XTSE:CCV Quarterly Report 10-Q Filing - 1/31/2012

Effective Date 1/31/2012

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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 January 31, 2012

OR

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

For the transition period from ______________to ______________

Commission file number 000-50346

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

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

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

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

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

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

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

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

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


APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 39,932,715 shares of common stock issued and outstanding as of March 9, 2012.

2


COUNTERPATH CORPORATION
JANUARY 31, 2012 QUARTERLY REPORT ON FORM 10-Q

INDEX

    Page
  Part I  
Item 1. Financial Statements. 4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 26
Item 4. Controls and Procedures. 39
  Part II  
Item 1. Legal Proceedings. 40
Item 1A. Risk Factors. 40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 47
Item 3. Defaults Upon Senior Securities. 47
Item 5. Other Information. 47
Item 6. Exhibits. 48

3


PART I

Item 1. Financial Statements.

It is the opinion of management that the interim consolidated financial statements for the quarter ended January 31, 2012 include all adjustments necessary in order to ensure that the interim consolidated financial statements are not misleading.

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

COUNTERPATH CORPORATION
INDEX TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)
(Stated in U.S. Dollars)

  Page
Interim Consolidated Balance Sheets 5
Interim Consolidated Statements of Operations and Comprehensive Loss 6
Interim Consolidated Statements of Cash Flows 7
Interim Consolidated Statements of Changes in Stockholders’ Equity 8
Notes to the Interim Consolidated Financial Statements 9 - 25

4



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

    January 31,     April 30,  
    2012     2011  
Assets   (Unaudited)        
   Current assets:            
       Cash $  8,141,839   $  1,707,397  
       Accounts receivable (net of allowance for doubtful accounts of $244,576 and $49,883, respectively)   4,092,358     3,018,188  
       Prepaid expenses and deposits   104,246     110,412  
           Total current assets   12,338,443     4,835,997  
             
   Deposits   62,146     159,433  
   Equipment   16,872     59,574  
   Intangible assets (net of accumulated amortization of $5,787,305 and $5,103,570, respectively) – Note 2(d)   141,063     859,664  
   Goodwill – Note 2(d)   8,752,329     9,247,993  
   Other assets   46,193     48,308  
Total Assets $  21,357,046   $  15,210,969  
             
Liabilities and Stockholders’ Equity            
   Current liabilities:            
       Accounts payable and accrued liabilities $  2,095,965   $  2,340,897  
       Derivative liability – Note 6   674,909      
       Unearned revenue   1,175,527     958,626  
       Customer deposits   807,316     2,018  
       Accrued warranty   98,668     146,868  
           Total current liabilities   4,852,385     3,448,409  
             
   Deferred lease inducements   59,620     2,474  
   Convertible debentures – Note 4       1,305,002  
   Unrecognized tax benefit   98,575     98,575  
           Total liabilities   5,010,580     4,854,460  
             
   Stockholders’ equity:            
   Preferred stock, $0.001 par value
        Authorized: 100,000,000
        Issued and outstanding: January 31, 2012 – 1; April 30, 2011 – 1
 

   

 
   Common stock, $0.001 par value – Note 6
       Authorized: 83,076,900
       Issued and outstanding:
       January 31, 2012 – 39,908,297; April 30, 2011 – 33,439,906
 


39,909
   


33,440
 
   Additional paid-in capital   60,786,052     53,420,601  
   Accumulated deficit   (44,199,891 )   (43,323,410 )
   Accumulated other comprehensive income (loss) – currency translation adjustment   (279,604 )   225,878  
           Total stockholders’ equity   16,346,466     10,356,509  
Liabilities and Stockholders’ Equity $  21,357,046   $  15,210,969  
             
Commitments – Note 8            

See accompanying notes to the consolidated financial statements

5



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

    Three Months Ended     Nine Months Ended  
    January 31,     January 31,  
    2012     2011     2012     2011  
Revenue – Note 7:                        
   Software $  1,856,867   $ 1,489,825   $  5,568,778   $  5,060,294  
   Service   1,629,004     1,532,277     4,149,680     2,749,056  
        Total revenue   3,485,871     3,022,102     9,718,458     7,809,350  
Operating expenses:                        
   Cost of sales (includes depreciation of $17,363 (2011 –
   $15,835) and amortization of intangible assets of
   $683,735 (2011 – $633,038) – Note 2(d))
 

670,687
   

724,309
   

2,179,033
   

2,168,993
 
   Sales and marketing   1,033,938     841,230     2,777,204     2,607,177  
   Research and development   1,231,789     1,157,581     3,338,317     3,317,343  
   General and administrative   869,446     986,003     2,923,753     3,033,564  
             Total operating expenses   3,805,860     3,709,123     11,218,307     11,127,077  
Loss from operations   (319,989 )   (687,021 )   (1,499,849 )   (3,317,727 )
Interest and other income (expense), net:                        
   Interest and other income   45,509     96,505     144,345     191,293  
   Interest expense   (428 )   (42,152 )   (172,112 )   (44,905 )
   Change in fair value of derivative liability – Note 6   208,504         636,232      
   Gain on settlement of debt           -     246,715  
   Foreign exchange gain   3,592     141,408     14,903     157,108  
Net loss for the period $  (62,812 ) $ (491,260 ) $  (876,481 ) $  (2,767,516 )
                         
                         
Other comprehensive income (loss):                        
   Foreign currency translation adjustments   (87,644 )   55,697     (505,482 )   (144,883 )
Comprehensive loss $  (150,456 ) $ (435,563 ) $  (1,381,963 ) $  (2,912,399 )
Net loss per share:                        
   Basic and diluted $  (0.00 ) $  (0.01 ) $  (0.02 ) $  (0.08 )
                         
   Weighted average common shares outstanding:   39,876,373     33,206,905     38,420,132     33,128,861  

See accompanying notes to the consolidated financial statements

6



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

    Nine Months Ended  
    January 31,  
    2012     2011  
Cash flows from operating activities:            
     Net loss for the period $  (876,481 ) $  (2,767,516 )
     Adjustments to reconcile net loss to net cash used in operating activities:        
           Depreciation and amortization   87,901     104,647  
           Amortization of intangible assets   683,735     633,038  
           Stock-based compensation   532,832     691,595  
           Share purchase warrants       227,707  
           Shares issued as part of share purchase plan       25,325  
           Change in fair value of derivative liability   (636,232 )    
           Foreign exchange loss   (14,903 )   (157,108 )
           Accretion of debenture discount   159,798     31,320  
Changes in assets and liabilities:            
           Accounts receivable   (1,071,667 )   (347,317 )
           Other current assets   1,237     65,626  
           Decrease in other assets   (8,599 )   (10,729 )
           Accounts payable and accrued liabilities   (184,480 )   (35,967 )
           Unearned revenue   216,901     187,274  
           Customer deposits   805,298     (3,109 )
           Accrued warranty   (48,200 )   27,598  
Net cash used in operating activities   (352,860 )   (1,327,616 )
             
Cash flows from investing activities:            
             Purchase of equipment   (33,573 )   (49,562 )
             Deposits   69,359     (48,111 )
Net cash provided by (used in) investing activities   35,786     (97,673 )
             
Cash flows from financing activities:            
         Common stock issued, net of transaction costs   6,685,428     160,116  
         Convertible debentures issued       1,464,800  
Net cash provided by financing activities   6,685,428     1,624,916  
             
Foreign exchange effect on cash   66,088     (46,433 )
             
Increase in cash   6,434,442     153,194  
             
Cash, beginning of the period   1,707,397     1,556,813  
Cash, end of the period $  8,141,839   $  1,710,007  
             
Supplemental disclosure of cash flow information            
   Cash paid for:            
             Interest $  12,314   $  14,800  
             Non cash transactions – Note 4 and 5            

See accompanying notes to the consolidated financial statements

7



COUNTERPATH CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
for the Nine Months Ended January 31, 2012
(Stated in U.S. Dollars)
(Unaudited)

    Common shares     Preferred Shares                          
                                        Accumulated        
    Number           Number           Additional           Other        
    of           of           Paid-in     Accumulated     Comprehensive        
    Shares     Par Value     Shares     Par Value     Capital     Deficit     Income (Loss)     Total  
Balance, May 1, 2011   33,439,906   $  33,440     1   $  –   $  53,420,601   $  (43,323,410 ) $  225,878   $  10,356,509  
                                                 
Shares issued:                                                
Private placements   3,145,800     3,146             5,633,024             5,636,170  
Less: Proceeds allocated to warrants (Note 6)                   (1,311,141 )           (1,311,141 )
Less: Share issue costs                   (605,922 )           (605,922 )
Issued on conversion of debentures   1,332,261     1,332             1,463,468             1,464,800  
Shares issued on exercise of warrants   1,666,668     1,667             1,498,334             1,500,001  
Exercise of stock options   323,662     324             154,856             155,179  
Stock based compensation (Note 6)                   532,832             532,832  
Net loss for the period                       (876,481 )       (876,481 )
Foreign currency translation adjustment                           (505,482 )   (505,482 )
Balance, January 31, 2012 (Unaudited)   39,908,297   $  39,909     1   $  –   $  60,786,052   $  (44,199,891 ) $  (279,604 ) $  16,346,466  

See accompanying notes to the consolidated financial statements

8



COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)

Note 1 Nature of Operations

CounterPath Corporation (the “Company”) was incorporated in the State of Nevada on April 18, 2003. The Company changed its name from CounterPath Solutions, Inc. to CounterPath Corporation on October 17, 2007. The Company’s common shares are quoted for trading on the Over-The-Counter Bulletin Board in the United States of America and on the TSX Venture Exchange in Canada.

On August 2, 2007, the Company acquired of all of the shares of NewHeights Software Corporation (“NewHeights”) through the issuance of 7,680,168 shares of the Company’s common stock and 369,836 preferred shares issued from a subsidiary of the Company that are exchangeable into 369,836 shares of common stock of the Company. For accounting purposes, the Company was deemed to be the acquirer of NewHeights based on certain factors including the number of common shares issued in the transaction as a proportion of the total common shares outstanding, and the composition of the board after the transaction.

On February 1, 2008, the Company acquired FirstHand Technologies Inc. (“FirstHand”), a private Ontario, Canada corporation, through the issuance of 5,900,014 shares of the Company’s common stock. For accounting purposes, the Company was deemed to be the acquirer of FirstHand based on certain factors including the number of common shares issued in the transaction as a proportion of the total common shares outstanding, and the composition of the board after the transaction.

On February 1, 2008, the Company acquired BridgePort Networks, Inc. (“BridgePort”), a private Delaware corporation, by way of merger in consideration for the assumption of all of the assets and liabilities of BridgePort. For accounting purposes, the Company was deemed to be the acquirer of BridgePort based on certain factors primarily being the composition of the board after the transaction.

On February 5, 2008, the Company's wholly-owned subsidiaries, NewHeights and CounterPath Solutions R&D Inc. were merged as a wholly-owned subsidiary of the Company under the name CounterPath Technologies Inc.

On March 19, 2008, the Company’s Board of Directors approved a five for one common stock consolidation. As a result, the Company's authorized capital decreased from 415,384,500 shares of common stock to 83,076,900 shares of common stock. The par value of the common stock was unaffected by the stock consolidation and remains at $0.001 per share. All per share amounts and outstanding shares, including all common stock equivalents (stock options and warrants) have been retroactively adjusted in the Consolidated Financial Statements and in the Notes to the Consolidated Financial Statements for all periods presented to reflect the stock consolidation.

On November 1, 2010, the Company's wholly-owned subsidiary, FirstHand Technologies Inc. was amalgamated with CounterPath Technologies Inc. and carrying on as CounterPath Technologies Inc.

