WPCS INTERNATIONAL
INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
October 31,
|
|
|
April 30,
|
|
|
|
2017
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,195,086
|
|
|
$
|
1,659,318
|
|
Restricted cash
|
|
|
500,176
|
|
|
|
500,026
|
|
Accounts receivable, net of allowance of $247,000 at October
31, 2017 and April 30, 2017, respectively
|
|
|
2,922,031
|
|
|
|
4,199,674
|
|
Costs and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
315,437
|
|
|
|
410,826
|
|
Prepaid expenses and other current assets
|
|
|
41,555
|
|
|
|
41,135
|
|
Total current assets
|
|
|
6,974,285
|
|
|
|
6,810,979
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
389,668
|
|
|
|
322,643
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
11,484
|
|
|
|
11,484
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,375,437
|
|
|
$
|
7,145,106
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of loans payable
|
|
$
|
51,590
|
|
|
$
|
52,946
|
|
Accounts payable and accrued expenses
|
|
|
1,732,411
|
|
|
|
1,790,256
|
|
Billings in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
2,247,174
|
|
|
|
2,105,797
|
|
Total current liabilities
|
|
|
4,031,175
|
|
|
|
3,948,999
|
|
|
|
|
|
|
|
|
|
|
Loans payable, net of current portion
|
|
|
99,702
|
|
|
|
124,559
|
|
Total liabilities
|
|
|
4,130,877
|
|
|
|
4,073,558
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Preferred stock - $0.0001 par value, 5,000,000 shares authorized
at October 31, 2017 and April 30, 2017, respectively
|
|
|
|
|
|
|
|
|
Convertible Series H, 8,500 shares designated - 8 shares issued
and outstanding at October 31, 2017 and April 30, 2017, respectively; liquidation preference of $1,000
|
|
|
1,242
|
|
|
|
1,242
|
|
Convertible Series H-1, 9,488 shares designated - 0 and 4,289
shares issued and outstanding at October 31, 2017 and April 30, 2017, respectively; liquidation preference of $0
|
|
|
-
|
|
|
|
437,530
|
|
Convertible Series H-2, 3,500 shares designated - 2,066 and
3,305 shares issued and outstanding at October 31, 2017 and April 30, 2017, respectively; liquidation preference of $250,000
|
|
|
167,494
|
|
|
|
230,721
|
|
Convertible Series H-3, 9,500 shares designated - 3,189 and
7,017 shares issued and outstanding at October 31, 2017 and April 30, 2017, respectively; liquidation preference of $440,000
|
|
|
251,233
|
|
|
|
475,185
|
|
Common stock - $0.0001 par value, 100,000,000 shares authorized,
5,090,224 and 3,352,159 shares issued and outstanding as of October 31, 2017 and April 30, 2017, respectively
|
|
|
508
|
|
|
|
335
|
|
Additional paid-in capital
|
|
|
91,612,396
|
|
|
|
89,003,669
|
|
Accumulated deficit
|
|
|
(88,788,313
|
)
|
|
|
(87,077,134
|
)
|
Total stockholders' equity
|
|
|
3,244,560
|
|
|
|
3,071,548
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
7,375,437
|
|
|
$
|
7,145,106
|
|
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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,859,617
|
|
|
$
|
4,847,710
|
|
|
$
|
7,382,964
|
|
|
$
|
8,264,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
3,061,372
|
|
|
|
3,819,187
|
|
|
|
5,815,922
|
|
|
|
6,454,695
|
|
Selling, general and administrative expenses
|
|
|
1,249,147
|
|
|
|
1,567,326
|
|
|
|
2,433,648
|
|
|
|
2,920,312
|
|
Depreciation and amortization
|
|
|
38,844
|
|
|
|
28,029
|
|
|
|
68,917
|
|
|
|
48,695
|
|
|
|
|
4,349,363
|
|
|
|
5,414,542
|
|
|
|
8,318,487
|
|
|
|
9,423,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(489,746
|
)
|
|
|
(566,832
|
)
|
|
|
(935,523
|
)
|
|
|
(1,159,539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,581
|
)
|
|
|
(1,029
|
)
|
|
|
(3,632
|
)
|
|
|
(3,010
|
)
|
Income from legal settlement
|
|
|
7,750
|
|
|
|
30,902
|
|
|
|
15,500
|
|
|
|
1,180,902
|
|
Other income
|
|
|
27,471
|
|
|
|
117,947
|
|
|
|
27,471
|
|
|
|
122,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations before income tax provision
|
|
|
(456,106
|
)
|
|
|
(419,012
|
)
|
|
|
(896,184
|
)
|
|
|
140,787
|
|
Income tax provision
|
|
|
1,020
|
|
|
|
(51
|
)
|
|
|
1,020
|
|
|
|
2,567
|
|
(Loss) income from operations
|
|
|
(457,126
|
)
|
|
|
(418,961
|
)
|
|
|
(897,204
|
)
|
|
|
138,220
|
|
Net (loss) income
|
|
|
(457,126
|
)
|
|
|
(418,961
|
)
|
|
|
(897,204
|
)
|
|
|
138,220
|
|
Deemed dividend on convertible preferred stock, due to
beneficial conversion feature
|
|
|
(813,975
|
)
|
|
|
(19,724
|
)
|
|
|
(813,975
|
)
|
|
|
(19,724
|
)
|
Net (loss) income attributable to WPCS common stockholders
|
|
$
|
(1,271,101
|
)
|
|
$
|
(438,685
|
)
|
|
$
|
(1,711,179
|
)
|
|
$
|
118,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per common share
|
|
$
|
(0.34
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
0.04
|
|
Diluted (loss) income per common share
|
|
$
|
(0.34
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic
|
|
|
3,748,861
|
|
|
|
2,854,230
|
|
|
|
3,550,510
|
|
|
|
2,777,817
|
|
Weighted average shares outstanding – diluted
|
|
|
3,748,861
|
|
|
|
2,854,230
|
|
|
|
3,550,510
|
|
|
|
3,790,800
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
WPCS INTERNATIONAL
INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance, April 30, 2017
|
|
|
14,619
|
|
|
$
|
1,144,678
|
|
|
|
3,352,159
|
|
|
$
|
335
|
|
|
$
|
89,003,669
|
|
|
$
|
(87,077,134
|
)
|
|
$
|
3,071,548
|
|
Warrants exercised for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
802,463
|
|
|
|
80
|
|
|
|
1,070,136
|
|
|
|
-
|
|
|
|
1,070,216
|
|
Conversion of Series H-1 preferred stock to common stock
|
|
|
(4,289
|
)
|
|
|
(860,501
|
)
|
|
|
428,900
|
|
|
|
43
|
|
|
|
860,458
|
|
|
|
-
|
|
|
|
-
|
|
Deemed dividend on conversion of Series H-1 convertible preferred stock to common stock
|
|
|
-
|
|
|
|
422,971
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(422,971
|
)
|
|
|
-
|
|
Conversion of Series H-2 preferred stock to common stock
|
|
|
(1,239
|
)
|
|
|
(149,919
|
)
|
|
|
123,900
|
|
|
|
12
|
|
|
|
149,907
|
|
|
|
-
|
|
|
|
-
|
|
Deemed dividend on conversion of Series H-2 convertible preferred stock to common stock
|
|
|
-
|
|
|
|
86,692
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(86,692
|
)
|
|
|
-
|
|
Conversion of Series H-3 preferred stock to common stock
|
|
|
(3,828
|
)
|
|
|
(528,264
|
)
|
|
|
382,802
|
|
|
|
38
|
|
|
|
528,226
|
|
|
|
-
|
|
|
|
-
|
|
Deemed dividend on conversion of Series H-3 convertible preferred stock to common stock
|
|
|
-
|
|
|
|
304,312
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(304,312
|
)
|
|
|
-
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(897,204
|
)
|
|
|
(897,204
|
)
|
Balance, October 31, 2017
|
|
|
5,263
|
|
|
$
|
419,969
|
|
|
|
5,090,224
|
|
|
$
|
508
|
|
|
$
|
91,612,396
|
|
|
$
|
(88,788,313
|
)
|
|
$
|
3,244,560
|
|
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,
|
|
|
|
2017
|
|
|
2016
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(897,204
|
)
|
|
$
|
138,220
|
|
Adjustments to reconcile consolidated net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
68,917
|
|
|
|
48,695
|
|
Shares based compensation
|
|
|
-
|
|
|
|
22,501
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,277,643
|
|
|
|
(324,990
|
)
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
95,389
|
|
|
|
(372,408
|
)
|
Prepaid expenses and other current assets
|
|
|
(420
|
)
|
|
|
(46,908
|
)
|
Other assets
|
|
|
-
|
|
|
|
1,999
|
|
Accounts payable and accrued expenses
|
|
|
(57,845
|
)
|
|
|
143,477
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
141,377
|
|
|
|
372,707
|
|
Net cash provided by (used in) operating activities
|
|
|
627,857
|
|
|
|
(16,707
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(135,942
|
)
|
|
|
(96,475
|
)
|
Net cash used in investing activities
|
|
|
(135,942
|
)
|
|
|
(96,475
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Warrants exercised for cash
|
|
|
1,070,216
|
|
|
|
-
|
|
Repayment under loan payable obligations
|
|
|
(26,213
|
)
|
|
|
(52,027
|
)
|
