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WPCS INTERNATIONAL INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[July 30, 2014]

WPCS INTERNATIONAL INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Edgar Glimpses Via Acquire Media NewsEdge) This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as "may" "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of its management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.



Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that its assumptions are based upon reasonable data derived from and known about our business and operations and the business and operations of the Company. No assurances are made that actual results of operations or the results of our future activities will not differ materially from its assumptions. Factors that could cause differences include, but are not limited to, expected market demand for the Company's services, fluctuations in pricing for materials, and competition.

Overview We offer low voltage communication infrastructure in the public services, healthcare, energy and corporate enterprise markets with 240 employees in five (5) operations centers on three continents. In addition, we have launched a Bitcoin trading platform for the trading of digital currencies, through the acquisition of software technology in the emerging Bitcoin industry.


For communications infrastructure, we provide an integrated approach to project coordination that creates cost-effective solutions. Corporations, government entities, healthcare organizations and educational institutions depend on the reliability and accuracy of voice, data and video communications. However, the potential for this new technology cannot be realized without the right infrastructure to support the convergence of technology. In this regard, we create integrated building systems, including the installation of advanced structured cabling systems. We specialize in wireless technology or combination of various technologies to develop a cost effective network for a customer's wireless communication requirements. This includes Wi-Fi networks, point-to-point systems, cellular networks, in-building systems and two-way communication systems. We support the integration of telecommunications, life safety, security and HVAC in an environmentally safe manner and design for future growth by building in additional capacity for expansion as new capabilities are added.

Industry Strategy In April 2014, we launched the BTX trading platform to focus on opportunities within the digital currency market, including, but not limited to: (i) trading systems; and (ii) exchanges.

BTX's current business strategy is to continue to implement advanced trading algorithms for digital currency traders. BTX expects to generate revenue from the trading systems by offering users advanced Bitcoin trading algorithms and strategies that are not currently available. The trading system is a cloud-hosted service that incorporates some high-end features traders may be familiar with from other asset classes, including access to reliable and curated market data, and utilizing sophisticated market data visualization tools such as advanced charting, trading blotters, tick charts and consolidated level 2 order books. BTX offers a product that provides trading integration against the largest Bitcoin exchanges, allowing users to see liquidity across all platforms, route orders to the best platforms, and identify possible arbitrage opportunities across platforms. Additionally, it allows users to place synthetic stop loss orders against those exchanges, to hedge against Bitcoin price volatility. To date, the trading platform is accessible online with approximately 5,000 users and over 1,500 unique visitors per month.

On July 28, 2014, BTX announced the launch of an exchange and its second product, Celery, which will allow consumers to initially purchase Bitcoin and Dogecoin digital currencies, where it expects to generate revenue from transaction fees. Celery is a hosted online wallet that deploys direct bank transfers to allow its customers the use of their digital currency in a timely manner. BTX has launched Celery in the United States, and is committed to ensuring full compliance with its digital currency wallet and exchange services.

For the fiscal year ended April 30, 2014, we generated revenues from continuing operations of approximately $21.3 million, compared to $24.8 million for the fiscal year ended April 30, 2013. Our backlog at April 30, 2014 and 2013 was approximately $19.4 million and $22.3 million, respectively.

Recent Developments Sale of Pride Operations On September 19, 2013, we entered into a securities purchase agreement (the Agreement) to sell 100% of the shares of Pride to Turquino Equity LLC, a limited liability company (Turquino), whose managing member is Andrew Hidalgo (Hidalgo), our former President, Chief Executive Officer and member of the board of directors, for $1,400,000. Until the date of closing of the Agreement, which we currently anticipate to be July 31, 2014, we shall continue to pay Hidalgo his current base salary of $325,000 per year through our normal payroll process, pursuant to the Separation Agreement previously entered into with Hidalgo. As of June 30, 2014, the balance of the accrued severance expense due Hidalgo is approximately $1,219,000. At the closing date, we shall make the final Severance Payment; net of applicable taxes, and shall apply the net after tax Severance Payment as partial payment towards the purchase price for Pride. The cash difference between the after tax Severance Payment and the purchase price shall be paid to the Company at the closing date.

The Agreement contains a number of conditions to closing, including but not limited to the following: (i) each of the Company and Turquino shall have performed and complied with all terms of the Agreement required to be performed or complied with by it at or prior to the Closing Date; (ii) no action or proceeding by or before any governmental authority shall have been instituted or threatened (and not subsequently dismissed, settled or otherwise terminated) which might restrain, prohibit or invalidate any of the transactions contemplated by the Agreement, other than an action or proceeding instituted or threatened by a party or any of its affiliates; (iii) the representations and warranties contained in made by each of the Company and Turquino to each other shall be true and correct in all material respects on the closing date as though made on and as of the closing date; (iv) the Company obtaining a fairness opinion that the Purchase Price is fair; and (v) the Company obtaining shareholder approval. On July 15, 2014, we obtained shareholder approval of the transaction. In order to close, we need to obtain the release of liens by our secured note holders of the stock of Pride.

29 Sale of the Seattle Operations On March 31, 2014, we entered into an asset purchase agreement (the Asset Purchase Agreement) by and among the Company, and EC Company, as purchaser.

Pursuant to the Asset Purchase Agreement, we agreed to sell substantially all of the assets of the Seattle Operations to EC Company for approximately $2.7 million in an all cash transaction. The final closing price is subject to adjustment based on the value of the assets on the closing date.

On May 30, 2014, the Asset Purchase Agreement was amended to provide that in the event that the acquisition is not consummated by July 31, 2014, through no fault of EC Company, the purchase price will be reduced by $100,000. The consummation of the sale is subject to the approval of the Company's stockholders, the NASDAQ Capital Market and the release of liens by our secured note holders of the assets of the Seattle Operations. We anticipate that the transaction will be closed in August 2014.

Acquisition of BTX Software On December 17, 2013, we entered into various agreements, as more fully described below, which are expected to add a new line of business and reporting segment to our existing operations. We acquired software technology in the emerging Bitcoin industry of a cross-exchange trading technology platform that provides access to ninety percent of publicly available Bitcoin liquidity, or the BTX Software. The BTX Software enables users to make informed decisions by providing aggregated and curated market data from all major trading venues. In connection with the acquisition of the BTX Software, we also established a wholly-owned subsidiary, BTX.