The Company focuses on the design, development, marketing and sales of desktop and mobile communications application software, conferencing software, gateway (server) software and related professional services, such as pre and post sales technical support and customization services. The Company’s products are sold into the Voice over Internet Protocol (VoIP) market primarily to telecom carriers, telecom original equipment manufacturers and businesses in North America, Central and South America, Europe and Asia.

Note 2 Significant Accounting Policies

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

9



COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)

Note 2 Significant Accounting Policies - (cont’d)

  a)

Basis of Presentation

     
 

These 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. incorporated under the laws of the state of Delaware, BridgePort Networks (Europe) Ltd. Incorporated in the United Kingdom, and 6789722 Canada Inc., incorporated under the Canada Business Corporations Act. The results of NewHeights Software Corporation (which subsequently merged with another subsidiary to become CounterPath Technologies Inc.) are included from August 2, 2007, the date of acquisition. The results of FirstHand Technologies Inc. and BridgePort Networks, Inc. are included from February 1, 2008, the date of acquisition. All inter- company transactions and balances have been eliminated.

     
  b)

Interim Reporting

     
 

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

     
 

These statements reflect all adjustments, which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented in accordance with accounting principles generally accepted in the United States of America. Except where noted, these interim financial statements follow the same accounting policies and methods of their application as the Company’s April 30, 2011 annual 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, 2011 annual consolidated financial statements.

10



COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)

Note 2 Significant Accounting Policies - (cont’d)

  b)

Interim Reporting – (cont’d)

     
 

Operating results for the nine months ended January 31, 2012 are not necessarily indicative of the results that can be expected for the year ending April 30, 2012.

     
  c)

New Accounting Pronouncements

     
 

In September 2009, the FASB revised the authoritative guidance for revenue recognition for arrangements with multiple deliverables. The new guidance modifies the requirements for determining whether a deliverable can be treated as a separate unit of accounting by removing the criteria that verifiable and objective evidence of fair value exists for the undelivered elements. In allocating transaction consideration among the deliverables, the guidance also introduced the concept of using management's best estimate of a stand-alone selling price as an alternate basis for allocation. The guidance is effective in fiscal years beginning on or after June 15, 2010, and the Company is required to adopt this guidance in its first quarter of fiscal 2012. The adoption of this standard did not have a material impact on the Company's financial statements.

     
 

In September 2009, FASB’s Emerging Issues Task Force issued ASU 2009-14 “Certain Revenue Arrangements That Include Software Elements.” ASU 2009-14 addresses certain revenue arrangements that include software elements. This guidance states that tangible products with hardware and software components that work together to deliver the product functionality are considered non-software products, and the accounting guidance under the revenue arrangements with multiple deliverables is to be followed. This guidance is effective for arrangements entered into, or materially modified, in periods beginning on or after June 15, 2010, with earlier adoption permitted, and the Company is required to adopt this guidance in its first quarter of fiscal 2012. The adoption of ASU 2009-14 did not have a material impact on the Company's financial statements.

     
 

In April 2010, the FASB issued Accounting Standards Update No. 2010-13, Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades, amends Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. It is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The adoption of ASC 2010-13 did not have a material impact on the Company's financial statements.

     
 

In April 2010, the FASB issued Accounting Standards Update No. 2010-17, Revenue Recognition— Milestone Method (Topic 605) Revenue Recognition (ASU 2010-17). ASU 2010-17 provides guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research or development transactions is appropriate. It provides criteria for evaluating if the milestone is substantive and clarifies that a vendor can recognize consideration that is contingent upon achievement of a milestone as revenue in the period in which the milestone is achieved, if the milestone meets all the criteria to be considered substantive. ASU 2010-17 is effective for the Company in fiscal 2012 and should be applied prospectively. The adoption of ASU 2010-17 did not have a material impact on the Company's financial statements.

11



COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)

Note 2 Significant Accounting Policies - (cont’d)

  c)

New Accounting Pronouncements – (cont’d)

     
 

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which aligns the fair value measurement and disclosure requirements in U.S. GAAP and the International Financial Reporting Standards (IFRSs). Many of the amendments in this ASU will not result in a change in requirements, but simply clarify existing requirements. The amendments in this ASU that do change a principle or requirement for measuring fair value or disclosing information about fair value measurements include the following: (1) the ASU permits an exception for measuring fair value when a reporting entity manages its financial instruments on the basis of its net exposure, rather than gross exposure, to those risks; (2) the ASU clarifies that the application of premiums and discounts in a fair value measurement is related to the unit of account for the asset or liability being measured at fair value; (3) the ASU prohibits blockage discounts for level 2 and 3 investments; and (4) the amendments expand the fair value measurement disclosures. The ASU is to be applied prospectively. For public entities, the ASU is effective during interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the impact of the pending adoption of ASU 2011-04 on its consolidated financial statements.

     
 

In June 2011 the FASB issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income, which eliminates the option of presenting the components of other comprehensive income (OCI) as part of the statement of changes in stockholders’ equity. The ASU instead permits an entity to present the total of comprehensive income, the components of net income and the components of OCI either in a single continuous statement of comprehensive income or in two separate but consecutive statements. With either format, the entity is required to present each component of net income along with total net income, each component of OCI along with the total for OCI, and a total amount for comprehensive income. Also, the ASU requires entities to present, for either format, reclassification adjustments for items that are reclassified from OCI to net income in the statement(s) where the components of net income and the components of OCI are presented. This ASU is to be applied retrospectively. For public entities, the ASU is effective for interim and annual periods beginning after December 15, 2011. The Company does not anticipate that the adoption of ASU 2011-05 will have any impact on its consolidated financial statements.

     
  d)

Goodwill and Intangible Assets

     
 

Goodwill represents the excess purchase price over the estimated fair value of net assets acquired as of the acquisition date. ASC Topic 350 (prior authoritative literature: Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”)). ASC 350 requires goodwill to be tested for impairment annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company's business enterprise below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. Recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit, which is measured based upon, among other factors, market multiples for comparable companies as well as a discounted cash flow analysis.

12



COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)

Note 2 Significant Accounting Policies - (cont’d)

  d)

Goodwill and Intangible Assets – (cont’d)

     
 

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

     
 

Goodwill of $6,339,717 (CDN$6,704,947) and $2,083,960 (CDN$2,083,752) was initially recorded in connection with the acquisition of NewHeights Software Corporation on August 2, 2007 and FirstHand Technologies Inc. on February 1, 2008. Translated to U.S. dollars using the period end rate, the goodwill balance at January 31, 2012 was $6,677,457 (CDN$6,704,947) (April 30, 2011 - $7,055,616) and $2,074,872 (CDN$2,083,752) (April 30, 2011 - $2,192,377), respectively. Management will perform its annual impairment test in its fiscal fourth quarter. No impairment charges were recorded for the nine months ended January 31, 2012 and 2011.

     
 

The Company recognizes impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value.

     
 

Intangible assets include the intangibles purchased in connection with the acquisition of NewHeights Software Corporation on August 2, 2007, and FirstHand Technologies Inc. and BridgePort Networks, Inc. on February 1, 2008.

     
 

The intangible assets of NewHeights are reported at acquisition cost and include amounts initially allocated to acquired technologies of $3,454,839 (CDN$3,678,100) and customer asset of $2,283,908 (CDN$2,431,500). The acquired technologies are amortized based on their estimated useful life of four years and the customer asset is amortized on the basis of Management’s estimate of the future cash flows from this asset over approximately five years, which is Management’s estimate of the useful life of the customer asset.

     
 

The intangible assets of FirstHand are reported at acquisition cost and include amounts initially allocated to acquired technologies of $2,804,700 (CDN$2,804,700) and customer asset of $587,000 (CDN$587,000). The acquired technologies are amortized based on their estimated useful life of four years and the customer asset is amortized on the basis of Management’s estimate of the future cash flows from this asset over approximately five years, which is Management’s estimate of the useful life of the customer asset.

     
 

The intangible assets of BridgePort are being carried and reported at acquisition cost and include amounts initially allocated to acquired technologies of $476,703 and customer asset of $43,594. The acquired technologies are amortized based on their estimated useful life of four years and the customer asset is amortized on the basis of Management’s estimate of the future cash flows from this asset over approximately five years, which is Management’s estimate of the useful life of the customer asset.

     
 

A summary of the Company’s intangible assets, net, at January 31, 2012 is as follows:


                  Accumulated        
            Accumulated     Impairment     Net Carrying  
      Cost     Amortization     Charge     Amount  
  Acquired technologies $  6,306,337   $  4,417,679   $  1,888,658   $  –  
  Customer assets   2,726,718     1,369,627     1,216,028     141,063  
  Intangible assets $  9,033,055   $  5,787,306   $  3,104,686   $  141,063  

13



COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)

Note 3 Related Party Transactions

The Company’s Chairman is the Chairman and founding shareholder of Mitel Networks Corporation (“Mitel”). On July 31, 2008 the Company entered into a source code license agreement whereby the Company licensed to Mitel the source code for the Your Assistant product in consideration of a payment of $650,000. Associated with the agreement are ongoing license fees to be paid by Mitel of $13.50 per copy deployed, declining to $9.00 per copy deployed after two years and declining from $9.00 to nil after four years. In addition, the agreement provides Mitel with a first right to match any third party offer to purchase the source code software and related intellectual property. The Company’s software license revenue for the three and nine months ended January 31, 2012, pursuant to the terms of these agreements, was $147,551 and $355,937 (2011 - $136,803 and $399,128), respectively. As at January 31, 2012, the Company had an accounts receivable balance from Mitel of $113,971 (April 30, 2011 - $114,369).

During the three and nine months ended January 31, 2012, the Company through its wholly owned subsidiary, CounterPath Technologies Inc., paid $19,902 and $59,706 (2011 - $19,971 and $59,913) to Kanata Research Park Corporation (“KRP”) for leased office space. KRP is controlled by the Company’s Chairman.

In connection with a private placement on June 14, 2011, Wesley Clover, a company controlled by the Chairman of the Company, converted all of its outstanding convertible debentures of the Company in the aggregate principal amount of $490,750 to 358,211 shares of common stock concurrent with the closing of the private placement (Note 4). On August 24, 2011, Wesley Clover exercised 833,334 warrants at the original exercise price of $0.90 per share.

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

Note 4 Convertible Debentures

On July 30, 2010 and October 29, 2010, the Company issued two convertible debentures in the principal amounts of $483,300 and $490,750, respectively, to an investor. The debentures were convertible by the holder, at any time prior to maturity, in whole or in part into common shares of the Company at a conversion price of $1.00 per share. On October 29, 2010, the Company issued a third convertible debenture in the principal amount of $490,750 to a company controlled by the Chairman of the Company. The debenture was convertible by the holder at any time prior to maturity, in whole or in part into common shares of the Company at a conversion price of $1.37 per share. The three convertible debentures were unsecured, bearing interest at the prime bank rate as quoted by the Bank of Montreal with interest payable monthly and maturing on July 30, 2012.

The convertible debentures could be prepaid in whole or in part by the Company by paying 105% of the principal to be prepaid together with accrued and unpaid interest on or before July 30, 2011, or by paying 102.5% of the principal to be prepaid together with accrued and unpaid interest between July 31, 2011 and April 30, 2012, or by paying 100% of the principal to be prepaid together with accrued and unpaid interest between May 1, 2012 and July 30, 2012.

14



COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)

Note 4 Convertible Debentures – (cont’d)

Pursuant to ASC Topic 470-20, “Debt with Conversion and Other Options,” the Company determined that the convertible debentures issued on October 29, 2010 contain a beneficial conversion feature, as the fair value of the Company’s common stock on the date of issuance was greater than the initial conversion price.

