XTSE:CCV Quarterly Report 10-Q Filing - 7/31/2012

Effective Date 7/31/2012

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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 July 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: 41,572,353 shares of common stock issued and outstanding as of September 12, 2012.

2


COUNTERPATH CORPORATION
JULY 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. 24
     
Item 4. Controls and Procedures. 35
     
  Part II
     
Item 1. Legal Proceedings. 35
     
Item 1A. Risk Factors. 35
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 42
     
Item 3. Defaults Upon Senior Securities. 42
     
Item 5. Other Information. 42
     
Item 6. Exhibits. 42

3


PART I

Item 1. Financial Statements.

It is the opinion of management that the interim consolidated financial statements for the quarter ended July 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
July 31, 2012
(Unaudited)
(Stated in U.S. Dollars)

  Page
   
Interim Consolidated Balance Sheets 5
   
Interim Consolidated Statements of Operations and Comprehensive Income (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 - 23

4


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

    July 31,     April 30,  
    2012     2012  
Assets   (Unaudited)        
   Current assets:            
       Cash $  11,404,439   $  8,154,139  
       Accounts receivable (net of allowance for doubtful accounts of $258,974 and $334,294, respectively)   5,391,270     4,014,472  
       Prepaid expenses and deposits   123,262     170,556  
           Total current assets   16,918,971     12,339,167  
             
   Deposits   77,741     62,521  
   Equipment   109,077     101,024  
   Intangible assets (net of accumulated amortization of $5,900,190 and $5,890,282, respectively) – Note 2(e)   29,139     38,853  
   Derivative instruments – Note 4   57,700      
   Goodwill – Note 2(e)   8,754,087     8,957,977  
   Other assets   53,582     44,402  
Total Assets $  26,000,297   $  21,543,944  
             
Liabilities and Stockholders’ Equity            
   Current liabilities:            
       Accounts payable and accrued liabilities $  2,357,631   $  2,416,489  
       Derivative instruments – Note 4   1,244,876     2,026,944  
       Unearned revenue   1,679,861     1,308,174  
       Customer deposits   13,872     13,872  
       Accrued warranty   94,072     84,948  
           Total current liabilities   5,390,312     5,850,427  
             
   Deferred lease inducements   54,758     56,082  
   Unrecognized tax benefit   98,575     98,575  
           Total liabilities   5,543,645     6,005,084  
             
   Stockholders’ equity:            
            Preferred stock, $0.001 par value 
            Authorized: 100,000,000 
            Issued and outstanding: July 31, 2012 – 1; April 30, 2012 – 1
       
   Common stock, $0.001 par value – Note 5            
            Authorized: 83,076,900 
            Issued and outstanding: 
            July 31, 2012 – 41,563,353; April 30, 2012 – 39,960,479
  41,564     39,961  
   Additional paid-in capital   65,234,746     61,025,529  
   Accumulated deficit   (44,579,233 )   (45,446,771 )
   Accumulated other comprehensive income – currency translation adjustment   (240,425 )   (79,859 )
           Total stockholders’ equity   20,456,652     15,538,860  
Liabilities and Stockholders’ Equity $  26,000,297   $  21,543,944  
             
Commitments – Note 7            

See accompanying notes to the consolidated financial statements

5


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

    Three Months Ended  
    July 31,  
    2012     2011  
Revenue – Note 6:            
   Software $  2,528,056   $  1,584,051  
   Service   1,859,712     1,174,683  
             Total revenue   4,387,768     2,758,734  
Operating expenses:            
   Cost of sales (includes depreciation of $5,310 (2011 – $6,181)
   and amortization of intangible assets of $9,908 (2011 – $280,880) – Note 2(e))
  559,793     860,145  
   Sales and marketing   1,055,035     822,034  
   Research and development   1,361,012     992,511  
   General and administrative   1,379,319     1,034,274  
             Total operating expenses   4,355,159     3,708,964  
Income (loss) from operations   32,609     (950,230 )
Interest and other income (expense), net:            
   Interest and other income   43,853     49,353  
   Interest expense   (470 )   (171,242 )
   Fair value adjustment on derivative instruments – Note 4   785,128     145,714  
   Foreign exchange gain   6,418     687  
Net income (loss) for the period $  867,538   $  (925,718 )
             
             
Other comprehensive income (loss):            
   Foreign currency translation adjustments   (160,566 )   (47,057 )
Comprehensive income (loss) $  706,972   $  (972,775 )
Net income (loss) per share:            
   Basic and diluted $  0.02   $  (0.03 )
             
   Weighted average common shares outstanding:   40,727,122     35,831,910  

See accompanying notes to the consolidated financial statements

6


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

    Three Months Ended  
    July 31,  
    2012     2011  
Cash flows from operating activities:            
     Net income (loss) for the period $  867,538   $  (925,718 )
     Adjustments to reconcile net income (loss) to net cash used in operating activities:        
           Depreciation and amortization   33,495     30,841  
           Amortization of intangible assets   9,908     280,880  
           Stock-based compensation   396,770     244,261  
           Share purchase warrants        
           Shares issued as part of share purchase plan        
           Fair value adjustment on derivative instruments   (785,128 )   (145,714 )
           Foreign exchange gain   (6,418 )   (687 )
           Accretion of debenture discount       159,798  
     Changes in assets and liabilities:            
           Accounts receivable   (1,376,773 )   599,061  
           Other current assets   47,175     24,927  
           Decrease in other assets   (12,752 )   (29,229 )
           Accounts payable and accrued liabilities   (29,129 )   (387,661 )
           Unearned revenue   371,687     (188,252 )
           Customer deposits       65  
           Accrued warranty   9,124     (22,967 )
Net cash used in operating activities   (474,503 )   (360,395 )
             
Cash flows from investing activities:            
             Purchase of equipment   (41,227 )   (671 )
             Deposits   6,726     (1,021 )
Net cash used in investing activities   (34,501 )   (1,692 )
             
Cash flows from financing activities:            
         Common stock issued, net of transaction costs   3,759,409     5,857,404  
Net cash provided by financing activities   3,759,409     5,857,404  
             
Foreign exchange effect on cash   (105 )   26,760  
             
Increase (decrease) in cash   3,250,300     5,522,077  
             
Cash, beginning of the period   8,154,139     1,707,397  
Cash, end of the period $  11,404,439   $  7,229,474  
             
Supplemental disclosure of cash flow information            
   Cash paid for:            
             Interest $  470   $  5,297  
             Non cash transactions – Note 4            

