NOTE 1 - BASIS OF PRESENTATION AND LIQUIDITY

Basis of Presentation

The consolidated financial statements include the accounts of WPCS International Incorporated (WPCS) and its wholly and majority-owned subsidiaries, as follows, collectively referred to as “we”, “us” or the "Company". United States-based subsidiaries include WPCS Incorporated, WPCS International – Suisun City, Inc. (Suisun City Operations), WPCS International – Lakewood, Inc. (Lakewood Operations), WPCS International – Hartford, Inc. (Hartford Operations), WPCS International – Trenton, Inc. (Trenton Operations), WPCS International – Seattle, Inc. (Seattle Operations), WPCS International – Portland, Inc. (Portland Operations) and BTX Trader, LLC (BTX). International operations include WPCS Asia Limited, 60% of Taian AGS Pipeline Construction Co. Ltd. (China Operations), WPCS Australia Pty Ltd., WPCS International – Brendale, Pty Ltd., and The Pride Group (QLD) Pty Ltd. (Pride), (collectively, Australia Operations).

The Company offers low voltage communication infrastructure contracting services to public services, healthcare, energy and corporate enterprise markets and has launched a Bitcoin trading platform through its wholly-owned subsidiary for the trading of digital currencies.

On July 25, 2012, the Company sold substantially all of the assets of two of its wholly-owned subsidiaries, the Hartford and Lakewood Operations. As a result of the execution of the definitive purchase agreement for the divestiture of Pride on September 19, 2013 and the execution of the definitive purchase agreement for the divestiture of the Seattle Operations on March 31, 2014, the Company has recorded the Australia and Seattle Operations financial results as discontinued operations. These consolidated financial statements reflect the results of these four operations as discontinued operations for all periods presented, including certain reclassifications to prior year financial statements to present discontinued operations.

Liquidity and Going Concern

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the fiscal year ended April 30, 2014, the Company has incurred losses from continuing operations and a consolidated net loss of approximately $11,048,000. In addition, the Company has outstanding balances due to its former surety under a forbearance agreement of approximately $1,534,000. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to the carrying amount and classification of recorded assets and liabilities should the Company be unable to continue operations. Management’s plans are to continue to raise additional funds through the sales of debt or equity securities or sales of assets. There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company and whether the Company will become profitable and generate positive operating cash flow. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables and reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.

Zurich Forbearance Agreement

As more fully described in Note 18, “Commitments and Contingencies,” on July 12, 2012, the Company executed the Surety Financing and Confession of Judgment Agreement (the Financing Agreement) with Zurich American Insurance Company (Zurich), to assist in the completion of the project contract with the Camden County Improvement Authority for work at the Cooper Medical Center of Rowan University (the Owner or Cooper Project).

On April 17, 2013, the Company executed the Surety Forbearance and Confession of Judgment Agreement (the Forbearance Agreement) with Zurich, which supersedes the Financing Agreement. The Company is currently in default under the Forbearance Agreement due to its failure to: (1) pay the monthly Interim Liability Payment of $25,000 per month since December 1, 2013; and (2) pay the Loss Amount of $1,533,757 that was due December 31, 2013 under the Forbearance Agreement. The Company is currently in discussions with Zurich for the settlement of the Loss Amount due under the Forbearance Agreement. There can be no assurance that the Company will be successful in settling with Zurich the Loss Amount due.

Cooper Medical Center Claim

The Company has submitted a claim and request for equitable adjustment to the Owner in the amount of $2,421,425 (the Claim) for significant delays, disruptions and construction changes that were beyond its control related to the Cooper Project, which was completed in the fiscal year ended April 30, 2013. If the Company is successful in the settlement of this Claim, the Company expects to use the proceeds from the claim to repay Zurich the remaining amounts due under the Forbearance Agreement. There can be no assurance that the Company will be successful in settling with the Owner for all or a portion of the submitted claim.

