WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
July 31,
|
|
|
April 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,939,900
|
|
|
$
|
2,235,597
|
|
Accounts receivable, net of allowance of $92,000 at July 31, 2016 and April 30, 2016, respectively
|
|
|
4,328,118
|
|
|
|
2,886,154
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
437,185
|
|
|
|
357,210
|
|
Prepaid expenses and other current assets
|
|
|
123,977
|
|
|
|
66,256
|
|
Total current assets
|
|
|
6,829,180
|
|
|
|
5,545,217
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
298,559
|
|
|
|
237,800
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
24,940
|
|
|
|
21,162
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,152,679
|
|
|
$
|
5,804,179
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of loans payable
|
|
$
|
60,848
|
|
|
$
|
53,996
|
|
Accounts payable and accrued expenses
|
|
|
2,276,717
|
|
|
|
2,071,765
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
1,901,295
|
|
|
|
1,358,289
|
|
Total current liabilities
|
|
|
4,238,860
|
|
|
|
3,484,050
|
|
|
|
|
|
|
|
|
|
|
Loans payable, net of current portion
|
|
|
108,833
|
|
|
|
94,825
|
|
Total liabilities
|
|
|
4,347,693
|
|
|
|
3,578,875
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Preferred stock - $0.0001 par value, 5,000,000 shares authorized at July 31, 2016 and April 30, 2016, respectively
|
|
|
|
|
|
|
|
|
Convertible Series H, 8,500 shares designated, - 2,638 shares issued and outstanding at July 31, 2016 and April 30, 2016, respectively; liquidation preference of $406,000
|
|
|
406,262
|
|
|
|
406,262
|
|
Convertible Series H-1, 9,488 shares designated, - 8,119 shares issued and outstanding at July 31, 2016 and April 30, 2016, respectively; liquidation preference of $1,348,000
|
|
|
699,324
|
|
|
|
699,324
|
|
Common stock - $0.0001 par value, 100,000,000 shares authorized, 2,706,159 and 2,691,055 shares issued and outstanding as of July 31, 2016 and April 30, 2016, respectively
|
|
|
271
|
|
|
|
269
|
|
Additional paid-in capital
|
|
|
85,962,888
|
|
|
|
85,940,389
|
|
Accumulated deficit
|
|
|
(84,263,759
|
)
|
|
|
(84,820,940
|
)
|
Total stockholders' equity
|
|
|
2,804,986
|
|
|
|
2,225,304
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
7,152,679
|
|
|
$
|
5,804,179
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(UNAUDITED)
|
|
For the three months ended
|
|
|
|
July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,416,453
|
|
|
$
|
4,464,003
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
2,635,508
|
|
|
|
3,447,203
|
|
Selling, general and administrative expenses
|
|
|
1,352,986
|
|
|
|
1,312,803
|
|
Depreciation and amortization
|
|
|
20,666
|
|
|
|
14,969
|
|
|
|
|
4,009,160
|
|
|
|
4,774,975
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(592,707
|
)
|
|
|
(310,972
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,981
|
)
|
|
|
(892
|
)
|
Income from Section 16 settlement
|
|
|
-
|
|
|
|
400,000
|
|
Income from Arbitration settlement
|
|
|
1,150,000
|
|
|
|
-
|
|
Other income (expense)
|
|
|
4,487
|
|
|
|
(2,906
|
)
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax provision
|
|
|
559,799
|
|
|
|
85,230
|
|
Income tax provision
|
|
|
2,618
|
|
|
|
1,099
|
|
Income from continuing operations
|
|
|
557,181
|
|
|
|
84,131
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
-
|
|
|
|
41,261
|
|
Consolidated net income
|
|
|
557,181
|
|
|
|
125,392
|
|
Net income attributable to noncontrolling interest
|
|
|
-
|
|
|
|
16,505
|
|
Net income attributable to WPCS
|
|
|
557,181
|
|
|
|
108,887
|
|
Dividends declared on preferred stock
|
|
|
-
|
|
|
|
(3,587,121
|
)
|
Deemed dividend on convertible preferred stock, due to beneficial conversion feature
|
|
|
-
|
|
|
|
(703,770
|
)
|
Net income (loss) attributable to WPCS common shareholders
|
|
$
|
557,181
|
|
|
$
|
(4,182,004
|
)
|
|
|
|
|
|
|
|
|
|
Basic income (loss) from continuing operations per common share
|
|
$
|
0.21
|
|
|
$
|
(2.86
|
)
|
Basic income from discontinued operations per common share
|
|
|
-
|
|
|
|
0.02
|
|
Basic income (loss) per common share
|
|
$
|
0.21
|
|
|
$
|
(2.84
|
)
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) from continuing operations per common share
|
|
$
|
0.14
|
|
|
$
|
(2.86
|
)
|
Diluted income from discontinued operations per common share
|
|
|
-
|
|
|
|
0.02
|
|
Diluted income (loss) per common share
|
|
$
|
0.14
|
|
|
$
|
(2.84
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
2,701,404
|
|
|
|
1,470,248
|
|
Weighted average shares outstanding - diluted
|
|
|
3,937,628
|
|
|
|
1,470,248
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
(UNAUDITED)
|
|
For the three months ended
|
|
|
|
July 31,
|
|
|
|
2016
|
|
|
2015
|
|
Consolidated net income
|
|
$
|
557,181
|
|
|
$
|
125,392
|
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
|
(647
