Annual report pursuant to Section 13 and 15(d)

BASIS OF PRESENTATION AND LIQUIDITY

v3.2.0.727
BASIS OF PRESENTATION AND LIQUIDITY
12 Months Ended
Apr. 30, 2015
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
BASIS OF PRESENTATION AND LIQUIDITY
NOTE 1 - BASIS OF PRESENTATION AND LIQUIDITY
 
Basis of Presentation
 
The consolidated financial statements include the accounts of WPCS International Incorporated, a Delaware corporation (“WPCS”) and its wholly and majority-owned subsidiaries, (collectively, the “Company”). The Company’s subsidiaries based in the United States include, or have included: WPCS International - Suisun City, Inc. (the “Suisun City Operations”), WPCS International - Lakewood, Inc. (the “Lakewood Operations”), WPCS International - Hartford, Inc. (the “Hartford Operations”), WPCS International - Trenton, Inc. (the “Trenton Operations”), WPCS International - Seattle, Inc. (the “Seattle Operations”), WPCS International - Portland, Inc. (the “Portland Operations”) and BTX Trader, LLC (“BTX”). International operations include WPCS Asia Limited, a 60% joint venture interest in Tai'an AGS Pipeline Construction Co. Ltd. (the “China Operations”), and WPCS Australia Pty Ltd, WPCS International – BrendalePty Ltd., and The Pride Group (QLD) Pty Ltd., (collectively, the “Australia Operations”).
 
With the recent divestitures of The Pride Group (QLD) Pty Ltd. (“Pride”), BTX and substantially all of the assets of the Seattle Operations, and the planned sale of the China Operation. The Suisun City Operation is the Company’s only remaining continuing operation as of April 30, 2015. As such, the Company intends to dissolve the remaining inactive domestic and international subsidiaries listed above, as soon as it is administratively feasible to do so.
 
Certain reclassifications associated with the discontinued operations of Pride, BTX, and the Seattle Operations have been made to the prior years’ financial information in order to conform to the current year’s presentation. The reclassifications had no impact on previously reported net loss or stockholders’ equity. In addition, as of April 30, 2015, the Company has entered into an Interest Purchase Agreement with an Investor to sell all of its ownership in its China Operation and therefore has classified all activity related to its China Operation as discontinued operations in these financial statements.
 
The Company specializes in contracting services, with 68 employees in one operation center and currently offers communications infrastructure services through the Suisun City Operations.
 
Liquidity and Capital Resources
 
As of April 30, 2015, we had a working capital deficiency of approximately $1,246,000, which consisted of current assets of approximately $14,006,000 and current liabilities of $15,252,000. This compares to a working capital of approximately $611,000 at April 30, 2014. The current liabilities as presented in the audited balance sheet at April 30, 2015 primarily include approximately $1,703,000 of short-term promissory notes, $5,711,000 of liabilities held for sale (primarily associated with our China Operations), $5,409,000 of accounts payable and accrued expenses and $678,000 of dividends payable
 
Our cash and cash equivalents balance at April 30, 2015 was $2,364,000.
 
As described in the subsequent event footnote (Note 13) below, the Company has completed a series of transactions subsequent to April 30, 2015 that it believes will provide it with sufficient working capital and equity to operate for the next twelve months, from the date of this filing, while it continues its plan to seek growth opportunities, including, but not limited, (i) organic growth to complement and enhance existing operations; (ii) acquisitions; and/or (iii) a viable merger candidate.
 
The subsequent transactions included the: (i) elimination of $1,703,000 of promissory notes which were due and payable on September 30, 2015; (ii) issuance of common stock to satisfy approximately $500,000 of the $677,000 of dividends payable at April 30, 2015; (iii) completion of a $1,575,000 equity financing transaction; and (iv) closing of a $1,000,000 line of credit for our Suisun Operation.
 
