UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31,
2014
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________
to __________
Commission File Number 001-34643
WPCS INTERNATIONAL INCORPORATED
(Exact name of registrant as specified in
its charter)
Delaware |
|
98-0204758 |
(State or other jurisdiction of incorporation
or organization) |
|
(I.R.S. Employer Identification No.)
|
|
|
|
521 Railroad Avenue
Suisun City, California |
94585 |
(707) 421-1300 |
(Address of principal executive office) |
(Zip Code) |
(Registrant’s telephone number,
Including area code) |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes x
No ¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer ¨ |
Accelerated filer ¨ |
Non-accelerated filer ¨ |
Smaller reporting company x |
(Do not check if a smaller reporting company) |
|
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of September 19, 2014, there were 13,913,164 shares of registrant’s
common stock outstanding.
TABLE OF CONTENTS
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| |
July 31, | | |
April 30, | |
| |
2014 | | |
2014 | |
| |
(Unaudited) | | |
| |
ASSETS | |
| | | |
| | |
CURRENT ASSETS: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 1,318,949 | | |
$ | 2,177,070 | |
Accounts receivable, net of allowance of $1,086,000 and $1,034,000
at July 31, 2014 and April 30, 2014, respectively | |
| 9,697,262 | | |
| 8,614,396 | |
Costs and estimated earnings in excess of billings on uncompleted contracts | |
| 567,186 | | |
| 431,348 | |
Deferred contract costs | |
| 1,221,201 | | |
| 1,166,734 | |
Prepaid expenses and other current assets | |
| 239,173 | | |
| 217,235 | |
Current assets held for sale | |
| 2,972,938 | | |
| 4,001,812 | |
Total current assets | |
| 16,016,709 | | |
| 16,608,595 | |
| |
| | | |
| | |
PROPERTY AND EQUIPMENT, net | |
| 1,652,387 | | |
| 1,780,520 | |
| |
| | | |
| | |
CAPITALIZED SOFTWARE COSTS, net | |
| 2,940,793 | | |
| 3,207,305 | |
| |
| | | |
| | |
OTHER ASSETS | |
| 20,675 | | |
| 52,376 | |
| |
| | | |
| | |
OTHER ASSETS HELD FOR SALE | |
| 193,339 | | |
| 372,930 | |
| |
| | | |
| | |
Total assets | |
$ | 20,823,903 | | |
$ | 22,021,726 | |
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
| |
July 31, | | |
April 30, | |
| |
2014 | | |
2014 | |
| |
(Unaudited) | | |
| |
| |
| | |
| |
LIABILITIES AND EQUITY | |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Current portion of loans payable | |
$ | 37,549 | | |
$ | 31,680 | |
Senior secured convertible notes, net of debt discount of $0 and $853,000, respectively | |
| 898,338 | | |
| 44,921 | |
Make-whole amount on senior secured convertible notes
| |
| 1,889,716 | | |
| - | |
Accounts payable and accrued expenses | |
| 6,121,161 | | |
| 4,956,232 | |
Accrued severance | |
| 301,455 | | |
| 1,520,205 | |
Billings in excess of costs and estimated earnings on uncompleted contracts | |
| 1,213,690 | | |
| 1,448,563 | |
Due related party | |
| 789,710 | | |
| 778,573 | |
Other payable to Zurich | |
| 1,533,757 | | |
| 1,533,757 | |
Short-term bank loan | |
| 3,240,700 | | |
| 3,195,000 | |
Income taxes payable | |
| 9,731 | | |
| 30,855 | |
Dividend payable | |
| 74,487 | | |
| 72,034 | |
Current liabilities held for sale | |
| 1,415,351 | | |
| 1,886,019 | |
Total current liabilities | |
| 17,525,645 | | |
| 15,497,839 | |
| |
| | | |
| | |
Loans payable, net of current portion | |
| 61,227 | | |
| 56,537 | |
Secured promissory note, related parties | |
| 500,000 | | |
| 500,000 | |
| |
| | | |
| | |
Total liabilities | |
| 18,086,872 | | |
| 16,054,376 | |
| |
| | | |
| | |
COMMITMENTS AND CONTINGENCIES | |
| | | |
| | |
| |
| | | |
| | |
EQUITY: | |
| | | |
| | |
| |
| | | |
| | |
WPCS EQUITY: | |
| | | |
| | |
Preferred stock - 5,000,000 shares authorized, 2,438 shares of Series E Convertible Preferred Stock issued with $1,000 stated value, and liquidation preference of $5,617,000 | |
| 2,438,000 | | |
| 2,438,000 | |
Common stock - $0.0001 par value, 14,285,714 shares authorized, 13,913,164
shares issued and outstanding as of July 31, 2014 and April 30, 2014 | |
| 1,391 | | |
| 1,391 | |
Additional paid-in capital | |
| 66,672,106 | | |
| 66,672,106 | |
Accumulated deficit | |
| (67,534,540 | ) | |
| (65,222,355 | ) |
Accumulated other comprehensive income on foreign currency translation | |
| 358,274 | | |
| 1,232,003 | |
| |
| | | |
| | |
Total WPCS equity | |
| 1,935,231 | | |
| 5,121,145 | |
| |
| | | |
| | |
Noncontrolling interest | |
| 801,800 | | |
| 846,205 | |
Total equity | |
| 2,737,031 | | |
| 5,967,350 | |
| |
| | | |
| | |
Total liabilities and equity | |
$ | 20,823,903 | | |
$ | 22,021,726 | |
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
| |
Three months ended | |
| |
July 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
REVENUE | |
$ | 6,770,884 | | |
$ | 4,255,743 | |
| |
| | | |
| | |
COSTS AND EXPENSES: | |
| | | |
| | |
Cost of revenue | |
| 5,293,104 | | |
| 3,154,715 | |
Selling, general and administrative expenses | |
| 1,360,814 | | |
| 1,412,132 | |
Severance expense | |
| - | | |
| 1,474,277 | |
Depreciation and amortization | |
| 442,545 | | |
| 200,348 | |
| |
| | | |
| | |
| |
| 7,096,463 | | |
| 6,241,472 | |
| |
| | | |
| | |
OPERATING LOSS | |
| (325,579 | ) | |
| (1,985,729 | ) |
| |
| | | |
| | |
OTHER EXPENSE (INCOME): | |
| | | |
| | |
Interest expense | |
| 2,901,396 | | |
| 1,159,493 | |
Change in fair value of derivative liabilities | |
| - | | |
| 3,041,905 | |
Other expenses | |
| 7,500 | | |
| - | |
| |
| | | |
| | |
Loss from continuing operations before income tax provision | |
| (3,234,475 | ) | |
| (6,187,127 | ) |
| |
| | | |
| | |
Income tax provision | |
| - | | |
| 24,151 | |
| |
| | | |
| | |
LOSS FROM CONTINUING OPERATIONS | |
| (3,234,475 | ) | |
| (6,211,278 | ) |
| |
| | | |
| | |
Discontinued operations: | |
| | | |
| | |
Income from discontinued operations | |
| 148,861 | | |
| 339,952 | |
Gain on sale of Australia operations | |
| 798,896 | | |
| - | |
| |
| | | |
| | |
Income from discontinued operations, net of tax | |
| 947,757 | | |
| 339,952 | |
| |
| | | |
| | |
CONSOLIDATED NET LOSS | |
| (2,286,718 | ) | |
| (5,871,326 | ) |
| |
| | | |
| | |
Net (loss) income attributable to noncontrolling interest | |
| (49,020 | ) | |
| 21,744 | |
| |
| | | |
| | |
NET LOSS ATTRIBUTABLE TO WPCS | |
| (2,237,698 | ) | |
| (5,893,070 | ) |
| |
| | | |
| | |
Dividend declared on preferred stock | |
| (74,487 | ) | |
| - | |
| |
| | | |
| | |
NET LOSS ATTRIBUTABLE TO WPCS COMMON SHAREHOLDERS | |
$ | (2,312,185 | ) | |
$ | (5,893,070 | ) |
| |
| | | |
| | |
Basic and diluted net loss attributable to WPCS common shareholders: | |
| | | |
| | |
Loss from continuing operations | |
$ | (0.23 | ) | |
$ | (6.21 | ) |
Income from discontinued operations | |
$ | 0.01 | | |
$ | 0.34 | |
Gain from disposal | |
$ | 0.06 | | |
$ | - | |
Basic and diluted net income from discontinued operations | |
$ | 0.07 | | |
$ | 0.34 | |
Basic and diluted net loss per common share attributable to WPCS | |
$ | (0.17 | ) | |
