WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
October 31,
|
|
|
April 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,070,388
|
|
|
$
|
2,235,597
|
|
Accounts receivable, net of allowance of $92,000
|
|
|
3,211,144
|
|
|
|
2,886,154
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
729,618
|
|
|
|
357,210
|
|
Prepaid expenses and other current assets
|
|
|
113,164
|
|
|
|
66,256
|
|
Total current assets
|
|
|
6,124,314
|
|
|
|
5,545,217
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
358,230
|
|
|
|
237,800
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
19,163
|
|
|
|
21,162
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,501,707
|
|
|
$
|
5,804,179
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of loans payable
|
|
$
|
58,139
|
|
|
$
|
53,996
|
|
Accounts payable and accrued expenses
|
|
|
2,215,242
|
|
|
|
2,071,765
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
1,730,996
|
|
|
|
1,358,289
|
|
Total current liabilities
|
|
|
4,004,377
|
|
|
|
3,484,050
|
|
|
|
|
|
|
|
|
|
|
Loans payable, net of current portion
|
|
|
111,305
|
|
|
|
94,825
|
|
Total liabilities
|
|
|
4,115,682
|
|
|
|
3,578,875
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Preferred stock - $0.0001 par value, 5,000,000 shares authorized at October 31, 2016 and April 30, 2016, respectively
|
|
|
|
|
|
|
|
|
Convertible Series H, 8,500 shares designated, - 1,213 shares issued and outstanding at October 31, 2016
and 2,638 at April 30, 2016, respectively; liquidation preference of $187,000
|
|
|
186,812
|
|
|
|
406,262
|
|
Convertible Series H-1, 9,488 shares designated - 7,919 shares issued and outstanding at October 31, 2016
and 8,119 at April 30, 2016, respectively; liquidation preference of $1,315,000
|
|
|
682,128
|
|
|
|
699,324
|
|
Common stock - $0.0001 par value, 100,000,000 shares authorized, 2,868,659 and 2,691,055 shares issued and outstanding as of October 31, 2016 and April 30, 2016, respectively
|
|
|
287
|
|
|
|
269
|
|
Additional paid-in capital
|
|
|
86,219,242
|
|
|
|
85,940,389
|
|
Accumulated deficit
|
|
|
(84,702,444
|
)
|
|
|
(84,820,940
|
)
|
Total stockholders' equity
|
|
|
2,386,025
|
|
|
|
2,225,304
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
6,501,707
|
|
|
$
|
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
|
|
|
For the six months ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,847,710
|
|
|
$
|
3,824,241
|
|
|
$
|
8,264,163
|
|
|
$
|
8,288,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
3,819,187
|
|
|
|
3,294,565
|
|
|
|
6,454,695
|
|
|
|
6,741,768
|
|
Selling, general and administrative expenses
|
|
|
1,567,326
|
|
|
|
2,555,206
|
|
|
|
2,920,312
|
|
|
|
3,868,009
|
|
Depreciation and amortization
|
|
|
28,029
|
|
|
|
14,493
|
|
|
|
48,695
|
|
|
|
29,462
|
|
|
|
|
5,414,542
|
|
|
|
5,864,264
|
|
|
|
9,423,702
|
|
|
|
10,639,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(566,832
|
)
|
|
|
(2,040,023
|
)
|
|
|
(1,159,539
|
)
|
|
|
(2,350,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,029
|
)
|
|
|
(606
|
)
|
|
|
(3,010
|
)
|
|
|
(1,498
|
)
|
Income from Section 16 settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
400,000
|
|
Income from arbitration settlements
|
|
|
30,902
|
|
|
|
-
|
|
|
|
1,180,902
|
|
|
|
-
|
|
Other income (expense)
|
|
|
117,947
|
|
|
|
-
|
|
|
|
122,434
|
|
|
|
(2,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income tax provision
|
|
|
(419,012
|
)
|
|
|
(2,040,629
|
)
|
|
|
140,787
|
|
|
|
(1,955,399
|
)
|
Income tax provision
|
|
|
(51
|
)
|
|
|
-
|
|
|
|
2,567
|
|
|
|
1,099
|
|
(Loss) income from continuing operations
|
|
|
(418,961
|
)
|
|
|
(2,040,629
|
)
|
|
|
138,220
|
|
|
|
(1,956,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41,261
|
|
Gain from disposal
|
|
|
-
|
|
|
|
837,720
|
|
|
|
-
|
|
|
|
837,720
|
|
Consolidated net (loss) income
|
|
|
(418,961
|
)
|
|
|
(1,202,909
|
)
|
|
|
138,220
|
|
|
|
(1,077,517
|
)
|
Net income attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,505
|
|
Net (loss) income attributable to WPCS
|
|
|
(418,961
|
)
|
|
|
(1,202,909
|
)
|
|
|
138,220
|
|
|
|
(1,094,022
|
)
|
Dividends declared on preferred stock
|
|
|
-
|
|
|
|
(782,837
|
)
|
|
|
-
|
|
|
|
(4,369,958
|
)
|
Deemed dividend on convertible preferred stock, due to beneficial conversion feature
|
|
|
(19,724
|
)
|
|
|
-
|
|
|
|
(19,724
|
)
|
|
|
(703,770
|
)
|
