NOTE 15 – SHAREHOLDERS’ EQUITY

Issuance of Series E Convertible Preferred Stock and BTX Warrants

On December 17, 2013, the Company entered into the BTX Purchase Agreement with the Investors pursuant to which the Company sold an aggregate of 2,438 shares the Series E Convertible Preferred Stock, $1,000 stated value and the BTX Warrants, to purchase up to an aggregate of 1,500,000 shares of Common Stock. As consideration for the purchase of the Securities, the Investors sold their collective interests in BTX to the Company.

Each share of Series E Preferred Stock has a stated value of $1,000 and is convertible into shares of the Company’s common stock equal to the stated value (and all accrued but unpaid dividends) divided by the conversion price of $3.50 per share (subject to adjustment in the event of stock splits and dividends). The Series E Preferred Stock accrues dividends at a rate of 12% per annum, payable quarterly in arrears in cash or in kind, subject to certain conditions being met. The Series E Preferred Stock contains a seven year “make-whole” provision such that if the Series E Preferred Stock is converted prior to the seventh anniversary of the date of original issuance, the holder will be entitled to receive the remaining amount of dividends that would have accrued from the conversion until such seven year anniversary. The Company is prohibited from effecting the conversion of the Series E Preferred Stock to the extent that, as a result of such conversion, the holder beneficially owns more than 9.99%, in the aggregate, of the issued and outstanding shares of the Company’s common stock calculated immediately after giving effect to the issuance of shares of common stock upon the conversion of the Series E Preferred Stock.

In the event of a liquidation event (as defined in the Series E Preferred Stock Certificate of Designation), each of the Investors shall be entitled to receive in cash any of the asset liquidation funds of the Company before any amount shall be paid to the holders of the Company’s common stock (the Liquidation Funds). The amount of the Liquidation Funds shall be the greater of (a) 125% of the Conversion Amount, (as defined in the Series E Preferred Stock Certificate of Designation), or (b) the amount per share such Investor would receive if the Investor converted the Series E Preferred Stock into the Company’s common stock immediately prior to the date of such payment. As of April 30, 2014, the Liquidation Funds were approximately $5,707,000 based on the Conversion Amount described above.

The BTX Warrants have an initial exercise price of $5.00 per share (subject to adjustment in the event of stock splits and dividends) and are exercisable on a “cashless” basis beginning six months after the date of issuance if there is not then an effective registration statement covering the resale of the shares of Common Stock underlying the BTX Warrants.

Pursuant to the Purchase Agreement, the Company agreed to use its reasonable best efforts to obtain stockholders’ approval at the next annual stockholder meeting or a special meeting of stockholders for (i) the increase of the number of shares of the Company’s common stock authorized for issuance to 75,000,000 and (ii) the issuance of all of the securities issuable pursuant to the Purchase Agreement (Stockholder Approval). The Company agreed to seek to obtain Stockholder Approval by April 30, 2014. As the Company did not obtain Stockholder Approval by April 30, 2014, it is obligated to cause an additional annual stockholder meeting to be held annually at which Stockholder Approval will be sought (or if no Annual Meeting of stockholders of WPCS is held in any given year, to seek such approval at a special meeting of stockholders of WPCS in such given year) until such Stockholder Approval is obtained. In June 2014, the Company obtained Stockholder Approval for the issuance of the securities issuable pursuant to the Purchase Agreement but not the increase in authorized shares. The Company intends to seek Stockholder Approval for the increase in authorized shares at a future stockholder meeting.

Neither the shares of Series E Preferred Stock nor the BTX Warrants shall be convertible or exercisable, respectively, until Stockholder Approval is obtained.

In connection with the Financing, (i) the Company entered into a registration rights agreement with the Investors (the BTX Registration Rights Agreement) and (ii) the Company entered into a voting agreement with its officers and directors to vote in favor of the Stockholder Approval (as hereinafter defined). Pursuant to the BTX Registration Rights Agreement, the Company will agree to file a registration statement with the SEC, within 30 days following receipt of a request from a Buyer or Investor (or 45 days with respect to an underwritten offering), covering such shares of common stock issuable upon conversion of the Notes or exercise of the Warrants or BTX Warrants, as requested by the Buyers or Investors, and have such registration statement declared effective by the SEC within 90 days thereafter. The Company also agreed to notify the Buyers or Investors if the Company at any time proposes to register any of its securities under the Securities Act of 1933, as amended, and of such Buyers’ or Investors’ right to participate in such registration.

