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

FORM 10-Q

(Mark One)

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

For the quarterly period ended October 31, 2013

OR

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

For the transition period from ______________ to ______________

Commission file number 000-50346

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

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

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

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

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

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

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

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

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


APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 42,137,532 shares of common stock issued and outstanding as of December 9, 2013.

 

2


COUNTERPATH CORPORATION
OCTOBER 31, 2013 QUARTERLY REPORT ON FORM 10-Q

INDEX

    Page
     
 
   
Item 1. Financial Statements.
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
   
Item 4. Controls and Procedures.
   
 
     
Item 1. Legal Proceedings. 39
     
Item 1A. Risk Factors. 39
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 46
     
Item 3. Defaults Upon Senior Securities. 46
     
Item 5. Other Information. 46
     
Item 6. Exhibits. 47

3


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

It is the opinion of management that the interim consolidated financial statements for the quarter ended October 31, 2013 include all adjustments necessary in order to ensure that the interim consolidated financial statements are not misleading.

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

COUNTERPATH CORPORATION
INDEX TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2013
(Unaudited)
(Stated in U.S. Dollars)

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

4


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

 

October 31, April 30,

 

2013 2013

Assets

(Unaudited)  

   Current assets:

           

       Cash and cash equivalents

$  9,423,773 $  11,229,595

       Accounts receivable (net of allowance for doubtful accounts of $330,905 and $456,051, respectively)

  3,585,191     4,640,620  

       Prepaid expenses and deposits

103,770 139,591

           Total current assets

  13,112,734     16,009,806  

 

   

   Deposits

  127,770     125,160  

   Equipment

120,709 167,986

   Derivative instruments – Note 4

      9,830  

   Goodwill – Note 2(e)

8,398,158 8,660,930

   Other assets

  98,090     82,165  

Total Assets

$  21,857,461 $  25,055,877

 

           

Liabilities and Stockholders’ Equity

   

   Current liabilities:

           

       Accounts payable and accrued liabilities

$  2,262,103 $  2,363,311

       Derivative instruments – Note 4

  9,814     93,057  

       Unearned revenue

1,533,841 1,442,511

       Customer deposits

  9,553     9,553  

       Accrued warranty

77,221 91,151

           Total current liabilities

  3,892,532     3,999,583  

 

   

   Deferred lease inducements

  14,570     30,110  

   Unrecognized tax benefit

98,575 98,575

           Total liabilities

  4,005,677     4,128,268  

 

   

   Stockholders’ equity:

           

   Preferred stock, $0.001 par value 
         Authorized: 100,000,000 
         Issued and outstanding: October 31, 2013 – nil; April 30, 2013 – 1

       

   Common stock, $0.001 par value – Note 5 
         Authorized: 100,000,000 
         Issued:
         October 31, 2013 – 42,080,937; April 30, 2013 – 41,958,350

  42,081     41,959  

             Treasury stock

(25 ) (79 )

   Additional paid-in capital

  66,735,885     66,191,140  

   Accumulated deficit

(48,311,010 ) (44,974,491 )

   Accumulated other comprehensive income (loss) – currency translation adjustment

  (615,147 )   (330,920 )

           Total stockholders’ equity

17,851,784 20,927,609

Liabilities and Stockholders’ Equity

$  21,857,461   $  25,055,877  

 

   

Commitments – Note 7

           

See accompanying notes to the consolidated financial statements

5


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

    Three Months Ended     Six Months Ended  
    October 31,     October 31,  
    2013     2012     2013     2012  

Revenue – Note 6:

                       

   Software

$  1,451,475   $  1,811,815   $  3,098,995   $ 4,339,871  

   Service

  1,095,335     1,750,972     2,307,302     3,610,684  

             Total revenue

  2,546,810     3,562,787     5,406,297     7,950,555  

Operating expenses:

                       

   Cost of sales (includes depreciation of $45,598 (2012 – $22,071)
   and amortization of intangible assets of $nil (2012 – $19,591))

  571,857     626,006     1,129,312     1,185,799  

   Sales and marketing

  1,315,421     1,028,217     2,528,904     2,083,252  

   Research and development

  1,324,308     1,284,594     2,737,383     2,645,606  

   General and administrative

  1,101,457     1,164,092     2,114,987     2,543,411  

             Total operating expenses

  4,313,043     4,102,909     8,510,586     8,458,068  

Income (loss) from operations

  (1,766,233 )   (540,122 )   (3,104,289 )   (507,513 )

Interest and other income (expense), net:

                       

   Interest and other income

  56,989     18,090     84,474     61,943  

   Interest expense

  (161 )   (154 )   (932 )   (624 )

   Fair value adjustment on derivative instruments – Note 4

  (12,574 )   208,036     73,413     993,164  

   Foreign exchange gain (loss)

  (389,249 )   (10,955 )   (389,185 )   (4,537 )

Net income (loss) for the period

$  (2,111,228 ) $  (325,105 ) $  (3,336,519 ) $ 542,433  

 

                       

Net income (loss) per share:

                       

   Basic and diluted – Note 8

$  (0.05 ) $  (0.01 ) $  (0.08 ) $ 0.01  

 

                       

   Weighted average common shares outstanding:

                       

         Basic and diluted – Note 8

  42,007,439     41,592,776     41,971,160     41,159,949  

See accompanying notes to the consolidated financial statements

 

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

Net income (loss) for the period

$  (2,111,228 ) $  (325,105 ) $  (3,336,519 ) $  542,433  

Other comprehensive income (loss):

                       

   Foreign currency translation adjustments

  (154,988 )   31,857     (284,227 )   (128,709 )

Comprehensive income (loss)

$  (2,266,216 ) $  (293,248 ) $  (3,620,746 ) $  413,724  

See accompanying notes to the consolidated financial statements

6


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

    Six Months Ended  
    October 31,  

 

  2013     2012  

Cash flows from operating activities:

           

   Net income (loss) for the period

$  (3,336,519 ) $  542,433  

   Adjustments to reconcile net income (loss) to net cash used in operating activities:

       

           Depreciation and amortization

  112,974     81,830  

           Amortization of intangible assets

      19,591  

           Deferred lease inducements

  (15,540 )    

           Stock-based compensation

  637,043     611,375  

           Fair value adjustment on derivative instruments

  (73,413 )   (993,164 )

           Foreign exchange gain (loss)

  (1,382 )   4,537  

   Changes in assets and liabilities:

           

           Accounts receivable

  1,064,192     (715,238 )

           Prepaid expenses and deposits

  35,864     86,818  

           Increase in other assets

  (15,925 )   (47,560 )

           Accounts payable and accrued liabilities

  (69,067 )   (76,320 )

           Unearned revenue

  91,330     286,469  

           Accrued warranty

  (13,930 )   2,607  

Net cash generated from (used in) operating activities

  (1,584,373 )   (196,622 )

 

           

Cash flows from investing activities:

           

             Purchase of equipment

  (63,870 )   (213,927 )

             Deposits

  (5,824 )   (42,560 )

Net cash used in investing activities

  (69,694 )   (256,487 )

 

           

Cash flows from financing activities:

           

             Common stock issued

  70,565     3,993,190  

             Common stock repurchased

  (162,737 )    

             Transaction costs

      (15,592 )

Net cash provided by (used) in financing activities

  (92,172 )   3,977,598  

 

           

Foreign exchange effect on cash

  (59,583 )   (8,882 )

 

           

Increase (decrease) in cash

  (1,805,822 )   3,515,607  

 

           

Cash, beginning of the period

  11,229,595     8,154,139  

Cash, end of the period

$  9,423,773   $  11,669,746  

 

           

Supplemental disclosure of cash flow information

           

   Cash paid for:

           

             Interest

$  932   $  624  

             Non cash transactions – Note 5

           

See accompanying notes to the consolidated financial statements

7


COUNTERPATH CORPORATION
INTERIM CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
for the Six Months Ended October 31, 2013
(Stated in U.S. Dollars)
(Unaudited)

    Common Shares     Treasury Shares     Preferred Shares                          
                                                    Accumulated        
    Number           Number           Number           Additional           Other        
    of           of           of           Paid-in     Accumulated     Comprehensive        
    Shares     Par Value     Shares     Par Value     Shares     Par Value     Capital     Deficit     Income (Loss)     Total  
                                                             

Balance, April 30, 2013

  41,958,350   $  41,959     (78,608 ) $  (79 )   1   $  –   $  66,191,140   $  (44,974,491 ) $  (330,920 ) $  20,927,609  

 

                                                           

Shares issued:

                                                           

Exercise of stock options

  231,655     232                     108,683             108,915  

Share repurchase plan

          (105,148 )   (105 )           105              

Cancellation of shares - Note 5

  (158,936 )   (159 )   158,936     159             (162,737 )           (162,737 )

Conversion of deferred share units

  49,868     49                     (38,349 )           (38,300 )

Stock-based compensation – Note 5

                          637,043             637,043  

Cancellation of preferred share

                  (1 )                    

Net Income (loss) for the period

                              (3,336,519 )         (3,336,519 )

Foreign currency translation adjustment

                                  (284,227 )   (284,227 )

 

                                                           

Balance, October 31, 2013 (unaudited)

  42,080,937   $  42,081     (24,820 ) $   (25 )     $  –   $  66,735,885   $  (48,311,010 ) $  (615,147 ) $  17,851,784  

See accompanying notes to the consolidated financial statements

8


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2013
(Unaudited)

Note 1 Nature of Operations
   

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

   

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 the Company’s common stock. 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 of directors 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 of directors 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 of directors 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. (“CounterPath Technologies”).

   

On November 1, 2010, the Company's wholly-owned subsidiaries, FirstHand and CounterPath Technologies 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, conferencing software, gateway (server) software and related professional services, such as pre and post sales technical support and customization services. The Company’s products are sold into the Voice over Internet Protocol (“VoIP”) market primarily to telecom carriers, telecom original equipment manufacturers and businesses in North America, Central and South America, Europe and Asia.

   
Note 2

Significant Accounting Policies

   

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

   

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
October 31, 2013
(Unaudited)


Note 2 Significant Accounting Policies - (cont’d)

  a)

Basis of Presentation

     
 

These interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, CounterPath Technologies, a company existing under the laws of the province of British Columbia, Canada, and BridgePort, incorporated under the laws of the state of Delaware. The results of NewHeights (which subsequently was amalgamated with another subsidiary to become CounterPath Technologies) are included from August 2, 2007, the date of acquisition. The results of FirstHand (which subsequently was amalgamated with CounterPath Technologies) and BridgePort 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, 2013 annual audited consolidated financial statements. All adjustments are of a normal recurring nature. It is suggested that these interim financial statements be read in conjunction with the Company’s April 30, 2013 annual audited consolidated financial statements.

     
 

Operating results for the six months ended October 31, 2013 are not necessarily indicative of the results that can be expected for the year ending April 30, 2014.

     
  c)

New Accounting Pronouncements

     
 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-11, Balance Sheet (Topic 210), Disclosure About Offsetting Assets and Liabilities , that included new disclosure requirements that are intended to enhance current disclosures on offsetting financial assets and liabilities. The new disclosures require an entity to disclose both gross and net information about derivative instruments accounted for in accordance with the guidance on derivatives and hedging that are eligible for offset on the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. The provisions of the new disclosure requirements are effective as of the beginning of the year ended April 30, 2015. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

10


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2013
(Unaudited)


Note 2 Significant Accounting Policies - (cont’d)

  c)

New Accounting Pronouncements – (cont’d)

     
 

In July 2012, FASB issued ASU 2012-02, Intangibles – Goodwill and Other (Topic 350), Testing Indefinite Lived Intangible Assets For Impairments , that permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test. An entity would continue to calculate the fair value of an indefinite-lived intangible asset if the asset fails the qualitative assessment, while no further analysis would be required if it passes. The provisions of the new guidance were effective as of the beginning of the year ended April 30, 2014. The Company has adopted this standard and it did not materially impact the consolidated financial statements.

     
 

In February 2013, FASB issued ASU 2013-02, Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income , that requires an entity to disclose information showing the effect of items reclassified from accumulated other comprehensive income on the line items of net income. The provisions of this new guidance are effective prospectively as of the beginning of the year ended April 30, 2014. The adoption of the standard requires the Company to declare the nature of changes in other comprehensive income that will have an impact on net income or loss in the future. The Company has accumulated other comprehensive income relating to the translation of its subsidiary’s financial information into the presentation currency of the Company’s financial statements, which would reverse through net income or loss should the underlying assets and liabilities be disposed of.

     
  d)

Derivative Instruments

     
 

The Company accounts for derivative instruments, consisting of foreign currency forward contracts, pursuant to the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS 161”), effective at the beginning of the first quarter of fiscal year 2010. SFAS 161 was incorporated into Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging (“ASC 815”). ASC 815 requires the Company to measure derivative instruments at fair value and record them in the balance sheet as either an asset or liability and expands financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, results of operations and cash flows. The Company does not use derivative instruments for trading purposes. The Company did not enter into any foreign currency derivatives designed as cash flow hedges in the six months ended October 31, 2013 (2012 - none).

