Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - DropCar, Inc.ex311.htm
EX-32.1 - EXHIBIT 32.1 - DropCar, Inc.ex321.htm
EX-21.1 - EXHIBIT 21.1 - DropCar, Inc.ex211.htm
EX-23.1 - EXHIBIT 23.1 - DropCar, Inc.ex231.htm
EX-31.2 - EXHIBIT 31.2 - DropCar, Inc.ex312.htm
EX-10.22 - EXHIBIT 10.22 - DropCar, Inc.ex1022.htm
EX-10.21 - EXHIBIT 10.21 - DropCar, Inc.ex1021.htm
EX-10.20 - EXHIBIT 10.20 - DropCar, Inc.ex1020.htm
EX-10.19 - EXHIBIT 10.19 - DropCar, Inc.ex1019.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended April 30, 2010

Commission File Number 000-262771

WPCS INTERNATIONAL INCORPORATED
(Exact name of registrant as specified in its charter)

Delaware
 
                  98-0204758
(State or other jurisdiction of incorporation
or organization)
 
                         (IRS Employer Identification No.)
 
One East Uwchlan Avenue, Suite 301
Exton, Pennsylvania
 19341
 
                          (610) 903-0400
(Address of principal executive office)
 (Zip Code)
             (Registrant’s telephone number,  Including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
Common Stock, $0.0001 par value
 
The NASDAQ Global Market
Right to Purchase Series D Junior Participating Preferred Stock
(attached to Common Stock)
 
The NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yeso   Nox

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yeso   Nox

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. Yesx    Noo

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 (§ 229.405 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 o   No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o

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 o
 Accelerated filer o
 Non-accelerated filer o
 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).Yeso Nox

The aggregate market value of the voting common equity held by non-affiliates as of October 31, 2009, based on the closing sales price of the Common Stock as quoted on the Nasdaq Global Market was $20,945,641. For purposes of this computation, all officers, directors, and 5 percent beneficial owners of the registrant are deemed to be affiliates.  Such determination should not be deemed an admission that such directors, officers, or 5 percent beneficial owners are, in fact, affiliates of the registrant.

As of July 20, 2010, there were 6,954,766 shares of registrant’s common stock outstanding.

 
 

 


TABLE OF CONTENTS

       
PAGE
 
PART I
 
       
Item 1.
 
Business
 
3
 
Item 1A.
 
Risk Factors
 
7
 
Item 1B.
 
Unresolved Staff Comments
 
13
 
Item 2.
 
Properties
 
13
 
Item 3.
 
Legal Proceedings
 
13
 
Item 4.
 
(Removed and Reserved)
 
13
 
           
PART II
 
       
Item 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
14
 
Item 6.
 
Selected Financial Data
 
14
 
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
15
 
Item 7A.
 
Quantitative and Qualitative Disclosures about Market Risk
 
25
 
Item 8.
 
Financial Statements and Supplementary Data
 
F1-F30
 
Item 9.
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
 
26
 
Item 9A.
 
Controls and Procedures
 
26
 
Item 9B.
 
Other Information
 
26
 
           
PART III
 
       
Item 10.
 
Directors, Executive Officers and Corporate Governance
 
27
 
Item 11.
 
Executive Compensation
 
30
 
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
35
 
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
 
37
 
Item 14.
 
Principal Accounting Fees and Services
 
37
 
           
PART IV
 
       
Item 15.
 
Exhibits
 
38
 
           
   
Signatures
 
41
 
 
 
 
 
2

 

 
PART I

ITEM 1 - BUSINESS

This Annual Report on Form 10-K (including the section regarding Management's Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this Annual Report on Form 10-K.  Additionally, statements concerning future matters are forward-looking statements.

Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our Management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading "Risks Factors” below, as well as those discussed elsewhere in this Annual Report on Form 10-K. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We file reports with the Securities and Exchange Commission ("SEC"). We make available on our website under "Investor Relations/SEC Filings," free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such materials with or furnish them to the SEC. Our website address is www.wpcs.com. You can also read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549.  You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

This Annual Report on Form 10-K includes 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".   Domestic operations include WPCS Incorporated, WPCS International – Suisun City, Inc. (Suisun City Operations), WPCS International - St. Louis, Inc. (St. Louis Operations), WPCS International – Lakewood, Inc. (Lakewood Operations), WPCS International – Hartford, Inc. (Hartford Operations), WPCS International – Sarasota, Inc. (Sarasota Operations), WPCS International – Trenton, Inc. (Trenton Operations), WPCS International – Seattle, Inc. (Seattle Operations), and WPCS International – Portland, Inc. (Portland Operations).   International operations include WPCS Asia Limited, Taian AGS Pipeline Construction Co. Ltd. (China Operations), and WPCS Australia Pty Ltd, WPCS International – Brisbane, Pty Ltd., WPCS International – Brendale, Pty Ltd., and The Pride Group (QLD) Pty Ltd. (Pride), (collectively the Australia Operations).

Overview and Recent Developments

We are a global provider of design-build engineering services for communications infrastructure, with over 500 employees in ten operation centers on three continents.  We provide our engineering capabilities including wireless communication, specialty construction and electrical power to a diversified customer base in the public services, healthcare, energy and corporate enterprise markets worldwide.

Historically, each of our wholly-owned subsidiaries has operated and was known primarily by our customers and vendors through a variety of subsidiary legal names, while our investors know us primarily by our “WPCS” name.  In order to better serve our diversified customer base, we launched a key initiative in the third and fourth quarter of fiscal 2009 to brand each of our subsidiaries with the “WPCS” name.  We believe this branding strategy positions our company to better pursue national contracts with existing customers, further develops our relationships with technology providers, improves our purchasing power and achieves certain cost reductions under one integrated name.  This branding strategy has included, among other things, changing our subsidiaries’ legal names, company website, email, promotional and advertising materials and signage.  The total cost for the branding initiative was $166,000 which was incurred during the fiscal years ended April 30, 2010 and 2009. In addition, by operating under one name we have consolidated certain operations to reduce administrative overhead expenses and improve operating efficiencies.


 
3

 

Furthermore, as part of our branding strategy and to better represent our comprehensive design-build engineering capabilities, we have reorganized our operating segments to correspond to our primary service lines: wireless communication, specialty construction and electrical power.  Accordingly, we are reporting our results under these three business segments in this Form 10-K for the fiscal years ended April 30, 2010 and 2009.  As a result, certain reclassifications have been made to the prior year segment information to conform to the reorganized composition of our operating segments.
 
 
The global economy depends on efficient voice, data and video communication. Old communication infrastructure needs to be replaced and new technology needs to be implemented. We believe we have the design-build capabilities to address the demand.   For communication infrastructure projects that are significant in scope, we have the ability to offer wireless communication, specialty construction and electrical power.  Because we are technology independent, we can integrate multiple products and services across a variety of communication requirements.  This gives our customers the flexibility to obtain the most appropriate solution for their communication needs on a cost effective basis.     In wireless communication, we can design and deploy all types of wireless systems in a variety of applications for mobile communications, asset tracking and video surveillance. In specialty construction, we have provided building design services for mechanical, electrical and hydraulic systems as well as construction services for energy including solar power systems and wind turbines. In specialty construction, we have installed traffic control systems and smart message signs for transportation infrastructure. On the electrical power side, we are capable of all types of commercial and industrial electrical work including the integration of advanced building communications technology for voice and data, life safety, security and HVAC.

Since our inception in 2001, we have grown organically and through strategic acquisitions to establish a presence in addressing the global needs of communications technology.  For the fiscal year ended April 30, 2010, we generated revenues of approximately $106 million, compared to $107 million for the fiscal year ended April 30, 2009.  Our backlog at April 30, 2010 and 2009 was approximately $48.6 million and $38.4 million, respectively.
 
Industry Trends

We focus on markets such as public services, healthcare, energy and international which continue to show strong growth potential.
 
·  
Public services.  We provide communications infrastructure for public services which includes police, fire, emergency dispatch, utilities, education, military and transportation infrastructure. The public services sector is benefitting from the enactment of the American Recovery and Reinvestment Act of 2009 (ARRA) which has made funding available for state and local municipalities nationwide. Of the $787 billion in total funding, according to a July 2010 article by The New York Times, approximately $32 billion has been allocated for communications infrastructure projects to be completed over the next several years which fit our service capabilities.

·  
Healthcare.  We provide communications infrastructure for hospitals and medical centers. In the healthcare market, according to an October 2008 report from Market Research, the aging population and the need to reduce labor costs through the implementation of advanced communications technology is driving projected expenditures of $3 billion per year over the next few years.

·  
Energy.  We provide communications infrastructure for petrochemical, natural gas, electric utilities and alternative energy. The need to deliver basic energy more efficiently and to create new energy sources is driving the growth in energy construction. This creates opportunities to upgrade and deploy new communications technology which creates the demand for communications infrastructure.   According to a July 2010 article by The New York Times, the ARRA legislation has allocated approximately $36 billion in funding for energy and conservation projects over the next few years which fit our service capabilities.

·  
International.  We provide communications infrastructure internationally for a variety of companies and government entities. China is spending on building its internal infrastructure and Australia is upgrading their infrastructure.  China is expecting a positive GDP growth rate of 10% per China’s National Bureau of Statistics and Australia is expecting a positive GDP growth rate of 3% per the Australia Department of Foreign Affairs and Trade.

Business Strategy

Our goal is to become the recognized design-build engineering leader for communications infrastructure on a global scale. Our business strategy focuses on both organic growth and the pursuit of acquisitions that add to our engineering capacity and geographic coverage. We believe that our financial strength, geographic coverage and repeat customer base presents the opportunity to grow the Company substantially from a revenue and earnings perspective.   Specifically, we will endeavor to:

·  
Provide additional services for our customers. Each acquisition we make expands our customer base. We seek to expand these new customer relationships by making them aware of the diverse products and services we offer. We believe that providing these customers the full range of our services will lead to new revenue producing projects and increased profitability.

·  
Maintain and expand our focus in strategic markets. We have designed and deployed successful and innovative communications infrastructure solutions for multiple customers in a number of strategic markets, such as public services, healthcare, energy and corporate enterprise. We will continue to seek additional customers in these targeted markets and look for new ways in which we can design and deploy communications infrastructure for increased productivity.

·  
Strengthen our relationships with technology providers. We will continue to strengthen the relationships we have with technology providers. These companies rely on us to deploy their technology products. We have worked with these providers in testing new communications technology. Our technicians are trained and maintain certifications on a variety of leading communications technology products which exhibits our commitment in providing advanced solutions for our customers.

·  
Seek strategic acquisitions.  We will continue to look for additional acquisitions of compatible businesses that can be readily assimilated into our organization, increase our engineering capabilities, expand our geographic coverage and add accretive earnings to our business. Our preferred acquisition candidates will have experience in the wireless communication, specialty construction and/or electrical power markets. A specific goal is to expand our international operations, primarily in Australia and China.

 
4

 
Design-Build Services

We operate in three business segments: wireless communication; specialty construction; and electrical power. For the fiscal year ended April 30, 2010, wireless communication represented approximately 28.5% of our total revenue, specialty construction represented approximately 14.2% of our total revenue and electrical power represented approximately 57.3% of our revenue. For the fiscal year ended April 30, 2009, wireless communication represented approximately 31.9% of our total revenue, specialty construction represented approximately 9.6% of our total revenue and electrical power represented approximately 58.5% of our revenue.  See Note 12 to the Consolidated Financial Statements for the financial results of each segment for the fiscal years ended April 30, 2010 and 2009.

Wireless Communication

Throughout the community or around the world, in remote and urban locations, wireless networks provide the connections that keep information flowing. The design and deployment of a wireless network solution requires an in-depth knowledge of radio frequency engineering so that wireless networks are free from interference with other signals and amplified sufficiently to carry data, voice or video with speed and accuracy. We have extensive experience and methodologies that are well suited to address these challenges for our customers. We are capable of designing wireless networks and providing the technology integration necessary to meet goals for enhanced communication, increased productivity and reduced costs. We have the engineering expertise to utilize all facets of 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, WiMAX networks, point-to-point systems, mesh networks, microwave systems, cellular networks, in-building systems and two-way communication systems.

Specialty Construction

We offer specialty construction services for building design including the design and integration of mechanical, electrical, hydraulic and life safety systems in an environmentally safe manner. We work through all phases of the building design and construction to evaluate the design for cost, flexibility, efficiency, productivity and overall environmental impact.

