The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
The Company currently specializes in low voltage communications, audio-visual and security contracting
services, conducting business in one segment but two operation centers, through its wholly-owned domestic subsidiaries, WPCS International
- Suisun City, Inc. (“Suisun City Operations”) and WPCS International - Texas Operations, Inc. (“Texas Operations”).
The Company is a full-service low voltage
contractor that specializes in the installation and service of Voice & Data Networks, Security Systems, Audio-Visual Solutions,
and Distributed Antenna Systems and provides experienced project management and delivers complex projects to key vertical markets
that include Healthcare, Education, Transportation, Energy & Utilities, Oil & Gas, Manufacturing, Commercial Real Estate,
Financial, Government, etc.
The Company also has strategic alliances
with technology partners to provide consulting and application software development services for collaboration, visualization and
unified communications and is aligned with major manufacturers to provide the products and technology for seamless integrated and
enhanced user experience for enterprise solutions.
Basis of Presentation
The consolidated financial statements of
WPCS International Incorporated, a Delaware corporation (“WPCS”) and its wholly and majority-owned subsidiaries, (collectively,
the “Company”) included in this Report for the years ended April 30, 2016 and 2015, reflect the accounts of current
and former entities as either continued or discontinued operations, as discussed below.
Continuing operations
for the years ended April 30, 2016 and 2015 include the results of operations of the: WPCS International Incorporated (corporate
operating expenses), Suisun City Operations and the Texas Operations, the Company’s only two active operations; WPCS Incorporated,
an inactive subsidiary; and WPCS International – Trenton, Inc. (“Trenton Operations”), which was closed in September
2013.
Discontinued operations for the year
ended April 30, 2015 include the results of The Pride Group (QLD) Pty Ltd. (“Pride”), BTX Trader, LLC
(“BTX”) and WPCS Asia Limited, a 60% joint venture interest in Tai'an AGS Pipeline Construction Co. Ltd. (the
“China Operations”), as well as the various transactions involving the sale of substantially all of the assets of
each of WPCS International - Seattle, Inc. (“Seattle Operations”) and WPCS International - Portland, Inc.
(“Portland Operations”). Discontinued operations for the year ended April 30, 2016 only includes results
from the China Operations.
NOTE 2 – LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2016, The Company had a working capital surplus of approximately $2,061,000. This compares
to a working capital deficit of approximately $1,246,000 at April 30, 2015.
The Company’s cash and cash equivalents
balance at April 30, 2016 was $2,236,000 as compared to $2,364,000 at April 30, 2015.
The Company's future plans and growth are
dependent on its ability to increase revenues and continue its business development efforts surrounding its contract award backlog.
If the Company continues to incur losses and revenues do not generate from the backlog as expected, the Company may need to raise
additional capital to expand its business and continue as a going concern. The Company currently anticipates that its current cash
position, along with the receipt of $1,150,000 associated with the Cooper Union settlement (see Footnote 15 – Subsequent
Events), will be sufficient to meet its working capital requirements to continue its sales and marketing efforts for at least 12
months from the filing date of this report. If in the future our plans or assumptions change or prove to be inaccurate, the Company
may need to raise additional funds through public or private debt or equity offerings, financings, corporate collaborations, or
other means. The Company may also be required to reduce operating expenditures or investments in its infrastructure.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
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.
Reclassifications
Certain reclassifications have been made
in prior years’ consolidated financial statements to conform to the current year’s presentation. These reclassifications
reflect the results of the BTX, China, Australia and Seattle Operations as discontinued operations for all periods presented.
Use of Estimates
In preparing financial statements in conformity
with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenue and expenses during the reporting period. The most significant estimates relate to the
calculation of percentage-of-completion on uncompleted contracts, allowance for doubtful accounts, realization of deferred tax
assets, and valuation of equity instruments. Actual results could differ from these estimates.
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 domestic 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.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
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.
As of April 30, 2016, the Company has two customers who comprised 55% of the Company’s total
accounts receivable as compared to one customer who comprised 61% of the total accounts receivable at April 30,2015. Also included
in the accounts receivable is retainage receivable of $326,000 and $1,119,000 at April 30, 2016 and 2015, respectively, and both
the retainer and aged accounts receivable are expected to be collected.
Comprehensive Loss
The Company reports comprehensive loss
and its components in its consolidated financial statements. Comprehensive loss consists of net loss and foreign currency translation
adjustments, affecting stockholders’ equity that, under Accounting Principles Generally Accepted in the United States of America (“U.S, GAAP”), is excluded from net loss.
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 (two to
three years).
Fair Value of Financial Instruments
The Company’s material financial
instruments at April 30, 2016 and 2015 for which disclosure of fair value is required by certain accounting standards consisted
of cash and cash equivalents, accounts receivable, account payable, loans payable, promissory notes and short-term bank loan. The
fair values of cash and cash equivalents, accounts receivable, and account payable are equal to their carrying value because of
their liquidity and short-term maturity. Management believes that the fair values of loans payable, promissory notes and short-term
bank loan do not differ materially from their aggregate carrying values, because the interest rates of these financial instruments
approximate the prevailing interest rates management expects to receive if additional financing was necessary.
As defined by the Accounting Standards Codification (“ASC”), fair value measurements
and disclosures establish a hierarchy that prioritizes fair value measurements based on the type of inputs used for the various
valuation techniques (market approach, income approach and cost approach). The levels of hierarchy are described below:
|
·
|
Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities.
|
|
·
|
Level 2: Inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly: these include quoted prices for similar assets or liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals.
|
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
|
·
|
Level 3: Unobservable inputs
that reflect the reporting entity’s own assumptions, as there is little, if any, related market activity.
|
|
|
The Company's chief financial officer determines its valuation policies and procedures associated with Level 3 inputs.
|
Fair Value of Series F, Series F-1, Series G and Series
G-1 Preferred Stock
The fair value of the Preferred Stock is based on unobservable
inputs. Such unobservable inputs include use of the Company’s own data or assumptions such as earnings and discounted cash
flow. The Company estimates of the fair value of the Preferred Stock is based on assumptions that market participants would use
in their estimates of fair value. Some of these assumptions include estimates for expected dividends and the fair value of the
underlying common stock. Using the Black Sholes pricing model and input for risk free interest rate of .97%, volatility of 180.2%,
dividends of $0 and a three year term the fair value of the Preferred Series F and F-1 shares were determined to be $301.81 per
share and the Preferred Series G and G-1 were determined to be $350.43 per share.