     
 

ASC 815 also requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. Following the guidance in ASC 815-40-15, the Company recorded the warrants issued as derivative instruments due to their exercise price being denominated in a currency other than the Company’s U.S. dollar functional currency initially at fair value. Subsequent changes in the fair value of the derivative instruments are recorded as a gain or loss in the Company’s consolidated statements of operations.

     
 

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

11


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2013
(Unaudited)


Note 2 Significant Accounting Policies - (cont’d)

  d)

Derivative Instruments – (cont’d)

     
 

The Company records foreign currency forward contracts on its consolidated balance sheets as derivative instruments assets or liabilities depending on whether the net fair value of such contracts is a net asset or net liability, respectively (see Note 4 “Derivative Financial Instruments and Risk Management” of the Notes to the Company’s Audited Consolidated Financial Statements for the year ended April 30, 2013). The Company did not enter any foreign currency derivatives designated as cash flow hedges in the six months ended October 31, 2013 (2012 - none).

     
  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 on August 2, 2007 and FirstHand on February 1, 2008. Translated to U.S. dollars using the period end rate, the goodwill balance at October 31, 2013 was $6,407,248 (CDN$6,704,947) (April 30, 2013 - $6,607,725) and $1,990,910 (CDN$2,083,414) (April 30, 2013 - $2,053,205), respectively. Management will perform its annual impairment test in its fiscal fourth quarter. No impairment charges were recorded for the six months periods ended October 31, 2013 and 2012.

     
 

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 on August 2, 2007, and FirstHand and BridgePort 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.

12


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2013
(Unaudited)


Note 2 Significant Accounting Policies - (cont’d)

  e)

Goodwill and Intangible Assets – (cont’d)

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. All the intangible assets were fully amortized as at April 30, 2013.

  f)

Accounts receivable and allowance for doubtful accounts

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

      October 31,     April 30,  
      2013     2013  
               
 

Balance of allowance for doubtful accounts, beginning of period

$  456,051   $  334,294  
 

Bad debt provision

  288,158     265,970  
 

Write-off of receivables

  (413,304 )   (144,213 )
 

Balance of allowance for doubtful accounts, end of period

$  330,905   $  456,051  

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

   
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. As the period in which the Company earned license fees under the agreement ended on July 31, 2012, the Company’s software license revenue for the three and six months ended October 31, 2013, pursuant to the terms of these agreements, was $nil and $nil (2012 - $nil and $134,493), respectively.

13


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2013
(Unaudited)


Note 3

Related Party Transactions – (cont’d)

   

During the three and six months ended October 31, 2013, the Company through its wholly owned subsidiary, CounterPath Technologies, paid $17,226 and $34,452 (2012 - $21,025 and $42,049), respectively, to Kanata Research Park Corporation (“KRP”) for leased office space. KRP is controlled by the Chairman of the Company.

   

The Company’s Chairman is a beneficial shareholder of Mitel Trade s.r.o. (“Mitel Trade”). On January 30, 2012, the Company sold products and services to Mitel Trade for consideration of $208,992. As at July 31, 2013, the Company determined the balance due from Mitel Trade as uncollectible and wrote off any remaining balance. As at October 31, 2013, the Company had an accounts receivable balance from Mitel Trade of $nil (April 30, 2013 - $206,500). The Company’s revenue for the three and six months ended October 31, 2013, was $nil and $nil (2012 - $10,969 and $21,938), respectively.

   

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

   
Note 4

Derivative Financial Instruments and Risk Management

   

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

   
 

Foreign Currency Exchange Rate Risk

   

The Company accounts for derivative instruments, consisting of foreign currency forward contracts, pursuant to the provisions of SFAS 161, effective at the beginning of the first quarter of fiscal year 2010. SFAS 161 was incorporated into ASC 815 which requires the Company to measure derivative instruments at fair value and record them in our balance sheet as either an asset or liability and expands financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, results of operations and cash flows. The Company does not use derivative instruments for trading purposes. ASC 815 also requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements.

   

A majority of the Company’s revenue activities are transacted in U.S. dollars. However, the Company is exposed to foreign currency exchange rate risk inherent in conducting business globally in numerous currencies, of which the most significant to the Company’s operations for the six months ended October 31, 2013 is the Canadian dollar. The Company is primarily exposed to a strengthening Canadian dollar as the Company’s operating expenses are primarily denominated in Canadian dollars while revenues are primarily denominated in U.S. dollars. The Company’s foreign currency risk management program includes foreign currency derivatives with cash flow hedge accounting designation that utilizes foreign currency forward contracts to hedge exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S. dollar-denominated cash flows. These instruments generally have a maturity of less than one year. For these derivatives, the company reports the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss) in stockholders’ equity and reclassifies it into earnings in the same period in which the hedged transaction affects earnings, and within the same line item on the consolidated statements of operations as the impact of the hedged transaction.

14


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2013
(Unaudited)


Note 4

Derivative Financial Instruments and Risk Management (cont’d)

   
 

Foreign Currency Exchange Rate Risk (cont’d)

   

The Company also routinely enters into foreign currency forward contracts, not designated as hedging instruments, to protect the Company from fluctuations in exchange rates. As of October 31, 2013, the Company had $4,000,000 of notional value foreign currency forward contracts maturing through February 28, 2014. 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 October 31, 2013 is ($9,814).

   
 

Fair Value Measurement

   

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

   

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

   

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

   

The fair value of the derivative instrument is primarily based on the standard industry accepted binomial model. The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis.


      Carrying           Fair Value        
  As at October 31, 2013   Amount     Fair Value     Levels     Reference  
  Cash $  9,423,773   $  9,423,773     1        
  Accounts receivable   3,585,191     3,585,191     2        
  Forward contracts   (9,814 )   (9,814 )   3        
  Derivative warrant liability $  −   $  −     3     Note 5  

      Carrying           Fair Value        
  As at April 30, 2013   Amount     Fair Value     Levels     Reference  
  Cash $  11,229,595   $  11,229,595     1        
  Accounts receivable   4,640,620     4,640,620     2        
  Forward contracts   9,830     9,830     3        
  Derivative warrant liability $  93,057   $  93,057     3     Note 5  

15


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2013
(Unaudited)


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

  Forward contracts   October 31,     April 30,  
      2013     2013  
 

Opening balance at the beginning of the period/year

$  9,830   $  −  
 

Fair value of forward, at issuance

       
 

Change in fair value of forward contracts since issuance

  (18,479 )   32,405  
 

Fair value of forward contracts settled during the period/year

  (1,165 )   (22,575 )
 

Fair value of forward contracts at end of period/year

$  (9,814 ) $  9,830  

Note 5 Common Stock
   
  Stock Options
   

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

   

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

   

The Company has elected to use the Black-Scholes option pricing model to determine the fair value of stock options granted. In accordance with ASC 718, Compensation – Stock Compensation (“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.

   

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 six month period ended October 31, 2013 and 2012 in determining the expense recorded in the accompanying consolidated statement of operations.

16


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2013
(Unaudited)


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

The weighted-average fair value of options granted during the six months ended October 31, 2013 was $0.89 (2012 - $2.90). The weighted-average assumptions utilized to determine such values are presented in the following table:


      Six Months Ended  
      October 31, 2013     October 31, 2012  
  Risk-free interest rate   1.31%     0.62%  
  Expected volatility   78.94%     74.47%  
  Expected term   3.7 years     3.7 years  
  Dividend yield   0%     0%  

The following is a summary of the status of the Company’s stock options as of October 31, 2013 and the stock option activity during the six months ended October 31, 2013:

      Weighted Average  
      Number of     Exercise Price  
      Options     per Share  
  Outstanding at April 30, 2013   3,930,818     $1.33  
  Granted   1,055,000     $1.67  
  Exercised   (231,655 )   $0.47  
  Forfeited/Cancelled   (18,604 )   $1.86  
  Expired   (40,000 )   $0.47  
  Outstanding at October 31, 2013   4,695,559     $1.45  
               
  Exercisable at October 31, 2013   2,682,368     $1.14  
  Exercisable at April 30, 2013   2,677,887     $1.00  

17


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2013
(Unaudited)


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

The following table summarizes information regarding stock options outstanding as of October 31, 2013:


    Number of     Aggregate              Number of     Aggregate  
    Options     Intrinsic           Options     Intrinsic  
Exercise Price   Outstanding        Value     Expiry Date     Exercisable     Value  
$0.44   227,541   $  172,704     December 15, 2013     227,541   $  172,704  
$0.47 173,270 126,314 January 1, 2014 to September 26, 2016 173,270 126,314
$0.60   388,873     232,935     December 14, 2014     372,527     223,144  
$0.62   850,000     492,150     April 17, 2014     850,000     492,150  
$1.41   100,000         October 1, 2018          
$1.44   250,000         September 12, 2018          
$1.53   200,000         August 29, 2018          
$1.70   750,000         December 14, 2016     343,749      
$1.88   30,000         December 13, 2017     6,250      
$1.90 916,875 December 14, 2015 to July 25, 2018 290,832
$2.00 12,000 December 31, 2014 to February 28, 2015 12,000
$2.15   240,000         September 7, 2016     240,000      
$2.26   200,000         March 14, 2018     37,302      
$2.27   52,000         March 10, 2016     33,584      
$2.90   305,000         July 19, 2017     95,313      
 October 31, 2013   4,695,559   $ 1,024,103           2,682,368   $ 1,014,312  
                               
 April 30, 2013   3,930,818   $ 2,636,687           2,677,887   $ 2,464,253  

The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on the Company’s closing stock price of $1.20 per share as of October 31, 2013 (April 30, 2013 – $1.87), 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 October 31, 2013 was 1,623,338 (April 30, 2013 – 2,096,096). The total intrinsic value of options exercised during the six months ended October 31, 2013 was $168,839 (2012 – $238,038). The grant date fair value of options vested during the six months ended October 31, 2013 was $280,074 (2012 – $320,694).

The following table summarizes information regarding the non-vested stock purchase options outstanding as of October 31, 2013.

            Weighted  
      Number of     Average Grant  
      Options     Date Fair Value  
 

Non-vested options at April 30, 2013

  1,252,931     $1.09  
 

Granted

  1,055,000     $0.89  
 

Vested

  (285,053 )   $0.98  
 

Cancelled/Forfeited

  (9,687 )   $1.08  
 

Non-vested options at October 31, 2013

  2,013,191     $1.00  

18


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2013
(Unaudited)


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

As of October 31, 2013 there was, $1,727,835 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 years.

   

Employee and non-employee stock-based compensation amounts classified in the Company’s consolidated statements of operations for the three months and six months ended October 31, 2013 and 2012 are as follows:


      Three Months Ended     Six Months Ended  
      October 31,     October 31,  
      2013     2012     2013     2012  
  Cost of sales $  18,285   $  8,797   $  26,838   $  17,636  
  Sales and marketing   107,933     73,072     197,273     127,007  
  Research and development   15,851     10,531     24,537     21,247  
  General and administrative   37,083     55,100     70,570     111,043  
  Total stock-option based compensation $  179,152   $  147,500   $  319,218   $  276,933  

Warrants

On May 17, 2012 and July 25, 2012, holders 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. On October 25, 2012 and November 27, 2012, holders of warrants issued under a brokered private placement, exercised 110,103 and 110,103 warrants respectively, at the original exercise price of $1.75 per common share.

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

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

      October 31,     April 30,  
      2013     2013  
 

Opening balance at the beginning of the period/year

$  93,057   $  2,026,944  
 

Fair value of warrant liability, at issuance

       
 

Change in fair value of warrant liability

  (93,057 )   (1,753,368 )
 

Fair value of warrants exercised during the period/year

      (180,519 )
 

Fair value of warrant liability at end of period/year

$  –   $  93,057  

19


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2013
(Unaudited)


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

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


            As at the date of
    As at   As at   issuance
    October 31, 2013   April 30, 2013   June 14, 2011
  Risk-free interest rate   0.11%   1.60%
  Expected volatility   70%   70%
  Expected term   0.12 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 instruments 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. The balance of unexercised warrants expired on June 14, 2013, and the balance in the liability account of $93,057 has been recorded as a gain in the Company’s consolidated statement of operations.