|
)
|
Comprehensive income
|
|
|
557,181
|
|
|
|
124,745
|
|
Less: comprehensive loss attributable to noncontrolling interest
|
|
|
-
|
|
|
|
(431
|
)
|
Comprehensive income attributable to WPCS shareholders
|
|
$
|
557,181
|
|
|
$
|
125,176
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
WPCS INTERNATIONAL INCORPORATED AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF EQUITY
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance, May 1, 2016
|
|
|
10,757
|
|
|
$
|
1,105,586
|
|
|
|
2,691,055
|
|
|
$
|
269
|
|
|
$
|
85,940,389
|
|
|
$
|
(84,820,940
|
)
|
|
$
|
2,225,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
15,104
|
|
|
|
2
|
|
|
|
22,499
|
|
|
|
-
|
|
|
|
22,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
557,181
|
|
|
|
557,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2016
|
|
|
10,757
|
|
|
$
|
1,105,586
|
|
|
|
2,706,159
|
|
|
$
|
271
|
|
|
$
|
85,962,888
|
|
|
$
|
(84,263,759
|
)
|
|
$
|
2,804,986
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(UNAUDITED)
|
|
For the three months ended
|
|
|
|
July 31,
|
|
|
|
2016
|
|
|
2015
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income from operations
|
|
$
|
557,181
|
|
|
$
|
84,131
|
|
Consolidated net income from discontinued operations
|
|
|
-
|
|
|
|
41,261
|
|
Adjustments to reconcile consolidated net income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
20,666
|
|
|
|
14,969
|
|
Shares based compensation
|
|
|
22,501
|
|
|
|
|
|
Income on Section 16 settlement
|
|
|
-
|
|
|
|
(400,000
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,441,964
|
)
|
|
|
1,424,935
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
(79,975
|
)
|
|
|
(103,324
|
)
|
Current assets held for sale
|
|
|
-
|
|
|
|
(506,215
|
)
|
Prepaid expenses and other current assets
|
|
|
(57,721
|
)
|
|
|
84,464
|
|
Other assets
|
|
|
(3,778
|
)
|
|
|
-
|
|
Other assets held for sale
|
|
|
-
|
|
|
|
(34,522
|
)
|
Income taxes payable
|
|
|
-
|
|
|
|
(2,658
|
)
|
Accounts payable and accrued expenses
|
|
|
204,952
|
|
|
|
(1,277,741
|
)
|
Current liabilities held for sale
|
|
|
-
|
|
|
|
2,200,030
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
543,006
|
|
|
|
125,355
|
|
Net cash (used in) provided by operating activities
|
|
|
(235,132
|
)
|
|
|
1,650,685
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(30,803
|
)
|
|
|
(10,707
|
)
|
Net cash used in investing activities
|
|
|
(30,803
|
)
|
|
|
(10,707
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Series H-1 preferred stock and warrants
|
|
|
-
|
|
|
|
1,575,000
|
|
Borrowings under loan payable obligations
|
|
|
-
|
|
|
|
7,762
|
|
Repayment under loan payable obligations
|
|
|
(29,762
|
)
|
|
|
-
|
|
Repayments under other payable to Zurich
|
|
|
-
|
|
|
|
(135,000
|
)
|
Repayments of short term convertible note
|
|
|
-
|
|
|
|
(4,000
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(29,762
|
)
|
|
|
1,443,762
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
-
|
|
|
|
91,510
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(295,697
|
)
|
|
|
3,175,250
|
|
Cash and cash equivalents, beginning of the period
|
|
|
2,235,597
|
|
|
|
2,364,360
|
|
Cash and cash equivalents, end of the period
|
|
$
|
1,939,900
|
|
|
$
|
5,539,610
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (CONTINUED)
(UNAUDITED)
|
|
For the three months ended
|
|
|
|
July 31,
|
|
|
|
2016
|
|
|
2015
|
|
Schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
Asset financing
|
|
$
|
50,622
|
|
|
$
|
-
|
|
Declaration on preferred dividend payable
|
|
$
|
-
|
|
|
$
|
3,587,121
|
|
Warrants issued with convertible preferred stock
|
|
$
|
-
|
|
|
$
|
841,405
|
|
Deemed dividend on conversion of preferred stock to common stock
|
|
$
|
-
|
|
|
$
|
703,770
|
|
Conversion of dividends payable related to make-whole amount to common stock
|
|
$
|
-
|
|
|
$
|
3,375,792
|
|
Conversion of dividends payable related to Series F-1 preferred stock
|
|
$
|
-
|
|
|
$
|
501,826
|
|
Conversion of dividends payable related to Series G-1 preferred stock
|
|
$
|
-
|
|
|
$
|
158,481
|
|
Conversion of short term convertible note to Series H preferred stock
|
|
$
|
-
|
|
|
$
|
1,299,000
|
|
Conversion of Series F and F-1 preferred stock to common stock
|
|
$
|
-
|
|
|
$
|
2,731,984
|
|
Conversion of Series G and G-1 preferred stock to common stock
|
|
$
|
-
|
|
|
$
|
1,084,230
|
|
Conversion of Series H preferred stock to common stock
|
|
$
|
-
|
|
|
$
|
691,768
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED 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 three 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 condensed 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 three months ended July 31, 2016 and 2015, reflect the
accounts of current and former entities as either continued or discontinued operations, as discussed below.