Revenue Recognition
Domestically, the Company generates its
revenue by offering low voltage communications infrastructure contracting services. The Company’s contracting services report
revenue pursuant to customer contracts that span varying periods of time. The Company reports revenue from contracts when persuasive
evidence of an arrangement exists, fees are fixed or determinable, and collection is reasonably assured.
The Company records revenue and profit
from long-term contracts on a percentage-of-completion basis, measured by the percentage of contract costs incurred to date to
the estimated total costs for each contract. Cost-to-cost method is used because management considers it to be the best available measure of progress
on these contracts. Contracts in process are valued at cost plus accrued profits less earned revenues
and progress payments on uncompleted contracts. Contract costs include direct materials, direct labor, third party subcontractor
services and those indirect costs related to contract performance. Contracts are generally considered substantially complete when
engineering is completed and/or site construction is completed.
The Company has numerous contracts that
are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition.
Cost estimates are reviewed monthly on a contract-by-contract basis, and are revised periodically throughout the life of the contract
such that adjustments to profit resulting from revisions are made cumulative to the date of the revision. Significant management
judgments and estimates, including the estimated cost to complete projects, which determines the project’s percent complete,
must be made and used in connection with the revenue recognized in the accounting period. Current estimates may be revised as additional
information becomes available. If estimates of costs to complete long-term contracts indicate a loss, provision is made currently
for the total loss anticipated.
The length of the Company’s contracts
varies but is typically between three months and two years. Assets and liabilities related to long-term contracts are included
in current assets and current liabilities in the accompanying consolidated balance sheets, as they will be liquidated in the normal
course of contract completion, although this may require more than one year.
The Company also recognizes certain revenue
from short-term contracts when the services have been provided to the customer. For maintenance contracts, revenue is recognized
ratably over the service period.
Other Concentrations
As of April 30, 2016, the Company has
53 union employees in its Suisun City Operations. At April 30, 2016, 76% of the Company’s labor force is subject to collective
bargaining agreements. Although the Company’s past experience has been favorable with respect to resolving conflicting demands
with these unions, it is always possible that a protracted conflict may occur which could impact the renewal of the collective
bargaining agreements. The current union contract is scheduled to expire in December 2017.The Company hires union employees on
an “as needed basis” and the number of union employees will vary depending on the number of jobs in process.
For the fiscal year ended April 30, 2016
and April 30, 2015, the Company had one customer, which accounted for 16.8% and 60.6% of the Company’s revenue, respectively.
Share
Based Compensation
The Company estimates the fair value of stock options granted using the Black-Scholes-Merton
option-pricing model. The Company determines the forfeiture rate based on the historical forfeitures of stock options previously
granted to employees and directors. Historically employee stocks options have generally fully vested prior to cancellation or
termination and therefore the Company has determined that the forfeiture rate was 0% for the years ended April 30, 2016 and 2015,
respectively. Compensation cost is then recognized on a straight-line basis over the vesting or service period and is net of estimated
forfeitures.
Income Taxes
The Company accounts for income taxes pursuant
to the asset and liability method which requires deferred income tax assets and liabilities to be computed annually for differences
between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date.
On a periodic basis, the Company evaluates
its ability to realize its deferred tax assets net of its deferred tax liabilities and adjusts such amounts in light of changing
facts and circumstances, including but not limited to the level of past and future taxable income, and the current and future expected
utilization of tax benefit carryforwards. The Company considers all available evidence, both positive and negative, to determine
whether, based on the weight of that evidence, a valuation allowance is required to reduce the net deferred tax assets to the amount
that is more likely than not to be realized in future periods. The Company considers past performance, expected future taxable
income and prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. The Company’s
forecast of expected future taxable income is based over such future periods that it believes can be reasonably estimated. The
Company will continue to evaluate the realization of its deferred tax assets and liabilities on a periodic basis, and will adjust
such amounts in light of changing facts and circumstances.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
The Company performed a review for uncertainty
in income tax positions in accordance with authoritative guidance. This review did not result in the recognition of any material
unrecognized tax benefits as of April 30, 2016 and 2015. Management continually evaluates expiring statutes of limitations, audits,
proposed settlements, changes in tax law and new authoritative rulings. The Company recognizes interest accrued related to unrecognized
tax benefits in interest expense and penalties in selling, general and administrative expenses.
For the years ended April 30, 2016
and 2015, the Company recognized no interest or penalties. The statute of limitations for the Company's federal, state and foreign
income tax returns for fiscal years 2013 to fiscal 2016 are still open.
Recently Issued Accounting Pronouncements
Fiscal 2016 Accounting Pronouncement
Adoptions
Reporting Discontinued Operations
In April 2014, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08 “Reporting Discontinued
Operations and Disclosures of Disposals of Components of an Entity.” ASU No. 2014-08 changes the criteria for reporting discontinued
operations and modifies related disclosure requirements. The new guidance is effective for us in our first quarter of fiscal 2016.
The Company does not expect any material impact from adoption of this guidance on the Company’s consolidated financial statements.
Debt Issuance Cost
In April 2015, the FASB issued ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs, which require debt issuance costs to be presented in the balance sheet as
a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount.
ASU 2015-03 is effective for us in our first quarter of fiscal 2016. The Company does not expect any material impact from adoption
of this guidance on the Company’s consolidated financial statements.
Fiscal 2017 Accounting Pronouncement
Adoptions
Disclosures of Uncertainties about an
Entity’s Ability to Continue as a Going Concern
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern (“ASU No. 2014-15”) that will require management to evaluate whether there
are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within
one year after the financial statements are issued on both an interim and annual basis. Management will be required to provide
certain footnote disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about
the Company’s ability to continue as a going concern. ASU No. 2014-15 becomes effective for us in the first quarter
of fiscal 2017.
The Company will adopt ASU No. 2014-15 during the first quarter of fiscal
2017, and its adoption is not expected to have a material impact on its financial statements.
Share-Based Payments with Performance
Targets
In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-12,
Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the
Requisite Service Period
(ASU 2014-12). ASU 2014-12 requires that a performance target that affect vesting and could be achieved
after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in
ASC 718,
Compensation
—
Stock Compensation
, as it relates to such awards. ASU 2014-12 is effective for use
in our first quarter of fiscal 2017 with early adoption permitted using either of two methods: (i) prospective to all awards
granted or modified after the effective date; or (ii) retrospective to all awards with performance targets that are outstanding
as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter,
with the cumulative effect of applying ASU 2014-12 as an adjustment to the opening retained earnings balance as of the beginning
of the earliest annual period presented in the financial statements. The Company will adopt ASU No. 2014-12 during the first quarter
of fiscal 2017, and its adoption is not expected to have a material impact on its financial statements.