BTX was formed in the state of Delaware on December 4, 2013. In connection with the formation of BTX, certain investors who previously purchased Notes contributed an aggregate of (i) $439,408 of Notes, along with all rights under the related securities purchase agreement, security and pledge agreement and registration rights agreement (other than the Exchange Cap Allocation and Authorized Share Allocation, as such terms are defined in the Notes) (such $439,408 of Contributed Notes) and (ii) $1,185,000 in cash, as their initial capital contributions to BTX. On December 17, 2013, BTX purchased the BTX Software and related intellectual property rights from Divya Thakur and Ilya Subkhankulov in consideration for (i) the assignment of the Contributed Notes and (ii) the BTX Note. BTX's obligations under the BTX Note are secured by the assets of BTX pursuant to a Security Agreement.

On December 17, 2013, we entered into a securities purchase agreement (the BTX Purchase Agreement) with certain accredited investors (the Investors) pursuant to which we sold an aggregate of 2,438 shares of our Series E Convertible Preferred Stock and warrants (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 us, which interests constituted 100% of the outstanding membership interests of BTX, causing BTX to become a wholly owned subsidiary of WPCS.

Each share of Series E 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 $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 seventh year anniversary. We are 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 our common stock calculated immediately after giving effect to the issuance of shares of common stock upon the conversion of the Series E Preferred Stock.

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 BTX Purchase Agreement, we agreed to use our 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 Common Stock authorized for issuance to 75,000,000 and (ii) the issuance of all the securities issuable pursuant to the BTX Purchase Agreement (Stockholder Approval). The Company agreed to seek Stockholder Approval by April 30, 2014. As we did not obtain Stockholder Approval by April 30, 2014, we are 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, we obtained the Stockholder Approval for the issuance of all the securities issuable pursuant to the BTX Purchase Agreement but not the increase in the authorized shares. We intend to seek Stockholder Approval for the increase in authorized shares at a futurestockholder meeting.

30 Senior Secured Convertible Note and Warrant Amendments On December 4, 2012, we entered into a securities purchase agreement (the Securities Purchase Agreement) with six accredited investors (the Buyers) pursuant to which, the Company sold an aggregate of (i) $4,000,000 principal amount of senior secured convertible notes (the Notes) and (ii) warrants (the Warrants) to purchase 2,274,796 shares of the Company's common stock (Common Stock), to the Buyers for aggregate gross proceeds of $4,000,000.

On October 25, 2013, we entered into an amendment, waiver and exchange agreement (the Amendment) with the Buyers of the Notes and Warrants. Pursuant to the Amendment, the Buyers exchanged 154,961 of their Warrants for 38,740 shares of common stock and warrants to purchase 154,961 shares of common stock, or the Exchange Warrants. Effectively, for every four Warrants surrendered, the Buyers received a unit of four Exchange Warrants and one Share. It was determined that the Black-Scholes value of one warrant being exchanged was equal to $1.83, resulting in four Warrants being equal to $7.32 and the parties valued the unit at a price of $7.52. As a result, the Shares issued were calculated at $0.20, and by the operation of the terms of the Notes, the conversion price of the Notes automatically adjusted to $0.20. The Exchange Warrants are exercisable for a period of five years from the date of issuance of the original Warrants at an initial exercise price of $2.1539 per share. The exercise price will only adjust in the event of any future stock splits or dividends.

Pursuant to the Amendment, the Buyers permanently waived, effective as of October 24, 2013, various provisions of the remaining 2,119,835 Warrants, including the anti-dilution protection from the issuance of securities at a price lower than the Exercise Price, the adjustment to market price on the first anniversary of the date of issuance of the Warrants and the Black-Scholes valuation upon the occurrence of a Fundamental Transaction (as defined in the Warrants). As a result of these waivers, the exercise price of the Warrants will only adjust in the event of any future stock splits or dividends. The Exercise Price of the 2,119,835 Warrants and 154,961 Exchange Warrants remains at $2.1539 per share. After the Amendment, the Warrants and Exchange Warrants have the same terms, conditions and rights. Further, the Buyers agreed to waive any defaults through February 28, 2014 relating to the failure to have enough authorized shares of common stock available for issuance upon conversion of the Notes and/or exercise of the Warrants.

Effective October 31, 2013, we entered into an amendment agreement (the Note Amendment) with the Buyers. The Note Amendment eliminated certain features of the Notes which would otherwise result in substantial accounting charges tothe Company.

Pursuant to the Amendment, the Buyers permanently waived various provisions of the Notes, including the adjustment to the conversion price under a Fundamental Transaction (as defined in the Notes), the anti-dilution protection from the issuance of securities at a price lower than the current exercise price and the adjustment to market price on the first anniversary of the date of issuance of the Notes. As a result of these waivers, the conversion price of the Notes will only adjust in the event of any future stock splits or dividends. Further, the Buyers waived certain events of default that had occurred under the Notes.

Prior to the Note Amendment, if an event of default existed under the Notes, the Buyers would have been entitled to redeem $3,400,000 in aggregate principal and interest of the Notes for a redemption price equal to the greater of 125% of (x) the deemed value of the shares of common stock underlying the Note (the Intrinsic Value) and (y) the outstanding principal and unpaid interest under the Notes (the Base Value). The Note Amendment reduces and fixes the event of default redemption price by eliminating the Intrinsic Value calculation and modifying the Base Value calculation and interest rate to more accurately make-whole the holders of the Notes from the loss of interest from an early redemption of the Notes and the decreased value of the Notes without such Intrinsic Value rights. As revised, the event of default redemption amount equals the sum of the Conversion Amount (as defined in the Notes) to be redeemed, 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. As a result, the fixed value of the event of default redemption price was approximately $10,900,000 at the time of the Note Amendment. As a result of Note conversions during the fiscal year, the value of the event of default redemption price was approximately $2,800,000 as of April 30, 2014. In addition, the interest rate of the Notes was amended to 15% per annum, subject to increase to 25% per annum if an event of default occurs and is continuing.

As a result of the significant modifications of the Notes, we determined that the Notes were extinguished and new Notes were issued. In connection with this modification, we compared the present value of the beneficial conversion features of the Notes to the new Notes. We determined that the present value of the new Notes exceeded the present value of the old Notes by more than 10%, which resulted in the application of extinguishment accounting. The modification of the Note resulted in the debt instruments being exchanged with substantially different terms and extinguishment accounting was applied resulting in a loss on extinguishment of debt for the unamortized discount related to the Notes of $1,299,304. In addition, we recorded a new debt discount based on the fixed conversion rate and exercise price of $0.20 per share of $3,400,000 related to the remaining proceeds of the new Notes.

