three months ended October 31, 2017, representing a decrease of $969,304 or 28%.

            Software revenue decreased by $893,451 or 49% to $923,416 for the three months ended October 31, 2018 compared to $1,861,867 for the three months ended October 31, 2017. The decrease in software revenue was a result of decreased sales to channel partners, service providers, and enterprises.

            Subscription, support and maintenance revenue increased by $338,221 or 34% to $1,319,840 for the three months ended October 31, 2018 compared to $981,619 for the three months ended October 31, 2017. The increase in subscription, support and maintenance revenue was a result of increased sales to channel partners, and service providers.

            Professional services and other revenue decreased by $414,074 or 68% to $198,005 for the three months ended October 31, 2018 compared to $612,079 for the three months ended October 31, 2017. The decrease in professional services and other revenue was a result of decreased sales to service providers and channel partners.

            North American revenue decreased by $112,819 or 6% to $1,642,703 for the three months ended October 31, 2018 compared to $1,755,522 for the three months ended October 31, 2017, as a result of lower sales of software to channel partners partially offset by higher sales of service to channel partners and service providers. International revenue outside of North America decreased by $856,485 or 52% to $798,558 for the three months ended October 31, 2018 compared to $1,655,043 for the three months ended October 31, 2017, as a result of lower sales of software and service to international service providers, channel partners, and enterprises.

  Six Months Ended October 31,                
    2018     2017     Period-to-Period Change  
          Percent           Percent           Percent  
          of Total           of Total           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Revenue by Type                                    
Software $ 2,279,418     43%   $ 3,515,760     54%     ($1,236,342 )   (35% )
Subscription, support and maintenance   2,570,860     48%     1,948,681     30%     622,179     32%  
Professional services and other   478,813     9%     1,058,930     16%     (580,117 )   (55% )
Total revenue $ 5,329,091     100%   $ 6,523,371     100%     ($1,194,280 )   (18% )
Revenue by Region                                    
 North America $ 3,381,006     63%   $ 3,509,598     54%     ($128,592 )   (4% )
 International   1,948,085     37%     3,013,773     46%     (1,065,688 )   (35% )
Total revenue $ 5,329,091     100%   $ 6,523,371     100%     ($1,194,280 )   (18% )

30



            For the six months ended October 31, 2018, we generated $5,329,091 in revenue compared to $6,523,371 for the six months ended October 31, 2017, representing a decrease of $1,194,280 or 18%.

            Software revenue decreased by $1,236,342 or 35% to $2,279,418 for the six months ended October 31, 2018 compared to $3,515,760 for the six months ended October 31, 2017. The decrease in software revenue was a result of decreased sales to service providers, channel partners, and enterprises.

            Subscription, support and maintenance revenue increased by $622,179 or 32% to $2,570,860 for the six months ended October 31, 2018 compared to $1,948,681 for the six months ended October 31, 2017. The increase in subscription, support and maintenance revenue was a result of increased sales to channel partners and service providers.

            Professional services and other revenue decreased by $580,117 or 55% to $478,813 for the six months ended October 31, 2018 compared to $1,058,930 for the six months ended October 31, 2017. The decrease in professional services and other revenue was a result of decreased sales to service providers and channel partners.

            North American revenue decreased by $128,592 or 4% to $3,381,006 for the six months ended October 31, 2018 compared to $3,509,598 for the six months ended October 31, 2017, as a result of lower sales of software to enterprises, service providers, and channel partners partially offset by higher sales of service to channel partners and service providers. International revenue outside of North America decreased by $1,065,688 or 35% to $1,948,085 for the six months ended October 31, 2018 compared to $3,013,773 for the six months ended October 31, 2017, as a result of lower sales of software and service to European service providers and channel partners.

Operating Expenses

Cost of Sales

            Cost of sales for the three and six months ended October 31, 2018 and 2017 were as follows:

    October 31, 2018     October 31, 2017     Period-to-Period Change  
          Percent           Percent           Percent  
          of Total           of Total           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 623,811     26%   $ 380,822     11%   $ 242,989     64%  
Six months ended $ 1,219,367     23%   $ 769,065     12%   $ 450,302     59%  

            Cost of sales was $623,811 for the three months ended October 31, 2018 compared to $380,822 for the three months ended October 31, 2017. The increase of $242,989 or 64% was primarily attributable to an increase in third-party service fees of approximately $160,700, wages and benefits expenses of approximately $67,200, an increase in licenses and software expense of approximately $37,000, offset by a decrease in other expenses of approximately $17,400.