Senior Secured Convertible Notes and Events of Default

As further described in Note 7, “Senior Secured Convertible Notes”, on December 4, 2012, the Company issued an aggregate of $4,000,000 principal amount of senior secured convertible notes (the Notes) to certain accredited investors (the Buyers) for aggregate gross proceeds of $ 4,000,000 pursuant to a securities purchase agreement (the Securities Purchase Agreement) on December 4, 2012. Pursuant to the terms of the Notes, an event of default occurs when the Company’s common stock is suspended or threatened with suspension from trading on The NASDAQ Capital Market (or an equivalent market). As a result of the separate notices received by the Company from NASDAQ as described below, as well as the Company’s failure to obtain an increase in authorized common stock by February 28, 2014, separate events of default occurred under the Notes for each notice (the Events of Default).

On May 2, 2014, the Company received a letter from the Staff of the Listing Qualifications Department of NASDAQ (the Staff) indicating that unless the Company timely requested a hearing before the NASDAQ Hearing Panel (the Panel), the Company’s Common Stock would be subject to delisting from The NASDAQ Capital Market on May 13, 2014 due to the Company’s non-compliance with the requirement to hold an annual meeting of stockholders and to solicit proxy statements, as required by Listing Rules 5620(a) and 5620(b) (the “Annual Meeting Requirement”). The Company timely requested a hearing before the Panel, and on June 12, 2014, the Company conducted a hearing with the Panel to request the continued listing of its securities on The NASDAQ Capital Market pending the completion of its plan to regain and sustain compliance with the Annual Meeting Requirement. On July 1, 2014, the Panel granted the Company’s request for continued listing on the NASDAQ Capital Market, subject to holding a combined annual meeting for the 2013 and 2014 fiscal years by September 30, 2014.

On June 18, 2014, the Company received a separate letter from the Staff indicating that for the last 30 consecutive business days, the closing bid price of the Company’s common stock has been below $1.00 per share, the minimum closing bid price required by the continued listing requirements of NASDAQ, as set forth in Listing Rule 5550(a)(2) (the Rule). In accordance with Listing Rule 5810(c)(3)(A), we have been granted 180 calendar days, or until December 14, 2014, to regain compliance with the Rule (the Compliance Period). To regain compliance, the closing bid price of the Company’s common stock must be at least $1.00 per share for a minimum of 10 consecutive business days, but generally no more than 20 business days, during the Compliance Period.

If the Company does not regain compliance with the Rule by December 14, 2014, NASDAQ will provide written notification to the Company that our common stock may be delisted. However, we would be entitled to an additional 180-day period from December 14, 2014 to regain compliance, if, on December 14, 2014, we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The NASDAQ Capital Market, with the exception of the bid price requirement, and we would need to provide written notice to NASDAQ of our intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary.

As a result of each of the Events of Default, the Buyers have the right to require the Company to redeem the Notes equal to the Conversion Amount (as defined in the Notes) plus a make-whole amount equal to the amount of any interest that, but for any redemption of the Notes on such given date, would have accrued with respect to the Conversion Amount being redeemed under the Notes at the interest rate then in effect for the period from such given date through October 31, 2023, the amended maturity date of the Notes, discounted to the present value of such interest using a discount rate of 2.5% per annum. The value of the event of default redemption price is approximately $2,800,000. Currently, the principal amount of Notes outstanding is $898,334, and the interest rate on the Notes was increased to 25% per annum effective March 1, 2014.

The Company has provided notice to the Buyers of each of the Events of Default, but no Buyer has exercised its right of redemption. If the Company is required to repay the Notes, the Company does not have sufficient working capital to repay the outstanding borrowings. The Company and the Buyers have commenced discussions concerning a forbearance or waiver of the Event of Default, however, there can be no assurance that the Company and Buyers will come to any agreement (either oral or written) regarding repayment, forbearance, waiver and/or modification of the Notes.

The Company's continuation as a going concern beyond the next twelve months and its ability to discharge its liabilities and commitments in the normal course of business is ultimately dependent upon the execution of its future plans, which includes the following: (1) its ability to generate future operating income, reduce operating expenses and produce cash from its operating activities, which will be affected by general economic, competitive, and other factors, many of which are beyond the Company's control; (2) the repayment of, or the modification of the terms under the Zurich Forbearance Agreement; (3) the forbearance or waiver of the Events of Default under the Notes, (4) the settlement of the claim with the Owner; and (5) obtaining additional funds, either through financing or sale of assets. There can be no assurance that the Company’s plans to ensure continuation as a going concern will be successful.