See accompanying notes to the consolidated financial statements

7


COUNTERPATH CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
for the Three Months Ended July 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     Total  
Balance, May 1, 2012   39,960,479   $  39,961     1   $  –   $  61,025,529   $  (45,446,771 ) $  (79,859 ) $  15,538,860  
Shares issued:                                                
Private Placements   1,465,000     1,465             3,577,870             3,579,335  
Proceeds allocated on exercise of warrants (Note 5)                   54,640             54,640  
Less: Share issue costs                   (15,592 )           (15,592 )
Shares issued on exercise of warrants   57,000     57             126,871             126,928  
Exercise of stock options   80,874     81             68,658             68,739  
Stock based compensation (Note 5)                   396,770             396,770  
Net income for the period                       867,538         867,538  
Foreign currency translation adjustment                           (160,566 )   (160,566 )
Balance, July 31, 2012 (Unaudited)   41,563,353   $  41,564     1   $  –   $  65,234,746   $  (44,579,233 ) $  (240,425 ) $  20,456,652  

See accompanying notes to the consolidated financial statements

8


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
July 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’s common shares are quoted for trading on the NASDAQ Capital Market in the United States of America and on the Toronto Stock Exchange in Canada.

 

On August 2, 2007, the Company acquired 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 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 amalgamated under the name CounterPath Technologies Inc.

 

On November 1, 2010, the Company's wholly-owned subsidiaries, FirstHand Technologies Inc. and CounterPath Technologies Inc. were amalgamated under the name CounterPath Technologies Inc.

 

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

 

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

9


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
July 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, and BridgePort Networks, Inc. incorporated under the laws of the state of Delaware. The results of NewHeights Software Corporation (which subsequently was amalgamated with another subsidiary to become CounterPath Technologies Inc.) are included from August 2, 2007, the date of acquisition. The results of FirstHand Technologies Inc. (which subsequently was amalgamated 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.

     
  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, 2012 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, 2012 annual consolidated financial statements.

     
 

Operating results for the three months ended July 31, 2012 are not necessarily indicative of the results that can be expected for the year ending April 30, 2013.

     
  c)

New Accounting Pronouncements

     
 

In May 2011, the FASB issued Accounting Standards Update (ASU) 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.

10


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

Note 2 Significant Accounting Policies – (cont’d)

  c)

New Accounting Pronouncements – (cont’d)

     
 

In June 2011 the FASB issued Accounting Standards Update (ASU) 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. We early implemented the requirements and present net income and comprehensive income in a single continuous statement.

     
 

In May 2011, the FASB issued Accounting Standards Update (ASU) 2011-04, "Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS." There are few differences between the ASU and IFRS 13. While the ASU is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands ASC 820's existing disclosure requirements for fair value measurements and makes other amendments. The amendments in the update became effective for fiscal years and interim periods beginning after December 15, 2011. The Company has adopted this standard, and it did not materially impact the consolidated financial statements.

In September 2011, the FASB issued Accounting Standards Update (ASU) 2011-08 to simplify how tests for potential goodwill impairment are performed. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit in which goodwill resides is less than its carrying value. For reporting units in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform further goodwill impairment testing as required under the previous standards. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 31, 2011. Early adoption was permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011 if an entity’s financial statements had not yet been issued. We have early adopted this standard on September 30, 2011 and it did not materially impact our consolidated financial statements.

     
  d)

Derivative Financial Instruments

     
 

Foreign currency contracts are used by the Company to offset fluctuations in exchange rates. Our company’s foreign currency risk management program includes foreign currency derivatives with cash flow hedge accounting designation that utilizes foreign currency forward contracts to hedge exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S. dollar-denominated cash flows. These instruments generally have a maturity of less than one year. For these derivatives, our company reports the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss) in stockholders’ equity and reclassifies it into earnings in the same period in which the hedged transaction affects earnings, and within the same line item on the consolidated statements of operations as the impact of the hedged transaction. There can be no assurance that our hedging program will not result in a negative impact on our earnings and earnings per share. We did not enter any foreign currency derivatives designated as cash flow hedges in the quarter ended July 31, 2012.

     
 

We also routinely enter into foreign currency forward contracts, not designated as hedging instruments, to protect us from fluctuations in exchange rates. Gains or losses arising out of marked to market fair value valuation of forward contracts, not designated as hedges, are recognized in earnings.

11


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

Note 2 Significant Accounting Policies – (cont’d)

  e)

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

     
 

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

     
 

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 July 31, 2012 was $6,678,798 (CDN$6,704,947) (April 30, 2012 - $6,834,353) and $2,075,289 (CDN$2,083,752) (April 30, 2012 - $2,123,624), respectively. Management will perform its annual impairment test in its fiscal fourth quarter. No impairment charges were recorded for the three months ended July 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.

12


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

Note 2 Significant Accounting Policies – (cont’d)

  e)

Goodwill and Intangible Assets – (cont’d)

     
 

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


                  Accumulated        
            Accumulated     Impairment     Net Carrying  
      Cost     Amortization     Charge     Amount  
  Acquired technologies $  6,306,336   $  4,417,678   $  1,888,658   $  –  
  Customer assets   2,727,679     1,482,512     1,216,028     29,139  
  Intangible assets $  9,034,015   $  5,900,190   $  3,104,686   $  29,139  

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, as amended on April 6, 2009, are license fees 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 months ended July 31, 2012, pursuant to the terms of these agreements, was $134,493 (2011 - $108,642).

 

As at July 31, 2012, the Company had an accounts receivable balance from Mitel of $150,632 (April 30, 2012 - $242,469).

 

During the three months ended July 31, 2012, the Company through its wholly owned subsidiary, CounterPath Technologies Inc., paid $21,025 (2011 - $21,030) to Kanata Research Park Corporation (“KRP”) for leased office space. KRP is controlled by the Chairman of the Company.

 

In connection with a non-brokered private placement which closed on October 29, 2010, the Company issued a convertible debenture in the principal amount of $490,750 (CDN$500,000) to Wesley Clover Corporation, a company controlled by the Chairman of the Company. In connection with a subsequent private placement on June 14, 2011, Wesley Clover Corporation converted its outstanding convertible debentures of the Company in the aggregate principal amount of $490,750 to 358,211 shares of common stock. 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 convertible debenture was 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

 

In connection with a non-brokered private placement of 3,333,334 units which closed on October 29, 2009, Wesley Clover Corporation purchased 1,666,667 units, at a price of $0.56 (CDN$0.60) per unit, for aggregate proceeds of $933,881 (CDN$1,000,000). Each unit consisted of one share of common stock and one-half of one non-transferable common share purchase warrant. In the event that Wesley Clover did not exercise all of the warrants on or before August 31, 2011, a default amount of $250,000 would have been immediately due and payable to the Company and such default amount would have incurred interest at the rate of 2% per month (on a pro-rata basis) on the default amount until the default amount is paid in full.