            Cost of sales was $1,219,367 for the six months ended October 31, 2018 compared to $769,065 for the six months ended October 31, 2017. The increase of $450,302 or 59% was primarily attributable to an increase in third-party service fees of approximately $274,000, wages and benefits expenses of approximately $93,100, an increase in licenses and software expense of approximately $93,600, offset by a decrease in other expenses of approximately $10,400.

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Sales and Marketing

            Sales and marketing expenses for the three and six months ended October 31, 2018 and 2017 were as follows:

    October 31, 2018     October 31, 2017     Period-to-Period Change  
          Percent           Percent           Percent  
          of Total           of Total           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 967,689     40%   $ 1,031,227     30%     ($63,538 )   (6% )
Six months ended $ 1,962,649     37%     2,035,511     31%     ($72,862 )   (4% )

            Sales and marketing expenses were $967,689 for the three months ended October 31, 2018 compared to $1,031,227 for the three months ended October 31, 2017. The decrease of $63,538 or 6% was primarily attributable to a decrease in wages, benefits and consulting fees of approximately $77,300, offset by an increase in other expenses of approximately $13,700.

            Sales and marketing expenses were $1,962,649 for the six months ended October 31, 2018 compared to $2,035,511 for the six months ended October 31, 2017. The decrease of $72,862 or 4% was primarily attributable to a decrease wages, benefits and consulting fees of approximately $83,600 and a decrease in marketing expenses of approximately $34,500. This decrease was offset by an increase in travel and trade show expenses of approximately $9,300 and an increase in other expenses of approximately $35,900.

Research and Development

            Research and development expenses for the three and six months ended October 31, 2018 and 2017 were as follows:

    October 31, 2018     October 31, 2017     Period-to-Period Change  
          Percent           Percent           Percent  
          of Total           of Total           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 1,391,737     57%   $ 1,329,437     39%   $ 62,300     5%  
Six months ended $ 2,794,693     52%   $ 2,690,910     41%   $ 103,783     4%  

            Research and development expenses were $1,391,737 for the three months ended October 31, 2018 compared to $1,329,437 for the three months ended October 31, 2017. The increase of $62,300 or 5% was primarily attributable to an increase in wages, benefits and consulting fees of approximately $41,100, and an increase in other expenses of approximately $21,200.

            Research and development expenses were $2,794,693 for the six months ended October 31, 2018 compared to $2,690,910 for the six months ended October 31, 2017. The increase of $103,783 or 4% was primarily attributable to an increase in wages, benefits and consulting fees of approximately $57,700, and an increase in other expenses of approximately $46,100.

General and Administrative

            General and administrative expenses for the three and six months ended October 31, 2018 and 2017 were as follows:

    October 31, 2018     October 31, 2017     Period-to-Period Change  
          Percent           Percent           Percent  
          of Total           of Total           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 1,550,101     63%   $ 714,598     21%   $ 853,503     117%  
Six months ended $ 2,541,739     48%   $ 1,607,185     25%   $ 934,554     58%  

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            General and administrative expenses were $1,550,101 for the three months ended October 31, 2018 compared to $714,598 for the three months ended October 31, 2017. The increase of $853,503 or 117% in general and administrative expenses was primarily attributable to an increase in bad debts expense of $601,300, a one time accrual of $321,000 related to the departure of our former chief executive officer, an increase in audit, legal and other professional expenses of approximately $22,100, an increase in license and permits fees of approximately $105,700, an increase in other expenses of approximately $31,900, offset by a decrease in wages, benefits and consulting fees of approximately $171,800.

            General and administrative expenses were $2,541,739 for the six months ended October 31, 2018 compared to $1,607,185 for the six months ended October 31, 2017. The increase of $934,554 or 58% in general and administrative expenses was primarily attributable to an increase in bad debts expense of approximately $651,200, a one time accrual of $321,000 related to the departure of our former chief executive officer, an increase in audit, legal and other professional expenses of approximately $63,400, an increase in license and permit fees of approximately $107,800, an increase in other expenses of approximately $49,400, offset by a decrease in wages, benefits and consulting fees of approximately $183,600.