Next, we have established capabilities in transportation infrastructure. In the developing world, urbanization has created increased mobility, placing great demands on transportation infrastructure. Governments are responding by making the construction of safe, efficient roads a priority. New systems are needed for traffic monitoring, traffic signaling, video surveillance and smart message signs to communicate information advisories. We are providing design-build engineering services for these technologically advanced systems.

Lastly, as world economies are growing, standards of living are improving and energy supplies are dwindling. It is a scenario that has accelerated the search for new energy sources and better ways of delivery existing supply. We are contributing in both of these critical areas. We design and deploy alternative energy solutions in wind and solar power. Through a unique combination of scientific, geologic, engineering and construction expertise, we offer solutions in site design, solar installation, meteorological towers and wind turbine installation. In addition, we support energy companies as they maximize the efficiency of their energy supply infrastructure, by providing a range of services from pipeline trenching to the deployment of wireless solutions.

Electrical Power

Electrical power transmission and distribution networks built years ago often cannot fulfill the growing technological needs of today's end users. We provide complete electrical contracting services to help commercial and industrial facilities of all types and sizes to upgrade their power systems. Our capabilities include power transmission, switchgear, underground utilities, outside plant, instrumentation and controls. We provide an integrated approach to project coordination that creates cost-effective solutions. In addition, 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 electrical infrastructure to support the convergence of technology.  In this regard, we create integrated building systems, including the installation of advanced structured cabling systems and electrical networks. We support the integration of telecommunications, fire protection, 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.

 
5

 
Project Characteristics

Our contracts are primarily service-based projects providing installation and engineering services, which include providing labor, materials and equipment for a complete installation. The projects are generally staffed with a project manager who manages multiple projects and a field supervisor who is responsible for an individual project. Depending on the scope of the contract, project staff size could range from two to four engineers to as high as 25 to 30 engineers. A project may also include subcontracted services along with our direct labor. The project manager coordinates the daily activities of direct labor and subcontractors and works closely with our field supervisors. Project managers are responsible for job costing, change order tracking, billing, and customer relations. Executive management monitors the performance of all projects regularly through work-in-progress reporting or percentage-of-completion, and reviews this information with each project manager. Our projects are primarily executed on a contract basis. These contracts can be awarded through a competitive bidding process, an informal bidding process, or a simple quote request. Upon award of a contract, there can be delays of several months before work begins. The active work time on our projects can range in duration from a few days up to as long as two years. Once services under the contract commence, our average project length is approximately two months.

Customers

We serve a variety of public services, healthcare, energy and corporate enterprise customers. For the fiscal years ended April 30, 2010 and 2009, there were no customers which accounted for more than 10% of our revenue.

Sales and Marketing

We have dedicated sales and marketing resources that develop opportunities within our existing customer base, and identify new customers through our strategic market focus and our relationships with technology providers. In addition, our project managers devote a portion of their time to sales and marketing. When an opportunity is identified, we assess the opportunity to determine our level of interest in participation. After qualifying an opportunity, our sales and marketing resources work with the internal project management teams to prepare a cost estimate and contract proposal for a particular project. We keep track of bids submitted and bids that are awarded. Once a bid is awarded to us, it is assigned to a project management team and included in our backlog.

Backlog

As of April 30, 2010, we had a backlog of unfilled orders of approximately $48.6 million compared to approximately $38.4 million at April 30, 2009. 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 an executed 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.


 
6

 
Competition

We face competition from numerous service organizations, ranging from small independent regional firms to larger firms servicing national markets. Historically, there have been relatively few significant barriers to entry into the markets in which we operate, and, as a result, any organization that has adequate financial resources and access to technical expertise may become a competitor. At the present time, we believe that there are no dominant competitors in the communications infrastructure market but we would classify Quanta Services, Inc. (NYSE:PWR), Dycom Industries, Inc. (NYSE:DY) and Tetra Tech, Inc. (NASDAQ:TTEK) as national competitors. The principal competitive advantage in these markets is establishing a reputation of delivering projects on time and within budget. Other factors of importance include accountability, engineering capability, certifications, project management expertise, industry experience and financial strength. We believe that the ability to provide comprehensive communications infrastructure design-build services including wireless communication, specialty construction and electrical power gives us a competitive advantage. We maintain a trained and certified staff of engineers that have developed proven methodologies for the design and deployment of communications infrastructure, and can provide these services on an international basis. In addition, we offer both a union and non-union workforce that allow us to bid on either labor requirement, creating yet another competitive advantage. However, our ability to compete effectively also depends on a number of additional factors that are beyond our control. These factors include competitive pricing for similar services and the ability and willingness of the competition to finance projects on favorable terms.

Employees

As of April 30, 2010, we employed 518 full time employees, of whom 354 are project engineers and technicians, 47 are project managers, 111 are in administration and sales and six are executives.  Approximately 47% of the project engineers are represented by the International Brotherhood of Electrical Workers. We also have non-union employees. We believe we have excellent relations with all of our employees. We have 168 union employees who are covered by contracts that expire at various times as follows:

Operations
# of Employees
Union Contract Expiration Date
     
St. Louis
2
October 31, 2010
Portland
11
December 31, 2010
Trenton
20
May 31, 2011
Seattle
66
May 31, 2011
Suisun City
69
November 30, 2011
Total Union Employees
168
 

ITEM 1A - RISK FACTORS

If we fail to accurately estimate costs associated with our fixed-price contracts using percentage-of-completion, our actual results may vary from our assumptions, which may reduce our profitability or impair our financial performance.

A substantial portion of our revenue is derived from fixed price contracts. Under these contracts, we set the price of our services on an aggregate basis and assume the risk that the costs associated with our performance may be greater than we anticipated. We recognize revenue and profit on these contracts as the work on these projects progresses on a percentage-of-completion basis. Under the percentage-of-completion method, contracts in process are valued at cost plus accrued profits less earned revenues and progress payments on uncompleted contracts.

The percentage-of-completion method therefore relies on estimates of total expected contract costs. These costs may be affected by a variety of factors, such as lower than anticipated productivity, conditions at work sites differing materially from what was anticipated at the time we bid on the contract and higher costs of materials and labor. Contract revenue and total cost estimates are reviewed and revised monthly as the work progresses, such that adjustments to profit resulting from revisions are made cumulative to the date of the revision. Adjustments are reflected in contract revenue for the fiscal period affected by these revised estimates. If estimates of costs to complete long-term contracts indicate a loss, we immediately recognize the full amount of the estimated loss. Such adjustments and accrued losses could result in reduced profitability and liquidity.

Failure to properly manage projects may result in unanticipated costs or claims.

Our project engagements may involve large scale, highly complex projects. The quality of our performance on such projects depends in large part upon our ability to manage the relationship with our customers, and to effectively manage the project and deploy appropriate resources, including third-party contractors and our own personnel, in a timely manner. Any defects or errors or failure to meet customers’ expectations could result in claims for substantial damages against us. Our contracts generally limit our liability for damages that arise from negligent acts, errors, mistakes or omissions in rendering services to our customers. However, we cannot be sure that these contractual provisions will protect us from liability for damages in the event we are sued. In addition, in certain instances, we guarantee customers that we will complete a project by a scheduled date or that the network will achieve certain performance standards. If the project or network experiences a performance problem, we may not be able to recover the additional costs we would incur, which could exceed revenues realized from a project.

 
7

 
The ongoing economic downturn and instability in the financial markets may adversely impact our customers’ future spending as well as payment for our services and, as a result, our operations and growth.

The U.S. economy is still recovering from the recent recession, and growth in economic activity has slowed substantially. The financial markets also have not fully recovered. It is uncertain when these conditions will significantly improve. Stagnant or declining economic conditions have adversely impacted the demand for our services and resulted in the delay, reduction or cancellation of certain projects and may continue to adversely affect us in the future. Additionally, our customers may finance their projects through the incurrence of debt or the issuance of equity. The availability of credit remains constrained, and many of our customers’ equity values have not fully recovered from the negative impact of the recession. A reduction in cash flow or the lack of availability of debt or equity financing may continue to result in a reduction in our customers’ spending for our services and may also impact the ability of our customers to pay amounts owed to us, which could have a material adverse effect on our operations and our ability to grow at historical levels.

An economic downturn in any of the industries we serve may lead to less demand for our services.

Because the vast majority of our revenue is derived from a few industries, a downturn in any of those industries would adversely affect our results of operations. Specifically, an economic downturn in any industry we serve could result in the delay, reduction or cancellation of projects by our customers as well as cause our customers to outsource less work, resulting in decreased demand for our services and potentially impacting our operations and our ability to grow at historical levels. A number of other factors, including financing conditions and potential bankruptcies in the industries we serve or a prolonged economic downturn or recession, could adversely affect our customers and their ability or willingness to fund capital expenditures in the future or pay for past services. For example, our wireless communication segment has been negatively impacted since mid-2008 by the slowdown in spending for public services projects at the state and local government level, resulting in reductions, delays or postponements of these projects, and we expect this slowdown will likely continue, at least in the near-term. Consolidation, competition, capital constraints or negative economic conditions in the public services, healthcare and energy industries may also result in reduced spending by, or the loss of, one or more of our customers.

The industry in which we operate has relatively low barriers to entry and increased competition could result in margin erosion, which would make profitability even more difficult to sustain.

Other than the technical skills required in our business, the barriers to entry in our business are relatively low. We do not have any intellectual property rights to protect our business methods and business start-up costs do not pose a significant barrier to entry. The success of our business is dependent on our employees, customer relations and the successful performance of our services. If we face increased competition as a result of new entrants in our markets, we could experience reduced operating margins and loss of market share and brand recognition.

Our business depends upon our ability to keep pace with the latest technological changes, and our failure to do so could make us less competitive in our industry.

The market for our services is characterized by rapid change and technological improvements. Failure to respond in a timely and cost-effective way to these technological developments may result in serious harm to our business and operating results. We have derived, and we expect to continue to derive, a substantial portion of our revenues from design-build services that are based upon today’s leading technologies and that are capable of adapting to future technologies. As a result, our success will depend, in part, on our ability to develop and market service offerings that respond in a timely manner to the technological advances of our customers, evolving industry standards and changing preferences.

Our failure to attract and retain engineering personnel or maintain appropriate staffing levels could adversely affect our business.

Our success depends upon our attracting and retaining skilled engineering personnel. Competition for such skilled personnel in our industry is high and at times can be extremely intense, especially for engineers and project managers, and we cannot be certain that we will be able to hire sufficiently qualified personnel in adequate numbers to meet the demand for our services. We also believe that our success depends to a significant extent on the ability of our key personnel to operate effectively, both individually and as a group. Additionally, we cannot be certain that we will be able to hire the requisite number of experienced and skilled personnel when necessary in order to service a major contract, particularly if the market for related personnel is competitive. Conversely, if we maintain or increase our staffing levels in anticipation of one or more projects and the projects are delayed, reduced or terminated, we may underutilize the additional personnel, which could reduce our operating margins, reduce our earnings and possibly harm our results of operations. If we are unable to obtain major contracts or effectively complete such contracts due to staffing deficiencies, our revenues may decline and we may experience a drop in net income.

 
8

 
If we are unable to identify and complete future acquisitions, we may be unable to continue our growth.

Since November 1, 2001, we have acquired nineteen companies and we intend to further expand our operations through targeted strategic acquisitions. However, we may not be able to identify suitable acquisition opportunities. Even if we identify favorable acquisition targets, there is no guarantee that we can acquire them on reasonable terms or at all. If we are unable to complete attractive acquisitions, the growth that we have experienced historically may slow or decline in the future.

Future acquired companies could be difficult to assimilate, disrupt our business, diminish stockholder value and adversely affect our operating results.

Completing acquisitions may require significant management time and financial resources because we may need to assimilate widely dispersed operations with distinct corporate cultures. Our failure to manage future acquisitions successfully could seriously harm our operating results. Also, acquisitions could cause our quarterly operating results to vary significantly. Furthermore, our stockholders would be diluted if we financed the acquisitions by issuing equity securities. In addition, acquisitions expose us to risks such as undisclosed liabilities, increased indebtedness associated with an acquisition and the potential for cash flow shortages that may occur if anticipated financial performance is not realized or is delayed from such acquired companies.

Amounts included in our backlog may not result in actual revenue or translate into profits.