Net cash provided by (used in) financing activities
|
|
|
1,044,003
|
|
|
|
(52,027
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
|
1,535,918
|
|
|
|
(165,209
|
)
|
Cash, cash equivalents and restricted cash beginning of the year
|
|
|
2,159,344
|
|
|
|
2,235,597
|
|
Cash, cash equivalents and restricted cash end of the year
|
|
$
|
3,695,262
|
|
|
$
|
2,070,388
|
|
WPCS INTERNATIONAL INCORPORATED AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(UNAUDITED)
|
|
For the six months ended
|
|
|
|
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
Schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Automobile financing
|
|
$
|
-
|
|
|
$
|
72,650
|
|
Conversion of Series H preferred stock through the issuance of common stock
|
|
$
|
-
|
|
|
$
|
219,450
|
|
Conversion of Series H-1 preferred stock to common stock
|
|
$
|
860,501
|
|
|
$
|
36,920
|
|
Deemed dividend on conversion of Series H-1 convertible preferred stock
to common stock
|
|
$
|
422,971
|
|
|
$
|
19,724
|
|
Conversion of Series H-2 preferred stock to common stock
|
|
$
|
149,919
|
|
|
$
|
-
|
|
Deemed dividend on conversion of Series H-2 convertible preferred stock
to common stock
|
|
$
|
86,692
|
|
|
$
|
-
|
|
Conversion of Series H-3 preferred stock to common stock
|
|
$
|
528,264
|
|
|
$
|
-
|
|
Deemed dividend on conversion of Series H-3 convertible preferred stock
to common stock
|
|
$
|
304,312
|
|
|
$
|
-
|
|
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
WPCS International Incorporated, a Delaware
corporation (“WPCS”) and its wholly and majority-owned subsidiaries (collectively, the “Company”) currently
specializes in low voltage communications, audio-visual and security contracting services, conducting business in one segment
at one operations center, through its wholly-owned domestic subsidiary, WPCS International - Suisun City, Inc. (“Suisun
City Operations”). During the year ended April 30, 2017 the Company also conducted operations from its wholly-owned Texas
subsidiary, WPCS International-Texas, Inc. (“Texas Operations”), however, as of April 30, 2017, the Texas Operations
were closed.
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.
Basis of Presentation
The condensed consolidated financial statements
of WPCS and its wholly and majority-owned subsidiaries included in this Report for the six months ended October 31, 2017 and 2016,
reflect the accounts of current entities as continued operations, as discussed below.
Results of operations for the three and
six months ended October 31, 2017 and 2016 include the results of: (i) WPCS (which primarily reflects corporate operating expenses
and nonoperating income); (ii) Suisun City Operations and the Texas Operations, (the Texas Operations were closed during the year
ended April 30, 2017 and therefore the Suisun Operation remains the Company’s only active operating subsidiary); (iii) WPCS
Incorporated, an inactive subsidiary; (iv) WPCS International – Trenton, Inc. (“Trenton Operations”), which
operations were closed in September 2013; and (v) DC Acquisition Corporation., a wholly-owned subsidiary of WPCS formed on August
7, 2017 solely for the purpose of the proposed merger between WPCS and DropCar, Inc. (see Note 11 – Proposed Merger).
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, 2017.
The results of operations for the six
months ended October 31, 2017 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, 2017, the Company had
a working capital surplus of approximately $2,943,000 and cash, cash equivalents and restricted cash of approximately $3,695,000.
During the quarter ended October 31, 2017, the Company received proceeds of approximately $1,070,000 from the exercise of preferred
stock warrants (see Note 10).
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, 2017.
Recent Accounting Standards
Leases
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,
Leases (Topic
842)
which supersedes FASB ASC Topic 840,
Leases (Topic 840)
and provides principles for the recognition,
measurement, presentation and disclosure of leases for both lessees and lessors. The FASB has continued to clarify this guidance
and most recently issued ASU 2017-13 “Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017
EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments.” The new standard requires lessees to
apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease
is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based
on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required
to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification.
Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard
will be effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance.
The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and related
disclosures.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 amends the guidance for
revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the
International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition
that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures
regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions
include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction
price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances.
The amendments of ASU 2014-09 were effective for reporting periods beginning after December 15, 2016, with early adoption prohibited.
Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.
Subsequent to issuing ASU 2014-09, the
FASB issued the following amendments concerning the adoption and clarification of ASU 2014-09. In August 2015, the FASB issued
ASU No. 2015-14 “Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date” (“ASU 2015-14”),
which deferred the effective date one year. As a result, the amendments of ASU 2014-09 are effective for reporting periods beginning
after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016.
In March 2016, the FASB issued ASU No. 2016-08 “Revenue from Contracts with Customers (Topic 606), Principal versus Agent
Considerations (Reporting Revenue versus Net)” (“ASU 2016-08”), which clarifies the implementation guidance
on principal versus agent considerations in the new revenue recognition standard. ASU 2016-08 clarifies how an entity should identify
the unit of accounting (i.e. the specified good or service) for the principal versus agent evaluation and how it should apply
the control principle to certain types of arrangements.
In April 2016, the FASB issued ASU No.
2016-10 “Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing” (“ASU
2016-10”), which reduces the complexity when applying the guidance for identifying performance obligations and improves
the operability and understandability of the license implementation guidance. In May 2016, the FASB issued ASU No. 2016-12 “Revenue
from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”),
which amends the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar
taxes. ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the
revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability
threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the
standard’s contract criteria. In December 2016, the FASB issued an update (“ASU 2016-20”) to ASC 606, Technical
Corrections and Improvements, which outlines technical corrections to certain aspects of the new revenue recognition standard
such as provisions for losses on construction type contracts and disclosure of remaining performance obligations, among other
aspects. In September 2017, the FASB issued ASU 2017-13, “Revenue Recognition” (Topic 605), “Revenue from Contracts
with Customers” (Topic 606), “Leases” (Topic 840), and “Leases” (Topic 842)
,
which provides
additional implementation guidance on the previously issued ASU 2014-09.
The Company is currently evaluating the
potential impact that these ASUs may have on its financial statements and related disclosures.