At the time of the private placement offering, the Company allocated the proceeds to each of the common shares and the one-half of one common share purchase warrants. Because the warrants were classified as 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.

The following table summarizes information regarding the warrants outstanding as of October 31, 2013:

      Number of     Weighted Average        
      Warrants     Exercise Price     Expiry Dates  
                     
  Warrants at April 30, 2013   2,248,399     2.57     June 14, 2013 to June 19, 2014  
  Granted            
  Exercised            
  Expired   (1,515,899 )   2.25     June 14, 2013  
  Warrants at October 31, 2013   732,500     3.25     June 19, 2014  

20


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2013
(Unaudited)


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

Under the terms of the Employee Stock Purchase Plan (the “ESPP”) all regular salaried (non- probationary) employees can purchase up to 6% of their base salary in common shares of the Company at market price. The Company will match 50% of the shares purchased by issuing or purchasing in the market up to 3% of the respective employee’s base salary in shares. During the six months ended October 31, 2013, the Company matched $26,106 (April 30, 2013 - $56,250) in shares purchased by employees under the ESPP.

   

A total of 700,000 shares have been reserved for issuance under the ESPP. As of October 31, 2013, a total of 556,401 shares were available for issuance under the ESPP. During the six months ended October 31, 2013, 48,222 shares (April 30, 2013 – 61,622) were sold, issued, or purchased by employees on the open market under the ESPP.

   
 

Normal Course Issuer Bid Plan

   

Pursuant to a normal course issuer bid commencing on August 20, 2012 and expiring on March 19, 2013, the Company was authorized to purchase up to 1,995,414 of its common shares and on March 19, 2013 (expiring March 18, 2014) the Company was authorized to purchase 2,462,365 of its common shares through the facilities of the Toronto Stock Exchange (the “TSX”) and other Canadian marketplaces. Between August 20, 2012 and March 18, 2013, the Company repurchased 72,292 common shares at an average price of $1.99 (CDN$1.98) for a total of $143,861 and during the period from March 19, 2013 to October 31, 2013, the Company repurchased 154,836 common shares at an average price of $1.77 (CDN$1.83) for a total of $274,060. As of October 31, 2013 a total of 202,308 common shares have been cancelled and the remaining 24,820 repurchased shares are in the process of being cancelled.

   
 

Deferred Share Unit Plan

   

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

   

A total of 2,500,000 common shares have been reserved for issuance under the DSUP. During the six months ended October 31, 2013, 191,066 (2012 - 133,443) DSUs were issued under the DSUP, of which 75,417 were granted to officers or employees and 115,649 were granted to non-employee directors. As of October 31, 2013, a total of 587,427 common shares were available for issuance under the DSUP.

21


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2013
(Unaudited)


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

The following table summarizes the Company’s outstanding DSU awards as of October 31, 2013, and changes during the period then ended:


            Weighted Average  
            Grant Date Fair  
      Number of DSU’s     Value Per Unit  
 

DSUs outstanding at April 30, 2013

  1,643,119   $1.02  
 

Granted

  191,066   $1.90  
 

Conversions

  (73,334 ) $1.00  
 

DSUs outstanding at October 31, 2013

  1,760,851   $1.10  

The following table summarizes information regarding the non-vested DSUs outstanding as of October 31, 2013:

            Weighted Average  
            Grant Date Fair  
      Number of DSU’s     Value Per Unit  
 

Non-vested DSUs at April 30, 2013

  207,444     $1.98  
 

Granted

  191,066     $1.90  
 

Vested

  (227,048 )   $1.79  
 

Non-vested DSUs at October 31, 2013

  171,462     $2.19  

As of October 31, 2013 there was $297,160 (2012 – $361,356) of total unrecognized compensation cost related to unvested DSU awards. This unrecognized compensation cost is expected to be recognized over a weighted average period of 1.94 years (2012 – 2.02 years).

Employee and non-employee DSU based compensation amounts classified in the Company’s consolidated statements of operations for the three and six months ended October 31, 2013 and 2012 are as follows:

  Three Months Ended Six Months Ended
  October 31, October 31,
  2013 2012 2013 2012
Sales and marketing $  6,667   $  4,167   $  13,334   $  8,334  
Research and development 2,082 2,082 4,164 2,354
General and administrative   74,592     60,856     300,327     323,754  
Total DSU-based compensation $  83,341 $  67,105 $  317,825 $  334,442

22


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2013
(Unaudited)


Note 6 Segmented Information
   

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

   

Revenues are based on the country in which the customer is located. The following is a summary of total revenues by geographic area for the three and six months ended October 31, 2013 and 2012:


      Three Months Ended     Six Months Ended  
      October 31,     October 31,  
      2013     2012     2013     2012  
  North America $  1,880,466   $  2,263,483   $  3,774,573   $  5,184,000  
  Europe   286,103     735,177     711,134     1,426,290  
  Asia and Africa   232,382     276,342     504,502     833,029  
  Latin America   147,859     287,785     416,088     507,236  
    $  2,546,810   $  3,562,787   $  5,406,297   $  7,950,555  

Contained within the results of North America for the three and six months ended October 31, 2013 are revenues from the United States of $1,491,481 and $2,700,339 (2012 - $1,865,651 and $3,800,737), respectively, and from Canada of $388,985 and $1,074,234 (2012 - $397,832 and $1,383,263), respectively.

Contained within the results of Europe for the three and six months ended October 31, 2013 are revenues from the United Kingdom of $48,502 and $210,642 (2012 - $182,250 and $305,396), respectively, from Germany of $50,963 and $98,124 (2012 - $58,088 and $188,501), respectively, from Greece of $44,525 and $50,195 (2012 - $11,525 and $43,754), respectively, from France of $15,022 and $36,395 (2012 - $216,871 and $233,664), respectively, and from Norway of $19,470 and $33,077 (2012 - $35,424 and $214,805), respectively.

Contained within the results of Asia and Africa for the three and six months ended October 31, 2013 are revenues from Japan of $42,640 and $197,308 (2012 - $118,249 and $474,129), respectively, from Australia of $25,906 and $51,196 (2012 - $24,782 and $45,084), respectively, from the United Arab Emirates of $25,025 and $25,907 (2012 - $nil and $nil), respectively, from South Africa of $18,028 and $38,717 (2012 - $11,302 and $28,837), respectively, and from China of $17,858 and $42,213 (2012 - $38,884 and $116,142), respectively.

Contained within the results of Latin America for the three and six months ended October 31, 2013 are revenues from Colombia of $78,950 and $137,010 (2012 - $49,209 and $59,910), respectively, from Mexico of $33,995 and $185,843 (2012 - $99,192 and $119,761), respectively, from Brazil of $17,506 and $39,756 (2012 - $8,062 and $153,551), respectively, and from Chile of $5,427 and $24,264 (2012 - $102,031 and $106,172), respectively.

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COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2013
(Unaudited)


Note 6 Segmented Information – (cont’d)
   

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


      As at  
      October 31,     April 30,  
      2013     2013  
  Canada $  8,547,832   $  8,796,202  
  United States   69,125     114,879  
    $  8,616,957   $  8,911,081  

Revenue from significant customers for the three and six months ended October 31, 2013 and 2012 is summarized as follows:

      Three Months Ended     Six Months Ended  
      October 31,     October 31,  
      2013     2012     2013     2012  
  Customer A   8%     10%     9%     8%  
  Customer B   7%     1%     4%     9%  
      15%     11%     13%     17%  

Accounts receivable balances for Customer A were $335,837 as at October 31, 2013 (April 30, 2013 - $321,344). Accounts receivable balances for Customer B were $159,000 as at October 31, 2013 (April 30, 2013 - $663,643).

   
Note 7 Commitments

  a)

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 $47,780 was made. The monthly lease payment under the agreement is $22,673 plus $20,321 in operating costs. Management believes that this office space is adequate for the operations of the Company for the foreseeable future.

     
  b)

On December 9, 2011, the Company signed a fifth amendment to an existing lease agreement to extend the lease for the period May 1, 2012 to April 30, 2014. The monthly lease payment under the lease extension is $5,742 (CDN$6,009). This lease expense is a related party transaction as it was incurred with a company with a director in common with the Company.

     
  c)

On March 22, 2013, the Company entered into an extension of an existing operating lease agreement which commenced on April 1, 2013 and expires on May 31, 2016. The monthly lease payment under the extension agreement is $5,000 plus $295 in operating expenses.

     
  d)

On October 21, 2013, the Company entered into an extension of an existing operating lease agreement which commenced on December 1, 2013 and expires on February 28, 2013. The monthly lease payment under the extension agreement is $2,630.

24


COUNTERPATH CORPORATION
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2013
(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 –     Total Office  
      Related Party     Unrelated Party     Leases  
  2014 $  34,453   $  257,535   $  291,988  
  2015       267,776     267,776  
  2016       63,540     63,540  
  2017       5,295     5,295  
    $  34,453   $  594,146   $  628,599  

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

      Three Months Ended     Six Months Ended  
      October 31,     October 31,  
      2013     2012     2013     2012  
  Net income (loss) $  (2,111,228 ) $  (325,105 ) $  (3,336,519 ) $  542,433  
  Weighted average common shares outstanding – basic and diluted (1)   42,007,439     41,592,776     41,971,160     41,159,949  
  Basic and diluted EPS $  (0.05 ) $  (0.01 ) $  (0.08 ) $  0.01  

For the three and six months ended October 31, 2013 and October 31, 2012, common share equivalents (consisting of common shares issuable, on exercise of options, warrants and DSUs) totalling, 5,004,257 and 6,104,549, respectively, were not included in the computation of diluted EPS because the effect was anti-dilutive.

  (1)

Diluted by assumed exercise of outstanding common share equivalents using the treasury stock method.

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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.

            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, was amalgamated with CounterPath Technologies, 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, FirstHand and BridgePort comprising acquired technologies and customer assets. The acquired technologies are amortized based on their estimated useful life of four years and the customer asset is amortized on the basis of management's estimate of the future cash flows from this asset over approximately five years 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 an expense when earned by the employee. We expect increases in sales and marketing expense for the foreseeable future as we further increase the number of sales professionals and increase our marketing activities with the intent to grow our revenue. We expect sales and marketing expense to decrease as a percentage of total revenue, however, as we leverage our current sales and marketing personnel as well as our distribution partnerships.

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

Interim Reporting

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

            These statements reflect all adjustments, which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented in accordance with accounting principles generally accepted in the United States. Except where noted, the interim consolidated financial statements follow the same accounting policies and methods of their application as our April 30, 2013 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, 2013 annual audited consolidated financial statements.

            Operating results for the six months ended October 31, 2013 are not necessarily indicative of the results that can be expected for the year ending April 30, 2014.

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Revenue Recognition

            We recognize revenue in accordance with the Accounting Standards Codification (“ASC”) 985-605 (prior authoritative literature: American Institute of Certified Public Accountants (AICPA) Statement of Position (“SOP”) 97-2) “Software Revenue Recognition”, as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions”. In accordance with these standards, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection of the related accounts receivable is deemed probable. In making these judgments, management evaluates these criteria as follows:

  • Persuasive evidence of an arrangement. We consider a noncancelable agreement signed by our Company and the customer to be representative of persuasive evidence of an arrangement.

  • Delivery has occurred. We consider delivery to have occurred when the product has been delivered to the customer and no post-delivery obligations exist. In instances where customer acceptance is required, delivery is deemed to have occurred when customer acceptance has been achieved.

  • Fees are fixed or determinable. We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within normal payment terms. If the fee is subject to refund or adjustment, we recognize revenue when the refund or adjustment right lapses. If offered payment terms exceed our company’s normal terms, we recognize revenue as the amounts become due and payable or upon the receipt of cash when extended payment terms beyond 180 days are offered.

  • Collection is deemed probable. Collection is deemed probable if, based upon our company’s evaluation, we expect that the customer will be able to pay amounts under the arrangement as payments become due. If we determine that collection is not probable, revenue is deferred and recognized upon the receipt of cash.

            A substantial amount of our sales involve multiple element arrangements, such as products, 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 (“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 represents support services. Revenue is allocated to each of the undelivered elements based on its respective fair value.

            For contracts with elements related to customized network solutions and certain network build-outs, for transactions accounted for as sales of products or services, we apply Financial Accounting Standards Board (“FASB”) ASC Subtopic 605-25 (Prior authoritative literature: Emerging Issues Task Force Issue No. 08-1, “Revenue Arrangements with Multiple Deliverables”) and revenues are recognized under ASC 605-35, for long-term transactions entered to supply software, or software systems, that require significant modification or customization (prior authoritative literature: SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”), generally using the percentage-of-completion method.