As of April 30, 2010, we had a backlog of unfilled orders of approximately $48.6 million. This backlog amount is based on contract values and purchase orders and may not result in actual receipt of revenue in the originally anticipated period or at all. In addition, contracts included in our backlog may not be profitable. 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 delays or cancellations in the future. If our backlog fails to materialize, we could experience a reduction in revenue, profitability and liquidity.

Our business could be affected by adverse weather conditions, resulting in variable quarterly results.

Adverse weather conditions, particularly during the winter season, could affect our ability to perform outdoor services in certain regions of the United States. As a result, we might experience reduced revenue in the third and fourth quarters of our fiscal year. Natural catastrophes could also have a negative impact on the economy overall and on our ability to perform outdoor services in affected regions or utilize equipment and crews stationed in those regions, which in turn could significantly impact the results of any one or more of our reporting periods.

If we are unable to retain the services of Messrs. Hidalgo, Polulak, Heinz, Walker, or Voacolo, operations could be disrupted.

Our success depends to a significant extent upon the continued services of Mr. Andrew Hidalgo, our Chief Executive Officer and Messrs. Myron Polulak, James Heinz, Gary Walker, and Jeffrey Voacolo, our Executive Vice Presidents. Mr. Hidalgo has overseen our company since inception and provides leadership for our growth and operations strategy. Messrs. Polulak, Heinz, Walker, and Voacolo oversee the day-to-day operations of our operating subsidiaries. Loss of the services of Messrs. Hidalgo, Polulak, Heinz, Walker, or Voacolo could disrupt our operations and harm our growth, revenues, and prospective business. We do not maintain key-man insurance on the lives of Messrs. Hidalgo, Polulak, Heinz, Walker, or Voacolo.

Employee strikes and other labor-related disruptions may adversely affect our operations.

Our business is labor intensive, with certain projects requiring large numbers of engineers. Over 32% of our workforce is unionized. Strikes or labor disputes with our unionized employees may adversely affect our ability to conduct our business. If we are unable to reach agreement with any of our unionized work groups on future negotiations regarding the terms of their collective bargaining agreements, or if additional segments of our workforce become unionized, we may be subject to work interruptions or stoppages. Any of these events could be disruptive to our operations and could result in negative publicity, loss of contracts and a decrease in revenues.

 
9

 
Our business is labor intensive and we may be unable to attract and retain qualified employees.

Our ability to maintain our productivity and profitability is limited by our ability to employ, train and retain the skilled personnel necessary to operate our business. We cannot be certain that we will be able to maintain the skilled labor force necessary to operate efficiently and support our growth strategy. Our ability to do so depends on a number of factors such as general rates of employment, competitive demands for employees having the skills we need and the level of compensation required to hire and retain qualified employees. In addition, we cannot be certain that our labor expenses will not increase as a result of shortages in the supply of these skilled personnel. As a result, our ability to maintain our productivity and profitability may be affected if we are unable to hire qualified employees and manage labor costs to retain employees.

We may incur goodwill impairment charges in our reporting entities which could harm our profitability.

In accordance with Accounting Standards Codification (ASC) 350, “Intangibles-Goodwill and Other,” we periodically review the carrying values of our goodwill to determine whether such carrying values exceed the fair market value of the reporting units. Each of the reporting units is subject to an annual review for goodwill impairment. If impairment testing indicates that the carrying value of a reporting unit exceeds its fair value, the goodwill of the reporting unit is deemed impaired. Accordingly, an impairment charge would be recognized for that reporting unit in the period identified, which could reduce our profitability.

Legislative actions and initiatives relating to electric power, renewable energy and telecommunications may fail to result in increased demand for our services.

Demand for our services may not result from renewable energy initiatives. While many states currently have mandates in place that require certain percentages of power to be generated from renewable sources, states could reduce those mandates or make them optional, which could reduce, delay or eliminate renewable energy development in the affected states. Additionally, renewable energy is generally more expensive to produce and may require additional power generation sources as backup. The locations of renewable energy projects are often remote and are not viable unless new or expanded transmission infrastructure to transport the power to demand centers is economically feasible. Furthermore, funding for renewable energy initiatives may not be available, which may be further constrained as a result of the current tight credit markets. These factors may result in fewer renewable energy projects than anticipated and a delay in the construction of these projects and the related infrastructure, which could adversely affected the demand for our services. These factors could continue to result in delays or reductions in projects, which could further negatively impact our business.

The ARRA provides for various stimulus programs, such as grants, loan guarantees and tax incentives, relating to renewable energy, energy efficiency and electric power and telecommunications infrastructure. We cannot predict when programs under the ARRA will be implemented, the timing and scope of any investments to be made under these programs or whether these programs will result in increased demand for our services. Investments for renewable energy, electric power infrastructure and telecommunications fiber deployment under ARRA programs may not occur, may be less than anticipated or may be delayed, any of which would negatively impact demand for our services.

In addition, other current and potential legislative initiatives may not result in increased demand for our services. For instance, certain provisions of the proposed American Clean Energy and Security Act (ACES Act) are intended to encourage electric power transmission and renewable energy projects. However, it is uncertain whether the ACES Act, if enacted, will positively impact infrastructure spending in the long-term. Specifically, the ACES Act may not result in the anticipated acceleration of future transmission projects or encourage the installation of renewable energy generation facilities, which could result in fewer electric power transmission and substation projects than anticipated and consequently adversely impact demand for our services. It is not certain when or if these legislative initiatives, including the ACES Act, will be enacted or whether any potentially beneficial provisions will be included in the final legislation.

There are also a number of other legislative and regulatory proposals, including the ACES Act, to address greenhouse gas emissions, which are in various phases of discussion or implementation. The outcome of federal and state actions to address global climate change could negatively affect the operations of our customers through costs of compliance or restraints on projects, which could reduce their demand for our services.

 
10

 
Our quarterly results fluctuate and may cause our stock price to decline.

Our quarterly operating results have fluctuated in the past and will likely fluctuate in the future. As a result, we believe that period to period comparisons of our results of operations are not a good indication of our future performance. A number of factors, many of which are beyond our control, are likely to cause these fluctuations. Some of these factors include:

 
the timing and size of design-build projects and technology upgrades by our customers;

 
fluctuations in demand for outsourced design-build services;

 
the ability of certain customers to sustain capital resources to pay their trade account balances and required changes to our allowance for doubtful accounts based on periodic assessments of the collectability of our accounts receivable balances;

 
reductions in the prices of services offered by our competitors;

 
our success in bidding on and winning new business; and

 
our sales, marketing and administrative cost structure.

Because our operating results may vary significantly from quarter to quarter, our operating results may not meet the expectations of securities analysts and investors, and our common stock could decline significantly which may expose us to risks of securities litigation, impair our ability to attract and retain qualified individuals using equity incentives and make it more difficult to complete acquisitions using equity as consideration.

Our stock price may be volatile, which may result in lawsuits against us and our officers and directors.

The stock market in general and the stock prices of technology and telecommunications companies in particular, have experienced volatility that has often been unrelated to or disproportionate to the operating performance of those companies. The market price of our common stock has fluctuated in the past and is likely to fluctuate in the future. Between May 1, 2009 and April 30, 2010, our common stock has traded as low as $1.90 and as high as $4.38 per share, based upon information provided by the NASDAQ Global Market. Factors which could have a significant impact on the market price of our common stock include, but are not limited to, the following:

 
quarterly variations in operating results;

 
announcements of new services by us or our competitors;

 
the gain or loss of significant customers;

 
changes in analysts’ earnings estimates;

 
rumors or dissemination of false information;

 
pricing pressures;

 
short selling of our common stock;

 
impact of litigation;

 
general conditions in the market;

 
changing the exchange or quotation system on which we list our common stock for trading;

 
political and/or military events associated with current worldwide conflicts; and

 
events affecting other companies that investors deem comparable to us.

Companies that have experienced volatility in the market price of their stock have frequently been the object of securities class action litigation. Class action and derivative lawsuits could result in substantial costs to us and a diversion of our management’s attention and resources, which could materially harm our financial condition and results of operations.

 
11

 
Future changes in financial accounting standards may adversely affect our reported results of operations.

A change in accounting standards could have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New pronouncements and varying interpretations of pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 (SOX), newly enacted SEC regulations and NASDAQ Stock Market rules, have created additional burdens for companies such as ours. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest appropriate resources to comply with evolving standards. This may result in increased general and administrative costs, including potential increased audit fees for SOX compliance, and a diversion of management time and attention from revenue-generating activities to compliance activities.

We can issue shares of preferred stock without shareholder approval, which could adversely affect the rights of common shareholders.

Our certificate of incorporation permits us to establish the rights, privileges, preferences and restrictions, including voting rights, of future series of our preferred stock and to issue such stock without approval from our stockholders. The rights of holders of our common stock may suffer as a result of the rights granted to holders of preferred stock that we may issue in the future. In addition, we could issue preferred stock to prevent a change in control of our company, depriving common shareholders of an opportunity to sell their stock at a price in excess of the prevailing market price.

There may be an adverse effect on the market price of our shares as a result of shares being available for sale in the future.

On April 15, 2010, we filed a registration statement on Form S-3 using a “shelf” registration process.  Under this shelf registration process, we may offer up to 2,314,088 shares of our common stock, from time to time, in amounts, at prices, and terms that we will determine at the time of the offering.    Each share of our common stock automatically includes one right to purchase one one-thousandth of a share of Series D Junior Participating Preferred Stock, par value $0.0001 per share, which becomes exercisable pursuant to the terms and conditions set forth, in a Rights Plan Agreement with Interwest Transfer Co., Inc, as amended from time to time. We have not designated the amount of net proceeds from this offering that we will use for any particular purpose. Accordingly, our management will have broad discretion as to the application of the net proceeds. Our shareholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds. Moreover, our management may use the net proceeds for corporate purposes that may not increase our profitability or market value.

As of April 30, 2010, holders of our outstanding options have the right to acquire 597,605 shares of common stock issuable upon the exercise of stock options, at exercise prices ranging from $2.37 to $12.10 per share, with a weighted average exercise price of $5.17. The sale or availability for sale in the market of the shares underlying these options could depress our stock price. We have registered substantially all of the underlying shares described above for resale. Holders of registered underlying shares may resell the shares immediately upon issuance upon exercise of an option.

If our stockholders sell substantial amounts of our shares of common stock, including shares issued upon the exercise of outstanding options, the market price of our common stock may decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

 Our stockholder rights plan may discourage a takeover.

In February 2010, our Board of Directors authorized shares of Series D Junior Participating Preferred Stock in connection with its adoption of a stockholder rights plan, under which we issued rights to purchase Series D Preferred Stock to holders of our common stock. Upon certain triggering events, such rights become exercisable to purchase common stock (or, in the discretion of our Board of Directors, Series D Preferred Stock) at a price substantially discounted from the then current market price of the common stock. Our stockholder rights plan may generally discourage a merger or tender offer involving our securities that is not approved by our Board of Directors by increasing the cost of effecting any such transaction and, accordingly, could have an adverse impact on stockholders who might want to vote in favor of such merger or participate in such tender offer. Our stockholder rights plan expires in February 2020.

Our international operations expose us to risks such as different business cultures, laws and regulations.

During fiscal 2010, we generated approximately 9.1% of our revenue from international clients. The different business cultures associated with international operations may not be fully appreciated before we sign an agreement, and thereby expose us to risk. Likewise, prior to signing a contract, we need to understand international laws and regulations, such as foreign tax and labor laws, and U.S. laws and regulations applicable to companies engaging in business outside of the United States, such as the Foreign Corrupt Practices Act. For these reasons, pricing and executing international contracts is more difficult and carries more risk than pricing and executing domestic contracts.

 
12

 
Our international operations expose us to foreign currency risk.

A majority of our transactions are in U.S. dollars; however, a few foreign subsidiaries conduct businesses in various foreign currencies. Therefore, we are subject to currency exposures and volatility because of currency fluctuations, inflation changes and economic conditions in these countries. We currently have no foreign currency hedges. We attempt to minimize our exposure to foreign currency fluctuations by matching our revenues and expenses in the same currency for our contracts.

We are subject to the risks associated with doing business in the People’s Republic of China (PRC).