Interest and Other Income (Expense), Net

            Interest and other income (expense), net was $28,319 and $114,652, for the three and six months ended October 31, 2018, respectively, compared to $204,353 and ($414,399) for the same periods in the prior year and is primarily comprised of foreign exchange gains and losses realized during the period. Foreign exchange gain for the three and six months ended October 31, 2018 was $43,535 and $124,471, respectively, compared to a foreign exchange gain of $204,515 and a foreign exchange loss of $414,184 for the three months and six months ended October 31, 2017, respectively. The foreign exchange gain (loss) represents the gain (loss) on account of translation of the intercompany accounts of our subsidiary which maintains their records in Canadian dollars and transactional gains and losses. The foreign exchange gain (loss) includes the translation of quarterly intercompany transfer pricing invoices from our Canadian subsidiary to us.

Liquidity and Capital Resources

            The following is a summary of selected financial information as at the dates indicated:

Selected Consolidated Balance Sheet Data   October 31, 2018     April 30, 2018  
Cash $ 1,848,630   $ 2,348,883  
Current assets $ 4,374,743   $ 6,049,138  
Total assets $ 11,539,396   $ 13,334,227  
Current liabilities $ 5,185,271   $ 5,068,939  
Total liabilities $ 6,204,105   $ 5,093,041  

            As of October 31, 2018, we had $1,848,630 in cash compared to $2,348,883 as of April 30, 2018, representing a decrease of $500,253. Our working capital deficit was $810,528 at October 31, 2018 compared to working capital of $980,199 at April 30, 2018, representing a decrease of $1,790,727.

            We have experienced recurring losses and an accumulated deficit of $66,642,356 as of October 31, 2018, as a result of flat to declining revenues resulting from a number of factors including our buildout of a cloud based subscription platform concurrent with the change of our licensing model to subscription based licensing and has not reached profitable operations which raises substantial doubt about its ability to continue operating as a going concern within one year of the date of issuance of the consolidated financial statements.

            To alleviate this situation, we have plans in place to improve our financial position and liquidity, while executing on our growth strategy, by managing and or reducing costs that is not expected to have an adverse impact on the ability to generate cash flows, as the transition to our software as a service platform and subscription licensing continues.

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     We have historically been able to manage liquidity requirements through cost management and cost reduction measures, supplemented with raising additional financing. During the quarter ended October 31, 2018, we entered into a loan agreement for an aggregate principal amount of up to $3,000,000. As of October 31, 2018, the principal balance of the loan payable was $1,000,000. We do not have any other commitments to raise funds as of the date of issuance of this quarterly report on Form 10-Q.

            Our company has $1,326,893 in cash held outside of the United States, and there is no intent to repatriate such cash at this time. Should we decide to repatriate such cash in the future, taxes would need to be accrued and paid.

Cash Flows

            Our cash flows for the six months ended October 31, 2018 and 2017 are as follows:

    Six months ended     Six months ended  
    October 31, 2018     October 31, 2017  
Net cash used in operating activities   ($1,481,323 )   ($1,527,624 )
Net cash used in investing activities   ($21,283 )   ($62,403 )
Net cash provided by financing activities $ 1,010,439   $ 1,162,556  
Net decrease in cash   ($500,253 )   ($388,887 )

Operating Activities

            Our operating activities resulted in a net cash outflow of $1,481,323 for the six months ended October 31, compared to a net cash outflow of $1,527,624 for the same period in the prior year, representing a decrease in net cash used in operating activities of $46,301. The decrease in net cash used in operating activities for the six months ended October 31, 2018 was primarily due to an increase in the change in accounts receivables of approximately $2,952,400 and increases in accounts payable and accrued liabilities by approximately $60,500. These increases are offset by increases in net loss of approximately $2,081,005, non-cash foreign exchange gain of approximately $555,000 and stock-based compensation expense of approximately $67,400. The decrease in cash used in operating activities is also attributed to decreases in deferred sales commissions costs and unearned revenue of approximately $31,500 and $206,000, respectively.

Investing Activities

            Investing activities resulted in a net cash outflow of $21,283 for the six months ended October 31, 2018, compared to $62,403 for the same period in the prior year. The decrease in net cash outflow from investing activities was primarily a result of a decrease in investments in computer equipment and intangible assets. At October 31, 2018, we did not have any material commitments for future capital expenditures.