Accordingly, the Company allocated $765,964 to the convertible debentures and $215,536 to the beneficial conversion feature. The amounts allocated to the beneficial conversion feature represent a discount on the debt financing which is accreted to income over the term of the debt. During the year ended April 30, 2011, the Company accreted $55,738 by way of discount on the debentures issued.

The convertible debentures issued on July 30, 2010 did not contain a beneficial conversion feature, as the fair value of the Company’s common stock on the date of issuance was equal to or less than the initial conversion price.

On June 14, 2011 all the outstanding convertible debentures of the Company in the aggregate principal amount of $1,464,800 were converted with a total of 1,332,261 common shares being issued to the holders. In addition, the Company accreted $159,798 by way of discount on the debentures issued.

Note 5 Exchangeable Shares

On August 2, 2007, the Company entered into a voting and exchange trust agreement among its subsidiary, 6789722 Canada Inc., and Valiant Trust Company whereby the Company issued and deposited with Valiant Trust a special preferred voting share of the Company in order to enable Valiant Trust to execute certain voting and exchange rights as trustee from time to time for and on behalf of the registered holders of the preferred shares of 6789722 Canada Inc. Each preferred share of 6789722 Canada Inc. is exchangeable into one share of common stock of the Company at the election of the shareholder, or, in certain circumstances, of the Company.

On October 9, 2008, and November 19, 2008, the Company issued 50,000 shares each totaling to 100,000 shares of common stock pursuant to a holder of 100,000 shares of exchangeable preferred shares of its subsidiary 6789722 Canada Inc. exercising their exchange rights. There were 269,841 outstanding exchangeable shares as of April 30, 2009 (April 30, 2008 - 369,841). As the exchangeable shares have already been recognized in connection with the acquisition of NewHeights, the value ascribed to these shares on exchange is $nil.

On May 11, 2009, the Company issued 50,000 shares of common stock pursuant to a holder of 50,000 shares of exchangeable preferred shares of its subsidiary 6789722 Canada Inc. exercising their exchange rights. On December 16, 2009, the Company issued 154,546 shares of common stock pursuant to a holder of 154,546 shares of exchangeable preferred shares of its subsidiary 6789722 Canada Inc. exercising their exchange rights.

On April 27, 2010, the Company issued 4,424 shares of common stock pursuant to a holder of 4,424 shares of exchangeable preferred shares of its subsidiary 6789722 Canada Inc. exercising their exchange rights. On May 14, 2010, the Company issued 50,000 shares of common stock pursuant to a holder of 50,000 shares of exchangeable preferred shares of its subsidiary 6789722 Canada Inc. exercising their exchange rights. On January 27, 2011, the Company issued 1,122 shares of common stock pursuant to a holder of 1,122 shares of exchangeable preferred shares of its subsidiary 6789722 Canada Inc. exercising their exchange rights.

On January 28, 2011, the Company redeemed all of the remaining 9,749 exchangeable shares outstanding pursuant to the Company's redemption call right under the provisions attaching to the exchangeable shares of 6789722 Canada Inc., and the voting and exchange trust agreement was terminated on January 28, 2011. As a result there were no outstanding exchangeable shares as of April 30, 2011 (April 30, 2010 – 60,871). As the exchangeable shares have already been recognized in connection with the acquisition of NewHeights, the value ascribed to these shares on exchange is $nil.

15



COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)

Note 6 Common Stock

Private Placement

On June 14, 2011, the Company issued an aggregate of 3,145,800 units under a brokered private placement for aggregate gross proceeds of $5,636,170 (CDN$5,505,150) at a price of $1.79 (CDN$1.75) per unit, with each unit consisting of one share of the Company’s common stock and one-half of one common share purchase warrant, with each whole warrant entitling the holder to purchase one additional common share of the Company’s common stock at an exercise price of CDN$2.25 per share until June 14, 2013. In connection with the offering, the Company issued an aggregate of 220,206 broker warrants, with each broker warrant entitling the holder thereof to purchase one common share of the Company at an exercise price of CDN$1.75 per share until December 14, 2012. In addition, the Company incurred $605,922 in share issue costs.

Stock Options

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

The maximum number of shares of common stock authorized by the stockholders and reserved for issuance by the Board of Directors of the Company under the 2010 Stock Option Plan is 6,860,000.

The Company has elected to use the Black-Scholes option pricing model to determine the fair value of stock options granted. In accordance with ASC 718 for employees, the compensation expense is amortized on a straight-line basis over the requisite service period which approximates the vesting period. Compensation expense for stock options granted to non-employees is amortized over the vesting period or, if none exists, over the service period. Compensation associated with unvested options granted to non-employees is remeasured on each balance sheet date using the Black-Scholes option pricing model.

The expected volatility of options granted has been determined using the method described under ASC 718 using the historical stock price. The expected term of options granted to employees in the current fiscal period has been determined utilizing the “simplified” method as prescribed by ASC 718 Share-Based Payment. For non-employees, based on the Company’s history, the expected term of the options approximates the full term of the options. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The Company has not paid and does not anticipate paying dividends on its common stock; therefore, the expected dividend yield is assumed to be zero. In addition, ASC 718 requires companies to utilize an estimated forfeiture rate when calculating the expense for the period, whereas prior to the adoption of ASC 718 the Company recorded forfeitures based on actual forfeitures and recorded a compensation expense recovery in the period when the awards were forfeited. As a result, based on the Company’s experience, the Company applied an estimated forfeiture rate of 15% for the nine month period ended January 31, 2012 and 2011 in determining the expense recorded in the accompanying consolidated statement of operations.

16



COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)

Note 6 Common Stock – (cont’d)

Stock Options - (cont’d)

The weighted-average fair value of options granted during the nine months ended January 31, 2012 was $0.90 (2011 - $1.11) . The weighted-average assumptions utilized to determine such values are presented in the following table:

      Nine Months Ended     Nine Months Ended  
      January 31, 2012     January 31, 2011  
  Risk-free interest rate   0.86%     1.95%  
  Expected volatility   74.2%     83.1%  
  Expected term   3.7 yrs     3.7 yrs  
  Dividend yield   0%     0%  
  Weighted average fair value $ 0.90   $ 1.12  

The following is a summary of the status of the Company’s stock options as of January 31, 2012 and the stock option activity during the nine months ended January 31, 2012:

            Weighted Average  
      Number of     Exercise Price  
      Options     per Share  
  Outstanding at April 30, 2011   3,607,663   $ 0.97  
  Granted   1,000,000   $ 1.70  
  Exercised   (323,662 ) $ 0.44  
  Forfeited/Cancelled   (303,399 ) $ 1.73  
  Expired   (13,400 ) $ 0.47  
  Outstanding at January 31, 2012   3,967,202   $ 1.12  
               
  Exercisable at January 31, 2012   1,999,295   $ 0.81  
  Exercisable at April 30, 2011   1,930,647   $ 0.78  

The following table summarizes information regarding stock purchase options outstanding as of January 31, 2012:

    Number of     Aggregate           Number of     Aggregate  
Exercise   Options     Intrinsic           Options     Intrinsic  
Price   Outstanding     Value     Expiry Date     Exercisable     Value  
$0.44   405,008   $  490,060     December 15, 2013     306,452   $  370,807  
$0.47   482,277     569,087     May 1,2012 to September 26, 2016     480,610     567,120  
$0.60   434,917     456,663     December 14, 2014     230,795     242,335  
$0.62   850,000     875,500     April 17, 2014     584,375     601,906  
$1.70   1,000,000         December 14, 2016          
$1.90   435,000         December 14, 2015     117,812      
$2.00   18,000         October 1, 2012 to February 28, 2015     18,000      
$2.15   240,000         September 7, 2016     240,000      
$2.27   102,000         March 10, 2016     21,251      
January 31, 2012   3,967,202   $  2,391,310           1,999,295   $  1,782,168  
                               
April 30, 2011   3,607,663   $  3,984,765           1,930,647   $  2,485,779  

17



COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)

Note 6 Common Stock – (cont’d)

Stock Options – (cont’d)

The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on the Company’s closing stock price of $1.65 per share as of January 31, 2012 (April 30, 2011 – $2.06), which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options vested and exercisable as of January 31, 2012 was 1,602,232 (April 30, 2011 –1,690,647). The total intrinsic value of options exercised during the nine months ended January 31, 2012 was $378,878 (2011 – $420,683). The grant date fair value of options vested during the nine months ended January 31, 2012 was $272,758 (2011 – $258,778).

The following table summarizes information regarding the non-vested stock purchase options outstanding as of January 31, 2012.

            Weighted Average  
            Grant Date Fair  
      Number of Options     Value  
  Non-vested options at April 30, 2011   1,677,016   $ 0.69  
  Granted   1,000,000   $ 0.90  
  Vested   (474,967 ) $ 0.57  
  Cancelled/Forfeited   (234,142 ) $ 1.03  
  Non-vested options at January 31, 2012   1,967,907   $ 0.79  

As of January 31, 2012 there was $1,336,199 of total unrecognized compensation cost related to unvested share-based compensation awards. This unrecognized compensation cost is expected to be recognized over a weighted average period of 3.27 years.

Employee and non-employee stock-based compensation amounts classified in the Company’s consolidated statements of operations for the three and nine months ended January 31, 2012 and 2011 are as follows:

      Three Months Ended     Nine Months Ended  
      January 31,     January 31,  
      2012     2011     2012     2011  
                           
  Cost of sales $  8,835   $  8,971   $  26,754   $  19,312  
  Sales and marketing   41,991     31,640     77,863     71,119  
  Research and development   9,347     8,961     27,418     25,512  
  General and administrative   42,876     28,003     104,274     134,359  
  Total stock-based compensation $  103,049   $  77,575   $  236,309   $  250,302  

Warrants

On June 14, 2011, the Company issued an aggregate of 3,145,800 units under a brokered private placement for aggregate gross proceeds of $5,636,170 (CDN$5,505,150) at a price of $1.79 (CDN$1.75) per unit, with each unit consisting of one share of the Company’s common stock and one-half of one common share purchase warrant, with each whole warrant entitling the holder to purchase one additional common share of the Company’s common stock at an exercise price of CDN$2.25 per share until June 14, 2013. In connection with the offering, the Company issued an aggregate of 220,206 broker warrants, with each broker warrant entitling the holder thereof to purchase one common share of the Company at an exercise price of CDN$1.75 per share until December 14, 2012.

18



COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)

Note 6 Common Stock – (cont’d)

Warrants – (cont’d)

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

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

      January 31,     April 30,  
      2012     2011  
  Fair value of warrant liability, at issuance $  1,311,141   $  –  
  Change in fair value of warrant liability for the period   (636,232 )    
  Fair value of warrant liability at January 31, 2012 $  674,909   $  –  

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

            As at the date of  
      As at     issuance  
      January 31, 2012     June 14, 2011  
  Risk-free interest rate   0.12%     1.60%  
  Expected volatility   70%     70%  
  Expected term   0.87 years to 1.37 years     1.5 years to 2 years  
  Dividend yield   0%     0%  

The warrant liability is revalued at the end of each reporting period with the change in the fair value of the derivative liability recorded as a gain or loss in the Company’s consolidated statement of operations. The fair value of the warrants will continue to be classified as a liability until such time as they are exercised, expire or there is an amendment to the respective agreements that renders these financial instruments to be no longer classified as a liability.

At the time of the private placement offering, the Company allocated the proceeds to each of the common shares and the one-half of one common share purchase warrants. Because the warrants were classified as liability and are subsequently marked to fair value through earnings in each reporting period, the Company allocated the proceeds of $1,311,141 to the warrants at inception with the residual proceeds of $3,773,946 allocated to common stock.