 

On August 24, 2011, Wesley Clover Corporation exercised 833,334 warrants at the original exercise price of $0.90 per common share.

13


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

Note 3 Related Party Transactions – (cont’d)
   

The Company’s Chairman is a beneficial shareholder of Mitel Trade s.r.o. On January 30, 2012, the Company sold products and services to Mitel Trade s.r.o. for consideration of $208,992. The Company’s revenue for the three months ended July 31, 2012, pursuant to the terms of this sale, was $10,969 (2011 - $nil). As at July 31, 2012, the Company had an accounts receivable balance from Mitel Trade s.r.o. of $206,500 (April 30, 2012 - $206,500).

 

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

 

Note 4

Derivative Instruments and Fair Value Measurement

 

 

Forward Contracts

 

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.

 

The Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. 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. There can be no assurance that the Company’s hedging program will not result in a negative impact on the Company’s earnings and earnings per share. The Company did not enter any foreign currency derivatives designated as cash flow hedges in the quarter ended July 31, 2012.

 

The Company also routinely enter into foreign currency forward contracts, not designated as hedging instruments, to protect us from fluctuations in exchange rates. As of July 31, 2012, the Company had $2,000,000 of notional value foreign currency forward contracts maturing through February 25, 2013. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under the contracts. The fair value marked to market gain (loss) of forward contracts as of July 31, 2012 is $57,700.

 

 

Derivative Warrant Liability

 

Following the guidance in ASC 815-40-15, the Company recorded the warrants issued on June 14, 2011 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.

14


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

Note 4 Derivative Instruments – (cont’d)
   
  Derivative Warrant Liability – (cont’d)
   
  The warrant liability is accounted for at its fair value as follows:

      Fair Value  
  Fair value of warrant liability, at issuance $  1,311,141  
  Change in fair value of warrant liability for the period   715,803  
  Fair value of warrant liability at April 30, 2012   2,026,944  
  Change in fair value of warrant liability for the period   (727,429 )
  Warrants exercised during the period   (54,639 )
  Fair value of warrant liability at July 31, 2012 $  1,244,876  

The Company used the Binomial method to estimate the fair value of the June 14, 2011 warrants with the following assumptions:

    As at   As at the date of issuance
    July 31, 2012   June 14, 2011
  Risk-free interest rate 0.17%   1.60%
  Expected volatility 70%   70%
  Expected term 0.87 years to 0.37 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 June 14, 2011 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 a 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 three months ended July 31, 2010, 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 320,000 stock purchase warrants that was charged to revenue during the three months ended July 31, 2011 was $136,934. The warrants expired unexercised on July 30, 2012.

Fair Value Measurement

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

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

15


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

Note 4 Derivative Instruments – (cont’d)
   
  Fair Value Measurement – (cont’d)
   

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

   
  The fair value of the derivative instrument is primarily based on standard industry accepted binomial model.

  As at July 31, 2012     Fair Value     Level 1     Level 2     Level 3  
  Derivate Warrant Liability   $  (1,244,876 ) $   $  −   $  (1,244,876 )
  Forward exchange contracts     57,700   $ 57,700          
  Total Liabilities   $  (1,187,176 ) $ 57,700   $  −   $  (1244,876 )

  As at April 30, 2012     Fair Value     Level 1     Level 2     Level 3  
  Derivative Warrant Liability   $  (2,026,944 ) $  −   $  −   $  (2,026,944 )
  Forward exchange contracts                  
  Total Liabilities   $  (2,026,944 ) $  −   $  −   $  (2,026,944 )

Note 5 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.

 

On June 19, 2012, the Company issued an aggregate of 1,465,000 units under a non–brokered private placement for aggregate gross proceeds of CDN $3,662,500 ($3,580,156) at a price of CDN $2.50 ($2.24) 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 $3.25 per share until June 19, 2014.

 

 

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.

16


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

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

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 three month period ended July 31, 2012 and 2011 in determining the expense recorded in the accompanying consolidated statement of operations.

 

The weighted-average fair value of options granted during the three months ended July 31, 2012 was $1.54 (2011 - $nil). The weighted-average assumptions utilized to determine such values are presented in the following table:


      Three Months Ended  
      July 31, 2012     July 31, 2011  
  Risk-free interest rate   0.62%     n/a  
  Expected volatility   74.47%     n/a  
  Expected term   3.7 years     n/a  
  Dividend yield   0%     n/a  

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

            Weighted Average  
      Number of     Exercise Price  
      Options     per Share  
  Outstanding at April 30, 2012   3,925,979   $ 1.15  
  Granted   305,000   $ 2.90  
  Exercised   (80,874 ) $ 0.85  
  Forfeited/Cancelled   (175,875 ) $ 1.69  
  Outstanding at July 31, 2012   3,974,230   $ 1.27  
               
  Exercisable at July 31, 2012   2,286,993   $ 0.90  
  Exercisable at April 30, 2012   2,087,742   $ 0.85  

17


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

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

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


    Number of     Aggregate       Number of     Aggregate  
Exercise   Options     Intrinsic       Options     Intrinsic  
Price   Outstanding     Value   Expiry Date   Exercisable     Value  
$0.44   387,258   $  778,389   December 15, 2013   344,119   $  691,679  
$0.47   411,389     814,550   October 12, 2012 to September 26, 2016   411,389     814,550  
$0.60   425,708     787,560   December 14, 2014   279,088     516,313  
$0.62   850,000     1,555,500   April 17, 2014   690,625     1,263,844  
$1.70   800,000     600,000   December 17, 2014   116,667     87,500  
$1.90   421,875     232,031   December 14, 2015   165,104     90,807  
$2.00   6,000     2,700   October 1, 2012   6,000     2,700  
$2.15   240,000     72,000   September 7, 2016   240,000     72,000  
$2.27   102,000     18,360   March 10, 2016   34,001     6,120  
$2.55   25,000       March 8, 2017        
$2.90   305,000       July 19, 2017        
July 31, 2012   3,974,230   $  4,861,090       2,286,993   $  3,545,513  
                           
April 30, 2012   3,925,979   $  6,751,493       2,087,742   $  4,213,032  

The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on the Company’s closing stock price of $2.45 per share as of July 31, 2012 (April 30, 2012 – $2.87), 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 July 31, 2012 was 2,286,993 (April 30, 2012 – 2,087,742). The total intrinsic value of options exercised during the three months ended July 31, 2012 was $129,403 (2011 – $61,665). The grant date fair value of options vested during the three months ended July 31, 2012 was $199,542 (2011 – $112,474).