Compensation-Stock Compensation
In March 2016, the FASB issued ASU No.
2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
This ASU
makes targeted amendments to the accounting for employee share-based payments. This guidance is to be applied using various
transition methods such as full retrospective, modified retrospective, and prospective based on the criteria for the specific
amendments as outlined in the
guidance. The guidance is effective for annual periods, and interim periods within those annual
periods, beginning after December 15, 2016. Early adoption
is permitted, as long as all of the amendments are adopted in
the same period. The Company is currently evaluating the provisions of this guidance and
assessing its impact on the Company’s
consolidated financial statements and disclosures.
Income Taxes
In November 2015, the FASB
issued
ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”), which
changes how deferred taxes are classified on organizations’ balance sheets. ASU 2015-17 eliminates the current requirement
for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead,
organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments apply to all organizations
that present a classified balance sheet. ASU 2015-17 is effective for financial statements issued for annual periods
beginning after December 15, 2016, and interim periods within those annual periods. Early adoption of ASU 2015-17 is permitted.
The Company is currently evaluating the impact of adopting ASU 2015-17 on the consolidated financial statements.
Fiscal 2018 Accounting Pronouncement
Adoptions
Revenue Recognition
In March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).
This ASU amends the principal versus agent guidance in ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
which was issued in May 2014 (“ASU 2014-09”). Further, in April 2016, the FASB issued ASU No. 2016-10,
Revenue from
Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
. This ASU also amends ASU 2014-09 and
is related to the identification of performance obligations and accounting for licenses. The effective date and transition requirements
for both of these amendments to ASU 2014-09 are the same as those of ASU 2014-09, which was deferred for one year by ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
. That is, the guidance under these standards
is to be applied using a full retrospective method or a modified retrospective method, as outlined in the guidance, and is effective
for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted
only for annual periods, and interim period within those annual periods, beginning after December 15, 2016. The Company is currently
evaluating the provisions of each of these standards and assessing their impact on the Company’s consolidated financial statements
and disclosures.
Fiscal 2019 Accounting Pronouncement
Adoptions
Leases
In February 2016, the FASB issued ASU 2016-02,
Leases
("ASU 2016-02"). The standard amends the existing accounting standards for lease accounting, including
requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02
will be effective beginning in the first quarter of 2019. Early adoption of ASU 2016-02 is permitted. The new leases standard
requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application,
with an option to use certain transition relief. The Company is currently evaluating the impact of adopting ASU 2016-02 on our
consolidated financial statements.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTE 4 – BASIC AND DILUTED NET
LOSS PER COMMON SHARE
Basic and diluted net loss per common share
from continuing operations is computed as net loss from continuing operations less noncontrolling interest and dividends on preferred
stock, divided by the weighted average number of common shares outstanding for the period. Diluted net loss per common share reflects
the potential dilution that could occur from common stock issuable through exercise of stock options, warrants and Note conversions.
The table below presents the computations
of loss per share from continuing operations applicable to common stockholders, after consideration of noncontrolling interest
and dividends declared on preferred stock, as follows:
|
|
For the years ended
|
|
|
|
April 30,
|
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to WPCS common shareholders
|
|
$
|
(9,118,522
|
)
|
|
$
|
(9,506,300
|
)
|
Income (loss) from discontinued operations, basic and diluted
|
|
|
848,476
|
|
|
|
(1,822,239
|
)
|
Net loss attributable to WPCS common shareholders, basic and diluted
|
|
$
|
(8,270,046
|
)
|
|
$
|
(11,328,539
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding
|
|
|
2,290,050
|
|
|
|
672,723
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss from continuing operations per common share
|
|
$
|
(3.98
|
)
|
|
$
|
(14.13
|
)
|
Basic and diluted income (loss) from discontinued operations per common share
|
|
|
0.37
|
|
|
|
(2.71
|
)
|
Basic and diluted loss per common share
|
|
$
|
(3.61
|
)
|
|
$
|
(16.84
|
)
|
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
The following were excluded from the computation
of diluted shares outstanding due to the losses for the years ended April 30, 2016 and 2015, as they would have had an anti-dilutive
impact on the Company’s net loss (all amounts are rounded to 000).
