UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended October 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 December 6, 2002
2
WPCS INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
I N D E X
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed consolidated balance sheets at October 31, 2002
(unaudited) and April 30, 2002 (audited) 4 - 5
Condensed consolidated statement of operations for the three
and six months ended October 31, 2002 (unaudited) 6
Condensed consolidated statement of cash flows for the six
months ended October 31, 2002 (unaudited) 7 - 8
Condensed consolidated statement of shareholders' equity for the
six months ended October 31, 2002 (unaudited) 9
Notes to condensed consolidated financial statements 10 - 13
ITEM 2. Management's Discussions and Analysis 14 - 18
ITEM 3. Controls and Procedures 19
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on 8-K 20
SIGNATURES 21
CERTIFICATIONS 22 - 24
3
WPCS INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, April 30,
ASSETS 2002 2002
-------------------- -----------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 78,606 $ 15,554
Accounts receivable, net of allowance for
doubtful accounts of $26,285 at October 31, 2002 130,966 91,183
Inventory 5,645 7,975
Prepaid consulting services 2,559
-------------------- -----------------
-
Total current assets 217,776 114,712
PROPERTY AND EQUIPMENT, Net 25,186 28,271
OTHER ASSETS, security deposits 2,242 2,242
-------------------- -----------------
Totals $ 245,204 $ 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)
October 31, April 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2002
--------- ---------
(UNAUDITED)
CURRENT LIABILITIES:
Accounts payable and accrued expenses .................................. $ 72,399 $ 95,119
Current maturities of capital lease obligations ........................ 2,183 2,077
Due to Shareholder ..................................................... - 20,743
--------- ---------
Total current liabilities ........................................ 74,582 117,939
Capital lease obligations, net of current maturities ....................... 5,783 6,902
Deferred income taxes ...................................................... 4,150 4,150
--------- ---------
Total Liabilities .............................................. 84,515 128,991
--------- ---------
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 October 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
Retained earnings (accumulated deficit) .................................. (455,496) 11,234
--------- ---------
Total shareholders' equity ...................................... 160,689 16,234
--------- ---------
Totals ......................................................... $ 245,204 $ 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.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Six Months
Ended Ended
October 31, October 31,
2002 2002
---- ----
SALES ................................. $ 213,359 $ 606,482
COST OF SALES ......................... 170,919 474,096
----------- -----------
GROSS PROFIT .......................... 42,440 132,386
----------- -----------
OPERATING EXPENSES:
Selling expenses .................. 1,743 7,017
General and administrative expenses 205,941 389,729
Provision for doubtful accounts .. 26,285 26,285
Depreciation and amortization 1,542 3,085
----------- -----------
Total ........................ 235,511 426,116
----------- -----------
NET LOSS .............................. (193,071) (293,730)
Imputed dividends accreted on
Convertible Series B Preferred stock -- (173,000)
----------- -----------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS ............... $ (193,071) $ (466,730)
=========== ===========
Basic net loss per common share ....... $ (0.02) $ (0.05)
=========== ===========
Basic weighted average number of
common shares outstanding ........... 9,025,632 8,689,620
=========== ===========
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 STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months
Ended
October 31,
2002
OPERATING ACTIVITIES:
Net loss ............................................................... $(293,730)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization ..................................... 3,085
Provision for doubtful accounts ................................... 26,285
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable ......................................... (66,068)
Inventory ................................................... 2,331
Prepaid expenses ............................................ (2,559)
Accounts payable and accrued expenses ....................... (42,792)
---------
NET CASH USED IN OPERATING ACTIVITIES ....................................... (373,448)
---------
FINANCING ACTIVITIES:
Cash received in reverse acquisition ................................... 3,257
Repayment of advances from shareholders ................................ (20,743)
Proceeds received from sale of Series B preferred stock ............... 455,000
Payments of capital lease obligations .................................. (1,014)
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................................... 436,500
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................................... 63,052
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD .................................................................. 15,554
---------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................... $ 78,606
=========
The accompanying notes are an integral part of these condensed financial
statements
7
WPCS INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
Six Months
Ended
October 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 SIX MONTHS ENDED OCTOBER 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 acquisition (500,000) (50) 50
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 ................................. -- -- -- -- (293,730) (293,730)
------ ------ ----------- --------- ---------- ------------ ----------
BALANCE, OCTOBER 31, 2002 ................ 519 $ -- 9,025,632 $ 903 $ 615,282 $ (455,496) $ 160,689
====== ====== =========== ========= ========== ============ ==========
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 ("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 periods. Operating results for the three and six-month periods ended
October 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, assets,
liabilities and the outstanding preferred stocks 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 for the three and six months ended October 31, 2001 and
cash flows for the six months ended October 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 six months or less at the date of acquisition.
Revenue recognition
Revenue consists of sales of wireless solutions and their 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)
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 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 October 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 antidilutive.
NOTE 4 - 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.
12
WPCS INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Through October 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.
NOTE 5 - SUBSEQUENT EVENTS
On November 13, 2002, the Company entered into an agreement and completed a
merger with Invisinet Acquisitions Inc., a wholly owned subsidiary of the
Company, and Invisinet, Inc., an unrelated Delaware corporation. Pursuant to the
terms of the Agreement and Plan of Merger, Invisinet Acquisitions, Inc. acquired
100% of the common stock of Invisinet, Inc., by issuing 1,000,000 shares of the
Company's common stock with a fair value of $1,750,000, based on the value of
the Company's common stock as of that date. Based on the net assets acquired of
Invisinet, Inc., the Company will recognize goodwill of approximately $1,600,000
(unaudited). Subsequently, Invisinet Acquisitions Inc. was merged into
Invisinet, Inc. with Invisinet, Inc. being the surviving company. Invisinet,
Inc. is in the same business as the Company, providing fixed wireless technology
solutions to its customers.