Financing Activities

            Financing activities resulted in a net cash inflow of $1,010,439 for the six months ended October 31, 2018 compared to a net cash inflow of $1,162,556 for the six months ended October 31, 2017. The decrease in net cash inflow from financing activities was primarily due to the private placement that occurred on July 20, 2017 where we issued an aggregate of 539,240 shares of common stock at a price of $2.20 per share for total gross proceeds of $1,186,328 less issuance costs of $19,832. During the six months ended October 31, 2018, we received proceeds of $1,000,000 under a loan agreement, in addition to proceeds received related shares issued pursuant to our employee stock purchase plan of approximately $10,400.

Off-Balance Sheet Arrangements

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

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Recently Adopted Accounting Pronouncements

            In May 2014, FASB issued ASU 2014-09, Revenue From Contracts With Customers (“Topic 606”) which supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (“Topic 605”) and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. The Company adopted ASU 2014-09 as of May 1, 2018 using the modified retrospective transition method. See Note 4 – Revenue Recognition under ASC 606 in our notes to consolidated financial statements for further details.

Recently Issued Accounting Pronouncements

            In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends the presentation and disclosure requirements and changes how companies assess effectiveness. The amendments are intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. This amendment is effective for annual periods beginning after December 15, 2018, including interim periods within those periods. Early application is permitted. We are currently assessing the future impact of this update on its consolidated financial statements and related disclosures.

            In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment, which amends the guidance to eliminate Step 2 from the goodwill impairment test. Instead, under the amendments in the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The amendments will be effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We are evaluating the impact of this amendment on our consolidated financial statements and related disclosures.

            In June 2016, the FASB issued ASU 2016-13, Financial Instruments: Measurement of Credit Losses on Financial Instruments, which amends the guidance on measuring credit losses on financial assets held at amortized cost. The amendment is intended to address the issue that the previous “incurred loss” methodology was restrictive of our ability to record credit losses based on not yet meeting the “probable” threshold. The new language will require these assets to be valued at amortized cost presented at the net amount expected to be collected will a valuation provision. The amendments will be effective for fiscal years beginning after December 15, 2019. We are evaluating the impact of this amendment on our consolidated financial statements and related disclosures.

            In February 2016, FASB issued ASU 2016-02, “Leases” which would require lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The guidance is effective for annual and interim reporting periods beginning on or after December 15, 2018. We are currently evaluating the impact of its pending adoption of ASU 2016-02 on our consolidated financial statements.

Item 3.        Quantitative and Qualitative Disclosures About Market Risk.

            Not Applicable.

Item 4.        Controls and Procedures.

Disclosure Controls and Procedures

            Disclosure controls and procedures are controls 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 Interim Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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            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 Interim Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our company's Interim Chief Executive Officer and Chief Financial Officer concluded that as of October 31, 2018, our disclosure controls and procedures were effective.

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, 2018 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

            Lack of cash flow which may affect our ability to continue as a going concern.

            Presently, our operating cash flows are not sufficient to meet operating and capital expenses. Our business plan calls for continued research and development of our products and expansion of our market share. We will require additional financing to fund working capital and pay for operating expenses and capital requirements until we achieve a positive cash flow.

            There is no assurance that actual cash requirements will not exceed our estimates. In particular, additional capital may be required in the event that:

  • we incur delays and additional expenses as a result of technology failure;

  • we are unable to create a substantial market for our products; or

  • we incur any significant unanticipated expenses.

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            The occurrence of any of the aforementioned events could adversely affect our ability to meet our proposed business plans.

            We depend on a mix of revenues and outside capital to pay for the continued development of our technology and the marketing of our products. Such outside capital may include the sale of additional stock and/or commercial borrowing. There can be no assurance that capital will continue to be available if necessary to meet these continuing development costs or, if the capital is available, that it will be on terms acceptable to us. Disruptions in financial markets and challenging economic conditions have and may continue to affect our ability to raise capital. The issuance of additional equity securities by us would result in a dilution, possibly a significant dilution, in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.

            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.

            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.

            We may be unable to predict subscription renewal rates and the impact these rates may have on our future revenue and operating results.