During the nine months ended January 31, 2011, the Company entered into a warrant agreement with a customer whereby the Company issued 1,000,000 stock purchase warrants as part of a contract that the Company entered into with the customer. The fair value of 372,222 stock purchase warrants that was charged to revenue during the nine months ended January 31, 2011 was $161,710.

19



COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)

Note 6 Common Stock – (cont’d)

Warrants – (cont’d)

The following table summarizes information regarding the warrants outstanding as of January 31, 2012:

            Weighted        
      Number of     Average        
      Warrants     Exercise Price     Expiry Dates  
  Warrants at April 30, 2011   2,666,667   $ 1.12     October 29, 2011 to July 30, 2012  
  Granted   1,793,106   $ 2.19     December 14, 2012 to June 14, 2013  
  Exercised   (1,666,668 ) $ 0.90     October 29, 2011  
  Warrants at January 31, 2012   2,793,105   $ 1.94     July 30, 2012 to June 14, 2013  

Employee Stock Purchase Plan

Under the terms of the Employee Stock Purchase Plan (ESPP), all regular salaried (non-probationary) employees may purchase up to 6% of their base salary in shares of common stock of the Company at market price. The Company matches 50% of the shares purchased by issuing or purchasing at market price up to 3% of the respective employee’s base salary in shares.

A total of 700,000 shares have been reserved for issuance under the ESPP. As of January 31, 2012, a total of 556,401 shares (April 30, 2011 - 556,401) were available for issuance under the ESPP. During the nine months ended January 31, 2012, no shares (April 30, 2011 - 55,571) were sold or issued to employees under the ESPP.

Deferred Share Unit Plan

Under the terms of the Deferred Share Unit Plan (DSUP) which is effective as at October 22, 2009, each deferred share unit is equivalent to one share of common stock. The maximum number of shares of common stock that may be reserved for issuance to any one participant pursuant to deferred share units granted under the DSUP and any share compensation arrangement is 5% of the number of shares of common stock of the Company outstanding at the time of reservation and, as applicable, any grants of deferred share units to any one participant may not exceed a value of $100,000 per annum on the date of grant. A deferred share unit (DSU) granted to a participant who is a director of the board of the Company shall vest immediately on the award date. A deferred share unit granted to a participant other than a director will generally vest as to one-third (1/3) of the number of deferred share units granted on the first, second and third anniversaries of the award date. Fair value of the DSU’s, which is based on the closing price of the Company’s common stock on the date of grant, is recorded as compensation expense over the vesting period.

A total of 2,000,000 shares have been reserved for issuance under the DSUP. During the nine months ended January 31, 2012, deferred share units were issued under the DSUP, of which 108,108 were granted to officers or employees and 93,243 were granted to non-employee directors. As of January 31, 2012, a total of 411,936 shares were available for issuance under the DSUP.

20



COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)

Note 6 Common Stock – (cont’d)

Deferred Share Unit Plan – (cont’d)

The following table summarizes the Company’s outstanding DSU awards as of January 31, 2012, and changes during the period then ended:

            Weighted Average  
            Grant Date Fair  
      Number of DSU’s     Value Per Unit  
  DSU’s outstanding at April 30, 2011   1,386,713   $ 0.83  
  Granted   201,351   $ 1.85  
  Conversions        
  DSU’s outstanding at January 31, 2012   1,588,064   $ 0.96  

The following table summarizes information regarding the non-vested deferred share units outstanding as of January 31, 2012:

            Weighted Average  
            Grant Date Fair  
      Number of DSU’s     Value Per Unit  
  Non-vested DSU’s at April 30, 2011   426,083   $ 0.89  
  Granted   201,351   $ 1.85  
  Vested   (197,768 ) $ 2.18  
  Non-vested DSU’s at January 31, 2012   429,666   $ 1.23  

As of January 31, 2012 there was $385,435 (2011 – $240,338) of total unrecognized compensation cost related to unvested deferred share units awards. This unrecognized compensation cost is expected to be recognized over a weighted average period of 2.02 years (2011 – 2.24 years).

Employee and non-employee deferred share unit based compensation amounts classified in the Company’s consolidated statements of operations for the nine months ended January 31, 2012 and 2011 are as follows:

      Three Months Ended     Nine Months Ended  
      January 31,     January 31,  
      2012     2011     2012     2011  
  General and administrative $  55,600   $  32,236   $  296,523   $  441,293  
  Total deferred share unit-based compensation $  55,600   $  32,236   $  296,523   $  441,293  

21



COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)

Note 7 Segmented Information

The Company’s chief operating decision maker reviews financial information presented on a consolidated basis, accompanied by desegregated 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.

Foreign revenues are based on the country in which the customer is located. The following is a summary of total revenues by geographic area for the three and nine months ended January 31, 2012 and 2011:

      Three Months Ended     Nine Months Ended  
      January 31,     January 31,  
      2012     2011     2012     2011  
  North America $  2,333,540   $  1,734,031   $  6,285,291   $  4,688,080  
  Europe   940,391     867,454     2,552,706     2,127,894  
  Asia and Africa   156,118     299,733     553,390     535,476  
  Latin America   55,822     120,884     327,071     457,900  
    $  3,485,871   $  3,022,102   $  9,718,458   $  7,809,350  

Contained within the results of North America for the three and nine months ended January 31, 2012 are revenues from the United States of $1,610,754 and $4,143,930 (2011 - $869,702 and $3,303,109) respectively and from Canada of $722,786 and $2,141,361 (2011 - $864,329 and $1,384,971) respectively.

Contained within the results of Europe for the three and nine months ended January 31, 2012 are revenues from the United Kingdom of $400,139 and $1,236,771 (2011 - $407,104 and $1,202,222) respectively, from Czech Republic of $166,946 and $174,220 (2011 - $26,067 and $nil) respectively, Germany of $59,729 and $196,915 (2011 - $64,576 and $148,811) respectively, from France of $26,668 and $147,767 (2011 - $4,840 and $19,058) respectively, and from the Netherlands of $17,358 and $124,728 (2011 - $110,417 and $138,855) respectively.

Contained within the results of Asia and Africa for the three and nine months ended January 31, 2012 are revenues from Australia of $22,481 and $106,226 (2011 - $10,824 and $54,296) respectively, from South Africa of $10,285 and $98,531 (2011 - $12,842 and $27,158) respectively, from Japan of $20,840 and $63,531 (2011 - $114,560 and $174,806) respectively, and from Tunisia of $42,681 and $46,641 (2011 - $nil and $nil) respectively.

Contained within the results of Latin America for the three and nine months ended January 31, 2012 are revenues from Mexico of $22,077 and $101,066 (2011 - $31,541 and $148,040) respectively, from Brazil of $5,341 and $87,230 (2011 - $18,175 and $39,472) respectively, from Chile of $nil and $18,123 (2011 - $7,204 and $128,802) respectively, and from Colombia of $9,276 and $37,696 (2011 - $46,376 and $69,869) respectively.

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

      As at  
      January 31, 2012     April 30, 2011  
  Canada $  8,948,748   $  10,190,468  
  United States   7,709     25,071  
    $  8,956,457   $  10,215,539  

22



COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)

Note 7 Segmented Information – (cont’d)

The proportion of total revenue from significant customers for the three and nine months ended January 31, 2012 and 2011 is summarized as follows:

      Three Months Ended     Nine Months Ended  
      January 31,     January 31,  
      2012     2011     2012     2011  
  Customer A   13%     -%     6%     -%  
  Customer B   10%     11%     9%     13%  
  Customer C   2%     18%     10%     8%  
  Customer D   1%     9%     2%     15%  
      26%     38%     27%     36%  

Accounts receivable balances for Customer A were $483,000 as at January 31, 2012 (April 30, 2011 - $nil). Accounts receivable balances for Customer B were $233,500 as at January 31, 2012 (April 30, 2011 -$311,100). Accounts receivable balances for Customer C were $53,675 as at January 31, 2012 (April 30, 2011 - $881,400). Accounts receivable balances for Customer D were $77,896 as at January 31, 2012 (April 30, 2011 - $93,837).

Note 8 Commitments

  a)

On December 30, 2010, the Company entered into an extension agreement on an existing lease, which commenced on April 1, 2011 and expires March 31, 2012. The monthly lease payment under the extension agreement is $1,667. The lease expense for the three months ended January 31, 2012 was $5,001 (2011 - $7,017).

     
  b)

On April 29, 2005, the Company entered into a lease for office premises, which commenced on October 1, 2005 and expires on September 30, 2012 for which a deposit of $9,888 was made. The monthly lease payment under this agreement is $9,888 plus $8,664 in operating costs. The Company is subleasing part of these premises for a monthly charge of $7,475. The sublease commenced on August 1, 2007 and expires on September 30, 2012. The lease expense net of rental revenue for the three and nine months ended January 31, 2012 was $14,146 and $42,438 (2011 - $14,146 and $42,438) respectively.

     
  c)

On January 11, 2011, the Company entered into a lease agreement, which commenced on October 1, 2011, and expires September 30, 2014 for which a deposit of $49,795 was made. The monthly lease payment under the agreement is $20,148 plus $21,178 in operating costs. The lease expense for the three and nine months ended January 31, 2012 was $123,978 and $390,889 (2011 - $135,351 and $406,053) respectively. Management believes that this office space is adequate for the operations of the Company for the foreseeable future.

     
  d)

On May 1, 2009, the Company modified its existing lease agreement for office premises, as a result of which it surrendered a substantial part of the previously leased area. The new agreement commenced on May 1, 2009 and expires on April 20, 2012. The monthly lease payment under this agreement is $6,634 (CDN$6,662). This lease expense is a related party transaction as it was incurred with a company with a director in common with the Company. The lease expense for the three and nine months ended January 31, 2012 was $19,903 and $59,709 (2011 - $19,903 and $59,709) respectively. On December 9, 2011, the Company signed a fifth amendment to the existing lease agreement to extend the lease starting May 1, 2012 to April 30, 2014. The monthly lease payment under the new lease extension will be $7,007 (CDN$7,034).

23



COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)

Note 8 Commitments – (cont’d)

  e)

On March 12, 2009, the Company and its wholly-owned subsidiary, CounterPath Technologies Inc., entered into a settlement agreement with a founder and former officer of the Company. Under the settlement agreement, the Company will pay a total of $492,971 (CDN$495,000) over 45 months at a rate of CDN$11,000 per month and pay for health benefits for 33 months from the date of the agreement.

     
  f)

On August 2, 2011, the Company entered into extension of an existing operating lease agreement which commenced on August 1, 2011 and expires on February 28, 2013. The monthly lease payment under the new extension agreement is $6,700. The lease expense for the three and nine months ended January 31, 2012 was $20,100 and $62,062 (2011 - $21,825 and $71,250).

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

      Office Leases –     Office Leases –     Sub Lease     Total Office     Settlement  
      Related Party     Unrelated Party     Income     Leases     Agreement  
  2012 $  19,903   $  203,065   $  (22,424 ) $  200,544   $  32,865  
  2013   84,082     655,663     (37,374 )   702,371     82,162  
  2014   84,082     495,906         579,988      
  2015       206,627         206,627      
  2016                    
    $  188,067   $  1,561,261   $  (59,798 ) $  1,689,530   $  115,027  

Note 9 Derivative Instruments and Hedging Activities

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

Foreign Currency Exchange Rate Risk

A majority of the Company’s revenue activities are transacted in U.S. dollars. However, the Company is exposed to foreign currency exchange rate risk inherent in conducting business globally in numerous currencies, of which the most significant to its operations for the nine months ended January 31, 2012 is the Canadian dollar. The Company is primarily exposed to a strengthening Canadian dollar as its operating expenses are primarily denominated in Canadian dollars while its revenues are primarily denominated in U.S. dollars. The Company’s foreign currency risk management program includes foreign currency derivatives with cash flow hedge accounting designation that utilizes foreign currency forward contracts to hedge exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S. dollar-denominated cash flows. These instruments generally have a maturity of less than one year. For these derivatives, the 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. The Company did not enter into any forward contracts during the nine months ended January 31, 2012.

