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 July 31, 2003
-----------------
[ ] 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
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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)
(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: 15,691,290 shares
issued and outstanding as of September 8, 2003.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
I N D E X
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed consolidated balance sheets at July 31, 2003
(unaudited) and April 30, 2003 4 - 5
Condensed consolidated statements of operations for the three
months ended July 31, 2003 and 2002 (unaudited) 6
Condensed consolidated statement of shareholders'
equity for the three months ended July
31, 2003 (unaudited) 7
Condensed consolidated statements of cash flows for the three
months ended July 31, 2003 and 2002 (unaudited) 8 - 9
Notes to condensed consolidated financial statements (unaudited) 10 - 16
ITEM 2. Management's Discussion and Analysis 17 - 24
ITEM 3. Controls and Procedures 25
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on 8-K 26
SIGNATURES 27
CERTIFICATIONS 28 - 31
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, April 30,
ASSETS 2003 2003
-------------------- -----------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 929,084 $ 167,547
Accounts receivable, net of allowance of $10,679 and
$11,779 at July 31, 2003 and April 30, 2003, respectively 3,070,588 2,397,236
Costs and estimated earnings in excess of billings on
uncompleted contracts 946,658 408,194
Inventory 90,352 77,775
Prepaid expenses 196,473 143,113
Deferred tax assets 70,000 70,000
-------------------- -----------------
Total current assets 5,303,155 3,263,865
PROPERTY AND EQUIPMENT, NET 612,470 647,951
CUSTOMER LISTS, NET 472,000 499,000
GOODWILL 5,538,882 5,388,882
OTHER ASSETS 22,771 21,528
-------------------- -----------------
Totals $ 11,949,278 $ 9,821,226
==================== =================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
July 31, April 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2003 2003
----------------- -----------------
(UNAUDITED)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,145,131 $ 1,278,443
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,407,155 215,819
Current maturities of capital lease obligations 2,294 2,294
Current maturities of equipment loans payable 10,327 21,268
Note payable, officer 100,000 100,000
Due to shareholders 208,207 58,207
Income taxes payable 143,000 23,700
Deferred income taxes, current portion 129,000 129,000
----------------- -----------------
Total current liabilities 3,145,114 1,828,731
Capital lease obligations, net of current maturities 4,056 4,608
Deferred income taxes, net of current portion 434,000 527,000
----------------- -----------------
Total Liabilities 3,583,170 2,360,339
----------------- -----------------
COMMITMENTS
SHAREHOLDERS' EQUITY:
Preferred Stock - $0.0001 par value, 5,000,000 shares authorized
Series C Convertible Preferred Stock, 1,000 shares designated, 1,000 shares
issued and outstanding at July 31, 2003,
liquidation preference $1,000,000 - -
Common Stock - $0.0001 par value,
30,000,000 shares authorized, 14,856,604 and
13,078,844 shares issued and outstanding at July 31, 2003 and April
30, 2003, respectively 1,486 1,308
Additional paid- in capital 9,030,426 8,002,639
Accumulated deficit (665,804) (543,060)
----------------- -----------------
Total shareholders' equity 8,366,108 7,460,887
----------------- -----------------
Totals $ 11,949,278 $ 9,821,226
================= =================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
July 31,
2003 2002
----------------- -----------------
SALES $ 3,096,483 $ 393,124
COST OF SALES 2,029,246 303,177
----------------- -----------------
GROSS PROFIT 1,067,237 89,947
----------------- -----------------
OPERATING EXPENSES:
Selling expenses 16,236 5,275
General and administrative expenses, including
$129,965 of non-cash compensation expense
for the three months ended July 31, 2003 1,069,063 183,789
Depreciation and amortization 63,682 1,543
----------------- -----------------
Total 1,148,981 190,607
----------------- -----------------
LOSS BEFORE PROVISION FOR INCOME TAXES (81,744) (100,660)
Provision for income taxes (41,000) -
----------------- -----------------
NET LOSS (122,744) (100,660)
Imputed dividends accreted on
Convertible Series B Preferred stock - (173,000)
----------------- -----------------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ (122,744) $ (273,660)
================= =================
Basic net loss per common share $ (0.01) $ (0.03)
================= =================
Basic weighted average number of
common shares outstanding 13,252,755 8,400,632
================= =================
The accompanying notes are an integral part of these condensed
consolidated financial statements
6
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JULY 31, 2003
(UNAUDITED)