Net (loss) income attributable to WPCS common shareholders
|
|
$
|
(438,685
|
)
|
|
$
|
(1,985,746
|
)
|
|
$
|
118,496
|
|
|
$
|
(6,167,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income from continuing operations per common share
|
|
$
|
(0.15
|
)
|
|
$
|
(1.17
|
)
|
|
$
|
0.04
|
|
|
$
|
(3.62
|
)
|
Basic income from discontinued operations per common share
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.01
|
|
Basic gain from disposal
|
|
$
|
-
|
|
|
$
|
0.35
|
|
|
$
|
-
|
|
|
$
|
0.43
|
|
Basic income from discontinued operations per common share
|
|
$
|
-
|
|
|
$
|
0.35
|
|
|
$
|
-
|
|
|
$
|
0.44
|
|
Basic (loss) income per common share
|
|
$
|
(0.15
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
0.04
|
|
|
$
|
(3.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income from continuing operations per common share
|
|
$
|
(0.15
|
)
|
|
$
|
(1.17
|
)
|
|
$
|
0.03
|
|
|
$
|
(3.62
|
)
|
Diluted income from discontinued operations per common share
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.01
|
|
Diluted gain from disposal
|
|
$
|
-
|
|
|
$
|
0.35
|
|
|
$
|
-
|
|
|
$
|
0.43
|
|
Diluted income from discontinued operations per common share
|
|
$
|
-
|
|
|
$
|
0.35
|
|
|
$
|
-
|
|
|
$
|
0.44
|
|
Diluted (loss) income per common share
|
|
$
|
(0.15
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
0.03
|
|
|
$
|
(3.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic
|
|
|
2,854,230
|
|
|
|
2,415,113
|
|
|
|
2,777,817
|
|
|
|
1,942,681
|
|
Weighted average shares outstanding – diluted
|
|
|
2,854,230
|
|
|
|
2,415,113
|
|
|
|
3,790,800
|
|
|
|
1,942,681
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Consolidated net (loss) income
|
|
$
|
(418,961
|
)
|
|
$
|
(1,202,909
|
)
|
|
$
|
138,220
|
|
|
$
|
(1,077,517
|
)
|
Reclassification adjustments of other comprehensive loss on the sale of China operations
|
|
|
-
|
|
|
|
(349,723
|
)
|
|
|
-
|
|
|
|
(349,723
|
)
|
Comprehensive (loss) income attributable to WPCS shareholders
|
|
$
|
(418,961
|
)
|
|
$
|
(1,552,632
|
)
|
|
$
|
138,220
|
|
|
$
|
(1,427,240
|
)
|
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
|
|
Conversion of Series H preferred stock to common stock
|
|
|
(1,425
|
)
|
|
|
(219,450
|
)
|
|
|
142,500
|
|
|
|
14
|
|
|
|
219,436
|
|
|
|
-
|
|
|
|
0
|
|
Conversion of Series H-1 preferred stock to common stock
|
|
|
(200
|
)
|
|
|
(36,920
|
)
|
|
|
20,000
|
|
|
|
2
|
|
|
|
36,918
|
|
|
|
-
|
|
|
|
-
|
|
Deemed dividend on conversion of Series H-1 convertible preferred
stock to common stock
|
|
|
-
|
|
|
|
19,724
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,724
|
)
|
|
|
-
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
138,220
|
|
|
|
138,220
|
|
Balance, October 31, 2016
|
|
|
9,132
|
|
|
$
|
868,940
|
|
|
|
2,868,659
|
|
|
$
|
287
|
|
|
$
|
86,219,242
|
|
|
$
|
(84,702,444
|
)
|
|
$
|
2,386,025
|
|
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 six months ended
|
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss) from operations
|
|
$
|
138,220
|
|
|
$
|
(1,956,498
|
)
|
Consolidated net income from discontinued
operations
|
|
|
-
|
|
|
|
878,981
|
|
Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
48,695
|
|
|
|
14,969
|
|
Shares based compensation
|
|
|
22,501
|
|
|
|
1,540,181
|
|
Gain on sale of China operations
|
|
|
-
|
|
|
|
(837,720
|
)
|
Income on Section 16 settlement
|
|
|
-
|
|
|
|
(400,000
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(324,990
|
)
|
|
|
2,407,532
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
(372,408
|
)
|
|
|
(165,287
|
)
|
Current assets held for sale
|
|
|
-
|
|
|
|
(3,853,621
|
)
|
Prepaid expenses and other current assets
|
|
|
(46,908
|
)
|
|
|
92,677
|
|
Other assets
|
|
|
1,999
|
|
|
|
-
|
|
Other assets held for sale
|
|
|
-
|
|
|
|
(34,523
|
)
|
Accounts payable and accrued expenses
|
|
|
143,477
|
|
|
|
(2,653,981
|
)
|
Current liabilities held for sale
|
|
|
-
|
|
|
|
2,200,030
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
372,707
|
|
|
|
203,039
|
|
Net cash used in operating activities
|
|
|
(16,707
|
)
|
|
|
(2,564,221
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(96,475
|
)
|
|
|
-
|
|
Proceeds from sale of China operations, net of acquisition cost
|
|
|
-
|
|
|
|
1,325,744
|
|
Net cash (used in) provided by investing activities
|
|
|
(96,475
|
)
|
|
|
1,325,744
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(52,027