As a result of the Amendment and Note Amendment effective as of October 31, 2013, the exercise price of the Notes were fixed at $0.20 per share, and will only adjust in the event of any future stock splits or dividends, and the redemption price of the Notes in the event of default was fixed at approximately $10,900,000 at the time of the Note Amendment. As a result of the Note conversions during the fiscal year, the value of the event of default redemption price was approximately $2,800,000 as of April 30, 2014. In addition, the exercise price of the Warrants was fixed at $2.1539 per share, and will only adjust in the event of any future stock splits or dividends. As a result, we determined that the Notes and Warrants no longer contained the provisions that required bifurcation of the embedded derivatives and the classification was changed from liability to an equity instrument. This resulted in extinguishment of the derivative liabilities. Accordingly, we reclassified the total former derivative liability related to the Notes and Warrants of $7,094,000 to additional paid-in capital at October 31, 2013, allowing us to regain compliance with the minimum stockholder equity NASDAQ listing requirement.

31 Events of Default under the Senior Secured Convertible Notes Pursuant to the terms of the Notes, an event of default occurs when our common stock is suspended or threatened with suspension from trading on The NASDAQ Capital Market (or an equivalent market). As a result of the notices received by the Company from NASDAQ as described above, as well as our failure to obtain an increase in authorized common stock by February 28, 2014 described above, separate events of default occurred under the Notes (the Events of Default).

As a result of each of the Events of Default, the Buyers have the right to require us to redeem the Notes equal to the Conversion Amount (as defined in the Notes) to be redeemed, 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.

We have provided notice to the Buyers of each of the Events of Default, but no Buyer has exercised its right of redemption. If we are required to repay the Notes, we do 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 Events 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.

Executive Management Changes On March 31, 2014, we entered into the Separation Agreement with Heater, the Company's Chief Financial Officer, and on July 28, 2014, we entered into the Amendment to Separation Agreement). Pursuant to the Amendment to Separation Agreement, Heater will resign, effective at the close of business on the Termination Date, as the Chief Financial Officer of the Company and from all officer and director positions with the Company's subsidiaries.

Pursuant to the Separation Agreement, as amended, we shall pay Heater the sum of $250,000 between the Termination Date and January 31, 2015, which will be payable in five (5) monthly installments of $41,666.67, payable on the first business day of each month from September 2014 through January 2015 and one (1) final payment of $41,666.65 to be made on January 31, 2015. In addition, Heater shall receive a bonus of $35,000, to be paid on July 31, 2014, and we will pay Heater for all accrued but unused vacation time through August 31, 2014. Heater will also receive medical and other insurance benefits through January 31, 2015 under the applicable plans maintained by the Company.

Zurich Forbearance Agreement On July 12, 2012, we executed the Financing Agreement with Zurich, to assist in the completion of the project contract with the Owner of Cooper Project. On April 17, 2013, we executed the Forbearance Agreement with Zurich, which supersedes the Financing Agreement. We are currently in default under the Forbearance Agreement due to our 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. We are currently in discussions with Zurich for the settlement of the Loss Amount due under the Forbearance Agreement. There can be no assurance that we will be successful in settling with Zurich the Loss Amount due.

We have submitted a Claim to the Owner of $2,421,425 to settle the Claim. If we are successful in the settlement of this Claim, we expect to use the proceeds from the Claim to repay Zurich the Loss Amount as it exists at the time. There can be no assurance that we will be successful in settling with the Owner for all or a portion of the submitted claim.

Segment Reporting As part of our acquisition of the BTX Software and the addition of a related new line of business, we have reorganized our operating segments to correspond to our primary service lines: communications infrastructure contracting services and Bitcoin trading platform. Accordingly, we have reclassified the reporting of our segment results under these two reporting segments in this Form 10-K for the years ended April 30, 2014 and 2013.

32 Current Operating Trends and Financial Highlights Management currently considers the following events, trends and uncertainties to be important in understanding our results of operations and financial condition during the current fiscal year: In regards to our financial results for the year ended April 30, 2014, we generated revenue of approximately $21.3 million, compared to revenue of $24.8 million for the same period in the prior year. This decrease in revenue was due primarily to an $8.8 million decrease in revenue in our Trenton Operations due to the significantly reduction in this operation in fiscal 2014. Excluding the decrease for Trenton Operations, the effective increase in revenue from the remaining Suisun City and China Operations was approximately 34.4%.

We generated a net loss to common shareholders for the year ended April 30, 2014 of approximately $11,168,000, or $1.99 per common share, which includes one-time charges of approximately $1,776,000 related to severance expense recorded per the Separation Agreements with Hidalgo and Heater, approximately $4,279,000 related to the non-cash interest expense for the amortization of Notes discount and expenses related to the issuance of the Exchange Warrants and Shares, $1,299,000 related to the loss on extinguishment of the old Notes, and $834,000 related to the change in fair value of the derivative liabilities associated with the Notes and Warrants, prior to the Amendment and Note Amendment which enabled us to reclassify the former derivative liabilities to stockholders' equity The non-cash charges have no impact on our operating income or cash flows. The net loss includes a loss from discontinued operations for the Australia, Lakewood, Hartford and Seattle Operations of approximately $71,000, or $0.01 per common share. In addition, the net loss includes operating losses from the initial start-up of the Bitcoin trading segment of approximately $443,000 and the operating losses from the Trenton Operation of approximately $438,000.

The net loss to common shareholders for the year ended April 30, 2014 compares to a net loss of approximately $6,911,000, or $6.95 per common share for the year ended April 30, 2013, which includes a loss from discontinued operations for the Australia, Lakewood, Hartford, and Seattle Operations of approximately $1,531,000, or $1.54 per common share. In our continuing operations, for the year ended April 30, 2013, we incurred a net loss of approximately $5,284,000, or $5.41 per common share. The net loss also includes non-recurring operating income of approximately $1,329,000 from the Trenton Operation primarily as a result of non-recurring change order revenue related to the Cooper Project, for costs accrued in prior periods.

The markets we serve in public services, healthcare, and energy continue to afford opportunities to grow our business. Two of our most important economic indicators for measuring our future revenue producing capability and demand for our services continue to be our backlog and bid list. For comparative purposes our backlog and bid list for prior periods only includes our continuing operations. Our backlog of unfilled orders was approximately $19.4 million at April 30, 2014, compared to backlog of $22.0 million at January 31, 2014, and $22.3 million at April 30, 2013.