            For multi-element arrangements, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) VSOE of fair value, (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of selling price (“ESP”). VSOE generally exists only when our company sells the deliverable separately and is the price actually charged by our company for that deliverable. ESPs reflect our best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis.

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

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            Service revenue includes sales of support and other services, including professional services, training, and reimbursable travel. Support services include telephone support, e-mail support and unspecified rights to product updates and upgrades, and are recognized ratably over the term of the service period, which is generally twelve months. Support revenue is generally 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 has been performed.

Stock-Based Compensation

            Stock options granted are accounted for under ASC 718 (prior authoritative literature: Statement of Financial Accounting Standards (“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 Financial Accounting Standards (“FAS”) 123 and Accounting Principles Board (“APB”) 25, and requires public companies to recognize the cost of employee services received in exchange for equity instruments, based on the fair value of those instruments on the measurement date which generally is the grant date, with limited exceptions. Stock-based compensation represents the cost related to stock-based awards granted to employees and non-employee consultants. We measure stock-based compensation cost at measurement date, based on the estimated fair value of the award, and generally recognize the cost as expense on a straight-line basis (net of estimated forfeitures) over the employee requisite service period or the period during which the related services are provided by the non-employee consultants and the options are earned. We estimate the fair value of stock options using a Black-Scholes option valuation model.

            The expected volatility of options granted has been determined using the volatility of our company's stock. The expected life of options granted after April 30, 2006 has been determined utilizing the “simplified” method as prescribed by the SEC's Staff Accounting Bulletin 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 six months ended October 31, 2013 in determining the expense recorded in our consolidated statement of operations. Cost of sales and operating expenses include stock-based compensation expense, and deferred share unit plan expense. For the six months ended October 31, 2013, we recorded an expense of $637,043 in connection with share-based payment awards. A future expense of non-vested options of $1,727,835 is expected to be recognized over a weighted-average period of three years. A future expense of non-vested deferred share units of $375,846 is expected to be recognized over a weighted-average period of 2.19 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.

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Goodwill and Intangible Assets

            We have goodwill and intangible assets on our balance sheet related to the acquisitions of NewHeights, FirstHand and BridgePort. 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.

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 2013, did not result in an impairment charge, nor did we record any goodwill impairment for the six months ending October 31, 2013.

            We make judgments about the recoverability of purchased intangible assets whenever events or changes in circumstances indicate that 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 six months ending October 31, 2013 (2012 - $nil).

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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 Accounting Standards Codification (“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.

            We periodically enter into foreign currency forward contracts, not designated as hedging instruments, to protect us from fluctuations in exchange rates. As of October 31, 2013, we had $4,000,000 of notional value foreign currency forward contracts maturing through. 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 loss of forward contracts for the six months ended October 31, 2013 is $19,644.

Results of Operations

            Our operating activities during the six months ended October 31, 2013 consisted primarily of selling our IP telephony software and related services to telecom service providers and original equipment manufacturers serving the telecom industry, and the continued development of our IP telephony software products.

Selected Consolidated Financial Information

            The following tables set out selected consolidated unaudited financial information for the periods indicated. The selected consolidated financial information set out below as at October 31, 2013 and April 30, 2013 and for the six months ended October 31, 2013 and 2012 has been derived from the consolidated unaudited financial statements and accompanying notes for the six months ended October 31, 2013 and 2012 and audited consolidated financial statements for the fiscal year ended April 30, 2013. Each investor should read the following information in conjunction with those statements and the related notes thereto.

    October 31,     April 30,  
Selected Consolidated Balance Sheet Data   2013     2013  
Cash and cash equivalents $ 9,423,773   $ 11,229,595  
Current assets   13,112,734     16,009,806  
Current liabilities   3,892,532     3,999,583  
Total liabilities   4,005,667     4,128,268  
Total assets $ 21,857,461   $ 25,055,877  

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    Three Months Ended October 31,  
Selected Consolidated Statements of Operations Data   2013     2012  
          Percent of           Percent  
          Total           of Total  
    Amount     Revenue     Amount     Revenue  

Revenue

$ 2,546,810     100%   $ 3,562,787     100%  

 

                       

Operating expenses

  4,313,043     169%     4,102,909     115%  

Income (loss) from operations

  (1,766,233 )   (69% )   (540,122 )   (15% )

Interest and other income, net

  56,828     2%     17,936     −%  

Fair value adjustment on derivative instrument

  (12,574 )   −%     208,036     6%  

Foreign exchange gain (loss)

  (389,249 )   (16% )   (10,955 )   −%  

Net income (loss)

  ($2,111,228 )   (83% )   ($325,105 )   (9% )

 

                       

Net income (loss) per share

                       

-Basic and diluted

  ($0.05 )         ($0.01 )      

 

                       

Weighted average common shares outstanding

                       

-Basic and diluted

  42,007,439           41,592,776        
                         

    Six Months Ended October 31,  
Selected Consolidated Statements of Operations Data   2013     2012  
          Percent of           Percent  
          Total           of Total  
    Amount     Revenue     Amount     Revenue  

Revenue

$ 5,406,297     100%   $ 7,950,555     100%  

 

                       

Operating expenses

  8,510,586     158%     8,458,068     106%  

Income (loss) from operations

  (3,104,289 )   (58% )   (507,513 )   (6% )

Interest and other income, net

  83,542     2%     61,319     1%  

Fair value adjustment on derivative instrument

  73,413     1%     993,164     12%  

Foreign exchange gain (loss)

  (389,185 )   (7% )   (4,537 )   −%  

Net income (loss)

  ($3,336,519 )   (62% ) $ 542,433     7%  

 

                       

Net income (loss) per share

                       

-Basic and diluted

  ($0.08 )       $ 0.01        

 

                       

Weighted average common shares outstanding

                       

-Basic and diluted

  41,971,160           41,159,949        
                         

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Revenue

  Three Months Ended October 31,      
    2013     2012     Period-to-Period Change  
          Percent           Percent           Percent  
          of Total           of Total           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Revenue by Type                                    
 Software $ 1,451,475     57%   $ 1,811,815     51%     ($360,340 )   (20% )
 Service   1,095,335     43%     1,750,972     49%     (655,637 )   (37% )
Total revenue $ 2,546,810     100%   $ 3,562,787     100%     ($1,015,977 )   (29% )
                                     
Revenue by Region                                    
 International $ 666,343     26%   $ 1,299,304     36%     ($632,961 )   (49% )
 North America   1,880,467     74%     2,263,483     64%     (383,016 )   (17% )
Total revenue $ 2,546,810     100%   $ 3,562,787     100%     ($1,015,977 )   (29% )

            For the three months ended October 31, 2013, we generated $2,546,810 in revenue compared to $3,562,787 for the three months ended October 31, 2012. This represents a decrease of $1,015,977 or 29% from the same period last year. We generated $1,451,475 in software revenue for the three months ended October 31, 2013 compared to $1,811,815 for the three months ended October 31, 2012, representing a decrease of $360,340 or 20%. The decrease in software revenue for the three months ended October 31, 2013 was primarily a result of a decrease in sales to channel partners and service providers. For the three months ended October 31, 2013, service revenue was $1,095,335 compared to $1,750,972 for the three months ended October 31, 2012. The decrease of $655,637 or 37% in service revenue was primarily a result of a decrease in sales to channel partners and service providers. International revenue outside of North America decreased by 49% during the three months ended October 31, 2013 compared to the three months ended October 31, 2012, primarily due to lower sales in Europe and Latin America. North American revenue decreased by 17% compared to the three months ended October 31, 2012, due primarily to a decrease in sales of software and services to North American channel partners partially offset by stronger sales to service providers.

     Six Months Ended October 31,      
    2013     2012     Period-to-Period Change  
          Percent           Percent           Percent  
          of Total           of Total           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Revenue by Type                                    
 Software $ 3,098,995     57%   $ 4,339,871     55%     ($1,240,876 )   (29% )
 Service   2,307,302     43%     3,610,684     45%     (1,303,382 )   (36% )
Total revenue $ 5,406,297     100%   $ 7,950,555     100%     ($2,544,258 )   (32% )
                                     
Revenue by Region                                    
 International $ 1,631,724     31%   $ 2,766,555     35%     ($1,134,831 )   (41% )
 North America   3,774,573     69%     5,184,000     65%     (1,409,427 )   (27% )
Total revenue $ 5,406,297     100%   $ 7,950,555     100%     ($2,544,258 )   (32% )

            For the six months ended October 31, 2013, we generated $5,406,297 in revenue compared to $7,950,555 for the six months ended October 31, 2012. This represents a decrease of $2,544,258 or 32% from the same period last year. We generated $3,098,995 in software revenue for the six months ended October 31, 2013 compared to $4,339,871 for the six months ended October 31, 2012, representing a decrease of $1,240,876 or 29%. The decrease in software revenue for the six months ended October 31, 2013 was primarily a result of a decrease in sales to channel partners, service providers, and enterprises. For the six months ended October 31, 2013, service revenue was $2,307,302 compared to $3,610,684 for the six months ended October 31, 2012. The decrease of $1,303,382 or 36% in service revenue was primarily due to a decrease in sales to channel partners, service providers, and enterprises. International revenue outside of North America decreased by 41% during the six months ended October 31, 2013 compared to the six months ended October 31, 2012, as a result of decreased sales in Europe, Asia and Africa, and Latin America. North American revenue decreased by 27%, compared to the six months ended October 31, 2012, due primarily to a decrease in sales of software and services to North American channel partners, service providers, and enterprises.

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Operating Expenses

Cost of Sales

            Cost of sales for the three and six months ended October 31, 2013 and 2012 were as follows:

    October 31, 2013     October 31, 2012     Period-to-Period Change  
          Percent           Percent           Percent  
          of           of           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 571,857     22%   $ 626,006     18%     ($54,149 )   (9% )
Six months ended $ 1,129,312     21%   $ 1,185,799     15%     ($56,487 )   (5% )

            Cost of sales was $571,857 for the three months ended October 31, 2013 compared to $626,006 for the three months ended October 31, 2012. This decrease of $54,149 was primarily attributable to a decrease in licenses and permits of approximately $33,500 due to lower sales of those licenses, a decrease in consulting fees of approximately $20,600 and a decrease in other expenses of approximately $10,500. The decrease in cost of sales was partially offset by an increase in wages and benefits of approximately $11,000. Cost of sales expressed as a percent of revenue was 22% of revenue for the three months ended October 31, 2013, as compared to 18% for the three months ended October 31, 2012. This increase in percentage was the result of a decrease in revenue of $1,015,977 for the three months ended October 31, 2013 compared to revenue for quarter ended October 31, 2012 while costs of sales decreased by $54,149 quarter-over-quarter.

            Cost of sales was $1,129,312 for the six months ended October 31, 2013 compared to $1,185,799 for the six months ended October 31, 2012. The decrease of $56,487 was primarily attributable to a decrease in licenses and permits of approximately $41,700 due to lower sales of those licenses, a decrease in contracting fees of approximately $37,000, a decrease in rent expense of approximately $18,000 and a decrease in other expenses of approximately $20,200. The decrease in cost of sales was partially offset by an increase in wages and benefits of approximately $60,000.

Sales and Marketing

            Sales and marketing expenses for the three and six months ended October 31, 2013 and 2012 were as follows:

    October 31, 2013     October 31, 2012     Period-to-Period Change  
          Percent           Percent           Percent  
          of           of           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 1,315,421     52%   $ 1,028,217     29%   $ 287,204     28%  
Six months ended $ 2,528,904     47%   $ 2,083,252     26%   $ 445,652     21%  

            Sales and marketing expenses were $1,315,421 for the three months ended October 31, 2013 compared to $1,028,217 for the three months ended October 31, 2012. The increase of $287,204 was primarily attributable to an increase in wages and benefits of approximately $225,000, an increase in trade show and travel expenses of approximately $85,500, an increase in stock based compensation of approximately $34,900 and an increase in other expenses of approximately $7,200. The increases were partially offset by a decrease in consulting fees of approximately $66,800.

            Sales and marketing expenses were $2,528,904 for the six months ended October 31, 2013 compared to $2,083,252 for the six months ended October 31, 2012. The increase of $445,652 was primarily attributable to an increase in wages and benefits of approximately $410,600, an increase in trade shows and travel of approximately $102,700, an increase in stock based compensation of $72,800 and an increase in other expenses of approximately $60,600. The increases were partially offset by a decrease in consulting fees of approximately $131,300 and a decrease in commissions and marketing expenses of approximately $71,000.