Continuing operations for the three months
ended July 31, 2016 and 2015 include the results of operations of: (i) WPCS International Incorporated (corporate operating expenses);
(ii) Suisun City Operations and the Texas Operations, the Company’s only two active operating subsidiaries; (iii) WPCS Incorporated,
an inactive subsidiary; and (iv) WPCS International – Trenton, Inc. (“Trenton Operations”), which operations
were closed in September 2013.
Discontinued operations for the three months
ended July 31, 2015 include the results of WPCS Asia Limited, a 60% joint venture interest in Tai'an AGS Pipeline Construction
Co. Ltd. (the “China Operations”). There are no discontinued operations for the three months ended July 31, 2016.
The unaudited condensed consolidated financial
information furnished herein reflects all adjustments (consisting of normal recurring accruals) which are, in the opinion of management,
considered necessary for a fair presentation of the financial position and the results of operations and cash flows of the Company
for the periods presented. All intercompany accounts and transactions have been eliminated in consolidation. These unaudited condensed
consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles
("GAAP") for interim financial information. Accordingly, they do not include all of the information and notes required
by GAAP for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction
with the financial statements included in the Annual Report on Form 10-K for the fiscal year ended April 30, 2016.
The results of operations for the three
months ended July 31, 2016 are not necessarily indicative of the results to be expected for the full fiscal year.
NOTE 2 – LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 2016, the Company had a working capital surplus of approximately $2,590,000 as compared to
a working capital surplus of approximately $2,061,000 at April 30, 2016. The increase in working capital is due primarily to an
increase in accounts receivable and cash received for an arbitration settlement, offset by an increase in liabilities and cash
used to fund our operating loss.
The Company’s cash and cash equivalents
balance at July 31, 2016 was $1,940,000 as compared to $2,236,000 at April 30, 2016.
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 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 the Company’s 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.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Accounting Policies
There have been no material changes in
the Company’s significant accounting policies to those previously disclosed in the Form 10-K for the year ended April
30, 2016.
Recent Accounting Pronouncements
Accounting standards that have been issued or proposed by the
Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission (“SEC”) or other standard
setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated
financial statements upon adoption.
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 China Operations as discontinued operations for all periods presented.
NOTE 4 – CONCENTRATIONS
Accounts Receivable
As of July 31, 2016, two customers comprised
42% of the Company’s total accounts receivable. Also included in the accounts receivable is retainage receivable of $404,000
and $326,000 at July 31, 2016 and April 30, 2016, respectively, and both the retainage and aged accounts receivable are expected
to be collected.
Revenue Recognition
For the three months ended July 31, 2016,
8% of revenue was derived from one customer as compared to two customers who generated 21% and 15% of the revenue for the same
period in 2015.
NOTE 5 – BASIC AND DILUTED NET INCOME (LOSS) PER COMMON
SHARE
Basic and diluted net income (loss) per common share from continuing operations is computed as net income
(loss) from continuing operations less non-controlling interest and dividends on preferred stock, divided by the weighted average
number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could
occur from common stock issuable through the exercise of stock options and warrants and note conversions.