These events have provided cash to the Company, eliminated future cash requirements and, along with expected continued operating profits from its Suisun Operation for fiscal year 2016 and lower corporate overhead, are the primary factors that support our belief that the Company will have adequate liquidity for the next twelve months.
  
Recent Developments
 
The Company is herein outlining some of its most significant recent development since the filing of its Form 10-K for the year ended April 30, 2014.
 
Reverse Stock Split
 
On April 18, 2015, the Company amended its Certificate of Incorporation, as amended, pursuant to which the Company effected a one-for-twenty two reverse split of the Company’s outstanding shares of common stock (the “Reverse Stock Split”). The total issued and outstanding common stock was decreased from 19,508,727 shares to 886,760 shares. With the issuance of 1,372 additional common shares due to rounding from the Reverse Stock Split, the total issued and outstanding shares was increased to 888,132 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.
 
Authorized Shares Correction
 
On December 19, 2014, The Company filed a Certificate of Correction to the Certificate of Amendment to correct the Company’s Certificate of Incorporation so that it would accurately reflect that the total number of authorized shares of Common Stock is 100,000,000. As a result of the correction certain descriptions regarding the authorized shares have been corrected in the accompanying financial statements. The Company has also determined that there is no material financial statement impact as a result of this change. 
 
Amendment, Waiver and Exchange Agreements
 
September Exchange Agreement
 
On September 30, 2014, the Company entered into an Amendment, Waiver and Exchange Agreement (the “September Exchange Agreement”) with Hudson Bay Master Fund Ltd. (“Hudson Bay”), a holder of outstanding notes, warrants and preferred stock of the Company purchased pursuant to a Securities Purchase Agreement dated December 4, 2012 (the “2012 SPA”), an Amendment, Waiver and Exchange Agreement, dated October 25, 2013 (the “2013 Amendment”) and a Securities Purchase Agreement dated December 17, 2013, as amended (the “2013 SPA”).
 
Pursuant to the 2012 SPA, Hudson Bay purchased (i) a senior secured convertible note, which as of the date of the September Exchange Agreement (the “Hudson Closing Date”), had an outstanding principal amount of $145,362 (the “2012 Hudson Note”), which was convertible into shares of Common Stock and (ii) a warrant, which as of the Hudson Closing Date, allowed Hudson Bay to purchase 710,248 shares of Common Stock (the “2012 Hudson Warrant”). Pursuant to the 2013 Amendment, Hudson Bay acquired a warrant, which as of the Hudson Closing Date, allowed Hudson Bay to purchase an additional 61,760 shares of Common Stock (the “Amendment Hudson Warrant”). Pursuant to the 2013 SPA, Hudson Bay purchased (i) shares of series E convertible preferred stock (the “Series E Preferred Stock”), which as of the Hudson Closing Date, 794 were owned by Hudson Bay and were convertible into shares of Common Stock and (ii) a warrant, which as of the Hudson Closing Date, allowed Hudson Bay to purchase an additional 488,603 shares of Common Stock (the “2013 Hudson Warrant,” and together with the 2012 Hudson Warrant and the Amendment Hudson Warrant, the “Hudson Warrants”).
 
Pursuant to the September Exchange Agreement, Hudson Bay exchanged (i) the 2012 Hudson Note and associated make-whole amount for 5,268 shares of newly designated series F convertible preferred stock, par value $0.001 (the “Series F Preferred Stock”); (ii) the Series E Preferred Stock for a promissory note in a principal amount of $794,000 (the “2014 Hudson Note”) and 1,060 shares of series G convertible preferred stock, par value $0.001 (the “Series G Preferred Stock”); and (iii) the Hudson Warrants for 1,028 shares of Series G Preferred Stock.
 
As a result of the September Exchange Agreement, the Company recorded an inducement expense of $1,871,000, which was included in other expense on the statement of operations.
 
