UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 2002
-----------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number: 0-26277
-----------
WPCS INTERNATIONAL INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 98-0204758
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
140 South Village Avenue
Suite 20
Exton, Pennsylvania 19341
(Address of principal executive offices)
(610) 903-0400
--------------
(Registrant's telephone number, including area code)
Phoenix Star Ventures, Inc.
2438 Marine Drive, Suite 215
West Vancouver, British Columbia, Canada V7V 1L2
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 after the distribution of securities under a plan confirmed
by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the registrant's classes
of common equity, as of the latest practicable date: 9,025,632 shares issued and
outstanding as of September 12, 2002
WPCS INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
CONTENTS
Condensed consolidated balance sheets at July 31, 2002 (unaudited) and
April 30, 2002 (audited) 4 - 5
Condensed consolidated statement of operations for the three
months ended July 31, 2002 (unaudited) 6
Condensed consolidated statement of cash flows for the three
months ended July 31, 2002 (unaudited) 7 - 8
Condensed consolidated statement of shareholders' equity for the
three months ended July 31, 2002 (unaudited) 9
Notes to condensed consolidated financial statements 10 - 13
3
WPCS INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, April 30,
ASSETS 2002 2002
--------------- ---------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 138,271 $ 15,554
Accounts receivable 296,724 91,183
Inventory 11,241 7,975
Prepaid consulting services 125,000 -
------------ ----------------
Total current assets 571,236 114,712
PROPERTY AND EQUIPMENT, Net 26,728 28,271
OTHER ASSETS, security deposits 2,242 2,242
------------ -------------
Totals $ 600,206 $ 145,225
=========== ============
The accompanying notes are an integral part of these condensed financial
statements.
4
WPCS INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
July 31, April 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2002
------------- --------
(UNAUDITED)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 222,191 $ 95,119
Current maturities of capital lease obligations 1,943 2,077
Due to Shareholder 11,628 20,743
------------- --------
Total current liabilities 235,762 117,939
Capital lease obligations, net of current maturities 6,535 6,902
Deferred income taxes 4,150 4,150
------------- --------
Total Liabilities 246,447 128,991
------------- --------
SHAREHOLDERS' EQUITY:
Preferred Stock - $0.0001 par value, 5,000,000 shares authorized
Series B Convertible Preferred Stock, 1,000 shares designated, 519 shares
issued and outstanding at July 31, 2002,
liquidation preference $519,000 - -
Common Stock - $0.0001 par value,
30,000,000 shares authorized, 9,025,632 shares and
5,500,000 shares issued and outstanding, respectively 903 550
Additional paid- in capital 615,282 4,450
(Accumulated deficit) retained earnings (262,426) 11,234
------------- --------
Total shareholders' equity 353,759 16,234
------------- --------
Totals $ 600,206 $ 145,225
============= ========
The accompanying notes are an integral part of these condensed financial
statements.
5
WPCS INTERNATIONAL INC. AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months
Ended
July 31,
2002
SALES $ 393,124
COST OF SALES 303,177
------------------
GROSS PROFIT 89,947
------------------
OPERATING EXPENSES:
Selling expenses 5,275
General and administrative expenses 183,789
Depreciation and amortization 1,543
------------------
Total 190,607
------------------
NET LOSS (100,660)
IMPUTED DIVIDENDS ACCRETED ON CONVERTIBLE
SERIES B PREFERRED STOCK (173,000)
------------------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (273,660)
==================
BASIC NET LOSS PER COMMON SHARE $ (0.03)
==================
BASIC WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 8,400,632
==================
The accompanying notes are an integral part of these condensed financial
statements
6
WPCS INTERNATIONAL INC. AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months
Ended
July 31,
2002
OPERATING ACTIVITIES:
Net loss $ (100,660)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 1,543
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable (205,541)
Inventory (3,266)
Prepaid consulting service (117,500)
Accounts payable and accrued expenses 99,499
-------------
NET CASH USED IN OPERATING ACTIVITIES (325,925)
-------------
FINANCING ACTIVITIES:
Cash received in reverse acquisition 3,257
Repayment of advances from shareholders (9,115)
Proceeds received from sale of Series B preferred stock 455,000
Payments of capital lease obligations (500)
-------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 448,642
-------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 122,717
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 15,554
-------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 138,271
=============
The accompanying notes are an integral part of these condensed financial
statements
7
WPCS INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(UNAUDITED)
Three Months
Ended
July 31,
2002
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 220
===========
Income taxes $ 190
===========