ADDITIONAL ACCUMULATED TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN DEFICIT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EQUITY
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE MAY 1, 2003 1,000 $ - 13,078,844 $ 1,308 $8,002,639 $ (543,060) $7,460,887
Issuance of common stock through
private placement - - 1,777,760 $ 178 897,822 - 898,000
Fair value of stock options granted to
nonemployees - - - - 129,965 - 129,965
NET LOSS - - - - - (122,744) (122,744)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JULY 31, 2003 1,000 $ - 14,856,604 $ 1,486 $9,030,426 $ (665,804) $8,366,108
=========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
July 31,
2003 2002
-------------- --------------
OPERATING ACTIVITIES:
Net loss $ (122,744) $ (100,660)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 63,682 1,543
Provision for doubtful accounts (1,100) -
Fair value of stock options granted to non-employees 129,965 -
Deferred income taxes (93,000) -
Changes in operating assets and liabilities:
Accounts receivable (672,252) (205,541)
Costs and estimated earnings in excess of billings on
uncompleted contracts (538,464) -
Inventory (12,577) (3,266)
Prepaid expenses (53,360) (117,500)
Other assets (1,243) -
Accounts payable and accrued expenses (133,312) 99,499
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,191,336 -
Income taxes payable 119,300 -
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (123,769) (325,925)
-------------- --------------
INVESTING ACTIVITIES:
Acquisition of property and equipment (1,201) -
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (1,201) -
-------------- --------------
FINANCING ACTIVITIES:
Cash received in reverse acquisition - 3,257
Proceeds from sale of preferred stock - 455,000
Proceeds from issuance of common stock 898,000 -
Repayment of notes payable-bank - (9,115)
Repayment of equipment loans payable (10,941) -
Payments of capital lease obligations (552) (500)
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 886,507 448,642
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 761,537 122,717
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 167,547 15,554
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 929,084 $ 138,271
============== ==============
The accompanying notes are an integral part of these condensed
consolidated financial statements
8
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-continued
(UNAUDITED)
Three Months Ended
July 31,
2003 2002
---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 1,778 $ 220
========== ==========
Income taxes $ 22,077 $ 190
========== ==========
SCHEDULE OF NON-CASH INVESTING AND 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
========== ==========
Earn-out consideration unpaid relating to an acquisition $ 150,000 $ -
========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
9
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements 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 unaudited
condensed financial statements should be read in conjunction with our audited
consolidated financial statements and notes thereto for the fiscal year ended
April 30, 2003. 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, results of operations, and cash flows for
the interim periods. Operating results for the three month period ended July 31,
2003 are not necessarily indicative of the results that may be expected for the
fiscal year ending April 30, 2004.
The accompanying unaudited condensed consolidated financial statements include
the accounts of WPCS International Incorporated ("WPCS") and its wholly owned
subsidiaries, WPCS Acquisition Corp. (which changed its name to WPCS
Incorporated) ("Subsidiary"), Invisinet Inc. ("Invisinet") from November 13,
2002 (date of acquisition) and Walker Comm Inc. ("Walker") from December 30,
2002 (date of acquisition), collectively the "Company". For the three months
ended July 31, 2002, the statements of operations, shareholders' equity and cash
flows are that of WPCS Holdings, Inc. ("Holdings"), the accounting acquirer of
the business of Phoenix Star Ventures, Inc. ("PSVI") as explained below.
The Company is a project engineering company that focuses on the implementation
requirements of specialty communication systems, wireless fidelity (WiFi)
deployment and fixed wireless deployment. It provides complete wireless
solutions including best of breed wireless products, engineering services and
deployment. The Company defines 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. The Company generates its 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.
WPCS is the successor-consolidated entity formed by the merger, on May 17, 2002,
of PSVI, a newly formed, wholly owned subsidiary of PSVI and Holdings, a
Delaware corporation.
On May 17, 2002, PSVI a publicly held "shell company", became the legal acquirer
of Holdings by issuing 5,500,000 shares of its common stock to the shareholders
of Holdings in exchange for all of the outstanding common shares of Holdings.