Our bid list, which represents project bids under proposal for new and existing customers, was approximately $14.4 million at April 30, 2014, compared to approximately $18.1 million at January 31, 2014 and $21.1 million at April 30, 2013. Our goal is to convert more of these bids into contract awards and to increase our backlog in the quarters ahead.

We believe our low voltage communication infrastructure contracting services for public services, healthcare, energy and corporate enterprise markets will create additional opportunities domestically. We believe that the ability to provide comprehensive communications infrastructure contracting services gives us a competitive advantage. In regards to strategic development, our focus is on organic growth opportunities and we feel optimistic about the markets we serve as evidenced by our new contract awards and customers continuing to seek bids from us, due to our experience in these markets.

While we continue to consider and develop organic growth opportunities, we are also seeking opportunities to improve our balance sheet. We have sought a number of opportunities for improvement, including the execution of an aggressive plan over the past year to stabilize the operations and cash flows of the business and have reduced operating costs. The restructuring of the Notes and Warrants has enabled us to eliminate the former derivative liabilities and rebuild our stockholders' equity to regain compliance with the NASDAQ minimum stockholder equity requirements.

We are in the process of divesting certain operations through the sale of the Pride Operations, the sale of the assets of the Seattle Operations and the significant reduction of the unprofitable Trenton Operations. Furthermore, in May 2014, we entered into a non-binding letter of intent to sell our 60% majority ownership interest in the China Operations to AIC Investments Limited, a Hong Kong company (AIC), in an all-cash transaction valued at approximately $2.1 Million. The consummation of this transaction is subject to a number of conditions, including, but not limited to, completion of due diligence by AIC, the negotiation and execution of a definitive purchase agreement, third party governmental and regulatory consents, approval of by the board of directors from the Company and AIC, shareholder approval of the Company and approval from holders of senior secured debt of the Company.

33 Industry Strategy In April 2014, we launched the BTX trading platform to focus on opportunities within the digital currency market, including, but not limited to: (i) trading systems; and (ii) exchanges.

BTX's current business strategy is to continue to implement advanced trading algorithms for digital currency traders. BTX expects to generate revenue from the trading systems by offering users advanced Bitcoin trading algorithms and strategies that are not currently available. The trading system is a cloud-hosted service that incorporates some high-end features traders may be familiar with from other asset classes, including access to reliable and curated market data, and utilizing sophisticated market data visualization tools such as advanced charting, trading blotters, tick charts and consolidated level 2 order books. BTX offers a product that provides trading integration against the largest Bitcoin exchanges, allowing users to see liquidity across all platforms, route orders to the best platforms, and identify possible arbitrage opportunities across platforms. Additionally, it allows users to place synthetic stop loss orders against those exchanges, to hedge against Bitcoin price volatility. To date, the trading platform is accessible online with approximately 5,000 users and over 1,500 unique visitors per month.

On July 28, 2014, BTX announced the launch of an exchange and its second product, Celery, which will allow consumers to initially purchase Bitcoin and Dogecoin digital currencies, where it expects to generate revenue from transaction fees. Celery is a hosted online wallet that deploys direct bank transfers to allow its customers the use of their digital currency in a timely manner. BTX has launched Celery in the United States, and is committed to ensuring full compliance with its digital currency wallet and exchange services.

As a result, we believe that all of these actions provide us with an opportunity to deliver improved shareholder value in the future.

Results of Operations for the Fiscal Year Ended April 30, 2014 Compared to Fiscal Year Ended April 30, 2013 Consolidated results for the years ended April 30, 2014 and 2013 were as follows.

Years Ended April 30, 2014 2013 REVENUE $ 21,264,288 100.0 % $ 24,774,876 100.0 % COSTS AND EXPENSES: Cost of revenue 16,744,720 78.7 % 17,556,832 70.9 % Selling, general and administrative expenses 5,988,117 28.2 % 6,574,237 26.5 % Severance expense 1,775,732 8.4 % - - Depreciation and amortization 752,109 3.5 % 916,449 3.7 % Total costs and expenses $ 25,260,678 118.8 % $ 25,047,518 101.1 % OPERATING LOSS (3,996,390 ) (18.8 )% (272,642 ) (1.1 )% OTHER EXPENSE (INCOME): Interest expense 5,042,189 23.7 % 2,091,771 8.4 %Loss on extinguishment of Notes 1,299,304 6.1 % - - Change in fair value of derivative liabilities 833,750 4.0 % 2,703,248 10.9 % Interest income (11,595 ) (0.1 )% - - Loss from continuing operations before income tax (benefit) provision (11,160,038 ) (52.5 )% (5,067,661 ) (20.4 )% Income tax (benefit) provision (182,942 ) (0.9 )% 216,314 0.9 % LOSS FROM CONTINUING OPERATIONS (10,977,096 ) (51.6 )% (5,283,975 ) (21.3 )% Discontinued operations Income (loss) from discontinued operations, net of tax 33,890 0.2 % (3,287,932 ) (13.3 )% (Loss) gain from disposal (104,446 ) (0.5 )% 1,756,586 7.1 % Loss from discontinued operations, net of tax (70,556 ) (0.3 )% (1,531,346 ) (6.2 )% CONSOLIDATED NET LOSS (11,047,652 ) (51.9 )% (6,815,321 ) (27.5 )% Net income attributable to noncontrolling interest 11,287 0.1 % 95,406 0.4 % NET LOSS ATTRIBUTABLE TO WPCS (11,058,939 ) (52.0 )% (6,910,727 ) (27.9 )% Dividend declared on preferred stock (109,027 ) (0.5 )% - - NET LOSS ATTRIBUTABLE TO WPCS COMMON SHAREHOLDERS $ (11,167,966 ) (52.5 )% $ (6,910,727 ) (27.9 )% 34 Revenue Revenue for the year ended April 30, 2014 was approximately $21,264,000, as compared to approximately $24,775,000 for the year ended April 30, 2013. The decrease in revenue was due primarily to a reduction in revenue of the contracting services segment, as a result of the significant reduction of the Trenton Operation during fiscal 2014, partially offset by an increase in contracting services project revenue in our Suisun City Operations. The prior period also included approximately $1,641,000 of change order revenue related to the Cooper Project. There was no revenue for the Bitcoin trading platform segment. For the year ended April 30, 2014, there was one customer who comprised 16.6% of the consolidated total revenue. For the year ended April 30, 2013, there was one customer who comprised 23.3% of the consolidated total revenue.