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Issuance of 64 shares of Series B preferred stock
as payment of advances from shareholder and
accounts payable $ 64,000
===========
Imputed Series B preferred stock dividend attributable to a
beneficial conversion feature $ (173,000)
===========
The accompanying notes are an integral part of these condensed financial
statements
8
WPCS INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JULY 31, 2002
(UNAUDITED)
RETAINED
ADDITIONAL EARNINGS/ TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) EQUITY
------ ------ --------- ------ ---------- ------------ -------------
BALANCE, MAY 1, 2002 - 5,500,000 $550 $ 4,450 $ 11,234 $ 16,234
Effects of reverse acquisition 250 1 1,025,632 103 (80,919) (80,815)
Return and retirement of common stock
in connection with reverse (500,000) (50) 50
acquisition
Sale of Series B preferred stock sold
through private placement 455 455,000 455,000
Series B preferred stock issued as
payment of advances from
shareholder and accounts payable 64 64,000 64,000
Conversion of Series A preferred stock
to common stock (250) (1) 3,000,000 300 (299)
Imputed Series B preferred stock
dividend attributable to beneficial
conversion feature 173,000 (173,000)
Net loss (100,660) (100,660)
------ ------ --------- ------ ---------- ------------ -------------
BALANCE, JULY 31, 2002 519 $ - 9,025,632 $903 $615,282 $(262,426) $ 353,759
====== ====== ========= ====== ========== ============ =============
The accompanying notes are an integral part of these condensed financial
statements.
9
WPCS INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
WPCS International, Inc. and Subsidiary (collectively, the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC") for quarterly reports on Form 10-QSB and do not include
all of the information and footnote disclosures required by accounting
principles generally accepted in the United States of America. Accordingly, the
financial statements should be read in conjunction with our audited consolidated
financial statements and notes thereto for the fiscal year ended April 30, 2002
and the unaudited proforma information, included in the Company's report on Form
8-K originally filed on May 24, 2002 and amended 8-K/A dated August 6, 2002
previously filed with the SEC. The accompanying unaudited condensed consolidated
financial statements reflect all adjustments (consisting of normal recurring
accruals), which are, in the opinion of the management, considered necessary for
a fair presentation of financial position and results of operations for the
interim period. Operating results for the three-month period ended July 31, 2002
are not necessarily indicative of the results that may be expected for the
fiscal year ending April 30, 2003.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
WPCS International, Inc. is the successor-consolidated entity formed by the
merger, on May 17, 2002, of Phoenix Star Ventures, Inc. ("PSVI"), WPCS
Acquisition Corp., a newly formed, wholly owned subsidiary of PSVI
("Subsidiary") and WPCS Holdings Inc., a Delaware corporation ("WPCS").
On May 17, 2002, pursuant to the agreement and plan of merger, PSVI a publicly
held "shell company", became the legal acquirer of WPCS by issuing 5,500,000
shares of its common stock to the shareholders of WPCS in exchange for all of
the outstanding common shares of WPCS. The former shareholders of WPCS,
immediately after the business combination, owned the majority of the combined
companies. Accordingly, the business combination has been accounted for as a
reverse acquisition, whereby, for accounting purposes, WPCS is the accounting
acquirer and PSVI is the accounting acquiree. The unaudited condensed
consolidated financial statements of the Company include the accounts of PSVI
since its acquisition. The cost of the acquisition approximated the fair value
of the net assets of PSVI that were acquired, and, accordingly, the assets,
liabilities and the outstanding preferred stock of PSVI were initially recorded
at historical carrying values.
On May 24, 2002, as a condition to the plan and merger agreement, PSVI's
principal shareholder returned 500,000 shares of its common stock to the
Company, without compensation. Subsequently, these common shares were retired
and cancelled.
WPCS did not commence operations until November 15 2001 and, accordingly,
results of operations and cash flows for the three months ended July 31, 2001
have not been presented.
10
WPCS INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------------
Nature of business
The Company provides fixed wireless solutions, including engineering, deployment
and installation relating to voice-data-video transmission between two or more
points without the utilization of a landline infrastructure to businesses and
governmental institutions.
Principles of consolidation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly owned Subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and highly liquid investments with a
maturity of three months or less at the date of acquisition.
Revenue recognition
Revenue consists of sales of wireless solutions and its deployment. Equipment
sales are recognized when delivered and maintenance revenues are recognized when
services are provided.
Inventory
Inventory consists of parts and supplies and is stated using the weighted
average cost method.