24



COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2012
(Unaudited)

Note 10 Subsequent Events

On March 8, 2012, the Company granted 25,000 stock options to an employee pursuant to its 2010 Stock Option Plan. Each stock option entitles the holder thereof the right to purchase one share of common stock at a price equal to the closing market price on March 8, 2012. The options vest in the amount of 12.5% on the date which is six months from the date of grant and then beginning in the seventh month at 1/42 per month for 42 months, at which time the options are fully vested.

On February 16, 2012, the Company announced a Normal Course Issuer Bid pursuant to which the Company may acquire up to an aggregate of 1,995,414 shares of its common stock by way of open market transactions over the next 12-month period representing approximately 5% of the issued and outstanding common shares of the Company.

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

Forward-Looking Statements

     This quarterly report contains forward-looking statements as that term is defined in Section 27A of the United States Securities Act of 1933 and Section 21E of the United States Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “intends”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors”, which may cause our or our industry’s actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements.

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

     Our financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles. All references to “common shares” refer to our shares of common stock. As used in this quarterly report, the terms “we”, “us” and “our” means CounterPath Corporation, unless otherwise indicated.

     The following discussion and analysis should be read in conjunction with the financial statements and related notes and the other financial information appearing elsewhere in this quarterly report. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions.

Background

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

     On August 2, 2007, we acquired all of the shares of NewHeights Software Corporation through the issuance of 7,680,168 shares of our common stock and 369,836 preferred shares issued from a subsidiary of our company, which preferred shares were exchangeable into 369,836 shares of common stock.

     On February 1, 2008, we acquired all of the shares of FirstHand Technologies Inc. through the issuance of 5.9 million shares of our common stock. On February 1, 2008, we acquired all of the issued and outstanding shares of BridgePort Networks, Inc. by way of merger in consideration for the assumption of all of the assets and liabilities of BridgePort Networks.

     On March 19, 2008, our board of directors approved a five for one common stock consolidation. As a result, our authorized capital decreased from 415,384,500 shares of common stock to 83,076,900 shares of common stock.

     On November 1, 2010, our company’s wholly-owned subsidiary, FirstHand Technologies Inc. was amalgamated with CounterPath Technologies Inc. and carrying on as CounterPath Technologies Inc.

     On January 28, 2011, we redeemed all of the outstanding exchangeable shares pursuant to the redemption call right provided under the provisions attaching to the exchangeable shares of our subsidiary 6789722 Canada Inc.

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Business of CounterPath

     Our business focuses on the design, development, marketing and sales of desktop and mobile application software, gateway server software and related professional services, such as pre and post sales, technical support and customization services. Our software products are sold into the telecommunications sector, specifically the voice over Internet protocol (VoIP), unified communications and fixed-mobile convergence markets. VoIP, unified communications and fixed-mobile convergence are general terms for technologies that use Internet or mobile protocols for the transmission of packets of data which may include voice, video, text, fax, and other forms of information that have traditionally been carried over the dedicated circuit-switched connections of the public switched telephone network.

     Our strategy is to sell our software to our customers to allow such customers to deliver session initiation protocol and voice over Internet protocol (VoIP) services. Our customers include: (1) large incumbent telecommunications service providers, Internet telephony service providers, (2) original equipment manufacturers serving the telecommunication market; (3) small, medium and large sized businesses; and (4) end users. Our software enables voice communication from the end user through the network to another end user and enables the service provider to deliver other streaming content to end users such as video. Our acquisitions of FirstHand Technologies Inc. and BridgePort Networks, Inc. in February 2008, expanded the product portfolio of our company to include fixed-mobile-convergence applications for the enterprise and telecom service provider markets.

Revenue

     We derive revenue from the sale of software licenses and software customization and services associated with software such as technical support services, implementation and training. We recognize software and services revenue at the time of delivery, provided all other revenue recognition criteria have been met.

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

     We offer our products and services directly through our sales force and indirectly through distribution partners. Our distribution partners include networking and telecommunications equipment vendors throughout the world.

     The amount of product configuration and customization, which reflects the requested features, determines the price for each sale. The number of software licenses purchased will have a direct impact on the average selling price. Services may vary depending upon a customer's requirements for technical support, implementation and training.

     We believe that our revenue and results of operations may vary significantly from quarter to quarter as a result of long sales and deployment cycles, new product introductions and variations in customer ordering patterns.

Operating Expenses

     Operating expenses consist of cost of sales, sales and marketing, research and development, and general and administrative expenses, and restructuring costs. 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) amortization of intangible assets, (d) billable and non-billable travel, lodging, and other out-of-pocket expenses, (e) payments to third party vendors for compression/decompression software known as codecs, (f) amortization of capitalized software that is implemented into our products and (g) warranty expense. Amortization of intangible assets consists of the amortization expense related to the intangible assets acquired from NewHeights Software Corporation, FirstHand Technologies Inc. and BridgePort Networks, Inc. comprising acquired technologies and customer assets. The acquired technologies are amortized based on their estimated useful life of four years and the customer asset is amortized on the basis of management's estimate of the future cash flows from this asset over approximately five years, which is management's estimate of the useful life of the customer asset.

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     Sales and marketing expense consists primarily of: (a) salaries and related personnel costs including stock-based compensation, (b) commissions, (c) travel, lodging and other out-of-pocket expenses, (d) marketing programs such as trade shows and (e) other related overhead. Commissions are recorded as expense when earned by the employee. We expect increases in sales and marketing expense for the foreseeable future as we further increase the number of sales professionals and increase our marketing activities with the intent to grow our revenue. We expect sales and marketing expense to decrease as a percentage of total revenue, however, as we leverage our current sales and marketing personnel as well as our distribution partnerships.

     Research and development expense consists primarily of: (a) salaries and related personnel costs including stock-based compensation, (b) payments to suppliers 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 and regulatory fees and (c) other related overhead.

     Restructuring costs are post acquisition activities related to the acquisition of NewHeights Software Corporation, FirstHand Technologies Inc. and BridgePort Networks, Inc. We incurred restructuring costs related to employee severance agreements as a result of post acquisition consolidation of administration, sales and marketing and research and development departments. At January 31, 2012 we had a restructuring accrual for severance of $nil.

Application of Critical Accounting Policies and Use of Estimates

     Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates under different assumptions or conditions. There have been no material changes to these estimates for the periods presented in this quarterly report.

     We believe that of our significant accounting policies, which are described in Note 2 to our annual financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, the following policies are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

Basis of Presentation

     The consolidated financial statements include the accounts of our company and our wholly-owned subsidiaries, CounterPath Technologies Inc., a company existing under the laws of the province of British Columbia, Canada, BridgePort Networks, Inc. incorporated under the laws of the state of Delaware and 6789722 Canada Inc., incorporated under the Canada Business Corporations Act. The results of NewHeights Software Corporation (which subsequently merged with another subsidiary to become CounterPath Technologies Inc.) are included from August 2, 2007, the date of acquisition. The results of FirstHand Technologies Inc. (which subsequently merged with CounterPath Technologies Inc.) and BridgePort Networks, Inc. are included from February 1, 2008, the date of acquisition. All inter-company transactions and balances have been eliminated.

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Interim Reporting

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

     These statements reflect all adjustments, which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented in accordance with accounting principles generally accepted in the United States of America. Except where noted, the interim consolidated financial statements follow the same accounting policies and methods of their application as our April 30, 2011 annual consolidated financial statements. All adjustments are of a normal recurring nature. It is suggested that these interim consolidated financial statements be read in conjunction with our April 30, 2011 annual consolidated financial statements.

     Operating results for the nine months ended January 31, 2012 are not necessarily indicative of the results that can be expected for the year ending April 30, 2012.

Revenue Recognition

     We recognize revenue in accordance with the American Institute of Certified Public Accountants (AICPA) ASC 985-605 “Software Revenue Recognition”, as amended by SOP 98-9 “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions”.

     In all of our arrangements, we do not recognize any revenue until we can determine that persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and we deem collection to be probable. For distribution and reseller arrangements, fees are fixed or determinable and collection probable when there are no rights to exchange or return and fees are not dependable upon payment from the end-user. If any of these criteria are not met, revenue is deferred until such time that all criteria have been met.

     A substantial percentage of our revenue is generated by multiple-element arrangements, such as products, maintenance and support, professional services and training. When arrangements include multiple elements, we allocate the total fee among the various elements using the residual method. Under the residual method, revenue is recognized when vendor-specific objective evidence, or VSOE, of fair value exists for all of the undelivered elements of the arrangement, but does not exist for one or more of the delivered elements of the arrangement. Each arrangement requires us to analyze the individual elements in the transaction and to estimate the fair value of each undelivered element, which typically includes maintenance and services. Revenue is allocated to each of the undelivered elements based on its respective fair value, with the fair value determined by the price charged when that element is sold separately.

     For contracts with elements related to customized network solutions and certain network build-outs, we apply FASB Emerging Issues Task Force Issue ASC 605-25, “Revenue Arrangements with Multiple Deliverables” and revenues are recognized under ASC 605-35, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”, generally using the percentage-of-completion method.

     In using the percentage-of-completion method, revenues are generally recorded based on a completion of milestones as described in the agreement. Profit estimates on long-term contracts are revised periodically based on changes in circumstances and any losses on contracts are recognized in the period that such losses become known.

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

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     PCS service revenue generally is deferred until the related product has been accepted and all other revenue recognition criteria have been met. Professional services and training revenue is recognized as the related service is performed.

     We have set up a warranty provision in the amount of 1% of software sales, which is amortized over a twelve-month term. We recognize this deferred revenue evenly over a twelve-month period from the date of the sale.

Stock-Based Compensation

     Stock options granted are accounted for under ASC 718 (prior authoritative literature: SFAS No. 123R) “Share-Based Payment” and are recognized at the fair value of the options as determined by an option pricing model as the related services are provided and the options earned. ASC 718 replaces existing requirements under FAS 123 and APB 25, and requires public companies to recognize the cost of employee services received in exchange for equity instruments, based on the fair value of those instruments on the measurement date which generally is the grant date, with limited exceptions.

     Stock-based compensation represents the cost related to stock-based awards granted to employees and non-employee consultants. We measure stock-based compensation cost at measurement date, based on the estimated fair value of the award, and generally recognize the cost as expense on a straight-line basis (net of estimated forfeitures) over the employee requisite service period or the period during which the related services are provided by the non-employee consultants and the options are earned. We estimate the fair value of stock options using a Black-Scholes option valuation model.

     The expected volatility of options granted has been determined using the volatility of our company's stock. The expected life of options granted after April 30, 2006 has been determined utilizing the “simplified” method as prescribed by the SEC's Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero. In addition, ASC 718 requires companies to utilize an estimated forfeiture rate when calculating the expense for the period. We applied an estimated forfeiture rate of 15.0% in the nine months ended January 31, 2012 in determining the expense recorded in our consolidated statement of operations. Cost of sales and operating expenses include stock-based compensation expense, and deferred share unit plan expense. For the nine months ended January 31, 2012, we recorded an expense of $532,832 in connection with share-based payment awards. A future expense of non-vested options of $1,336,199 is expected to be recognized over a weighted-average period of 3.27 years. A future expense of non-vested deferred share units of $385,435 is expected to be recognized over a weighted-average period of 2.02 years.

