The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
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 has been 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 consolidated financial statements of the
Company included in this Report for the years ended April 30, 2017 and 2016, reflect the accounts of current and former entities
as either continued or discontinued operations, as discussed below.
Continuing operations for the years ended April
30, 2017 and 2016 include the results of operations 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 in February 2017 and therefore
the Suisun Operation remains the Company’s only active operating subsidiary); (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 year ended
April 30, 2016 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 year ended April 30, 2017.
NOTE 2 – LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2017, the Company had a working capital surplus of approximately $2,862,000 and cash, cash
equivalents and restricted cash of approximately $2,159,000.
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.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
A summary of significant accounting policies
consistently applied in the preparation of the accompanying consolidated financial statements follows:
Principles of Consolidation
All significant intercompany transactions and
balances have been eliminated in these consolidated financial statements.
Reclassifications
Certain reclassifications have been made in
prior years’ consolidated financial statements to conform to the current year’s presentation. These reclassifications
reflect the results of the China operations as discontinued operations for all periods presented.
Use of Estimates
In preparing financial statements in conformity
with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenue and expenses during the reporting period. The most significant estimates relate to the
calculation of percentage-of-completion on uncompleted contracts, allowance for doubtful accounts, realization of deferred tax
assets, and valuation of equity instruments. Actual results could differ from these estimates.
Revenue Recognition
The Company generates its revenue by offering
low voltage communications infrastructure contracting services. The Company’s contracting services report revenue pursuant
to customer contracts that span varying periods of time. The Company reports revenue from contracts when persuasive evidence of
an arrangement exists, fees are fixed or determinable, and collection is reasonably assured.
The Company records revenue and profit
from long-term contracts on a percentage-of-completion basis, measured by the percentage of contract costs incurred to date to
the estimated total costs for each contract. Cost-to-cost method is used because management considers it to be the best available
measure of progress on these contracts. Contracts in process are valued at cost plus accrued profits less earned revenues and progress
payments on uncompleted contracts. Contract costs include direct materials, direct labor, third party subcontractor services and
those indirect costs related to contract performance. Contracts are generally considered substantially complete when engineering
is completed and/or site construction is completed.
The Company has numerous contracts that
are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition.
Cost estimates are reviewed monthly on a contract-by-contract basis, and are revised periodically throughout the life of the contract
such that adjustments to profit resulting from revisions are made cumulative to the date of the revision. Significant management
judgments and estimates, including the estimated cost to complete projects, which determines the project’s percent complete,
must be made and used in connection with the revenue recognized in the accounting period. Current estimates may be revised as additional
information becomes available. If estimates of costs to complete long-term contracts indicate a loss, provision is made currently
for the total loss anticipated.
The length of the Company’s contracts
varies but is typically between three months and two years. Assets and liabilities related to long-term contracts are included
in current assets and current liabilities in the accompanying consolidated balance sheets, as they will be liquidated in the normal
course of contract completion, although this may require more than one year.
The Company also recognizes certain revenue
from short-term contracts when the services have been provided to the customer. For maintenance contracts, revenue is recognized
ratably over the service period.
Cash, Cash Equivalents and Restricted
Cash
Cash and cash equivalents include all cash
and highly liquid investments with a maturity, at time of purchase, of three months or less.
Restricted cash is classified separately on
the Balance Sheet and included with cash and cash equivalents on the Statement of Cash Flows. The Company entered into a Series
H-3, Preferred Stock, Securities Purchase Agreement, whereby $500,000 of the purchase price was directed to and is to be held
in a separate account (the “Restricted Account”). While held in the Restricted Account, the Restricted Account Funds
may not be accessed or otherwise used by the Company. The Restricted Account Funds may be released from the Restricted Account
upon the unanimous approval of the Company’s board of directors.
Concentrations of Credit Risk
Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash and accounts receivable.
The Company reduces credit risk by placing its temporary cash and cash equivalents with major domestic financial institutions.
At times, such amounts may exceed federally insured limits. The Company reduces credit risk related to accounts receivable by routinely
assessing the financial strength of its customers and maintaining an appropriate allowance for doubtful accounts based on its history
of write-offs, current economic conditions and an evaluation of the credit risk related to specific customers. The Company does
not require collateral in most cases, but may file claims against the construction project if a default in payment occurs.
The Company maintains it cash, cash equivalents
and restricted cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced
losses in such accounts; however, amounts in excess of the federally insured limit may be at risk if the bank experiences financial
difficulties. As of April 30, 2017, approximately $1,564,000 was in excess of the Federal Deposit Insurance Corporation limits.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
Accounts Receivable
Accounts receivable are due within contractual
payment terms and are stated at amounts due from customers net of an allowance for doubtful accounts. Credit is extended based
on evaluation of a customer's financial condition. Accounts outstanding longer than the contractual payment terms are considered
past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts
receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company,
and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
Property and Equipment
Property and equipment are stated at cost.
Depreciation and amortization are provided for using straight-line methods, in amounts sufficient to charge the cost of depreciable
assets to operations over their estimated service lives. Repairs and maintenance costs are charged to operations as incurred. Leasehold
improvements are amortized over the lesser of the term of the related lease or the estimated useful lives of the assets (two to
three years).
Fair Value of Financial Instruments
The Company’s material financial instruments
at April 30, 2017 and 2016 for which disclosure of fair value is required by certain accounting standards consisted of cash, cash
equivalents and restricted cash, accounts receivable, account payable, loans payable and short-term bank loan. The fair values
of cash and cash equivalents, accounts receivable, and account payable are equal to their carrying value because of their liquidity
and short-term maturity. Management believes that the fair values of loans payable and short-term bank loan do not differ materially
from their aggregate carrying values, because the interest rates of these financial instruments approximate the prevailing interest
rates management expects to receive if additional financing was necessary.