            Some of our products and services are sold on a subscription basis that is generally month-to-month or one year in length. Our customers have no obligation to renew their subscriptions for our services after the expiration of their initial subscription period, and some customers elect not to renew. We cannot provide assurance that our subscriptions will be renewed at the same or higher level of service, for the same number of licenses or for the same duration of time, if at all. We cannot provide assurance that we will be able to accurately predict future customer renewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our services, our ability to continue to regularly add features and functionality, the reliability (including uptime) of our subscription services, the prices of our services, the prices of services offered by our competitors, mergers and acquisitions affecting our customer base, reductions in our customers’ spending levels or declines in customer activity as a result of economic downturns or uncertainty in financial markets. If our customers do not renew their subscriptions for our services or if they renew on terms less favorable to us, our revenue may decline.

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

            Operating expenses of $4,533,338 and $8,518,448 exceeded revenue by $2,092,077 and $3,189,357 for the three and six months ended October 31, 2018, respectively. 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.

            Such competition may potentially adversely 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. 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.

            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.

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            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.

            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.

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            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.

            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.

            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.

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            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 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.

            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 three months ended October 31, 2018 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. We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. 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. We did not enter into any forward contracts for hedging purposes during the three months ended October 31, 2018 (2017 - none).

            Tax matters, including changes in tax rates, disagreements with taxing authorities and imposition of new taxes could impact our results of operations and financial condition.

            We are subject to income taxes as well as non-income-based taxes, such as payroll, sales, use, value added, net worth, property, withholding and franchise taxes in both the U.S. and various foreign jurisdictions. From time to time, we are also subject to reviews, examinations and audits by taxing authorities with respect to such income and non-income-based taxes inside and outside of the U.S. When a taxing authority disagrees with our tax positions, we could face additional tax liabilities, including interest and penalties. Payment of such additional amounts upon final settlement or adjudication of any disputes could have a material impact on our results of operations and financial position.

            In addition, we are directly and indirectly affected by new tax legislation and regulation and the interpretation of tax laws and regulations worldwide. Changes in legislation, regulation or interpretation of existing laws and regulations in the U.S. and other jurisdictions where we are subject to taxation could increase our taxes and have an adverse effect on our operating results and financial condition.

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            If a security breach or cyberattack of our IT networks and systems, or any of our products, occurs, our operations could be interrupted, our products and services may be perceived as vulnerable, and our brand and reputation could be damaged, which could reduce revenue, increase expenses, and expose us to legal claims or regulatory actions.

Cybersecurity refers to the combination of technologies, processes, and procedures established to protect information technology systems and data from unauthorized access, attack, or damage. We are subject to cybersecurity risks. Information cybersecurity risks have significantly increased in recent years and, while we have not experienced any material losses relating to cyber-attacks or other information security breaches, we could suffer such losses in the future. Our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code and other events that could have a security impact. If one or more of such events occur, this potentially could jeopardize confidential and other information, including nonpublic personal information and sensitive business data, processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. This could result in significant losses, reputational damage, litigation, regulatory fines or penalties, or otherwise adversely affect our business, financial condition or results of operations. Privacy and information security laws and regulation changes, and compliance with those changes, may result in cost increases due to system changes and the development of new administrative processes. In the future, we may be required to expend significant additional resources to modify our protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks. In addition, we may be subject to litigation and financial losses that are not fully insured.

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 5,943,082 shares of common stock that were issued and outstanding as of October 31, 2018, our directors owned approximately 50% 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 settle all of their vested stock options and deferred share units as at October 31, 2018, then we would be required to issue an additional 1,059,762 shares of our common stock, which would represent approximately 15% 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.

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            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.

            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.

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            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

            None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 Issuer Purchases of Equity Securities 





Period



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(1)
8/1/2018 – 8/31/2018 284,278
9/1/2018 – 9/30/2018 284,278
10/1/2018 – 10/31/2018 284,278
Total 284,278

  (1)

Pursuant to a normal course issuer bid announced on March 27, 2018, which commenced on March 29, 2018 and expires on March 28, 2019 to purchase up to 284,278 shares of our common stock.

On March 27, 2018, we announced our intention to purchase, by way of a normal course issuer bid, for cancellation purposes, up to 284,278 shares of our common stock, representing approximately 10% of our then outstanding public float. We believe that our shares trade in a price range that does not adequately reflect their underlying value based on our business prospects.