|
)
|
|
|
(10,837
|
)
|
Repayments under other payable to Zurich
|
|
|
-
|
|
|
|
(270,000
|
)
|
Repayments of short term convertible note
|
|
|
-
|
|
|
|
(4,000
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(52,027
|
)
|
|
|
1,297,925
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
-
|
|
|
|
91,510
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(165,209
|
)
|
|
|
150,958
|
|
Cash and cash equivalents, beginning of the period
|
|
|
2,235,597
|
|
|
|
2,364,360
|
|
Cash and cash equivalents, end of the period
|
|
$
|
2,070,388
|
|
|
$
|
2,515,318
|
|
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 six months ended
|
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
Schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Automobile financing
|
|
$
|
72,650
|
|
|
$
|
-
|
|
Declaration on preferred dividend payable
|
|
$
|
-
|
|
|
$
|
4,369,958
|
|
Conversion of dividends payable related to make-whole amount to common stock
|
|
$
|
-
|
|
|
$
|
4,104,529
|
|
Conversion of dividends payable related to Series F-1 preferred stock
|
|
$
|
-
|
|
|
$
|
624,977
|
|
Conversion of dividends payable related to Series G-1 preferred stock
|
|
$
|
-
|
|
|
$
|
212,113
|
|
Conversion of short term convertible note to Series H preferred stock
|
|
$
|
-
|
|
|
$
|
1,299,000
|
|
Conversion of Series F and F-1 preferred stock through the issuance of common stock
|
|
$
|
-
|
|
|
$
|
3,292,741
|
|
Conversion of Series G and G-1 preferred stock through the issuance of common stock
|
|
$
|
-
|
|
|
$
|
1,351,722
|
|
Conversion of Series H preferred stock through the issuance of common stock
|
|
$
|
219,450
|
|
|
$
|
865,018
|
|
Conversion of Series H-1 preferred stock through the issuance of common stock
|
|
$
|
36,920
|
|
|
$
|
-
|
|
Deemed dividend on conversion of Series H-1 convertible preferred stock to common stock
|
|
$
|
19,724
|
|
|
$
|
-
|
|
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 at 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 and six months ended October 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 and six
months ended October 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 and six
months ended October 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 and six months ended October
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 and
six months ended October 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 October 31, 2016, the Company had a working
capital surplus of approximately $2,120,000 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 October 31, 2016 was $2,070,000 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
In August 2016, the FASB issued ASU No.
2016-15, Statement of Cash Flows (Topic 230). This amendment will provide guidance on the presentation and classification
of specific cash flow items to improve consistency within the statement of cash flows. ASU 2016-15 is effective for fiscal years,
and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted. The Company is
evaluating the effect that ASU 2016-15 will have on its financial statements and related disclosures.
In November 2016, the FASB issued
ASU
No.
2016-18,
Statement
of Cash Flows (Topic 230): Restricted Cash
(“ASU 2016-18”) that changes the
presentation of restricted cash and cash equivalents on the statement of cash flows. Restricted cash and restricted cash equivalents
will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown
on the statement of cash flows. This amendment is effective for the Company in the fiscal year beginning October 1, 2018,
but early adoption is permissible. The Company is currently evaluating the potential impact that ASU 2016-18 may have on its financial
position and statement of cash flows.
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’ condensed 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
The concentration of
accounts receivable as of October 31, 2016 and April 30, 2016, respectively are as follows:
|
|
As of
|
|
|
|
October 31,
2016
|
|
|
April 30,
2016
|
|
Customer A
|
|
|
19
|
%
|
|
|
22
|
%
|
Customer B
|
|
|
14
|
%
|
|
|
-
|
|
Customer C
|
|
|
10
|
%
|
|
|
11
|
%
|
Customer D
|
|
|
-
|
|
|
|
37
|
%
|
The accounts receivable also included retainage
receivable of $431,000 and $326,000 at October 31, 2016 and April 30, 2016, respectively, and both the retainage and aged accounts
receivable are expected to be collected.