Derivative Liability

     On June 14, 2011, we issued an aggregate of 3,145,800 units under a brokered private placement for aggregate gross proceeds of $5,636,170 (CDN$5,505,150) at a price of $1.79 (CDN$1.75) per unit, with each unit consisting of one share of our common stock and one-half of one common share purchase warrant, with each whole warrant entitling the holder to purchase one additional share of our common stock at an exercise price of CDN$2.25 per share until June 14, 2013. In connection with the offering, we issued an aggregate of 220,206 broker warrants, with each broker warrant entitling the holder thereof to purchase one share of our common stock at an exercise price of CDN$1.75 per share until December 14, 2012. We follow the guidance in ASC 815-40-15, and record the warrants issued as derivative liabilities due to their exercise price being denominated in a currency other than our U.S. Dollar functional currency. The fair value of the derivative liability is revalued at the end of each reporting period using the Binomial method, and the change in fair value of the derivative liability is recorded as a gain or loss in our consolidated statements of operations.

Research and Development Expense for Software Products

     Research and development expense includes costs incurred to develop intellectual property. The costs for the development of new software and substantial enhancements to existing software are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized. We have determined that technological feasibility is established at the time a working model of software is completed. Because we believe our current process for developing software will be essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date.

30


Accounts Receivable and Allowance for Doubtful Accounts

     We extend credit to our customers based on evaluation of an individual customer's financial condition and collateral is generally not required. Accounts outstanding beyond the contractual payment terms are considered past due. We determine our allowance for doubtful accounts by considering a number of factors, including the length of time accounts receivable are beyond the contractual payment terms, our previous loss history, and a customer's current ability to pay its obligation to us. We write-off accounts receivable when they are identified as uncollectible. All outstanding accounts receivable accounts are periodically reviewed for collectibility on an individual basis.

Goodwill and Intangible Assets

     We have a significant amount of goodwill and intangible assets on our balance sheet related to the acquisitions of NewHeights Software Corporation, FirstHand Technologies Inc. and BridgePort Networks, Inc. Intangible assets are carried and reported at acquisition cost, net of accumulated amortization subsequent to acquisition. The intangible assets acquired are comprised of acquired technologies and customer assets relating to customer relationships. The acquired technologies are amortized based on their estimated useful life of four years and the customer asset is amortized on the basis of management's estimate of the future cash flows from this asset over approximately five years, which is management's estimate of the useful life of the customer asset. The intangible assets are reviewed for impairment whenever events or circumstances indicate impairment might exist in accordance with ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Projected undiscounted net cash flows expected to be derived from the use of those assets are compared to the respective net carrying amounts to determine whether any impairment exists. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.

     The determination of the net carrying value of goodwill and intangible assets and the extent to which, if any, there is impairment, are dependent on material estimates and judgments on our part, including the useful life over which the intangible assets are to be amortized and the estimates of the value of future net cash flows, which are based upon further estimates of future revenues, expenses and operating margins.

Goodwill and Intangible Assets—Impairment Assessments

     We review goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable in accordance with FASB ASC 350, Goodwill and Other Intangible Assets. The provisions of ASC 350 require that a two-step impairment test be performed on goodwill. In the first step, we compare the fair value of our reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not considered impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of our reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.

     Determining the fair value of our reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for our reporting unit. Our most recent annual goodwill impairment analysis, which was performed at the end of the fourth quarter of fiscal 2011, did not result in an impairment charge, nor did we record any goodwill impairment for the nine months ending January 31, 2012.

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     We make judgments about the recoverability of purchased intangible assets whenever events or changes in circumstances indicate that an other- than- temporary impairment may exist. Each period we evaluate the estimated remaining useful lives of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. In accordance with ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets, recoverability of these assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

     Assumptions and estimates about future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows and risk adjusted discounted rates and future economic and market conditions. Our updated long-term financial forecast represents the best estimate that our management has at this time and we believe that its underlying assumptions are reasonable. As a result of our review of the recoverability of intangibles assets there was no impairment charge for the nine months ending January 31, 2012 (2011 - $nil).

Use of Estimates

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

Results of Operations

     Our operating activities during the three and nine months ended January 31, 2012 consisted primarily of selling our IP telephony software and related services to telecom service providers and original equipment manufacturers serving the telecom industry, and the continued development of our IP telephony software products.

Selected Consolidated Financial Information

     The following tables set out selected consolidated unaudited financial information for the periods indicated. The selected consolidated financial information set out below for the three and nine months ended January 31, 2012 and 2011, and as at January 31, 2012 and April 30, 2011 has been derived from the consolidated unaudited financial statements and accompanying notes for the three and nine months ended January 31, 2012 and 2011 and the fiscal year ended April 30, 2011. Each investor should read the following information in conjunction with those statements and the related notes thereto. We believe the presentation of non-GAAP operating expenses provides useful information to our investors. In particular, we disclose that we utilize non-GAAP operating expenses to internally measure our operating performance and also present such measure to allow investors to analyze our operating performance utilizing the same measure as used by our management.

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Selected Consolidated Statements of Operations Data   Three Months Ended January 31,  
    2012     2011  
          Percent of           Percent  
          Total           of Total  
    Amount     Revenue     Amount     Revenue  
Revenue $ 3,485,871     100%   $ 3,022,102     100%  
                         
Non-GAAP operating expenses1   3,447,561     99%     3,384,666     112%  
Stock-based compensation   158,648     5%     109,811     4%  
Amortization of intangible assets   199,561     6%     214,646     7%  
GAAP operating expenses   3,805,860     110%     3,709,123     123%  
                         
Loss from operations   (319,989 )   (9% )   (687,021 )   (23% )
Interest and other income, net   45,081     1%     54,353     2%  
Change in fair value of derivative liability   208,504     6%     -     -%  
Foreign exchange gain   3,592     -%     141,408     5%  
Net income (loss)   ($62,812 )   (2% )   ($491,260 )   (16% )
                         
Loss per share   0.00           ($0.01 )      
                         
Weighted average common shares outstanding   39,552,114           33,206,905        
__________
1.

Non-GAAP operating expense is equal to GAAP operating expense less stock-based compensation and amortization of intangible assets.


Selected Consolidated Statements of Operations Data   Nine Months Ended January 31,  
    2012     2011  
          Percent of           Percent  
          Total           of Total  
    Amount     Revenue     Amount     Revenue  
Revenue $ 9,718,458     100%   $ 7,809,350     100%  
                         
Non-GAAP operating expenses1   10,001,740     103%     9,802,444     126%  
Stock-based compensation   532,832     5%     691,595     9%  
Amortization of intangible assets   683,735     7%     633,038     8%  
GAAP operating expenses   11,218,307     115%     11,127,077     143%  
                         
Loss from operations   (1,499,849 )   (15% )   (3,317,727 )   (42% )
Interest and other income, net   (27,767 )   (-%)     393,103     5%  
Change in fair value of derivative liability   636,232     6%     -     -%  
Foreign exchange gain   14,903     -%     157,108     2%  
Net loss   ($876,481 )   (9% )   ($2,767,516 )   (35% )
                         
Loss per share   ($0.02 )         ($0.08 )      
                         
Weighted average common shares outstanding   37,692,012           33,128,861        
__________
1.

Non-GAAP operating expense is equal to GAAP operating expense less stock-based compensation and amortization of intangible assets.

33



    January 31,     April 30,  
Selected Consolidated Balance Sheet Data   2012     2011  
Cash $ 8,141,839   $ 1,707,397  
Current assets   12,338,443     4,835,997  
Current liabilities   4,852,385     3,448,409  
Total liabilities   5,010,580     4,854,460  
Total assets $ 21,357,046   $ 15,210,969  

Revenue

     Three Months Ended January 31,              
    2012     2011     Period-to-Period Change  
          Percent           Percent           Percent  
          of Total           of Total           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Revenue by Type                                    
 Software $ 1,856,867     53%   $ 1,489,825     49%   $ 367,042     25%  
 Service   1,629,004     47%     1,532,277     51%     96,727     6%  
Total revenue $ 3,485,871     100%   $ 3,022,102     100%   $ 463,769     15%  
                                     
Revenue by Region                                    
 International $ 1,152,331     33%   $ 1,288,071     43%     ($135,740 )   (11% )
 North America   2,333,540     67%     1,734,031     57%     599,509     35%  
Total revenue $ 3,485,871     100%   $ 3,022,102     100%   $ 463,769     15%  

     For the three months ended January 31, 2012, we generated $3,485,871 in revenue compared to $3,022,102 for the three months ended January 31, 2011. This represents an increase of $463,769 or 15% from the same period last year. We generated $1,856,867 in software revenue for the three months ended January 31, 2012 compared to $1,489,825 for the three months ended January 31, 2011, representing an increase of $367,042 or 25%. The increase in software revenue was primarily the result of an increase in sales of our products to original equipment manufacturers, as well as increased sales of mobile applications. For the three months ended January 31, 2012, service revenue was $1,629,004 compared to $1,532,277 for the three months ended January 31, 2011. The increase of $96,727 or 6% in service revenue was primarily the result of an increase in sales of professional services and support which typically grows as software sales grow. International revenue outside of North America decreased by 11% during the three months ended January 31, 2012 compared to the three months ended January 31, 2011, due to lower sales in regions other than in North America and Europe. North American revenue increased by 35%, compared to the three months ended January 31, 2011, due primarily to an increase in sales of software and services to North American original equipment manufacturers.

     Nine Months Ended January 31,              
    2012     2011     Period-to-Period Change  
          Percent           Percent           Percent  
          of Total           of Total           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Revenue by Type                                    
 Software $ 5,568,778     57%   $ 5,060,294     65%   $ 508,484     10%  
 Service   4,149,680     43%     2,749,056     35%     1,400,624     51%  
Total revenue $ 9,718,458     100%   $ 7,809,350     100%   $ 1,909,108     24%  
                                     
Revenue by Region                                    
 International $ 3,433,167     35%   $ 3,121,270     40%   $ 311,897     10%  
 North America   6,285,291     65%     4,688,080     60%     1,597,211     34%  
Total revenue $ 9,718,458     100%   $ 7,809,350     100%   $ 1,909,108     24%  

34


     For the nine months ended January 31, 2012, we generated $9,718,458 in revenue compared to $7,809,350 for the nine months ended January 31, 2011. This represents an increase of $1,909,108 or 24% from the same period last year. We generated $5,568,778 in software revenue for the nine months ended January 31, 2012 compared to $5,060,294 for the nine months ended January 31, 2011, representing an increase of $508,484 or 10%. The increase in software revenue was primarily the result of an increase in sales of our products to original equipment manufacturers, as well as increased sales of mobile applications. For the nine months ended January 31, 2012, service revenue was $4,149,680 compared to $2,749,056 for the nine months ended January 31, 2011. The increase of $1,400,624 or 51% in service revenue was primarily due to the increase in sales of professional services and support for both original equipment manufacturers and telecom service providers in preparation for launching customized applications. The service revenue related to customization is expected to lead to future software revenue as our customers deploy that customized software. International revenue outside of North America increased by 10% during the nine months ended January 31, 2012 compared to the nine months ended January 31, 2011, due to primarily to increased sales in Europe. North American revenue increased by 34%, compared to the nine months ended January 31, 2011, due primarily to an increase in sales of software and services to North American original equipment manufacturers.