Property and equipment
Property and equipment are recorded at cost less accumulated depreciation, which
is provided on the straight-line basis over the estimated useful lives of 5 to 7
years. Expenditures for maintenance and repairs are expensed as incurred.
11
WPCS INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------------
Uses 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 revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3 - NET LOSS PER COMMON SHARE
Loss per common share is computed pursuant to Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("EPS"). Basic income (loss) per share is computed as net income (loss)
available to common shareholders divided by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common stock issuable through stock based
compensation including stock options, restrictive stock awards, warrants and
other convertible securities. At July 31, 2002, the Company had 11,111 stock
options outstanding. Diluted EPS is not presented since the effect of the
assumed exercise of options and the assumed conversion of the Series B
convertible preferred stock would be antidilitive.
NOTE 4 - PREPAID CONSULTING SERVICES
In June 2002, the Company entered into a twelve month consulting agreement. Per
the agreement, the Company paid $175,000 in advance for public relation services
through June 2003. The Company recognizes consulting expenses as services are
performed. For the three months ended July 31, 2002, consulting expense was
$50,000.
In August 2002, the Company terminated the agreement and received $68,000 from
the consultant. Management expects to receive the remaining balance by July 31,
2003.
NOTE 5- DUE TO SHAREHOLDER
Due to shareholder is due on demand and is non-interest bearing.
12
WPCS INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - SHAREHOLDERS' EQUITY
Preferred Stock
Series B Convertible Preferred Stock
On May 15, 2002, the Board of Directors of the Company adopted and created a
series of preferred stock consisting of 1,000 shares designated as Series B
Convertible Preferred Stock ("Preferred Stock"). Each share of Preferred Stock
has a liquidation preference of $1,000 and does not accrue any dividends. The
Preferred Stock is convertible into the Company's common stock, at the option of
the holder, at any time after the 30th calendar day the Company receives payment
in full. Each share of preferred stock is convertible at a basis of $1,000 per
share at a conversion price equal to 75% of the average market price of the
common stock for ten days prior to the date of conversion. Among other
provisions, the number of shares issuable upon conversion may not be less than
1,000 shares or greater than 4,000 shares of common stock.
In addition, the Company may repurchase the outstanding Series B Convertible
Preferred Stock within one year following the date on which the Company received
payment in full for the Preferred Stock at a price of $1,200 per share.
Through July 31, 2002, the Company sold 455 shares of Preferred Stock through a
private placement and received proceeds of $455,000 and issued 64 shares to a
shareholder of the Company as payment for advances from shareholder and accounts
payable totaling $64,000.
Based on the conversion price of 75% of market value, the Company recorded a
beneficial conversion feature of $173,000 for the 519 Series B preferred shares
issued as an imputed preferred stock dividend.
Common Stock
On May 23, 2002, all of the 250 shares of Series A preferred stock, which had
been issued by PSVI prior to the reverse acquisition, were converted into
3,000,000 shares of the Company's common stock.
13
Item 6. Management's Discussion and Analysis
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto set forth in Item 1of this Quarterly
Report. In addition to historical information, this discussion and analysis
contains forward-looking statements that involve risks, uncertainties and
assumptions, which could cause actual results to differ materially from
Management's expectations. Factors that could cause differences include, but are
not limited to, expected market demand for the Company's products, fluctuations
in pricing for products distributed by the Company and products offered by
competitors, as well as general conditions of the telecommunications
marketplace.
Overview
WPCS International, Inc. focuses on the implementation requirements of fixed
wireless technology. Significant advances in wireless communications has created
fixed wireless high bandwidth solutions that are cost effective. Today, a
company can connect their data network and PBX system internally or between
locations by using a fixed wireless solution. Depending on the requirements,
fixed wireless solutions can be used from T1 to gigabit bandwidth rates and can
travel distances of over fifty miles.
We provide complete fixed wireless solutions including best of breed wireless
products, engineering services and deployment. We define fixed wireless
deployment as the internal and external design and installation of a fixed
wireless solution to support voice/data/video transmission between two or more
points without the utilization of landline infrastructure. We generate our
revenues from product sales and services. There are multiple products associated
with the deployment of a fixed wireless solution including radios, repeaters,
amplifiers, antennas, cabling and specialty components. There are also important
services such as spectrum analysis, site surveys, site design, tower
construction, mounting and alignment. The successful integration of all these
products and services is critical in achieving the desired results for the
customer. We offer the ability to integrate superior solutions from a multitude
of vendors across the vast majority of communication requirements.