Business Combinations
In January 2017, the FASB issued an ASU
2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. The amendments in this Update is to clarify
the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should
be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting
including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December
15, 2017, including interim periods within those periods. The Company is currently evaluating the impact of adopting this guidance.
Accounting standards that have been issued
or proposed by the Financial Accounting Standards Board (“FASB”), 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.
NOTE 4 – CONCENTRATIONS
Accounts Receivable
The concentration of accounts
receivable as of October 31, 2017 and April 30, 2017, respectively are as follows:
|
|
As of
|
|
|
|
October 31, 2017
|
|
|
April 30, 2017
|
|
Customer A
|
|
|
55
|
%
|
|
|
24
|
%
|
Customer B
|
|
|
11
|
%
|
|
|
12
|
%
|
Customer C
|
|
|
-
|
|
|
|
10
|
%
|
The accounts receivable also included
retainage receivable of $1,094,000 and $326,000 at October 31, 2017 and April 30, 2017, 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, 2017 and 2016, respectively are as follows:
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Customer A
|
|
|
51
|
%
|
|
|
14
|
%
|
|
|
38
|
%
|
|
|
10
|
%
|
Customer B
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
13
|
%
|
|
|
-
|
|
|
-
|
Represents less than 10%
|
NOTE 5 – BASIC AND DILUTED NET
(LOSS) INCOME PER COMMON SHARE
Basic and diluted net (loss) income per
common share is computed as net (loss) income 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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to WPCS common
stockholders, basic and diluted
|
|
$
|
(1,271,101
|
)
|
|
$
|
(438,685
|
)
|
|
$
|
(1,711,179
|
)
|
|
$
|
118,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic
|
|
|
3,748,861
|
|
|
|
2,854,230
|
|
|
|
3,550,510
|
|
|
|
2,777,817
|
|
Stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
99,783
|
|
Series H and H-1 convertible preferred
stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
913,200
|
|
Weighted average shares outstanding – diluted
|
|
|
3,748,861
|
|
|
|
2,854,230
|
|
|
|
3,550,510
|
|
|
|
3,790,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per common share
|
|
$
|
(0.34
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
0.04
|
|
Diluted (loss) income per common share
|
|
$
|
(0.34
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
0.03
|
|
The following securities were excluded
from the weighted average dilutive common shares outstanding because their inclusion would have been antidilutive.
|
|
As of October 31,
|
|
|
|
2017
|
|
|
2016
|
|
Common stock equivalents:
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
3,252,000
|
|
|
|
852,000
|
|
Series H, H-1, H-2 and H-3 preferred stock
|
|
|
526,000
|
|
|
|
913,000
|
|
Common stock purchase warrants
|
|
|
2,090,000
|
|
|
|
1,295,000
|
|
Totals
|
|
|
5,868,000
|
|
|
|
3,060,000
|
|
NOTE 6 – COSTS AND ESTIMATED
EARNINGS ON UNCOMPLETED CONTRACTS
The asset, “Costs and estimated
earnings in excess of billings on uncompleted contracts”, represents revenue recognized in excess of amounts billed. The
liability, “Billings in excess of costs and estimated earnings on uncompleted contracts”, represents billings in excess
of revenue recognized. Costs and estimated earnings on uncompleted contracts consist of the following at October 31, 2017 and
April 30, 2017:
|
|
October 31, 2017
|
|
|
April 30, 2017
|
|
|
|
|
|
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
17,149,734
|
|
|
$
|
16,362,011
|
|
Estimated contract earnings
|
|
|
3,660,429
|
|
|
|
3,714,584
|
|
|
|
|
20,810,163
|
|
|
|
20,076,595
|
|
Less: Billings to date
|
|
|
22,741,900
|
|
|
|
21,771,566
|
|
Total
|
|
$
|
(1,931,737
|
)
|
|
$
|
(1,694,971
|
)
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
315,437
|
|
|
$
|
410,826
|
|
Billings in excess of cost and estimated earnings on uncompleted contracts
|
|
|
2,247,174
|
|
|
|
2,105,797
|
|
Total
|
|
$
|
(1,931,737
|
)
|
|
$
|
(1,694,971
|
)
|
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 – LOANS PAYABLE
The following tables summarize outstanding loans
payable related to automobiles as of October 31, 2017 and April 30, 2017, respectively:
|
|
|
|
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
Stated
|
|
|
as of
|
|
|
Estimated Future Payment
|
|
|
|
Maturity Date
|
|
Interest Rate
|
|
|
October 31, 2017
|
|
|
Within 1 Year
|
|
|
After 1 year
|
|
0% automobile loan payable
|
|
April
2018 - June 2019
|
|
|
0.0
|
%
|
|
$
|
14,000
|
|
|
$
|
9,000
|
|
|
$
|
5,000
|
|
1% automobile loan payable
|
|
November 2022
|
|
|
1.0
|
%
|
|
|
21,000
|
|
|
|
5,000
|
|
|
|
16,000
|
|
3% automobile loan payable
|
|
November 2022
|
|
|
3.0
|
%
|
|
|
21,000
|
|
|
|
5,000
|
|
|
|
16,000
|
|
4% automobile loan payable
|
|
December 2016 - January 2020
|
|
|
4.0
|
%
|
|
|
19,000
|
|
|
|
7,000
|
|
|
|
12,000
|
|
5% automobile loan payable
|
|
January 2020 - February 2020
|
|
|
5.0
|
%
|
|
|
42,000
|
|
|
|
18,000
|
|
|
|
24,000
|
|
7% automobile loan payable
|
|
June 2019
|
|
|
7.0
|
%
|
|
|
21,000
|
|
|
|
5,000
|
|
|
|
16,000
|
|
8% automobile loan payable
|
|
October
2021
|
|
|
8.0
|
%
|
|
|
13,000
|
|
|
|
3,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
$
|
151,000
|
|
|
$
|
52,000
|
|
|
$
|
99,000
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
Stated
|
|
|
as of
|
|
|
Estimated Future Payment
|
|
|
|
Maturity Date
|
|
Interest Rate
|
|
|
April 30, 2017
|
|
|
Within 1 Year
|
|
|
After 1 year
|
|
0% automobile loan payable
|
|
April 2018 - June 2019
|
|
|
0.0
|
%
|
|
$
|
18,000
|
|
|
$
|
9,000
|
|
|
$
|
9,000
|
|
1% automobile loan payable
|
|
November 2022
|
|
|
1.0
|
%
|
|
|
23,000
|
|
|
|
5,000
|
|
|
|
18,000
|
|
3% automobile loan payable
|
|
November 2022
|
|
|
3.0
|
%
|
|
|
24,000
|
|
|
|
5,000
|
|
|
|
19,000
|
|
4% automobile loan payable
|
|
December 2016 - January 2020
|
|
|
4.0
|
%
|
|
|
25,000
|
|
|
|
9,000
|
|
|
|
16,000
|
|
5% automobile loan payable
|
|
January 2020 - February 2020
|
|
|
5.0
|
%
|
|
|
50,000
|
|
|
|
17,000
|
|
|
|
33,000
|
|
7% automobile loan payable
|
|
June 2019
|
|
|
7.0
|
%
|
|
|
23,000
|
|
|
|
5,000
|
|
|
|
18,000
|
|
8% automobile loan payable
|
|
October 2021
|
|
|
8.0
|
%
|
|
|
15,000
|
|
|
|
3,000
|
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
$
|
178,000
|
|
|
$
|
53,000
|
|
|
$
|
125,000
|
|
NOTE 8 – INCOME FROM ARBITRATION SETTLEMENTS
For the three and six months ended October
31, 2017, the Company received approximately $8,000 and $16,000, respectively, in a settlement related to its former subsidiary,
BTX Trader, Inc.