Cost of Revenue Cost of revenue consists of direct costs on contracts: materials, direct labor, third party subcontractor services, union benefits and other overhead costs. Our cost of revenue was approximately $16,745,000, or 78.7%, of revenue for the year ended April 30, 2014, compared to $17,557,000, or 70.9%, for the prior year. The decrease in total cost of revenue was due to the decrease in revenue as compared to the prior year. The increase as a percentage of revenue is primarily due to the revenue blend of project work completed during the year. The prior period also included approximately $1,641,000 of change order revenue related to the Cooper Project, the costs of which were incurred in fiscal 2012.

Severance Expense On July 24, 2013, we entered into the Separation Agreement with Hidalgo, our former President, Chief Executive Officer and a member of the board of directors.

On March 31, 2014, we entered into the Separation Agreement with Heater, the Company's Chief Financial Officer. Pursuant to the Separation Agreement, Heater will resign, effective on July 31, 2014, as the Chief Financial Officer of the Company and from all officer and director positions with the Company's subsidiaries.

The Company recorded severance expense of $1,775,732 related to these Separation Agreements.

Selling, General and Administrative Expenses For the year ended April 30, 2014, total selling, general and administrative expenses were approximately $5,988,000, or 28.2%, of total revenue compared to $6,574,000, or 26.5%, of revenue for the prior year. Included in selling, general and administrative expenses for the year ended April 30, 2014 were salaries, commissions, payroll taxes and other employee benefits incurred in the normal course of business of $2,746,000, which was a $652,000 decrease compared to the prior year, due primarily to lower salaries from cost reduction strategies, offset by BTX signing bonuses. Professional fees were $1,145,000, which include on-going accounting, legal and investor relations fees. The increase in professional fees was due primarily to legal costs incurred in connection with the acquisition of the BTX Software, and consulting fees related to Sebastian Giordano, our Interim Chief Executive Officer. Insurance costs were $607,000 and rent for office facilities was $363,000. Automobile and other travel expenses were $409,000. Other selling, general and administrative expenses totaled $718,000. For the year ended April 30, 2014, total selling, general and administrative expenses for the contracting services and Bitcoin segments were approximately $3,060,000 and $437,000, respectively, with the balance of approximately $2,491,000 pertaining to corporate expenses.

For the year ended April 30, 2013, total selling, general and administrative expenses were approximately $6,574,000, or 26.5%, of total revenue. Included in selling, general and administrative expenses for the year ended April 30, 2013 was $3,397,000 for salaries, commissions, payroll taxes and other employee benefits. Professional fees were $1,074,000, which include accounting, legal and investor relation fees. Insurance costs were $642,000 and rent for office facilities was $271,000. Automobile and other travel expenses were $681,000.

Other selling, general and administrative expenses totaled $509,000. For the year ended April 30, 2013, total selling, general and administrative expenses for the contracting services segment was approximately $3,635,000 with the balance of approximately $2,939,000 pertaining to corporate expenses. The Bitcoin segment did not exist for the year ended April 30, 2013.

35 Depreciation and Amortization For the years ended April 30, 2014 and 2013, depreciation and amortization was approximately $752,000 and $916,000, respectively. The decrease in depreciation is due to the retirement of certain assets.

Interest Expense For the years ended April 30, 2014 and 2013, interest expense was approximately $5,042,000 and $2,092,000, respectively. The increase in interest expense is due primarily to noncash interest expense for the amortization of the debt discount for the Notes of approximately $4,137, 000 for the year ended April 30, 2014, as compared to $1,355,000 of noncash interest expense for the same period in the prior year.

Loss on Extinguishment of Notes For the years ended April 30, 2014, the loss on extinguishment of Notes was approximately $1,299,000, as a result of the modification of the Notes, which resulted in the debt instruments being exchanged with substantially different terms and extinguishment accounting was applied.

Change in Fair Value of Derivative Liabilities Prior to the Note and Warrant Amendments, we determined the fair value of the embedded conversion features of the Notes and the Warrants and recorded each of them as a discount to the Notes and each as a derivative liability. Accordingly, changes in the fair value of the derivatives are recognized and classified as an unrealized noncash gain or loss on the derivative financial instruments. For the year ended April 30, 2014, the increase in the fair value of the embedded conversion features of the Notes and Warrants was approximately $834,000 due to increases in the market price of our common stock during the period from May 1, 2013 through October 31, 2013.

Income Taxes The actual income tax rate from continuing operations for the year ended April 30, 2014 was 1.64% compared to -4.27% for same period in the prior year. The difference was primarily due to no tax benefit being claimed for federal and state losses during the year ended April 30, 2014. We recorded income tax provision of approximately $104,000 for our China Operations for the year ended April 30, 2014.

As of April 30, 2014, we had federal net operating losses of approximately $28 million.

Income (Loss) From Discontinued Operations As a result of the execution of the Agreement for the divestiture of Pride on September 19, 2013, we have recorded the Australia Operations financial results as discontinued operations. As a result of the execution of the Asset Purchase Agreement for the divestiture of Seattle on March 31, 2014, we have recorded the Seattle Operations financial results as discontinued operations. As a result of the sale of the assets of the Hartford and Lakewood Operations on July 25, 2012, we recorded the financial results of these operations as discontinued operations. For the year ended April 30, 2014, we recorded a loss from discontinued operations of approximately $71,000, including a loss from disposal of $104,000 related to the Hartford and Lakewood Operations. For the year ended April 30, 2013, we recorded a loss from discontinued operations of approximately $1,531,000. Included in the income from discontinued operations is a gain from disposal of approximately $1,757,000, net of expenses directly related with the sale of the assets of the Hartford and Lakewood Operations, respectively.

Net Loss Attributable to WPCS Common Shareholders The net loss attributable to WPCS common shareholders was approximately $11,168,000 for the year ended April 30, 2014. The net loss was net of federal and state income tax benefit of approximately $183,000 and dividend declared on the Series E Preferred Stock of approximately $109,000.

The net loss attributable to WPCS common shareholders was approximately $6,911,000 for the year ended April 30, 2013. The net loss was net of Federal and state income tax provision of approximately $261,000.