|
|
As of April 30,
|
|
|
|
2016
|
|
|
2015
|
|
Common stock equivalents:
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
3,290,000
|
|
|
|
41,000
|
|
Series F and F-1 preferred stock
|
|
|
-
|
|
|
|
496,000
|
|
Series G and G-1 preferred stock
|
|
|
-
|
|
|
|
291,000
|
|
Series H and H-1 preferred stock
|
|
|
1,076,000
|
|
|
|
-
|
|
Make-whole on preferred shares
|
|
|
-
|
|
|
|
204,000
|
|
Common stock purchase warrants
|
|
|
1,295,000
|
|
|
|
16,000
|
|
Totals
|
|
|
5,661,000
|
|
|
|
1,048,000
|
|
NOTE 5 - COSTS AND ESTIMATED EARNINGS
ON UNCOMPLETED CONTRACTS
The asset, “Costs and estimated earnings
in excess of billings on uncompleted contracts”, represents revenue recognized in excess of amounts billed. The liability,
“Billings in excess of costs and estimated earnings on uncompleted contracts”, represents billings in excess of revenue
recognized. Costs and estimated earnings on uncompleted contracts consist of the following at April 30, 2016 and 2015:
|
|
April 30, 2016
|
|
|
April 30, 2015
|
|
|
|
|
|
|
|
|
Costs incurred on uncompleted contracts
|
|
|
28,884,776
|
|
|
$
|
32,008,307
|
|
Estimated contract earnings
|
|
|
4,367,463
|
|
|
|
6,031,338
|
|
|
|
|
33,252,239
|
|
|
|
38,039,645
|
|
Less: Billings to date
|
|
|
34,253,318
|
|
|
|
38,965,672
|
|
Total
|
|
$
|
(1,001,079
|
)
|
|
$
|
(926,027
|
)
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
357,210
|
|
|
$
|
420,434
|
|
Billings in excess of cost and estimated earnings on uncompleted contracts
|
|
|
1,358,289
|
|
|
|
1,346,461
|
|
Total
|
|
$
|
(1,001,079
|
)
|
|
$
|
(926,027
|
)
|
Revisions in the estimated gross profits
on contracts and contract amounts are made in the period in which circumstances requiring the revisions become known. Although
management believes it has established adequate procedures for estimating costs to complete on open contracts, it is at least reasonably
possible that additional significant costs could occur on contracts prior to completion.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at April 30,
2016 and 2015:
|
|
Estimated
useful life
(years)
|
|
2016
|
|
|
2015
|
|
Furniture and fixtures
|
|
5-7
|
|
$
|
74,265
|
|
|
$
|
74,265
|
|
Computers and software
|
|
2-3
|
|
|
283,928
|
|
|
|
273,755
|
|
Vehicles
|
|
5-7
|
|
|
909,175
|
|
|
|
799,012
|
|
Machinery and equipment
|
|
5
|
|
|
88,689
|
|
|
|
88,689
|
|
Leasehold improvements
|
|
2-3
|
|
|
291,688
|
|
|
|
291,688
|
|
|
|
|
|
|
1,647,745
|
|
|
|
1,527,409
|
|
Less accumulated depreciation
|
|
|
|
|
(1,409,945
|
)
|
|
|
(1,364,423
|
)
|
|
|
|
|
$
|
237,800
|
|
|
$
|
162,986
|
|
Depreciation and amortization expense
for property and equipment for the years ended April 30, 2016 and 2015 was approximately $65,000 and $60,000, respectively.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTE 7 – INCOME FROM SECTION 16 SETTEMENTS
For the years ended April 30, 2016 and
2015 the Company received income from Section 16 settlements of approximately $400,000 and $1,402,000, respectively. This income
was comprised of forgiveness of certain promissory notes and receipt of cash as part of the settlements with certain note holders
who were defendants named in a Section 16 litigation brought by a shareholder of WPCS. These settlements resolved all issues related
to this litigation.
NOTE 8 – BANK LINE OF CREDIT
On May 20, 2015, the Company entered into
an asset-based revolving credit line agreement with a California-based bank, which provides a $1,000,000 line of credit for its
Suisun Operations. The line of credit expires on August 15, 2017, has an interest rate of prime plus 2% and is subject to a monthly
borrowing base calculation based upon eligible accounts receivable. The line of credit is secured by all the assets of the Company.
In addition, the line of credit requires our Suisun Operations to comply with certain financial and operational covenants. These
covenants require our Suisun Operations to, among other things, maintain a certain quick ratio and a minimum net worth, which the
Suisun Operations is in compliance with. As of the filing date of this report the Company has not drawn down on the line of credit.
NOTE 9 – LOANS PAYABLE
As of April 30, 2016 and 2015 the Company
had approximately $149,000 and $84,000 of loans payable, respectively. These loans are associated with the purchase or automobiles
and carry interest rates ranging from 3.89% to 4.89%. The due dates of these loans range from August 2016 to February 2020. As
of April 30, 2016 the Company has classified approximately $54,000 as short term and $95,000 as long term loans payable.
NOTE 10 - RETIREMENT PLANS
Employee Benefit Plan
The Company and its subsidiaries participate
in employee savings plans under Section 401(k) of the Internal Revenue Code pursuant to which eligible employees may elect to defer
a portion of their annual salary by contributing to the plan. There were no Company matching contributions made for the years ended
April 30, 2016 and 2015.
Union Sponsored Pension Plan
The Company also contributes to one multiemployer
pension plan pursuant to a collective bargaining agreement. The information available to the Company about the multiemployer plan
in which it participates, whether via request to the plan or publicly available, is generally dated due to the nature of the reporting
cycle of multiemployer plans and legal requirements under the Employee Retirement Income Security Act (“ERISA”) as
amended by the Multiemployer Pension Plan Amendments Act (“MPPAA”). Based upon the plans most recently available annual
report, the Company’s contribution to the plan was less than 5% of each such plans total contributions. The “FIP/RP
Status Pending or Implemented” column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan
(RP) is either pending or has been implemented.
The risks of participation in a multiemployer
plan is different than single-employer plans in the following aspects; (i) assets contributed to the plan by a company may be
used to provide benefits to participants of other companies;(ii) if a participating company discontinues contributions to a plan,
other participating employers may have to cover and unfunded liability that may exist; and (iii) if the Company stops participating
in the multiemployer pension plan, the Company may be required to pay those plans an amount based on the underfunded status of
the plan, referred to as a withdrawal liability.
Information on the significant
multiemployer pension plan in which the Company participates is included in the table below.