|
|
For the three months ended
|
|
|
|
July 31,
|
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to WPCS common shareholders
|
|
$
|
557,181
|
|
|
$
|
(4,206,760
|
)
|
Income from discontinued operations, basic and diluted
|
|
|
-
|
|
|
|
24,756
|
|
Net income (loss) attributable to WPCS common shareholders, basic and diluted
|
|
$
|
557,181
|
|
|
$
|
(4,182,004
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic
|
|
|
2,701,404
|
|
|
|
1,470,248
|
|
Stock options
|
|
|
160,524
|
|
|
|
-
|
|
Series H and H-1 convertible preferred stock
|
|
|
1,075,700
|
|
|
|
-
|
|
Weighted average shares outstanding – diluted
|
|
|
3,937,628
|
|
|
|
1,470,248
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) from continuing operations per common share
|
|
$
|
0.21
|
|
|
$
|
(2.86
|
)
|
Basic income from discontinued operations per common share
|
|
|
-
|
|
|
|
0.02
|
|
Basic income (loss) per common share
|
|
$
|
0.21
|
|
|
$
|
(2.84
|
)
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) from continuing operations per common share
|
|
$
|
0.14
|
|
|
$
|
(2.86
|
)
|
Diluted income from discontinued operations per common share
|
|
|
-
|
|
|
|
0.02
|
|
Diluted income (loss) per common share
|
|
$
|
0.14
|
|
|
$
|
(2.84
|
)
|
The following securities were excluded from the weighted average dilutive common shares outstanding because
their inclusion would have been antidilutive.
|
|
As of July 31,
|
|
|
|
2016
|
|
|
2015
|
|
Common stock equivalents:
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
865,000
|
|
|
|
41,000
|
|
Series F and F-1 preferred stock
|
|
|
-
|
|
|
|
84,000
|
|
Series G and G-1 preferred stock
|
|
|
-
|
|
|
|
118,000
|
|
Series H and H-1 preferred stock
|
|
|
-
|
|
|
|
1,248,000
|
|
Make-whole on preferred shares
|
|
|
-
|
|
|
|
56,000
|
|
Common stock purchase warrants
|
|
|
1,295,000
|
|
|
|
1,295,000
|
|
Totals
|
|
|
2,160,000
|
|
|
|
2,842,000
|
|
NOTE 6 – COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED
CONTRACTS
Costs and estimated earnings in excess of billings on uncompleted contracts represents revenue recognized
in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts”,
represents billings in excess of revenue recognized. Costs and estimated earnings on uncompleted contracts consist of the following
at July 31, 2016 and April 30, 2016:
|
|
July 31, 2016
|
|
|
April 30, 2016
|
|
|
|
|
|
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
30,127,451
|
|
|
$
|
28,884,776
|
|
Estimated contract earnings
|
|
|
4,663,183
|
|
|
|
4,367,463
|
|
|
|
|
34,790,634
|
|
|
|
33,252,239
|
|
Less: Billings to date
|
|
|
36,254,744
|
|
|
|
34,253,318
|
|
Total
|
|
$
|
(1,464,110
|
)
|
|
$
|
(1,001,079
|
)
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
437,185
|
|
|
$
|
357,210
|
|
Billings in excess of cost and estimated earnings on uncompleted contracts
|
|
|
1,901,295
|
|
|
|
1,358,289
|
|
Total
|
|
$
|
(1,464,110
|
)
|
|
$
|
(1,001,079
|
)
|
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.
NOTE 7 – DISCONTINUED OPERATIONS
The Company previously disclosed the details
regarding the sales of its China Operations in its Form 10-K filed for the year ended April 30, 2016. The schedule below shows
the results of discontinued operations from China for the three months ended July 31, 2016 and 2015.
|
|
For the three months ended
|
|
|
|
July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
839,969
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
-
|
|
|
|
546,296
|
|
Selling, general and administrative expenses
|
|
|
-
|
|
|
|
111,324
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
80,971
|
|
|
|
|
-
|
|
|
|
738,591
|
|
Operating income (loss) from discontinued operations
|
|
|
-
|
|
|
|
101,378
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
-
|
|
|
|
49,234
|
|
Income (loss) from discontinued operations before income tax provision
|
|
|
-
|
|
|
|
52,144
|
|
Income tax provision
|
|
|
-
|
|
|
|
10,883
|
|
Total income from discontinued operations
|
|
$
|
-
|
|
|
$
|
41,261
|
|
Due Related Party
As of July 31, 2016 and April 30, 2016,
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 $0, respectively, due on demand to a related party, TGG.
This loan, which was paid off at the time of sale of our China Operations was not guaranteed by WPCS. Interest expense for the
quarter ended July 31, 2015 was immaterial.
The China Operations earned revenue for
contracting services provided to TGG (noncontrolling interest in China Operations) and subsidiaries of $0 and $212,000 for the
three months ended July 31, 2016 and 2015, respectively.
NOTE 8 – INCOME FROM SECTION 16 SETTLEMENT
For the three months ended July 31, 2016,
the Company received no income from Section 16 settlements. For the same period in 2015, the Company received $400,000 of income
from a Section 16 settlement. This income was comprised of forgiveness of certain promissory notes as part of the settlement with
a note holder who was a defendant named in a Section 16 litigation brought by a shareholder of WPCS. These settlements resolved
all issues related to this litigation.