36 Liquidity and Capital Resources At April 30, 2014, we had working capital of approximately $1,199,000, which consisted of current assets of approximately $16,609,000 and current liabilities of $15,410,000. This compares to a working capital deficiency of approximately $484,000 at April 30, 2013. The current liabilities as presented in the consolidated balance sheet at April 30, 2014 include approximately $1,520,000 of severance liability related to the Hidalgo and Heater Separation Agreements and the $1,533,757 Loss Amount due under the Zurich Forbearance Agreement.

Our cash and cash equivalents balance at April 30, 2014 was $2,177,070. Our working capital needs are influenced by our level of operations, and generally increase with higher levels of revenue. Our sources of cash in the last several years have come from credit facility borrowings and sales of debt and equity securities. Our future operating results may be affected by a number of factors including our success in bidding on future contracts, ability to generate revenue and profits from the launch of the BTX trading platform, and our continued ability to manage our controllable operating costs effectively. Our capital requirements depend on numerous factors, including the market for our services, additional software development costs for the launch of BTX, and the resources we devote to developing, marketing, selling and supporting our business, and the timing and extent of establishing additional markets andother factors.

Operating activities used approximately $1,445,000 in cash for the year ended April 30, 2014. The sources of cash from operating activities total approximately $14,712,000, comprised of approximately $7,620,000 of net noncash charges, a $1,869,000 decrease in restricted cash, a $1,520,000 increase in accrued severance expense for the Hidalgo and Heater Separation Agreements, a $1,963,000 increase in accounts payable and accrued expenses, a $1,199,000 decrease in net assets held for sale, $416,000 decrease in deferred contract costs and a $104,000 increase in billings in excess of costs and estimated earnings on uncompleted contracts, and a $21,000 decrease in other assets. The uses of cash from operating activities total approximately $16,157,000, comprised of a net loss of approximately $11,048,000, a $4,666,000 increase in accounts receivable, $114,000 increase in deferred revenue, a $120,000 increase in prepaid expenses and other current assets, a $102,000 decrease in estimated earnings in excess of billings on uncompleted contracts, and a $107,000 increase in income taxes payable.

Our investing activities provided cash of approximately $1,069,000, comprised of approximately $1,185,000 from the issuance of the series E Preferred Stock and BTX Warrants in connection with the acquisition of the BTX Software, offset by $79,000 for acquiring property and equipment and approximately $37,000, of dividends paid on Series E Preferred Stock during the year ended April 30, 2014.

Our financing activities provided cash of approximately $1,194,000 for the year ended April 30, 2014. Financing activities provided cash of approximately $1,627,000 including $816,000 from short-term loan borrowings, $790,000 of borrowings from Taian Gas Group (TGG), our joint venture partner, and $21,000 borrowings on loans payables, offset by approximately $210,000 of repayments under other payables due Zurich, $138,000 of debt issuance costs paid, $77,000 of repayments under loans payable, and $10,000 redemption of the Notes.

Senior Secured Convertible Notes On December 4, 2012, we entered into the Purchase Agreement with the Buyers pursuant to which, we sold an aggregate of (i) $4,000,000 principal amount of Notes and (ii) the Warrants to purchase 2,274,796 shares of our Common Stock, to the Buyers for aggregate Financing gross proceeds of $4,000,000. In connection with the Financing, (i) we entered into a Registration Rights Agreement, (ii) we and our subsidiaries entered into the Security Agreement, and (iii) our subsidiaries entered into the Guaranty in favor of the collateral agent for the Buyers. The Closing Date of the Financing was December 5, 2012.

Pursuant to the terms of the Notes, we deposited the initial funds received from the Financing, minus the Initial Lending Amount of $2,178,516 into the Lockbox Account controlled by the Collateral Agent, as collateral agent on behalf of the Buyers. We used the Initial Lending Amount to repay the existing loan of $2,000,000, plus $78,516 of interest accrued and fees and expenses to Sovereign N.A., which credit agreement was terminated in connection with the Notes, and $100,000 for Buyer legal fees in connection with the Notes. In addition, all our payments of accounts receivable (and our domestic subsidiaries) shall be deposited into the Lockbox Account. We are permitted to receive from the Lockbox Account, on a daily basis, such amount of cash equal to: (A) (i) cash balance in the Lockbox Account plus (ii) 95% of available qualified accounts receivable minus (iii) $250,000 minus (B) amount of principal, accrued interest, fees, costs and expenses owed pursuant to the Notes. The Notes contain certain customary representations and warranties, affirmative and negative covenants, and events of default. The principal covenant is that we shall maintain a current ratio of not less than 0.6 to 1.0 as of the last calendar day of each month. As of April 30, 2014, we are in compliance with the covenants.

37 Prior to the Note Amendment, $593, 923 of Notes was converted into 275, 242 shares of our Common Stock.

During the year ended April 30, 2014, $2,501,666 of Notes was converted into 12,508,340 shares of the Company's Common stock, resulting in the accelerated write-off of unamortized debt discount of $2,501,666. In addition, $19,231 of accrued interest on New Notes was converted into 96,155 shares of the Company's Common Stock. The outstanding principal balance of the New Notes was $898,334 as of April 30, 2014.The Notes were amended on October 25, 2013 and October 31, 2013. See "Recent Developments - Note and Warrant Amendments" under this Item 7 for a full description of the terms of such amendments.

In connection with the BTX Purchase Agreement, we agreed to waive any rights to compel the redemption of the New Notes. The Buyers agreed to restrict their ability to convert the Notes and/or exercise the Warrants and receive shares of our Common Stock such that the number of shares of Common Stock held by the Buyer in the aggregate and its affiliates after such conversion or exercise does not exceed 9.99% of the then issued and outstanding shares of our Common Stock.

Pursuant to the Registration Rights Agreement, we agreed to file a registration statement with the SEC, within 30 days following receipt of a request from a Buyer (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, as requested by the Buyers, and have such registration statement declared effective by the SEC within 90 days thereafter. We also agreed to notify the Buyers if we at any time propose to register any of our securities under the Securities Act of 1933, as amended, and of such Buyers' right to participate in such registration. No request has been received from a Buyerto register such shares.

If we fail to comply with the registration statement filing, effective date or maintenance date filing requirements, we are required to pay the Buyers a registration delay payment in cash equal to 2% of the Buyer's original principal amount stated on such Investors' Note as of the Closing Date on the date of each failure, and on every thirty (30) day anniversary of the of the respective failures (Registration Delay Payment). Notwithstanding the foregoing, in no event shall the aggregate amount of Registration Delay Payments exceed 10% of such Investor's original principal amount stated on the Note on the Closing Date. We account for such Registration Delay Payments as contingent liabilities and recognize such damages when it becomes probable that they will be incurred and amounts are reasonably estimable. No liability has been recorded for any Registration Delay Payments.