$ | (5.89 | ) |
| |
| | | |
| | |
Basic and diluted weighted average number of common shares outstanding | |
| 13,913,164 | | |
| 1,000,624 | |
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
(Unaudited)
| |
Three Months Ended | |
| |
July 31, | |
| |
2014 | | |
2013 | |
Consolidated net loss | |
$ | (2,286,718 | ) | |
$ | (5,871,326 | ) |
Other comprehensive loss | |
| | | |
| | |
Foreign currency translation adjustments | |
| (7,010 | ) | |
| (225,801 | ) |
Reclassification adjustments of other comprehensive loss on sale of Australia operations | |
| (866,719 | ) | |
| - | |
Other comprehensive loss | |
| (873,729 | ) | |
| (225,801 | ) |
| |
| | | |
| | |
Comprehensive loss | |
| (3,160,447 | ) | |
| (6,097,127 | ) |
Less: comprehensive (loss) income attributable to noncontrolling interest | |
| (44,405 | ) | |
| 26,491 | |
Comprehensive loss attributable to WPCS shareholders | |
$ | (3,116,042 | ) | |
$ | (6,123,618 | ) |
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
EQUITY (DEFICIT)
(Unaudited)
| |
| | |
| | |
| | |
| | |
| | |
| | |
Accumulated | | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| | |
Additional | | |
| | |
Other | | |
| | |
Non- | | |
| |
| |
Preferred Stock | | |
Common Stock | | |
Paid0In | | |
Accumulated | | |
Comprehensive | | |
WPCS | | |
Controlling | | |
Total | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
(Loss) Income | | |
Equity(Deficit) | | |
Interest | | |
Equity(Deficit) | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
BALANCE, April 30, 2014 | |
| 2,438 | | |
| 2,438,000 | | |
| 13,913,164 | | |
| 1,391 | | |
| 66,672,106 | | |
| (65,222,355 | ) | |
| 1,232,003 | | |
| 5,121,145 | | |
| 846,205 | | |
| 5,967,350 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Dividend declared on Series E preferred stock | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (74,487 | ) | |
| - | | |
| (74,487 | ) | |
| - | | |
| (74,487 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Other comprehensive loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (7,010 | ) | |
| (7,010 | ) | |
| 4,615 | | |
| (2,395 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Reclassification adjustments of other comprehensive loss on sale
of Australia operations | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (866,719 | ) | |
| (866,719 | ) | |
| - | | |
| (866,719 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss attributable to noncontrolling interest | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (49,020 | ) | |
| (49,020 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss attributable to WPCS | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (2,237,698 | ) | |
| | | |
| (2,237,698 | ) | |
| - | | |
| (2,237,698 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
BALANCE, July 31, 2014 | |
| 2,438 | | |
$ | 2,438,000 | | |
| 13,913,164 | | |
$ | 1,391 | | |
$ | 66,672,106 | | |
$ | (67,534,540 | ) | |
$ | 358,274 | | |
$ | 1,935,231 | | |
$ | 801,800 | | |
$ | 2,737,031 | |
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
| |
Three months ended | |
| |
July 31, | |
| |
2014 | | |
2013 | |
OPERATING ACTIVITIES : | |
| | | |
| | |
Consolidated net loss from continuing operations | |
$ | (3,234,475 | ) | |
$ | (6,233,022 | ) |
Less: net income (loss) attributable to noncontrolling interests | |
| (49,020 | ) | |
| 21,744 | |
Net loss attributable to WPCS | |
| (3,185,455 | ) | |
| (6,211,278 | ) |
Consolidated net income from discontinued operations | |
| 947,757 | | |
| 339,952 | |
Adjustments to reconcile consolidated net (loss) income to net cash provided by (used in) operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 442,545 | | |
| 200,348 | |
Amortization of notes discount | |
| 853,417 | | |
| 1,032,741 | |
make-whole amount | |
| 1,889,716 | | |
| - | |
Gain on sale of Australia operations | |
| (798,896 | ) | |
| - | |
Stock-based compensation | |
| - | | |
| 21,371 | |
Change in the fair value of derivative liabilities | |
| - | | |
| 3,041,905 | |
Provision for doubtful accounts | |
| - | | |
| (2,465 | ) |
Amortization of debt issuance costs | |
| - | | |
| 40,549 | |
Gain on sale of fixed assets | |
| - | | |
| (3,892 | ) |
Changes in operating assets and liabilities: | |
| | | |
| | |
Restricted cash | |
| - | | |
| 1,213,424 | |
Accounts receivable | |
| (1,837,261 | ) | |
| (507,627 | ) |
Costs and estimated earnings in excess of billings on uncompleted contracts | |
| (169,500 | ) | |
| (160,805 | ) |
Deferred contract costs | |
| (53,538 | ) | |
| 38,001 | |
Current assets held for sale | |
| 1,028,874 | | |
| (1,477,022 | ) |
Prepaid expenses and other current assets | |
| (60,539 | ) | |
| (99,851 | ) |
Other assets | |
| 15,825 | | |
| (22,751 | ) |
Other assets held for sale | |
| 179,591 | | |
| 83,887 | |
Income taxes payable | |
| (21,124 | ) | |
| 19,342 | |
Accounts payable and accrued expenses | |
| 2,011,957 | | |
| 342,451 | |
Current liabilities held for sale | |
| (470,668 | ) | |
| 974,020 | |
Accrued severance expense | |
| (1,218,750 | ) | |
| 1,462,500 | |
Billings in excess of costs and estimated earnings on uncompleted contracts | |
| (182,441 | ) | |
| (155,594 | ) |
Deferred revenue | |
| - | | |
| 162,930 | |
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | |
| (628,490 | ) | |
| 332,136 | |
| |
| | | |
| | |
INVESTING ACTIVITIES: | |
| | | |
| | |
Acquisition of property and equipment, net | |
| (159,384 | ) | |
| - | |
Addition on acquisition of BTX software | |
| (833 | ) | |
| - | |
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES | |
| (160,217 | ) | |
| - | |
| |
| | | |
| | |
FINANCING ACTIVITIES: | |
| | | |
| | |
Borrowings (repayments) under loans payable, net | |
| 10,559 | | |
| (14,791 | ) |
Repayments under other payable | |
| - | | |
| (157,000 | ) |
Dividend paid on preferred stock | |
| (72,034 | ) | |
| - | |
NET CASH USED IN FINANCING ACTIVITIES | |
| (61,475 | ) | |
| (171,791 | ) |
| |
| | | |
| | |
Effect of exchange rate changes on cash | |
| (7,939 | ) | |
| (59,063 | ) |
| |
| | | |
| | |
NET DECREASE IN CASH AND CASH EQUIVALENTS | |
| (858,121 | ) | |
| 101,282 | |
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD | |
| 2,177,070 | | |
| 1,410,223 | |
CASH AND CASH EQUIVALENTS, END OF THE PERIOD | |
$ | 1,318,949 | | |
$ | 1,511,505 | |
| |
| | | |
| | |
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | |
| | | |
| | |
Declaration on preferred dividend payable | |
$ | 74,487 | | |
$ | - | |
Settlement of severance obligation and sale of Australia | |
$ | 970,000 | | |
$ | - | |
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND LIQUIDITY
Basis of Presentation and Recent
Developments
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), WPCS International - Portland, Inc. (Portland Operations) and BTX Trader,
LLC (BTX). International operations include WPCS Asia Limited, 60% of Taian AGS Pipeline Construction Co. Ltd. (China Operations),
WPCS Australia Pty Ltd. and WPCS International - Brendale, Pty Ltd. (collectively, Australia Operations).