35


Research and Development

            Research and development expenses for the three and six months ended October 31, 2013 and 2012 were as follows:

    October 31, 2013     October 31, 2012     Period-to-Period Change  
          Percent           Percent           Percent  
          of           of           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 1,324,308     52%   $ 1,284,594     36%   $ 39,714     3%  
Six months ended $ 2,737,383     51%   $ 2,645,606     33%   $ 91,777     3%  

            Research and development expenses were $1,324,308 for the three months ended October 31, 2013 compared to $1,284,594 for the three months ended October 31, 2012. The increase of $39,714 was primarily attributable to an increase in consulting fees of approximately $60,000 and an increase in rent expense of approximately $7,300. The increase was partially offset by a decrease in wages and benefits of approximately $30,000.

            Research and development expenses were $2,737,383 for the six months ended October 31, 2013 compared to $2,645,606 for the six months ended October 31, 2012. The increase of $91,777 was primarily attributable to an increase in consulting fees of approximately $111,200, an increase in rent expense of approximately $22,700 and an increase in other expenses of approximately $17,100. The increase was partially offset by a decrease in wages and benefits of approximately $57,000.

General and Administrative

            General and administrative expenses for the three and six months ended October 31, 2013 and 2012 were as follows:

    October 31, 2013     October 31, 2012     Period-to-Period Change  
          Percent           Percent           Percent  
          of           of           Increase /  
    Amount     Revenue     Amount     Revenue     Amount     (Decrease)  
Three months ended $ 1,101,457     43%   $ 1,164,092     33%     ($62,635 )   (5% )
Six months ended $ 2,114,987     39%   $ 2,543,411     32%     ($428,424 )   (17% )

            General and administrative expenses were $1,101,457 for the three months ended October 31, 2013 compared to $1,164,092 for the three months ended October 31, 2012. The decrease of $62,635 in general and administrative expenses was primarily attributable to a decrease in exchange listing fees of approximately $197,000, a decrease in legal related costs of approximately $89,000, and a decrease in rent expense of approximately $35,000. The decreases were partially offset by increases in bad debts reserve of approximately $203,000, an increase in wages and benefits of approximately $22,000, an increase in interest and bank charges of approximately $20,000 and an increase in patent costs of approximately $13,000.

            General and administrative expenses were $2,114,987 for the six months ended October 31, 2013 compared to $2,543,411 for the six months ended October 31, 2012. The decrease of $428,424 in general and administrative expenses was primarily attributable to a decrease in exchange listing fees of approximately $282,000, a decrease in legal and professional costs of approximately $143,000, a decrease in stock based compensation of approximately $60,000, a decrease in rent expense of approximately $85,000, a decrease in investor relation costs of approximately $68,000 and a decrease in travel and director expenses of approximately $26,000. The decreases were partially offset by an increase in bad debts reserve of approximately $185,000 and an increase in interest and bank charges of approximately $75,000.

36


Interest and Other Income

            Interest income for the three and six months ended October 31, 2013 was $56,989 and $84,474, respectively, compared to $18,090 and $61,943, respectively, for the three and six months ended October 31, 2012. Interest expense for the three and six months ended October 31, 2013 was $161 and $932, respectively, compared to $154 and $624, respectively, for the three and six months ended October 31, 2012.

            Foreign exchange gain (loss) for the three and six months ended October 31, 2013 was ($389,249) and ($389,185), respectively, compared to ($10,955) and ($4,537) respectively, for the three and six months ended October 31, 2012. The foreign exchange gain (loss) represents the gain (loss) on account of translation of the intercompany accounts of our subsidiaries which maintain their records in currencies other than U.S. dollars and transactional losses and gains. As well, the foreign exchange gain (loss) includes the translation of funds held in the parent company in currencies other than U.S. dollars.

Liquidity and Capital Resources

            As of October 31, 2013, we had $9,423,773 in cash compared to $11,229,595 as of April 30, 2013, representing a decrease of $1,805,822. Our working capital was $9,220,202 at October 31, 2013 compared to $12,010,223 at April 30, 2013, representing a decrease of $2,790,021. 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 $9,234,162 in cash held outside of the United States, and there is no intent to repatriate at this time. Should we decide to repatriate in the future, taxes would need to be accrued and paid.

Operating Activities

            Our operating activities resulted in a net cash outflow of $1,584,373 for the six months ended October 31, 2013. This compares to a net cash outflow of $196,622 for the same period last year representing an increase of $1,387,752 in cash outflow from operations compared to the same period last year. The net cash outflow from operating activities for the six months ended October 31, 2013 was primarily a result of a net loss for the period of $3,336,519, partially offset by a decrease in accounts receivable of $1,064,192, a non-cash expense for stock based compensation of $637,043, a non-cash expense for depreciation and amortization of $112,974, a decrease in unearned revenue of $91,330 and a decrease in prepaid expenses and deposits of $35,864.

Investing Activities

            Investing activities resulted in a net cash outflow of $69,694 for the six months ended October 31, 2013 primarily from purchases of computer equipment. This compares with a net cash outflow from investing activities of $256,487 for the same period last year principally for purchases of computer, other equipment and deposits. At October 31, 2013, we did not have any material commitments for future capital expenditures.

Financing Activities

            Financing activities resulted in a net cash outflow of $92,172 for the six months ended October 31, 2013 compared to a net cash inflow of $3,977,598 for the six months ended October 31, 2012. The net cash outflow was primarily a result of repurchasing 105,148 shares of common stock at an average price of $1.63 per share for $162,737 and $38,350 in taxes paid related to conversion of deferred share units to shares of common stock. These outflows were partially offset by funds received through exercise of stock options of $108,915.

            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.

37


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 December 2011, FASB issued Accounting Standards Updates (“ASU”) 2011-11, Balance Sheet (Topic 210), Disclosure About Offsetting Assets and Liabilities , that included new disclosure requirements that are intended to enhance current disclosures on offsetting financial assets and liabilities. The new disclosures require an entity to disclose both gross and net information about derivative instruments accounted for in accordance with the guidance on derivatives and hedging that are eligible for offset on the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. The provisions of the new disclosure requirements are effective as of the beginning of the year ended April 30, 2015. We are currently evaluating the impact of the new guidance on its consolidated financial statements.

            In July 2012, FASB issued ASU 2012-02, Intangibles – Goodwill and Other (Topic 350), Testing Indefinite Lived Intangible Assets For Impairments , that permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test. An entity would continue to calculate the fair value of an indefinite-lived intangible asset if the asset fails the qualitative assessment, while no further analysis would be required if it passes. The provisions of the new guidance were effective as of the beginning of the year ended April 30, 2014. We do not expect the new guidance to have an impact on our 2014 impairment test results.

            In February 2013, FASB issued ASU 2013-02, Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income , that requires an entity to disclose information showing the effect of items reclassified from accumulated other comprehensive income on the line items of net income. The provisions of this new guidance were effective prospectively as of the beginning of the year ended April 30, 2014. The adoption of the standard requires that we declare the nature of changes in other comprehensive income that will have an impact on our net income or loss in the future. We have accumulated other comprehensive income relating to the translation of our subsidiary’s financial information into the presentation currency of our financial statements, which would reverse through net income or loss should the underlying assets and liabilities be disposed of.

Item 4.         Controls and Procedures.

Disclosure Controls and Procedures

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

            In connection with this quarterly report, as required by Rule 13a-15 under the Securities Exchange Act of 1934, we have carried out an evaluation of the effectiveness of the design and operation of our company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our company's management, including our company's Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our company's Chief Executive Officer and Chief Financial Officer concluded that as of October 31, 2013, our disclosure controls and procedures are effective as at the end of the period covered by this report.

38


Changes in Internal Control over Financial Reporting

            There were no changes in our internal control over financial reporting that occurred during the quarter ended October 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

            None.

Item 1A. Risk Factors.

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

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

Risks Associated with our Business and Industry

             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, Europe 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, which may be extended by selling our products through channel partners;

39


  • 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 manage our operating expenses, then our financial condition may be adversely affected.

            Operating expenses increased to $4,313,043 for the three months ended October 31, 2013 from $4,102,909 for the three months ended October 31, 2012 while our revenue decreased to $2,546,810 for the three months ended October 31, 2013 from $3,562,787 for the three months ended October 31, 2012. Our ability to reach and maintain profitability is conditional upon our ability to manage our operating expenses. There is a risk that we will have to increase our operating expenses in the future. Factors that could cause our operating expenses to increase include our determination to spend more on sales and marketing in order to increase product sales or our determination that more research and development expenditures are required in order to keep our current software products competitive or in order to develop new products for the market. To the extent that our operating expenses increase without a corresponding increase in revenue, our financial condition would be adversely impacted.

             We face larger and better-financed competitors, which may affect our ability to 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 ability to operate our business, our financial results and our ability to achieve or maintain revenues and/or profitability.

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

40


            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.

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

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

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

  • cause us to lose access to key distribution channels;

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

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

  • affect our ability to raise additional capital;

  • cause our stock price to decline significantly; and

  • lead to the bankruptcy or liquidation of our company.

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

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

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

41


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

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

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

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

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

             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.

42


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

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

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

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

            We are subject to the credit risk of our customers. Businesses that are good credit risks at the time of sale may become bad credit risks over time. In 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 six months ended October 31, 2013 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 into any forward contracts for hedging purposes during the six months ended October 31, 2013 (2012 - none).

43


            We also routinely enter into foreign currency forward contracts, not designated as hedging instruments, to protect us from fluctuations in exchange rates. As of October 31, 2013, we had $4,000,000 of notional value foreign currency forward contracts maturing through February 28, 2014. 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 of forward contracts as of October 31, 2013 is ($9,814) (April 30, 2013 - $9,830).

Risks Associated with our Common Stock

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

            Based on the 42,080,937 shares of common stock that were issued and outstanding as of October 31, 2013, our directors owned approximately 26% of our outstanding common stock. As a result, our directors as a group could have a significant influence in delaying, deferring or preventing any potential change in control of our company; they will be able to strongly influence the actions of our board of directors even if they were to cease being directors of our company and can effectively control the outcome of actions brought to our stockholders for approval. Such a high level of ownership may adversely affect the exercise of your voting and other stockholder rights.

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

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

             The exercise of all or any number of outstanding 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 October 31, 2013, then we would be required to issue an additional 5,004,257 shares of our common stock, which would represent approximately 12% 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.

44


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

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

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

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

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

             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.

45


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

Recent Sales of Unregistered Securities

            On September 12, 2013, we granted 250,000 stock options pursuant to our 2010 Stock Option Plan to two employees and one consultant. Each stock option entitles the holder thereof the right to purchase one share of common stock at a price equal to $1.44. 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 100,000 the stock options to a non-U.S. person (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 150,000 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.

            On October 1, 2013, we granted 100,000 stock options pursuant to our 2010 Stock Option Plan to one employee. Each stock option entitles the holder thereof the right to purchase one share of common stock at a price equal to $1.41. 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 the 100,000 the stock options to a non-U.S. person (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.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers








Total
number of
shares
purchased



Average
price paid
per share

Total number of
shares purchased
as part of publicly
announced plans
or programs
Maximum
number of shares
that may yet be
purchased under
the plans or
programs
August 1, 2013 to August 31, 2013 (1) 18,840 $1.71 18,840 2,344,009
September 1, 2013 to September 30, 2013 (1) 16,540 $1.47 16,540 2,327,469
October 1, 2013 to October 31, 2013 (1) 19,940 $1.29 19,940 2,307,529
Total 55,320 $1.48 55,320 2,307,529

(1)

Pursuant to a normal course issuer bid, which commenced on March 19, 2013 and expires on March 18, 2014, to purchase up to an aggregate of 2,462,365 common shares of the Company.

Item 3. Defaults Upon Senior Securities.

            None.

Item 5. Other Information.

            On September 25, 2013, our stockholders approved an amendment to our Company’s Articles of Incorporation to increase the authorized capital from 83,076,900 shares of common stock to 100,000,000 shares of common stock. We filed a Certificate of Amendment to Articles of Incorporation with the Nevada Secretary of State on October 1, 2013.

46


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).

 

 

3.7

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

 

 

3.8

Certificate of Amendment to Articles of Incorporation (filed herewith).

 

 

(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).

47



4.9 Amended Deferred Share Unit Plan effective September 25, 2013 (filed herewith).
   
(10)

Material Contracts

   
10.1

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

   
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

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).

   
10.6

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).

   
10.7

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).

   
10.8

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).

   
10.9

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).

   
10.10

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).

   
10.11

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).

   
10.12

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).

48



14.2

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

 

 

(21)

Subsidiaries of CounterPath Corporation

 

 

 

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

 

 

 

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

 

 

(31)

Section 302 Certifications

 

 

31.1

Section 302 Certification of Donovan Jones (filed herewith).

 

 

31.2

Section 302 Certification of David Karp (filed herewith).