We conduct certain business in China through our China Operations, which is organized under the laws of the PRC. Our China operations are directly related to and dependent on the social, economic and political conditions in this country, many of which we have no control over, and are influenced by many factors, including:

 
changes in the region’s economic, social and political conditions or government policies;

 
changes in trade laws, tariffs and other trade restrictions or licenses;

 
changes in foreign exchange regulation in China may limit our ability to freely convert currency to make dividends or other payments in U.S. dollars;

 
fluctuation in the value of the RMB (Chinese Yuan) could adversely affect the value of our investment in China;

 
adverse changes in tax laws and regulations;

 
difficulties in managing or overseeing our China operations, including the need to implement appropriate systems, policies, benefits and compliance programs; and

 
different liability standards and less developed legal systems that may be less predictable than those in the United States.

The occurrence or consequences of any of these conditions may restrict our ability to operate and/or decrease the profitability our operations in China.

ITEM 1B – UNRESOLVED STAFF COMMENTS

None.

ITEM 2 – PROPERTIES

Our principal executive office is located in Exton, Pennsylvania. We operate our business under office leases in the following locations:
Location
Operations
Lease Expiration Date
Annual Rent
       
Exton, Pennsylvania
WPCS International
January 31, 2014
 $            53,869
Windsor, Connecticut
Hartford
April 30, 2014
 $            94,032
West Greenwich, Rhode Island
Hartford
November 30, 2010
 $            10,153
Chicopee, Massachusetts
Hartford
August 31, 2010
 $              1,200
Lakewood, New Jersey
Lakewood
August 31, 2010
 $            44,496
St. Helens, Oregon
Portland
May 11, 2011
 $            26,916
Sarasota, Florida (1)
Sarasota
July 31, 2011
 $            56,123
Woodinville, Washington
Seattle
December 31, 2012
 $            91,198
St. Louis, Missouri
St. Louis
August 31, 2010
 $            21,833
West Chester, Pennsylvania
St. Louis
May 31, 2011
 $            16,200
Hempstead, Texas
St. Louis
monthly lease
 $            19,200
Moline, Illinois
St. Louis
October 31, 2011
 $            47,408
San Leandro, California
Suisun City
July 31, 2011
 $            16,212
Suisun City, California (2)
Suisun City
February 28, 2011
 $            96,470
Lincoln, California
Suisun City
December 31, 2011
 $            44,640
Lincoln, California
Suisun City
April 30, 2012
 $            15,225
Reno, Nevada
Suisun City
May 31, 2011
 $              4,680
West Sacramento, California
Suisun City
July 31, 2010
 $            19,416
West Sacramento, California
Suisun City
October 31, 2013
 $            27,232
Trenton, New Jersey (3)
Trenton
May 1, 2011
 $            69,000
Brendale, Queensland, Australia
Australia
August 17, 2011
 $            31,209
South Brisbane, Australia
Australia
July 31, 2012
 $            57,940
Woombye, Queensland, Australia
Australia
December 1, 2010
 $            39,480

 
(1)  We lease our Sarasota, Florida location from a trust, of which one of the former shareholders of the Sarasota Operations is the trustee.

 
(2) We lease our Suisun City, California location from a trust, of which Gary Walker, one of our Executive Vice Presidents, is the trustee.

 
(3)  We lease our Trenton, New Jersey location from Voacolo Properties LLC, of which the former shareholders of Voacolo Electric, Inc. (Trenton Operations) are the members.

We believe that our existing facilities are suitable and adequate to meet our current business requirements. We intend to renew leases expiring within the next twelve months at their current locations or at similar facilities in the same geographic locations.
 
 
ITEM 3 - LEGAL PROCEEDINGS

We are currently not a party to any material legal proceedings or claims.

ITEM 4 – (REMOVED AND RESERVED)

 
13

 
 
PART II

ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock

Our common stock is currently traded on the NASDAQ Global Market under the symbol “WPCS.” For the period from May 1, 2008 to date, the following table sets forth the high and low sale prices of our common stock as reported by NASDAQ Global Market.

Period
 
High
   
Low
 
 
Fiscal Year Ended April 30, 2010:
           
First Quarter
  $ 3.53     $ 1.90  
Second Quarter
    4.38       2.53  
Third Quarter
    3.85       2.69  
Fourth Quarter
    3.90       2.98  
 
Fiscal Year Ended April 30, 2009:
               
First Quarter
  $ 7.60     $ 5.25  
Second Quarter
    6.08       2.05  
Third Quarter
    3.38       1.63  
Fourth Quarter
    2.13       1.32  

On July 20, 2010, the closing sale price of our common stock, as reported by the NASDAQ Global Market, was $2.60 per share. On July 20, 2010, there were 61 holders of record of our common stock, which does not include shares held in street name.

On November 24, 2008, we adopted a stock repurchase program of up to 2,000,000 shares of our common stock which expired on December 1, 2009.  A total of 308,817 shares were purchased and retired by us at a total cost of $729,730 including transaction costs, or an average cost per common share of $2.36.

Dividend Policy

We have never paid any cash dividends on our capital stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future.   We intend to retain future earnings to fund ongoing operations and future capital requirements of our business. Any future determination to pay cash dividends will be at the discretion of the Board and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board deems relevant.

ITEM 6 – SELECTED FINANCIAL DATA

Not required under Regulation S-K for “smaller reporting companies.”

 
14

 

ITEM 7 - 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.

Business Overview and Recent Developments

We are a global provider of design-build engineering services for communications infrastructure, with over 500 employees in ten operation centers on three continents.  We provide our engineering capabilities including wireless communication, specialty construction and electrical power to a diversified customer base in the public services, healthcare, energy and corporate enterprise markets worldwide.

Historically, each of our wholly-owned subsidiaries has operated and was known primarily by our customers and vendors through a variety of subsidiary legal names, while our investors know us primarily by our “WPCS” name.  In order to better serve our diversified customer base, we launched a key initiative in the third and fourth quarter of fiscal 2009 to brand each of our subsidiaries with the “WPCS” name.  We believe this branding strategy positions our company to better pursue national contracts with existing customers, further develop our relationships with technology providers, improves our purchasing power and achieves certain cost reductions under one integrated name.  This branding strategy included, among other things, changing our subsidiaries’ legal names, company website, email, promotional and advertising materials and signage. The total cost for the branding initiative was $166,000 which was incurred during the fiscal years ended April 30, 2010 and 2009.  In addition, by operating under one name we have consolidated certain operations to reduce administrative overhead expenses and improve operating efficiencies.

Furthermore, as part of our branding strategy and to better represent our comprehensive design-build engineering capabilities, we have reorganized our operating segments to correspond to our primary service lines: wireless communication, specialty construction and electrical power.  As a result, certain reclassifications have been made to the prior year segment information to conform to the reorganized composition of our operating segments.
 
 Wireless Communication

Throughout the community or around the world, in remote and urban locations, wireless networks provide the connections that keep information flowing. The design and deployment of a wireless network solution requires an in-depth knowledge of radio frequency engineering so that wireless networks are free from interference with other signals and amplified sufficiently to carry data, voice or video with speed and accuracy. WPCS has extensive experience and methodologies that are well suited to address these challenges for our customers. WPCS is capable of designing wireless networks and providing the technology integration necessary to meet goals for enhanced communication, increased productivity and reduced costs. We have the engineering expertise to utilize all facets of 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, WiMAX networks, point-to-point systems, mesh networks, microwave systems, cellular networks, in-building systems and two-way communication systems.

Specialty Construction

We offer specialty construction services for building design including the design and integration of mechanical, electrical, hydraulic and life safety systems in an environmentally safe manner. We work through all phases of the building design and construction to evaluate the design for cost, flexibility, efficiency, productivity and overall environmental impact.

 
15

 
Next, we have established capabilities in transportation infrastructure. In the developing world, urbanization has created increased mobility, placing great demands on transportation infrastructure. Governments are responding by making the construction of safe, efficient roads a priority. New systems are needed for traffic monitoring, traffic signaling, video surveillance and smart message signs to communicate information advisories. WPCS is providing design-build engineering services for these technologically advanced systems.

Lastly, world economies are growing, standards of living are improving and energy supplies are dwindling. It is a scenario that has accelerated the search for new energy sources and better ways of delivery existing supply. WPCS is contributing in both of these critical areas. We design and deploy alternative energy solutions in wind and solar power. Through a unique combination of scientific, geologic, engineering and construction expertise, we offer solutions in site design, solar installation, meteorological towers and wind turbine installation. In addition, we support energy companies as they maximize the efficiency of their energy supply infrastructure, by providing a range of services from pipeline trenching to the deployment of wireless solutions.

Electrical Power

Electrical power transmission and distribution networks built years ago often cannot fulfill the growing technological needs of today's end users. We provide complete electrical contracting services to help commercial and industrial facilities of all types and sizes to upgrade their power systems. Our capabilities include power transmission, switchgear, underground utilities, outside plant, instrumentation and controls. We provide an integrated approach to project coordination that creates cost-effective solutions. In addition, 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 electrical infrastructure, to support the convergence of technology.  In this regard, we create integrated building systems, including the installation of advanced structured cabling systems and electrical networks. We support the integration of telecommunications, fire protection, 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.

For the fiscal year ended April 30, 2010, wireless communication represented approximately 28.5% of our total revenue, specialty construction represented approximately 14.2% of our total revenue and electrical power represented approximately 57.3% of our revenue. For the fiscal year ended April 30, 2009, wireless communication represented approximately 31.9% of our total revenue, specialty construction represented approximately 9.6% of our total revenue and electrical power represented approximately 58.5% of our revenue.
 
 
Industry Trends

We focus on markets such as public services, healthcare, energy and international which continue to show strong growth potential.
 
 
·  
Public services.  We provide communications infrastructure for public services which includes police, fire, emergency dispatch, utilities, education, military and transportation infrastructure. The public services sector is benefitting from the enactment of the American Recovery and Reinvestment Act of 2009 (ARRA) which has made funding available for state and local municipalities nationwide. Of the $787 billion in total funding, according to a July 2010 article by The New York Times, approximately $32 billion has been allocated for communications infrastructure projects to be completed over the next several years which fit our service capabilities.

·  
Healthcare.  We provide communications infrastructure for hospitals and medical centers. In the healthcare market, according to an October 2008 report from Market Research, the aging population and the need to reduce labor costs through the implementation of advanced communications technology is driving projected expenditures of $3 billion per year over the next few years.

·  
Energy.  We provide communications infrastructure for petrochemical, natural gas, electric utilities and alternative energy. The need to deliver basic energy more efficiently and to create new energy sources is driving the growth in energy construction. This creates opportunities to upgrade and deploy new communications technology which creates the demand for communications infrastructure.   According to a July 2010 article by The New York Times, the ARRA legislation has allocated approximately $36 billion in funding for energy and conservation projects over the next few years which fit our service capabilities.

·  
International.  We provide communications infrastructure internationally for a variety of companies and government entities. China is spending on building its internal infrastructure and Australia is upgrading their infrastructure.  China is expecting a positive GDP growth rate of 10% per China’s National Bureau of Statistics and Australia is expecting a positive GDP growth rate of 3% per the Australia Department of Foreign Affairs and Trade.