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, 2014 included in the Company’s
Annual Report on Form 10-K, filed on July 30, 2014. 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 months ended July 31, 2014 are not necessarily indicative of the results
that may be expected for the fiscal year ending April 30, 2015. The amounts for the April 30, 2014 consolidated balance sheet
have been extracted from the audited consolidated financial statements included in Form 10-K for the year ended April 30,
2014. All material intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications associated
with the discontinued operations of Seattle and Australia have been made to the prior periods financial information in
order to conform to the current period’s presentation. The reclassifications had no impact on previously reported net
loss or stockholders’ equity.
The Company specializes in contracting
services for communications infrastructure and the development of a digital currency trading platform.
Recent Developments
Australia
On July 30, 2014, the Company entered into
a waiver agreement (the “Waiver”) with holders (“Holders”) of a majority of the outstanding senior secured
convertible notes (“Notes”) and warrants that were sold pursuant to a securities purchase agreement dated December
4, 2012 (Purchase Agreement). The Notes are secured by a first priority lien on the assets of the Company and subsidiaries pursuant
to a security and pledge agreement (the “Security Agreement”) dated December 4, 2012 by the Company and subsidiaries
in favor of Worldwide Stock Transfer LLC (the “Collateral Agent”), in its capacity as collateral agent for the Holders.
As a result of the Waiver, the Collateral Agent released the stock of The Pride Group (QLD) Pty Ltd. (“Pride”), a wholly-owned
subsidiary of the Company, from collateral pursuant to the Security Agreement.
On July 31, 2014 (the “Closing Date”),
the Company completed the sale of Pride to Turquino Equity LLC, a limited liability company (“Turquino”), whose managing
member is Andrew Hidalgo (“Hidalgo”), former Chairman and Chief Executive Officer of the Company. The closing of the
sale was pursuant to the Securities Purchase Agreement, dated September 19, 2013, by and between WPCS Australia Pty Ltd (“WPCS
Australia”), a wholly-owned subsidiary of the Company, and Turquino (the “Agreement”).
Pursuant to the Agreement, WPCS Australia
agreed to sell 100% of the shares of Pride to Turquino for $1,400,000 (“Purchase Price”), which Purchase Price was
subject to adjustment based on the net tangible asset value (“NTAV”) of Pride on the Closing Date. In the event that
the NTAV was less than AUD$1.4 million on the Closing Date, WPCS Australia was required to pay Turquino an amount equal to the
shortfall between the NTAV as of the Closing Date and AUD$1.4 million. At the closing, the Purchase Price was to be settled by
applying the net after tax severance balance due Hidalgo under his separation agreement, dated July 24, 2013 by and between Hidalgo
and the Company (the “Severance Agreement”), as payment towards the Purchase Price.
Pursuant to a letter agreement, dated July
31, 2014, by and between WPCS Australia and Turquino (the “Letter Agreement”), the parties agreed that the NTAV of
Pride on the Closing Date was $970,000. By the Letter Agreement, Hidalgo agreed to reduce the total severance owed to him under
the Severance Agreement by $168,000, which reduced the total severance due Hidalgo to $970,000, the NTAV of Pride on the Closing
Date. As a result, the Company was not required to make any further payment to Hidalgo pursuant to the Severance Agreement.
WPCS International - Seattle, Inc.
On August 15, 2014, the Company reconvened
a special meeting of stockholders, at which the Company’s stockholders approved the proposal to approve the sale of substantially
all of the assets of the Seattle Operations. The closing of the transaction is subject to completion of other closing conditions,
including obtaining the consent from the Holders to release the assets of the Seattle Operations from the Security Agreement.
NASDAQ Listing Requirements
On September 3, 2014, the Company received
a letter from the Staff of the Listing Qualifications Department of The NASDAQ Stock Market LLC (“NASDAQ”) informing
the Company that the Company regained compliance with NASDAQ Listing Rule 5550(a)(2) as for the prior 10 consecutive business days,
the closing bid price of the Company’s common stock was $1.00 per share or greater.
Liquidity and Going Concern
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. For the three months ended July 31, 2014, the Company
incurred losses from continuing operations of $3,234,000 and had a condensed consolidated net loss of $2,312,000. At July 31, 2014,
the Company had a working capital deficiency of approximately $1,509,000, which consisted of current assets of approximately $16,017,000
and current liabilities of $17,526,000. These factors raise substantial doubt about the Company’s ability to continue as
a going concern. The financial statements do not include any adjustments to the carrying amount and classification of recorded
assets and liabilities should the Company be unable to continue operations. Management’s plans are to continue to raise additional
funds through the sales of debt or equity securities or sales of assets. There is no assurance that additional financing will be
available when needed or that management will be able to obtain financing on terms acceptable to the Company and whether the Company
will become profitable and generate positive operating cash flow. If the Company is unable to raise sufficient additional funds,
it will have to develop and implement a plan to further extend payables and reduce overhead until sufficient additional capital
is raised to support further operations. There can be no assurance that such a plan will be successful.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
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, realization of deferred tax
assets, capitalization of software costs, and valuation of equity instruments. Actual results could differ from these 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. The Company determines its allowance by considering a number of factors, including the length of time trade accounts
receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company,
and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Included
in the accounts receivable is retainage receivable of $1,073,000 and $635,000 at July 31, 2014 and April 30, 2014, respectively,
such amounts are anticipated to be collected within the next fiscal year.
Approximately $4,259,000 of account receivables
are associated with our China Operations, of which approximately $178,000 is aged longer than one (1) year, and it is expected
that the remaining balance will be collected between six (6) to twelve (12) months.
Revenue Recognition
The Company generates its revenue by offering
low voltage communications infrastructure contracting services. The Company’s contracting services report revenue pursuant
to customer contracts that span varying periods of time. The Company reports revenue from contracts when persuasive evidence of
an arrangement exists, fees are fixed or determinable, and collection is reasonably assured.
The Company records 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.
The Company has 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.
The length of the Company’s contracts
varies but is typically between three months and two years. Assets and liabilities related to long-term contracts are included
in current assets and current liabilities in the accompanying consolidated balance sheets as they will be liquidated in the normal
course of contract completion, although this may require more than one year.
The Company records revenue and profit
from short-term contracts for the 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 deferred contract
costs are accumulated on the consolidated balance sheets as deferred contract costs, but no revenue or income is recorded before
completion or substantial completion of the work. The Company’s decision is based on the short-term nature of the work performed.
Deferred contract costs include equipment lease deposits to the third party vendors of approximately $766,000 and $748,000 as of
July 31, 2014 and April 30, 2014, respectively.
The Company also recognizes certain revenue
from short-term contracts when the services have been provided to the customer. For maintenance contracts, revenue is recognized
ratably over the service period.