|
|
|
|
|
|
|
|
|
|
Expiration of
|
|
|
|
|
|
|
|
|
Federal
|
|
Pension
|
|
FIP/RP
|
|
Collective
|
|
|
|
|
|
|
|
|
Identification
|
|
Certified Zone Status
|
|
Status Pending
|
|
Bargaining
|
|
Company's Contributions
|
|
Pension Plan Legal name
|
|
Number
|
|
2016
|
|
2015
|
|
or Implemented
|
|
Arrangement
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Brotherhood of Electrical Workers District No. 9 Pension Plan
|
|
93-6074829
|
|
NA
|
|
Green
|
|
No
|
|
11/30/2017
|
|
$
|
366,923
|
|
|
$
|
489,786
|
|
Governmental regulations impose certain
requirements relative to the multi-employer plans. In the event of plan termination or employer withdrawal, an employer may be
liable for a portion of the plan’s unfunded vested benefits. The Company has not received information from the plan’s
administrators to determine its share of unfunded vested benefits. The Company does not anticipate withdrawal from the plans, nor
is the Company aware of any expected plan terminations.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTE 11 - INCOME TAXES
Loss from continuing operations before provision
for income taxes shown below is based on the geographic locations to which such loss is attributed for the years ended April 30:
|
|
Years
Ended
|
|
|
|
April
30,
|
|
|
|
2016
|
|
|
2015
|
|
Loss income before income taxes:
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(3,629,549
|
)
|
|
$
|
(6,928,103
|
)
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Totals
|
|
$
|
(3,629,549
|
)
|
|
$
|
(6,928,103
|
)
|
The provision for income taxes from continuing
operations for the years ended April 30, 2016 and 2015 is summarized as follows:
|
|
Years Ended
|
|
|
|
April 30,
|
|
|
|
2016
|
|
|
2015
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
(175)
|
|
State
|
|
|
1,706
|
|
|
|
43,914
|
|
Foreign
|
|
|
-
|
|
|
|
25,940
|
|
Totals
|
|
|
1,706
|
|
|
|
69,679
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Totals
|
|
|
-
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
1,706
|
|
|
$
|
69,679
|
|
The actual provision for income taxes from
continuing operations reflected in the consolidated statements of operations for the years ended April 30, 2016 and 2015 differs
from the provision computed at the federal statutory tax rates. The principal differences between the statutory income tax and
the actual provision for income taxes are summarized as follows:
|
|
Years Ended
|
|
|
|
April 30,
|
|
|
|
2016
|
|
|
2015
|
|
Expected tax (benefit) provision at statutory rate (34%)
|
|
$
|
(1,233,531
|
)
|
|
$
|
(2,355,555
|
)
|
Rate differential between US statutory rate (34%) and foreign tax rates
|
|
|
-
|
|
|
|
25,940
|
|
Foreign Tax Deduction
|
|
|
-
|
|
|
|
(8,820
|
)
|
State and local taxes, net of federal tax benefit
|
|
|
(675,924
|
)
|
|
|
(214,606
|
)
|
Valuation allowance
|
|
|
1,288,447
|
|
|
|
(208,988
|
)
|
Non deductible financing costs
|
|
|
-
|
|
|
|
963,857
|
|
Write-off of Foreign Tax Credits
|
|
|
265,600
|
|
|
|
-
|
|
Inducement Expense
|
|
|
136,000
|
|
|
|
1,867,566
|
|
Permanent differences
|
|
|
1,706
|
|
|
|
285
|
|
Other
|
|
|
219,408
|
|
|
|
-
|
|
Totals
|
|
$
|
1,706
|
|
|
$
|
69,679
|
|
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
Deferred tax assets and liabilities are provided
for the effects of temporary difference between tax basis of an asset or liability and its reported amount in the consolidated
balance sheets. These temporary differences result in taxable or deductible amounts in future years.
The components of the Company’s deferred tax assets and liabilities
are as follows:
|
|
April 30, 2016
|
|
|
April 30, 2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
36,156
|
|
|
$
|
34,392
|
|
Bonus and vacation accruals
|
|
|
53,727
|
|
|
|
79,274
|
|
Non-qualified stock options
|
|
|
1,135,090
|
|
|
|
144,972
|
|
Federal benefit for foreign tax credit
|
|
|
-
|
|
|
|
265,600
|
|
Accruals
|
|
|
-
|
|
|
|
-
|
|
Valuation allowance
|
|
|
(1,224,973
|
)
|
|
|
(524,238
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets-current
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
-
|
|
|
|
-
|
|
Goodwill
|
|
|
-
|
|
|
|
-
|
|
Capital loss carryforward
|
|
|
4,126,345
|
|
|
|
3,884,389
|
|
Property and equipment
|
|
|
43,948
|
|
|
|
26,434
|
|
Net operating loss carryforward
|
|
|
12,590,576
|
|
|
|
12,262,334
|
|
Valuation allowance
|
|
|
(16,760,869
|
)
|
|
|
(16,173,157
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets-long term
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
At April 30, 2016, the Company has net operating loss carryforwards for Federal tax purposes approximating
$30.7 million expiring through 2036. The Company also has net operating loss carryforwards in multiple states approximating $36.8
million and expiring in varying amounts through 2036. However, the future use of some or all of such carried forward domestic losses
may be limited by Sec. 382 of Internal Revenue Code in the event of an ownership change.
The Company considers past performance, expected
future taxable income and prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. The
Company’s forecast of expected future taxable income is based over such future periods that it believes can be reasonably
estimated. Based on its analysis as of April 30, 2016, the Company increased its valuation allowance by approximately $1,288,447
on its domestic deferred tax assets. Due to the uncertainty of recognizing a tax benefit on loss carryforwards, the Company
has provided a valuation allowance of approximately $17,986,000 at April 30, 2016.
At April 30, 2016, the Company’s net
deferred tax assets are fully offset by a valuation allowance. The Company continues to analyze the realizability of its deferred
tax assets on a regular basis.
Accounting for uncertainty in income taxes
requires uncertain tax positions to be classified as non-current income tax liabilities unless they are expected to be paid within
one year. The Company has concluded that there are no uncertain tax positions requiring recognition in its consolidated financial
statements as of April 30, 2016 and 2015. The Company recognizes interest accrued related to unrecognized tax benefits in interest
expense. For the years ended April 30, 2016 and 2015 there was no interest expense relating to unrecognized tax benefits.
The Company and its domestic subsidiaries file
a U.S. federal consolidated income tax return. The U.S. federal statute of limitations remains open for the years April 30, 2013
and thereafter. State income tax returns are generally subject to examination for a period of 3 to 5 years after filing
the respective return. The Company is not currently under examination by any taxing authority.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTE 12 – SHAREHOLDERS’ EQUITY
Preferred Shares
Series H Preferred Stock
On June 30, 2015, the Company entered into Amendment, Waiver and Exchange Agreements (the “Exchange
Agreements”) with certain of its promissory note holders, who held $1,299,000 in principal amount of unsecured promissory
notes of the Company. Pursuant to the terms of the Exchange Agreements, the Holders agreed to exchange all of the existing indebtedness
for, and the Company agreed to issue to the Holders, an aggregate of 8,435 shares of the Company’s newly designated Series
H Convertible Preferred Stock, par value $0.0001 per share (“Series H Preferred Stock”). Each share of Series H is
convertible into 100 shares of common stock.
Accounting at issuance
The fair value of the Series H Preferred
Stock approximated the carrying value of the promissory note based on the fair market value of the common stock at $1.54 at the
date of the transaction and therefore not gain or loss was recorded upon extinguishment of debt.
Conversions of Series H Preferred Stock
For the period from July 2, 2015 to April
30, 2016, holders of Series H preferred stock have converted 5,797 shares of Series H preferred into 579,700 shares of common stock.
