LIQUIDITY AND BASIS OF PRESENTATION

9 Months Ended

Jan. 31, 2012

Liquidity And Basis Of Presentation

LIQUIDITY AND BASIS OF PRESENTATION

NOTE 1 - LIQUIDITY AND BASIS OF PRESENTATION

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

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. At January 31, 2012, the Company had cash and cash equivalents of $1,746,624 and working capital of $6,838,414, which consisted of current assets of $29,648,736 and current liabilities of $22,810,322. For the nine months ended January 31, 2012, the Company provided or generated operating cash flow of approximately $1,648,000. The Company expects to meet its cash requirements through a combination of the new credit agreement described below, working capital balances and on-going expense management.

On January 27, 2012, WPCS and its United States-based subsidiaries Suisun City Operations, Seattle Operations, Portland Operations, Hartford Operations, Lakewood Operations, and Trenton Operations (collectively, the Subsidiaries), entered into a loan and security agreement (the Credit Agreement) with Sovereign Bank, N.A. (Sovereign). The Credit Agreement provides for a revolving line of credit in an amount not to exceed $12,000,000. Pursuant to the Credit Agreement, the Company and these subsidiaries granted a security interest to Sovereign in all of their assets. In addition, pursuant to a collateral pledge agreement, WPCS pledged 100% of its ownership in the domestic Subsidiaries and 65% of its ownership in WPCS Australia Pty Ltd. The Company used the initial funds provided by the loan, to repay the existing loan of $2,428,491 to Bank of America, N.A. (BOA), which loan agreement was terminated in connection with the Credit Agreement. As of January 31, 2012, the total amount available to borrow under the Credit Agreement was $6,386,015, and the total amount outstanding was $3,103,830, resulting in net availability for future borrowings of $3,282,185.

The Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants, and events of default. Principal covenants include (a) Fixed Charge Coverage Ratio of not less than 1.2 to 1.0, measured as of April 30, 2012 and as of each fiscal quarter end thereafter, in each case on a trailing two (2) quarter basis; and (b) Leverage Ratio of not more than 1.75 to 1.0, measured as of each fiscal quarter end. The Company met the Leverage Ratio covenant as of January 31, 2012. Due to the operating loss for the quarter ended January 31, 2012, it is expected that the Company will not meet the Fixed Charge Coverage Ratio of 1.2 to 1.0, when first required to be measured for the two quarters ending April 30, 2012. Note 4, “Debt”, further describes the terms of the Credit Agreement with Sovereign.

Finally, as described in Note 6, “Shareholders’ Equity”, the Company filed a shelf registration statement on Form S-3 on April 15, 2010. Sales of the Company’s common stock may be offered in amounts and at prices and terms that the Company would determine at the time of the offering. The issuance of additional stock is considered to be another alternative to generate additional funds for corporate purposes. The Company may not be successful in issuing additional common stock on acceptable terms or at all.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for quarterly reports on Form 10-Q of Article 10 of Regulation S-X and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. Accordingly, the unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended April 30, 2011 included in the Company’s Annual Report on Form 10-K. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of the management, considered necessary for a fair presentation of condensed consolidated financial position, results of operations and cash flows for the interim periods. Operating results for the three and nine month periods ended January 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2012. The amounts for the April 30, 2011 balance sheet have been extracted from the audited consolidated financial statements included in Form 10-K for the year ended April 30, 2011.

On September 1, 2011, the Company sold its St. Louis and Sarasota Operations. These condensed consolidated financial statements reflect the results of the St. Louis and Sarasota Operations as discontinued operations for all periods presented.

The Company provides design-build engineering services that focus on the implementation requirements of communications infrastructure. The Company provides its engineering capabilities including wireless communication, specialty construction and electrical power to the public services, healthcare, energy and corporate enterprise markets worldwide.