Recently Issued Accounting Pronouncements
The Company does not believe that any recently
issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial
statements.
Significant Accounting Policies
There have been no material changes in
the Company’s significant accounting policies to those previously disclosed in the 2014 Annual Report.
NOTE 3 - BASIC AND DILUTED NET LOSS
PER COMMON SHARE
Basic and diluted net loss per common share
from continuing operations is computed as net loss from continuing operations less noncontrolling interest and dividends on preferred
stock, divided by the weighted average number of common shares outstanding for the period. Diluted net loss per common share reflects
the potential dilution that could occur from common stock issuable through exercise of stock options, warrants and Note conversions.
The following were excluded from the computation
of diluted shares outstanding due to the losses from continuing operations for the three months ended July 31, 2014 and 2013, as
they would have had an anti-dilutive impact on the Company’s net loss. Below is a tabulation
of the potentially dilutive securities that were “in the money” for the three months ended July 31, 2014 and
2013, respectively.
| |
Three months ended | |
| |
July 31, | |
| |
2014 | | |
2013 | |
Common stock equivalents: | |
| | | |
| | |
Stock options | |
| 79,207 | | |
| 116,279 | |
Series E preferred stock | |
| 696,571 | * | |
| - | |
Senior secured convertible notes | |
| 36,166,907 | * | (1) |
| 1,581,355 | |
Stock warrants | |
| 3,774,796 | * | |
| 2,274,796 | |
| |
| | | |
| | |
Totals | |
| 40,717,481 | | |
| 3,972,430 | |
* These diluted shares are non-exercisable/convertible until
there are enough authorized shares.
(1) The Company and the Holders
are currently reviewing the Notes and are seeking to resolve the number of shares of the Company’s common stock the Make-Whole
Amount would be convertible into.
NOTE 4 – CAPITALIZED SOFTWARE
The Company’s intangible assets with
finite lives consist of its capitalized BTX software costs, with estimated remaining economic useful lives of 3 years. For
all periods presented, the Company’s identifiable intangible assets were subject to amortization. The gross carrying amounts
and accumulated amortization related to the acquired intangible assets as of July 31, 2014 are as follows:
Capitalized Software at April 30, 2014, net | |
$ | 3,207,305 | |
Additions acquired | |
| 833 | |
Less: amortization expense | |
| 267,345 | |
Capitalized Software at July 31, 2014, net | |
$ | 2,940,793 | |
The Company incurred amortization
expense associated with its finite-lived intangible assets of $267,000 and $0 for the three months ended July 31, 2014 and 2013,
respectively.
The remaining amortization
period of the Company’s capitalized software is approximately 2.75 years. Future amortization of all capitalized software
is as follows:
| |
BTX Capitalized Software | |
Nine Months Ended April 30, 2015 | |
$ | 802,035 | |
Year Ended April 30, 2016 | |
| 1,069,379 | |
Year Ended April 30, 2017 | |
| 1,069,379 | |
Total | |
$ | 2,940,793 | |
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The asset, “Costs and estimated earnings
in excess of billings on uncompleted contracts”, represents revenue recognized in excess of amounts billed. The liability,
“Billings in excess of costs and estimated earnings on uncompleted contracts”, represents billings in excess of revenue
recognized. Costs and estimated earnings on uncompleted contracts consist of the following at July 31, 2014 and April 30, 2014:
| |
July 31, 2014 | | |
April 30, 2014 | |
| |
| | |
| |
Costs incurred on uncompleted contracts | |
$ | 17,822,248 | | |
$ | 14,457,907 | |
Estimated contract earnings | |
| 4,060,106 | | |
| 3,291,077 | |
| |
| 21,882,354 | | |
| 17,748,984 | |
Less: Billings to date | |
| 22,528,858 | | |
| 18,766,199 | |
Total | |
$ | (646,504 | ) | |
$ | (1,017,215 | ) |
| |
July 31, 2014 | | |
April 30, 2014 | |
| |
| | |
| |
Costs and estimated earnings in excess of billings on uncompleted contracts | |
$ | 567,186 | | |
$ | 431,348 | |
Billings in excess of cost and estimated earnings on uncompleted contracts | |
| 1,213,690 | | |
| 1,448,563 | |
Total | |
$ | (646,504 | ) | |
$ | (1,017,215 | ) |
Revisions in the estimated gross profits
on contracts and contract amounts are made in the period in which circumstances requiring the revisions become known. This increase
in gross profit is primarily the result of change orders received of approximately $1,641,000 from the Cooper Project, for costs
that were incurred in the prior fiscal year. Although management believes it has established adequate procedures for estimating
costs to complete on open contracts, it is at least reasonably possible that additional significant costs could occur on contracts
prior to completion.
Although management believes it has established
adequate procedures for estimating costs to complete open contracts, additional costs could occur on contracts prior to completion.
NOTE 6 – SENIOR SECURED CONVERTIBLE NOTES
Initial Proceeds from Issuance
On December 4, 2012, the Company entered
into a Securities Purchase Agreement with the Holders, pursuant to which, the Company sold an aggregate of (i) $4,000,000 principal
amount of Notes and (ii) warrants (the Warrants) to purchase 2,275,000 shares of the Company’s common stock, to the Holders
for aggregate gross proceeds of $4,000,000 (the Financing). In connection with the Financing, (i) the Company entered into a registration
rights agreement with the Holders (the Registration Rights Agreement), (ii) the Company and its subsidiaries entered into the Security
Agreement, and (iii) subsidiaries of the Company entered into a guaranty in favor of the Collateral Agent for the Holders (the
Guaranty). The Closing Date of the Financing was December 5, 2012.
Pursuant to the terms of the Notes, the
Company deposited the initial funds received from the Financing, minus $2,179,000 (Initial Lending Amount), which went into the
Lockbox Account controlled by the Collateral Agent, as collateral agent on behalf of the Holders. The Company used the Initial
Lending Amount to repay the existing loan of $2,000,000, plus $79,000 of interest accrued and fees and expenses to Sovereign Bank,
N.A., which credit agreement was terminated in connection with the Notes, and $100,000 for Holder legal fees in connection with
the Notes. The Notes contain certain customary representations and warranties, affirmative and negative covenants, and events of
default. The principal financial covenant is that the Company 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 July 31, 2014, the Company is in compliance with the financial covenants.
Amendment, Waiver and Exchange Agreement
On October 25, 2013, the Company entered
into an Amendment, Waiver and Exchange Agreement (Amendment) with the Holders that amended the conversion features of the Warrants
and Notes. Pursuant to the Amendment, the Holders exchanged 155,000 of their Warrants for 39,000 shares of common stock (the Shares)
and warrants to purchase 155,000 shares of common stock (Exchange Warrants). Effectively, for every four Warrants surrendered,
the Holder received a unit of four Exchange Warrants and one share of common stock. 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 of common stock 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 $2.15 per share. The exercise
price will only adjust in the event of any future stock splits or dividends.
Pursuant to the Amendment, the Holders
permanently waived, effective as of October 24, 2013, various provisions of the remaining 2,120,000 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 Warrants remains at $2.15 per share. The Amendment resulted in
2,120,000 Warrants and 155,000 Exchange Warrants having the same terms, conditions and rights.
Further, the Holders agreed to waive any
defaults through February 28, 2014 relating to the failure of the Company to have enough authorized shares of common stock available
for issuance upon conversion of the Notes and/or exercise of the Warrants.