Revenue Recognition
The concentration of
revenue recognition for the three and six months ended October 31, 2016 and 2015, respectively are as follows:
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Customer A
|
|
|
14
|
%
|
|
|
25
|
%
|
|
|
10
|
%
|
|
|
23
|
%
|
Customer B
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
%
|
Customer C
|
|
|
11
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
NOTE 5 – BASIC AND DILUTED NET (LOSS) INCOME 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
|
|
|
For the six months ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations attributable to WPCS common shareholders
|
|
$
|
(438,685
|
)
|
|
$
|
(2,823,466
|
)
|
|
$
|
118,496
|
|
|
$
|
(7,030,226
|
)
|
Income from discontinued operations, basic and diluted
|
|
|
-
|
|
|
|
837,720
|
|
|
|
-
|
|
|
|
862,476
|
|
Net (loss) income attributable to WPCS common shareholders, basic and diluted
|
|
$
|
(438,685
|
)
|
|
$
|
(1,985,746
|
)
|
|
$
|
118,496
|
|
|
$
|
(6,167,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
2,854,230
|
|
|
|
2,415,113
|
|
|
|
2,777,817
|
|
|
|
1,942,681
|
|
Stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
99,783
|
|
|
|
-
|
|
Series H and H-1 convertible preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
913,200
|
|
|
|
-
|
|
Weighted average shares outstanding - diluted
|
|
|
2,854,230
|
|
|
|
2,415,113
|
|
|
|
3,790,800
|
|
|
|
1,942,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income from continuing operations per common share
|
|
$
|
(0.15
|
)
|
|
$
|
(1.17
|
)
|
|
$
|
0.04
|
|
|
$
|
(3.62
|
)
|
Basic income from discontinued operations per common share
|
|
|
-
|
|
|
|
0.35
|
|
|
|
-
|
|
|
|
0.44
|
|
Basic (loss) income per common share
|
|
$
|
(0.15
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
0.04
|
|
|
$
|
(3.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income from continuing operations per common share
|
|
$
|
(0.15
|
)
|
|
$
|
(1.17
|
)
|
|
$
|
0.03
|
|
|
$
|
(3.62
|
)
|
Diluted income from discontinued operations per common share
|
|
|
-
|
|
|
|
0.35
|
|
|
|
-
|
|
|
|
0.44
|
|
Diluted (loss) income per common share
|
|
$
|
(0.15
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
0.03
|
|
|
$
|
(3.18
|
)
|
The following securities were excluded from
the weighted average dilutive common shares outstanding because their inclusion would have been antidilutive.
|
|
As of October 31,
|
|
|
|
2016
|
|
|
2015
|
|
Common stock equivalents:
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
852,000
|
|
|
|
2,724,000
|
|
Series G and G-1 preferred stock
|
|
|
-
|
|
|
|
76,000
|
|
Series H and H-1 preferred stock
|
|
|
913,000
|
|
|
|
1,135,000
|
|
Make-whole on preferred shares
|
|
|
-
|
|
|
|
21,000
|
|
Common stock purchase warrants
|
|
|
1,295,000
|
|
|
|
1,295,000
|
|
Totals
|
|
|
3,060,000
|
|
|
|
5,251,000
|
|
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 October 31, 2016 and April 30, 2016:
|
|
October 31, 2016
|
|
|
April 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
14,244,659
|
|
|
$
|
28,884,776
|
|
Estimated contract earnings
|
|
|
2,994,143
|
|
|
|
4,367,463
|
|
|
|
|
17,238,802
|
|
|
|
33,252,239
|
|
Less: Billings to date
|
|
|
18,240,180
|
|
|
|
34,253,725
|
|
Total
|
|
$
|
(1,001,378
|
)
|
|
$
|
(1,001,486
|
)
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
729,618
|
|
|
$
|
357,014
|
|
Billings in excess of cost and estimated earnings on uncompleted contracts
|
|
|
1,730,996
|
|
|
|
1,358,500
|
|
Total
|
|
$
|
(1,001,378
|
)
|
|
$
|
(1,001,486
|
)
|
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 and six months ended October 31, 2016 and 2015.
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
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 from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
101,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(49,234
|
)
|
Income from discontinued operations before income tax provision
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52,144
|
|
Income tax provision
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,883
|
)
|
Income from discontinued operations, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41,261
|
|
Gain from disposal
|
|
|
|
|
|
|
837,720
|
|
|
|
-
|
|
|
|
837,720
|
|
Total income from discontinued operations
|
|
$
|
-
|
|
|
$
|
837,720
|
|
|
$
|
-
|
|
|
$
|
878,981
|
|
Due Related Party
As of October 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
six months ended October 31, 2015 was immaterial.
The China Operations earned revenue for contracting
services provided to TGG (noncontrolling interest in China Operations) and subsidiaries of $0 for the three and six months ended
October 31, 2016 and $0 and $212,000 for the three and six months ended October 31, 2015, respectively.