Operating Expenses

Cost of Sales and Gross Profit

     Cost of sales and gross profit for the three and nine months ended January 31, 2012 and 2011 were as follows:

    January 31, 2012     January 31, 2011     Period-to-Period Change  
          Percent           Percent           Percent  
          of           of           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Cost of Sales                                    
Three months ended $ 670,687     19%   $ 724,309     24%   $ (53,622 )   (7% )
Nine months ended $ 2,179,033     22%   $ 2,168,993     28%   $ 10,040     -%  
                                     
Gross Profit                                    
Three months ended $ 2,815,184     81%   $ 2,297,793     76%   $ 517,391     23%  
Nine months ended $ 7,539,425     78%   $ 5,640,357     72%   $ 1,899,068     34%  

     Cost of sales was $670,687 for the three months ended January 31, 2012 compared to $724,309 for the three months ended January 31, 2011. The decrease of $53,622 was primarily attributable to a decrease in third party software and hardware costs, a decrease in warranty expenses, a decrease in personnel related costs and a decrease in a non-cash amortization of intangible assets related to the acquisitions of NewHeights Software in August 2007 and FirstHand Technologies in February 2008.

     Gross Profit was $2,815,184 for the three months ended January 31, 2012 compared to $2,297,793 for the three months ended January 31, 2011. The increase of $517,391 was primarily attributable to an increase of approximately $464,000 in revenue and decrease of approximately $54,000 in cost of sales.

     Cost of sales was $2,179,033 for the nine months ended January 31, 2012 compared to $2,168,993 for the nine months ended January 31, 2011. The increase was primarily due to an increase in wages and benefits and office rent, offset by a decrease in third party software and hardware costs and warranty expense. Additionally, there was a decrease of approximately $51,000 in a non-cash amortization of intangible assets related to the acquisitions of NewHeights Software in August 2007 and FirstHand Technologies in February 2008.

     Gross Profit was $7,539,425 for the nine months ended January 31, 2012 compared to $5,640,357 for the nine months ended January 31, 2011. The increase of $1,899,068 was primarily attributable to an increase of approximately $1,910,000 in revenue.

35


Sales and Marketing

     Sales and marketing expenses for the three and nine months ended January 31, 2012 and 2011 were as follows:

    January 31, 2012     January 31, 2011     Period-to-Period Change  
          Percent           Percent           Percent  
          of           of           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 1,033,938     30%   $ 841,230     28%   $ 192,708     23%  
Nine months ended $ 2,777,204     29%   $ 2,607,177     33%   $ 170,027     7%  

     Sales and marketing expenses were $1,033,938 for the three months ended January 31, 2012 compared to $841,230 for the three months ended January 31, 2011. The increase of $192,708 was primarily due to an increase of approximately $182,000 in personnel related expenses attributable to new hires and higher sales commissions.

     Sales and marketing expenses were $2,777,204 for the nine months ended January 31, 2012 compared to $2,607,177 for the nine months ended January 31, 2011. The increase of $170,027 was primarily due to an increase of approximately $89,000 in professional and consulting fees, an increase of approximately $51,000 in trade shows, an increase in travel expenses of approximately $50,000.

Research and Development

     Research and development expenses for the three and nine months ended January 31, 2012 and 2011 were as follows:

    January 31, 2012     January 31, 2011     Period-to-Period Change  
          Percent           Percent           Percent  
          of           of           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 1,231,789     35%   $ 1,157,581     38%   $ 74,208     6%  
Nine months ended $ 3,338,317     34%   $ 3,317,343     42%   $ 20,974     1%  

     Research and development expenses were $1,231,789 for the three months ended January 31, 2012 compared to $1,157,581 for the three months ended January 31, 2011. The increase of $74,208 was primarily due to an increase in wages and benefits and professional services.

     Research and development expenses were $3,338,317 for the nine months ended January 31, 2012 compared to $3,317,343 for the nine months ended January 31, 2011. The increase of $20,974 was primarily due to an increase of approximately $115,000 in professional services, partially offset by a decrease of approximately $74,000 in personnel related expenses.

General and Administrative

     General and administrative expenses for the three and nine months ended January 31, 2012 and 2011 were as follows:

    January 31, 2012     January 31, 2011     Period-to-Period Change  
          Percent           Percent           Percent  
          of           of           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 869,446     25%   $ 986,003     33%   $ (116,557 )   (12% )
Nine months ended $ 2,923,753     30%   $ 3,033,564     39%   $ (109,811 )   (4% )

     General and administrative expenses were $869,446 for the three months ended January 31, 2012 compared to $986,003 for the three months ended January 31, 2011. The decrease of $116,557 in general and administrative expenses was primarily attributable to a decrease in professional services of approximately $93,000 and a decrease in bad debts of approximately $45,000 partially offset by an increase of approximately $38,000 in stock based compensation.

36


     General and administrative expenses were $2,923,753 for the nine months ended January 31, 2012 compared to $3,033,564 for the nine months ended January 31, 2011. The decrease of $109,811 in general and administrative expenses was primarily attributable to a decrease of approximately $175,000 in stock based compensation and a decrease of approximately $100,000 in professional services offset by an increase, of approximately $52,000 in investor relations, an increase of approximately $75,000 in travel expenses and an increase of approximately $75,000 in bad debt expense.

Interest and Other Income

     Interest and other income for the three and nine months ended January 31, 2012 was $45,509 and $144,345, respectively, compared to $96,505 and $191,293 for the three and nine months ended January 31, 2011. Interest expense for the three and nine months ended January 31, 2012 was $428 and $172,112, respectively, compared to $42,152 and $44,905 for the three and nine months ended January 31, 2011, respectively. Interest expense for the three and nine months ended January 31, 2012 primarily relates to the accretion of the convertible debenture discount of approximately $160,000.

     Foreign exchange gain for the three and nine months ended January 31, 2012 was $3,592 and $14,903 respectively, compared to a gain of $141,408 and $157,108 for the three and nine months ended January 31, 2011, respectively. The foreign exchange gain/loss represents the gain/loss on account of translation of the inter company accounts of our subsidiaries who maintain their records in currencies other than U.S. dollars as well as transactional losses and gains.

Liquidity and Capital Resources

     As of January 31, 2012, we had $8,141,839 in cash compared to $1,707,397 at April 30, 2011, representing an increase of $6,434,442. The increase was primarily attributable to the completion of a private placement on June 14, 2011 for gross proceeds of $5,636,170 as more fully described under the heading “Financing Activities” below. Our working capital was $7,486,058 at January 31, 2012 compared to $1,387,588 at April 30, 2011, representing an increase of $6,098,470.

     Presently, our cash flow generated from operations is not sufficient to meet our operating and capital expenses and we have incurred operating losses since inception. Management anticipates that the future capital requirements of the Company will be primarily funded through cash flows generated from operations and working capital, and we may seek additional funding to meet ongoing operating expenses.

Operating Activities

     Our operating activities resulted in a net cash outflow of $352,860 for the nine months ended January 31, 2012. This compares to a net cash outflow of $1,327,616 for the same period last year and represents a decrease of $974,756 in cash outflow from operations compared to the same period last year. The net cash outflow from operating activities for the nine months ended January 31, 2012 was primarily a result of a net loss of $876,481, an increase of $1,071,667 in accounts receivable, a $184,480 decrease in accounts payable, a $216,901 increase in unearned revenue, and a non-cash gain of $636,232 due to the change in fair value of a derivative liability. The net cash outflow was offset by adjustments for non-cash expenses including $683,735 for amortization of intangible assets, $532,832 for stock-based compensation and $87,901 for depreciation and amortization.

     The net cash outflow of $1,327,616 from operating activities for the nine months ended January 31, 2011 was primarily a result of a net loss of $2,767,516 and a $347,317 increase in accounts receivable partially offset by a $187,274 increase in unearned revenue. The net cash outflow was further offset by adjustments for non-cash expenses including $691,595 for stock-based compensation, $633,038 for amortization of intangible assets, $227,707 for a warrants issued and $104,647 for depreciation and amortization.

37


Investing Activities

     Investing activities resulted in a net cash outflow of $35,786 for the nine months ended January 31, 2012 primarily from purchases of equipment. This compares with a net cash outflow from investing activities of $97,673 for the same period last year primarily for purchases of equipment. At January 31, 2012, we did not have any material commitments for future capital expenditures.

Financing Activities

     Financing activities resulted in a net cash inflow of $6,685,428 for the nine months ended January 31, 2012 compared to a net cash inflow of $1,624,916 for the nine months ended January 31, 2011.

     On June 14, 2011, we issued 3,145,800 units under a brokered private placement for aggregate gross proceeds of $5,636,170 (CDN$5,505,150) at a price of $1.79 (CDN$1.75) per unit, with each unit consisting of one share of common stock and one-half of one common share purchase warrant, with each whole warrant entitling the holder to purchase one additional share of common stock at an exercise price of CDN$2.25 per share until June 14, 2013. In connection with the offering, we paid $394,533 (CDN$385,361) in cash commissions and issued 220,206 broker warrants, with each broker warrant entitling the holder thereof to purchase one share of common stock at an exercise price of CDN$1.75 per share until December 14, 2012.

     On July 28, 2011, we issued 833,334 shares of common stock for the exercise of 833,334 warrants at an exercise price of $0.90 for proceeds of $750,000. On August 24, 2011, we issued 833,334 shares of common stock for the exercise of 833,334 warrants at an exercise price of $0.90 for proceeds of $750,000.

Off-Balance Sheet Arrangements

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

New Accounting Pronouncements

     In September 2009, the FASB revised the authoritative guidance for revenue recognition for arrangements with multiple deliverables. The new guidance modifies the requirements for determining whether a deliverable can be treated as a separate unit of accounting by removing the criteria that verifiable and objective evidence of fair value exists for the undelivered elements. In allocating transaction consideration among the deliverables, the guidance also introduced the concept of using management's best estimate of a stand along selling price as an alternate basis for allocation. The guidance is effective in fiscal years beginning on or after June 15, 2010, and we are required to adopt this guidance in its first quarter of fiscal 2012. The adoption of this standard did not have a material impact on our financial statements.

     In September 2009, FASB’s Emerging Issues Task Force issued ASU 2009-14 “Certain Revenue Arrangements That Include Software Elements.” ASU 2009-14 addresses certain revenue arrangements that include software elements. This guidance states that tangible products with hardware and software components that work together to deliver the product functionality are considered non-software products, and the accounting guidance under the revenue arrangements with multiple deliverables is to be followed. This guidance is effective for arrangements entered into, or materially modified, in periods beginning on or after June 15, 2010, with earlier adoption permitted, and we are required to adopt this guidance in its first quarter of fiscal 2012. The adoption of ASU 2009-14 did not have a material impact on our financial statements.

38


     In April 2010, the FASB issued Accounting Standards Update No. 2010-13, Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades, amends Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. It is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The adoption of ASC 2010-13 did not have a material impact on our financial statements.

     In April 2010, the FASB issued Accounting Standards Update No. 2010-17, Revenue Recognition—Milestone Method (Topic 605) Revenue Recognition (ASU 2010-17). ASU 2010-17 provides guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research or development transactions is appropriate. It provides criteria for evaluating if the milestone is substantive and clarifies that a vendor can recognize consideration that is contingent upon achievement of a milestone as revenue in the period in which the milestone is achieved, if the milestone meets all the criteria to be considered substantive. ASU 2010-17 is effective for us in fiscal 2012 and should be applied prospectively. The adoption of ASU 2010-17 did not have a material impact on our financial statements.

     In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, aligns the fair value measurement and disclosure requirements in U.S. GAAP and the International Financial Reporting Standards (IFRSs). Many of the amendments in this ASU will not result in a change in requirements, but simply clarify existing requirements. The amendments in this ASU that do change a principle or requirement for measuring fair value or disclosing information about fair value measurements include the following: (1) the ASU permits an exception for measuring fair value when a reporting entity manages its financial instruments on the basis of its net exposure, rather than gross exposure, to those risks; (2) the ASU clarifies that the application of premiums and discounts in a fair value measurement is related to the unit of account for the asset or liability being measured at fair value; (3) the ASU prohibits blockage discounts for level 2 and 3 investments; and (4) the amendments expand the fair value measurement disclosures. The ASU is to be applied prospectively. For public entities, the ASU is effective during interim and annual periods beginning after December 15, 2011. We are currently evaluating the impact of the pending adoption of ASU 2011-04 on our consolidated financial statements.