Fair value measurements
and disclosures establish a hierarchy that prioritizes fair value measurements based on the type of inputs used for the various
valuation techniques (market approach, income approach and cost approach). The levels of hierarchy are described below:
|
·
|
Level 1: Observable
inputs such as quoted market prices in active markets for identical assets or liabilities.
|
|
·
|
Level 2: Inputs other
than quoted market prices that are observable for the asset or liability, either directly or indirectly: these include quoted
prices for similar assets or liabilities in active markets, such as interest rates and yield curves that are observable at commonly
quoted intervals.
|
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
|
·
|
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions, as there is little, if any, related market activity.
|
|
|
|
|
|
The Company's chief financial officer determines its valuation policies and procedures associated with Level 3 inputs.
|
Fair Value of Series H, Series H-1, H-2 and H-3 Preferred
Stock
The fair value of the Preferred Stock is based
on unobservable inputs. Such unobservable inputs include use of the Company’s own data or assumptions such as earnings and
discounted cash flow. The Company estimates of the fair value of the Preferred Stock is based on assumptions that market participants
would use in their estimates of fair value. The Company used the Black Sholes pricing model to determine the fair value of Preferred
Series H, H-1, H-2 and H-3 stock.
Other Concentrations
As of April 30, 2017, the Company has 60 union
employees in its Suisun City Operations. At April 30, 2017, 78% of the Company’s labor force is subject to collective bargaining
agreements. Although the Company’s past experience has been favorable with respect to resolving conflicting demands with
these unions, it is always possible that a protracted conflict may occur which could impact the renewal of the collective bargaining
agreements. The current union contract is scheduled to expire in November 2017. The Company hires union employees on an “as
needed basis” and the number of union employees will vary depending on the number of jobs in process.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
For the fiscal years ended April 30, 2017 and
April 30, 2016, the Company had the following concentrations:
Accounts Receivable
The concentration of
accounts receivable as of April 30, 2017 and April 30, 2016, respectively are as follows:
|
|
As of
|
|
|
|
April 30, 2017
|
|
|
April 30, 2016
|
|
Customer A
|
|
|
24
|
%
|
|
|
-
|
%
|
Customer B
|
|
|
12
|
%
|
|
|
-
|
%
|
Customer C
|
|
|
10
|
%
|
|
|
21
|
%
|
Customer D
|
|
|
-
|
%
|
|
|
34
|
%
|
Customer E
|
|
|
-
|
|
|
|
10
|
%
|
The accounts receivable also included retainage
receivable of $730,000 and $326,000 at April 30, 2017 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 years ended April 30, 2017 and April 30, 2016, respectively are as follows:
|
|
For the years ended
|
|
|
|
April 30, 2017
|
|
|
April 30, 2016
|
|
Customer A
|
|
|
16
|
%
|
|
|
17
|
%
|
Share Based Compensation
The Company estimates the fair value of stock options using
the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise
price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected
term, the risk-free interest rate over the option’s term, and the Company’s expected annual dividend yield. The Company
has adopted ASU 2016-09 as of April 30, 2017, and has elected to recognize forfeitures as they occur rather than estimate their
forfeiture rate.
Income Taxes
The Company accounts for income taxes pursuant
to the asset and liability method which requires deferred income tax assets and liabilities to be computed annually for differences
between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date.
On a periodic basis, the Company evaluates
its ability to realize its deferred tax assets net of its deferred tax liabilities and adjusts such amounts in light of changing
facts and circumstances, including but not limited to the level of past and future taxable income, and the current and future expected
utilization of tax benefit carryforwards. The Company considers all available evidence, both positive and negative, to determine
whether, based on the weight of that evidence, a valuation allowance is required to reduce the net deferred tax assets to the amount
that is more likely than not to be realized in future periods. The Company considers past performance, expected future taxable
income and prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. The Company’s
forecast of expected future taxable income is based over such future periods that it believes can be reasonably estimated. The
Company will continue to evaluate the realization of its deferred tax assets and liabilities on a periodic basis, and will adjust
such amounts in light of changing facts and circumstances.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
Adoption of Recent Accounting Standards
In August 2014, the FASB issued Accounting
Standards Update (“ASU”) 2014-15,
Disclosure of Uncertainties about an Entity’s Ability to Continue as
a Going Concern
, that requires management to evaluate whether there are conditions and events that raise substantial doubt
about the Company’s ability to continue as a going concern within one year after the financial statements are issued or available
to be issued on both an interim and annual basis. Management is required to provide certain footnote disclosures if it concludes
that substantial doubt exists or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern.
The Company adopted ASU 2014-15 as of January 31, 2017, and its adoption did not have any significant impact on the Company’s
financial statements.
In November 2015,
the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
. ASU 2015-17 requires that deferred tax
liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for
financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.
Early adoption is permitted.
The Company adopted this guidance
as of January 31,
2017
on a prospective basis, and its adoption did not have any significant impact on the Company’s
consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15 Statement
of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which addresses specific cash flow classification
issues where there is currently diversity in practice including debt prepayment and proceeds from the settlement of insurance claims.
ASU 2016-15 is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The Company elected
to early adopt ASU 2016-15 effective as of January 31, 2017. The adoption of ASU 2016-15 did not impact our results of operations
or cash flows.
In November 2016, the FASB issued ASU No.
2016-18 Statement of Cash Flows - Restricted Cash, which requires entities to show the changes in the total of cash,
cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no
longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement
of cash flows. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The
Company elected to early adopt ASU 2016-18 including retrospective adoption for all prior periods. The impact
of the adoption of ASU 2016-18 is the addition of a reconciliation of the totals in the statement of cash flows to the related
captions in the balance sheet and was not material to the results.
Stock Compensation
In March 2016, the FASB issued ASU 2016-09, Compensation
- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendment is to simplify several
aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards
as either equity or liabilities, and classification on the statement of cash flows. For public entities, the amendments in ASU
2016-09 are effective for interim and annual reporting periods beginning after December 15, 2016. The Company adopted ASU
2016-09 as of April 30, 2017, and its adoption did not have any significant impact on the Company’s financial statements.