Purchases will be made on the open market through the facilities of the TSX, NASDAQ Capital Market or such other stock exchange or quotation system upon which our shares are then listed or quoted, including other Canadian marketplaces, at market prices prevailing at the time of purchase and may take place over a 12-month period beginning on March 29, 2018 and expiring on March 28, 2019. We are permitted to make block purchases once per calendar week in accordance with the rules of the TSX. The daily purchase restriction is 1,199 shares, subject to certain prescribed exemptions. All shares purchased by our company under the normal course issuer bid will be returned to treasury and cancelled.

In connection with the normal course issuer bid, we renewed our automatic share purchase plan with National Bank Financial Inc., in order to facilitate purchases of our shares. Under the purchase plan, National Bank may purchase shares on our behalf at times when we would ordinarily not be permitted to purchase shares due to internal trading blackout periods, insider trading rules or otherwise. The purchase plan has been approved by the TSX and was implemented as of March 28, 2018. Purchases will be made by National Bank on the open market based upon the parameters prescribed by the TSX, applicable laws and the terms and conditions of the purchase plan.

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To our knowledge, none of our directors, senior officers or other insiders (as defined in the TSX Company Manual) intends to sell any shares under the normal course issuer bid. However, sales by such persons through the facilities of the TSX may occur if the personal circumstances of any such person change or if any such person makes a decision unrelated to these normal course purchases. The benefits to any such person whose shares are purchased would be the same as the benefits available to all other holders whose shares are purchased.

Stockholders may obtain a copy of the notice submitted to the TSX with respect to the normal course issuer bid, without charge, by contacting our Chief Financial Officer.

Item 3. Defaults Upon Senior Securities.

            None.

Item 4. Mine Safety Disclosures.

            Not Applicable.

Item 5. Other Information.

            None.

Item 6. Exhibits.

Exhibits required by Item 601 of Regulation S-K

(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)

   
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*

Employee Share Purchase Plan

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4.2* Amended 2010 Stock Option Plan
   
4.3

Deferred Share Unit Plan (incorporated by reference from our Quarterly Report on Form 10-Q filed on March 13, 2017)

   
(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)

   
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 between our company and various investors in connection with the non-brokered private placement completed on September 4, 2015 (incorporated by reference from our Current Report on Form 8-K filed on September 8, 2015)

   
10.5

Form of Warrant Certificate issued to various investors in connection with the non-brokered private placement completed on September 4, 2015 (incorporated by reference from our Current Report on Form 8-K filed on September 8, 2015)

   
10.6

Amended Employment Agreement between Donovan Jones and CounterPath Corporation and its wholly owned subsidiary, CounterPath Technologies Inc., dated February 17, 2016 (incorporated by reference from our Quarterly Report on Form 10-Q filed on March 15, 2016)

   
10.7

Form of Subscription Agreement between our company and various investors in connection with the non-brokered private placement completed on December 15, 2016 (incorporated by reference from our Current Report on Form 8-K filed on December 19, 2016)

   

10.8

Form of Subscription Agreement between our company and various investors in connection with the non-brokered private placement completed on July 20, 2017 (incorporated by reference from our Current Report on Form 10-Q filed on September 14, 2017)

   
10.9

Form of Subscription Agreement between our company and various investors in connection with the non-brokered private placement completed on January 24, 2018 (incorporated by reference from our Current Report on Form 8-K filed on January 26, 2018)

   
10.10

Amended Employment Agreement between David Karp and CounterPath Corporation and its wholly owned subsidiary, CounterPath Technologies Inc., dated March 7, 2018 (incorporated by reference from our Quarterly Report on Form 10-Q filed on March 13, 2018)

   
10.11

Loan Agreement between Wesley Clover International Corporation, KMB Trac Two Holdings Ltd. and CounterPath Corporation dated October 10, 2018 (incorporated by reference from our Current Report on Form 8-K filed on October 12, 2018)

   
10.12* Separation Agreement between Donovan Jones and CounterPath Corporation and CounterPath Technologies Inc. dated September 17, 2018
   
(14)

Code of Ethics

   
14.1

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)

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(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 David Karp (filed herewith).
   
(32) Section 906 Certifications
   
32.1 Section 906 Certification of David Karp (filed herewith).

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SIGNATURES

            Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

COUNTERPATH CORPORATION

By: /s/ David Karp  
  David Karp  
  Interim Chief Executive Officer  
  Chief Financial Officer, Treasurer and Secretary  
  (Principal Executive Officer, Principal Financial Officer and  
  Principal Accounting Officer)  
     
Date: December 12, 2018  

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