 
16

 
Current Operating Trends and Financial Highlights

Management currently considers the following events, trends and uncertainties to be important in understanding our results of operations and financial condition during the current fiscal year:

· Over our past seven fiscal quarters, current economic conditions have adversely affected certain markets of our business, primarily related to the public services sector. General spending has slowed at the state and local government level due to a decrease in tax revenue and credit impediments.  However, with the ARRA legislation, $32 billion has been set aside for public services communications infrastructure projects. Many states have received funding and are currently determining which projects to approve.  We believe based on the level of our backlog and bid solicitations, that the demand for communications infrastructure engineering services remains high in this market and will continue over the next several years;
 
· In the healthcare market, we continue to receive bid requests and complete new projects, as the primary drivers in this market continue to be the need to provide healthcare infrastructure for an aging population and to cut costs in delivering healthcare.  The ARRA legislation also provides $32 billion for healthcare infrastructure spending;
 
· In the energy market, we continue to receive bid requests and complete new projects as oil, gas, water and electric utility companies continue to upgrade their communications infrastructure, while in alternative energy the growth in wind and solar power development is expected to continue.  The ARRA legislation also provides $36 billion for energy infrastructure spending;
 
· Two of our most important economic indicators for measuring our future revenue producing capability and demand for our services are our backlog and bid list. The protracted conversion of bid solicitations to backlog has been an obstacle for revenue growth during fiscal 2010.  However, at April 30, 2010, our backlog of unfilled orders was approximately $49 million compared to backlog of approximately $38 million at April 30, 2009.  Through the first six months of calendar 2010, we announced approximately $60  million in new contracts, which is more than the total amount of contracts announced for all of calendar 2009, which we believe will give us momentum to produce better earnings in the future;
 
· Our bid list, which represents project bids under proposal for new and existing customers, was approximately $131 million at April 30, 2010, compared to approximately $169 million at April 30, 2009. With the passage of the ARRA legislation in February 2009, during the fourth quarter of fiscal 2009 and the first nine months of fiscal 2010 we experienced a significant escalation in our bid list as a result of initial demand for ARRA funds from state and local governments.  This increase in bids over the course of our fiscal year was not representative of our historical bid pattern.  Although many projects requested ARRA funding, not all of these bids were going to be approved due to the prioritization of these initial bids.  Immediately approved projects were converted to backlog, and those that were not approved were removed from the bid list, resulting in a decrease in the bid list over the past fiscal year.   We believe our bid list at April 30, 2010 represents a more normal bid level and we expect our bids to remain in a range of $125 million to $150 million, while ARRA funding continues to be made available in the quarters ahead;
 
· We believe our design-build engineering focus for public services, healthcare, energy and corporate enterprise infrastructure will create additional opportunities both domestically and internationally. We believe that the ability to provide comprehensive communications infrastructure services including wireless communication, specialty construction and electrical power gives us a competitive advantage. We expect an increase in backlog in the future as a result of the current level of bid activity for communication infrastructure services in both project opportunities generated from the ARRA legislation and general projects from our diversified customer base. Our opportunity to obtain work related to the ARRA legislation depends on the timing of funding allocations and our ability to receive bid requests and be awarded new projects; however, we believe that our experience in performing work in each of these sectors will result in continued bid activity in the near future;
 
· We continue to focus on expanding our international presence in China and Australia, and we believe that these markets have not been impacted as much by recent economic conditions.  In China, our focus is primarily in the energy market, and in Australia primarily on the corporate enterprise market. Our current international revenue annual run rate is approximately $11 million with our recent acquisition of Pride;
 
· Although we are focused on organic growth opportunities, we continue to search for acquisitions that increase our engineering capabilities, add to our customer base and expand our geographic scope. We continue to have a particular interest in expanding our international business; and
 
· We are maintaining a healthy balance sheet with approximately $27.0 million in working capital, and credit facility borrowings of approximately $5.6 million. The ratio of credit facility borrowings to working capital is approximately 21%.  We believe this is an important measure of our current financial strength. We expect to use our working capital and remaining availability of approximately $9.4 million under the credit facility to fund our continued growth.

 
17

 
Results of Operations for the Fiscal Year Ended April 30, 2010 Compared to Fiscal Year Ended April 30, 2009


This Annual Report on Form 10-K includes 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".  Domestic operations include WPCS Incorporated, WPCS International – Suisun City, Inc. (Suisun City Operations), WPCS International - St. Louis, Inc. (St. Louis Operations), WPCS International – Lakewood, Inc. (Lakewood Operations), WPCS International – Hartford, Inc. (Hartford Operations), WPCS International – Sarasota, Inc. (Sarasota Operations), WPCS International – Trenton, Inc. (Trenton Operations), WPCS International – Seattle, Inc. (Seattle Operations), and WPCS International – Portland, Inc. (Portland Operations).   International operations include WPCS Asia Limited, Taian AGS Pipeline Construction Co. Ltd. (China Operations), and WPCS Australia Pty Ltd, WPCS International – Brisbane, Pty Ltd., WPCS International – Brendale, Pty Ltd., and The Pride Group (QLD) Pty Ltd. (Pride), (collectively the Australia Operations).

Consolidated results for the years ended April 30, 2010 and 2009 were as follows.

   
Years Ended
 
   
April 30,
 
   
2010
   
2009
 
                         
REVENUE
  $ 105,769,432       100.0 %   $ 107,101,360       100.0 %
                                 
COSTS AND EXPENSES:
                               
Cost of revenue
    77,930,126       73.7 %     78,334,115       73.2 %
Selling, general and administrative expenses
    23,454,081       22.2 %     23,052,464       21.5 %
Depreciation and amortization
    2,729,882       2.6 %     2,578,824       2.4 %
Change in fair value of acquisition-related contingent consideration
    125,092       0.1 %     -       0.0 %
                                 
Total costs and expenses
    104,239,181       98.6 %     103,965,403       97.1 %
                                 
OPERATING INCOME
    1,530,251       1.4 %     3,135,957       2.9 %
                                 
OTHER EXPENSE (INCOME):
                               
Interest expense
    397,765       0.4 %     421,022       0.4 %
Interest income
    (15,849 )     (0.0 %)     (53,947 )     (0.1 %)
                                 
INCOME BEFORE INCOME TAX PROVISION
    1,148,335       1.0 %     2,768,882       2.6 %
                                 
Income tax provision
    576,226       0.5 %     989,027       0.9 %
                                 
NET INCOME
    572,109       0.5 %     1,779,855       1.7 %
                                 
Net (loss) income attributable to noncontrolling interest
    (282,292 )     (0.3 %)     108,228       0.1 %
                                 
NET INCOME ATTRIBUTABLE TO WPCS
  $ 854,401       0.8 %   $ 1,671,627       1.6 %


 
18

 
Revenue

Revenue for the year ended April 30, 2010 was approximately $105,769,000, as compared to $107,101,000 for the year ended April 30, 2009.  The decrease in revenue for the year was primarily attributable to a temporary slowdown in spending for public services projects at the state and local government level, resulting in reductions, delays or postponements of these projects, and a decrease in revenue from existing operations in our electrical power segment.  This decrease was partially offset by an increase in revenue from the acquisitions of the Portland Operations and Pride, and organic growth from our specialty construction segment.  For the years ended April 30, 2010 and 2009, there were no customers which comprised more than 10% of total revenue.

Wireless communication segment revenue for the years ended April 30, 2010 and 2009 was approximately $30,163,000 or 28.5% and $34,161,000 or 31.9% of total revenue, respectively. The decrease in revenue was due primarily to reductions, delays or postponements of projects at the state and local government level for public services projects.
 
Specialty construction segment revenue for the years ended April 30, 2010 and 2009 was approximately $15,050,000 or 14.2% and $10,298,000 or 9.6% of total revenue, respectively. The increase in revenue was primarily attributable to organic revenue growth of approximately 46% for specialty construction in fiscal 2010. The increase in organic growth is due to a project award of approximately $11.7 million which commenced in the third quarter of fiscal 2010.  This project is expected to be completed by the end of the third quarter of fiscal 2011, and as a result, we expect the fiscal 2011 revenue in this segment to remain at levels consistent with fiscal 2010.

Electrical power segment revenue for the years ended April 30, 2010 and 2009 was approximately $60,556,000 or 57.3% and $62,642,000 or 58.5% of total revenue, respectively. The decrease in revenue was due primarily to a decrease in revenue from existing operations from the timing and completion of work on certain larger projects last year. This decrease was partially offset by an increase in revenue from the acquisitions of the Portland Operations and Pride.

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 $77,930,000 or 73.7% of revenue for the year ended April 30, 2010, compared to $78,334,000 or 73.2% for the prior year.  The dollar decrease in our total cost of revenue is due to the corresponding decrease in revenue during the year ended April 30, 2010 as a result of the delays and postponements of projects at the state and local government level for public services projects. The 0.5% increase in cost of revenue as a percentage of revenue is due to the blend of project revenue attributable to our existing operations and recent acquisitions. Historically, over the past three fiscal years, our cost of revenue as a percentage of revenue was ranged from approximately 66% to 76%. The cost of revenue percentage is expected to vary depending on our mix of project revenue.

Wireless communication segment cost of revenue and cost of revenue as a percentage of revenue for the years ended April 30, 2010 and 2009 was approximately $22,696,000 and 75.2% and $24,198,000 and 70.8%, respectively.   The dollar decrease in our cost of revenue is due to the corresponding decrease in revenue during the year ended April 30, 2010.  The increase in cost of revenue as a percentage of revenue was due primarily to the revenue blend attributable to our existing operations and a cost overrun on a recently completed project.

Specialty construction segment cost of revenue and cost of revenue as a percentage of revenue for the years ended April 30, 2010 and 2009 was approximately $10,732,000 and 71.3% and $6,664,000 and 64.7%, respectively.  As discussed above, the dollar increase in our total cost of revenue is due to the corresponding increase in revenue during the year ended April 30, 2010. The increase as a percentage of revenue is due primarily to the blend of project revenue attributable to our existing operations.
 
Electrical power segment cost of revenue and cost of revenue as a percentage of revenue for the years ended April 30, 2010 and 2009 was approximately $44,502,000 and 73.5% and $47,472,000 and 75.8%, respectively.  The dollar decrease in our cost of revenue is due to the corresponding decrease in revenue during the year ended April 30, 2010, primarily attributable to the delays and postponements of projects at the state and local government level for public services projects. The decrease as a percentage of revenue is due primarily to the blend of project revenue attributable to our existing operations.

Selling, General and Administrative Expenses

For the year ended April 30, 2010, total selling, general and administrative expenses were approximately $23,454,000, or 22.2% of total revenue compared to $23,052,000, or 21.5% of revenue for the prior year. The dollar increase in the selling, general and administrative expenses is due primarily to the acquisitions of Pride and the Portland Operations. Included in selling, general and administrative expenses for the year ended April 30, 2010 are $13,733,000 for salaries, commissions, payroll taxes and other employee benefits. The $429,000 increase in salaries and payroll taxes compared to the prior year is due primarily to the increase in headcount as a result of the acquisitions of Pride and the Portland Operations, partially offset by a decrease in the administrative overhead headcount from the consolidation of certain operations with the branding initiative. Professional fees were $1,502,000, which is primarily related to accounting, legal and investor relation fees, and also includes $102,000 in fees related to the completion of the Pride acquisition. Insurance costs were $2,486,000 and rent for office facilities was $1,087,000.  Automobile and other travel expenses were $1,955,000 and telecommunication expenses were $607,000. Other selling, general and administrative expenses totaled $2,084,000.  For the year ended April 30, 2010, total selling, general and administrative expenses for the wireless communication, specialty construction and electrical power segments were approximately $6,573,000, $2,295,000 and $11,194,000, respectively, with the balance of approximately $3,392,000 pertaining to corporate expenses.

 
19

 
For the year ended April 30, 2009, total selling, general and administrative expenses were approximately $23,052,000, or 21.5% of total revenue. Included in selling, general and administrative expenses for the year ended April 30, 2009 are $13,304,000 for salaries, commissions, payroll taxes and other employee benefits. Professional fees were $1,402,000, which include accounting, legal and investor relation fees. Insurance costs were $2,559,000 and rent for office facilities was $988,000.  Automobile and other travel expenses were $1,956,000 and telecommunication expenses were $610,000. Other selling, general and administrative expenses totaled $2,233,000.  For the year ended April 30, 2009, total selling, general and administrative expenses for the wireless communication, specialty construction and electrical power segments were approximately $8,306,000, $1,948,000 and $9,783,000, respectively, with the balance of $3,015,000 pertaining to corporate expenses.
 
Depreciation and Amortization

For the years ended April 30, 2010 and 2009, depreciation was approximately $2,064,000 and $1,783,000, respectively.  The increase in depreciation is due to the purchase of property and equipment and the acquisition of fixed assets from recent acquisitions. The amortization of customer lists and backlog for the year ended April 30, 2010 was $666,000 as compared to $796,000 for the same period of the prior year.  The net decrease in amortization was due primarily to certain customer lists and backlog being fully amortized in the current year compared to the prior year, partially offset by customer lists and backlog acquired from recent acquisitions. All customer lists are amortized over a period of three to nine years from the date of their acquisitions. Backlog is amortized over a period of one to three years from the date of acquisition based on the expected completion period of the related contracts.

Change in Fair Value of Acquisition-Related Contingent Consideration

For the years ended April 30, 2010 and 2009,   the change in fair value of acquisition-related contingent consideration was approximately $125,000 and $0, respectively.  The change in fair value of acquisition-related contingent consideration is due to the non-cash expense recorded in the fiscal 2010 income statement for the change in present value of the future payments of acquisition-related contingent consideration for the Pride acquisition.