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
Company’s former electrical services segment operated through its now closed Trenton Operations which is no longer part
of the Company’s ongoing operation. In addition, for the three months ended October 31, 2016 the Company had a $31,000 legal
settlement in its Suisun Operations.
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 (the “Credit
Line”) for its Suisun City Operations. The Credit Line has an interest rate of prime plus 2%, is subject to a monthly borrowing
base calculation based upon eligible accounts receivable and had an original expiration date of August 15, 2017, and has been
extended to August 15, 2018. As of October 31, 2017, the monthly borrowing base calculation supported the entire $1,000,000 of
available credit under the Credit Line. The Credit Line is secured by all of the assets of the Company. In addition, the Credit
Line requires the Suisun City Operations to monthly comply with certain financial and operational covenants, such as, amongst
other things, maintaining a certain quick ratio and a minimum net worth. The Suisun City Operations is currently in compliance
with all such covenants.
As of the filing date of this quarterly
report on Form 10-Q, the Company has not drawn down on the Credit Line.
NOTE 10 – STOCKHOLDERS’
EQUITY
Conversion of Preferred Stock
During the quarter ended October 31, 2017,
holders of Series H-1, H-2 and H-3 Preferred Stock converted 4,289 shares of Series H-1, 1,239 shares of Series H-2 and 3,828
shares of Series H-3 into 935,600 shares of the Company’s Common Stock.
The conversion of these Series H-1, H-2
and H-3 Preferred Shares resulted in a deemed dividend of approximately $814,000 due to the beneficial conversion feature associated
with the shares converted.
Exercise of preferred stock warrants
During the quarter ended October 31, 2017,
holders of Series H-1, H-2 and H-3 Preferred Stock Warrants exercised 61,898 of the Series H-1, warrants, 309,900 of the Series
H-2 Warrants and 430,665 of the Series H-3 warrants for an aggregate of 802,463 shares of the Company’s Common Stock. These
Warrants exercises were on a cash basis and the Company received approximately $1,070,000 in warrant exercise proceeds. These
proceeds are unencumbered; however, the Company is required to have sufficient cash on hand at time of closing of the DropCar
merger so as to include these funds in the closing financing being arranged by DropCar (see Note 11 – Proposed Merger).
NOTE 11 – PROPOSED MERGER
On September 6, 2017, the Company, DC
Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of the Company (“Merger Sub”), and DropCar,
Inc., a Delaware corporation (“DropCar”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger
Agreement”), pursuant to which, among other things, subject to the satisfaction or waiver of the conditions set forth in
the Merger Agreement, Merger Sub will merge with and into DropCar, with DropCar becoming a wholly-owned subsidiary of the Company
and the surviving corporation of the merger (the “Merger”). The Merger is intended to qualify for federal income tax
purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended.
Subject to the terms and conditions of
the Merger Agreement, at the closing of the Merger (the “Closing”), (a) each outstanding share of DropCar common stock
and DropCar preferred stock will be converted into the right to receive a number of shares of the Company’ common stock
(“WPCS Common Stock”) equal to the Exchange Ratio (as defined below); and (b) each outstanding DropCar warrant that
has not previously been exercised prior to the Closing will be assumed by the Company.
Under the exchange ratio formula in the
Merger Agreement (the “Exchange Ratio”), as of immediately after the Merger, the former DropCar securityholders (including
the investors in the Company Closing Financing (as defined below) and certain DropCar advisors), pursuant to Amendment No. 3 (described
in Note 12 below), are expected to own approximately 84% of the outstanding shares of WPCS Common Stock on a fully-diluted basis
and securityholders of the Company as of immediately prior to the Merger are expected to own approximately 16% of the outstanding
shares of WPCS Common Stock on a fully-diluted basis. The Exchange Ratio and respective ownership of the DropCar securityholders
and existing WPCS equity holders is subject to adjustment in the event that the Company’s “Net Cash” (as defined
in the Merger Agreement) is less than, or greater than, $419,000 as of the Closing. For purposes of calculating the Exchange Ratio,
the number of outstanding shares of WPCS Common Stock immediately before the Merger takes into account the dilutive effect, calculated
using the Treasury Method under U.S. GAAP, of the shares of WPCS Common Stock underlying options (but not warrants) outstanding
as of the date of the Merger Agreement using an assumed value of $2.50 per share of WPCS Common Stock. In addition, the shares
underlying warrants to purchase DropCar common stock will be included in the DropCar 84% allocation. All the shares of the Company’s
convertible preferred stock and options and warrants to purchase shares of WPCS Common Stock will remain outstanding after the
Merger and all outstanding DropCar warrants will be exchanged for warrants to purchase WPCS Common Stock based upon the Exchange
Ratio. No fractional shares will be issued in the Merger; rather, the Company will pay cash in lieu of any such fractional shares.
As a condition to the Closing, DropCar
is obligated to raise up to $5 million, but not less than $4 million, in equity financing (the “Company Closing Financing”).
The Company Closing Financing is expected to close immediately prior to or simultaneously with the Closing. This obligation for
equity financing is reduced on a dollar for dollar basis for the amount of cash received prior to closing for any preferred warrant
exercises received by the Company. As of the filing date of this report the Company has received approximately $2,546,000 in proceeds
from warrant exercises. In addition, the consummation of the Merger is subject to customary conditions, including, without limitation,
(a) approval by the Company and DropCar stockholders of the Merger Agreement and the transactions contemplated thereby; (b) the
absence of any law, order, injunction or other legal restraint prohibiting the Merger; and (c) receipt of approval from NASDAQ
to list the shares of WPCS Common Stock on the NASDAQ Capital Market post-Merger. Moreover, each party’s obligation to consummate
the Merger is subject to certain other conditions, including, without limitation, (i) the accuracy of the other party’s
representations and warranties (subject to customary qualifiers), and (ii) the other party’s compliance with its covenants
and agreements contained in the Merger Agreement (subject to customary qualifiers). The Merger Agreement contains specified termination
rights for both the Company and DropCar, and further provides that, upon termination of the Merger Agreement under specified circumstances,
either party may be required to pay the other party a termination fee of $250,000, which, under specified circumstances, may include
reimbursement for various expenses incurred in connection with the proposed Merger up to a maximum of $125,000.
On October 11, 2017, the Company filed
a Registration Statement on Form S-4 with the Securities and Exchange Commission relating to the Merger. On November 21, 2017
and December 7, 2017, the Company filed Amendments Nos. 1 and 2 to the Registration Statement on Form S-4, respectively.
In connection with the Merger, the Company has incurred transaction
costs of approximately $240,000 and $400,000 for the three and six months ended October 31, 2017, respectively, which is included
in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.
NOTE 12 – SUBSEQUENT EVENT
Amendment to the Merger Agreement
On December 4, 2017, the Company, Merger Sub and DropCar entered
into Amendment No. 3 to the Merger Agreement (“Amendment No. 3”). The primary purpose of Amendment No. 3 is to make
certain changes to the definition of Exchange Ratio that were agreed to by the parties in connection with the Repricing Offer
described below. The principal changes to the definition of Exchange Ratio are as follows:
|
1.
|
The number of shares of WPCS Common Stock that are deemed
to be outstanding at the time of the Merger was increased to 6,530,681. Previously it
had been 6,118,689.
|
|
2.
|
WPCS equity allocation percentage was increased to 16.01%.
It had previously been 15%. Consequently, DropCar’s equity allocation percentage
is reduced to 83.99% from 85%.
|
As a result of the foregoing changes, the number of shares
of WPCS Common Stock that will be issued to DropCar’s securityholders and advisors will be reduced, although the DropCar
securityholders and advisors will still own a majority of the issued and outstanding shares of WPCS Common Stock following the
Merger. The reduction in the number of shares to be issued by WPCS in the Merger will result in a reduction in the number of shares
of WPCS Common Stock that will be allocated to DropCar’s advisors in connection with the Merger. Thus, the Advisory/Commitment
Allocation Percentage was reduced to 15.6% from 15.8%.