NOTE 8 – INCOME FROM SECTION 16 SETTLEMENT
For the three and six months ended October
31, 2016, the Company received no income from Section 16 settlements. For the same periods in 2015, the Company received $0 and
$400,000, respectively, 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 annually 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
The following tables summarize outstanding loans
payable related to automobile as of October 31, 2016 and April 30, 2016, respectively:
|
|
|
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
Stated
|
|
as of
|
|
|
Estimated Future Payment
|
|
|
|
Maturity Date
|
|
Interest Rate
|
|
October 31, 2016
|
|
|
Within 1 Year
|
|
|
After 1 year
|
|
0% automobile loan payable
|
|
April 2018 - June 2019
|
|
0.0%
|
|
$
|
30,000
|
|
|
$
|
13,000
|
|
|
$
|
17,000
|
|
4% automobile loan payable
|
|
December 2016 - January 2020
|
|
4.0%
|
|
|
39,000
|
|
|
|
21,000
|
|
|
|
18,000
|
|
5% automobile loan payable
|
|
January 2020 - February 2020
|
|
5.0%
|
|
|
57,000
|
|
|
|
16,000
|
|
|
|
41,000
|
|
7% automobile loan payable
|
|
June 2019
|
|
7.0%
|
|
|
26,000
|
|
|
|
5,000
|
|
|
|
21,000
|
|
8% automobile loan payable
|
|
October 2021
|
|
8.0%
|
|
|
17,000
|
|
|
|
3,000
|
|
|
|
14,000
|
|
|
|
|
|
|
|
$
|
169,000
|
|
|
$
|
58,000
|
|
|
$
|
111,000
|
|
|
|
|
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
Stated
|
|
as of
|
|
|
Estimated Future Payment
|
|
|
|
Maturity Date
|
|
Interest Rate
|
|
April 30, 2016
|
|
|
Within 1 Year
|
|
|
After 1 year
|
|
0% automobile loan payable
|
|
April 2018 - May 2019
|
|
0.0%
|
|
$
|
25,000
|
|
|
$
|
10,000
|
|
|
$
|
15,000
|
|
4% automobile loan payable
|
|
August 2016 - January 2020
|
|
4.0%
|
|
|
58,000
|
|
|
|
28,000
|
|
|
|
30,000
|
|
5% automobile loan payable
|
|
January 2020 - February 2020
|
|
5.0%
|
|
|
66,000
|
|
|
|
16,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
$
|
149,000
|
|
|
$
|
54,000
|
|
|
$
|
95,000
|
|
NOTE 11 – STOCKHOLDERS’ EQUITY
Conversion of Preferred 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 six months ended October 31, 2016.
The Company did not renew this agreement beyond
the July 31, 2016 termination date.
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 September 14, 2016, the Company issued 20,000 shares of its common
stock upon the conversion of 200 shares of Series H-1 Preferred Stock.
NOTE 12 – INCOME FROM ARBITRATION
SETTLEMENTS
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 six months ended October 31, 2016. The Cooper Medical School contract was performed under the electrical
services segment and is no longer part of the Company’s ongoing operation.
During the quarter ended October 31, 2016
the Company settled an outstanding contract claim for $30,000.
NOTE 13 – SUBSEQUENT EVENTS
On November
18, 2016, the Company issued 20,000 shares of its common stock upon the conversion of 200 shares of Series H-1 Preferred Stock.
On
December 13, 2016, the Company received a letter alleging the Company had breached a non-disclosure agreement with Collaboration
Solutions, Inc. (“CSI”) by hiring two former employees of CSI and assisting such former employees with violating non-competition
agreements and misappropriating trade secrets. CSI is seeking payment of $1,500,000 to settle such claims. The Company does
not believe the allegations in the letter have any merit, and if any actual litigation is commenced, intends to aggressively defend
against all such claims that might arise once actual litigation commences. Notwithstanding the monetary demand set forth
in the letter, the extent of the Company’s potential liability in this matter has not yet been determined.
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 October 31, 2016, the Texas Operations generated approximately $405,000 in revenue,
while incurring approximately $444,000 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. Recently, we instituted some changes and cost reductions in the Texas Operations staffing and related expenses
to better align our operational costs with short-term projected revenue expectations.
During the second 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 and six months ended October 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 and six months ended October
31, 2016, we generated revenues from continuing operations of $4,848,000 and $8,264,000, respectively as compared to $3,824,000
and $8,288,000, respectively for the same periods in 2015. Our backlog at October 31, 2016 was $16,325,000 as compared to $13,981,000
at October 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 October 31, 2016, we generated revenue of approximately $4,848,000 as compared to revenue
of $3,824,000 for the same period last year. This $1,024,000 increase in revenue was due primarily to a $618,000 increase in revenue
in our Suisun City Operations and by adding approximately $405,000 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 had been the case during previous fiscal
quarters.
We generated a net loss to common shareholders
for the three months ended October 31, 2016 of approximately $439,000, or ($0.15) per common share, which includes: (i) income
from our Suisun City Operations of approximately $380,000, (ii) a loss from our corporate division of approximately $441,000, which
is comprised of corporate expenses of approximately $549,000 offset by a gain on settlement of accounts payable of $108,000; and
(iii) a loss from our Texas Operations of approximately $358,000.