Series H-1 Preferred Stock
Between July 14 and July 20, 2015, the Company
entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with four Investors pursuant to
which the Company issued to the Investors an aggregate of 8,532 shares of Series H-1 Preferred Convertible Stock of the Company,
par value $0.0001 per share (“Series H-1 Shares”), and warrants to purchase 1,279,759 shares of common stock of the
Company , with an exercise price of between $1.63 and $1.66 per share (the “Warrants”). The purchase price for each
Series H-1 Share was between $163 and $166 and the purchase price for each warrant was $0.1250 per share of common stock, for an
aggregate purchase price for the Series H-1 Shares and Warrants of $1,575,000.
The Company has determined that the Warrants
qualify for accounting as equity classification. On the issuance date, the Company estimated the fair value of the Warrants at $1,649,000 under
the Black-Scholes option pricing model using the following primary assumptions: contractual term of 5.0 years, volatility
rate of 103%, risk-free interest rate of 2% and expected dividend rate of 0%. Based on the Warrant’s
relative fair value to the fair value of the Series H-1 Preferred Convertible Stock, approximately $841,000 of the $1,575,000
of proceeds was allocated to the Warrants, creating a corresponding preferred stock discount in the same amount.
Due to the reduction of allocated proceeds
to Series H-1 Shares the effective conversion price was approximately $0.80 per share or $704,000 in aggregate. Since the conversion
option of the preferred stock was immediately exercisable, the amount allocated to the Beneficial Conversion Feature was immediately
accreted to preferred dividends, resulting in an increase in the carrying value of the preferred stock.
Each share of Series H-1 Preferred Stock is convertible into 100 shares of common stock.
For the period from July 20, 2015 to April
30, 2016, holders of Series H-1 preferred stock have converted 413 shares of Series H-1 preferred into 41,300 shares of common
stock. The conversion of these shares resulted in a deemed dividend of $41,000.
Conversion of Preferred Shares
For the year ended April 30, 2016 the
Company issued approximately 1,408,000 common stock conversion shares, 205,000 common stock make-whole shares and 46,000
common stock dividend shares upon the conversion of series F, F-1, G, G-1, H and H-1 preferred shares. As a result of these
conversions, the Company has no remaining Series F, F-1, G or G-1 preferred shares remaining.
Stock-Based Compensation Plans
2014 Equity Incentive Plan
In January 2014, the Company adopted the
2014 Equity Incentive Plan, under which officers, directors, key employees or consultants may be granted options. In September
2015, the Company amended and restated the 2014 Equity Incentive Plan. Under the 2014 Equity Incentive Plan, 3,659,091 shares of
common stock were reserved for issuance upon the exercise of stock options, stock awards or restricted stock. Under the terms of
the 2014 Equity Incentive Plan, stock options are granted at exercise prices equal to the fair market value of the common stock
at the date of grant, and become exercisable and expire in accordance with the terms of the stock option agreement between the
optionee and the Company at the date of grant. These options generally vest from immediately to three years of continuous service
and have five-year contractual terms. At April 30, 2016, options to purchase 3,289,130 shares were outstanding at an exercise price
of $1.19 to $26.40. At April 30, 2016, there were 369,961 options available for grant under the 2014 Equity Incentive Plan.
2007 Incentive Stock Plan
In September 2006, the Company adopted the
2007 Incentive Stock Plan, under which officers, directors, key employees or consultants may be granted options. Under the 2007
Incentive Stock Plan, 2,597 shares of common stock were reserved for issuance upon the exercise of stock options, stock awards
or restricted stock. These shares were registered under Form S-8. Under the terms of the 2007 Incentive Stock Plan, stock options
are granted at exercise prices equal to the fair market value of the common stock at the date of grant, and become exercisable
and expire in accordance with the terms of the stock option agreement between the optionee and the Company at the date of grant.
These options generally vest based on between one to three years of continuous service and have five-year contractual terms. At
April 30, 2016, options to purchase 910 shares were outstanding at exercise prices ranging from $8.58 to $13.20. At April 30, 2016,
there were 1,687 options available for grant under the 2007 Incentive Stock Plan.
2006 Incentive Stock Plan
In September 2005, the Company adopted
the 2006 Incentive Stock Plan, under which officers, directors, key employees or consultants may be granted options. Under the
2006 Incentive Stock Plan, 2,597 shares of common stock were reserved for issuance upon the exercise of stock options, stock awards
or restricted stock. These shares were registered under Form S-8. Under the terms of the 2006 Incentive Stock Plan, stock options
are granted at exercise prices equal to the fair market value of the common stock at the date of grant, and become exercisable
and expire in accordance with the terms of the stock option agreement between the optionee and the Company at the date of grant.
These options generally vest based on between one to three years of continuous service and have five-year contractual terms. At
April 30, 2016, there were no options outstanding under this plan. At April 30, 2016, there were 2,597 options available for grant
under the 2006 Incentive Stock Plan.
2002 Plan
In March 2003, the Company established a stock
option plan pursuant to which options to acquire a maximum of 2,706 shares of the Company's common stock were reserved for grant
(the "2002 Plan"). These shares were registered under Form S-8. Under the terms of the 2002 Plan, the options are exercisable
at prices equal to the fair market value of the stock at the date of the grant and become exercisable in accordance with terms
established at the time of the grant. These options generally vest based on between one to three years of continuous service and
have five-year contractual terms. At April 30, 2016, options to purchase 233 shares were outstanding at exercise prices ranging
from $13.20 to $61.82. At April 30, 2016, there were no further shares available for grant under the 2002 Plan as the ten-year
term of the 2002 Plan had been reached.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
The following table summarizes stock option activities for the Company’s option plans for the years
ended April 30, 2016 and 2015:
|
|
Number of
Shares
|
|
|
Weighted
Average Exercise
Price
|
|
|
Total
Intrinsic
Value
|
|
|
Weighted
Average
Remaining
Contractual
Life (in
years)
|
|
Outstanding as of April 30, 2014
|
|
|
1,917
|
|
|
$
|
14.76
|
|
|
$
|
-
|
|
|
|
3.3
|
|
Employee options granted
|
|
|
46,363
|
|
|
|
20.06
|
|
|
|
-
|
|
|
|
5.1
|
|
Forfeited/expired
|
|
|
(7,592
|
)
|
|
|
25.52
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of April 30, 2015
|
|
|
40,688
|
|
|
|
18.79
|
|
|
|
-
|
|
|
|
5.9
|
|
Employee options granted
|
|
|
4,054,250
|
|
|
|
1.32
|
|
|
|
-
|
|
|
|
7.6
|
|
Forfeited/expired
|
|
|
(804,665
|
)
|
|
|
1.37
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of April 30, 2016
|
|
|
3,290,273
|
|
|
$
|
1.52
|
|
|
$
|
-
|
|
|
|
9.4
|
|
Options vested and exercisable
|
|
|
2,475,386
|
|
|
$
|
1.58
|
|
|
$
|
-
|
|
|
|
9.4
|
|
The Company recorded stock based compensation
expense of $2,506,234 and $170,562, which is included as part of selling, general and administrative expenses for the years ended
April 30, 2016 and 2015, respectively. The expense of $2,506,234 for the year ended April 30, 2016 is comprised of $2,438,734
for the issuance of stock options and $67,500 for the issuance of restricted common shares under a consulting agreement.