NOTE 9 – 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 City 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 of the assets of the Company. In addition, the line of credit requires our Suisun City Operations
to comply with certain financial and operational covenants, such as, amongst other things, maintaining a certain quick ratio and
a minimum net worth. Suisun City Operations is currently in compliance with all such covenants.
As of the filing date of this report,
the Company has not drawn down on the line of credit.
NOTE 10 – LOANS PAYABLE
As of July 31, 2016 and April 30, 2016, the Company had approximately $170,000 and $149,000 of loans payable,
respectively. These loans are associated with the purchase of automobiles and carry interest rates ranging from 3.89% to 4.89%.
The due dates of these loans range from August 2016 to August 2021. As of July 31, 2016, the Company has classified approximately
$61,000 as short-term and $109,000 as long-term loans payable.
NOTE 11 – STOCKHOLDERS’ EQUITY
Issuance of Common Shares
On August 1, 2015, the Company entered
into an engagement letter with an investment bank to provide investment advisory services for a period of twelve (12) months, which
may be extended by mutual consent of the parties. The Company agreed to pay a $7,500 monthly fee to the investment bank payable
in shares of common stock, calculated based on the closing bid price of the common stock on the trading day immediately prior to
date payment is due. On each date of payment, the common stock is issued in reliance upon the exemption from registration
in Section 4(a)(2) of the Securities Act of 1933. The shares issued for the payments due for the period from May 1, 2016
through July 31, 2016 were 15,104, which resulted in $22,501 of expense being recognized in the Condensed Consolidated Statement
of Operations for the quarter ended July 31, 2016. The total shares issued under this agreement as of July 31, 2016 is 63,073.
The Company did not renew this agreement beyond
the July 31, 2016 termination date.
NOTE 12 – INCOME FROM ARBITRATION
SETTLEMENT
On June 16, 2016, the Company entered into
a global settlement agreement and mutual release to resolve all disputes and claims 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. As a
result of such settlement, the Company received proceeds of $1,150,000 and recorded a gain in the Condensed Consolidated Statement
of Operations for the quarter ended July 31, 2016.
NOTE 13 – SUBSEQUENT EVENTS
On August 4, 2016 the Company issued 142,500
shares of its common stock upon the conversion of 1,425 shares of Series H Preferred Stock.
On August 8, 2016, the Company settled
a $232,000 accounts payable with a vendor for $125,000 and will recognize a gain on the settlement of $107,000 in the quarter ending
October 31, 2016.
ITEM 2 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis
of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current
views with respect to future events and financial performance. You can identify these statements by forward-looking words such
as “may” “will,” “expect,” “anticipate,” “believe,” “estimate”
and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations
of us and members of its management team as well as the assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties,
and that actual results may differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review
and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange
Commission. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking
statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence
of unanticipated events or changes in the future operating results over time. We believe that its assumptions are based upon reasonable
data derived from and known about our business and operations and the business and operations of the Company. No assurances are
made that actual results of operations or the results of our future activities will not differ materially from its assumptions.
Factors that could cause differences include, but are not limited to, expected market demand for the Company’s services,
fluctuations in pricing for materials, and competition.
Overview
The Company currently specializes in contracting
services offering communications, security and audio-visual infrastructure through its Suisun City and Texas Operations. We previously
announced that we launched the Texas Operations in San Antonio, Texas in January 2016 and then commenced operations in Dallas,
Texas in April 2016. During the quarter ended July 31, 2016, the Texas Operations generated approximately $262,000 in revenue,
while incurring approximately $366,000 in selling, general and administrative expenses in starting these two offices. It is our
belief that we can develop the Texas Operations and become profitable in those markets through organic growth, although there can
be no assurances.
During the third quarter of 2015, we sold
our joint venture interest in the former China Operations and therefore, the financial results of the China Operations for the
three months ended July 31, 2015, are included in the results from discontinued operations in our financial statements.
Our Suisun City and Texas Operations communication
infrastructure services offers low voltage communications infrastructure contracting services to the public services, healthcare,
energy and corporate enterprise markets. We provide an integrated approach to project coordination that creates cost-effective
solutions. Corporations, government entities, healthcare organizations and educational institutions depend on the reliability and
accuracy of voice, data and video communications. However, the potential for this new technology cannot be realized without the
right infrastructure to support the convergence of technology. In this regard, we create integrated building systems, including
the installation of advanced structured cabling systems. We specialize in wireless technology and a combination of various technologies
to develop a cost effective network for a customer's wireless communication requirements. This includes Wi-Fi networks, point-to-point
systems, cellular networks, in-building systems and two-way communication systems. We support the integration of telecommunications,
life safety, security and HVAC and design for future growth by building in additional capacity for expansion as new capabilities
are added.