Amendment No. 3 also includes a revised Exhibit D, which sets
forth the formula for adjusting the equity allocation percentages in the event WPCS Net Cash (as defined in the Merger Agreement)
at the time of the Merger is more or less than $419,000. The change in the formula reflects the changes set forth in paragraphs
1 and 2 above.
Finally, Amendment No. 3 includes a new Exhibit B-3, which
is the form of an Amended and Restated Support Agreement, dated as of December 4, 2017, which was executed by Alpha Capital Anstalt
(“
Alpha
”), DropCar’s largest stockholder, DropCar and WPCS, and which supersedes the Support Agreement
that Alpha had previously entered into with DropCar in which it agreed to vote any shares of WPCS Common Stock that it owns on
the record date for the Special Meeting in favor of the Merger. The Amended and Restated Support Agreement provides that Alpha
will own 9.99% of the outstanding shares of WPCS Common Stock on the record date for the Special Meeting (as a result of conversion
of shares of WPCS convertible preferred stock and/or exercise of warrants).
Repricing Offer – Series H-1 Warrants
On December 4, 2017, WPCS offered
(the “Repricing Offer Letter”) the holders of its Series H-1 Warrants (the “Holders”) the opportunity
to exercise such Warrants for cash at a reduced exercise price of $1.21 per share (the “Reduced Exercise Price”) provided
such Series H-1 Warrants are exercised for cash on or before 5:00 P.M. Eastern Standard time on December 26, 2017 (the “End
Date”). In addition, if more than 50% of the Series H-1 Warrants are exercised for cash by the Holders prior to the End
Date, WPCS will issue to the initial holders of the Series H-1 Warrants a “reload” warrant covering one share for
each Series H-1 Warrant exercised during that period with a strike price equal to the fair market value of a share of WPCS Common
Stock on the date such reload warrant becomes issuable (the “Reload Warrants”). The terms of the Reload Warrants would
be substantially identical to the terms of the Series H-1 Warrants except that: (i) the expiration date of the reload warrant
would be seven (7) years from the date of issuance; (ii) the Reload Warrants would have more limited cashless exercise rights
than the H-1 Warrants; and (iii) WPCS’ obligation to register the resale of the shares issuable upon exercise of the Reload
Warrants will be deferred. Finally, the Holders have entered into an irrevocable agreement with Alpha pursuant to which they have
agreed to sell to Alpha any Series H-1 Warrants that are unexercised as of the End Date. Such sale will take place promptly after
the End Date. WPCS received acceptance of the Reduced Exercise Price offer from all of the Holders on December 4, 2017.
If the Holders exercise all their Series H-1
Warrants, the aggregate gross proceeds to WPCS will be approximately $1,474,000.
Through December 12, 2017 (the date preceding
the filing date of this report) (i) 1,008,931 Series H-1 Warrants have been exercised for cash at the reduced exercise price of
$1.21, yielding aggregate gross proceeds to the Company of approximately $1,221,000 and 208,930 Series H-1 Warrants remained unexercised;
and (ii) the Company has issued Reload Warrants for (a) 290,000 shares with an exercise price of $1.18per share, (b) 400,000 shares
with an exercise price of $1.17 per share and (c) 318,931 shares with an exercise price of $1.09 per share.
Exercise of Series H-3 Warrants
For the period from October 31, 2017 until
the filing date of this report, in addition to the exercise of the Series H-1 Warrants in the Repricing Offer described above,
the holders of Series H-3 Warrants have exercised warrants for an aggregate of 185,063 shares of WPCS Common Stock for which the
Company received aggregate gross proceeds of approximately $255,000 in cash.
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 our assumptions are based upon reasonable
data derived from and known about our business and operations. 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 our services, fluctuations in pricing for materials, and competition.
Overview
WPCS International Incorporated, a Delaware
corporation, and its wholly and majority-owned subsidiaries (collectively referred to as “we”, “us” or
“our”) currently specialize in contracting services offering communications, security and audio-visual infrastructure
through our only operating subsidiary, WPCS International - Suisun City, Inc. (“Suisun City Operations”). We previously
announced that we launched WPCS International-Texas, Inc. (“Texas Operations”), in San Antonio, Texas in January 2016
and then commenced operations in Dallas, Texas in April 2016. During the year ended April 30, 2017, the Texas Operations generated
approximately $1,006,000 in revenue, while incurring approximately $1,980,000 in cost of revenue and selling, general and administrative
expenses in starting these two offices. During November 2016, 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. We initially
anticipated expending approximately $750,000 to develop these markets and the Texas Operations were taking longer than anticipated
to begin generating the expected level of revenue to warrant continued operation. Therefore, in late December 2016, we decided
to close the Texas Operations and, by the end of April 2017, the San Antonio and Dallas offices were closed.
Our Suisun City 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 October 31,
2017, we generated revenues of $3,860,000 as compared to $4,848,000 for the same period in fiscal year 2017. Our backlog at October
31, 2017 was $12,964,000 as compared to $14,596,000 at April 30, 2017.
Company Strategy
During the past two fiscal years, our
strategy in the contracting services segment included divesting certain operations through the sale of our China Operations and
closing of our Texas 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 our balance sheet as well as to increase revenue, profit and cash flow at our Suisun City Operations
and seeking viable acquisition and/or merger candidate(s).
After completing our restructuring plan
in fiscal year 2016, we launched a series of initiatives targeting revenue enhancement, including:
|
·
|
Strengthening our operations team
with proven audio-visual professionals;
|
|
·
|
Uniformly deploying full-service low voltage capabilities
for developing, installing and servicing structured cabling, audio-visual and security systems in our California market;
and
|
|
·
|
Developing strategic alliances with contractors
who have significant presence in our geographic operating area.
|
We believe that these initiatives have
the potential to improve our business and provide more opportunities for organic growth.
In addition, we continue to aggressively
explore other viable growth opportunities. (See Note 11 - Proposed Merger).
Proposed Merger
On September 6, 2017, we, along with,
DC Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of ours (“Merger Sub”), and DropCar,
Inc., a Delaware corporation (“DropCar”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger
Agreement”), pursuant to which, among other things, subject to the satisfaction or waiver of the conditions set forth in
the Merger Agreement, Merger Sub will merge with and into DropCar, with DropCar becoming a wholly-owned subsidiary of ours and
the surviving corporation of the merger (the “Merger”). The Merger is intended to qualify for federal income tax purposes
as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended.
Subject to the terms and conditions of
the Merger Agreement, at the closing of the Merger (the “Closing”), (a) each outstanding share of DropCar common stock
and DropCar preferred stock will be converted into the right to receive a number of shares of our common stock (“WPCS Common
Stock”) equal to the Exchange Ratio (as defined below); and (b) each outstanding DropCar warrant that has not previously
been exercised prior to the Closing will be assumed by us.
Under the exchange ratio formula in the
Merger Agreement (the “Exchange Ratio”), as of immediately after the Merger, the former DropCar securityholders (including
the investors in the WPCS Closing Financing (as defined below) and certain DropCar advisors),pursuant to Amendment No. 3 (described
below), are expected to own approximately 84% of the outstanding shares of WPCS Common Stock on a fully-diluted basis and our
securityholders as of immediately prior to the Merger are expected to own approximately 16% of the outstanding shares of WPCS
Common Stock on a fully-diluted basis. The Exchange Ratio and respective ownership of the DropCar securityholders and existing
WPCS equity holders is subject to adjustment in the event that our “Net Cash” (as defined in the Merger Agreement)
is less than, or greater than, $419,000 as of the Closing. For purposes of calculating the Exchange Ratio, the number of outstanding
shares of WPCS Common Stock immediately before the Merger takes into account the dilutive effect, calculated using the Treasury
Method under U.S. GAAP, of the shares of WPCS Common Stock underlying options (but not warrants) outstanding as of the date of
the Merger Agreement using an assumed value of $2.50 per share of WPCS Common Stock. In addition, the shares underlying warrants
to purchase DropCar common stock will be included in the DropCar 84% allocation. All the shares of our convertible preferred stock
and options and warrants to purchase shares of WPCS Common Stock will remain outstanding after the Merger and all outstanding
DropCar warrants will be exchanged for warrants to purchase WPCS Common Stock based upon the Exchange Ratio. No fractional shares
will be issued in the Merger; rather, we will pay cash in lieu of any such fractional shares.