The following assumptions were used to
compute the fair value of stock options granted during the years ended April 30, 2016 and 2015:
|
|
For the years ended
|
|
|
April 30,
|
|
|
2016
|
|
2015
|
Exercise price
|
|
$1.19 - $1.53
|
|
$4.84 - $26.40
|
Expected stock price volatility
|
|
101.7% - 104.1%
|
|
103.0% - 131.5%
|
Risk-free rate of interest
|
|
1.3%-1.6%
|
|
1.1% - 1.3%
|
Expected term (years)
|
|
5.0
|
|
5.0
|
The risk-free rate is based on the rate
of U.S Treasury zero-coupon issues with a remaining term equal to the expected term of the option grants. Expected volatility
is based on the historical volatility of the Company’s common stock using the weekly closing price of the Company’s
common stock. The expected term represents the period that the Company’s stock-based awards are expected to be outstanding
and was calculated using the simplified method.
Modification of performance targets
On September 29, 2015 and November 2, 2015 the Company issued
801,250 options to purchase common stock to five employees. These options vested subject to the employees achieving performance
targets of either: (i) The Company records $30 million in sales revenue by April 30, 2016, or: (ii) The Company closes a change
in control merger transaction by September 1, 2016. The total compensation expense related to the options was calculated to be
approximately $822,000 using the inputs in the table above and the Company recognized that expense in its statement of operations
for the period from September 29, 2015 to April 30, 2016.
On April 25, 2015, the Company determined that the revenue target
of $30 million and the September 1, 2016 merger transaction date were not achievable during the measurement period. Subsequently,
the Compensation Committee of the Board of Directors modified the performance targets to allow vesting of the 801,250 stock options
if the Company completes a merger or acquisition transaction by December 31, 2016 and removed the revenue target and September
1, 2016 merger target date. The Company recalculated the compensation expense associated with this amendment on April 25, 2016,
to be approximately $776,000.
On April 25, 2016, the Company reversed the $822,000 of compensation
expense associated with the September and November 2015 issuances and plans to record the $776,000 of compensation expense calculated
on the April 25, 2016 amendment date, if and when the December 31, 2016 performance target is achieved.
Common Stock Warrants
The following is a summary of the common stock warrant activity
for the years ended April 30, 2016 and 2015:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Life in years
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, April 30, 2014
|
|
|
171,582
|
|
|
|
72.27
|
|
|
|
3.0
|
|
Warrants exchanged in connection with the Amendment
|
|
|
(156,072
|
)
|
|
|
47.39
|
|
|
|
-
|
|
Outstanding as of April 30, 2015
|
|
|
15,510
|
|
|
|
7.25
|
|
|
|
3.3
|
|
Warrants issued in connection with Series H-1 preferred stock for cash
|
|
|
1,279,759
|
|
|
|
1.66
|
|
|
|
4.3
|
|
Outstanding, April 30, 2016
|
|
|
1,295,269
|
|
|
|
1.73
|
|
|
|
4.2
|
|
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTE 13 - DISCONTINUED OPERATIONS
The Company previously disclosed the details regarding the
sales of Pride, BTX, and substantially all the assets of its Seattle Operations in its Form 10-K filed for the year ended April
30, 2015.
China Operations
On June
3, 2015, the Company entered into an Interest Purchase Agreement with
Halcyon Coast Investment (Canada) Ltd.
to sell TAGS in an "as-is", all-cash transaction, for a total purchase price of $1,500,000 and received a $150,000 refundable
deposit at signing. The Transaction closed on August 14, 2015, whereby the Company received the remaining cash proceeds of $1,350,000,
of which: (i) it paid approximately $100,000 in a broker’s fee and (ii) $100,000 was held in escrow, pending a final determination
by the Chinese government with respect to any tax obligations arising from the transaction. Otherwise, the transaction is not subject
to any further post-closing adjustments. On September 20, 2015, the final tax determination was made and the Company received $93,000
of the escrow and $7,000 was paid to the buyer to settle the outstanding tax obligation.
The Company recognized a gain on the sale of
the China Operations of approximately $838,000, as it received $1,500,000 in cash, offset by the sale of approximately $9,350,000
of assets, $7,935,000 of liabilities, reversal of approximately $349,000 of accumulated other comprehensive income and $577,000
noncontrolling interest and incurring approximately $174,000 in closing costs.
The Company recorded the revenue and profit
from short-term contracts from its China Operations under the completed contract method, whereas income is recognized only when
a contract is completed or substantially completed. Accordingly, during the period of performance, billings and deferred contract
costs are accumulated on the consolidated balance sheets as deferred contract costs and deferred revenue. The Company’s accounting
policy is based on the short-term nature of the work performed. Deferred contract costs include equipment lease deposits to the
third party vendors of approximately $0 and $969,000 as of April 30, 2016 and April 30, 2015, respectively. The revenue results
from the China Operations are included in discontinued operations for the years ended April 30, 2016 and 2015.