For the three months ended July 31, 2016,
we generated revenues from continuing operations of $3,416,000 as compared to $4,464,000 for the same period in 2015. Our backlog
at July 31, 2016 was $13,070,000 as compared to $14,355,000 at July 31, 2015.
Company Strategy
During the past two fiscal years, our strategy
in the contracting services segment included divesting certain operations through the sales of Pride, Seattle Operations and China
Operations.
We divested and/or closed these operations either because they
were not profitable, or were part of our plan to reduce expenses and liabilities, improve operational performance, as well as to
generate cash for working capital and general corporate purposes.
Meanwhile, our ongoing plan continues to
be to strengthen the Company’s balance sheet as well as to increase revenue, profit and cash flow at our Suisun City
Operations and Texas Operations by developing new organic growth opportunities for the Company and seeking viable acquisition and/or
merger candidate(s).
The transition from our restructuring plan to a growth plan
began during fiscal 2016, as we launched the first wave of organic initiatives targeting revenue enhancement and selected demographic
expansion, including:
|
·
|
Establishing Texas Operations in San Antonio and Dallas;
|
|
·
|
Strengthening our operations team with proven audio-visual and security
systems professionals;
|
|
·
|
Hiring an experienced direct sales team;
|
|
·
|
Uniformly deploying full-service low voltage capabilities for developing,
installing and servicing structured cabling, audio-visual and security systems
into both our California and Texas
markets; and,
|
|
·
|
Introducing new recurring revenue product and service offerings.
|
We believe that these initiatives will change the Company’s
business and provide more opportunities for growth.
Historically, our Suisun City Operations operated primarily as a subcontractor for low-voltage structured
cabling systems, which were generally secured through the competitive bidding process. We were not adequately positioned with the
resources to deliver a fully integrated offering to include audio-visual and security. As a result, such opportunities had either
been lost, or had to be subcontracted to others. However, with the recent additions we have instituted, we are now able to offer
a full turnkey service in both our Suisun City and Texas Operations that will allow us to be fully engaged with our customers well
after an initial installation is completed.
In addition to expanding our geographical presence, broadening
our contracting revenue potential and offering higher margin recurring service capabilities, we are also pursuing and securing
more corporate affiliations and strategic alliances that will create more direct relationships capable of advancing our business
opportunities even further.
We have a multi-faceted execution strategy and intend to methodically
roll out new initiatives during the fiscal year. Furthermore, we continue to aggressively explore other viable growth opportunities.
In addition to the ongoing operational plan, at the corporate level we are evaluating and undertaking new
measures to enhance our public company profile by seeking to attract new long-term minded investors, optimize our capital resources
for growth and strengthen our Board of Directors.
We believe that our operational performance and corporate strategies will have a positive impact towards building
shareholder value.
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.
With regards to our financial results from continuing operations for the quarter ended July 31, 2016, we generated
revenue of approximately $3,416,000 as compared to revenue of $4,464,000 for the same period last year. This $1,048,000 decrease
in revenue was due primarily to a $1,310,000 decrease in revenue in our Suisun City Operations related to work on one major contract,
which was effectively completed during the last fiscal year, offset by adding approximately $262,000 in revenue from our newly
established Texas Operations. As such, the composition of our current revenue is less reliant on one large customer contract than
during the last fiscal year.
We generated a net income to common shareholders for the three months ended July 31, 2016 of approximately
$557,000, or $0.21 per common share, which includes income from our: (i) Suisun City Operations of approximately $207,000 and (ii)
corporate division of approximately $657,000, which is comprised of corporate expenses of approximately $495,000 offset by a gain
on legal settlement of $1,150,000; and which was partially offset by a loss from our Texas Operations of approximately $307,000.
The net income
to common shareholders for the three months ended July 31, 2016 compares to a net loss of approximately $4,182,000, or $2.84 per
common share for the three months ended July 31, 2015, which includes: (i) a loss from operations of approximately $311,000; (ii)
a gain from discontinued China Operations of approximately $41,000; and (ii) approximately $4,291,000 of non-cash dividends declared
on preferred stock, which were partially offset by income of $400,000 from a Section 16 settlement.
We believe that our integrated, full service
low voltage communication infrastructure contracting services strategy will create additional opportunities. We believe that the
ability to provide comprehensive communications infrastructure contracting services gives us a competitive advantage. In regards
to strategic development, our focus is on identifying organic growth and selected acquisition opportunities. We are optimistic
about our opportunities in the markets we currently serve, as evidenced by our new contract awards and customers continuing to
seek bids from us, due to our experience and strong reputation in these markets.