Amendment to Notes
Effective October 31, 2013, the Company
entered into an amendment agreement (the Note Amendment) with the Holders. The Note Amendment eliminated certain features of the
Notes which would otherwise result in substantial accounting charges to the Company. Pursuant to the Note Amendment, the Holders
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 Holders waived certain events
of default that had occurred under the Notes as more fully described as follows. Pursuant to the terms of the Notes, an event of
default occurs when the Company’s common stock is suspended or threatened with suspension from trading on The NASDAQ Capital
Market (or an equivalent market). On October 7, 2013, the Company received a notice from the Staff of the Listing Qualifications
Department of The NASDAQ Stock Market LLC (NASDAQ) indicating that the Company’s common stock would be subject to delisting
from The NASDAQ Capital Market on October 16, 2013 due to the Company’s non-compliance with the applicable $2.5 million stockholders’
equity requirement, as set forth in Listing Rule 5550(b) (1). As a result of the notice from NASDAQ, an event of default occurred
under the Notes, which was waived by the Holders pursuant to the Note Amendment.
Prior to the Note Amendment, if an event
of default existed under the Notes, the Holders would have been entitled to redeem $3,400,000 in aggregate principal and interest
of the Notes for a make-whole amount 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 make-whole amount 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 (“Make-Whole 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 make-whole
amount was approximately $10,900,000 at the time of the Note Amendment. As a result of Note conversions during the current fiscal
year, the value of the event of default make-whole amount was approximately $2,800,000 as of April 30, 2014. No Holder has exercised
its right of redemption as a result of the events of default discussed above. 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, the Company determined that the Notes were extinguished and new Notes were issued. In connection with this modification,
the Company compared the present value of the beneficial conversion features of the Notes to the new Notes. The Company 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 $1,299,000. In addition, the Company recorded a new beneficial conversion feature and associated debt discount
of $3,400,000 related to the proceeds of the new Notes based on the fixed conversion rate of $0.20 and the fair market value of
the common stock at the amendment date.
Prior to the Note Amendment, $594,000 of
Notes was converted into 276,000 shares of the Company’s common stock. In addition, $6,000 of Notes was redeemed for cash
at the request of a Holder.
During the year ended April 30, 2014, $2,502,000
of Notes was converted into 12,508,000 shares of the Company’s Common Stock, resulting in the accelerated write-off of unamortized
debt discount of $2,502,000 and included in interest expense. In addition, $19,000 of accrued interest on Notes was converted into
96,000 shares of the Company’s common stock.
In connection with the Amendment, the Company
reserved an aggregate of 12,867,000 shares of common stock for issuance in connection with the conversion of the Notes, Warrants,
and/or Exchange Warrants of the Holders (the Share Reserve Allocation). As of April 30, 2014, the Holders have converted Notes
up to the Share Reserve Allocation. Until such time as the Company has increased its number of authorized shares, pursuant to stockholder
approval, merger or otherwise, the Company shall not be required to reserve more than the Share Reserve Allocation, and the Holders
shall not be entitled to convert and/or exercise, as applicable, the Note, the Warrants, and/or the Exchange Warrants, since they
have already converted Notes up to the Share Reserve Allocation.
For the three months period ended July
31, 2014, the Company recorded $853,000 amortization of debt discount on the Notes.
Following the Note Amendment, the Notes consisted of the following
as of July 31, 2014:
| |
Notes | | |
Debt Discount | | |
Total | |
Beginning balance as of April 30, 2014 - Senior secured convertible notes, interest at 4% per annum to maturity June 5, 2014 | |
| 898,334 | | |
| (853,431 | ) | |
| 44,903 | |
Amortization of debt discount, Notes | |
| - | | |
| 853,431 | | |
| 853,431 | |
July 31, 2014 | |
$ | 898,334 | | |
$ | - | | |
$ | 898,334 | |
Events of Default under the 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) (“Event of Default”). As a result of the separate notices received by the Company from
NASDAQ as described above, as well as the Company’s failure to obtain an increase in authorized common stock
by February 28, 2014, Events of Default occurred under the Notes.
As a result of each of the Events of Default,
the Holders have the right to require the Company 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. Currently, the principal amount of Notes outstanding is $898,000
and the interest rate on the Notes was increased to 25% per annum effective March 1, 2014.
During
August 2014, Holders requested that the make-whole amounts be redeemed. As of a result of this request and the Event
of Default under the Notes, the Company recorded an addition $1,890,000 liability relating to the present value of
the make-whole amount with an offsetting amount to interest expense as of July 31, 2014. If the Holders elects to convert
(only after there are enough authorized shares) the make-whole amounts and principal payments, the Company will issue
36,166,907 shares of common stock. The Company and the Holders
are currently reviewing the Notes and are seeking to resolve the number of shares of the Company’s common stock the Make-Whole
Amount would be convertible into.
Registration Rights of the Shares
Issuable Upon Conversion of the Notes
The Company agreed to file a
registration statement with the SEC, within 30 days following receipt of a request from a Holder (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 Holders, and have such registration statement declared effective by the SEC within 90 days
thereafter. The Company also agreed to notify the Holders if the Company at any time proposes to register any of its
securities under the Securities Act of 1933, as amended, and of such Holders right to participate in such registration.
In connection with the conversion described above, no request has been received from a Holder to register such shares.
If the Company fails to comply with
the registration statement filing, effective date or maintenance date filing requirements, it is 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 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 New Notes on the Closing Date. The
Company accounts for such Registration Delay Payments as contingent liabilities. Accordingly, the Company recognizes such
damages when it becomes probable that they will be incurred and amounts are reasonably estimable. No Holders have submitted a
request for a registration statement as of the date of this filing.
Holders Security Interests and Guarantees
Pursuant to the Guaranty, subsidiaries
of the Company guaranteed to the collateral agent, for the benefit of the Holders, the punctual payment, as and when due and payable,
of all amounts owed by the Company 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, the
Company and its subsidiaries granted, in favor of the collateral agent for the Holders, a continuing security interest in all personal
property and assets of the Company and its subsidiaries, as collateral security for the obligations of the Company and its subsidiaries
under the Purchase Agreement, the Notes, the Guaranty and the other transaction documents.
In connection with the BTX purchase agreement,
the Company agreed to waive any rights to compel the redemption of the Notes. The Holders agreed to restrict their ability to convert
the Notes and/or exercise the Warrants and Exchange Warrants and receive shares of the Company’s common stock such that the
number of shares of common stock held by the Holder in the aggregate and its affiliates after such conversion or exercise does
not exceed 9.99% of the then issued and outstanding shares of the Company’s common stock.
NOTE 7 – OTHER DEBT
Short-Term Bank Loan
China Operations has a short-term bank
loan of $3,195,000 with the Bank of China (the Short-Term Bank Loan) with an interest rate of 7.38% due quarterly. The Short-Term
Bank Loan matured on August 1, 2014, and is secured by the assets of TGG. The Company has entered into a new agreement to extend
the maturity dated for another year.
Due Related Party
As of July 31, 2014, the China Operations
had outstanding payables due to a related party, TGG, totaling $790,000 due on demand, representing interest accrued on former
working capital loans from TGG to the China Operations.
Loans Payable and Secured Promissory
Note
The Company’s long-term debt also
consists of notes issued by the Company or assumed in acquisitions related to the purchase of property and equipment in the ordinary
course of business. A summary table of loans payable and secured promissory note is as follows:
| |
Principal | | |
Interest | | |
Due Date |
Loans payable | |
$ | 61,227 | | |
| 0-9 | % | |
Various through |
Secured promissory note | |
$ | 500,000 | | |
| 3-9 | % | |
2017 |
NOTE 8 - NONCONTROLLING INTEREST
The Company presents the 40% non-controlling
interests associated with the China Operations as a component of equity, with changes in the Company’s ownership interest
while it retains its controlling interest will be accounted for as an equity transaction, and upon a loss of control, retained
ownership interest will be re-measured at fair value, with any gain or loss recognized in earnings. Income and losses attributable
to the noncontrolling interests associated with the China Operations are presented separately in the Company’s financial
statements.