Since the sale of the China Operations closed
on August 14, 2015, the Company has determined that the activity of the China Operations should be classified as discontinued operations
for the years ended April 30, 2016 and 2015. In addition, during the year ended April 30, 2015, the Company had completed the sales
of Pride, BTX, and substantially all of the assets of the Seattle Operations. As a result, the Company has reported the financial
activity of Pride, BTX and Seattle as discontinued operations for the year ended April 30, 2015. The following is a summary of
the operating results for the discontinued operations as follows:
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
Below is a summary of the operating results
for the discontinued operations is as follows:
|
|
For the years ended
|
|
|
|
April 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
839,969
|
|
|
$
|
8,773,567
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
546,296
|
|
|
|
6,078,094
|
|
Selling, general and administrative expenses
|
|
|
125,324
|
|
|
|
2,963,330
|
|
Depreciation and amortization
|
|
|
80,971
|
|
|
|
1,144,056
|
|
Impairment loss on capitalized software
|
|
|
-
|
|
|
|
827,449
|
|
|
|
|
752,591
|
|
|
|
11,012,929
|
|
Operating income (loss) from discontinued operations
|
|
|
87,378
|
|
|
|
(2,239,362
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(49,234
|
)
|
|
|
(245,936
|
)
|
Income (loss) from discontinued operations before income tax provision
|
|
|
38,144
|
|
|
|
(2,485,298
|
)
|
Income tax provision
|
|
|
10,883
|
|
|
|
64,815
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
27,261
|
|
|
|
(2,550,113
|
)
|
Gain from disposal
|
|
|
837,720
|
|
|
|
798,896
|
|
Gain from disposal of BTX
|
|
|
-
|
|
|
|
19,700
|
|
Loss from disposal of Seattle Operations
|
|
|
-
|
|
|
|
(374,932
|
)
|
Total income (loss) from discontinued operations
|
|
$
|
864,981
|
|
|
$
|
(2,106,449
|
)
|
There were no assets or liabilities included
in the consolidated balance sheets for the Hartford and Lakewood Operations at April 30, 2016 or 2015.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
The following table summarizes the assets
and liabilities held for sale:
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2016
|
|
|
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance
|
|
$
|
-
|
|
|
$
|
4,264,451
|
|
Prepaid expenses and other current assets
|
|
|
-
|
|
|
|
34,800
|
|
Deferred contract cost
|
|
|
-
|
|
|
|
267,000
|
|
Total current assets held for sale
|
|
|
-
|
|
|
|
4,566,251
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
963,119
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
-
|
|
|
|
14,000
|
|
Total other assets held for sale
|
|
|
-
|
|
|
|
977,119
|
|
Total assets held for sale
|
|
$
|
-
|
|
|
$
|
5,543,370
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
-
|
|
|
$
|
1,700,943
|
|
Due to related party
|
|
|
-
|
|
|
|
785,684
|
|
Short term bank loan
|
|
|
-
|
|
|
|
3,224,180
|
|
Total current liabilities held for sale
|
|
|
-
|
|
|
|
5,710,807
|
|
Total liabilities held for sale
|
|
$
|
-
|
|
|
$
|
5,710,807
|
|
Short-Term Bank Loan
As of April 30, 2015, the China Operations
had a short-term bank loan of $3,224,000, with the Bank of China (the “Short-Term Bank Loan”) with an interest rate
of 7.38% due quarterly. The original August 1, 2014 maturity date of the Short-Term Bank Loan was extended to July 31, 2015. This
loan was paid off upon the sale of our China Operations.
Due to Related Party
As of April 30, 2016 and April 30, 2015,
the China Operations had outstanding payables, representing interest accrued on working capital loans and cash provided for the
purpose of retiring the short term bank loan in the amounts of $0 and $786,000, respectively, due on demand to a related party,
TGG. This loan, which was since paid off, was not guaranteed by WPCS. Interest expense for the years ended April 30, 2016 and 2015
was immaterial. This payable was classified as short-term liabilities held for sale in the Company’s financial statements
as of April 30, 2015.
The China Operations earned revenue for
contracting services provided to TGG (noncontrolling interest in China Operations) and subsidiaries of $212,000 and $1,661,000
for the year ended April 30, 2016 and 2015, respectively. The China Operations accounts receivable due from TGG and subsidiaries
was $0 and $0 as of April 30, 2016 and 2015, respectively.
Noncontrolling Interest
The Company presents the 40% non-controlling
interest associated with the China Operations as a component of equity, along with any changes in the Company’s ownership
interest, and will continue as such, for as long as the Company retains its controlling interest. Upon a loss of control, retained
ownership interest will be re-measured at fair value, with any gain or loss recognized in earnings. Income and losses attributable
to the non-controlling interests associated with the China Operations are presented separately in the Company’s financial
statements.
Noncontrolling interest for the years ended
April 30, 2016 and 2015 consists of the following:
|
|
For the years ended
|
|
|
|
April 30,
|
|
|
|
2016
|
|
|
2015
|
|
Balance, beginning of year
|
|
$
|
560,915
|
|
|
$
|
846,205
|
|
Net (loss) income attributable to noncontrolling interest
|
|
|
-
|
|
|
|
(284,211
|
)
|
Other comprehensive loss attributable to noncontrolling interest
|
|
|
-
|
|
|
|
(1,079
|
)
|
Reclassification adjustments of net loss attributable to noncontrolling interest on sale of China Operations
|
|
|
(560,915
|
)
|
|
|
-
|
|
Balance, end of year
|
|
$
|
-
|
|
|
$
|
560,915
|
|
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
On September 29, 2015, the Company entered
into change in control agreements (the “Agreements”) with its Chief Executive Officer (“CEO”) and its Chief
Financial Officer (“CFO”).
The Agreements have initial terms of four
years and automatically extend for additional one-year periods at the expiration of the initial term and on each anniversary thereafter
unless either party notifies the other party of non-renewal no later than 30 days prior to such anniversary. Under the Agreements,
The CEO and CFO are entitled to payments of $350,000 and $150,000, respectively, upon a change in control of the Company.
All payments under the Agreements are contingent
upon the respective officer’s execution and non-revocation of a general release of claims against the Company.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
Lease Commitments
The Company leases its office facilities pursuant
to noncancelable operating leases expiring through July 2019. The Company also has noncancelable vehicle and office equipment leases.
The minimum rental commitments under these noncancelable leases at April 30, 2016 are summarized as follows:
Year ending April 30,
|
|
|
|
|
2017
|
|
$
|
183,839
|
|
2018
|
|
|
105,730
|
|
2019
|
|
|
87,449
|
|
Total minimum lease payments
|
|
$
|
377,018
|
|
Rent expense for all operating leases was approximately $101,000
and $126,000 in 2016 and 2015, respectively.
NOTE 15 – SUBSEQUENT EVENTS
Cooper Union Settlement
On June 16, 2016, the Company entered into a settlement agreement and mutual release to resolve disputes
regarding the construction of the Cooper Medical School at Rowan University, located in Camden, New Jersey, in which the Company
served as an electrical prime contractor. During July 2016, the Company received $1,150,000 in the settlement from all existing
lawsuits and all claims among the parties were released.