Pursuant to the Guaranty, our subsidiaries guaranteed to the collateral agent, for the benefit of the Buyers, the punctual payment, as and when due and payable, of all amounts owed by us in respect of the Purchase Agreement, the Notes and the other transaction documents executed in connection with the Purchase Agreement.

Pursuant to the Security Agreement, we and our subsidiaries granted, in favor of the collateral agent for the Buyers, a continuing security interest in all our personal property and assets, as collateral security for our and the subsidiaries under the Purchase Agreement, the Notes, the Guaranty and theother transaction documents.

Hartford and Lakewood Operations Asset Sales On July 25, 2012, the Company and the Hartford and Lakewood Operations entered into an asset purchase agreement, pursuant to which the Hartford and Lakewood Operations sold substantially all of their assets to two newly-created subsidiaries of Kavveri Telecom Products Limited (Kavveri) for a purchase price of $5.5 million in cash, subject to adjustment, and the assumption of their various liabilities. At closing, we received $4.9 million in cash, with the remaining purchase price to be settled upon (1) completing the assignment of certain contracts post-closing, which was concluded, and (2) satisfying certain adjustments to the purchase price based on a final net asset valuation to be completed after closing as well as repurchase obligations of certain delinquent accounts receivables. We used the proceeds from this sale to repay the full amount outstanding under the Credit Agreement of $4,022,320 as of July 25, 2012.

The difference of $877,680 was deposited in its operating cash account.

To date, we have not reached agreement with Kavveri with regard to resolving the net asset valuation. We are currently in discussions with Kavveri for the settlement of the final adjustments to the purchase price, and have reserved $450,000 for possible future settlement, which includes $104,000 recorded for the year ended April 30, 2014. There can be no assurance that we will be successful in settling with Kavveri amounts claimed by them.

Short-Term Commitments with the China Operations Effective August 1, 2013, the China Operations entered into a secured loan with the Bank of China (the Short-Term Bank Loan). The Short-Term Bank Loan provides for a loan in the amount of $3,279,300. The proceeds from the Short-Term Bank Loan were used to repay the outstanding Short-Term Bank Loan as of April 30, 2013 of $2,404,545. The Short-Term Bank Loan has an interest rate of 7.38%, and interest is due on a quarterly basis.

38 Other Payable with Zurich On July 12, 2012, we executed the Financing Agreement with Zurich, to assist in the completion of the project contract with the Owner of Cooper Project. Under the terms of the Financing Agreement, Zurich advanced us $793,927 to assist in the completion of the Cooper Project, a $16.2 million project completed by our Trenton Operations. We were to repay Zurich the financial advances by September 2012; however, we were in default under the terms of the Financing Agreement as we did not repay Zurich the $793,927, and Zurich paid certain of the our vendors pursuant to Zurich's obligations under its payment bond on the Cooper Project.

In addition, we are contingently liable to Zurich and its affiliate F&D under the Indemnity Agreement. Zurich and F&D, as surety, issued certain performance and payment bonds on behalf of owners or customers regarding our work on various projects under the Indemnity Agreement. We agreed to indemnify the surety for any payments made by Zurich on contracts of suretyship, guaranty or indemnity.

On April 17, 2013, we executed the Forbearance Agreement with Zurich, which supersedes the Financing Agreement. Under the Forbearance Agreement, among other things, the parties have agreed to the following payments which will be credited against the Loss Amount owed to Zurich by us: (1) the Interim Liability Payments; (2) the Customer Payments; and (3) the Claim, up to the Loss Amount as it exists at the time. As of April 30, 2014, the net Other Payable for the Loss Amount owed Zurich under the Forbearance Agreement was $1,533,757.

Each or any of the following shall constitute an event of default under the Forbearance Agreement: (a) failure by us to make any of the Interim Liability Payments; (b) failure by us to remit any Customer Payments received; (c) the failure by us or the Owner to remit the proceeds of the Claim to Zurich; and (d) any Loss Amount that still exists as of December 31, 2013. We are currently in default under the Forbearance Agreement due to the 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 due December 31, 2013 under the Forbearance Agreement. We are currently in discussions with Zurich for the settlement of the Loss Amount due under the Forbearance Agreement. There can be no assurance that we will be successful in settling with Zurich the Loss Amount due.

We have submitted a Claim to the Owner of $2,421,425 for significant delays, disruptions and construction changes that were beyond its control and required us to perform additional work related to the Cooper Project, which was completed in the fiscal year ended April 30, 2013. On April 15, 2013, we filed a Mediation request with the American Arbitration Association with regard to the Claim. The Mediation has been postponed. We are presently awaiting a time to file a complaint against the Owner in federal court in New Jersey. If we are successful in the settlement of this Claim, we expect to use the proceeds from the Claim to repay Zurich the Loss Amount as it exists at the time, and any excess for working capital purposes. There can be no assurance that we will be successful in settling with the Owner for all or a portion of the submitted claim.

Going Concern Our continuation as a going concern beyond the next twelve months and our ability to discharge our liabilities and commitments in the normal course of business is ultimately dependent upon the execution of its future plans, which include the following: (1) our ability to generate future operating income, reduce operating expenses and produce cash from our operating activities, which will be affected by general economic, competitive, and other factors, many of which are beyond our control; (2) the repayment of, either 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 through financing or sale of assets. These factors raise substantial doubt about the Company's ability to continue as a going concern. There can be no assurance that our plans to ensure continuation as a going concern will be successful.

Backlog As of April 30, 2014, we had a backlog of unfilled orders of approximately $19.4 million compared to approximately $22.3 million at April 30, 2013. We define backlog as the value of work-in-hand to be provided for customers as of a specific date where the following conditions are met (with the exception of engineering change orders): (i) the price of the work to be done is fixed; (ii) the scope of the work to be done is fixed, both in definition and amount; and (iii) there is a written contract, purchase order, agreement or other documentary evidence which represents a firm commitment by the customer to pay us for the work to be performed. These backlog amounts are based on contract values and purchase orders and may not result in actual receipt of revenue in the originally anticipated period or at all. We have experienced variances in the realization of our backlog because of project delays or cancellations resulting from external market factors and economic factors beyond our control and we may experience such delays or cancellations in the future. Backlog does not include new firm commitments that may be awarded to us by our customers from time to time in future periods. These new project awards could be started and completed in this same future period. Accordingly, our backlog does not necessarily represent the total revenue that could be earned by us in future periods.