Noncontrolling interest as of July 31,
2014 consists of the following:
| |
July 31, 2014 | |
Balance, beginning of period | |
$ | 846,205 | |
| |
| | |
Net (loss) income attributable to noncontrolling interest | |
| (49,020 | ) |
| |
| | |
Other comprehensive income (loss) attributable to noncontrolling interest | |
| 4,615 | |
| |
| | |
Balance, end of period | |
$ | 801,800 | |
NOTE 9 - RELATED PARTY TRANSACTIONS
The China Operations earned revenue for
contracting services provided to TGG (noncontrolling interest in China Operations) and subsidiaries of $706,000 for the three months
ended July 31, 2014. The China Operations accounts receivable due from TGG and subsidiaries was $0 and $0 as of July
31, 2014 and April 30, 2014, respectively.
NOTE 10 - SEGMENT REPORTING
The Company's reportable segments are determined
and reviewed by management based upon the nature of the services, the external customers and customer industries and the sales
and distribution methods used to market the products. Management evaluates performance based upon income (loss) before income taxes.
Corporate includes corporate salaries and external professional fees, such as accounting, legal and investor relations costs which
are not allocated to the other segments. Corporate assets primarily include cash and cash equivalents and prepaid expenses.
As part of the acquisition of the BTX Software
and the expected addition of a related new line of business, we have reorganized the operating segments to correspond to the primary
service lines: communications infrastructure contracting services and virtual currency trading platform. Accordingly, the Company
has reclassified the reporting of its segment results under these two reporting segments in this Form 10-Q for the three months
ended July 31, 2014 and 2013.
The segment information presented below
contains the operating results for the continuing operations only. Segment results for the three months ended July 31, 2014 and 2013 are as follows:
| |
For the three months ended July 31, 2014 | |
| |
| | |
Contracting | | |
| | |
| |
| |
Corporate | | |
Services | | |
Virtual Currencies | | |
Total | |
| |
| | |
| | |
| | |
| |
Revenue | |
$ | - | | |
$ | 6,770,792 | | |
$ | 92 | | |
$ | 6,770,884 | |
| |
| | | |
| | | |
| | | |
| | |
Depreciation and amortization | |
$ | 289 | | |
$ | 173,681 | | |
$ | 268,575 | | |
$ | 442,545 | |
| |
| | | |
| | | |
| | | |
| | |
(Loss) income before income taxes from continuing operations | |
$ | (3,332,418 | ) | |
$ | 562,367 | | |
$ | (464,424 | ) | |
$ | (3,234,475 | ) |
| |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 4,617,498 | | |
$ | 9,559,977 | | |
$ | 3,480,151 | | |
$ | 17,657,626 | |
| |
| | | |
| | | |
| | | |
| | |
Additions of property and equipment | |
$ | - | | |
$ | 159,384 | | |
$ | - | | |
$ | 159,384 | |
| |
For the three months ended July 31, 2013 | |
| |
| | |
Contracting | | |
| | |
| |
| |
Corporate | | |
Services | | |
Virtual Currencies | | |
Total | |
| |
| | |
| | |
| | |
| |
Revenue | |
$ | - | | |
$ | 4,255,743 | | |
$ | - | | |
$ | 4,255,743 | |
| |
| | | |
| | | |
| | | |
| | |
Depreciation and amortization | |
$ | 4,073 | | |
$ | 196,275 | | |
$ | - | | |
$ | 200,348 | |
| |
| | | |
| | | |
| | | |
| | |
(Loss) income before income taxes from continuing operations | |
$ | (6,449,940 | ) | |
$ | 262,813 | | |
$ | - | | |
$ | (6,187,127 | ) |
| |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 1,148,571 | | |
$ | 12,451,479 | | |
$ | - | | |
$ | 13,600,050 | |
| |
| | | |
| | | |
| | | |
| | |
Additions of property and equipment | |
$ | - | | |
$ | 91,384 | | |
$ | - | | |
$ | 91,384 | |
As of and for the three months ended July 31, 2014 and
2013, the contracting services segment includes approximately $706,000 (10.4%) and $873,000 (20.5%), respectively in revenue
and approximately $6,125,195 at July 31, 2014 of total assets held in China related to the Company 60% interest in the
China Operations.
NOTE 11 - DISCONTINUED OPERATIONS
Australia Operations
On July 30, 2014, the Company entered into
the Waiver with the Holder of a majority of the Notes and Warrants. The Notes are secured by a first priority lien on the assets
of the Company and subsidiaries pursuant to the Security Agreement by the Company and subsidiaries in favor of the Collateral Agent.
As a result of the Waiver, the Collateral Agent released the stock of Pride from collateral pursuant to the Security Agreement.
On the Closing Date, the Company completed
the sale of Pride to Turquino, whose managing member is Hidalgo, former Chairman and Chief Executive Officer of the Company. The
closing of the sale was pursuant to the Agreement.
Pursuant to the Agreement, WPCS Australia
agreed to sell 100% of the shares of Pride to Turquino for the Purchase Price, which Purchase Price was subject to adjustment based
on the NTAV of Pride on the Closing Date. In the event that the NTAV was less than AUD$1.4 million on the Closing Date, WPCS Australia
was required to pay Turquino an amount equal to the shortfall between the NTAV as of the Closing Date and AUD$1.4 million. At the
closing, the Purchase Price was to be settled by applying the net after tax severance balance due Hidalgo under the Severance Agreement,
as payment towards the Purchase Price.
Pursuant to the Letter Agreement, the parties
agreed that the NTAV of Pride on the Closing Date was $970,000. By the Letter Agreement, Hidalgo agreed to
reduce the total severance owed to him under the Severance Agreement by $168,000, which reduced the total severance due Hidalgo
to $970,000, the NTAV of Pride on the Closing Date. As a result, the Company was not required to make any further payment to Hidalgo
pursuant to the Severance Agreement.
The gain on sale of Australia is as follows:
Purchase price | |
$ | 970,010 | |
| |
| | |
Net assets before accumulative other comprehensive income | |
| 1,037,833 | |
Accumulative other comprehensive income | |
| (866,719 | ) |
| |
| | |
Gain on sale of Australia | |
$ | 798,896 | |
WPCS International - Seattle, Inc.
On August 15, 2014, the Company
reconvened a special meeting of stockholders, at which the Company’s stockholders approved the proposal to approve the
sale of substantially all of the assets of the Seattle Operations.