 

 

(32)

Section 906 Certifications

 

 

32.1

Section 906 Certification of Donovan Jones (filed herewith).

   
32.2

Section 906 Certification of David Karp (filed herewith).

49


SIGNATURES

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

COUNTERPATH CORPORATION

By: /s/ Donovan Jones                                                 
  Donovan Jones
  President, Chief Executive Officer and Director
  (Principal Executive Officer)
   
  Date: December 12, 2013
   
   
  /s/ David Karp                                                       
  David Karp
  Chief Financial Officer, Treasurer and Secretary
  (Principal Financial Officer, Principal Accounting Officer)
   
  Date: December 12, 2013

50



 


 


 


 


 


 


 


 


 


 


 


 


 


 



COUNTERPATH CORPORATION

DEFERRED SHARE UNIT PLAN

1.           INTRODUCTION

1.1         Purpose

The CounterPath Corporation Deferred Share Unit Plan has been established to provide non-employee directors and senior officers of CounterPath Corporation and its subsidiaries with the opportunity to acquire deferred share units in order to allow them to participate in the long term success of CounterPath Corporation and to promote a greater alignment of interests between its non-employee directors, senior officers and shareholders.

1.2        Definitions

  (a)

“Acknowledgement of Recipient” means a document substantially in the form of Schedule “A”;

     
  (b)

“Affiliate” has the meaning assigned by the Securities Act (British Columbia), as amended from time to time;

     
  (c)

“Applicable Withholding Taxes” has the meaning set forth in Section 2.3 of the Plan;

     
  (d)

“Associate” has the meaning assigned by the Securities Act (British Columbia), as amended from time to time or any instrument adopted pursuant to such Act;

     
  (e)

“Award Date” means the date on which a Deferred Share Unit is granted, which date may be on or, if determined by the Board at the time of grant, after the date that the Board resolves to grant the Deferred Share Unit;

     
  (f)

“Award Market Value” means the volume weighted average closing trading price of the Shares on the Exchange for the five (5) trading days immediately preceding the Award Date;

     
  (g)

“Beneficiary” means a person who, on the date of a Participant’s death, is the person who has been designated as the Participant’s beneficiary, or where no such person has been validly designated by the Participant, or where the person is an individual and does not survive the Participant, the Participant’s legal representative;

     
  (h)

“Board” means the board of directors of the Corporation;

     
  (i)

“Cause” means, but is not limited to, termination of employment for any of the following actions: theft, dishonesty, misconduct, breach of fiduciary duty, or falsification of any of the Corporation’s documents or records; material failure to abide by code of conduct or other policies; misconduct that results in a required accounting restatement; unauthorized use, misappropriation, destruction or diversion of any of tangible or intangible assets or corporate opportunity; any intentional act which has a material detrimental effect on the Corporation’s reputation or business; repeated failure or inability to perform any reasonable assigned duties after written notice, and a reasonable opportunity to cure such failure or inability; any material breach of failure to cooperate in a corporate investigation; or conviction (including any plea of guilty or nolo contendere ) of any criminal act involving fraud, dishonesty, misappropriation or moral turpitude, or which impairs the person’s ability to perform his duties on the Corporation’s behalf or any other cause as that term is defined by common law applicable in British Columbia;




  (j)

“Change in Control” means the occurrence of any of the following: (i) a “Corporate Transaction,” meaning either: the sale, lease, conveyance or other disposition of all or substantially all of the Corporation’s assets to any person, entity or group of persons acting in concert; or a merger, consolidation or other transaction of the Corporation with or into any other corporation, entity or person, other than a transaction in which the holders of at least 50% of the shares of capital stock of the Corporation outstanding immediately prior thereto continue to hold (either by voting securities remaining outstanding or by their being converted into voting securities of the surviving entity or its controlling entity) at least 50% of the total voting power represented by the voting securities of the Corporation or such surviving entity (or its controlling entity) outstanding immediately after such transaction; or (ii) any person or group of persons becoming the “beneficial owner”, directly or indirectly, of securities of the Corporation representing 50% or more of the total voting power represented by the Corporation’s then outstanding voting securities; or (iii) a contest for the election or removal of members of the Board that results in the removal from the Board of at least 50% of the incumbent members of the Board;

     
  (k)

“Committee” means the committee of the Board responsible for recommending to the Board the compensation of the Participants, which at the effective date of the Plan is the Corporation’s Compensation Committee;

     
  (l)

“Corporate Secretary” means the corporate secretary of the Corporation;

     
  (m)

“Corporation” means CounterPath Corporation and its successors and assigns, and any reference in the Plan to activities by the Corporation means action by or under the authority of the Board or the Committee;

     
  (n)

“Deferred Share Unit” means a unit equivalent in value to a Share, under regulation 6801(d) of the Canadian Income Tax Act or successor legislation, credited by means of a bookkeeping entry in the books of the Corporation in accordance with Section 5 and which entitles the holder thereof, at the time specified in the Plan, to receive Shares subject to the provisions of the Plan;

     
  (o)

“Deferred Share Unit Agreement” means the agreement between the Corporation and the Participant evidencing the grant of Deferred Share Units;

     
  (p)

“Director’s Retainer” means the retainer payable to a Non-employee Director for service as a member of the Board during a calendar year and, for greater certainty, shall include, if any, Board or committee chairperson retainers, committee member retainers, Board or committee meeting fees, but shall not include special remuneration for ad hoc services rendered to the Board or any discretionary grant of Deferred Share Units;

2



  (q)

“Disability” shall have the meaning ascribed to such terms in the Corporation’s long-term disability plan provided that the Board’s determination as to whether or not a Participant has incurred a Disability is final and conclusive and binding on all persons;

     
  (r)

“Distribution” means an issuance from the treasury of the Corporation of a number of Shares required to settle the redemption of Deferred Share Units;

     
  (s)

“Distribution Dates” means up to two dates elected by Participants in a timely manner as described below, provided that in no event shall a Participant be permitted to elect a date which is earlier than the ninetieth (90) day following the Separation Date or later than the last business day of the calendar year following the calendar year in which the Separation Date occurs, and provided, further, that for any U.S. taxpayer who is also a “specified employee” (as determined for purposes of Section 409A of the U.S. Internal Revenue Code), the first Distribution Date shall be no earlier than six (6) months following the Separation Date. If no Distribution Date is elected, or if it is not elected in a timely manner, “Distribution Date” shall mean the first business day following the six-month anniversary of the Separation Date. A Distribution Date shall be deemed to be elected “in a timely manner” if it specifies the percentage of the Deferred Share Units the Participant wishes to have distributed to him or her under Section 5.4 of the Plan and the Participant complies with the following rules:


  (i)

for Participants who are U.S. taxpayers, the election shall be delivered to the Corporate Secretary in the form prescribed by the Corporation, a copy of which is attached hereto as Schedule “B”, prior to December 31 by current Participants with such election to apply in respect of Deferred Share Units awarded the following calendar years, or for new Participants who are U.S. taxpayers and who are eligible for the first time to participate in the Plan pursuant to Section 3 or Section 4, within 30 days following notice of such eligibility with such election to apply in respect of Deferred Share Units awarded that calendar year of eligibility. Such elections shall be irrevocable; and

     
  (ii)

for Participants resident in Canada only and who are not U.S. taxpayers, the election specifying the first Distribution Date shall be delivered prior to the Separation Date to the Corporate Secretary in the form prescribed by the Corporation, a copy of which is attached hereto as Schedule “C”, and the election, if any, specifying the second Distribution Date shall be delivered in writing to the Corporate Secretary prior to the occurrence of the first Distribution Date;


  (t)

“Distribution Value” means the volume weighted average closing trading price of the Shares on the Exchange for the five (5) trading days immediately preceding the Distribution Date;

     
  (u)

“Dividend Equivalents” means a bookkeeping entry whereby each Deferred Share Unit is credited with the equivalent amount of the dividend paid on a Share in accordance with Section 5.2;

3



  (v)

“Dividend Market Value” means the weighted average trading price of the Shares on the Exchange for the five (5) trading days immediately following the dividend record date for the payment of any dividend made on the Shares;

     
  (w)

“Exchange” shall mean the TSX Venture Exchange, or TSX if applicable, or any other exchange on which the Shares of the Corporation trade as approved by the Board;

     
  (x)

“Non-employee Director” means any member of the Board who is not employed by the Corporation or any of its subsidiaries;

     
  (y)

“Participant” means a current or former Non-employee Director or Senior Officer who has been or is eligible to be credited with Deferred Share Units under the Plan;

     
  (z)

“Participant Information” shall have the meaning set forth in Section 2.4;

     
  (aa)

“Plan” means this CounterPath Corporation Deferred Share Unit Plan, as amended from time to time;

     
  (bb)

“Plan Limit” shall have the meaning set forth in Section 2.5;

     
  (cc)

“Retirement” means the termination of employment of a Participant on or after age sixty- five (65) or any such other age as determined from time to time by the Corporation;

     
  (dd)

“Senior Officer” means the president of the Corporation, the chief executive officer of the Corporation, any officer of the Corporation, any executive vice-president of the Corporation, any senior vice-president of the Corporation and any vice-president or other employee of the Corporation designated by the Board as a Senior Officer for the purposes of this Plan;

     
  (ee)

“Separation Date” means the date on which a Participant has retired from all positions with the Corporation and its subsidiaries or when a Participant, except as a result of death, has ceased to hold any and all positions with the Corporation and its subsidiaries;

     
  (ff)

“Share” means a common share of the Corporation; and

     
  (gg)

“TSX” means the Toronto Stock Exchange.

1.3        Effective Date of the Plan

The effective date of the Plan shall be the date on which such Plan is approved by shareholders of the Corporation.

2.           ADMINISTRATION

2.1        Administration of the Plan

The Plan shall be administered by the Board, which shall have full authority to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan and to make such determinations as it deems necessary or desirable for the administration of the Plan; and all actions taken and decisions made by the Board in this regard shall be final, conclusive and binding on all parties concerned, including, but not limited to, the Corporation, the Participants and their legal representatives.

4


Subject to the limitations of the Plan, the Board has the authority, to:

  (a)

determine which individuals are to be granted Deferred Share Units and the number of Deferred Share Units to be issued to those Participants;

     
  (b)

determine the terms under which such Deferred Share Units are granted including, without limitation, those related to transferability, vesting and forfeiture;

     
  (c)

prescribe the form of the Plan with respect to a particular grant of Deferred Share Units;

     
  (d)

interpret the Plan and determine all questions arising out of the Plan and any Deferred Share Units granted pursuant to the Plan, which interpretations and determinations will be conclusive and binding on the Corporation and all other affected persons;

     
  (e)

to prescribe, amend and rescind rules and procedures relating to the Plan;

     
  (f)

subject to the provisions of the Plan and subject to such additional limitations and restrictions as the Board may impose, to delegate to one or more officers of the Corporation some or all of its authority under the Plan;

     
  (g)

to employ such legal counsel, independent auditors, third party service providers and consultants as it deems desirable for the administration of the Plan and to rely upon any opinion or computation received therefrom; and

     
  (h)

make any other determinations that the Board deems necessary or desirable for the administration of the Plan.

2.2         Determination of Value if Shares Not Publicly Traded

Should the Shares not be publicly traded on the Exchange at the relevant time such that the Distribution Value and/or the Award Market Value and/or the Dividend Market Value cannot be determined in accordance with the formulae set out in the definitions of those terms, such values shall be determined by the Committee acting in good faith, which may include the use of an independent valuation.

2.3        Taxes and Other Source Deductions

  (a)

The Corporation shall not be liable for any tax matters, issues or related tax problems, and for any tax imposed on any Participant or any Beneficiary as a result of the crediting, holding or redemption of Deferred Share Units, amounts paid or credited to such Participant (or Beneficiary), including the credit conversion of dividends to Deferred Share Units, or securities issued to such Participant (or Beneficiary) under this Plan;

     
  (b)

It is the responsibility of the Participant (or Beneficiary) to complete and file any tax returns which may be required under any applicable tax laws within the period prescribed by such laws; and

     
  (c)

The Participant (or Beneficiary) shall pay to the Corporation by wire transfer, certified or cashier's check, promptly upon distribution of Shares or, if later, the date that the amount of such obligations becomes determinable, all applicable federal, state, local and foreign withholding taxes (the “Applicable Withholding Taxes”) that the Corporation, in its discretion, determines to result upon Shares distributed upon redemption of Deferred Share Units. Upon approval of the Corporation, a Participant (or Beneficiary) may satisfy such obligation by complying with one or more of the following alternatives selected by the Corporation:

5


  (i)

by delivering to the Company Shares previously held by such Participant (or Beneficiary) or by the Company withholding Shares otherwise deliverable pursuant to the redemption of Deferred Share Units, which Shares received or withheld shall have a fair market value at such date (as determined by the Board) equal to any withholding tax obligations arising as a result of such redemption of Deferred Share Units; or

     
  (ii)

by complying with any other payment mechanism approved by the Corporation from time to time.