Interest Expense and Interest Income

For the years ended April 30, 2010 and 2009, interest expense was approximately $398,000 and $421,000, respectively. The decrease in interest expense is due to a reduction in interest rates on outstanding borrowings and a decrease in total borrowings on lines of credit compared to the year ended April 30, 2009.

           For the years ended April 30, 2010 and 2009, interest income was approximately $16,000 and $54,000, respectively. The decrease in interest earned is due principally to the decrease in our cash and cash equivalent balance and to a decrease in interest rates, respectively, compared to the same period in the prior year.

Net Income Attributable to WPCS

The net income attributable to WPCS was approximately $854,000 for the year ended April 30, 2010. Net income was net of Federal, state and foreign income tax expense of approximately $576,000. The increase in the effective tax rate was due to permanent differences, including the $125,092 non-cash expense increase in the fair value of the acquisition-related contingent consideration not deductible for tax purposes, and federal income taxes due on state income tax refunds received.  In addition, the rate increase is due to the difference between U.S. and foreign income tax rates, as foreign pre-tax losses provided less consolidated income tax benefit due to lower income tax rates than if tax-effected in the U.S.

The net income attributable to WPCS was approximately $1,672,000 for the year ended April 30, 2009. Net income was net of Federal, state and foreign income tax expense of approximately $989,000.


 
20

 
Liquidity and Capital Resources

At April 30, 2010, we had working capital of approximately $26,978,000, which consisted of current assets of approximately $44,689,000 and current liabilities of $17,711,000.  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 operating activities and credit facility borrowings.

Operating activities provided approximately $2,376,000 in cash for the year ended April 30, 2010. The sources of cash from operating activities total approximately $6,910,000, comprised of approximately $572,000 net income, $2,905,000 in net non-cash charges, a $743,000 decrease in accounts receivable, a $685,000 decrease in prepaid expenses and other current assets, a $1,595,000 increase in accounts payable and accrued expenses and a $410,000 increase in income taxes payable. The uses of cash from operating activities total approximately $4,534,000, comprised of a $3,507,000 increase in costs and estimated earnings in excess of billings on uncompleted contracts, a $239,000 increase in inventory, a $754,000 decrease in billings in excess of costs and estimated earnings on uncompleted contracts, a $4,000 decrease in deferred revenue and a $30,000 increase in other assets.  Net earnings adjusted for non-cash items provided cash of approximately $3,478,000 versus approximately $4,540,000 in fiscal 2009.  Working capital utilized cash of approximately $1,102,000 in 2010 versus providing cash of approximately $498,000 in 2009.  Working capital components utilized cash in fiscal 2010 reflecting higher levels of costs and estimated earnings in excess of billings on uncompleted contracts.
 
Our investing activities utilized approximately $3,197,000 in cash during the year ended April 30, 2010, which consisted of approximately $1,521,000 paid for property and equipment, and approximately $1,676,000 paid for the acquisitions of Pride and Portland, net of cash received.

Our financing activities utilized cash of approximately $112,000 during the year ended April 30, 2010.  Financing activities included the distribution to noncontrolling interest of $89,000, and repayment of loan payables and capital lease obligations of approximately $197,000, offset by the proceeds from exercise of common stock of $30,000, and $144,000 in net borrowings from shareholders.

Our capital requirements depend on numerous factors, including the market for our services, the resources we devote to developing, marketing, selling and supporting our business, the timing and extent of establishing additional markets and other factors.

On April 10, 2010, we renewed our loan agreement (Loan Agreement) with Bank of America, N.A. (BOA), for three years under terms similar to the prior loan agreement with BOA, including the same customary covenants. The Loan Agreement provides for a revolving line of credit in an amount not to exceed $15,000,000, together with a letter of credit facility not to exceed $2,000,000. We also entered into a security agreement with BOA, pursuant to which we granted a security interest to BOA in all of our domestic assets and 65% of the capital stock of our Australia Operations. The Loan Agreement contains customary covenants, including but not limited to (i) funded debt to tangible net worth and (ii) minimum interest coverage ratio. As of April 30, 2010, we are in compliance with all of its covenants. Borrowings bear interest at BOA’s prime rate (currently 3.25%) or at the optional interest rate of LIBOR plus two hundred seventy-five basis points, an unused loan commitment fee of .0375%, and a one-time loan commitment fee of $25,000 paid at closing. As of April 30, 2010, the interest rate was 3.25% on outstanding borrowings of approximately $5,626,000 under the Loan Agreement. The loan commitment expires on April 10, 2013 and we may repay the loan at any time.

On April 15, 2010, we filed a registration statement on Form S-3 using a “shelf” registration process.  Under this shelf registration process, we may offer up to 2,314,088 shares of our common stock, from time to time, in amounts and at prices and terms that we will determine at the time of the offering.    Each share of our common stock automatically includes one right to purchase one one-thousandth of a share of Series D Junior Participating Preferred Stock, par value $0.0001 per share, which becomes exercisable pursuant to the terms and conditions set forth in a Rights Plan Agreement with Interwest Transfer Co., Inc., as amended from time to time. If we sell any securities, the net proceeds will be added to our general corporate funds and may be used for general corporate purposes.   To date, no shares of our common stock have been issued under this shelf registration statement.

At April 30, 2010, we had cash and cash equivalents of approximately $5,584,000 and working capital of approximately $26,978,000. With internally available funds and funds available from the Loan Agreement, we believe that we have sufficient capital to meet our short term needs. The Loan Agreement expires on April 10, 2013 and has approximately $5,626,000 currently outstanding that will need to be repaid by that time, if not prepaid earlier.

  The China Operations has outstanding loans due within the next twelve months to our joint venture partner, Taian Gas Group (TGG), of approximately $3,288,000. We expect to repay these borrowings from working capital and for TGG to renew any remaining unpaid loan balances in its continued support of the China Operations. Our future operating results may be affected by a number of factors including our success in bidding on future contracts and our continued ability to manage controllable costs effectively. To the extent we grow by future acquisitions that involve consideration other than stock, our cash requirements may increase.

 
21

 
 
On November 4, 2009, we acquired Pride. The purchase price represents an amount up to $3,408,913 of which $1,975,429 was paid upon closing.  We will pay additional purchase price to the former Pride shareholders over each of the next two years based upon the achievement of future earnings before interest and taxes (EBIT) targets.  This acquisition-related contingent consideration arrangement requires us to pay the former Pride shareholders $919,488 if Pride’s EBIT for the twelve month period ending October 31, 2010 equals or exceeds $1,103,386 (the Target Amount) and another $919,488 if Pride’s EBIT for the twelve month period ending October 31, 2011 equals or exceeds the Target Amount.  In the event that Pride’s EBIT is less than the Target Amount for either measuring period, such $919,488 payment will be reduced by the percentage of the shortfall between the actual EBIT and the Target Amount.   The fair value of the acquisition-related contingent consideration was $1,433,483 as of the acquisition date and increased to $1,578,193 as of April 30, 2010, due primarily to the $125,092 non-cash expense recorded in the fiscal 2010 income statement for the change in the fair value of the contingent consideration from the change in present value of the future payments of this obligation as of the reporting date. This additional expense is not deductible for income tax purposes. We determined the fair value of the obligation to pay the contingent consideration based on the probability-weighted income approach, and is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in the Accounting Standards Codification.  In addition, in completing the acquisition of Pride we incurred approximately $102,000 of acquisition-related professional fees which are included in selling, general and administrative expenses. Pride is an electrical and security services provider specializing in the commercial and government sectors and focuses on low voltage security installations, alarm systems, video surveillance and access controls.   The acquisition of Pride provides further international expansion into Australia.

Backlog

As of April 30, 2010, we had a backlog of unfilled orders of approximately $48.6 million compared to approximately $38.4 million at April 30, 2009. 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 an executed 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 which 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.

Critical Accounting Policies

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

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

The accounting policies identified as critical are as follows:

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. The most significant estimates relate to revenue recognition based on the estimation of percentage of completion on uncompleted contracts, valuation of inventory, allowance for doubtful accounts, amortization methods and estimated lives of customer lists, acquisition-related contingent consideration and estimates of the fair value of reporting units and discounted cash flows used in determining whether goodwill has been impaired. Actual results could differ from those estimates.
 

 
 
22

 
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 against the allowance for doubtful accounts, and payment subsequently received on such receivables are credited to the allowance for doubtful accounts.

Goodwill and Other Long-lived Assets

We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable from the estimated future cash flows expected to result from their use and eventual disposition. Our long-lived assets subject to this evaluation include property and equipment and amortizable intangible assets. We assess the impairment of goodwill annually as of April 30 and whenever events or changes in circumstances indicate that it is more likely than not that an impairment loss has been incurred. Intangible assets other than goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. We are required to make judgments and assumptions in identifying those events or changes in circumstances that may trigger impairment. Some of the factors we consider include a significant decrease in the market value of an asset, significant changes in the extent or manner for which the asset is being used or in its physical condition, a significant change, delay or departure in our business strategy related to the asset, significant negative changes in the business climate, industry or economic condition, or current period operating losses, or negative cash flow combined  with a history of similar losses or a forecast that indicates continuing losses associated with the use of an asset.

Our annual review for goodwill impairment for the fiscal years 2010 and 2009 found that no impairment existed. Our impairment review is based on comparing the fair value to the carrying value of the reporting units with goodwill. The fair value of a reporting unit is measured at the business unit level using a discounted cash flow approach that incorporates our estimates of future revenues and costs for those business units. Reporting units with goodwill include the Australia, Hartford, Lakewood, Portland, Sarasota, Seattle, St. Louis, Suisun City and Trenton Operations.  Our estimates are consistent with the plans and estimates that we are using to manage the underlying businesses. If we fail to deliver products and services for these business units, or market conditions for these businesses fail to improve, our revenue and cost forecasts may not be achieved and we may incur charges for goodwill impairment, which could be significant and could have a material adverse effect on our net equity and results of operations.

All of the our reporting units had implied fair values that ranged from 14% to 324% in excess of their carrying values, except for one reporting unit which had an implied fair value that was 9% in excess of its carrying value.  This reporting unit, which was acquired in fiscal 2008, carries a goodwill balance of  approximately $4,500,000 and primarily provides electrical power services in public service and healthcare, for which management continues to maintain a positive performance outlook, as discussed in the “Current Operating Trends and Financial Highlights” of  this section.  Although the percentage by which this reporting unit’s fair value exceeded it carrying value was not substantial in comparison to our other reporting units, management determined that this reporting unit was not reasonably likely to fail step one of the two step impairment test required by the Accounting Standards Codification, and as a result would not reasonably likely recognize a goodwill impairment in future periods that could materially impact our consolidated financial position, results of operations, cash flows or financial statement disclosures.

Additionally, we evaluated the reasonableness of the estimated fair value of our reporting units by reconciling to our market capitalization. This reconciliation allowed us to consider market expectations in corroborating the reasonableness of the fair value of our reporting units.  In addition, we compared our market capitalization, including an estimated control premium that an investor would be willing to pay for a controlling interest in the company and the discount that our common stock trades at compared to our peer group of companies.   The determination of a control premium and trading discount requires the use of judgment and is based primarily on comparable industry and deal-size transactions, related synergies and other benefits.  Our market capitalization has declined as a result of market-driven factors in our stock trading price.  This decline was consistent with overall market conditions and was not considered to be a result of changes in our expectations of future cash flows. Our reconciliation of the gap between our market capitalization and our aggregate fair value depends on various factors, some of which are qualitative and involve management judgment, including high backlog coverage of future revenue to generate future operating cash flow.

 
23

 

Deferred Income Taxes

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

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

Revenue Recognition

We generate our revenue by providing design-build engineering services for communications infrastructure. Our engineering services report revenue pursuant to customer contracts that span varying periods of time. We report revenue from contracts when persuasive evidence of an arrangement exists, fees are fixed or determinable, and collection is reasonably assured.

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

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

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

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

Recently Issued Accounting Pronouncements

We have adopted the authoritative guidance issued by the FASB concerning the FASB Accounting Standards Codification (ASC)(Codification) as the source of authoritative accounting and reporting standards to be applied by nongovernmental entities to financial statements that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).  The FASB ASC is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of the FASB Codification did not have a material impact on our consolidated financial statements. The GAAP references in the accompanying consolidated financial statements reflect the FASB Codification.