The net loss to
common shareholders for the three months ended October 31, 2016 compares to a net loss of approximately $1,985,000, or ($1.17)
per common share for the three months ended October 31, 2015, which includes: (i) a loss from operations of approximately $2,041,000;
(ii) a gain from discontinued China Operations of approximately $838,000; and (ii) approximately $783,000 of non-cash dividends
declared on preferred stock.
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 October 31, 2016 Compared to the Three Months Ended October 31, 2015
|
|
For the three months ended
|
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,847,710
|
|
|
|
100.0
|
%
|
|
$
|
3,824,241
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
3,819,187
|
|
|
|
78.8
|
%
|
|
|
3,294,565
|
|
|
|
86.1
|
%
|
Selling, general and administrative expenses
|
|
|
1,567,326
|
|
|
|
32.3
|
%
|
|
|
2,555,206
|
|
|
|
66.8
|
%
|
Depreciation and amortization
|
|
|
28,029
|
|
|
|
0.6
|
%
|
|
|
14,493
|
|
|
|
0.4
|
%
|
|
|
|
5,414,542
|
|
|
|
111.7
|
%
|
|
|
5,864,264
|
|
|
|
153.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(566,832
|
)
|
|
|
-11.7
|
%
|
|
|
(2,040,023
|
)
|
|
|
-53.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,029
|
)
|
|
|
0.0
|
%
|
|
|
(606
|
)
|
|
|
0.0
|
%
|
Income from arbitration settlement
|
|
|
30,902
|
|
|
|
0.6
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Other income
|
|
|
117,947
|
|
|
|
2.4
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax provision
|
|
|
(419,012
|
)
|
|
|
-8.6
|
%
|
|
|
(2,040,629
|
)
|
|
|
-53.4
|
%
|
Income tax provision
|
|
|
(51
|
)
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Loss from continuing operations
|
|
|
(418,961
|
)
|
|
|
-8.6
|
%
|
|
|
(2,040,629
|
)
|
|
|
-53.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from disposal
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
837,720
|
|
|
|
21.9
|
%
|
Net loss attributable to WPCS
|
|
|
(418,961
|
)
|
|
|
-8.6
|
%
|
|
|
(1,202,909
|
)
|
|
|
-31.5
|
%
|
Dividends declared on preferred stock
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(782,837
|
)
|
|
|
-20.5
|
%
|
Deemed dividend on convertible preferred stock, due to beneficial conversion feature
|
|
|
(19,724
|
)
|
|
|
-0.4
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Net loss attributable to WPCS common shareholders
|
|
$
|
(438,685
|
)
|
|
|
-9.0
|
%
|
|
$
|
(1,985,746
|
)
|
|
|
-52.0
|
%
|
Operating Loss
The Company had an operating loss of approximately
$567,000 for the three months ended October 31, 2016. This quarter’s operating loss was comprised primarily of $338,000 in
operating income from Suisun City Operations, which was offset by an operating loss of approximately $357,000 from our Texas Operations
and $548,000 of corporate overhead expenses. For the three months ended October 31, 2015, the Company had an operating loss of
approximately $2,040,000 which was comprised primarily of $55,000 in operating income from Suisun City Operations and which was
offset by approximately $2,095,000 of corporate overhead. The details of the operating loss are as follows:
Revenue
Revenue for the three months ended October
31, 2016 increased $1,024,000, or 26.8%, to $4,848,000, as compared to $3,824,000 for same period last year due to an approximately
$618,000 increase in revenue in Suisun City Operations and by an approximately $405,000 increase in revenue from our newly established
Texas Operations. This increase in the Suisun City and Texas Operations’ revenue was primarily the result of addition of
lower revenue contracts thereby minimizing our reliance on a few large customers.
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 increased
$525,000, or 16%, to $3,819,000, or 78.8% of revenue, for the three months ended October 31, 2016, as compared to $3,295,000, or
86.1% of revenue, for the same period in 2015.This decrease in the cost of sales as a percentage of revenue (increase in gross
margin)is due to the increase in the number of contracts we are entering into that provide lower revenue but higher margin.
Selling, General and Administrative Expenses
For the three months ended October 31,
2016, total selling, general and administrative expenses decreased $988,000 or 39% to $1,567,000 as compared to $2,555,000 for
the same period in 2015, which was primarily due to $443,000 of increased expenses in our newly established Texas Operations and
increase in expense in our Suisun Operations of $115,000 but offset by lower corporate expenses of $1,547,000. The Texas Operations
did not have expenses during the three months ended October 31, 2015, the increase in expenses at our Suisun Operation were primarily
due to increase salary expense for the addition of business development personnel while the lower corporate overhead was comprised
primarily of lower stock option compensation expense.