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

        Weighted Average
    Number of Options   Grant Date Fair Value
  Non-vested options at April 30, 2012 1,838,237   $0.82
  Granted 305,000   $1.54
  Vested (280,125)   $0.71
  Cancelled/Forfeited (175,875)   $0.90
  Non-vested options at July 31, 2012 1,687,237   $0.96

As of July 31, 2012 there was, $1,411,923 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 3.14 years.

18


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

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

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


      Three Months Ended  
      July 31,  
      2012     2011  
  Cost of sales $  8,839   $  9,044  
  Sales and marketing   53,935     8,966  
  Research and development   10,716     10,050  
  General and administrative   55,943     30,878  
  Total stock-based compensation $  129,433   $  58,938  

Warrants

During the three months ended July 31, 2010, 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 320,000 stock purchase warrants that was charged to revenue during the three months ended July 31, 2011 was $136,934. These warrants expired unexercised on July 30, 2012.

On May 17, 2012, and July 25, 2012, holder of warrants issued under a brokered private placement, exercised 50,000 warrants and 7,000 warrants respectively, at the original exercise price of $2.25 per common share.

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

      Number of     Weighted Average    
      Warrants     Exercise Price   Expiry Dates
  Warrants at April 30, 2012   2,793,105   $1.94   July 30, 2012 to June 14, 2013
  Granted   732,500   $3.25   June 19, 2014
  Exercised   (57,000 ) $2.25   June 14, 2013
  Expired   (1,000,000 ) $1.50   July 30, 2012
  Warrants at July 31, 2012   2,468,605   $2.50   December 14, 2012 to June 19, 2014

Employee Stock Purchase Plan

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

A total of 700,000 shares have been reserved for issuance under the ESPP. As of July 31, 2012, a total of 556,401 (April 30, 2012 - 556,401) shares were available for issuance under the ESPP. During the three months ended July 31, 2012, nil shares (April 30, 2012 - 55,571) were sold or issued to employees under the ESPP.

19


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

Note 5

Common Stock – (cont’d)

 

 

Deferred Share Unit Plan

 

Under the terms of the Deferred Share Unit Plan (the “DSUP”), 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 three months ended July 31, 2012, 133,443 deferred share units were issued under the DSUP, of which 59,878 were granted to officers or employees and 73,565 were granted to non-employee directors. As of July 31, 2012, a total of 278,493 shares were available for issuance under the DSUP.

 

The following table summarizes the Company’s outstanding deferred share unit awards as of July 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, 2012 1,588,064   $0.83
  Granted 133,443   $2.90
  Conversions  
  DSU’s outstanding at July 31, 2012 1,721,507   $1.01

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

        Weighted Average
        Grant Date Fair
    Number of DSU’s   Value Per Unit
  Non-vested DSU’s at April 30, 2012 334,337     $1.33
  Granted 133,443     $2.90
  Vested (165,007)   $1.52
  Non-vested DSU’s at July 31, 2012 302,773     $1.63

As of July 31, 2012 there was $428,461 (2011 – $496,636) 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 2.17 years (2011 – 2.47 years).

20


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

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

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


      Three Months Ended  
      July 31,  
      2012     2011  
  Sales and marketing $  4,167   $  –  
  Research and development   272      
  General and administrative   262,898     185,323  
  Total deferred share unit-based compensation $  267,337   $  185,323  

Note 6 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 months ended July 31, 2012 and 2011:


      Three Months Ended  
      July 31,  
      2012     2011  
  North America $  2,920,517   $  1,603,753  
  Europe   691,113     847,033  
  Asia and Africa   556,687     219,198  
  Latin America   219,451     88,750  
    $  4,387,768   $  2,758,734  

Contained within the results of North America for the three months ended July 31, 2012 are revenues from the United States of $1,935,087 (2011 - $951,087) and from Canada of $985,430 (2011 - $652,666).

Contained within the results of Europe for the three months ended July 31, 2012 are revenues from Norway of $179,382 (2011 - $4,995), from Germany of $130,412 (2011 - $102,566), from the United Kingdom of $123,146 (2011 - $379,940), from Slovakia of $35,099 (2011 - $1,242), and from Spain of $33,398 (2011 - $25,083).

Contained within the results of Asia and Africa for the three months ended July 31, 2012 are revenues from Japan of $355,881 (2011 - $15,342), from China of $77,258 (2011 - $20,974), from Russian Federation of $55,731 (2011 - $17,175), from Australia of $20,301 (2011 - $22,270), and from South Africa of $17,535 (2011 - $72,974).

Contained within the results of Latin America for the three months ended July 31, 2012 are revenues from Brazil of $144,950 (2011 - $32,813), from Mexico of $20,568 (2011 - $14,115), from Dominican Republic of $14,160 (2011 - $nil), from Uruguay of $11,370 (2011 - $nil), and from Colombia of $10,701 (2011 - $19,192).

21


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

Note 6 Segmented Information – (cont’d)
   

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


      As at    
      July 31, 2012     April 30, 2012  
  Canada $  8,926,627   $ 9,830,664  
  United States   19,258     18,891  
    $  8,945,885   $ 9,849,555  

Revenue from significant customers for the three months ended July 31, 2012 and 2011 is summarized as follows:

      Three Months Ended  
      July 31,  
      2012     2011  
  Customer A   15%     –%  
  Customer B   10%     15%  
      25%     15%  

  Accounts receivable balances for Customer A were $770,828 as at July 31, 2012 (April 30, 2012 - $32,703).
  Accounts receivable balances for Customer B were $720,471 as at July 31, 2012 (April 30, 2012 - $79,100).
   