Recent Accounting Standards
Leases
In February 2016, FASB issued 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 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.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
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. The Company is currently evaluating the
potential impact the adoption of 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.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTE 4 – BASIC AND DILUTED NET LOSS
PER COMMON SHARE
Basic and diluted net loss per common share
from continuing operations is computed as net loss from continuing operations less noncontrolling interest and dividends on preferred
stock, divided by the weighted average number of common shares outstanding for the period. Diluted net loss per common share reflects
the potential dilution that could occur from common stock issuable through exercise of stock options, warrants and Note conversions.
The table below presents the computations of
loss per share from continuing operations applicable to common stockholders, after consideration of noncontrolling interest and
dividends declared on preferred stock, as follows:
|
|
For the years ended
|
|
|
|
April 30,
|
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to WPCS common shareholders
|
|
$
|
(2,256,194
|
)
|
|
$
|
(9,118,522
|
)
|
Income from discontinued operations, basic and diluted
|
|
|
-
|
|
|
|
848,476
|
|
Net loss attributable to WPCS common shareholders, basic and diluted
|
|
$
|
(2,256,194
|
)
|
|
$
|
(8,270,046
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding
|
|
|
2,967,984
|
|
|
|
2,290,050
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss from continuing operations per common share
|
|
$
|
(0.76
|
)
|
|
$
|
(3.98
|
)
|
Basic and diluted income from discontinued operations per common share
|
|
|
-
|
|
|
|
0.37
|
|
Basic and diluted loss per common share
|
|
$
|
(0.76
|
)
|
|
$
|
(3.61
|
)
|
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
The following were excluded from the computation
of diluted shares outstanding due to the losses for the years ended April 30, 2017 and 2016, as they would have had an anti-dilutive
impact on the Company’s net loss.
|
|
As of April 30,
|
|
|
|
2017
|
|
|
2016
|
|
Common stock equivalents:
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
3,328,000
|
|
|
|
3,290,000
|
|
Series H, H-1, H-2 and H-3 preferred stock
|
|
|
1,462,000
|
|
|
|
1,076,000
|
|
Common stock purchase warrants
|
|
|
2,893,000
|
|
|
|
1,295,000
|
|
Totals
|
|
|
7,683,000
|
|
|
|
5,661,000
|
|
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON
UNCOMPLETED CONTRACTS
The asset, “Costs and estimated earnings
in excess of billings on uncompleted contracts”, represents revenue recognized in excess of amounts billed. The liability,
“Billings in excess of costs and estimated earnings on uncompleted contracts”, represents billings in excess of revenue
recognized. Costs and estimated earnings on uncompleted contracts consist of the following at April 30, 2017 and 2016:
|
|
April 30, 2017
|
|
|
April 30, 2016
|
|
|
|
|
|
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
16,362,011
|
|
|
$
|
28,884,776
|
|
Estimated contract earnings
|
|
|
3,714,584
|
|
|
|
4,367,463
|
|
|
|
|
20,076,595
|
|
|
|
33,252,239
|
|
Less: Billings to date
|
|
|
21,771,566
|
|
|
|
34,253,318
|
|
Total
|
|
$
|
(1,694,971
|
)
|
|
$
|
(1,001,079
|
)
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
410,826
|
|
|
$
|
357,210
|
|
Billings in excess of cost and estimated earnings on uncompleted contracts
|
|
|
2,105,797
|
|
|
|
1,358,289
|
|
Total
|
|
$
|
(1,694,971
|
)
|
|
$
|
(1,001,079
|
)
|
Revisions in the estimated gross profits on
contracts and contract amounts are made in the period in which circumstances requiring the revisions become known. Although management
believes it has established adequate procedures for estimating costs to complete on open contracts, it is at least reasonably possible
that additional significant costs could occur on contracts prior to completion.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following
at April 30, 2017 and 2016:
|
|
Estimated useful life
(years)
|
|
2017
|
|
|
2016
|
|
Furniture and fixtures
|
|
5-7
|
|
$
|
98,550
|
|
|
$
|
74,265
|
|
Computers and software
|
|
2-3
|
|
|
302,843
|
|
|
|
283,928
|
|
Vehicles
|
|
5-7
|
|
|
914,217
|
|
|
|
909,175
|
|
Machinery and equipment
|
|
5
|
|
|
118,106
|
|
|
|
88,689
|
|
Leasehold improvements
|
|
2-3
|
|
|
291,689
|
|
|
|
291,688
|
|
|
|
|
|
|
1,725,405
|
|
|
|
1,647,745
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(1,402,762
|
)
|
|
|
(1,409,945
|
)
|
|
|
|
|
$
|
322,643
|
|
|
$
|
237,800
|
|
Depreciation and amortization expense for property
and equipment for the years ended April 30, 2017 and 2016 was approximately $115,000 and $65,000, respectively.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTE 7 – INCOME FROM SECTION 16 SETTLEMENTS
For the years ended April 30, 2017 and
2016, the Company received income from Section 16 settlements of approximately $0 and $400,000, respectively. This income was comprised
of forgiveness of certain promissory notes and receipt of cash as part of the settlements with certain note holders who were defendants
named in a Section 16 litigation brought by a shareholder of WPCS. These settlements resolved all issues related to this litigation.
NOTE 8 – BANK LINE OF CREDIT
On May 20, 2015, the Company entered into
an asset-based revolving credit line agreement with a California-based bank, which provides a $1,000,000 line of credit for its
Suisun City Operations. The line of credit expires on August 15, 2017, has an interest rate of prime plus 2% (5% as of April 30,
2017) and is subject to a monthly borrowing base calculation based upon eligible accounts receivable. The line of credit is secured
by all of the assets of the Company.