We continue to seek to expand our business by introducing new products and
services for our customers. Starting August 2002, we began offering additional
bandwidth services from AT&T and Sprint. The addition of these services allows
us to provide complete bandwidth solutions from a wireless and landline
perspective to commercial business and government accounts worldwide.
We continue to experience the challenging trends related to the economic
slowdown in the telecommunications industry. However, we believe the growing
trend towards cost effective wireless networks as an alternative to high cost
landline services will continue to provide significant opportunities for us.
Significant Transactions and Events
On May 17, 2002, pursuant to the agreement and plan of merger, Phoenix Star
Ventures Inc. ("PSVI"), a publicly held corporation, acquired WPCS Holdings
Inc., a Delaware corporation ("WPCS") by issuing 5,500,000 shares of its common
stock to shareholders of WPCS in exchange of all the outstanding shares of WPCS.
Concurrently with the acquisition, PSVI, the parent company, changed its name to
WPCS International, Inc. The shareholders of WPCS, after the acquisition, owned
the majority of the combined company. Accordingly, the combination has been
accounted for as a reverse acquisition, whereby, for accounting purposes, WPCS
is the accounting acquirer and PSVI is the accounting acquiree.
14
Results of Operations
WPCS's ongoing operations are that of its subsidiary WPCS Incorporated.
WPCS started business in December 2001. PSVI, the company acquired by WPCS on
May 17, 2002, was a development stage company and therefore had no material
operations in 2001. For the purpose of this discussion, the results of operation
for the three months ended July 31, 2002 include the operations of WPCS for the
entire period and PSVI since May 17, 2002, as if the merger took place on May 1,
2002.
Operating Revenues
Net revenues include product and service revenues. Product revenue is
derived primarily from sales of parts and components initially sold either
separately or as part of a packaged fixed wireless installation. Revenues from
products and from services are generally recorded when (i) persuasive evidence
of an arrangement exists, (ii) delivery has occurred and customer acceptance
requirements have been met, (iii) the price is fixed or negotiated, and (iv) the
collection of payments is reasonably assured and we have no additional
obligations.
Our customer base is generally Fortune 2000 companies and governmental
institutions. Our principal revenue-generating customers are likely to vary on a
quarterly basis. We anticipate that our revenues will expand through internal
growth and acquisitions.
Net sales for the three months ended July 31, 2002 were $393,000. The
Company is pursuing additional sources of revenue to supplement its existing
business. The additional sources of revenue can arise from acquisitions or
internal growth. In general, the Company intends to make acquisitions or expand
into markets, which will leverage the Company's existing infrastructure. The
Company has no present agreements or understandings with respect to specific
acquisitions. There can be no assurance the Company will complete any such
acquisitions or the terms of such acquisitions if they are completed.
Cost of Sales
Cost of sales consists of component and material costs, and direct labor cost
payments to third party sub-contractors for its installation.
The Company's gross margin varies from job to job. For the three months ended
July 31, 2002, gross margin was 22.9% or $90,000. We expect that the margins
will increase as we increase our service business relative to other revenues.
Operating Expenses
Operating expenses are comprised of selling, general and administrative costs
incurred in direct support of the business operations of the Company. Operating
expenses for the three months ended July 31, 2002, were $190,607.
Selling expenses
Selling expenses include expenses incurred for travel and promotional
activities. For the three months ended July 31, 2002, selling expenses were
$5,275 or 1.3% of sales. We expect selling expenses to increase in the near
future as we start to market our products and services in expanded markets.
15
General and administrative expenses
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
strategic and business development, legal, human resources and administration.
For the three months ended July 31, 2002, general and administrative expenses
were $184,000 or 46.8% of sales. Included in the general and administrative
expenses is $56,000 paid to consultants for investor relations, $40,000 in legal
and accounting fees in connection with the merger. Salaries, commissions and
payroll taxes amounted to $64,000 and rent for our office facilities amounted to
$7,400. We expect general and administrative expenses to increase as we expand
our business.
Liquidity and capital resources
At July 31, 2002, we had total current assets of approximately $571,000.
This included $138,000 in cash, $297,000 in accounts receivable, $11,000 in
inventories and $125,000 in prepaid expenses paid to a consultant for investor
relation services. We had total current liabilities of $236,000, which included
$222,000 in accounts payable and accrued expenses.
We utilized $326,000 in cash from operating activities during the three
months ended July 31, 2002. This was comprised of $101,000 in loss generated for
the three months ended July 31, 2002, $206,000 increase in accounts receivables,
$117,500 increase in prepaid expenses, offset by a decrease in accounts payable
by $99,500.