Depreciation and Amortization
For the three months ended October 31, 2016, depreciation and amortization was approximately $28,000 as compared
to approximately $14,000 for the same quarter in 2015, due primarily to the addition of vehicles and office furniture in our Texas
Operations.
Loss from Continuing Operations
The Company had a net loss from continuing
operations of $419,000 for the three months ended October 31, 2016 as compared to a loss of $2,041,000 for the same period in 2015.
Loss from continuing operations is determined by adjusting the operating loss by the following items:
Interest Expense
For the three months ended October 31,
2016 and 2015, interest expense was approximately $1,000 and $1,000, respectively.
Income from Arbitration Settlement
During
the quarter ended October 31, 2016, the Company received $30,000 in connection with a settlement of an outstanding contract dispute
in our Suisun Operations.
Other Income
During the quarter ended October 31, 2016,
the Company recognized $118,000 in other income upon the negotiated settlement of certain accounts payable to an outside vendor.
Net (Loss) Income Attributable to
WPCS Common Shareholders
The Company incurred a net loss attributable
to WPCS common shareholders of $439,000 for the three months ended October 31, 2016 as compared to a net loss attributable to
WPCS common shareholders of $1,986,000 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 October 31, 2016 as compared to a gain on disposal of $838,000 for the same period in 2015.
Dividends Declared on Preferred Stock
As a result of the issuance of preferred stock,
we declared dividends and make-whole dividends of $0 for the three months ended October 31, 2016 as compared to $783,000 for the
same period in 2015. These dividends are non-cash and were paid in common shares. As of December 31, 2015, the Company is no longer
required to pay any such dividends on any outstanding preferred stock. In addition, as a result of the conversion of some of our
Series H-1 preferred shares during the three months ended October 31, 2016 we recognized deemed dividends due to the beneficial
conversion feature associated with the shares converted.
Results of Operations
for the Six Months Ended October 31, 2016 Compared to the Six Months Ended October 31, 2015
|
|
For the six months ended
|
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
8,264,163
|
|
|
|
100.0
|
%
|
|
$
|
8,288,244
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
6,454,695
|
|
|
|
78.1
|
%
|
|
|
6,741,768
|
|
|
|
81.3
|
%
|
Selling, general and administrative expenses
|
|
|
2,920,312
|
|
|
|
35.3
|
%
|
|
|
3,868,009
|
|
|
|
46.7
|
%
|
Depreciation and amortization
|
|
|
48,695
|
|
|
|
0.6
|
%
|
|
|
29,462
|
|
|
|
0.4
|
%
|
|
|
|
9,423,702
|
|
|
|
114.0
|
%
|
|
|
10,639,239
|
|
|
|
128.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,159,539
|
)
|
|
|
-14.0
|
%
|
|
|
(2,350,995
|
)
|
|
|
-28.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,010
|
)
|
|
|
0.0
|
%
|
|
|
(1,498
|
)
|
|
|
0.0
|
%
|
Income from Section 16 settlement
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
400,000
|
|
|
|
4.8
|
%
|
Income from Arbitration settlement
|
|
|
1,180,902
|
|
|
|
14.2
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Other income (expense)
|
|
|
122,434
|
|
|
|
1.5
|
%
|
|
|
(2,906
|
)
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax provision
|
|
|
140,787
|
|
|
|
1.7
|
%
|
|
|
(1,955,399
|
)
|
|
|
-23.6
|
%
|
Income tax provision
|
|
|
2,567
|
|
|
|
0.0
|
%
|
|
|
1,099
|
|
|
|
0.0
|
%
|
Income (loss) from continuing operations
|
|
|
138,220
|
|
|
|
1.7
|
%
|
|
|
(1,956,498
|
)
|
|
|
-23.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
41,261
|
|
|
|
0.5
|
%
|
Gain from disposal
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
837,720
|
|
|
|
10.1
|
%
|
Consolidated net income (loss)
|
|
|
138,220
|
|
|
|
1.7
|
%
|
|
|
(1,077,517
|
)
|
|
|
-13.0
|
%
|
Net income attributable to noncontrolling interest
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
16,505
|
|
|
|
0.2
|
%
|
Net income (loss) attributable to WPCS
|
|
|
138,220
|
|
|
|
1.7
|
%
|
|
|
(1,094,022
|
)
|
|
|
-13.2
|
%
|
Dividends declared on preferred stock
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(4,369,958
|
)
|
|
|
-52.7
|
%
|
Deemed dividend on convertible preferred stock, due to beneficial conversion feature
|
|
|
(19,724
|
)
|
|
|
-0.3
|
%
|
|
|
(703,770
|
)
|
|
|
-8.5
|
%
|
Net income (loss) attributable to WPCS common shareholders
|
|
$
|
118,496
|
|
|
|
1.4
|
%
|
|
$
|
(6,167,750
|
)
|
|
|
-74.4
|
%
|
Operating Loss
The Company had an operating loss of approximately
$1,160,000 for the six months ended October 31, 2016. This period’s operating loss was comprised primarily of $546,000 in
operating income from Suisun City Operations, which was offset by an operating loss of approximately $663,000 from our Texas Operations
and $1,043,000 of corporate overhead expenses. For the six months ended October 31, 2015, the Company had an operating loss of
approximately $2,351,000 which was comprised primarily of $600,000 in operating income from Suisun City Operations and which was
offset by approximately $2,951,000 of corporate overhead. The Company did not have Texas Operations in 2015. The details of the
operating loss are as follows:
Revenue
Revenue for the six months ended October
31, 2016 decreased $24,000, or less than 1%, to $8,264,000, as compared to $8,288,000 for same period last year due to an approximately
$692,000 decrease in revenue in Suisun City Operations offset by an approximately $668,000 increase in revenue from our newly established
Texas Operations. This decrease in the Suisun City revenue was due primarily to lower sales in the first few months of the period
and, as disclosed earlier in this section, our three-month operating results as of October 31, 2016 for the Suisun City Operations
shows increased revenue.