Note 7 Commitments

  a)

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 $9,890 was made. The monthly lease payment under this agreement is $9,890 plus $8,666 in operating costs. The Company is subleasing part of these premises for a monthly charge of $7,476. The sublease commenced on August 1, 2007 and expires on September 30, 2012.

     
  b)

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 $49,805 was made. The monthly lease payment under the agreement is $21,579 plus $21,182 in operating costs. Management believes that this office space is adequate for the operations of the Company for the foreseeable future.

     
  c)

On December 9, 2011, the Company signed a fifth amendment to an existing lease agreement to extend the lease starting May 1, 2012 to April 30, 2014. The monthly lease payment under the new lease extension is $7,008 (CDN$7,036).This lease expense is a related party transaction as it was incurred with a company with a director in common with the Company.

     
  d)

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 $493,070 (CDN$495,000) over 45 months at a rate of CDN$11,000 per month.

     
  e)

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.

22


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

Note 7 Commitments – (cont’d)
   
  Total payable over the term of the agreements for the years ended April 30 are as follows:

            Office Leases                    
      Office Leases –     – Unrelated     Sub Lease     Total Office     Settlement  
      Related Party     Party     Income     Leases     Agreement  
  2013 $  63,074   $  456,014   $  (14,953 ) $  504,135   $  49,307  
  2014   84,099     496,005         580,104      
  2015       206,669         206,669      
    $  147,173   $  1,158,688   $  (14,953 ) $  1,290,908   $  49,307  

Note 8 Subsequent Events
   

On September 13, 2012, the Company granted 5,000 stock options to one 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 share price on September 13, 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.

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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 completed the acquisition of all of the shares of NewHeights Software Corporation through the issuance of 7,680,168 shares of common stock and 369,836 preferred shares issued from a subsidiary of our company, which preferred shares were exchangeable into 369,836 shares of our common stock.

          On February 1, 2008, we acquired FirstHand Technologies Inc., a private Ontario, Canada corporation, through the issuance of 5.9 million shares of our common stock.

          On February 1, 2008, we acquired BridgePort Networks, Inc., a private Delaware corporation, by way of merger in consideration for the assumption of all of the assets and liabilities of BridgePort Networks.

          On February 5, 2008, NewHeights and our subsidiary, CounterPath Solutions R&D Inc., were amalgamated under the name CounterPath Technologies Inc.

          On November 1, 2010, our wholly-owned subsidiary, FirstHand Technologies Inc., was amalgamated with CounterPath Technologies Inc., under the name CounterPath Technologies Inc.

Business of CounterPath

          Our business focuses on the design, development, marketing and sales of personal computer and mobile application software, 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.

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          Our strategy is to sell our software to our customers to allow such customers to deliver session initiation protocol and voice over Internet protocol (VoIP) services. Our customers include: (1) telecommunications service providers and Internet telephony service providers, (2) original equipment manufacturers serving the telecommunication market; (3) small, medium and large sized businesses; and (4) end users. Our software enables voice 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.

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. Personnel-related costs are the most significant component of each of these expense categories.

          Cost of sales primarily consists of: (a) salaries and benefits related to personnel including stock-based compensation, (b) related overhead, (c) amortization of intangible assets, (d) billable and non-billable travel, lodging, and other out-of-pocket expenses, (e) payments to third party vendors for compression/decompression software known as codecs, (f) amortization of capitalized software that is implemented into our products, and (g) warranty expense. Amortization of intangible assets consists of the amortization expense related to the intangible assets acquired from NewHeights Software Corporation, FirstHand Technologies Inc. and BridgePort Networks, Inc. comprising acquired technologies and customer assets. The acquired technologies is 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 from acquisition, which is management's estimate of the useful life of the customer asset.

          Sales and marketing expense consists primarily of: (a) salaries and related personnel costs including stock-based compensation, (b) 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.

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          Research and development expense consists primarily of: (a) salaries and related personnel costs including stock-based compensation, (b) payments to suppliers for design and 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.

Application of Critical Accounting Policies and Use of Estimates

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

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

Basis of Presentation

          The consolidated financial statements include the accounts of our company and our wholly-owned subsidiaries, CounterPath Technologies Inc., a company existing under the laws of the province of British Columbia, Canada, BridgePort Networks, Inc. incorporated under the laws of the state of Delaware. All inter-company transactions and balances have been eliminated.

Interim Reporting

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

          These statements reflect all adjustments, which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented in accordance with accounting principles generally accepted in the United States of America. Except where noted, the interim consolidated financial statements follow the same accounting policies and methods of their application as our April 30, 2012 annual consolidated financial statements. All adjustments are of a normal recurring nature. It is suggested that these interim consolidated financial statements be read in conjunction with our April 30, 2012 annual consolidated financial statements.

          Operating results for the three months ended July 31, 2012 are not necessarily indicative of the results that can be expected for the year ending April 30, 2013.

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Revenue Recognition

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

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

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

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

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

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

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

          We have a bad debt and a warranty provision in the amount of 2% and 1%, respectively, of software sales, which is amortized over a twelve-month term. We recognize this deferred revenue evenly over a twelve-month period from the date of the sale.

Stock-Based Compensation

          Stock options granted are accounted for under ASC 718 (prior authoritative literature: SFAS No. 123R) “Share-Based Payment” and are recognized at the fair value of the options as determined by an option pricing model as the related services are provided and the options earned. ASC 718 replaces existing requirements under FAS 123 and APB 25, and requires public companies to recognize the cost of employee services received in exchange for equity instruments, based on the fair value of those instruments on the measurement date which generally is the grant date, with limited exceptions. Stock-based compensation represents the cost related to stock-based awards granted to employees and non-employee consultants. We measure stock-based compensation cost at measurement date, based on the estimated fair value of the award, and generally recognize the cost as expense on a straight-line basis (net of estimated forfeitures) over the employee requisite service period or the period during which the related services are provided by the non-employee consultants and the options are earned. We estimate the fair value of stock options using a Black-Scholes option valuation model.

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          The expected volatility of options granted has been determined using the volatility of our company's stock. The expected life of options granted after April 30, 2006 has been determined utilizing the “simplified” method as prescribed by the SEC's Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero. In addition, ASC 718 requires companies to utilize an estimated forfeiture rate when calculating the expense for the period. We applied an estimated forfeiture rate of 15.0% in the three months ended July 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 three months ended July 31, 2012, we recorded an expense of $396,770 in connection with share-based payment awards. A future expense of non-vested options of $1,411,923 is expected to be recognized over a weighted-average period of 3.14 years. A future expense of non-vested deferred share units of $428,461 is expected to be recognized over a weighted-average period of 2.17 years.