On May 1, 2009, we adopted authoritative guidance issued by the FASB on business combinations. The guidance retains the fundamental requirements that the acquisition method of accounting (previously referred to as the purchase method of accounting) be used for all business combinations, but requires a number of changes, including changes in the way assets and liabilities are recognized and measured as a result of business combinations. It also requires the capitalization of in-process research and development at fair value and requires the expensing of acquisition-related costs as incurred. We applied this statement to account for the acquisition of Pride in November 2009.

On May 1, 2009, we adopted the authoritative guidance issued that changes the accounting and reporting for noncontrolling interests. Noncontrolling interests are to be reported as a component of equity separate from the parent's equity, and purchases or sales of equity interests that do not result in a change in control are to be accounted for as equity transactions. In addition, net income attributable to a noncontrolling interest is to be included in net income and, upon a loss of control, the interest sold, as well as any interest retained, is to be recorded at fair value with any gain or loss recognized in net income. The adoption of this pronouncement had no impact on our consolidated financial position, results of operations or cash flows.  However, we reclassified minority interest as noncontrolling interest, which is reported as a component of equity separate from our shareholders’ equity in the condensed consolidated balance sheets. Additionally, the net (loss) income attributable to noncontrolling interest is presented separately on the face of the condensed consolidated statements of income to conform to this standard.
 

 
 
24

 
 
 
On May 1, 2009, we adopted FASB ASC Topic No. 815, “Derivatives and Hedging”. This statement is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures. The adoption of this pronouncement had no impact on our consolidated financial position, results of operations, cash flows or financial statement disclosures.

On May 1, 2009, we adopted FASB ASC Subtopic No. 815-40 “Contracts in Entity’s Own Equity”. The primary objective of this statement is to provide guidance for determining whether an equity-linked financial instrument or embedded feature within a contract is indexed to an entity’s own stock, which is a key criterion of the scope exception to the standards of “Derivatives and Hedging.” An equity-linked financial instrument or embedded feature within a contract that is not considered indexed to an entity’s own stock could be required to be classified as an asset or liability and marked-to-market through earnings. This statement specifies a two-step approach in evaluating whether an equity-linked financial instrument or embedded feature within a contract is indexed to its own stock. The first step involves evaluating the instrument’s contingent exercise provisions, if any, and the second step involves evaluating the instrument’s settlement provisions. The adoption of this pronouncement had no impact on our consolidated financial position, results of operations, cash flows or financial statement disclosures.

On May 1, 2009, we adopted FASB ASC Topic No. 855, “Subsequent Events”.  This statement established principles and requirements for subsequent events. It also details the period after the balance sheet date during which we should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which we should recognize events or transactions occurring after the balance sheet date in our financial statements and the required disclosures for such events. The adoption of these standards did not have a material impact on our consolidated financial position, results of operations, cash flows or financial statement disclosures.

In June 2009, the SEC issued Staff Accounting Bulletin No. 112 (SAB 112). SAB 112 revises or rescinds portions of the interpretative guidance included in the codification of SABs in order to make the interpretive guidance consistent with current U.S. GAAP. We do not expect the adoption of these standards to have a material impact on our consolidated financial statements.

In September 2009, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are not covered by software revenue guidance. This guidance provides another alternative for establishing fair value for a deliverable when vendor specific objective evidence or third-party evidence for deliverables in an arrangement cannot be determined. Under this guidance, companies will be required to develop a best estimate of the selling price for separate deliverables. Arrangement consideration will need to be allocated using the relative selling price method as the residual method will no longer be permitted. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted.   We are currently evaluating the impact, if any, of this guidance on our consolidated financial position, results of operations, cash flows or financial statement disclosures.

No other recently issued accounting pronouncement issued or effective after the end of the fiscal year is expected to have a material impact on our consolidated financial statements.

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required under Regulation S-K for “smaller reporting companies.”
 
 
25

 
 
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES



INDEX TO FINANCIAL STATEMENTS

   
Page
     
Report of Independent Registered Public Accounting Firm
 
F-2
     
Consolidated Balance Sheets as of April 30, 2010 and 2009
 
F-3 – F-4
     
Consolidated Statements of Income for the years ended April 30, 2010 and 2009
 
F-5
     
Consolidated Statements of Comprehensive Income for the years ended April 30, 2010 and 2009
 
F-6
     
 Consolidated Statements of  Equity for the years ended  April 30, 2010 and 2009    F-7-F-8
     
Consolidated Statements of Cash Flows for the years ended April 30, 2010 and 2009
 
F-9 – F-11
     
Notes to Consolidated Financial Statements
 
F-12 – F-30

 
 
 

 
 
F-1

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Shareholders
WPCS International Incorporated

We have audited the accompanying consolidated balance sheets of WPCS International Incorporated and Subsidiaries as of April 30, 2010 and 2009, and the related consolidated statements of income, comprehensive income, equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WPCS International Incorporated and Subsidiaries as of April 30, 2010 and 2009, and their results of operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the Company adopted the new accounting standard for the reporting of noncontrolling interests effective May 1, 2009.


 / s / J.H. COHN LLP
 Eatontown, NJ

July 29, 2010


 
F-2

 


WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

   
April 30,
   
April 30,
 
ASSETS
 
2010
   
2009
 
         
(Note 1)
 
CURRENT ASSETS:
           
             
Cash and cash equivalents
  $ 5,584,309     $ 6,396,810  
Accounts receivable, net of allowance of $206,617 and $155,458 at April 30, 2010 and April 30, 2009, respectively
    26,011,955       25,662,784  
Costs and estimated earnings in excess of billings on uncompleted contracts
    8,859,056       5,229,043  
Inventory
    2,720,052       2,481,383  
Prepaid expenses and other current assets
    848,626       1,674,952  
Prepaid income taxes
    -       295,683  
Deferred tax assets
    666,000       95,808  
Total current assets
    44,689,998       41,836,463  
                 
PROPERTY AND EQUIPMENT, net
    6,468,787       6,668,032  
                 
OTHER INTANGIBLE ASSETS, net
    2,112,058       1,983,879  
                 
GOODWILL
    34,919,384       32,549,186  
                 
OTHER ASSETS
    162,858       132,948  
                 
Total assets
  $ 88,353,085     $ 83,170,508  
 
 
The accompanying notes are an integral part of these consolidated financial statements.

 

 
 
F-3

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)


LIABILITIES AND EQUITY
 
April 30,
   
April 30,
 
   
2010
   
2009
 
         
(Note 1)
 
CURRENT LIABILITIES:
           
             
Current portion of loans payable
  $ 63,683     $ 89,210  
Income taxes payable
    107,417       -  
Borrowings under line of credit
    -       5,626,056  
Current portion of capital lease obligations
    81,950       96,001  
Accounts payable and accrued expenses
    10,962,016       8,997,296  
Billings in excess of costs and estimated earnings on uncompleted contracts
    1,853,131       2,511,220  
Deferred revenue
    503,502       507,650  
Due to joint venture partner
    3,288,294       2,951,008  
Acquisition-related contingent consideration
    851,516       -  
Total current liabilities
    17,711,509       20,778,441  
                 
Acquisition-related contingent consideration, net of current portion
    726,677       -  
Borrowings under line of credit
    5,626,056       -  
Loans payable, net of current portion
    46,364       71,634  
Capital lease obligations, net of current portion
    69,961       151,425  
Deferred tax liabilities
    2,018,462       1,493,366  
Total liabilities
    26,199,029       22,494,866  
                 
                 
                 
COMMITMENTS AND CONTINGENCIES
               
                 
EQUITY:
               
Preferred stock - $0.0001 par value, 5,000,000 shares authorized, none issued
    -       -  
                 
Common stock - $0.0001 par value, 25,000,000 shares authorized, 6,954,766 and 6,942,266 shares issued and outstanding at April 30, 2010 and April 30, 2009, respectively
    695       694  
Additional paid-in capital
    50,346,655       50,175,479  
Retained earnings
    10,235,590       9,381,189  
Accumulated other comprehensive income (loss) on foreign currency translation
    398,116       (425,883 )
                 
Total WPCS shareholders' equity
    60,981,056       59,131,479  
                 
Noncontrolling interest
    1,173,000       1,544,163  
                 
Total equity
    62,154,056       60,675,642  
                 
Total liabilities and equity
  $ 88,353,085     $ 83,170,508  
 

The accompanying notes are an integral part of these consolidated financial statements

 
F-4

 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME

   
Years Ended
 
   
April 30
 
   
2010
   
2009
 
             
             
REVENUE
  $ 105,769,432     $ 107,101,360  
                 
COSTS AND EXPENSES:
               
Cost of revenue
    77,930,126       78,334,115  
Selling, general and administrative expenses
    23,454,081       23,052,464  
Depreciation and amortization
    2,729,882       2,578,824  
Change in fair value of acquisition-related contingent consideration
    125,092       -  
                 
Total costs and expenses
    104,239,181       103,965,403  
                 
OPERATING INCOME
    1,530,251       3,135,957  
                 
OTHER EXPENSE (INCOME):
               
Interest expense
    397,765       421,022  
Interest income
    (15,849 )     (53,947 )
                 
INCOME BEFORE INCOME TAX PROVISION
    1,148,335       2,768,882  
                 
Income tax provision
    576,226       989,027  
                 
NET INCOME
    572,109       1,779,855  
                 
Net (loss) income attributable to noncontrolling interest
    (282,292 )     108,228  
                 
NET INCOME ATTRIBUTABLE TO WPCS
  $ 854,401     $ 1,671,627  
                 
Basic net income per common share attributable to WPCS
  $ 0.12     $ 0.23  
                 
Diluted net income per common share attributable to WPCS
  $ 0.12     $ 0.23  
                 
Basic weighted average number of common shares outstanding
    6,945,280       7,131,967  
                 
Diluted weighted average number of common shares outstanding
    6,970,065       7,154,285  
 

The accompanying notes are an integral part of these consolidated financial statements.


 
F-5

 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

   
Years Ended
 
   
April 30
 
   
2010
   
2009
 
Net income
  $ 572,109     $ 1,779,855  
Other comprehensive income (loss) -
               
  Foreign currency translation adjustments, net of tax effects of
    823,686       (604,805 )
  $134,000 in 2010 and $- in 2009
               
Comprehensive income
    1,395,795       1,175,050  
                 
Comprehensive (income) loss attributable to noncontrolling interest
    282,605       (126,173 )
Comprehensive income attributable to WPCS
  $ 1,678,400     $ 1,048,877  
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
F-6

 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF EQUITY
 
                                         
Accumulated
                   
                                       
Other Compre-
                   
                           
Additional
         
hensive Income
   
WPCS
             
   
Preferred Stock
   
Common Stock
   
Paid-In
   
Retained
   
(Loss), net of
   
Shareholders'
   
Noncontrolling
   
Total
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Earnings
   
 taxes
   
Equity
   
Interest
   
Equity
 
                                                             
                                                             
BALANCE, MAY 1, 2008
    -     $ -       7,251,083     $ 725     $ 50,775,938     $ 7,709,562     $ 196,867     $ 58,683,092     $ 1,417,990     $ 60,101,082  
                                                                                 
Fair value of stock options granted to employees
    -       -       -       -       134,240       -       -       134,240       -       134,240  
                                                                                 
Equity issuance cost
    -       -       -       -       (5,000 )     -       -       (5,000 )     -       (5,000 )
                                                                                 
Repurchase of common stock
    -       -       (308,817 )     (31 )     (729,699 )     -       -       (729,730 )     -       (729,730 )
                                                                                 
Accumulated other comprehensive loss
    -       -       -       -       -       -       (622,750 )     (622,750 )     17,945       (604,805 )
                                                                                 
Net income attributable to noncontrolling interest
    -       -       -       -       -       -       -       -       108,228       108,228  
                                                                                 
Net income attributable to WPCS
    -       -       -       -       -       1,671,627       -       1,671,627       -       1,671,627  
                                                                                 
BALANCE, APRIL 30, 2009
    -     $ -       6,942,266     $ 694     $ 50,175,479     $ 9,381,189     $ (425,883 )   $ 59,131,479     $ 1,544,163     $ 60,675,642  
 

 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
F-7

 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF EQUITY – CONTINUED

                             Accumulated                    
                            Other Compre-                    
                Additional          
hensive Income
    WPCS              
   