In addition, the line of credit requires
our Suisun City Operations to comply with certain financial and operational covenants. These covenants require the Suisun City
Operations to, among other things, maintain a certain quick ratio and a minimum net worth, which the Suisun City Operations is
in compliance with.
As of July 21, 2017, the Company has not drawn
down on the line of credit.
NOTE 9 – LOANS PAYABLE
The following tables summarize outstanding loans
payable related to automobiles as of April 30, 2017 and 2016, respectively:
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
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 10 - RETIREMENT PLANS
Employee Benefit Plan
The Company and its subsidiaries participate
in employee savings plans under Section 401(k) of the Internal Revenue Code pursuant to which eligible employees may elect to defer
a portion of their annual salary by contributing to the plan. There were no Company matching contributions made for the years ended
April 30, 2017 and 2016.
Union Sponsored Pension Plan (Defined Contribution)
The Company contributes to one multiemployer,
money purchase defined contribution pension plan pursuant to a collective bargaining agreement. The plan is qualified under section
401(a) of the Internal Revenue Code. The Plan is not subject to the Pension Protections Act’s zone status and other reporting
obligations, which only apply to Defined Benefit Pension Plans. The information available to the Company about the multiemployer
plan in which it participates, whether via request to the plan or publicly available, is generally dated due to the nature of the
reporting cycle of multiemployer plans and legal requirements under the Employee Retirement Income Security Act (“ERISA”)
as amended by the Multiemployer Pension Plan Amendments Act (“MPPAA”). Based upon the plans most recently available
annual report, the Company’s contribution to the plan was less than 5% of each such plans total contributions. The “FIP/RP
Status Pending or Implemented” column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan
(RP) is either pending or has been implemented.
As the Plan is a Defined Contribution Pension
Plan, the Plan is 100% funded and has no unfunded liability balance as of April 30. 2017. In addition, employers who contribute
to this Plan have no withdrawal liability.
Information on the significant multiemployer
pension plan in which the Company participates is included in the table below.
|
|
|
|
|
|
|
|
|
|
Expiration
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
FIP/RP
|
|
of
|
|
|
|
|
|
|
|
|
Federal
Identification
|
|
Certified Zone
Status
|
|
Status Pending
or
|
|
Collective
Bargaining
|
|
Company's
Contributions
|
|
Pension Plan Legal name
|
|
Number
|
|
2016
|
|
2015
|
|
Implemented
|
|
Arrangement
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Brotherhood of Electrical Workers
District No. 9 Pension Plan
|
|
93-6074829
|
|
Green
|
|
Green
|
|
No
|
|
11/30/2017
|
|
$
|
525,523
|
|
|
$
|
366,923
|
|
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTE 11 - INCOME TAXES
The provision for income taxes from continuing
operations for the years ended April 30, 2017 and 2016 is summarized as follows:
|
|
Years Ended
|
|
|
|
April 30,
|
|
|
|
2017
|
|
|
2016
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
1,632
|
|
|
|
1,706
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Totals
|
|
|
1,632
|
|
|
|
1,706
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Totals
|
|
|
-
|
|
|
|
-
|
|
Total provision for income taxes (benefits)
|
|
$
|
1,632
|
|
|
$
|
1,706
|
|
The actual provision for income taxes from
continuing operations reflected in the consolidated statements of operations for the years ended April 30, 2017 and 2016 differs
from the provision computed at the federal statutory tax rates. The principal differences between the statutory income tax and
the actual provision for income taxes are summarized as follows:
|
|
Years Ended
|
|
|
|
April 30,
|
|
|
|
2017
|
|
|
2016
|
|
Expected tax (benefit) provision at statutory rate (34%)
|
|
$
|
(413,337
|
)
|
|
$
|
(1,233,531
|
)
|
State and local taxes, net of federal tax benefit
|
|
|
(684,228
|
)
|
|
|
(675,924
|
)
|
Valuation allowance
|
|
|
1,300,959
|
|
|
|
1,288,447
|
|
Deferred tax true-up
|
|
|
(320,038
|
)
|
|
|
|
|
Write-off of foreign tax credits
|
|
|
-
|
|
|
|
265,600
|
|
Inducement Expense
|
|
|
-
|
|
|
|
136,000
|
|
Permanent differences
|
|
|
118,276
|
|
|
|
1,706
|
|
Other
|
|
|
-
|
|
|
|
219,408
|
|
Totals
|
|
$
|
1,632
|
|
|
$
|
1,706
|
|
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
Deferred tax assets and liabilities are provided
for the effects of temporary difference between tax basis of an asset or liability and its reported amount in the consolidated
balance sheets. These temporary differences result in taxable or deductible amounts in future years.
The components of the Company’s deferred tax assets and liabilities
are as follows:
|
|
April 30, 2017
|
|
|
April 30, 2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
100,989
|
|
|
$
|
36,165
|
|
Bonus and vacation accruals
|
|
|
45,319
|
|
|
|
53,727
|
|
Non-qualified stock options
|
|
|
1,422,692
|
|
|
|
1,135,090
|
|
Valuation allowance
|
|
|
(1,569,000
|
)
|
|
|
(1,224,973
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets-current
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Capital loss carryforward
|
|
|
4,768,005
|
|
|
|
4,126,345
|
|
Property and equipment
|
|
|
(12,725
|
)
|
|
|
43,948
|
|
Net operating loss carryforward
|
|
|
12,962,521
|
|
|
|
12,590,576
|
|
Valuation allowance
|
|
|
(17,717,801
|
)
|
|
|
(16,760,869
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities)-long term
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
|
-
|
|
|
$
|
-
|
|
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
At April 30, 2017, the Company has net operating
loss carryforwards for Federal tax purposes approximating $32.1 million expiring in varying amount beginning in 2023 through 2037.