Research and Development Expense for Software Products

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

Accounts Receivable and Allowance for Doubtful Accounts

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

Goodwill and Intangible Assets

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

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Goodwill and Intangible Assets—Impairment Assessments

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

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

          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 three months ending July 31, 2012 (2011 - $nil).

Derivative Instruments

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

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          We periodically enter into foreign currency forward contracts, not designated as hedging instruments, to protect us from fluctuations in exchange rates. As of July 31, 2012, we had $2,000,000 of notional value foreign currency forward contracts maturing through February 25, 2013. Notional amounts do not quantify risk or represent assets or liabilities of our company, but are used in the calculation of cash settlements under the contracts. The fair value marked to market gain/loss of forward contracts as of July 31, 2012 is $57,700.

Results of Operations

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

Selected Consolidated Statements of Operations Data   Three Months Ended July 31,  
    2012     2011  
          Percent of           Percent  
          Total           of Total  
    Amount     Revenue     Amount     Revenue  
Revenue $ 4,387,768     100%   $ 2,758,734     100%  
                         
Non-GAAP operating expenses1   3,948,481     115%     3,183,823     115%  
Stock-based compensation   396,770     9%     244,261     9%  
Amortization of intangible assets   9,908     10%     280,880     10%  
GAAP operating expenses   4,355,159     134%     3,708,964     134%  
                         
Income (loss) from operations   32,609     (34% )   (950,230 )   (34% )
Interest income (expense), net   43,383     (4% )   (121,889 )   (4% )
Foreign exchange gain   6,418     -%     687     -%  
Fair value adjustment on derivative instrument   785,128     5%     145,714     5%  
Net income (loss) $ 867,538     (33% )   ($925,718 )   (33% )
                         
Net income (loss) per share $ 0.02           ($0.03 )      
                         
Weighted average common shares outstanding   40,727,122           35,831,910        
______________
  1.

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

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    July 31,     April 30,  
Selected Consolidated Balance Sheet Data   2012     2012  
Cash $ 11,404,439   $ 8,154,139  
Current assets   16,918,971     12,339,167  
Current liabilities   5,390,312     5,850,427  
Total liabilities   5,543,645     6,005,084  
Total assets $ 26,000,297   $ 21,543,944  

Revenue

      Three Months Ended July 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 $ 2,528,056     58%   $ 1,584,051     57%     944,005     60%  
 Service   1,859,712     42%     1,174,683     43%     685,029     58%  
Total revenue $ 4,387,768     100%   $ 2,758,734     100%   $ 1,629,034     59%  
                                     
Revenue by Region                                    
 International $ 1,467,251     33%   $ 1,154,981     42%   $ 312,270     27%  
 North America   2,920,517     67%     1,603,753     58%     1,316,764     82%  
Total revenue $ 4,387,768     100%   $ 2,758,734     100%   $ 1,629,034     59%  

          For the three months ended July 31, 2012, we generated $4,387,768 in revenue compared to $2,758,734 for the three months ended July 31, 2011. This represents an increase of $1,629,034 or 59% from the same period last year. We generated $2,528,056 in software revenue for the three months ended July 31, 2012 compared to $1,584,051 for the three months ended July 31, 2011, representing an increase of $944,005 or 60%. The increase in software revenue for the three months ended July 31, 2012 was primarily a result of increases in direct sales to telecom service providers and enterprises. For the three months ended July 31, 2012, service revenue was $1,859,712 compared to $1,174,683 for the three months ended July 31, 2011. The increase of $685,029 in service revenue was primarily due to the increase in sales of professional engineering and customization work for both telecom service providers and enterprises. The service revenue related to customization is expected to lead to future software revenue as our customers deploy further volumes of that customized software. International revenue outside of North America increased by 27% during the three months ended July 31, 2012 compared to the three months ended July 31, 2011, as a result of increased sales in Asia and Latin America offset by weaker sales in Europe. North American revenue increased by 82%, compared to the three months ended July 31, 2011, due primarily to an increase in sales of software and services to North American telecom service providers and enterprises.

Operating Expenses

Cost of Sales

          Cost of sales for the three months ended July 31, 2012 and 2011 were as follows:

    July 31, 2012     July 31, 2011     Period-to-Period Change  
          Percent           Percent           Percent  
          of           of           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 559,793     13%   $ 860,145     31%     ($300,352 )   (35% )

          Cost of sales was $559,793 for the three months ended July 31, 2012 compared to $860,145 for the three months ended July 31, 2011. The decrease of $300,352 was primarily attributable to a decrease in amortization of intangible assets of approximately $271,000, a decrease in wages and benefits of approximately $67,000, partially offset by an increase of approximately $31,000 of professional services. Cost of sales for the three months ended July 31, 2012 includes $9,908 ($280,880 – 2011) of non-cash amortization of the intangible assets as a result of the acquisitions of NewHeights Software in August 2007 and FirstHand Technologies in February 2008.

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Sales and Marketing

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

    July 31, 2012     July 31, 2011     Period-to-Period Change  
          Percent           Percent           Percent  
          of           of           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 1,055,035     24%   $ 822,034     30%   $ 233,001     28%  

          Sales and marketing expenses were $1,055,035 for the three months ended July 31, 2012 compared to $822,034 for the three months ended July 31, 2011. The increase of $233,001 was primarily attributable to an increase of approximately $107,000 in sales and marketing related wages and commissions, an increase of approximately $77,000 in professional services and consulting fees, and an increase of approximately $49,000 in stock based compensation cost.

Research and Development

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

    July 31, 2012     July 31, 2011     Period-to-Period Change  
          Percent           Percent           Percent  
          of           of           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 1,361,012     31%   $ 992,511     36%     368,501     37%  

          Research and development expenses were $1,361,012 for the three months ended July 31, 2012 compared to $992,511 for the three months ended July 31, 2011. The increase of $368,501 was primarily attributable to an increase in wages and benefits of approximately $322,000, an increase of approximately $32,000 in professional services and consulting fees and an increase of approximately $20,000 in office expenses.

General and Administrative

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

    July 31, 2012     July 31, 2011     Period-to-Period Change  
          Percent           Percent           Percent  
          of           of           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 1,379,319     31%   $ 1,034,274     37%   $ 345,045     33%  

          General and administrative expenses were $1,379,319 for the three months ended July 31, 2012 compared to $1,034,274 for the three months ended July 31, 2011. The increase of $345,045 in general and administrative expenses was primarily attributable to an increase of approximately $103,000 in stock based compensation, an increase of approximately $73,000 in exchange listing fees, an increase of approximately $54,000 in investor relations costs, an increase in bad debts reserve of approximately $46,000, an increase of approximately $31,000 in professional services and consulting fees and an increase of approximately $26,000 in wages and benefits.