The Company has reported the financial
activity of these two operations as discontinued operations for all periods presented. The following is a summary of the operating
results for the discontinued operations is as follows:
| |
Three months ended | |
| |
July 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
REVENUE | |
$ | 3,270,074 | | |
$ | 5,456,345 | |
| |
| | | |
| | |
COSTS AND EXPENSES: | |
| | | |
| | |
Cost of revenue | |
| 2,330,901 | | |
| 3,994,779 | |
Selling, general and administrative expenses | |
| 739,423 | | |
| 1,032,679 | |
Depreciation and amortization | |
| 49,884 | | |
| 91,141 | |
| |
| 3,120,208 | | |
| 5,118,599 | |
| |
| | | |
| | |
OPERATING INCOME FROM DISCONTINUED OPERATIONS | |
| 149,866 | | |
| 337,746 | |
| |
| | | |
| | |
Interest expense | |
| 1,005 | | |
| 564 | |
Interest income | |
| - | | |
| (2,770 | ) |
| |
| | | |
| | |
Income from discontinued operations | |
| 148,861 | | |
| 339,952 | |
| |
| | | |
| | |
Gain on sale of Australia | |
| 798,896 | | |
| - | |
| |
| | | |
| | |
TOTAL INCOME FROM DISCONTINUED OPERATIONS | |
$ | 947,757 | | |
$ | 339,952 | |
The following table summarizes the assets and liabilities held
for sale for the Seattle operations as of July 31, 2014 and April 30, 2014:
| |
July 31, 2014 | | |
April 30, 2014 | |
ASSETS | |
| | | |
| | |
| |
| | | |
| | |
CURRENT ASSETS: | |
| | | |
| | |
| |
| | | |
| | |
Accounts receivable, net of allowance | |
$ | 2,651,576 | | |
$ | 3,351,881 | |
Costs and estimated earnings in excess of billings on uncompleted contracts | |
| 318,215 | | |
| 616,858 | |
Prepaid expenses and other current assets | |
| 3,147 | | |
| 33,073 | |
Total current assets held for sale | |
| 2,972,938 | | |
| 4,001,812 | |
| |
| | | |
| | |
PROPERTY AND EQUIPMENT, net | |
| 179,339 | | |
| 342,884 | |
| |
| | | |
| | |
OTHER ASSETS | |
| 14,000 | | |
| 30,046 | |
Total other assets held for sale | |
| 193,339 | | |
| 372,930 | |
| |
| | | |
| | |
Total assets held for sale | |
$ | 3,166,277 | | |
$ | 4,374,742 | |
| |
| | | |
| | |
LIABILITIES | |
| | | |
| | |
Current portion of loans payable | |
$ | 27,218 | | |
$ | 26,921 | |
Accounts payable and accrued expenses | |
| 867,900 | | |
| 1,425,586 | |
Billings in excess of costs and estimated earnings on uncompleted contracts | |
| 438,727 | | |
| 345,108 | |
Total current liabilities held for sale | |
| 1,333,845 | | |
| 1,797,615 | |
| |
| | | |
| | |
Loans payable, net of current portion | |
| 81,506 | | |
| 88,404 | |
Total liabilities | |
$ | 1,415,351 | | |
$ | 1,886,019 | |
NOTE 12 - SUBSEQUENT EVENT
The Company evaluated all events or transaction
that occurred after July 31, 2014 up through date the Company issued these financial statements.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 developed a digital currency trading
platform for the trading of digital currencies.
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 three months
ended July 31, 2014, we generated revenues from continuing operations of approximately $6.8 million, compared to $4.3 million for
the three months ended July 31, 2013. Our backlog at July 31, 2014 was approximately $19.8 million.
Results of Operations for the Three Months Ended July 31,
2014 Compared to the Three Months Ended July 31, 2013
Consolidated results for the three months
ended July 31, 2014 and 2013 were as follows.
| |
Three months ended | |
| |
July 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
REVENUE | |
$ | 6,770,884 | | |
| 100.0 | % | |
$ | 4,255,743 | | |
| 100.0 | % |
| |
| | | |
| | | |
| | | |
| | |
COSTS AND EXPENSES: | |
| | | |
| | | |
| | | |
| | |
Cost of revenue | |
| 5,293,104 | | |
| 78.2 | % | |
| 3,154,715 | | |
| 74.1 | % |
Selling, general and administrative expenses | |
| 1,360,814 | | |
| 20.1 | % | |
| 1,412,132 | | |
| 33.2 | % |
Severance expense | |
| - | | |
| 0.0 | % | |
| 1,474,277 | | |
| 34.6 | % |
Depreciation and amortization | |
| 442,545 | | |
| 6.5 | % | |
| 200,348 | | |
| 4.7 | % |
Total costs and expenses | |
| 7,096,463 | | |
| 104.8 | % | |
| 6,241,472 | | |
| 146.7 | % |
| |
| | | |
| | | |
| | | |
| | |
OPERATING LOSS | |
| (325,579 | ) | |
| -4.8 | % | |
| (1,985,729 | ) | |
| -46.7 | % |
| |
| | | |
| | | |
| | | |
| | |
OTHER EXPENSE (INCOME): | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| 2,901,396 | | |
| 42.9 | % | |
| 1,159,493 | | |
| 27.2 | % |
Change in fair value of derivative liabilities | |
| - | | |
| - | | |
| 3,041,905 | | |
| 71.5 | % |
Other expenses | |
| 7,500 | | |
| 0.1 | % | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations before income tax provision | |
| (3,234,475 | ) | |
| -47.8 | % | |
| (6,187,127 | ) | |
| -145.4 | % |
| |
| | | |
| | | |
| | | |
| | |
Income tax provision | |
| - | | |
| 0.0 | % | |
| 24,151 | | |
| 0.6 | % |
| |
| | | |
| | | |
| | | |
| | |
LOSS FROM CONTINUING OPERATIONS | |
| (3,234,475 | ) | |
| -47.8 | % | |
| (6,211,278 | ) | |
| -146.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Discontinued operations: | |
| | | |
| | | |
| | | |
| | |
Income from discontinued operations | |
| 148,861 | | |
| 2.2 | % | |
| 339,952 | | |
| 8.0 | % |
Gain on sale of Australia | |
| 798,896 | | |
| 11.8 | % | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Income from discontinued operations, net of tax | |
| 947,757 | | |
| 14.0 | % | |
| 339,952 | | |
| 8.0 | % |
| |
| | | |
| | | |
| | | |
| | |
CONSOLIDATED NET LOSS | |
| (2,286,718 | ) | |
| -33.8 | % | |
| (5,871,326 | ) | |
| -138.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Net (loss) income attributable to noncontrolling interest | |
| (49,020 | ) | |
| -0.7 | % | |
| 21,744 | | |
| 0.5 | % |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS ATTRIBUTABLE TO WPCS | |
| (2,237,698 | ) | |
| -33.0 | % | |
| (5,893,070 | ) | |
| -138.5 | % |
| |
| | | |
| | | |
| | | |
| | |
Dividend declared on preferred stock | |
| (74,487 | ) | |
| -1.1 | % | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS ATTRIBUTABLE TO WPCS COMMON SHAREHOLDERS | |
$ | (2,312,185 | ) | |
| -34.1 | % | |
$ | (5,893,070 | ) | |
| -138.5 | % |
Revenue
Revenue for the
three months ended July 31, 2014 was approximately $6,771,000, as compared to approximately $4,256,000 for the three months
ended July 31, 2013. The increase in revenue was due primarily to an increase in revenue of the contracting services segment,
as a result of the significant increase in contracting services project revenue in our Suisun City Operations. There was
nominal revenue for the virtual currency trading platform segment. For the three months ended July 31, 2014, there was one
customer who comprised 45.4% of the consolidated total revenue. For the three months ended July 31, 2013, there were no
customers who comprised more than 10% of 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 $5,293,000, or 78.2% of revenue for the three months ended July 31, 2014, compared to $3,155,000,
or 74.1%, for the prior year. The increase in total cost of revenue was due to the increase 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.
Selling, General and Administrative Expenses
For the three
months ended July 31, 2014, total selling, general and administrative expenses were approximately $1,361,000 or 20.1%, of
total revenue. Included in selling, general and administrative expenses for the three months ended July 31, 2014 were
salaries, commissions, payroll taxes and other employee benefits incurred in the normal course of business of $468,000, which
was a $571,000 decrease compared to the prior year, due primarily to lower salaries from cost reduction strategies.