Preferred Stock
   
Common Stock
   
Paid-In
   
Retained
   
(Loss), net of
   
Shareholders'
   
Noncontrolling
   
Total
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Earnings
   
taxes
   
Equity
   
Interest
   
Equity
 
                                                             
BALANCE, MAY 1, 2009
    -     $ -       6,942,266     $ 694     $ 50,175,479     $ 9,381,189     $ (425,883 )   $ 59,131,479     $ 1,544,163     $ 60,675,642  
                                                                                 
Fair value of stock options granted to employees
    -       -       -       -       141,551       -       -       141,551       -       141,551  
                                                                                 
Distributions to noncontrolling interest
    -       -       -       -       -       -       -       -       (88,558 )     (88,558 )
                                                                                 
Net proceeds from exercise of stock options
    -       -       12,500       1       29,625       -       -       29,626       -       29,626  
                                                                                 
Accumulated other comprehensive income
    -       -       -       -       -       -       823,999       823,999       (313 )     823,686  
                                                                                 
Net loss attributable to noncontrolling interest
    -       -       -       -       -       -       -       -       (282,292 )     (282,292 )
                                                                                 
Net income attributable to WPCS
    -       -       -       -       -       854,401       -       854,401       -       854,401  
                                                                                 
BALANCE, APRIL 30, 2010
    -     $ -       6,954,766     $ 695     $ 50,346,655     $ 10,235,590     $ 398,116     $ 60,981,056     $ 1,173,000     $ 62,154,056  

 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
F-8

 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Years Ended
 
   
April 30
 
   
2010
   
2009
 
OPERATING ACTIVITIES :
           
Net income
  $ 572,109     $ 1,779,855  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    2,729,882       2,578,824  
Fair value of stock options granted to employees
    141,551       134,240  
Provision for doubtful accounts
    170,981       131,743  
Amortization of debt issuance costs
    49,198       12,266  
Change in the fair value of acquisition-related contingent consideration
    125,092       -  
Loss on sale of fixed assets
    17,268       29,649  
Deferred income taxes
    (328,494 )     (126,583 )
Changes in operating assets and liabilities, net of effects of acquisitions:
               
Accounts receivable
    742,748       3,260,420  
Costs and estimated earnings in excess of billings on uncompleted contracts
    (3,506,627 )     (1,393,027 )
Inventory
    (239,039 )     299,260  
Prepaid expenses and other current assets
    684,957       (514,494 )
Other assets
    (29,910 )     560,890  
Accounts payable and accrued expenses
    1,594,416       (294,564 )
Billings in excess of costs and estimated earnings on uncompleted contracts
    (754,629 )     (1,148,341 )
Deferred revenue
    (4,147 )     (94,953 )
Income taxes payable
    410,198       (176,998 )
NET CASH PROVIDED BY OPERATING ACTIVITIES
    2,375,554       5,038,187  

 
The accompanying notes are an integral part of these consolidated financial statements.



 
F-9

 

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH FLOWS – CONTINUED

   
Years Ended
 
   
April 30
 
   
2010
   
2009
 
             
INVESTING ACTIVITIES:
           
Acquisition of property and equipment, net
    (1,520,648 )     (1,233,829 )
Acquisition of businesses, net of cash received
    (1,676,671 )     (3,792,769 )
NET CASH USED IN INVESTING ACTIVITIES
    (3,197,319 )     (5,026,598 )
                 
FINANCING ACTIVITIES:
               
Net proceeds from exercise of stock options
    29,626       -  
Repurchase of common stock
    -       (729,730 )
Equity issuance costs
    -       (5,000 )
Borrowings under lines of credit
    -       3,250,000  
Repayments under lines of credit
    -        (2,750,000 )
Repayments of loans payable, net     (101,589     (1,273,179 )
Borrowings from joint venture partner
    143,790       581,642  
Repayments of capital lease obligations
    (95,515 )     (88,069 )
Distribution to noncontrolling interest
    (88,558 )     -  
NET CASH USED IN  FINANCING ACTIVITIES
    (112,246 )     (1,014,336 )
                 
Effect of exchange rate changes on cash
    121,510       (49,973 )
                 
NET DECREASE  IN CASH AND CASH EQUIVALENTS
    (812,501 )     (1,052,720 )
CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR
    6,396,810       7,449,530  
CASH AND CASH EQUIVALENTS, END OF THE YEAR
  $ 5,584,309     $ 6,396,810  

 
The accompanying notes are an integral part of these consolidated financial statements.



 
F-10

 

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH FLOWS – CONTINUED
                

    Years Ended  
   
April 30, 2010
   
April 30, 2009
 
             
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
           
Cash paid during the period for:
           
Interest
  $ 397,768     $ 408,752  
Income taxes
  $ 487,932     $ 1,284,710  
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
                 
                 
Issuance of notes for property and equipment
  $ -     $ 28,224  
 

 
The accompanying notes are an integral part of these consolidated financial statements
 
 
 
F-11

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE 1 - BASIS OF PRESENTATION

This Annual Report on Form 10-K includes 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".   Domestic operations include WPCS Incorporated, WPCS International – Suisun City, Inc. (Suisun City Operations), WPCS International - St. Louis, Inc. (St. Louis Operations), WPCS International – Lakewood, Inc. (Lakewood Operations), WPCS International – Hartford, Inc. (Hartford Operations), WPCS International – Sarasota, Inc. (Sarasota Operations), WPCS International – Trenton, Inc. (Trenton Operations), WPCS International – Seattle, Inc. (Seattle Operations), and WPCS International – Portland, Inc. (Portland Operations).   International operations include WPCS Asia Limited, Taian AGS Pipeline Construction Co. Ltd. (China Operations), and WPCS Australia Pty Ltd, WPCS International – Brisbane, Pty Ltd., WPCS International – Brendale, Pty Ltd., and The Pride Group (QLD) Pty Ltd. (Pride), (collectively the Australia Operations).

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

Certain reclassifications have been made to prior period financial statements to conform to current presentation.
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

In June 2009, the Financial Accounting Standards Board (FASB) issued guidance that establishes the Accounting Standards Codification (ASC) Topic No. 105, “Codification”, which confirmed that the FASB Accounting Standards Codification will become the single official source of authoritative U.S. Generally Accepted Accounting Principles (GAAP) (other than guidance issued by the SEC), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force ( "EITF" ) and related literature, and only one level of authoritative U.S. GAAP will exist. All other literature will be considered non-authoritative. The Codification does not change U.S. GAAP; instead, it introduces a new structure that is organized in an easily accessible, user-friendly online research system. The Codification became effective for interim and annual periods ending on or after September 15, 2009. The Company has applied the new Codification references in our consolidated financial statements.

A summary of significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:

Principles of Consolidation

All significant intercompany transactions and balances have been eliminated in these consolidated financial statements.

Cash and Cash Equivalents

Cash and cash equivalents include all cash and highly-liquid investments with a maturity at time of purchase of three months or less.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.  The Company reduces credit risk by placing its temporary cash and cash equivalents with major financial institutions.  At times, such amounts may exceed Federally insured limits.  The Company reduces credit risk related to accounts receivable by routinely assessing the financial strength of its customers and maintaining an appropriate allowance for doubtful accounts based on its history of write-offs, current economic conditions and an evaluation of the credit risk related to specific customers. The Company does not require collateral in most cases, but may file claims against the construction project if a default in payment occurs.

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 $3,554,455 and $3,499,161 at April 30, 2010 and 2009, respectively.

 
F-12

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Inventory

Inventory consists of materials, parts and supplies principally valued at the lower of cost using the first-in-first-out (FIFO) method, or market.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are provided for, using straight-line methods, in amounts sufficient to charge the cost of depreciable assets to operations over their estimated service lives. Repairs and maintenance costs are charged to operations as incurred. Leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful lives of the assets.

Goodwill and Other Intangible Assets

Goodwill represents the value of the Company's wholly-owned subsidiaries that are in excess of the fair value of identifiable net assets as of date of acquisition.  Other intangible assets have finite useful lives and are comprised of customer lists and backlog.

Goodwill is tested annually for impairment, utilizing a two-step methodology. The initial step requires the Company to determine the fair value of the business acquired (reporting unit) and compare it to the carrying value, including goodwill, of such business (reporting unit). If the fair value exceeds the carrying value, no impairment loss is recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of the unit may be impaired. The amount, if any, of the impairment is then measured in the second step, based on the excess, if any, of the reporting unit’s carrying value of goodwill over its implied value of goodwill.  The Company performed its annual impairment test as of April 30, 2010 and 2009 and determined that the goodwill was not impaired.

The Company determines the fair value of the businesses acquired (reporting units) for purposes of this test using the Income Approach, which utilizes a discounted cash flow model, as the Company believes that this approach best approximates the fair value of its reporting units. Significant estimates used in the valuation include estimates of future cash flows, both future short-term and long-term growth rates, and estimated cost of capital for purposes of arriving at a discount factor. The fair value of the Company’s reporting units derived using discounted cash flow models exceeded the carrying values of the reporting units at April 30, 2010 and 2009.

All of the Company’s reporting units had implied fair values that ranged from 14% to 324% in excess of their carrying values, except for one reporting unit which had an implied fair value that was 9% in excess of its carrying value.  This reporting unit, which was acquired in fiscal 2008, carries a goodwill balance of approximately $4,500,000 and primarily provides electrical power services in public service and healthcare, for which management continues to maintain a positive performance outlook.   Although the percentage by which this reporting unit’s fair value exceeded it carrying value was not substantial in comparison to the Company’s other reporting units, management determined that this reporting unit was not reasonably likely to fail step one of the two step impairment test required by the Accounting Standards Codification, and as a result would not reasonably likely recognize a goodwill impairment in future periods that could materially impact the Company’s consolidated financial position, results of operations, cash flows or financial statement disclosures.

Additionally, the Company evaluated the reasonableness of the estimated fair value of its reporting units by reconciling to its market capitalization. This reconciliation allowed the Company to consider market expectations in corroborating the reasonableness of the fair value of its reporting units.    In addition, the Company compared its market capitalization, including an estimated control premium that an investor would be willing to pay for a controlling interest in the Company and the discount that the Company’s common stock trades at compared to its peer group of companies.   The determination of a control premium and trading discount requires the use of judgment and is based primarily on comparable industry and deal-size transactions, related synergies and other benefits.  The Company’s market capitalization declined during the third quarter of fiscal 2009, and subsequently, as a result of market-driven declines in its stock trading price. This decline was consistent with overall market conditions and was not considered to be a result of changes in its expectations of future cash flows. The Company’s reconciliation of the gap between its market capitalization and the aggregate fair value of the Company depends on various factors, some of which are qualitative and involve management judgment, including high backlog coverage of future revenue and experience in meeting operating cash flow targets.
 
 
 
F-13

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
Effective May 1, 2009, in connection with the change in the structure of the Company’s internal organization, the Company reclassified certain operations from the specialty construction segment to the electrical power segment.  The reorganized composition of these two segments was completed in conjunction with the Company’s branding strategy and to better represent the Company’s design-build engineering capabilities. In addition, through this reorganization the Company consolidated certain operations to reduce administrative overhead expenses and improve operating efficiencies.

Goodwill through the years ended April 30, 2010 and 2009 consisted of the following:

   
Wireless
   
Specialty
   
Electrical
       
   
Communication
   
Construction
   
Power
   
Total
 
                         
Beginning balance, May 1, 2008
  $ 10,921,998     $ 2,800,272     $ 15,265,231     $ 28,987,501  
                                 
Trenton Operations acquisition
    -       -       2,500,000       2,500,000  
Seattle Operations acquisition
    -       -       6,353       6,353  
St. Louis Operations acquisition
    -       539,570       -       539,570  
Suisun City Operations acquisition
    -       -       81,366       81,366  
Australia Operations acquisition
    -       -       858,978       858,978  
Portland Operations acquisition
    -       -       17,888       17,888  
Foreign currency translation adjustments
    -       -       (442,470 )     (442,470 )
                                 
Beginning balance, May 1, 2009
  $ 10,921,998     $ 3,339,842     $ 18,287,346     $ 32,549,186  
                                 
Portland Operations acquisition
    -       -       121,786       121,786  
Australia Operations acquisitions
    -       -       1,717,484       1,717,484  
Foreign currency translation adjustments
    -       -       530,928       530,928