The Company also has net operating loss carryforwards in multiple states approximating $32.8 million and expiring in varying amounts
beginning in 2023 through 2037. However, the future use of some or all of such carried forward domestic losses may be limited by
Sec. 382 of Internal Revenue Code in the event of an ownership change.
The Company considers past performance,
expected future taxable income and prudent and feasible tax planning strategies in assessing the amount of the valuation allowance.
The Company’s forecast of expected future taxable income is based over such future periods that it believes can be reasonably
estimated. Based on its analysis as of April 30, 2017, the Company increased its valuation allowance by approximately $1.3
million on its deferred tax assets. Due to the uncertainty of recognizing a tax benefit on loss carryforwards, the Company
has provided a valuation allowance of approximately $19.3 million at April 30, 2017.
At April 30, 2017, the Company’s net
deferred tax assets are fully offset by a valuation allowance. The Company continues to analyze the realizability of its deferred
tax assets on a regular basis.
Accounting for uncertainty in income taxes
requires uncertain tax positions to be classified as non-current income tax liabilities unless they are expected to be paid within
one year. The Company has concluded that there are no uncertain tax positions requiring recognition in its consolidated financial
statements as of April 30, 2017 and 2016. The Company recognizes interest accrued related to unrecognized tax benefits in interest
expense. For the years ended April 30, 2017 and 2016 there was no interest expense relating to unrecognized tax benefits.
The Company and its domestic subsidiaries
file a U.S. federal consolidated income tax return. The U.S. federal statute of limitations remains open for the years April 30,
2014 and thereafter. State income tax returns are generally subject to examination for a period of 3 to 5 years after
filing the respective return. The Company is not currently under examination by any taxing authority.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTE 12 – SHAREHOLDERS’ EQUITY
Preferred Shares
Series H Preferred Stock
On June 30, 2015, the Company entered into
Amendment, Waiver and Exchange Agreements (the “Exchange Agreements”) with certain of its promissory note holders,
who held $1,299,000 in principal amount of unsecured promissory notes of the Company. Pursuant to the terms of the Exchange Agreements,
the Holders agreed to exchange all of the existing indebtedness for, and the Company agreed to issue to the Holders, an aggregate
of 8,435 shares of the Company’s newly designated Series H Convertible Preferred Stock, par value $0.0001 per share (“Series
H Preferred Stock”).
Under the terms of the Series H Certificate
of Designation, each share of Series H Preferred Stock has a stated value of $154 and is convertible into shares of the Company’s
common stock (“common stock”), equal to the stated value divided by the conversion price of $1.54 per share (subject
to adjustment in the event of stock splits or dividends). The Company is prohibited from effecting the conversion of the Series
H Preferred Stock to the extent that, as a result of such conversion, the holder would beneficially own more than 9.99%, in the
aggregate, of the issued and outstanding shares of the Company’s common stock calculated immediately after giving effect
to the issuance of shares of common stock upon such conversion.
Series H-1 Preferred Stock
Between July 14 and July 20, 2015, the
Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with four investors (the
“Series H-1 Investors”) pursuant to which the Company issued to the Series H-1 Investors an aggregate of 8,532 shares
of Series H-1 Preferred Convertible Stock of the Company, par value $0.0001 per share (the “Series H-1 Shares”), and
warrants to purchase 1,279,759 shares of common stock, with exercise prices between $1.63 and $1.66 per share (the “Series
H-1 Warrants”). The purchase price for each Series H-1 Share was between $163 and $166 and the purchase price for each Series
H-1 Warrant was $0.1250, for aggregate gross proceeds of $1,575,000.
The Company has determined that the Warrants
qualify for accounting as equity classification. On the issuance date, the Company estimated the fair value of the Warrants at $1,649,000 under
the Black-Scholes option pricing model using the following primary assumptions: contractual term of 5.0 years, volatility
rate of 103%, risk-free interest rate of 2% and expected dividend rate of 0%. Based on the Warrant’s
relative fair value to the fair value of the Series H-1 Preferred Convertible Stock, approximately $841,000 of the $1,575,000
of proceeds was allocated to the Warrants, creating a corresponding preferred stock discount in the same amount.
Due to the reduction of allocated proceeds
to Series H-1 Shares the effective conversion price was approximately $0.80 per share or $704,000 in aggregate. Since the conversion
option of the preferred stock was immediately exercisable, the amount allocated to the Beneficial Conversion Feature was immediately
accreted to preferred dividends, resulting in an increase in the carrying value of the preferred stock. In addition, the Company
recognized approximately $378,000 and $41,000 of deemed dividends for the years ended April 30, 2017 and 2016, respectively, upon
the conversion of shares of Series H-1 preferred to common stock.
Under the terms of the Series H-1 Certificate
of Designation, each of the Series H-1 Shares has a stated value of $166 and is convertible into shares of common stock, equal
to the stated value divided by the conversion price of $1.66 per share (subject to adjustment in the event of stock splits and
dividends). The Company is prohibited from effecting the conversion of the Series H-1 Shares to the extent that, as a result of
such conversion, the holder or any of its affiliates would beneficially own more than 9.99%, in the aggregate, of the issued and
outstanding shares of common stock calculated immediately after giving effect to the issuance of shares of common stock upon the
conversion of the Series H-1 Shares.
Series H-2 Preferred Stock
On December 21, 2016, the Company entered
into a Securities Purchase Agreement (the “Series H-2 Securities Purchase Agreement”) with two investors (the “Series
H-2 Investors”) pursuant to which the Company issued to the Series H-2 Investors an aggregate of 3,305 shares of Series H-2
Preferred Convertible Stock of the Company, par value $0.0001 per share (the “Series H-2 Shares”), and warrants to
purchase 495,750 shares of common stock, with an exercise price of $1.21 per share (the “Series H-2 Warrants”). The
purchase price for each Series H-2 Share was $121 and the purchase price for each Series H-2 Warrant was $0.1250, for aggregate
gross proceeds of $461,969.