As a condition to the Closing, DropCar
is obligated to raise up to $5 million, but not less than $4 million, in equity financing (the “WPCS Closing Financing”).
WPCS Closing Financing is expected to close immediately prior to or simultaneously with the Closing. This obligation for equity
financing is reduced on a dollar for dollar basis for the amount of cash received prior to closing for any preferred warrant exercises
received by us. As of the filing date of this report, we have received approximately $2,546,000 in proceeds from warrant exercises.
In addition, the consummation of the Merger is subject to customary conditions, including, without limitation, (a) approval by
our and DropCar stockholders of the Merger Agreement and the transactions contemplated thereby; (b) the absence of any law, order,
injunction or other legal restraint prohibiting the Merger; and (c) receipt of approval from NASDAQ to list the shares of WPCS
Common Stock on the NASDAQ Capital Market post-Merger. Moreover, each party’s obligation to consummate the Merger is subject
to certain other conditions, including, without limitation, (i) the accuracy of the other party’s representations and warranties
(subject to customary qualifiers), and (ii) the other party’s compliance with its covenants and agreements contained in
the Merger Agreement (subject to customary qualifiers). The Merger Agreement contains specified termination rights for both we
and DropCar, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may
be required to pay the other party a termination fee of $250,000, which, under specified circumstances, may include reimbursement
for various expenses incurred in connection with the proposed Merger up to a maximum of $125,000.
On October 11, 2017, we filed a Registration
Statement on Form S-4 with the Securities and Exchange Commission relating to the Merger. On November 21, 2017 and December 7,
2017, we filed Amendment Nos. 1 and 2 to the Registration Statement on S-4, respectively.
Recent Development
Amendment to the Merger Agreement
On December 4, 2017, WPCS, Merger Sub and DropCar entered into
Amendment No. 3 to the Merger Agreement (“Amendment No. 3”). The primary purpose of Amendment No. 3 is to make certain
changes to the definition of Exchange Ratio that were agreed to by the parties in connection with the Repricing Offer described
below. The principal changes to the definition of Exchange Ratio are as follows:
|
1.
|
The number of shares of WPCS common stock that are deemed
to be outstanding at the time of the Merger was increased to 6,530,681. Previously it
had been 6,118,689.
|
|
2.
|
WPCS equity allocation percentage was increased to 16.01%.
It had previously been 15%. Consequently, DropCar’s equity allocation percentage
is reduced to 83.99% from 85%.
|
As a result of the foregoing changes, the number of shares
of WPCS Common Stock that will be issued to DropCar’s securityholders and advisors will be reduced, although the DropCar
securityholders and advisors will still own a majority of the issued and outstanding shares of WPCS Common Stock following the
Merger. The reduction in the number of shares to be issued by WPCS in the Merger will result in a reduction in the number of shares
of WPCS Common Stock that will be allocated to DropCar’s advisors in connection with the Merger. Thus, the Advisory/Commitment
Allocation Percentage was reduced to 15.6% from 15.8%.
Amendment No. 3 also includes a revised Exhibit D, which sets
forth the formula for adjusting the equity allocation percentages in the event WPCS Net Cash (as defined in the Merger Agreement)
at the time of the Merger is more or less than $419,000. The change in the formula reflects the changes set forth in paragraphs
1 and 2 above.
Finally, Amendment No. 3 includes a new exhibit, B-3, which
is the form of an Amended and Restated Support Agreement, dated as of December 4, 2017, which was executed by Alpha Capital Anstalt
(“
Alpha
”), DropCar’s largest stockholder, DropCar and WPCS, and which supersedes the Support Agreement
that Alpha had previously entered into with DropCar in which it agreed to vote any shares of WPCS common stock that it owns on
the record date for the Special Meeting in favor of the Merger. The Amended and Restated Support Agreement provides that Alpha
will own 9.99% of the outstanding shares of WPCS common stock on the record date for the Special Meeting (as a result of conversion
of shares of WPCS convertible preferred stock and/or exercise of warrants).
Repricing Offer – Series H-1 Warrants
On December 4, 2017, WPCS offered (the “Repricing
Offer Letter”) the holders of its Series H-1 Warrants (the “Holders”) the opportunity to exercise such Warrants
for cash at a reduced exercise price of $1.21 per share (the “Reduced Exercise Price”) provided such Series H-1 Warrants
are exercised for cash on or before 5:00 P.M. Eastern Standard time on December 26, 2017 (the “End Date”). In addition,
if more than 50% of the Series H-1 Warrants are exercised for cash by the Holders prior to the End Date, WPCS will issue to the
initial holders of the Series H-1 Warrants a “reload” warrant covering one share for each Series H-1 Warrant exercised
during that period with a strike price equal to the fair market value of a share of WPCS Common Stock on the date such reload
warrant becomes issuable (the “Reload Warrants”). The terms of the Reload Warrants would be substantially identical
to the terms of the Series H-1 Warrants except that: (i) the expiration date of the reload warrant would be seven (7) years from
the date of issuance; (ii) the Reload Warrants would have more limited cashless exercise rights than the H-1 Warrants; and (iii)
WPCS’ obligation to register the resale of the shares issuable upon exercise of the Reload Warrants will be deferred. Finally,
the Holders have entered into an irrevocable agreement with Alpha pursuant to which they have agreed to sell to Alpha any Series
H-1 Warrants that are unexercised as of the End Date. Such sale will take place promptly after the End Date. WPCS received acceptance
of the Reduced Exercise Price offer from all of the Holders on December 4, 2017.
If the Holders exercise all their Series H-1 Warrants, the
aggregate gross proceeds to WPCS will be approximately $1,474,000.
Through December 12, 2017 (the date preceding
the filing date of this report) (i) 1,008,931 Series H-1 Warrants have been exercised for cash at the reduced exercise price of
$1.21, yielding aggregate gross proceeds to the Company of approximately $1,221,000 and 208,930 Series H-1 Warrants remained unexercised;
and (ii) the Company has issued Reload Warrants for (a) 290,000 shares with an exercise price of $1.18per share, (b) 400,000 shares
with an exercise price of $1.17 per share and (c) 318,931 shares with an exercise price of $1.09 per share.
Exercise of Series H-3 Warrants
For the period from October 31, 2017 until
the filing date of this report, in addition to the exercise of the Series H-1 Warrants in the Repricing Offer described above,
the holders of Series H-3 Warrants have exercised warrants for an aggregate of 185,063 shares of WPCS Common Stock for which the
Company received aggregate gross proceeds of approximately $255,000 in cash.
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
for the quarter ended October 31, 2017, we generated revenue of approximately $3,860,000 as compared to revenue of $4,848,000
for the same period last year. This $988,000 decrease in revenue was due primarily to a $582,000 decrease in revenue in our Suisun
City Operations and a decrease of approximately $406,000 in revenue from our Texas Operations. Also, the composition of our current
revenue is less reliant on one large customer contract than had been the case during previous fiscal quarters. We have closed
our Texas Operations and will no longer recognize any revenues from those operations.