Stock-Based Compensation Plans

2014 Equity Incentive Plan

In January 2014, the Company adopted the 2014 Equity Incentive Plan, subject to shareholder approval, under which officers, directors, key employees or consultants may be granted options. Under the 2014 Equity Incentive Plan, 3,500,000 shares of common stock were reserved for issuance upon the exercise of stock options, stock awards or restricted stock Options under the 2014 Equity Incentive Plan are exercisable upon stockholder approval of the 2014 Equity Incentive Plan and an increase in authorized common stock. Under the terms of the 2014 Equity Incentive Plan, stock options are granted at exercise prices equal to the fair market value of the common stock at the date of grant, and become exercisable and expire in accordance with the terms of the stock option agreement between the optionee and the Company at the date of grant. These options generally vest based on between immediately to three years of continuous service and have five-year contractual terms. At April 30, 2014, options to purchase 1,080,000 shares were outstanding at an exercise price of $1.20. At April 30, 2014, there were 2,420,000 options available for grant under the 2014 Equity Incentive Plan. The options granted under the 2014 Equity Incentive Plan were not exercisable at April 30, 2014 because shareholder approval had not been obtained. On July 15, 2014, the Company obtained stockholder approval of the 2014 Equity Incentive Plan, but not an increase in authorized shares of common stock.

2007 Incentive Stock Plan

In September 2006, the Company adopted the 2007 Incentive Stock Plan, under which officers, directors, key employees or consultants may be granted options. Under the 2007 Incentive Stock Plan, 57,142 shares of common stock were reserved for issuance upon the exercise of stock options, stock awards or restricted stock. These shares were registered under Form S-8. Under the terms of the 2007 Incentive Stock Plan, stock options are granted at exercise prices equal to the fair market value of the common stock at the date of grant, and become exercisable and expire in accordance with the terms of the stock option agreement between the optionee and the Company at the date of grant. These options generally vest based on between one to three years of continuous service and have five-year contractual terms. At April 30, 2014, options to purchase 41,429 shares were outstanding at exercise prices ranging from $2.73 to $21.98. At April 30, 2014, there were 13,929 options available for grant under the 2007 Incentive Stock Plan.

2006 Incentive Stock Plan

In September 2005, the Company adopted the 2006 Incentive Stock Plan, under which officers, directors, key employees or consultants may be granted options. Under the 2006 Incentive Stock Plan, 57,142 shares of common stock were reserved for issuance upon the exercise of stock options, stock awards or restricted stock. These shares were registered under Form S-8. Under the terms of the 2006 Incentive Stock Plan, stock options are granted at exercise prices equal to the fair market value of the common stock at the date of grant, and become exercisable and expire in accordance with the terms of the stock option agreement between the optionee and the Company at the date of grant. These options generally vest based on between one to three years of continuous service and have five-year contractual terms. At April 30, 2014, options to purchase 25,142 shares were outstanding at exercise prices ranging from $2.52 to $4.20. At April 30, 2014, there were 21,775 options available for grant under the 2006 Incentive Stock Plan.

2002 Plan

In March 2003, the Company established a stock option plan pursuant to which options to acquire a maximum of 59,523 shares of the Company's common stock were reserved for grant (the "2002 Plan"). These shares were registered under Form S-8. Under the terms of the 2002 Plan, the options are exercisable at prices equal to the fair market value of the stock at the date of the grant and become exercisable in accordance with terms established at the time of the grant. These options generally vest based on between one to three years of continuous service and have five-year contractual terms. At April 30, 2014, options to purchase 12,636 shares were outstanding at exercise prices ranging from $4.20 to $24.71. At April 30, 2014, there were no further shares available for grant under the 2002 Plan as the ten-year term of the 2002 Plan had been reached.

The following is a summary of information with respect to stock options granted under the 2002 Plan, 2006 Incentive Stock Plan, and 2007 Incentive Stock Plan at April 30, 2014 and 2013:

	Options Outstanding at April 30, 2014						Options Exercisable at April 30, 2014
Exercise prices	Shares under option		Weighted-average remaining life in years		Weighted-average Exercise Price		Shares under option		Weighted-average Exercise Price

2.52 - 5.88		74,000		3.44		4.06		74,000		4.06
16.59 - 39.90		5,207		0.56		21.91		5,207		21.91

Total		79,207		3.25		5.23		79,207		5.23

	Options Outstanding at April 30, 2013						Options Exercisable at April 30, 2013
Exercise prices	Shares under option		Weighted-average remaining life in years		Weighted-average Exercise Price		Shares under option		Weighted-average Exercise Price

2.52 - 5.88		97,143		4.43		4.09		88,571		4.13
16.59 - 39.90		19,136		1.07		19.94		18,945		19.93
Total		116,279		3.88		6.70		107,516		6.92

The following table summarizes stock option activity for the year ended April 30, 2014, during which there were no options exercised under the Company’s stock option plans:

	2002 Plan
	Number of Shares			Weighted- average Exercise Price		Weighted- average Remaining Contractual Term		Aggregate Intrinsic Value

Outstanding, May 1, 2013		15,779		$	7.56

Granted		-			0.00
Exercised		-			0.00
Forfeited/Expired		(3,143	)		11.60

Outstanding, April 30, 2014		12,636		$	6.58		3.0	$	0

Vested and expected to vest, April 30, 2014		12,636		$	6.58		3.0	$	0

	2006 Plan
	Number of Shares			Weighted- average Exercise Price		Weighted- average Remaining Contractual Term		Aggregate Intrinsic Value

Outstanding, May 1, 2013		46,571		$	4.19

Granted		340			3.55
Exercised		-			0.00
Forfeited/Expired		(21,769	)		4.25

Outstanding, April 30, 2014		25,142		$	4.19		3.4	$	0

Vested and expected to vest, April 30, 2014		25,142		$	4.19		3.4	$	0

	2007 Plan
	Number of Shares			Weighted- average Exercise Price		Weighted- average Remaining Contractual Term		Aggregate Intrinsic Value

Outstanding, May 1, 2013		53,929		$	8.60

Granted		1,420			3.55
Exercised		-			0.00
Forfeited/Expired		(13,920	)		19.15

Outstanding, April 30, 2014		41,429		$	5.45		3.2	$	0

Vested and expected to vest, April 30, 2014		41,429		$	5.45		3.2	$	0

The Company recorded stock-based compensation of $24,535 and $111,683 for the years ended April 30, 2014 and 2013, respectively.