Financing activities generated net inflow of $449,000 during the three
months ended July 31, 2002. This was comprised of $455,000 from proceeds of sale
of Series B Preferred Stock sold to investors in a private placement, $3,257 of
cash received from PSVI on reverse acquisition, offset by $10,000 in repayment
of notes payable and principal on capital lease obligations.
Our capital requirements depend on numerous factors, including market for
our products and services, the resources we devote to developing, marketing,
selling and supporting our products and services, the timing and extent of
establishing additional markets and other factors. We expect that our cash and
investment balances will be sufficient to meet our working capital and capital
expenditure needs for at least the next 12 months. After that, we may need to
raise additional funds for a number of uses. We may not be able to obtain
additional funds on acceptable terms, or at all. We expect to devote substantial
capital resources to search for, investigate and, potentially, acquire new
businesses, companies or technologies. The sale of additional equity or
convertible debt securities may result in additional dilution to our
shareholders.
Critical Accounting Policies
Financial Reporting Release No. 60, which was recently published by the
SEC, recommends that all companies include a discussion of critical accounting
policies used in the preparation of their financial statements. The Company's
significant accounting policies are summarized in Note 2 of its financial
statements. While all these significant accounting policies impact its financial
condition and results of operations, the Company views certain of these policies
as critical. Policies determined to be critical are those policies that have the
most significant impact on the Company's financial statements and require
management to use a greater degree of judgment and/or estimates. Actual results
may differ from those estimates.
16
The Company believes that given current facts and circumstances, it is
unlikely that applying any other reasonable judgments or estimate methodologies
would cause a material effect on the Company's consolidated results of
operations, financial position or liquidity for the periods presented in this
report.
The accounting policies identified as critical are as follows:
Revenue Recognition. The Company recognizes revenues in accordance with
accounting principles generally accepted in the United States of America as
outlined in SAB No. 101 which requires that four basic criteria be met before
revenue can be recognized: (1) persuasive evidence of an arrangement exists, (2)
product delivery, including customer acceptance, has occurred or services have
been rendered, (3) the price is fixed or determinable and (4) collectibility is
reasonably assured. The Company believes that its revenue recognition policy is
critical because revenue is a very significant component of its results of
operations. Decisions relative to criteria (4) regarding collectibility are
based upon management judgments and should conditions change in the future and
cause management to determine these criteria are not met, the Company's
recognized results may be affected.
Allowance for Doubtful Accounts. The Company performs ongoing credit evaluations
of its customers and adjusts credit limits based upon payment history and the
customer's current credit worthiness, as determined by a review of their current
credit information. The Company continuously monitors collections and payments
from customers and a provision for estimated credit losses is maintained based
upon its historical experience and any specific customer collection issues that
have been identified. At July 31, 2002, $38,000 of accounts receivable was
overdue. While the accounts receivable related to these customers may be late,
the Company does not believe the credit loss risk to be significant given the
consistent payment history by these customers. Accordingly, no allowance has
been recorded.
Recent Accounting Pronouncements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement eliminates the requirement under SFAS 4 to
aggregate and classify all gains and losses from extinguishments of debt as an
extraordinary item, net of related income tax effect. This statement also amends
SFAS 13 to require that certain lease modifications with economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. In addition, SFAS 145 requires reclassification of
gains and losses in all prior periods presented in comparative financial
statements related to debt extinguishments that do not meet the criteria for
extraordinary item in Accounting Principles Board Opinion ("APB") 30. The
statement is effective for fiscal years beginning after May 15, 2002 with early
adoption encouraged. The Company will adopt SFAS 145 effective May 1, 2003. The
Company is currently evaluating the requirements and impact of this statement on
our consolidated results of operations and financial position. We do not believe
that the adoption of SFAS 145 will have any material effect on our consolidated
financial statements.
On July 30, 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The statement requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the statement include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. The Company is currently evaluating the requirements and impact of
this statement on our consolidated results of operations and financial position.
17
Part II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
From time to time the Company is subject to litigation incidental to
its business. Such claims, if successful, could exceed applicable insurance
coverage. The Company is not currently a party to any material legal
proceedings.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
Item 5. OTHER INFORMATION.
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 99 Certification Pursuant to Sarbanes-Oxley
(b) Reports on Form 8-K.
Report on Form 8-K, dated June 7, 2002
Report on Form 8-K, dated June 12, 2002
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WPCS INTERNATIONAL INCORPORATED
Date: September 18, 2002 By: /s/ANDREW HIDALGO
Andrew Hidalgo
Chief Executive Officer,
Chief Financial
Officer and Director
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