The Company has determined that the Warrants
qualify for accounting as equity classification. On the issuance date, the Company estimated the fair value of the Warrants at $462,000 under
the Black-Scholes option pricing model using the following primary assumptions: contractual term of 5.0 years, volatility
rate of 238%, risk-free interest rate of 2% and expected dividend rate of 0%. Based on the Warrant’s
relative fair value to the fair value of the Series H-2 Shares, approximately $231,000 of the $462,000 of aggregate fair
value was allocated to the Warrants, creating a corresponding preferred stock discount in the same amount.
Due to the reduction of allocated proceeds
to Series H-2 Shares, the effective conversion price was approximately $0.60 per share creating a beneficial conversion feature
of $183,000. Since the conversion option of the Series H-2 Shares was immediately exercisable, the beneficial conversion feature
was immediately accreted to preferred dividends, resulting in an increase in the carrying value of the Series H-2 Shares.
Under the terms of the Series H-2 Certificate
of Designation, each of the Series H-2 Shares has a stated value of $121 and is convertible into shares of common stock, equal
to the stated value divided by the conversion price of $1.21 per share (subject to adjustment in the event of stock splits and
dividends). The Company is prohibited from effecting the conversion of the Series H-2 Shares to the extent that, as a result of
such conversion, the holder or any of its affiliates would beneficially own more than 9.99%, in the aggregate, of the issued and
outstanding shares of common stock calculated immediately after giving effect to the issuance of shares of common stock upon the
conversion of the Series H-2 Shares.
Pursuant to a Placement Agent Agreement
with an investment banking firm, at closing the Company paid a commission equal to seven percent (7%) of the aggregate consideration
raised from the sale of the Series H-2 Shares and the Series H-2 Warrants, which amounted to $32,338. The investment banking firm
is also entitled to a seven percent (7%) commission for any sales of equity or convertible debt securities made by the Company
to the Investors through December 14, 2017.
WPCS INTERNATIONAL
INCORPORATED AND SUBSIDIARIES
Series H-3 Preferred Stock
On March 30, 2017, the Company entered
into a Securities Purchase Agreement (the “Series H-3 Securities Purchase Agreement”) with five investors (the “Series
H-3 Investors”) pursuant to which the Company issued to the Series H-3 Investors an aggregate of 7,017 shares of Series H-3
Preferred Convertible Stock of the Company, par value $0.0001 per share (the “Series H-3 Shares”), and warrants to
purchase 1,101,751 shares of common stock, with an exercise price of $1.38 per share (the “Series H-3 Warrants”). The
purchase price for each Series H-3 Share was $138 and the purchase price for each Series H-3 Warrant was $0.1250, for aggregate
gross proceeds of $1,100,000.
The Company has determined that the Warrants
qualify for accounting as equity classification. On the issuance date, the Company estimated the fair value of the Warrants at $1,147,000 under
the Black-Scholes option pricing model using the following primary assumptions: contractual term of 5.0 years, volatility
rate of 106%, risk-free interest rate of 1.93% and expected dividend rate of 0%. Based on the Warrant’s
relative fair value to the fair value of the Series H-3 Shares, approximately $557,000 of the $1,147,000 of aggregate
fair value was allocated to the Warrants, creating a corresponding preferred stock discount in the same amount.
Due to the reduction of allocated proceeds
to Series H-3 Shares, the effective conversion price was approximately $0.69 per share creating a beneficial conversion feature
of $476,000. Since the conversion option of the Series H-3 Shares was immediately exercisable, the beneficial conversion feature
was immediately accreted to preferred dividends, resulting in an increase in the carrying value of the Series H-3 Shares.
Pursuant to the Series H-3 Securities Purchase
Agreement, $500,000 of the purchase price (the “Restricted Account Funds”) was directed to and is to be held in a separate
account (the “Restricted Account”). While held in the Restricted Account, the Restricted Account Funds may not be accessed
or otherwise used by the Company. The Restricted Account Funds may be released from the Restricted Account upon the unanimous approval
of the Company’s board of directors (the “Board”).
Pursuant to the Series H-3 Securities Purchase
Agreement, the Company agreed to not issue further common stock or securities convertible into or exercisable or exchangeable for
common stock, except for certain permitted issuances, without the consent of the holders of a majority of the Series H-3 Shares
outstanding, for a period beginning on the closing date and ending on the earlier of: (i) nine months after the closing date; or
(ii) a Change in Control (as that term is defined in the Series H-3 Securities Purchase Agreement) of the Company (the “Restricted
Period”). The Company also agreed to cause certain of its officers and directors to agree not to exercise their Company stock
options during the Restricted Period, except in connection with a Change in Control of the Company.
Under the terms of the Series H-3 Certificate
of Designation, each share of the Series H-3 Shares has a stated value of $138 and is convertible into shares of common stock,
equal to the stated value divided by the conversion price of $1.38 per share (subject to adjustment in the event of stock splits
and dividends). The Company is prohibited from effecting the conversion of the Series H-3 Shares to the extent that, as a result
of such conversion, the holder or any of its affiliates would beneficially own more than 9.99%, in the aggregate, of the issued
and outstanding shares of common stock calculated immediately after giving effect to the issuance of shares of common stock upon
the conversion of the Series H-3 Shares.
Pursuant to a Placement Agent Agreement
with an investment banking firm (the “Placement Agent”), at closing the Company paid fees to the Placement Agent which
consisted of (i) $42,000 cash, seven percent (7%) of the unrestricted portion of the proceeds ($600,000) raised from the sale of
the Series H-3 Shares and Series H-3 Warrant; and (ii) Series H-3 Warrants, to acquire up to 7% of the Conversion Shares (as defined
in the Securities Purchase Agreement) issuable to the Series H-3 Investors upon conversion of the Series H-3 Shares (the “Placement
Agent Warrants”). Pursuant to the Placement Agent Agreement, the Company also agreed to pay to the Placement Agent seven
percent (7%) of the restricted portion of the proceeds raised from the sale of the Series H-3 Shares and Series H-3 Warrants when
it is released from the Restricted Account, which amounts to $35,000.