The Company elected to adopt the shortcut method for determining the initial pool of excess tax benefits available to absorb tax deficiencies related to stock-based compensation. The shortcut method includes simplified procedures for establishing the beginning balance of the pool of excess tax benefits (the APIC Tax Pool) and for determining the subsequent effect on the APIC Tax Pool and the Company’s consolidated statements of cash flows of the tax effects of share-based compensation awards. Excess tax benefits related to share-based compensation are reflected as financing cash inflows.

The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing model. The Company determines the forfeiture rate based on the historical forfeitures of stock options previously granted to employees and directors. The forfeiture rate was 15% for the years ended April 30, 2014 and 2013. Compensation cost is then recognized on a straight-line basis over the vesting or service period and is net of estimated forfeitures. There were 1,760 stock options issued during the year ended April 30, 2014. The following assumptions were used to compute the fair value of stock options granted during the year ended April 30, 2014:

	Year Ended
	April 30,
	2014			2013

Average risk-free interest rate		0.87	%		0.38	%
Average expected volatility		68.6	%		53.3	%
Average expected dividend yield		0.00	%		0.00	%
Average expected term ( in years)		3			2.75

The risk-free rate is based on the rate of U.S Treasury zero-coupon issues with a remaining term equal to the expected term of the option grants. Expected volatility is based on the historical volatility of the Company’s common stock using the weekly closing price of the Company’s common stock. The expected dividend yield is zero based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was calculated using the simplified method.

Common Stock Warrants

The following is a summary of the common stock warrant activity for the year ended April 30, 2014:

				Weighted		Weighted
				Average		Average
	Number of			Exercise		Remaining
	Warrants			Price		Life in years

Outstanding, May 1, 2012		-			-		-
Warrants issued in connection with Notes		2,274,796		$	2.1539		5.00

Outstanding, April 30, 2013		2,274,796			2.1539		4.50

Warrants exchanged in connection with the Amendment		(154,961	)		2.1539		-
Exchange Warrants issued in connection with the Amendment		154,961			2.1539		3.60
BTX Warrants issued in connection with the BTX Purchase Agreement		1,500,000			5.0000		4.00
Outstanding as of April 30, 2014		3,774,796		$	3.2849		4.01

Reverse Stock Split

Effective May 28, 2013, the Company amended its Certificate of Incorporation, as amended, pursuant to which the Company affected a one-for-seven reverse split of the Company’s issued and outstanding shares of common stock (the Reverse Stock Split) and reduced the number of authorized shares of common stock by the same ratio, from 100 million to 14,285,715. The total issued and outstanding common stock was decreased from 6,954,766 shares to 993,538 shares. With the issuance of 649 additional common shares due to rounding from the Reverse Stock Split, the total issued and outstanding shares was increased to 994,187 common shares. All share-related and per share information have been adjusted to give effect to the Reserve Stock Split from the beginning of the earliest period presented.

Section 16(b) Settlement

On August 7, 2006, Maureen Huppe, a stockholder of the Company, filed suit in the United States District Court Southern District of New York, against defendants Special Situations Fund III QP, L.P. and Special Situations Private Equity Fund, L.P. (collectively SSF), former stockholders of the Company, alleging violations of Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p (b) (Section 16(b)). SSF made sales of 20,445 shares of the Company’s common stock from December 15, 2005 to January 30, 2006, at prices ranging from $64.26 to $88.34 per share. On April 12, 2006, SSF purchased 95,209 shares of the Company’s common stock at $49.00 per share.

The complaint sought disgorgement from SSF for any "short-swing profits" obtained by them in violation of Section 16(b), as a result of the foregoing sales and purchases of the Company’s common stock within periods of less than nine months while SSF was a beneficial owner of more than 10% of the Company’s common stock. The complaint sought disgorgement to the Company of all profits earned by SSF on the transactions, attorneys’ fees and other expenses. While the suit named the Company as a nominal defendant, it contained no claims against nor sought relief from the Company.

On June 13, 2012, the parties executed a court approved settlement which resolved this Section 16(b) action. Pursuant to this settlement, SSF agreed to pay the Company $529,280 in disgorgement of short-swing profits, less the fees and expenses agreed upon by the plaintiffs of $272,539 in connection with the settlement, resulting in the remainder, or $254,361, paid to the Company. The Company recorded the net proceeds as additional paid-in capital.