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Interest and Other Income

          Interest income for the three months ended July 31, 2012 was $43,853 compared to $49,353 for the three months ended July 31, 2011. Interest expense for the three months ended July 31, 2012 was $470 compared to $171,242 for the three months ended July 31, 2011. Interest expense for the three months ended July 31, 2011 primarily relates to the accretion of the convertible debenture discount of approximately $160,000.

          Foreign exchange gain for the three months ended July 31, 2012 was $6,418 compared to $687 for the three months ended July 31, 2011. The foreign exchange gain/loss represents the gain/loss on account of translation of the inter company accounts of our subsidiaries which maintain their records in currencies other than U.S. dollars as well as transactional losses and gains.

Liquidity and Capital Resources

           As of July 31, 2012, we had $11,404,439 in cash compared to $8,154,139 at April 30, 2012, representing an increase of $3,250,300. The increase was attributable to the completion of a private placement discussed below under Financing Activities. Our working capital was $11,528,659 at July 31, 2012 compared to $6,488,740 at April 30, 2012, representing an increase of $5,039,919. Management anticipates that the future capital requirements of our company will be primarily funded through cash flows generated from operations and from working capital, and we may seek additional funding to meet ongoing operating expenses.

          Our company has $695,981 in cash held outside of the U.S., and there is no intent to repatriate at this time. Should we decide to repatriate in the future, taxes would need to be accrued and paid.

Operating Activities

          Our operating activities resulted in a net cash outflow of $474,503 for the three months ended July 31, 2012. This compares to a net cash outflow of $360,395 for the same period last year and represents an increase of $114,108 in cash outflow from operations compared to the same period last year. The net cash outflow from operating activities for the three months ended July 31, 2012 was primarily a result of an increase in accounts receivable of $1,376,773, a non-cash gain of $785,128 due to the change in fair value of derivative instruments and a $29,129 decrease in accounts payable, which more than offset a net income of $867,538, a $371,687 increase in unearned revenue, and a non-cash expense of $396,770 for stock-based compensation and $33,495 for depreciation and amortization.

          The net cash outflow from operating activities for the three months ended July 31, 2011 was primarily a result of a net loss of $925,718, a $387,661 decrease in accounts payable, a $188,252 decrease in unearned revenue and a non-cash gain of $145,714 due to the change in fair value of a derivative instruments. The net cash outflow was primarily offset by a $599,061 decrease in accounts receivable. The net cash outflow was further offset by adjustments for non-cash expenses including $280,880 for amortization of intangible assets, $244,261 for stock-based compensation and $30,841 for depreciation and amortization.

Investing Activities

          Investing activities resulted in a net cash outflow of $34,501 for the three months ended July 31, 2012 primarily from purchases of computer equipment. This compares with a net cash outflow from investing activities of $1,692 for the same period last year from deposits and purchases of equipment. At July 31, 2012, we did not have any material commitments for future capital expenditures.

Financing Activities

          Financing activities resulted in a net cash inflow of $3,759,409 for the three months ended July 31, 2012 compared to a net cash inflow of $5,857,404 for the three months ended July 31, 2011.

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          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.

          On July 28, 2011, we received total proceeds of $750,001 from the exercise of 833,334 warrants issued pursuant to a private placement that closed October 29, 2009. On August 24, 2011, we received total proceeds of $750,001 from the exercise of 833,334 warrants issued pursuant to a private placement that closed October 29, 2009. On May 14, 2012, we received total proceeds of $114,086 (CDN$112,500) from the exercise of 50,000 warrants issued pursuant to the private placement that closed June 14, 2011.

          On June 19, 2012, we issued an aggregate of 1,465,000 units under a non-brokered private placement for aggregate gross proceeds of $3,597,000 (CDN$3,662,500) at a price of $2.46 (CDN$2.50) 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 common share of our common stock at an exercise price of $3.25 per share until June 19, 2014.

Off-Balance Sheet Arrangements

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

New Accounting Pronouncements

          In May 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. We early implemented the requirements and present net income and comprehensive income in a single continuous statement.

          In May 2011, the FASB issued Accounting Standards Update (ASU) 2011-04, "Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS." There are few differences between the ASU and IFRS 13. While the ASU is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands ASC 820's existing disclosure requirements for fair value measurements and makes other amendments. The amendments in the update became effective for fiscal years and interim periods beginning after December 15, 2011. We have adopted this standard, and it did not materially impact our 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. We early implemented the requirements and present net income and comprehensive income in a single continuous statement.

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          In September 2011, the FASB issued accounting Standards Update 2011-08 to simplify how tests for potential goodwill impairment are performed. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit in which goodwill resides is less than its carrying value. For reporting units in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform further goodwill impairment testing as required under the previous standards. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 31, 2011. Early adoption was permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011 if an entity’s financial statements had not yet been issued. We have early adopted this standard on September 30, 2011, and it did not materially impact our 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.

          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 July 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 July 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.

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

Risks Associated with our Business and Industry

          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, Europe and the 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 the European debt crisis, 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. 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 that they will continue to do so, which could have a material adverse effect on our operating results.

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

  demand for our products and the timing and size of customer orders;
     
  length of sales cycles;
     
  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.

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

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          Operating expenses increased to $4,355,159 for the three months ended July 31, 2012 from $3,708,964 for the three months ended July 31, 2011 while our revenue increased to $4,387,768 for the three months ended July 31, 2012 from $2,758,734 for the three months ended July 31, 2011. Our ability to reach and maintain 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 or maintain profitability.

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

 

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

     
 

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

     
 

offering customers financing assistance;

     
 

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

   

 

 

asserting infringement of their intellectual property rights.

          Such competition may potentially affect our profitability.

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

          A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital, or a delisting from a stock exchange on which our common stock trades. Because our operations have been partially financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our continued operations. Any reduction in our ability to raise equity capital in the future would force us to reallocate funds from other planned uses and would have a significant negative effect on our business plans and operations, including our ability to develop new products and continue our current operations. If our stock price declines, there can be no assurance that we can raise additional capital or generate funds from operations sufficient to meet our obligations.

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

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

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

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

 

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

     
 

cause us to lose access to key distribution channels;

     
 

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

     
 

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

     
 

cause our stock price to decline significantly; and

     
 

lead to the bankruptcy or liquidation of our company.