We generated a net loss to common stockholders
for the three months ended October 31, 2017 of approximately $1,271,000, or ($0.34) per common share (basic and fully diluted),
which includes income from our Suisun City Operations of approximately $181,000 and which was partially offset by: (i) a loss
from our corporate division of approximately $637,000, which is mainly comprised of corporate operating expenses of approximately
$250,000 and merger transaction costs of approximately $387,000; (ii) a loss from our Texas Operations of approximately $1,000;
and (iii) recognition of $814,000 of deemed dividends associated with the conversion of Series H-1, H-2 and H-3 preferred stock.
The net loss for the three months ended October
31, 2017 compares to a net loss of approximately $439,000, or ($0.15) per common share (basic and fully diluted) for the three
months ended October 31, 2016, which was comprised primarily of income from our : (i) Suisun City Operations of approximately
$377,000; offset by a (i) loss from our corporate division, of approximately $441,000 (which is comprised of corporate operating
expenses of approximately $548,000, offset by a one-time legal settlement of $107,000); (ii) a loss from our Texas Operations
of approximately $355,000; and (iii) recognition of $20,000 of deemed dividends associated with the conversion of Series H-1 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 regard
to strategic development and based upon the proposed merger (see Note 11 – Proposed Merger), our focus is on identifying
organic growth opportunities. We are optimistic about such opportunities in the market 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, 2017 Compared to the Three Months Ended October 31, 2016
|
|
For the three months ended
|
|
|
|
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,859,617
|
|
|
|
100.0
|
%
|
|
$
|
4,847,710
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
3,061,372
|
|
|
|
79.3
|
%
|
|
|
3,819,187
|
|
|
|
78.8
|
%
|
Selling, general and administrative expenses
|
|
|
1,249,147
|
|
|
|
32.4
|
%
|
|
|
1,567,326
|
|
|
|
32.3
|
%
|
Depreciation and amortization
|
|
|
38,844
|
|
|
|
1.0
|
%
|
|
|
28,029
|
|
|
|
0.6
|
%
|
|
|
|
4,349,363
|
|
|
|
112.7
|
%
|
|
|
5,414,542
|
|
|
|
111.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(489,746
|
)
|
|
|
-12.7
|
%
|
|
|
(566,832
|
)
|
|
|
-11.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,581
|
)
|
|
|
0.0
|
%
|
|
|
(1,029
|
)
|
|
|
0.0
|
%
|
Income from legal settlement
|
|
|
7,750
|
|
|
|
0.2
|
%
|
|
|
30,902
|
|
|
|
0.6
|
%
|
Other income
|
|
|
27,471
|
|
|
|
0.7
|
%
|
|
|
117,947
|
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations before income tax provision
|
|
|
(456,106
|
)
|
|
|
-11.8
|
%
|
|
|
(419,012
|
)
|
|
|
-8.7
|
%
|
Income tax provision
|
|
|
1,020
|
|
|
|
0.0
|
%
|
|
|
(51
|
)
|
|
|
0.0
|
%
|
Loss from operations
|
|
|
(457,126
|
)
|
|
|
-11.8
|
%
|
|
|
(418,961
|
)
|
|
|
-8.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(457,126
|
)
|
|
|
-11.8
|
%
|
|
|
(418,961
|
)
|
|
|
-8.6
|
%
|
Deemed dividend on convertible preferred stock, due to
beneficial conversion feature
|
|
|
(813,975
|
)
|
|
|
-21.1
|
%
|
|
|
(19,724
|
)
|
|
|
-0.4
|
%
|
Net loss attributable to WPCS common stockholders
|
|
$
|
(1,271,101
|
)
|
|
|
-32.9
|
%
|
|
$
|
(438,685
|
)
|
|
|
-9.0
|
%
|
Operating
Loss
We had an operating loss of approximately
$490,000 for the three months ended October 31, 2017. This quarter’s operating loss was comprised primarily of $158,000
in operating income from our Suisun City Operations, which was offset by an operating loss of approximately $1,000 from our Texas
Operations (final closing expenses) and $647,000 of corporate overhead expenses. For the three months ended October 31, 2016,
we had an operating loss of approximately $567,000 which was comprised primarily of $338,000 in operating income from our Suisun
City Operations and which was offset by approximately $548,000 of corporate overhead and $357,000 loss from our Texas Operation.
The details of the operating loss are as follows:
Revenue
Revenue for the three months ended October
31, 2017 decreased approximately $988,000, or 20%, to approximately $3,860,000, as compared to approximately $4,848,000 for same
period last year due to an approximately $583,000 decrease in revenue in our Suisun City Operations and an approximately $405,000
decrease in revenue from our Texas Operations. This decrease in our Suisun City Operations’ revenue was primarily the result
of the addition of lower revenue contracts which reduced our reliance on a few large customers. We closed our Texas Operations
in the fourth quarter of fiscal 2017 and do not expect to have any further revenue from that operation.
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
approximately $758,000, or 19.8%, to approximately $3,061,000, or 79.3% of revenue, for the three months ended October 31, 2017,
as compared to approximately $3,819,000, or 78.8% of revenue, for the same period in 2016. This less than 1% percent increase
in the cost of revenue is due to the different combination of contracts in process as compared to last year.
Selling, General and Administrative
Expenses
For the three months ended October 31,
2017, total selling, general and administrative expenses decreased approximately $318,000, or 20.3%, to approximately $1,249,000
as compared to approximately $1,567,000 for the same period in 2016, which was primarily due to $443,000 of decreased expenses
in our Texas Operations, as a result of its closure during fiscal 2017, offset by an increase in expense in our Suisun City Operations
of $26,000, and an increase in corporate overhead expenses of $99,000. The increase in expense at our Suisun Operations was primarily
due to an increased legal expense while the increased corporate overhead expenses was comprised primarily of higher consulting
and legal costs associated with the proposed merger of approximately $240,000 offset by lower salary and bonus expense of approximately
$140,000.
Depreciation and Amortization
For the three months ended October 31,
2017, depreciation and amortization was approximately $39,000 as compared to approximately $28,000 for the same quarter in 2016,
due primarily to the addition of vehicles and office furniture.
Loss from Operations
We had loss from operations of approximately
$457,000 for the three months ended October 31, 2017 as compared to a net loss from operations of approximately $419,000 for the
same period in 2016. Loss from operations is determined by adjusting the operating loss by the following items:
Interest Expense
For the three months ended October 31,
2017 and 2016, interest expense was approximately $1,600 and $1,000, respectively.
Income from Legal Settlement
For the three months ended October 31,
2017, we received approximately $7,800 in a settlement related to our former subsidiary, BTX Trader, Inc. For the three months
ended October 31, 2016, we received approximately $31,000 in connection with a settlement of an outstanding contract dispute in
our Suisun Operations.
Other Income
For the three months ended October 31,
2017 and 2016, other income was approximately $27,000 and approximately $118,000, respectively. These other income items relate
to negotiated settlements with suppliers on outstanding accounts payable items.
Net Loss Attributable to WPCS Common
Stockholders
We had net loss attributable to WPCS common
stockholders of $1,271,000 for the three months ended October 31, 2017 as compared to a net loss attributable to WPCS common stockholders
of $439,000 for the same period in 2016. The following items are the adjustments to the loss from operations that result in determining
the net loss attributable to WPCS common stockholders:
Dividends Declared on Preferred
Stock
As a result of the conversion of some
of our Series H-1, H-2 and H-3 Preferred Shares during the three months ended October 31, 2017 and 2016 we recognized deemed dividends
of $814,000 and $20,000, respectively, due to the beneficial conversion feature associated with these shares.