Results of
Operations for the Three Months Ended July 31, 2016 Compared to the Three Months Ended July 31, 2015
|
|
For the three month ended
|
|
|
|
July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,416,453
|
|
|
|
100.0
|
%
|
|
$
|
4,464,003
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
2,635,508
|
|
|
|
77.1
|
%
|
|
|
3,447,203
|
|
|
|
77.2
|
%
|
Selling, general and administrative expenses
|
|
|
1,352,986
|
|
|
|
39.6
|
%
|
|
|
1,312,803
|
|
|
|
29.4
|
%
|
Depreciation and amortization
|
|
|
20,666
|
|
|
|
0.6
|
%
|
|
|
14,969
|
|
|
|
0.3
|
%
|
|
|
|
4,009,160
|
|
|
|
117.3
|
%
|
|
|
4,774,975
|
|
|
|
107.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(592,707
|
)
|
|
|
-17.3
|
%
|
|
|
(310,972
|
)
|
|
|
-7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,981
|
)
|
|
|
-0.1
|
%
|
|
|
(892
|
)
|
|
|
0.0
|
%
|
Income from Section 16 settlement
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
400,000
|
|
|
|
9.0
|
%
|
Income from Arbitration settlement
|
|
|
1,150,000
|
|
|
|
33.7
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Other income
|
|
|
4,487
|
|
|
|
0.1
|
%
|
|
|
(2,906
|
)
|
|
|
-0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax provision
|
|
|
559,799
|
|
|
|
16.4
|
%
|
|
|
85,230
|
|
|
|
1.9
|
%
|
Income tax provision
|
|
|
2,618
|
|
|
|
0.1
|
%
|
|
|
1,099
|
|
|
|
0.0
|
%
|
Income from continuing operations
|
|
|
557,181
|
|
|
|
16.3
|
%
|
|
|
84,131
|
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
41,261
|
|
|
|
0.9
|
%
|
Consolidated net income
|
|
|
557,181
|
|
|
|
16.3
|
%
|
|
|
125,392
|
|
|
|
2.8
|
%
|
Net income attributable to noncontrolling interest
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
16,505
|
|
|
|
0.4
|
%
|
Net income attributable to WPCS
|
|
|
557,181
|
|
|
|
16.3
|
%
|
|
|
108,887
|
|
|
|
2.4
|
%
|
Dividends declared on preferred stock
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(3,587,121
|
)
|
|
|
-80.4
|
%
|
Deemed dividend on convertible preferred stock, due to beneficial conversion feature
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(703,770
|
)
|
|
|
-15.8
|
%
|
Net income (loss) attributable to WPCS common shareholders
|
|
$
|
557,181
|
|
|
|
16.3
|
%
|
|
$
|
(4,182,004
|
)
|
|
|
-93.7
|
%
|
Operating Loss
The Company had an operating loss of approximately
$593,000 for the three months ended July 31, 2016. This quarter’s operating loss was comprised primarily of $208,000 in operating
income from Suisun City Operations, which was offset by an operating loss of approximately $306,000 from our Texas Operations and
$495,000 of corporate overhead expenses. For the three months ended July 31, 2015, the Company had an operating loss of approximately
$311,000 which was comprised primarily of $544,000 in operating income from Suisun City Operations and which was offset by approximately
$855,000 of corporate overhead. The details of the operating loss are as follows:
Revenue
Revenue for the three months ended July
31, 2016 decreased $1,048,000, or 23.5%, to $3,416,000, as compared to $4,464,000 for same period last year due to an approximately
$1,310,000 decrease in revenue in Suisun City Operations offset by an approximately $262,000 increase in revenue from our newly
established Texas Operations. This decrease in the Suisun City Operations’ revenue was primarily the result of $1,310,000
in revenue recognized from one customer contract during the prior period, which did not reoccur during the current period.
Cost of Revenue
Cost of revenue, which consists of direct costs on contracts: materials, direct labor, third party subcontractor
services, union benefits and other overhead costs decreased $811,000, or 24%, to $2,636,000, or 77.1% of revenue, for the three
months ended July 31, 2016, as compared to $3,447,000, or 77.2% of revenue, for the same period in 2015.
Selling, General and Administrative
Expenses
For the three months ended July 31, 2016,
total selling, general and administrative expenses increased $40,000 or 3% to $1,353,000 as compared to $1,313,000 for the same
period in 2015, which was primarily due to $368,000 of increased expenses in our newly established Texas Operations but offset
by lower corporate expenses of $361,000. The Texas Operations did not have expenses during the quarter ended July 31, 2015, while
the lower corporate overhead was comprised primarily of lower professional fees.
Depreciation and Amortization
For the three months ended July 31, 2016,
depreciation and amortization was approximately $21,000 as compared to approximately $15,000 for the same quarter in 2015.
Loss from Continuing Operations
The Company had a net income from continuing
operations of $557,000 for the three months ended July 31, 2016 as compared to $84,000 for the same period in 2015. Income from
continuing operations is determined by adjusting the operating loss by the following items:
Interest Expense
For the three months ended July 31, 2016
and 2015, interest expense was approximately $1,981 and $892, respectively.