2.4

Information

     
(a)

Each Participant shall provide the Corporation and the Committee with all the information including, where required, all “personal information” as defined in the Personal Information Protection and Electronic Documents Act (Canada), or any applicable provincial privacy legislation, they require to administer or operate the plan or to permit the participant to participate in the Plan (collectively, the “Participant Information”);

     
(b)

The Corporation and the Committee may from time to time transfer or provide access to Participant Information to a third party service provider for purposes of the administration of the Plan provided that such service providers will be provided with such information for the sole purpose of providing services to the Corporation in connection with the operation or administration of the Plan and provided further that such service providers agree to take appropriate measures to protect the Participant Information and not to use it for any purpose except to administer or operate the Plan. By participating in the Plan, each Participant acknowledges that Participant Information may be so provided and agrees to its provision on the terms set forth herein, including where applicable, to the transfer of the Participant Information to such third service providers;

     
(c)

In addition, Participant Information may be disclosed or transferred to another party during the course of, or completion of, a change in ownership of, the grant of a security interest in, all or part of the Corporation or its affiliates including through an asset or share sale, or some other form of business combination, merger or joint venture, provided that such party is bound by appropriate agreements or obligations and required to use or disclose the Participant Information in a manner consistent with this Section 2.4; and

     
(d)

Except as contemplated in this Section 2.4, the Corporation and the Committee shall not disclose the Participant Information except in response to regulatory filing requirements or other requirements for the information by a government authority, regulatory body, or a self-regulatory body in which the Corporation participates in order to comply with applicable laws (including, without limitation, the rules, regulations and policies of the Exchange) or for the purpose of complying with a subpoena, warrant or other order by a court, person or body having jurisdiction over the Corporation and/or such persons to compel production of the Participant Information.

6



2.5

Shares Reserved for Issuance

     
(a)

The maximum number of Shares that are issuable under the Plan is 2,500,000 (the “Plan Limit”), subject to adjustment under Section 5.7.

     
(b)

The maximum number of Shares that may be reserved for issuance to any one Eligible Participant pursuant to Deferred Share Units granted under the Plan and any Share Compensation Arrangement is 5% of the number of Shares of the Corporation outstanding at the time of reservation.

     
(c)

For purposes of determining the number of Shares that remain available for issuance under the Plan, the number of Shares underlying any grants of Deferred Share Units that are surrendered, forfeited, waived and/or cancelled shall be added back to the Plan Limit and again be available for future grant.

2.6        Non-Exclusivity

Nothing contained in this Plan will prevent the Board from adopting other or additional equity compensation arrangements, subject to obtaining the prior approval of the Exchange or any other required regulatory or shareholder approvals.

2.7        Amendment of Plan and Deferred Share Units

The Board may amend, suspend or terminate the Plan at any time, provided that no such amendment, suspension or termination may be made without obtaining any required regulatory approval, including the Exchange, or, if requested by such regulatory authority, any shareholder approval.

Furthermore, no such amendment, suspension or termination may:

  (a)

without shareholder approval, increase the maximum number of Shares that may be issued pursuant to Deferred Share Units granted under the Plan; or

     
  (b)

amend, alter or impair in any manner any Deferred Share Units previously granted to a Participant, without the express written consent of said Participant, irrespective of any action taken by the Board pursuant to Section 2.7.

2.8         Compliance with Laws and Stock Exchange Rules

The Plan, the grant of Deferred Share Units under the Plan and the Corporation’s obligation to issue Shares will be subject to all applicable federal, provincial and foreign laws, rules and regulations under the rules of any stock exchange on which the Shares are listed for trading. Any Shares issued to Participants pursuant to the vesting of Deferred Share Units may be subject to limitation on sale or resale under applicable securities laws.

3.           PAYMENT OF NON-EMPLOYEE DIRECTOR’S RETAINER

The Board shall determine each year the manner in which the Corporation shall pay and/or issue, as the case may be, the Director’s Retainer (i.e., in cash, vested Deferred Share Units or a combination thereof) to such Non-employee Director for services as a member of the Board for the current fiscal year.

7


4.            GRANTING AND VESTING OF DEFERRED SHARE UNITS

Subject to such other terms and conditions as the as the Board or Committee may prescribe, the Committee may recommend and the Board may, from time to time, approve a grant of Deferred Share Units to a Participant, each of which represents the right of the Participant to receive one Share, subject to the following terms and conditions and shall contain such additional terms and conditions as the Board shall deem appropriate, not inconsistent with the terms of the Plan and applicable laws, regulations and rule.

Subject to the right of the Board to determine that a Deferred Share Unit may vest on dates different than the dates below or any other vesting requirements (to be set forth in the Deferred Share Unit Agreement), a Deferred Share Unit granted to a Participant other than a Director will vest as follows:

  (i)

on the first anniversary of the Award Date as to one-third (1/3) of the number of Deferred Share Units granted;

     
  (ii)

on the second anniversary of the Award Date as to one-third (1/3) of the number of Deferred Share Units granted; and

     
  (iii)

on the third anniversary of the Award Date as to one-third (1/3) of the number of Deferred Share Units granted.

Subject to the right of the Board to determine that a Deferred Share Unit may vest on different dates or any other vesting requirements (to be set forth in the Deferred Share Unit Agreement), a Deferred Share Unit granted to a Participant who is a Director shall vest immediately on the Award Date.

5.           DEFERRED SHARE UNITS

5.1         Number of Deferred Share Units

All Deferred Share Units received by a Participant shall be credited to an account maintained for the Participant on the books of the Corporation as of the Award Date, except where Deferred Share Units have been granted pursuant to Section 4, in which case such Deferred Share Units shall be credited to the Participant’s account according to a vesting Schedule “A” recommended by the Committee and approved by the Board at its discretion. Schedule “A” will be kept in the books of the Corporation for each award. Unless otherwise determined by the Board, such Deferred Share Units shall cease to vest on the Separation Date and any Deferred Share Units which have not vested on the Separation Date shall be cancelled. Notwithstanding the foregoing, unless otherwise determined by the Committee or the Board at the Award Date, any Deferred Share Units outstanding immediately prior to the occurrence of a Change in Control, but which are not then vested, shall become fully vested upon the occurrence of a Change in Control. Notwithstanding Section 2.2, in the event that the Change in Control will result in the Shares no longer being publicly traded on the Exchange, prior to the occurrence of the Change in Control the Committee or the Board, acting in good faith, shall determine the formulae that shall be used to determine any Distribution Value and/or the Award Market Value and/or the Dividend Market Value after the occurrence of the Change in Control.

The number of Deferred Share Units (including fractional Deferred Share Units) to be credited as of the Award Date in respect of the Director’s Retainer shall be determined by dividing (a) the amount of the Director’s Retainer to be paid in Deferred Share Units by (b) the Award Market Value, with fractions computed to three decimal places. The number of Deferred Share Units (including fractional Deferred Share Units) to be credited as of the Award Date in respect of a grant under Section 4 shall be the number of Deferred Share Units as determined by the Board as of the Award Date.

8


The award of Deferred Share Units to a Participant shall be evidenced by a letter to the Participant from the Corporation in the form attached as Schedule “A”.

5.2        Credits for Dividends

A Participant’s account shall be credited with Dividend Equivalents in the form of additional Deferred Share Units (which shall vest in accordance with the vesting schedules of the Deferred Share Units that are subject to such Dividend Equivalent) on each dividend payment date in respect of which normal cash dividends are paid on the Shares. Such Dividend Equivalents shall be computed by dividing: (a) the amount obtained by multiplying the amount of the dividend declared and paid per Share by the number of Deferred Share Units recorded in the Participant’s account on the record date for the payment of such dividend, by (b) the Dividend Market Value, with fractions computed to three decimal places.

5.3         Reporting of Deferred Share Units

Statements of the Deferred Share Unit accounts will be provided to the Participants on an annual basis.

5.4         Distribution of Deferred Share Units

  (a)

Subject to Section 5.4(b), a Participant shall receive, on the applicable Distribution Date, Shares equal to the number of Deferred Share Units recorded in the Participant’s account on the Distribution Date, provided that the Participant has delivered to the Corporation cash, or such other acceptable means to the Corporation as outlined in Section 2.3(c), to pay any Applicable Withholding Taxes. Upon payment in full of the value of the Deferred Share Units, the Deferred Share Units shall be cancelled and no further payments shall be made to the Participant under the Plan.

     
  (b)

Where a Participant resident in Canada only has elected to receive a portion of the Deferred Share Units on two Distribution Dates in accordance with Section 1.2(s), that Participant shall receive (i) on the first Distribution Date Shares equal to the number of Deferred Share Units recorded in the Participant’s account on such date which the Participant has elected to have distributed, provided that the Participant has delivered to the Corporation cash, or such other acceptable means to the Corporation as outlined in Section 2.3(c), to pay any Applicable Withholding Taxes, and (ii) on the second Distribution Date the Participant shall receive Shares equal to the number of Deferred Share Units remaining in the Participant’s account on such date, provided that the Participant has delivered to the Corporation cash, or such other acceptable means to the Corporation as outlined in Section 2.3(c), to pay any Applicable Withholding Taxes. Upon payment in full of the value of the Deferred Share Units, the Deferred Share Units shall be cancelled and no further payments shall be made to the Participant under the Plan. Where a Participant who is a U.S. taxpayer has elected to receive a portion of the Deferred Share Units on either one or two Distribution Dates for each year Deferred Share Units were issued to such Participant in accordance with Section 1.2(s), that Participant shall receive (i) on each first Distribution Date a Shares equal to the number of Deferred Share Units recorded in the Participant’s account on such date which the Participant has elected to have distributed, provided that the Participant has delivered to the Corporation cash, or such other acceptable means to the Corporation as outlined in Section 2.3(c), to pay any Applicable Withholding Taxes, and (ii) on each second Distribution Date the Participant shall receive Shares equal to the number of Deferred Share Units remaining in the Participant’s account on such date provided that the Participant has delivered to the Corporation cash, or such other acceptable means to the Corporation as outlined in Section 2.3(c), to pay any Applicable Withholding Taxes. For greater certainty, on the last elected second Distribution Date, the Participant shall also receive Shares equal to the number of Deferred Share Units remaining in the Participant’s account on such date, provided that the Participant has delivered to the Corporation cash, or such other acceptable means to the Corporation as outlined in Section 2.3(c), to pay any Applicable Withholding Taxes. Upon payment in full of the value of the Deferred Share Units, the Deferred Share Units shall be cancelled and no further payment shall be made to the Participant under the Plan.

9


5.5         Termination of Employment

Unless otherwise determined by the Board, in its sole discretion, or specified in the applicable Deferred Share Unit Agreement:

  (a)

Upon the voluntary resignation or the termination for Cause of a Participant, all of the Participant’s Deferred Share Units which remain unvested in the Participant’s Account shall be forfeited without any entitlement to such Participant. A terminated employee shall not be entitled to any new grants after receiving notice of termination, whether such notice is working notice or pay in lieu thereof.

     
  (b)

Upon the termination without Cause, the Disability, or the Retirement of a Participant, the Participant or the Participant’s Beneficiary, as the case may be, shall have a number of Deferred Share Units become vested (in addition to those already vested) in a linear manner equal to the sum for each grant of Deferred Share Units of the original number of Deferred Share Units granted multiplied by the number of completed months of employment since the Award Date divided by the number of months required to achieve the full vesting of such grant of Deferred Share Units reduced by the actual number of Deferred Share Units that have previously become vested in accordance with Section 4. Such vested Deferred Share Units shall be settled in accordance with Section 5.4. Termination without Cause may occur during a Change of Control period, if any of the following conditions occurs without the Senior Officer’s informed written consent, which condition remains in effect ten business days after the Senior Officer’s written notice to the Corporation of such condition: a material adverse change in the Senior Officer’s title, duties or responsibilities; a decrease in the Senior Officer’s base salary rate or target bonus amount; a relocation of the Senior Officer’s work place that increases the Senior Officer’s regular commute by more than 50 miles one-way; or a material breach by the Corporation or its successor of the Plan providing for Change in Control benefits following the consummation of a Change in Control.