The Placement Agent is also entitled to
comparable compensation as described above for any sales of equity or convertible debt securities made by the Company to the Series
H-3 Investors through March 21, 2018.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
Conversion of Preferred Shares
For the year ended April 30, 2017, the Company
issued approximately 646,000 common stock conversion shares upon the conversion of Series H and H-1 Preferred Shares.
For the year ended April 30, 2016, the Company
issued approximately 1,408,000 common stock conversion shares, 205,000 common stock make-whole shares and 46,000 common stock dividend
shares upon the conversion of series F, F-1, G, G-1, H and H-1 preferred shares. As a result of these conversions, the Company
has no remaining Series F, F-1, G or G-1 preferred shares remaining.
Stock-Based Compensation Plans
2014 Equity Incentive Plan
In January 2014, the Company adopted the
2014 Equity Incentive Plan, under which officers, directors, key employees or consultants may be granted options. In September
2015, the Company amended and restated the 2014 Equity Incentive Plan. Under the 2014 Equity Incentive Plan, 3,659,091 shares of
common stock were reserved for grants. The issuance of these shares is covered by a Registration Statement on Form S-8 (SEC File
No 333-216145). Under the 2014 Equity Incentive Plan, stock options are granted at exercise prices equal to the fair market value
of the common stock at the date of grant, and become exercisable and expire in accordance with the terms of the stock option agreement
between the optionee and the Company at the date of grant. These options generally vest from immediately to three years of continuous
service and have five-year contractual terms. At April 30, 2017, options to purchase 3,328,137 shares were outstanding at an exercise
price of $1.19 to $26.40 and 330,954 shares of common stock remain available for grants under the 2014 Equity Incentive Plan.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
The following table summarizes stock option
activities for the Company’s option plans for the years ended April 30, 2017 and 2016:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Total Intrinsic
Value
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
Outstanding as of May 1, 2015
|
|
|
40,688
|
|
|
$
|
18.8
|
|
|
$
|
-
|
|
|
|
5.9
|
|
Employee options granted
|
|
|
4,054,250
|
|
|
|
1.32
|
|
|
|
-
|
|
|
|
7.6
|
|
Forfeited/expired
|
|
|
(804,665
|
)
|
|
|
1.37
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of April 30, 2016
|
|
|
3,290,273
|
|
|
|
1.52
|
|
|
|
-
|
|
|
|
9.4
|
|
Employee options granted
|
|
|
1,017,000
|
|
|
|
1.35
|
|
|
|
-
|
|
|
|
9.3
|
|
Forfeited/expired
|
|
|
(979,136
|
)
|
|
|
1.38
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of April 30, 2017
|
|
|
3,328,137
|
|
|
$
|
1.51
|
|
|
$
|
108,655
|
|
|
|
8.7
|
|
Options vested and exercisable
|
|
|
2,928,137
|
|
|
$
|
1.53
|
|
|
$
|
108,655
|
|
|
|
8.5
|
|
The Company recorded stock based compensation
expense of $580,000 and $2,506,234, which is included as part of selling, general and administrative expenses for the years ended
April 30, 2017 and 2016, respectively. The expense of $2,506,234 for the year ended April 30, 2016 is comprised of $2,438,734 for
the issuance of stock options and $67,500 for the issuance of shares of restricted common stock under a consulting agreement.
The following assumptions were used to compute
the fair value of stock options granted during the years ended April 30, 2017 and 2016:
|
|
For the years ended
|
|
|
|
April 30,
|
|
|
|
2017
|
|
|
2016
|
|
Exercise price
|
|
$
|
1.35
|
|
|
|
$1.19 - $1.53
|
|
Expected term (years)
|
|
|
5.0
|
|
|
|
5.0
|
|
Expected stock price volatility
|
|
|
104.8
|
%
|
|
|
101.7% - 104.1
|
%
|
Risk-free rate of interest
|
|
|
1.8
|
%
|
|
|
1.3%-1.6
|
%
|
The risk-free rate is based on the rate of
U.S Treasury zero-coupon issues with a remaining term equal to the expected term of the option grants. Expected volatility is based
on the historical volatility of the Company’s common stock using the weekly closing price of the Company’s common stock.
The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was calculated
using the simplified method.
Modification of performance targets
On September 29, 2015 and November 2, 2015,
the Company issued 801,250 options to purchase common stock to five employees. These options vested subject to the employees achieving
performance targets of either: (i) the Company recording $30 million in sales revenue by April 30, 2016; or (ii) the Company closing
a change in control merger transaction by September 1, 2016. The total compensation expense related to the options was calculated
to be approximately $822,000 using the inputs in the table above and the Company recognized that expense in its statement of operations
for the period from September 29, 2015 to April 30, 2016.
On April 25, 2015, the Company determined that
the revenue target of $30 million and the September 1, 2016 merger transaction date were not achievable during the measurement
period. Subsequently, the Compensation Committee of the Board of Directors modified the performance targets to allow vesting of
the 801,250 stock options if the Company completes a merger or acquisition transaction by December 31, 2016 and removed the revenue
target and September 1, 2016 merger target date. The Company determined that the compensation expense associated with this amendment
was approximately $776,000.
On April 25, 2016, the Company reversed
the $822,000 of compensation expense associated with the September and November 2015 issuances and planned to record the $776,000
of compensation expense calculated on the April 25, 2016 amendment date, if and when the December 31, 2016 performance target is
achieved. The performance targets were not achieved and the compensation expense was not recorded.
As of December 31, 2016, these performance
targets were not achieved and no compensation expense was recognized and the stock option were forfeited.