13
Item 2. 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
On November 13, 2002, the Company entered into an agreement and completed a
merger with Invisinet Acquisitions Inc., a wholly owned subsidiary of the
Company, and Invisinet, Inc., an unrelated Delaware corporation. Pursuant to the
terms of the Agreement and Plan of Merger, Invisinet Acquisitions, Inc. acquired
100% of the common stock of Invisinet, Inc., by issuing 1,000,000 shares of the
Company's common stock with a fair value of $1,750,000, based on the value of
the Company's common stock as of that date. Based on the net assets acquired of
Invisinet, Inc., the Company will recognize goodwill of approximately $1,600,000
(unaudited). Subsequently, Invisinet Acquisitions Inc. was merged into
Invisinet, Inc. with Invisinet, Inc. being the surviving company. Invisinet,
Inc. is in the same business as the Company, providing fixed wireless technology
solutions to its customers.
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 six months ended October 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 and six months ended October 31, 2002 were
approximately $213,000 and $606,000, respectively. 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
that regards, the Company, on November 13, 2002, acquired a business in the same
line of business as the Company by issuing its common stock. Management
believes, but cannot assure, that this acquisition will substantially increase
the revenues of the Company. In general, the Company intends to make additional
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 and six months ended October
31, 2002, gross margin was 19.89% and 21.83%, respectively. We expect that the
margins will increase as we increase our service business relative to other
revenues.
15
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 and six months ended October 31, 2002, were
$236,000 and $426,000, respectively.
Selling expenses
Selling expenses include expenses incurred for travel and promotional
activities. For the three and six months ended October 31, 2002, selling
expenses were $1,700 and $7,000, respectively. We expect selling expenses to
increase in the near future as we start to market our products and services in
expanded markets.
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 October 31, 2002, general and administrative
expenses were $206,000. Included in the general and administrative expenses is
$36,000 paid to consultants for investor relations and $65,000 in legal and
accounting fees. Salaries, commissions and payroll taxes amounted to $72,000 and
rent for our office facilities amounted to $8,000. Other general and
administrative expenses amounted to $25,000.
For the six months ended October 31, 2002, general and administrative
expenses were $390,000. Included in the general and administrative expenses is
$92,000 paid to consultants for investor relations, $105,000 in legal and
accounting fees in connection with the merger and other compliance issues.
Salaries, commissions and payroll taxes amounted to $142,000 and rent for our
office facilities amounted to $15,000. For the six months ended October 31,
2002, other general and administrative expenses amounted to $36,000. We expect
general and administrative expenses to increase as we expand our business.
Liquidity and capital resources
At October 31, 2002, we had working capital of $143,000, which
consisted of current assets of approximately $218,000 and current liabilities of
$75,000. Current assets included $79,000 in cash, $131,000 in accounts
receivable, $6,000 in inventories and $2,000 in prepaid expenses. Current
liabilities included $73,000 in accounts payable and accrued expenses and $2,000
in current lease obligations.
We utilized $373,000 in cash from operating activities during the six
months ended October 31, 2002. This was mainly comprised of a $294,000 loss
generated for the six months ended October 31, 2002, a $66,000 increase in
accounts receivables and a $43,000 decrease in accounts payable and accrued
expenses.
The Company's financing activities generated cash of $437,000 during
the six months ended October 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
$22,000 in repayment of notes payable and principal on capital lease
obligations.
16
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. We acquired
Invisinet, Inc. without using cash, by issuing the Company's common stock. 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.
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 October 31, 2002, $30,000 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. However, the Company has recorded
an allowance of $26,285 as of October 31, 2002.
17
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 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.
18
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosures. The Company maintains disclosure
controls and procedures
designed to provide reasonable assurance that information
required to be disclosed in the reports filed with the SEC is
recorded, processed, summarized and reported within the time
periods specified in the rules of the SEC. Within 90 days
prior to the filing of this Quarterly Report on Form 10-QSB,
an evaluation, was completed under the supervision and
participation of management, including the Chief Executive
Officer and Chief Financial Officer, of the design and
operation of this disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in
timely alerting them to material information relating to the
company (including the Company's consolidated subsidiaries)
required to be included in the periodic SEC filings.
(b) Changes in internal controls. There were no significant changes
in internal controls or other factors that could significantly
affect the Company's internal controls subsequent to the date
of our evaluation.
19
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.
99.1 Certification of Chief Financial Officer, Chief Executive
Officer
(b) Reports on Form 8-K.
Report on Form 8-K/A, dated August 6, 2002
Report on Form 8-K, dated August 21, 2002
Report on Form 8-K/A, dated September 4, 2002
Report on Form 8-K/A dated November 27, 2002
CERTIFICATIONS
I, Andrew Hidalgo, certify that:
1) I have reviewed this quarterly report on Form 10-QSB of WPCS International
Incorporated ( "the registrant);
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
23
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 12, 2002 /s/ Andrew Hidalgo
----------------------------------
Andrew Hidalgo
Chief Executive Officer/
Chief Financial Officer
Director
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: December 12, 2002 By: /s/ANDREW HIDALGO
------------------
Andrew Hidalgo
Chief Executive Officer,
Chief Financial
Officer and Director