5.6         Death of Participant to Distribution

Upon the death of a Participant prior to the distribution of the Deferred Share Units credited to the account of such Participant under the Plan, a Distribution shall be made to the estate of such Participant on or about the thirtieth (30th) day after the Corporation is notified of the death of the Participant. Such Distribution shall be equivalent to the amount which would have been paid or issued to the Participant pursuant to and subject to Section 5.4, calculated on the basis that the day on which the Participant dies is the Distribution Date. Upon payment or issuance in full of the value of all of the Deferred Share Units that become payable or issuable under this Section 5.6, the Deferred Share Units shall be cancelled and no further payments or issuances will be made from the Plan in relation to the Participant.

10


5.7         Adjustments

In the event of any change in the outstanding Shares by reason of (a) a stock split, spin-off, share dividend or share combination, or (b) reclassification, recapitalization, merger or similar event that results in a holder thereof being entitled to a different class or type of security or other property, the Committee may, subject to applicable law, adjust appropriately the account of each Participant and the Deferred Share Units outstanding under the Plan shall be adjusted in such manner, if any, as the Committee may in its discretion deem appropriate to preserve proportionally the interests of Participants under the Plan.

6.           GENERAL

6.1         Amendment, Suspension, or Termination of Plan

The Board may from time to time amend or suspend the Plan in whole or in part and may at any time terminate the Plan without prior notice. However, any such amendment, suspension, or termination shall not adversely affect the Deferred Share Units previously granted to a Participant at the time of such amendment, suspension or termination, without the consent of the affected Participant.

If the Board terminates the Plan, no new Deferred Share Units (other than Deferred Share Units referred to in Section 5.2 and Deferred Share Units that have been granted but vest subsequently pursuant to Section 5.1) will be credited to the account of a Participant, but previously credited (and subsequently vesting) Deferred Share Units shall be paid out in accordance with the terms and conditions of the Plan existing at the time of termination. The Plan will finally cease to operate for all purposes when the last remaining Participant receives payment of all Deferred Share Units recorded in the Participant’s account.

6.2        Compliance with Laws

  (a)

The administration of the Plan shall be subject to and made in conformity with all applicable laws and any applicable regulations of a duly constituted authority. Should the Committee recommend and the Board, in its sole discretion, determine that it is not feasible or desirable to honor an election in favor of Deferred Share Units due to such laws or regulations, its obligation shall be satisfied by means of an equivalent cash payment (equivalence being determined on a before-tax basis) less any Applicable Withholding Taxes.

     
  (b)

In the event that the Committee recommends and the Board, after consultation with the Corporation’s Chief Financial Officer and external accountants, determines that it is not feasible or desirable to honor an election in favor of Deferred Share Units or to honor any other provision of the Plan (other than the Distribution Date) under generally accepted accounting principles as applied to the Plan and the accounts established under the Plan for each Participant, the Committee shall recommend and the Board shall make such changes to the Plan as the Board reasonably determines, after consultation with the Corporation’s Chief Financial Officer and external accountants, are required in order to avoid adverse accounting consequences to the Corporation with respect to the Plan and the accounts established under the Plan for each Participant, and the Corporation’s obligations under the Plan shall be satisfied by such other reasonable means as the Committee shall in its good faith determine.

11


6.3        Reorganization of the Corporation

The existence of any Deferred Share Units shall not affect in any way the right or power of the Corporation or its shareholders to make or authorize any adjustment, recapitalization, reorganization or other change in the Corporation’s capital structure or its business, or any amalgamation, combination, merger or consolidation involving the Corporation or to create or issue any bonds, debentures, shares or other securities of the Corporation or the rights and conditions attaching thereto or to effect the dissolution or liquidation of the Corporation or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar nature or otherwise.

6.4         General Restrictions and Assignment

Except as required by law, the rights of a Participant under the Plan are not capable of being assigned, transferred, alienated, sold, encumbered, pledged, mortgaged or charged and are not capable of being subject to attachment or legal process for the payment of any debts or obligations of the Participant.

Rights and obligations under the Plan may be assigned by the Corporation to a successor in the business of the Corporation.

6.5        No Right to Service

Neither participation in the Plan nor any action taken under the Plan shall give or be deemed to give any Participant a right to continued appointment as a member of the Board or as a Senior Officer or continued employment with the Corporation and shall not interfere with any right of the shareholders of the Corporation to remove any Participant as a member of the Board or any right of the Corporation to terminate a Senior Officer’s office or employment with the Corporation at any time.

6.6         No Shareholder Rights

Under no circumstances shall Deferred Share Units be considered Shares nor shall they entitle any Participant to exercise voting rights or any other rights attaching to the ownership of Shares, nor shall any Participant be considered the owner of the Shares by virtue of the award of Deferred Share Units, until and unless Shares have been issued or transferred to the Participant upon redemption of his or her Deferred Share Units.

6.7        Units Non-Transferable

Deferred Share Units are non-transferable (except to a Participant’s estate as provided in Section 5.5) and certificates representing Deferred Share Units will not be issued by the Corporation.

6.8         Unfunded and Unsecured Plan

Unless otherwise determined by the Board, the Plan shall be unfunded and the Corporation will not secure its obligations under the Plan. To the extent any Participant or his or her estate holds any rights by virtue of a grant of Deferred Share Units under the Plan, such rights (unless otherwise determined by the Board) shall be no greater than the rights of an unsecured creditor of the Corporation.

12


6.9          No Other Benefit

No amount will be paid to, or in respect of, a Participant under the Plan to compensate for a downward fluctuation in the price of a Share, nor will any other form of benefit be conferred upon, or in respect of, a Participant for such purpose.

6.10      Governing Law

The Plan shall be governed by, and interpreted in accordance with, the laws of the Province of British Columbia and the laws of Canada applicable therein, without regard to principles of conflict of laws.

6.11      Interpretation

In this text, words importing the singular meaning shall include the plural and vice versa, and words importing the masculine shall include the feminine gender.

6.12       Severability

The invalidity or unenforceability of any provision of this Plan shall not affect the validity or enforceability of any other provision and any invalid or unenforceable provision shall be severed from this Plan.

APPROVED by the Board of CounterPath Corporation on July 23, 2009, as amended effective September 27, 2012, and as further amended effective September 25, 2013.

  /s/ David Karp
  David Karp
  Chief Financial Officer

13


SCHEDULE “A”

Personal & Confidential

[Date]

[Name of Non-employee Director/Senior Officer]

Dear [Name] :

Pursuant to this election, we are pleased to advise you that [number] DSUs have been awarded to you at the discretion of the Board of Directors of CounterPath Corporation pursuant to the CounterPath Corporation Deferred Share Unit Plan (the “Plan”) and will be credited to your account in accordance with the following vesting schedule:

Award Date Vesting Date Number of DSUs Award Market Value
       
       
       
       

In accordance with the terms of the Plan, all DSUs credited to your account will be paid out at the time and in the manner specified in the Plan.

Please complete the attached Acknowledgement of Recipient and return to my attention.

If you have any questions on the above, or would like more details, please do not hesitate to contact me.

Yours truly,

David Karp
Corporate Secretary
Tel: (604) 628-9364
Email: dkarp@counterpath.com


ACKNOWLEDGEMENT OF RECIPIENT

I, (print name)__________________________________________________________, acknowledge that:

1.

I have received and reviewed a copy of the CounterPath Corporation Deferred Share Unit Plan (the “Plan”) and agree to be bound by it.

     
2.

The value of a Deferred Share Unit is based on the trading price of a Share and is thus not guaranteed. The eventual value of a Deferred Share Unit on the applicable payment date may be higher or lower than the value of the Deferred Share Unit at the time it was allocated to my account in the Plan.

     
3.

I will be liable for income and/or withholding taxes when Deferred Share Units (including Dividend Equivalents converted to Deferred Share Units) are paid in cash on a Distribution Date, in accordance with the terms of the Plan. Payments from the Plan shall be net of applicable source deductions. I understand that the Corporation is making no representation to me regarding taxes applicable to me under this Plan and I will confirm the tax treatment with my own tax advisor .

     
4.

No funds will be set aside to guarantee the payment of Deferred Share Units. Future payments from the Plan are an unfunded liability recorded on the books of the Corporation. Any rights under the Plan by virtue of a grant of Deferred Share Units shall be no greater than the rights of an unsecured creditor.

     
5.

I understand that:

     
(a)

all capitalized terms shall have the meanings attributed to them under the Plan;

     
(b)

all payments will be net of any Applicable Withholding Taxes; and

     
(c)

if I am a Non-employee Director and I resign or am removed from the Board or if I am a Senior Officer and I cease to be employed by the Corporation, unless otherwise determined by the Board, I will forfeit any Deferred Share Units which have not yet vested on such date, as set out in detail in the Plan.


   
  Signature
   
   
  Name
   
   
  Date


SCHEDULE “B”
U.S. TAXPAYER FORM OF ELECTION

FOR TIMING AND AMOUNT OF PAYMENT

THIS ELECTION FORM MUST BE RETURNED TO THE CORPORATE SECRETARY OF THE CORPORATION (AT THE FOLLOWING FAX NUMBER: (604) 320-3399 BY 5:00 P.M. (PACIFIC TIME)) BEFORE DECEMBER 31, 20 . [ FOR NEW PARTICIPANTS: WITHIN 30 DAYS OF ELIGIBILITY TO PARTICIPATE ]

I am currently a U.S. taxpayer due to my U.S. citizenship or tax residency.
I hereby irrevocably elect the following Distribution Date(s) and amounts:

First Distribution Date:
__________days (minimum of 90 days (unless I am a “specified employee” in which case a minimum of 185 days)) following my Separation Date.
Percentage of Deferred Share Units to Distribute to me on the First Distribution Date: __________% (must be in increments of 5%) Will be rounded up to the nearest unit.

Second Distribution Date (optional) :
__________days (minimum of 90 days (unless I am a “specified employee” in which case a minimum of 185 days)) following my Separation Date.

 

Remainder of Deferred Share Units will be delivered to me on the Second Distribution Date.

Please note that regardless of the elections above, if either Distribution Date falls on or after December 31 of the calendar year following the year during which the Participant’s Separation Date occurs, then the all amounts credited to a Participant’s account shall be automatically distributed on the business day that immediately precedes such December 31.

______________________________
Participant Signature

______________________________
Date


SCHEDULE “C”
NON-U.S. TAXPAYER: FORM OF ELECTION

FOR TIMING AND AMOUNT OF PAYMENT

THIS ELECTION FORM MUST BE RETURNED TO THE CORPORATE SECRETARY OF THE CORPORATION (AT THE FOLLOWING FAX NUMBER: (604) 320-3399 BY 5:00 P.M. (PACIFIC TIME)) PRIOR TO THE SEPARATION DATE, WITH RESPECT TO THE FIRST DISTRIBUTION DATE AND PRIOR TO THE FIRST DISTRIBUTION DATE, WITH RESPECT TO THE SECOND DISTRIBUTION DATE.

I hereby irrevocably elect the following Distribution Date(s) and Amounts.

First Distribution Date:


__________days (minimum of 90 days) following my Separation Date.

Percentage of Deferred Share Units to Distribute to me on the First Distribution Date:

__________% (must be in increments of 5%) Will be rounded up to the nearest unit.

Second Distribution Date (optional):


__________days (minimum of 90 days) following my Separation Date.

Remainder of Deferred Share Units will be delivered to me on the Second Distribution Date.

Please note that regardless of the elections above, if either Distribution Date falls on or after December 31 of the calendar year following the year during which the Participant’s Separation Date occurs, then the all amounts credited to a Participant’s account shall be automatically distributed on the business day that immediately precedes such December 31.

______________________________
Participant Signature

______________________________
Date



Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Donovan Jones, certify that:

1. I have reviewed this Quarterly Report of CounterPath Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by the quarterly report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: December 12, 2013 /s/ Donovan Jones
  Donovan Jones
  Chief Executive Officer
  (Principal Executive Officer)



Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David Karp , certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of CounterPath Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by the quarterly report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: December 12, 2013 /s/ David Karp
  David Karp
  Chief Financial Officer, Treasurer and Corporate Secretary
  (Principal Financial Officer, Principal Accounting Officer)



Exhibit 32

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT
TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

I, Donovan Jones, Chief Executive Officer of CounterPath Corporation (the “Company”), certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) the Quarterly Report of the Company on Form 10-Q for the three months ended October 31, 2013, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Donovan Jones                                                       
Donovan Jones
President and Chief Executive Officer
(Principal Executive Officer)

December 12, 2013

I, David Karp, Chief Financial Officer of CounterPath Corporation (the “Company”), certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) the Quarterly Report of the Company on Form 10-Q for the three months ended October 31, 2013, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ David Karp                                                             
David Karp
Chief Financial Officer, Treasurer and Corporate Secretary
(Principal Financial Officer, Principal Accounting Officer)

December 12, 2013