Common Stock Warrants
The following is a summary of the common stock
warrant activity for the years ended April 30, 2017 and 2016:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Life in years
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, May 1, 2015
|
|
|
15,510
|
|
|
$
|
7.25
|
|
|
|
3.3
|
|
Warrants issued in connection with Series H-1 preferred stock for cash
|
|
|
1,279,759
|
|
|
|
1.66
|
|
|
|
4.3
|
|
Outstanding as of April 30, 2016
|
|
|
1,295,269
|
|
|
$
|
5.50
|
|
|
|
4.2
|
|
Warrants issued in connection with Series H-2 preferred stock for cash
|
|
|
495,750
|
|
|
|
1.21
|
|
|
|
4.6
|
|
Warrants issued in connection with Series H-3 preferred stock for cash
|
|
|
1,101,751
|
|
|
|
1.38
|
|
|
|
4.9
|
|
Outstanding, April 30, 2017
|
|
|
2,892,770
|
|
|
$
|
3.23
|
|
|
|
4.1
|
|
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTE 13 - DISCONTINUED OPERATIONS
China Operations
On
June 3, 2015, the Company entered into an Interest Purchase Agreement with
Halcyon Coast Investment (Canada) Ltd.
to sell its China Operations in an "as-is", all-cash transaction, for a total purchase price of $1,500,000 and received
a $150,000 refundable deposit at signing. The transaction closed on August 14, 2015, whereby the Company received the remaining
cash proceeds of $1,350,000, of which: (i) it paid approximately $100,000 in a broker’s fee and (ii) $100,000 was held in
escrow, pending a final determination by the Chinese government with respect to any tax obligations arising from the transaction.
Otherwise, the transaction is not subject to any further post-closing adjustments. On September 20, 2015, the final tax determination
was made and the Company received $93,000 of the escrow and $7,000 was paid to the buyer to settle the outstanding tax obligation.
The Company recognized a gain on the sale of
the China Operations of approximately $838,000, as it received $1,500,000 in cash, offset by the sale of approximately $9,350,000
of assets, $7,935,000 of liabilities, reversal of approximately $349,000 of accumulated other comprehensive income and $577,000
noncontrolling interest and incurring approximately $174,000 in closing costs.
The Company recorded the revenue and profit
from short-term contracts from its China Operations under the completed contract method, whereas income is recognized only when
a contract is completed or substantially completed. Accordingly, during the period of performance, billings and deferred contract
costs were accumulated on the consolidated balance sheets as deferred contract costs and deferred revenue. The Company’s
accounting policy is based on the short-term nature of the work performed. Deferred contract costs include equipment lease deposits
to the third party vendors of approximately $0 as of April 30, 2016. The revenue results from the China Operations are included
in discontinued operations for the year ended April 30, 2016.
Since the sale of the China Operations closed
on August 14, 2015, the Company has determined that the activity of the China Operations should be classified as discontinued operations
for the year ended April 30, 2016. The following is a summary of the operating results for the discontinued operations as follows:
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
Below is a summary of the operating results
for the discontinued operations is as follows:
|
|
For the years ended
|
|
|
|
April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
839,969
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
-
|
|
|
|
546,296
|
|
Selling, general and administrative expenses
|
|
|
-
|
|
|
|
125,324
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
80,971
|
|
|
|
|
-
|
|
|
|
752,591
|
|
Operating income from discontinued operations
|
|
|
-
|
|
|
|
87,378
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
-
|
|
|
|
(49,234
|
)
|
Income from discontinued operations before income tax provision
|
|
|
-
|
|
|
|
38,144
|
|
Income tax provision
|
|
|
-
|
|
|
|
(10,883
|
)
|
Income from discontinued operations, net of tax
|
|
|
-
|
|
|
|
27,261
|
|
Gain from disposal
|
|
|
-
|
|
|
|
837,720
|
|
Total income from discontinued operations
|
|
$
|
-
|
|
|
$
|
864,981
|
|
There were no assets or liabilities included
in the consolidated balance sheets for the China Operations at April 30, 2017 or 2016.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
Due to Related Party
The China Operations earned revenue for
contracting services provided to
its minority shareholder
(noncontrolling interest
in China Operations) and subsidiaries of $0 and $212,000 for the year ended April 30, 2017 and 2016, respectively. The China Operations
accounts receivable due from its minority shareholder and subsidiaries was $0 and $0 as of April 30, 2017 and 2016, respectively.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Change in Control Agreements
On September 29, 2015, the Company entered
into change in control agreements (the “Agreements”) with its Chief Executive Officer (“CEO”) and its Chief
Financial Officer (“CFO”).
The Agreements have initial terms of four years
and automatically extend for additional one-year periods at the expiration of the initial term and on each anniversary thereafter
unless either party notifies the other party of non-renewal no later than 30 days prior to such anniversary. Under the Agreements,
the CEO and CFO are entitled to payments of $350,000 and $150,000, respectively, upon a change in control of the Company.
All payments under the Agreements are contingent
upon the respective officer’s execution and non-revocation of a general release of claims against the Company.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
Operating Lease Commitments
The Company leases its office facilities pursuant
to a noncancelable operating lease expiring through February 2021. The minimum rental commitments under the facility lease at
April 30, 2017 is summarized as follows:
Year ending April 30,
|
|
|
|
|
2018
|
|
$
|
80,213
|
|
2019
|
|
|
80,213
|
|
2020
|
|
|
80,213
|
|
2021
|
|
|
66,844
|
|
Total minimum lease payments
|
|
$
|
307,483
|
|
Rent expense for all operating leases was
approximately $207,000 and $101,000 in 2017 and 2016, respectively.
NOTE 15 – 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 Statement of Operations for
the year ended April 30, 2017. The Cooper Medical School contract was performed under the electrical services segment and is no
longer part of the Company’s ongoing operation.
NOTE 16 – SUBSEQUENT EVENTS
The Company has determined that there are
no significant subsequent events as of the filing date of this report.