Professional fees were $602,000, which include on-going accounting, legal and investor relations fees. The increase in
professional fees related to increases in NASDAQ listing fees and printing cost, and consulting fees related to
Sebastian Giordano, our Interim Chief Executive Officer. Insurance costs were $80,000 and rent for office facilities
was $53,000. Automobile and other travel expenses were $123,000. For the three months ended July 31, 2014, total selling,
general and administrative expenses for the contracting services and Virtual Currency segments were approximately $728,000
and $192,000, respectively, with the balance of approximately $441,000 pertaining to general corporate expenses.
For the three
months ended July 31, 2013, total selling, general and administrative expenses were approximately $1,412,000, or 33.2%, of
total revenue. Included in selling, general and administrative expenses for the three months ended July 31, 2013 was
$1,039,000 for salaries, commissions, payroll taxes and other employee benefits. Professional fees were $353,000, which
include accounting, legal and investor relation fees. Insurance costs were $212,000 and rent for office facilities was
$89,000. Automobile and other travel expenses were $151,000. Other selling, general and administrative expenses totaled
$29,000. For the three months ended July 31, 2013, total selling, general and administrative expenses for the contracting
services segment was approximately $595,000 with the balance of approximately $817,000 pertaining to general corporate
expenses. The virtual currency segment did not exist for the three months ended July 31, 2013.
Depreciation and Amortization
For
the three months ended July 31, 2014 and 2013, depreciation and amortization was approximately $442,000 and $200,000, respectively.
The increase in depreciation and amortization is due to the acquisition of BTX software in 2014. The BTX software is considered
as capitalized software and we started to record the amortization cost during the three months ended July 31, 2014.
Interest Expense
For the three months
ended July 31, 2014 and 2013, interest expense was approximately $2,901,000 and $1,159,000, respectively. The increase in interest
expense is related to the acceleration of debt discount and make-whole provision due to the events of default on senior secured
convertible notes.
Income (Loss) From Discontinued Operations
As a result of
the execution of the agreement on September 19, 2013 for the divestiture of Pride, we have recorded the Australia Operations
financial results as discontinued operations. As a result of the execution of the purchase agreement on March 31, 2014 for
the divestiture of Seattle on March 31, 2014, we have recorded the Seattle Operations financial results as
discontinued operations. For the three months ended July 31, 2014, we recorded an income from discontinued operations of
approximately $948,000.
Liquidity and Capital Resources
At July 31, 2014,
we had a working capital deficiency of approximately $1,509,000, which consisted of current assets of approximately
$16,017,000 and current liabilities of $17,526,000. This compares to a working capital of approximately $1,111,000 at
April 30, 2014. The current liabilities as presented in the
unaudited condensed consolidated balance sheet at July 31, 2014 include approximately $301,000 of severance liability related
to the separation agreement with our former chief financial officer, accrued interest on senior secured convertible notes of
$1,890,000 and the $1,534,000 loss amounts due under the Zurich American Insurance Company (Zurich).
Our cash and cash equivalents
balance at July 31, 2014 was $1,319,000. 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 and other factors.
Operating
activities used approximately $629,000 in cash for the three months ended July 31, 2014. The net cash used in operating
activities was comprised of approximately $2,387,000 of net noncash charges, a $1,219,000 decrease in accrued severance
expense for the separation agreement with our former chief executive officer, a $2,012,000 increase in accounts payable and
accrued expenses, a $1,029,000 decrease in net assets held for sale, $54,000 increase in deferred contract costs and a
$182,000 decrease in billings in excess of costs and estimated earnings on uncompleted contracts, and a $16,000 decrease in
other assets.
Our investing activities
used cash of approximately $160,000, comprised of approximately $159,000 for acquiring property and equipment and $800 of additional
acquisition of BTX software.
Our financing activities
used in cash of approximately $61,000 for three months ended July 31, 2014, including approximately $72,000 of dividends paid on
Series E Preferred Stock, offset by approximately $11,000 of net borrowings under loan payable.
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 a forbearance agreement with Zurich; (3) the
forbearance or waiver of the Events of Default under the Notes; (4) the settlement of the claim with the Camden County
Improvement Authority for work at the Cooper Medical Center of Rowan University; 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 July 31, 2014, we had a backlog of unfilled orders of approximately $19.8 million compared to approximately $19.4 million at
April 30, 2014. 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.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements
other than operating lease commitments.
Critical Accounting Policies
Our discussion and analysis of our financial
condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. GAAP.
The preparation of these financial statements requires us to make estimates and judgments that affect our reported amounts of assets,
liabilities, revenues and expenses.
On an ongoing basis,
we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We based our
estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts
of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates.
Our critical accounting
policies and significant estimates are detailed in our Annual Report on Form 10-K for the year ended April 30, 2014. Our critical
accounting policies and significant estimates have not changed substantially from those previously disclosed in our Annual Report
on Form 10-K for the year ended April 30, 2014.
Recent Accounting Pronouncements
Management does not
believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect
on the accompanying financial statements.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not required
under Regulation S-K for “smaller reporting companies.”
ITEM 4 – CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls
and procedures.
Our management, with
the participation of our interim chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure
controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by
this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures
relative to their costs.
Based on our evaluation,
our interim chief executive officer and chief financial officer concluded that, as of July 31, 2014, our disclosure controls and
procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are
required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
(b) Changes in internal control over financial reporting.
There were no changes
in our internal control over financial reporting that occurred during the quarter ended July 31, 2014 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There has been no material
change in outstanding legal proceedings from the disclosure set forth in the Annual Report on Form 10-K for the year ended April
30, 2014.
ITEM 1A. RISK FACTORS
Not required under
Regulation S-K for “smaller reporting companies.”
ITEM 2. UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON
SENIOR SECURITIES
No disclosure required.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| 31.01 | Certification of Interim Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.02 | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
| 32.01 | Certifications of Interim Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS |
XBRL Instance Document |
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101.SCH |
XBRL Taxonomy Extension Schema Document |
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101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB |
XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document |
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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WPCS INTERNATIONAL INCORPORATED |
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Date: September 22, 2014 |
By: |
/s/ SEBASTIAN GIORDANO |
|
Sebastian Giordano |
|
Interim Chief Executive Officer (Principal Executive Officer) |
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|
Date: September 22, 2014 |
By: |
/s/ DAVID HORIN |
|
David Horin |
|
Chief Financial Officer (Principal Accounting Officer) |
EXHIBIT 31.01
CERTIFICATION
I, Sebastian Giordano, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of WPCS International Incorporated; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions): |
(a) All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal controls over financial reporting.
Date: September 22, 2014
/s/ SEBASTIAN GIORDANO |
|
Sebastian Giordano |
|
Interim Chief Executive Officer |
|
EXHIBIT 31.02
CERTIFICATION
I,
David Horin, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of WPCS International Incorporated; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions): |
(a) All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal controls over financial reporting.
Date: September 22, 2014
/s/ DAVID HORIN |
|
David Horin |
|
Chief Financial Officer |
|
Exhibit 32.01
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
I, Sebastian Giordano,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
the Quarterly Report of WPCS International Incorporated on Form 10-Q for the quarterly period ended July 31, 2014 fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in this
Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of WPCS
International Incorporated.
|
By: |
/s/ SEBASTIAN GIORDANO |
Date: September 22, 2014 |
Name: |
Sebastian Giordano |
|
Title: |
Interim Chief Executive Officer |
I, David Horin, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly
Report of WPCS International Incorporated on Form 10-Q for the quarterly period ended July 31, 2014 fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in this Quarterly Report on
Form 10-Q fairly presents in all material respects the financial condition and results of operations of WPCS International Incorporated.
|
By: |
/s/ DAVID HORIN |
Date: September 22, 2014 |
Name: |
David Horin |
|
Title: |
Chief Financial Officer |
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