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

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

          Our success and ability to compete depends to a significant degree on our proprietary technology incorporated in our software. If any of our competitors' 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-Lite, and Softphone.com invaluable to our ability to continue to develop and maintain the goodwill and recognition associated with our brand. The measures we take to protect the proprietary technology software, and other intellectual property rights, which presently are based upon a combination of patents, patents pending, copyright, trade secret and trademark laws, may not be adequate to prevent their unauthorized use. Further, the laws of foreign countries may provide inadequate protection of such intellectual property rights.

          We may need to bring legal claims to enforce or protect such intellectual property rights. Any litigation, whether successful or unsuccessful, could result in substantial costs and 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.

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

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

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

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

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

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

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

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

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

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

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

          We are subject to the credit risk of our customers. Businesses that are good credit risks at the time of sale may become bad credit risks over time. In times of economic recession, the number of our customers who default on payments owed to us tends to increase. If we fail to adequately assess and monitor our credit risks, we could experience longer payment cycles, increased collection costs and higher bad debt expense. 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 financial condition, results of operations and liquidity.

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

          A majority of our revenue activities are transacted in U.S. dollars. However, we are exposed to foreign currency exchange rate risk inherent in conducting business globally in numerous currencies, of which the most significant to our operations for the three months ended July 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. We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. Our company’s foreign currency risk management program includes foreign currency derivatives with cash flow hedge accounting designation that utilizes foreign currency forward contracts to hedge exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S. dollar-denominated cash flows. These instruments generally have a maturity of less than one year. For these derivatives, our company reports the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss) in stockholders’ equity and reclassifies it into earnings in the same period in which the hedged transaction affects earnings, and within the same line item on the consolidated statements of operations as the impact of the hedged transaction. There can be no assurance that our hedging program will not result in a negative impact on our earnings and earnings per share. We did not enter any foreign currency derivatives designated as cash flow hedges in the quarter ended July 31, 2012.

          We also routinely enter into foreign currency forward contracts, not designated as hedging instruments, to protect us from fluctuations in exchange rates. As of July 31, 2012 we had $2,000,000 of notional value foreign currency forward contracts maturing through February 25, 2013. Notional amounts do not quantify risk or represent assets or liabilities of our company, but are used in the calculation of cash settlements under the contracts. The fair value marked to market gain/loss of forward contracts as of July 31, 2012 is $57,700.

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 41,563,353 shares of common stock that were issued and outstanding as of July 31, 2012, our directors owned approximately 26.5% 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.

40


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

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

          The exercise of all or any number of outstanding 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 July 31, 2012, then we would be required to issue an additional 8,164,342 shares of our common stock, which would represent approximately 16.4% 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.

          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.

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

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

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

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

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

          On July 19, 2012, we granted 133,433 deferred share units to six non-employee directors and two officers and one employee exchangeable into 133,433 shares of our common stock on a one for one basis pursuant to our Deferred Share Unit Plan. 73,565 of the deferred share units vest immediately and 59,878 of the deferred share units 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. We issued the deferred share units to non-U.S. persons (as that term is defined in Regulation S of the Securities Act of 1933) in an offshore transaction relying on Regulation S and/or Section 4(2) of the Securities Act of 1933.

          On July 19, 2012, we granted 305,000 stock options pursuant to our 2010 Stock Option plan to three employees. Each stock option entitles the holder thereof the right to purchase one share of common stock at a price equal to $2.55. The options vest in the amount of 12.5% on the date which is six months from the date of grant and then beginning in the seventh month at 1/42 per month for 42 months, at which time the options are fully vested. We issued 105,000 the stock options to non-U.S. persons (as that term is defined in Regulation S of the Securities Act of 1933) in an offshore transaction(s) relying on Regulation S and/or Section 4(2) of the Securities Act of 1933. We issued 200,000 of the stock options to U.S. persons (as that term is defined in Regulation S of the Securities Act of 1933) in reliance upon Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933, as applicable.

Item 3. Defaults Upon Senior Securities.

          None.

Item 5. Other Information.

          None.

Item 6. Exhibits.

Exhibits required by Item 601 of Regulation S-B

(3) Articles of Incorporation and By-laws
   
3.1

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

 

3.2

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

 

3.3

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

 

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).

42



3.7

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

 
(4)

Instruments defining the rights of security holders, including indentures

 
4.1

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

 

4.2

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

 

4.3

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

 

4.4

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

 

4.5

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

 

4.6

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

 

4.7

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

 

4.8

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

 

4.9

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)

Material Contracts

 

10.1

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

 

10.2

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

 

10.3

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).

 

10.4

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).

 

10.5

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).

43



10.6

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).

   
10.7

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).

   
10.8

Form of Subscription Agreement and Form of Convertible Debenture dated July 30, 2010 between our company and various investors (incorporated by reference from our Current Report on Form 8-K filed on August 4, 2010).

   
10.9

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 14, 2011).

   
10.10

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 14, 2011).

   
10.11

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 14, 2011).

   
10.12

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 14, 2011).

   
10.13

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 14, 2011).

   
10.14

Form of Subscription Agreement between our company and various investors in connection with the brokered private placement completed on June 19, 2012 (incorporated by reference from our Annual Report on Form 10-K filed on July 19, 2012).

   
10.15

Form of Warrant Certificate issued to various investors in connection with the brokered private placement completed on June 19, 2012 (incorporated by reference from our Annual Report on Form 10-K filed on July 19, 2012).

   
(14)

Code of Ethics

   
14.1

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

   
14.2

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

   
(21)

Subsidiaries of CounterPath Corporation

   

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

   

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

   

BridgePort Networks (Europe) Ltd. (incorporated in the United Kingdom)

44



(31) Section 302 Certifications
   
31.1 Section 302 Certification of Donovan Jones (filed herewith).
   
31.2 Section 302 Certification of David Karp (filed herewith).
   
(32) Section 906 Certifications
   
32.1 Section 906 Certification of Donovan Jones (filed herewith).
   
32.2 Section 906 Certification of David Karp (filed herewith).

45


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  
  Date: September 13, 2012  
     
     
  /s/ David Karp  
  David Karp  
  Chief Financial Officer, Treasurer and Secretary  
  Date: September 13, 2012  

46


XTSE:CCV Quarterly Report 10-Q Filling

XTSE:CCV Stock - Get Quarterly Report SEC Filing of XTSE:CCV stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XTSE:CCV Quarterly Report 10-Q Filing - 7/31/2012
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