39 Off-Balance Sheet Arrangements We have no off-balance sheet arrangements other than operating lease commitments.

Critical Accounting Policies Financial Reporting Release No. 60, published by the SEC, recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.

We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our condensed consolidated results of operations, financial position or liquidity for the periods presented in this report.

The accounting policies identified as critical are as follows: Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. The most significant estimates relate to the calculation of percentage-of-completion on uncompleted contracts, allowance for doubtful accounts, valuation of inventory, realization of deferred tax assets, capitalization of software costs, amortization method and lives of customer lists, acquisition-related contingency consideration and estimates of the fair value of reporting units and discounted cash flows used in determining whether goodwill has been impaired. Actual results could differ from those estimates.

Accounts Receivable Accounts receivable are due within contractual payment terms and are stated at amounts due from customers net of an allowance for doubtful accounts. Credit is extended based on evaluation of a customer's financial condition. Accounts outstanding longer than the contractual payment terms are considered past due.

We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customer's current ability to pay its obligation to the us, and the condition of the general economy and the industry as a whole. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

Capitalized Software Costs Costs incurred in the research, design and development of software for sale to others as a separate product or embedded in a product and sold as part of the product as a whole are charged to expense until technological feasibility is established. Thereafter, software development costs, consisting primarily of payroll and related costs, purchased materials and services and software to be used within our products, which significantly enhance the marketability or significantly extend the life of our products are capitalized, and amortized to cost of revenue on a straight-line basis over three years, beginning when the products are offered for sale or when the enhancements are integrated intothe product.

Derivative Instruments Derivative liabilities were related to embedded conversion features of the Notes and the common stock Warrants issued in connection with the Securities Purchase Agreement. For derivative instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in fair value recognized in earnings each reporting period. We used the binomial lattice model to value the derivative instruments at inception and subsequent valuation dates and the value is re-assessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not the net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

40 Fair Value of Financial Instruments Our material financial instruments at April 30, 2014 and for which disclosure of estimated fair value is required by certain accounting standards consisted of cash and cash equivalents, accounts receivable, account payable, Notes, common stock Warrants and loans payable. The fair values of cash and cash equivalents, accounts receivable, and account payable are equal to their carrying value because of their liquidity and short-term maturity. We believe that the fair values of the loans payable do not differ materially from their aggregate carrying values in that substantially all the obligations bear variable interest rates that are based on market rates or interest rates that are periodically adjustable to rates that are based on market rates.

Impairment of Long-lived Assets We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable from the estimated future cash flows expected to result from their use and eventual disposition. Our long-lived assets subject to this evaluation include property and equipment and amortizable intangible assets.

Income Taxes We determine deferred tax liabilities and assets at the end of each period based on the future tax consequences that can be attributed to net operating loss carryovers and differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, using the tax rate expected to be in effect when the taxes are actually paid or recovered. The recognition of deferred tax assets is reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible.

At April 30, 2014, our net deferred tax assets are fully offset by a valuation allowance. We will continue to evaluate the realization of our deferred tax assets and liabilities on a periodic basis, and will adjust such amounts in light of changing facts and circumstances.

We consider past performance, expected future taxable income and prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. Our forecast of expected future taxable income is based over such future periods that we believe can be reasonably estimated. Changes in market conditions that differ materially from our current expectations and changes in future tax laws in the U.S. may cause us to change our judgments of future taxable income. These changes, if any, may require us to adjust our existing tax valuation allowance higher or lower than the amount we have recorded.

Revenue Recognition We generate our revenue by offering communications infrastructure contracting services. Our contracting services report revenue pursuant to customer contracts that span varying periods of time. We report revenue from contracts when persuasive evidence of an arrangement exists, fees are fixed or determinable, and collection is reasonably assured.

We record revenue and profit from long-term contracts on a percentage-of-completion basis, measured by the percentage of contract costs incurred to date to the estimated total costs for each contract. Contracts in process are valued at cost plus accrued profits less earned revenues and progress payments on uncompleted contracts. Contract costs include direct materials, direct labor, third party subcontractor services and those indirect costs related to contract performance. Contracts are generally considered substantially complete when engineering is completed and/or site construction is completed.

We have numerous contracts that are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. Cost estimates are reviewed monthly on a contract-by-contract basis, and are revised periodically throughout the life of the contract such that adjustments to profit resulting from revisions are made cumulative to the date of the revision. Significant management judgments and estimates, including the estimated cost to complete projects, which determines the project's percent complete, must be made and used in connection with the revenue recognized in the accounting period. Current estimates may be revised as additional information becomes available. If estimates of costs to complete long-term contracts indicate a loss, provision is made currently for the total loss anticipated.

41 The length of our contracts varies. Assets and liabilities related to long-term contracts are included in current assets and current liabilities as they will be liquidated in the normal course of contract completion, although this may require more than one year.

We record revenue and profit from short-term contracts for our China Operations under the completed contract method, whereas income is recognized only when a contract is completed or substantially completed. Accordingly, during the period of performance, billings and costs are accumulated on the balance sheet, but no revenue or income is recorded before completion or substantial completion of the work. Our decision is based on the short-term nature of the work performed.

We also recognize certain revenue from short-term contracts when equipment is delivered or the services have been provided to the customer. For maintenance contracts, revenue is recognized ratably over the service period.

Recently Issued Accounting Pronouncements Share-Based Payments with Performance Targets In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU 2014-12). ASU 2014-12 requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC 718, Compensation - Stock Compensation, as it relates to such awards. ASU 2014-12 is effective for us in our first quarter of fiscal 2017 with early adoption permitted using either of two methods: (i) prospective to all awards granted or modified after the effective date; or (ii) retrospective to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter, with the cumulative effect of applying ASU 2014-12 as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements. We are currently evaluating the impact of our pending adoption on ASU 2014-12 on our consolidated financial statements.

Revenue Recognition In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.

Reporting Discontinued Operations In April 2014, the FASB issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08), to change the criteria for determining which disposals can be presented as discontinued operations and enhanced the related disclosure requirements. ASU 2014-08 is effective for us on a prospective basis in our first quarter of fiscal 2016 with early adoption permitted for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued. We are currently evaluating the impact of our pending adoption of ASU 2014-08 on our consolidated financial statements.

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