Results of
Operations for the Six Months Ended October 31, 2017 Compared to the Six Months Ended October 31, 2016
|
|
For the six months ended
|
|
|
|
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
7,382,964
|
|
|
|
100.0
|
%
|
|
$
|
8,264,163
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
5,815,922
|
|
|
|
78.8
|
%
|
|
|
6,454,695
|
|
|
|
78.1
|
%
|
Selling, general and administrative expenses
|
|
|
2,433,648
|
|
|
|
33.0
|
%
|
|
|
2,920,312
|
|
|
|
35.3
|
%
|
Depreciation and amortization
|
|
|
68,917
|
|
|
|
0.9
|
%
|
|
|
48,695
|
|
|
|
0.6
|
%
|
|
|
|
8,318,487
|
|
|
|
112.7
|
%
|
|
|
9,423,702
|
|
|
|
194.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(935,523
|
)
|
|
|
-12.72
|
%
|
|
|
(1,159,539
|
)
|
|
|
-14.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,632
|
)
|
|
|
-0.0
|
%
|
|
|
(3,010
|
)
|
|
|
-0.1
|
%
|
Income from legal settlement
|
|
|
15,500
|
|
|
|
0.2
|
%
|
|
|
1,180,902
|
|
|
|
14.3
|
%
|
Other income
|
|
|
27,471
|
|
|
|
0.4
|
%
|
|
|
122,434
|
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations before income tax provision
|
|
|
(896,184
|
)
|
|
|
-12.1
|
%
|
|
|
140,787
|
|
|
|
1.7
|
%
|
Income tax provision
|
|
|
1,020
|
|
|
|
0.0
|
%
|
|
|
2,567
|
|
|
|
0.0
|
%
|
(Loss) income from operations
|
|
|
(897,204
|
)
|
|
|
-12.1
|
%
|
|
|
138,220
|
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(897,204
|
)
|
|
|
-12.12
|
%
|
|
|
138,220
|
|
|
|
1.7
|
%
|
Deemed dividend on convertible preferred stock, due to
beneficial conversion feature
|
|
|
(813,975
|
)
|
|
|
-11.1
|
%
|
|
|
(19,724
|
)
|
|
|
-0.3
|
%
|
Net (loss) income attributable to WPCS common stockholders
|
|
$
|
(1,711,179
|
)
|
|
|
-23.2
|
%
|
|
$
|
118,496
|
|
|
|
1.4
|
%
|
Operating
Loss
We had an operating loss of approximately
$935,000 for the six months ended October 31, 2017. This period’s operating loss was comprised primarily of $343,000 in
operating income from our Suisun City Operations, which was offset by an operating loss of approximately $8,000 from our Texas
Operations (final closing expenses) and $1,270,000 of corporate overhead expenses. For the six months ended October 31, 2016,
we had an operating net loss of approximately $1,160,000 which was comprised primarily of $543,000 in operating income from our
Suisun City Operations and which was offset by approximately $1,043,000 of corporate overhead and $660,000 loss from our Texas
Operation. The details of the operating loss are as follows:
Revenue
Revenue for the six months ended October 31,
2017 decreased approximately $881,000, or 10.7%, to approximately $7,383,000, as compared to approximately $8,264,000 for same
period last year due to an approximately $203,000 decrease in revenue in our Suisun City Operations and an approximately $678,000
decrease in revenue from our Texas Operations. This decrease in our Suisun City Operations’ revenue was primarily the result
of the addition of lower revenue contracts which reduced our reliance on a few large customers. We closed our Texas Operations
in the fourth quarter of fiscal 2017 and do not expect to have any further revenue from that operation.
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
approximately $639,000, or 9.9%, to approximately $5,816,000, or 78.8% of revenue, for the six months ended October 31, 2017,
as compared to approximately $6,455,000, or 78.1% of revenue, for the same period in 2016. This less than 1% percent increase
in the cost of revenue is due to the different combination of contracts in process as compared to last year.
Selling, General and Administrative
Expenses
For the six months ended October 31, 2017,
total selling, general and administrative expenses decreased approximately $486,000, or 16.6%, to approximately $2,434,000 as
compared to approximately $2,920,000 for the same period in 2016, which was primarily due to $813,000 of decreased expenses in
our Texas Operations, as a result of its closure during fiscal 2017, offset by an increase in expense in our Suisun City Operations
of $100,000, and an increase in corporate overhead expenses of $226,000. The increase in expense at our Suisun Operations was
primarily due to an increased legal and salary expenses while the increased corporate overhead expenses was comprised primarily
of higher consulting and legal costs associated with the proposed merger of approximately $400,000 offset by lower salary and
bonus expense of approximately $174,000.
Depreciation and Amortization
For the six months ended October 31, 2017,
depreciation and amortization was approximately $69,000 as compared to approximately $49,000 for the same quarter in 2016, due
primarily to the addition of vehicles and office furniture.
Loss from Operations
We had loss from operations of approximately
$897,000 for the six months ended October 31, 2017 as compared to income from operations of approximately $138,000 for the same
period in 2016. Loss or income from operations is determined by adjusting the operating loss or income by the following items:
Interest Expense
For the six months ended October 31, 2017
and 2016, interest expense was approximately $3,600 and $3,000, respectively.
Income from Legal Settlements
For the six months ended October 31, 2017,
we received $15,500 in a settlement related to our former subsidiary, BTX Trader, Inc.
During the six months ended October 31,
2016, we received $1,181,000 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, through its former Trenton Operations, served as an electrical prime contractor.
Other Income
For the six months ended October 31, 2017
and 2016, other income was approximately $27,000 and approximately $122,000, respectively. These other income items relate to
negotiated settlements with suppliers on outstanding accounts payable items.
Net Loss Attributable to WPCS Common
Stockholders
We had net loss attributable to WPCS common
stockholders of $1,711,000 for the six months ended October 31, 2017 as compared to net income attributable to WPCS common stockholders
of $118,000 for the same period in 2016. The following items are the adjustments to the net loss or income from operations that
result in determining the net loss attributable to WPCS common stockholders:
Dividends Declared on Preferred
Stock
As a result of the conversion of some
of our Series H-1, H-2 and H-3 Preferred Shares during the six months ended October 31, 2017 and 2016 we recognized deemed dividends
of $814,000 and $20,000, 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, 2017, we had working
capital of approximately $2,443,000, which consisted of current assets of approximately $6,974,000 and current liabilities of
approximately $4,031,000. This compares to working capital of approximately $2,862,000 at April 30, 2017. The current liabilities
as presented in the balance sheet at October 31, 2017 primarily include approximately $1,732,000 of accounts payable and accrued
expenses and approximately $2,247,000 of billings in excess of costs and estimated earnings on uncompleted contracts.
Our cash and cash equivalents balance
at October 31, 2017 was approximately $3,695,000 of which approximately $500,000 is classified as restricted cash.
In addition, our Suisun Operations has
a $1,000,000 million operating line of credit (the “Credit Line”), which expires on August 15, 2018. As of December
12, 2017, we have no outstanding balance under the Credit Line.
Our future plans and growth are dependent
on its ability to increase revenues and continue its business development efforts surrounding its contract award backlog. If we
continue to incur losses and revenues do not generate from the backlog as expected, we may need to raise additional capital to
expand our business and continue as a going concern. We currently anticipate that our current cash position will be sufficient
to meet our working capital requirements to continue our sales and marketing efforts for at least 12 months from the filing date
of this Quarterly Report on Form 10-Q. If in the future our plans or assumptions change or prove to be inaccurate, we may need
to raise additional funds through public or private debt or equity offerings, financings, corporate collaborations, or other means.
We may also be required to reduce operating expenditures or investments in its infrastructure.
Backlog
As of October 31, 2017, we had a backlog
of unfilled orders of approximately $12,964,000 as compared to approximately $14,596,000 at April 30, 2017. 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, 2017. Our critical accounting policies and significant estimates
have not changed substantially from those previously disclosed in the Form 10-K.