     In June 2011 the FASB issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income, eliminates the option of presenting the components of other comprehensive income (OCI) as part of the statement of changes in stockholders’ equity. The ASU instead permits an entity to present the total of comprehensive income, the components of net income, and the components of OCI either in a single continuous statement of comprehensive income or in two separate but consecutive statements. With either format, the entity is required to present each component of net income along with total net income, each component of OCI along with the total for OCI, and a total amount for comprehensive income. Also, the ASU requires entities to present, for either format, reclassification adjustments for items that are reclassified from OCI to net income in the statement(s) where the components of net income and the components of OCI are presented. This ASU is to be applied retrospectively. For public entities, the ASU is effective for interim and annual periods beginning after December 15, 2011. We do not anticipate that the adoption of ASU 2011-05 will have any impact on its consolidated financial statements.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

     Disclosure controls and procedures and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act 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 Exchange Act is accumulated and communicated to management including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

39


     In connection with this quarterly report, as required by Rule 13a-15 under the Securities Exchange Act of 1934, we have carried out an evaluation of the effectiveness of the design and operation of our company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our company's management, including our company's Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our company's Chief Executive Officer and Chief Financial Officer concluded that as of January 31, 2012, our disclosure controls and procedures are effective as at the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

     There were no changes in our internal control over financial reporting that occurred during the quarter ended January 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

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”.

40


Risks Associated with our Business and Industry

     The current economic environment has adversely affected business spending patterns, which may have an adverse effect on our business.

     The disruptions in the financial markets and challenging economic conditions have adversely affected the United States and world economy, and in particular, reduced consumer spending and reduced spending by businesses. Turmoil in global credit markets and recent turmoil in the geopolitical environment in many parts of the world and other disruptions, such as changes in energy costs are and may continue to put pressure on global economic conditions. Our operating results in one or more segments may also be affected by uncertain or changing economic conditions particularly germane to that segment or to particular customer markets within that segment. The challenges we have seen in the United States have expanded overseas. If our customers delay or cancel spending on their IT infrastructure, that decision could result in reductions in sales of our products, longer sales cycles and increased price competition. There can be no assurances that government responses to the disruptions in the financial markets will restore spending to previous levels. If global economic and market conditions, or economic conditions in the United States or other key markets, remain uncertain or persist, spread, or deteriorate further, we may experience material impacts on our business, operating results, and financial condition.

     Our revenue, operating results and gross margin can fluctuate significantly and unpredictably from quarter to quarter and from year to year, and we expect they will continue to do so, which could cause the trading price of our stock to decline.

     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;

  • 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.

41


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

Operating expenses increased to $11,218,307 for the nine month period ended January 31, 2012 from $11,127,077 for the period ended January 31, 2011 while our revenue increased to $9,718,458 for the nine month period ended January 31, 2012 from $7,809,350 for the nine month period ended January 31, 2011. Our ability to reach profitability is conditional upon our ability to control our operating expenses. While we have been successful in containing 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 operate our business and achieve 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 will potentially affect our chances of achieving profitability and ultimately adversely affect our ability to continue as a going concern.

     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. 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.

42


     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;

  • 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 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' copies or otherwise gains 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-Pro and X-Lite, 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 diversions of resources. In addition, notwithstanding any rights we have secured in our intellectual property, other persons may bring claims against us that we have infringed on their intellectual property rights, including claims based upon the content we license from third parties or claims that our intellectual property right interests are not valid. Any claims against us, with or without merit, could be time consuming and costly to defend or litigate, divert our attention and resources, result in the loss of goodwill associated with our service marks or require us to make changes to our website or other of our technologies.

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

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

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     Unless we can establish 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.

44


     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. Additionally, to the degree that the ongoing turmoil in the credit markets makes it more difficult for some customers to obtain financing, those customers’ ability to pay could be adversely impacted, which in turn could have a material adverse impact on our business, operating results, and financial condition.

     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 its operations for the nine months ended January 31, 2012 is the Canadian dollar. We are primarily exposed to a strengthening Canadian dollar as our operating expenses are primarily denominated in Canadian dollars while our revenues are primarily denominated in U.S. dollars. Our company’s foreign currency risk management program includes foreign currency derivatives with cash flow hedge accounting designation that utilizes foreign currency forward contracts to hedge exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S. dollar-denominated cash flows. These instruments generally have a maturity of less than one year. For these derivatives, our company reports the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss) in stockholders’ equity and reclassifies it into earnings in the same period in which the hedged transaction affects earnings, and within the same line item on the consolidated statements of operations as the impact of the hedged transaction.

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 39,932,715 shares of common stock that were issued and outstanding as of March 9, 2012, our directors owned approximately 27.6% 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 or at all. 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.

45


     The exercise of all or any number of outstanding warrants or 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 warrants, stock options and deferred share units exercise or convert all of their vested warrants, stock options and deferred share units as at January 31, 2012, then we would be required to issue an additional 5,880,465 shares of our common stock, which would represent approximately 14.7% of our issued and outstanding common stock after such issuances. The exercise of any or all outstanding warrants or stock options that are exercisable below market price will result in dilution to the interests of other holders of our common stock as the holders may sell some or all of the shares of common stock underlying the warrants and stock options into the public market.

     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.

     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. Our securities are 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.

     In addition to the “penny stock” rules described above, 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, the 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.

46


     We will have an ongoing relationship with our placement agents that may impact our ability to obtain additional capital.

     In connection with the private placement of units which closed on June 14, 2011, we issued to our placement agents warrants to acquire up to 220,206 shares of our common stock. These warrants are exercisable until December 14, 2012 at a price of CDN$1.75 per share. During the term of the warrants, the holders thereof will be given the opportunity to profit from a rise in the market price of our common stock, with a resulting dilution in the interest of our other stockholders. The terms on which we could obtain additional capital during the life of these warrants may be adversely affected because the holders of these warrants may exercise such warrants when we are attempting to obtain any additional capital in a new offering of securities at a price greater than the exercise price of the warrants. In addition, we agreed not to sell, offer to sell or solicit any offer to buy any securities in a manner that would (i) be integrated with the offer and sale of the 3,145,800 units that we sold on June 14, 2011, and (ii) cause the exemptions and/or exclusions from registration that we relied on in order to sell such units to become unavailable.

     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. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us issue an adverse opinion regarding our stock price, our stock price would likely 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.

     On December 14, 2011, we granted 1,000,000 stock options pursuant to our 2010 Stock Option plan to various employees and contractors. Each stock option entitles the holder thereof the right to purchase one share of common stock at a price equal to $1.70. The options vest in the amount of 12.5% on the date which is six months from the date of grant and then beginning in the seventh month at 1/42 per month for 42 months, at which time the options are fully vested. Of the stock options, 150,000 options were issued a U.S. person (as that term is defined in Regulation S of the Securities Act of 1933) in reliance upon Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933, as applicable. We issued a total of 850,000 options to non-U.S. persons (as that term is defined in Regulation S of the Securities Act of 1933) in a offshore transaction(s) relying on Regulation S and/or Section 4(2) of the Securities Act of 1933.

Item 3. Defaults Upon Senior Securities.

     None.

Item 5. Other Information.

     None.

47


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).

 

(10)

Material Contracts

 

10.1

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

 

10.2

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

 

10.3

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

 

10.4

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

 

10.5

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

 

10.6

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

 

10.7

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).

 

10.8

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).

 

10.9

Form of Stock Option and Subscription Agreement dated August 2, 2007, between our company and each of the former optionees of NewHeights Software Corporation (incorporated by reference from our Current Report on Form 8-K filed on August 8, 2007).

48



10.10

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).

 

10.11

2005 Amended and Restated Stock Option Plan effective January 10, 2006 (incorporated by reference from our Post-Effective Amendment No.1 to the Registration Statement on Form S-8 filed on January 30, 2009).

 

10.12

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

 

10.13

Settlement Agreement amongst Mark Bruk, CounterPath Corporation, and CounterPath Technologies Inc. dated March 12, 2009 (incorporated by reference from our Quarterly Report on Form 10-Q filed on March 12, 2009).

 

10.14

Form of Debt Conversion Agreement dated July 17, 2009 between our company and The Trustees of Columbia University in the City of New York (incorporated by reference from our Annual Report on Form 10-K filed on July 28, 2009).

 

10.15

Deferred Share Unit Plan effective October 22, 2009 (incorporated by reference from our Definitive Proxy Statement on Schedule 14A filed on September 8, 2009).

 

10.16

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

 

10.17

Form of Subscription Agreement dated and Form of Convertible Debenture between our company and various investors (incorporated by reference from our Current Report on Form 8-K filed on August 4, 2010).

 

10.18

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

 

10.19

Agency Agreement dated June 14, 2011 amongst National Bank Financial Inc., Canaccord Genuity Corp. and our company (incorporated by reference from our Quarterly Report on Form 10-Q filed on September 28, 2011).

 

10.20

Form of Registration Rights Agreement between our company and various investors in connection with the brokered private placement completed on June 14, 2011 (incorporated by reference from our Quarterly Report on Form 10-Q filed on September 28, 2011).

 

10.21

Form of Subscription Agreement between our company and various investors in connection with the brokered private placement completed on June 14, 2011 (incorporated by reference from our Quarterly Report on Form 10-Q filed on September 28, 2011).

 

10.22

Form of Broker Warrant Certificate issued to National Bank Financial Inc. and Canaccord Genuity Corp. pursuant to the Agency Agreement dated June 14, 2011 (incorporated by reference from our Quarterly Report on Form 10-Q filed on September 28, 2011).

 

10.23

Form of Warrant Certificate issued to various investors in connection with the brokered private placement completed on June 14, 2011 (incorporated by reference from our Quarterly Report on Form 10-Q filed on September 28, 2011).

 

(14) Code of Ethics

49



14.1 Code of Business Conduct and Ethics (incorporated by reference from our Annual Report on Form 10- KSB filed on July 29, 2004).
   
14.2 Code of Business Conduct and Ethics and Compliance Program (incorporated by reference from our Quarterly Report on Form 10-QSB filed on September 15, 2008).
   
(21) Subsidiaries of CounterPath Corporation
   
  CounterPath Technologies Inc. (incorporated in the Province of British Columbia, Canada)  
   
  6789722 Canada Inc. (incorporated in Canada)
   
  BridgePort Networks, Inc. (incorporated in the state of Delaware)
   
  BridgePort Networks (Europe) Ltd. (incorporated in the United Kingdom)
   
(31) Section 302 Certifications
   
31.1 Section 302 Certification of Donovan Jones (Principal Executive Officer) (filed herewith).
   
31.2 Section 302 Certification of David Karp (Principal Financial Officer) (filed herewith).
   
(32) Section 906 Certifications
   
32.1 Section 906 Certification of Donovan Jones (Principal Executive Officer) (filed herewith).
   
32.2 Section 906 Certification of David Karp (Principal Financial Officer) (filed herewith).

50


SIGNATURES

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

COUNTERPATH CORPORATION

By: /s/ Donovan Jones  
  Donovan Jones  
  President, Chief Executive Officer and Director  
  (Principal Executive Officer)  
  Date: March 12, 2012  
     
     
  /s/ David Karp  
  David Karp  
  Chief Financial Officer, Treasurer and Secretary  
  (Principal Financial Officer)  
  Date: March 12, 2012  

51


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