November Exchange Agreements
 
On November 20, 2014, the Company entered into Amendment, Waiver and Exchange Agreements (the “November Exchange Agreements”) with the other eight holders (the “Holders”) of notes, warrants, and preferred stock of the Company purchased pursuant to the 2012 SPA, the 2013 Amendment, and the 2013 SPA.
 
Pursuant to the 2012 SPA, the Holders purchased (i) senior secured convertible notes, which as of the date of the November Exchange Agreement (the “Closing Date”), had an outstanding aggregate principal amount of $313,568 (collectively, the “2012 Notes”), which were convertible into shares of Common Stock and (ii) warrants, which as of the Closing Date, allowed the Holders to purchase an aggregate of 1,161,567 shares of Common Stock (collectively, the “2012 Warrants”).  Pursuant to the 2013 Amendment, the Holders exchanged the 2012 Warrants for warrants that allowed the Holders to purchase an aggregate of an additional 1,161,567 shares of Common Stock (the “Amendment Warrants”). Pursuant to the 2013 SPA, the Holders purchased (i) shares of Series E Preferred Stock, an aggregate of 1,644 of which were purchased by the Holders as of the Closing Date and (ii) warrants, which as of the Closing Date, allowed the holders to purchase an aggregate of 1,011,397 additional shares of Common Stock (collectively, the “2013 Warrants,” and together with the 2012 Warrants and the Amendment Warrants, the “Warrants”).
 
Pursuant to the November Exchange Agreements, the Holders exchanged (i) the 2012 Notes and associated make-whole amount for an aggregate of 11,175 shares of newly designated Series F-1 convertible preferred stock, par value $0.001 (the “Series F-1 Preferred Stock”); (ii) the Series E Preferred Stock for promissory notes in an aggregate principal amount of $1,644,000 (collectively the “2014 Notes”) and 2,194 shares of series G-1 convertible preferred stock, par value $0.001 (the “Series G-1 Preferred Stock” and collectively with the Series F Preferred Stock, the Series G Preferred Stock, and the Series F-1 Preferred Stock, the “Convertible Preferred Stock”); and (iii) the Warrants for 1,248 shares of Series G-1 Preferred Stock (collectively, the “Exchange”). The Series F-1 Preferred Stock and Series G-1 Preferred Stock were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933.
 
As a result of the November Exchange Agreement, the Company recorded an inducement expense of $3,622,000 which was included in other expense on the statement of operations.
 
Short Term Promissory Notes
 
The 2014 Hudson Note and the 2014 Notes totaled approximately $2,438,000. $735,000 of these short-term promissory notes was settled in accordance with Section 16 settlements as of April 30, 2015. Of the remaining $1,703,000 in promissory notes as of April 30, 2015, $400,000 of these short term promissory notes were settled through Section 16 settlements, $1,299,000 of these short term promissory notes were exchanged for Series H preferred convertible stock and $4,000 of these short term promissory notes were paid in cash subsequent to year end.
 
Terms of the Preferred Stock
 
Pursuant to the September and November Exchange, on the Closing Date, the Company filed with the Secretary of State of the State of Delaware a Certificate of Designations, Preferences and Rights of Series F-1 Preferred Stock (the “Series F-1 Certificate of Designation”) and a Certificate of Designations, Preferences and Rights of Series G-1 Preferred Stock (the “Series G-1 Certificate of Designation”). Under the terms of the Series F-1 Certificate of Designation, each share of Series F-1 Preferred Stock has a stated value of $1,000 and is convertible into shares of Common Stock equal to the stated value (and all accrued but unpaid dividends) divided by the conversion price of $1.00 per share (subject to adjustment in the event of stock splits and dividends).  The Series F-1 Preferred Stock accrues dividends at a rate of 8% per annum, payable quarterly in arrears in cash or in kind, subject to certain conditions being met.  The Series F-1 Preferred Stock contains a three-year “make-whole” provision, such that the holder is entitled to receive an amount equal to the dividends that would have accrued from the date of the conversion until the third anniversary of such conversion. The Company is prohibited from effecting the conversion of the Series F-1 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 Common Stock calculated immediately after giving effect to the issuance of shares of common stock upon the conversion of the Series F-1 Preferred Stock. 
 