Income from Section 16 Settlement
During the quarter ended July 31, 2015,
the Company recorded income of $400,000 as it recorded forgiveness of certain promissory notes as part of the settlements with
certain note holders who were the remaining defendants named in a Section 16 litigation brought by a shareholder of WPCS.
Income from Arbitration Settlement
During the quarter ended July 31, 2016,
the Company received $1,150,000 in connection with a global settlement agreement and mutual release to resolve all existing disputes
and claims 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.
Other Income (Expense)
For the three months ended July 31, 2016,
other income was approximately $5,000 as compared to other expense of approximately $3,000 for the same period in 2015.
Net Income (Loss) Attributable to
WPCS Common Shareholders
The Company incurred a net income attributable
to WPCS common shareholders of $557,000 for the three months ended July 31, 2016 as compared to net loss attributable to WPCS common
shareholders of $4,182,000 for the same period in 2015. The following items are the adjustments to the loss from continuing operations
that result in determining the net loss attributable to WPCS common shareholders:
Income From Discontinued Operations
As a result of the sale of the China Operations,
we have recorded all activity related to that operation as income from discontinued operations. The cumulative effect is no income
or loss for the three months ended July 31, 2016 as compared to income of $41,000 for the same period in 2015.
Dividends Declared on Preferred Stock
As a result of the issuance of preferred
stock, we declared dividends, make-whole dividends, and deemed dividends of $0 for the three months ended July 31, 2016 as compared
to $4,291,000 for the same period in 2015. These dividends are non-cash and were paid in common shares. The Company is no longer
required to pay any such dividends on any remaining preferred stock.
Effects of Inflation
Inflation has not had a material impact on our business.
Liquidity and Capital Resources as of July 31, 2016
As of July 31, 2016, we had working capital
of approximately $2,590,000, which consisted of current assets of approximately $6,829,000 and current liabilities of approximately
$4,239,000. This compares to working capital of approximately $2,061,000 at April 30, 2016. The current liabilities as presented
in the balance sheet at July 31, 2016 primarily include approximately $2,276,000 of accounts payable and accrued expenses and approximately
$1,901,000 of billings in excess of costs and estimated earnings on uncompleted contracts.
Our cash and cash equivalents balance at
July 31, 2016 was approximately $1,940,000.
During the prior fiscal year ended April
30, 2016, the Company had completed a series of transactions that it believed would provide it with sufficient working capital
and equity to operate its business plan for the next twelve months from the date of filing this report, while it continues to seek
growth opportunities, including, but not limited to: (i) organic growth to complement and enhance existing operations; (ii) acquisitions;
and/or (iii) a viable merger candidate.
Some of these transactions provided cash
to the Company while others eliminated future cash spending requirements. Along with expected continued operating profits from
its Suisun City Operations for fiscal year 2017 and lower corporate overhead, these are the primary factors that support the belief
that the Company will have adequate liquidity for the next twelve months from the filing date of this report. In addition, during
the quarter ended July 31, 2016, we settled an outstanding legal claim and collected a cash settlement of $1,150,000.
Backlog
As of July 31, 2016, we had a backlog
of unfilled orders of approximately $13,070,000 as compared to approximately $13,200,000 at April 30, 2016. We define backlog
as the value of work-in-hand to be provided for customers as of a specific date where the following conditions are met (with the
exception of engineering change orders): (i) the price of the work to be done is fixed; (ii) the scope of the work to be done
is fixed, both in definition and amount; and (iii) there is a written contract, purchase order, agreement or other documentary
evidence which represents a firm commitment by the customer to pay us for the work to be performed. These backlog amounts are
based on contract values and purchase orders and may not result in actual receipt of revenue in the originally anticipated period
or at all. We have experienced variances in the realization of our backlog because of project delays or cancellations resulting
from external market factors and economic factors beyond our control and we may experience such delays or cancellations in the
future. Backlog does not include new firm commitments that may be awarded to us by our customers from time to time in future periods.
These new project awards could be started and completed in this same future period. Accordingly, our backlog does not necessarily
represent the total revenue that could be earned by us in future periods.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements
other than operating lease commitments.
Critical Accounting Policies
Our discussion and analysis of our financial
condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. GAAP.
The preparation of these financial statements requires us to make estimates and judgments that affect our reported amounts of assets,
liabilities, revenues and expenses.
On an ongoing basis, we evaluate our estimates
and judgments, including those related to accrued expenses and stock-based compensation. We based our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that
are not readily apparent from other sources. Actual results may differ from these estimates.
Our critical accounting policies and significant
estimates are detailed in the Form 10-K for the year ended April 30, 2016. Our critical accounting policies and significant estimates
have not changed substantially from those previously disclosed in the Form 10-K.