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
$287,000, or 4.3%, to $6,455,000, or 78.1% of revenue, for the six months ended October 31, 2016, as compared to $6,742,000, or
81.3% of revenue, for the same period in 2015. This decrease in the cost of sales as a percentage of revenue (higher gross margin)
is due to the increase in the number of contracts we are entering into that provide lower revenue but higher margin.
Selling, General and Administrative
Expenses
For the six months ended October 31, 2016,
total selling, general and administrative expenses decreased $948,000 or 24.5% to $2,920,000 as compared to $3,868,000 for the
same period in 2015, which was primarily due to $811,000 of increased expenses in our newly established Texas Operations and increase
in expense in our Suisun Operations of $148,000 but offset by lower corporate expenses of $1,907,000. The Texas Operations did
not have expenses during the six months ended October 31, 2015, the increase in expenses at our Suisun Operation were primarily
due to increase salary expense for the addition of business development personnel, while the lower corporate overhead was comprised
primarily of lower stock option compensation expense and professional fees.
Depreciation and Amortization
For the six months ended October 31, 2016,
depreciation and amortization was approximately $49,000 as compared to approximately $29,000 for the same period in 2015, due primarily
to the addition of vehicles and office furniture in our Texas Operations.
Income (Loss) from Continuing Operations
The Company had net income from continuing
operations of $138,000 for the six months ended October 31, 2016 as compared to a loss of $1,956,000 for the same period in 2015.
Income (loss) from continuing operations is determined by adjusting the operating loss by the following items:
Interest Expense
For the six months ended October 31, 2016
and 2015, interest expense was approximately $3,000 and $1,000, respectively.
Income from Section 16 Settlement
During the six months ended October 31,
2016 and 2015, the Company recorded income of $0 and $400,000, respectively, for 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 six months ended October 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.
During the six months ended October 31,
2016, the Company received $30,000 in connection with a settlement of an outstanding contract in our Suisun Operations.
Other Income (Expense)
During the six months ended October 31, 2016,
the Company recognized $118,000 in other income upon the negotiated settlement of certain accounts payable to an outside vendor
and miscellaneous other income of approximately $4,000.
Net Income (Loss) Attributable to WPCS
Common Shareholders
The Company had net income attributable to
WPCS common shareholders of $118,000 for the six months ended October 31, 2016 as compared to a net loss attributable to WPCS common
shareholders of $6,168,000 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 six months ended October 31, 2016 as compared to net income and a gain on disposal of $879,000 for the same period
in 2015.
Dividends Declared on Preferred Stock
As a result of the issuance of preferred
stock, we declared dividends and make-whole dividends of $0 for the six months ended October 31, 2016 as compared to $4,370,000
for the same period in 2015. These dividends are non-cash and were paid in common shares. As of December 31, 2015, the Company
is no longer required to pay any such dividends on any outstanding preferred stock. In addition, as a result of the issuance and
conversion of some of our Series H-1 preferred shares during the six months ended October 31, 2016 and 2015 we recognized deemed
dividends of $19,724 and $704,000, respectively due to the beneficial conversion feature associated with these shares.
Effects of Inflation
Inflation has not had a material impact on our business.
Liquidity and Capital Resources as of October 31,
2016
As of October 31, 2016, we had working capital
of approximately $2,120,000, which consisted of current assets of approximately $6,124,000 and current liabilities of approximately
$4,004,000. This compares to working capital of approximately $2,061,000 at April 30, 2016. The current liabilities as presented
in the balance sheet at October 31, 2016 primarily include approximately $2,215,000 of accounts payable and accrued expenses and
approximately $1,730,000 of billings in excess of costs and estimated earnings on uncompleted contracts.
Our cash and cash equivalents balance at October
31, 2016 was approximately $2,070,000.
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.
Backlog
As of October 31, 2016, we had a backlog
of unfilled orders of approximately $16,325,000 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.