Under the terms of the Series G-1 Certificate of Designation, each share of Series G-1 Preferred Stock has a stated value of $1,000 and is convertible into shares of Common Stock equal to the stated value (and all accrued but unpaid dividends) divided by the conversion price of $0.815 per share (subject to adjustment in the event of stock splits and dividends).  The Series G-1 Preferred Stock accrues dividends at a rate of 8% per annum, payable quarterly in arrears in cash or in kind, subject to certain conditions being met.  The Series G-1 Preferred Stock contains a three year “make-whole” provision such that if the Series G-1 Preferred Stock is converted prior to the third anniversary of the date of original issuance, the holder will be entitled to receive the remaining amount of dividends that would accrued from the date of the conversion until such third year anniversary.  The Company is prohibited from effecting the conversion of the Series G-1 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 G-1 Preferred Stock. 
 
September and November Exchange Inducement Expense
  
For the year ended April 30, 2015, the Company recognized an inducement expense of $5,493,000 under these Exchange Agreements. A summary table of the inducement expense (difference between the fair value of the preferred stock and the carrying amount of the senior secured convertible note and make-whole amount prior to the conversion) for the year ended April 30, 2015, is as follows:
 
 
 
April 30, 2015
 
Fair value of series F and F-1 preferred stock (16,443 shares at $301.81)
 
$
4,963,000
 
Fair value of series G and G-1 preferred stock (5,530 shares at $350.43)
 
 
1,938,000
 
Total consideration
 
 
6,901,000
 
Less: senior secured convertible note
 
 
(459,000)
 
Less: make-whole amount on senior secured convertible note
 
 
(949,000)
 
Total inducement expenses
 
$
5,493,000
 
 
The Inducement expense above is net of $241,000 related to190 shares of Series F-1 Preferred Stock and 805 shares of Series G-1 Preferred Stock that were issued in error and then returned to the Company.
 
In addition, as described above and in Note 6 – Senior Secured Convertible Notes, during the year ended April 30, 2015, the Company issued the 2014 Notes in exchange for all of the outstanding Series E Preferred Shares with no gain or loss recognized on the exchange.
 
China Operations
 
On June 3, 2015, The Company entered into an Interest Purchase Agreement (the “Purchase Agreement”) with Halcyon Coast Investment (Canada) Ltd. (“HCI”) to sell its 60% joint venture and profit interest in Tai’an AGS Pipeline Construction Co. Ltd., a contractual joint venture established in accordance with the laws of the People’s Republic of China (“TAGS”) in an all-cash transaction, for a price of $1,500,000 (the “Transaction”). The transfer shall be consummated pursuant to a Joint Venture Interest Transfer Agreement, which the Company and HCI executed simultaneously with the Purchase Agreement (the “Transfer Agreement”). HCI paid a deposit of $150,000 to the Company upon the signing of the Purchase Agreement, which is refundable in the event the Transaction fails to close by September 30, 2015. The balance of the purchase price is due at the closing of the Transaction. The closing of the Transaction is subject to the approval of the Tai’an Bureau of Commerce and Industry , which the Company expects to receive prior to September 30, 2015 as it has already received the approval of the Tai’an Bureau of Foreign Affairs.
  
Income from Section 16 Settlements
 
During the year ended April 30, 2015, the Company recorded in the statement of operations other income of $1,402,000 as it received $650,000 in cash, $735,000 in forgiveness of the Hudson 2014 Note and one of the 2014 Notes and $17,000 of make-whole forgiveness on certain convertible preferred notes as part of the settlement with certain Holders of the 2012 Note who were defendants named in a Section 16 litigation brought by a shareholder of WPCS.