The former shareholders of Holdings, 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, Holdings is the accounting acquirer and PSVI is the
accounting acquiree. The 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.
10
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION-(Continued)
On May 24, 2002, 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.
On November 13, 2002, the Company acquired all of the outstanding shares of
Invisinet from its shareholders in exchange for an aggregate of 1,000,000 newly
issued shares of the Company's common stock. An additional 150,000 shares of the
Company's common stock were to be issued to a shareholder, provided Invisinet
achieved certain financial targets over a two year period beginning on the first
anniversary date of the merger. On May 27, 2003, the Company and the shareholder
mutually agreed to cancel the issuance of bonus shares and in exchange, issued
options to purchase 300,000 shares of the Company's common stock
On December 30, 2002, the Company acquired all of the outstanding shares of
Walker in exchange for an aggregate of 2,486,000 newly issued shares of the
Company's common stock and $500,000 cash consideration. An additional $500,000
is payable contingent upon Walker achieving certain net profits, to be paid in
quarterly distributions equal to 75% of net income, which would increase the
purchase price.
NOTE 2 - SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES
A summary of selected accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
Goodwill
Effective May 1, 2002, the Company adopted Statement of Financial Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets. In accordance with the
guidelines of this accounting standard, goodwill and indefinite-lived intangible
assets are no longer amortized but are assessed for impairment on at least an
annual basis. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment. SFAS No. 142 requires
that goodwill be tested for impairment upon adoption and at least annually
thereafter, utilizing a two-step methodology. The initial step requires the
Company to determine the fair value of the business acquired (reporting unit)and
compare it to the carrying value, including goodwill, of such business
(reporting unit). If the fair value exceeds the carrying value, no impairment
loss would be recognized. However, if the carrying value of the reporting unit
exceeds its fair value, the goodwill of the unit may be impaired. The amount, if
any, of the impairment is then measured in the second step.
The Company determined the fair value of the businesses acquired for purposes of
this test primarily by using a discounted cash flow valuation technique.
Significant estimates used in the valuation include estimates of future cash
flows, both future short-term and long- term growth rates, and estimated cost of
capital for purposes of arriving at a discount factor. On an ongoing basis, the
Company expects to perform its annual impairment test during the fourth quarter
absent any interim impairment indicators.
11
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue recognition
Wireless sales
Revenue consists of the sale of wireless products and services associated with
their deployment. Product sales are recognized when installed and service
revenues are recognized when services are provided.
Contracts
The Company records profits on contracts on a percentage-of-completion basis on
the cost to cost method. Contracts in process are valued at cost plus accrued
profits less earned revenues and progress payments on uncompleted contracts.
Contracts are generally considered substantially complete when engineering is
completed and/or site construction is completed. The Company includes in
operations pass-through revenue and costs on cost-plus contracts, which are
customer-reimbursable materials, equipment and subcontractor costs, when the
Company determines that it is responsible for the engineering specification,
procurement and management of such cost components on behalf of the customer.
The Company has numerous contracts that are in various stages of completion.
Such contracts require estimates to determine the appropriate cost and revenue
recognition. The Company has a history of making reasonably dependable estimates
of the extent of progress towards completion, contract revenues and contract
costs. However, 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
elapsed time from award of a contract to completion of performance may be up to
two years.
Earnings (Loss) Per Share
Earnings (Loss) per common share is computed pursuant to SFAS 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 options,
restrictive stock awards, warrants and other convertible securities. At July 31,
2003, the Company had 1,000 shares of Series C Convertible Preferred Stock with
potential conversion into 1,786,000 shares of the Company's common stock, and
2,638,000 stock options grants outstanding. Diluted EPS is not presented since
the effect of the assumed exercise of options and the assumed conversion of the
Series C convertible preferred stock would be antidilitive.
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. The most significant estimates relate to the calculation of percentage
of completion on uncompleted contracts, allowance for doubtful accounts,
valuation of inventory and life of customer lists. Actual results could differ
from those estimates.
12
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the
following at July 31, 2003:
Costs incurred on uncompleted contracts $ 5,625,623
Estimated contract profit 1,644,097
---------------
7,269,720
Less: billings to date 7,730,217
---------------
$ (460,497)
===============
Costs and estimated earnings in excess of billings $ 946,658
Billings in excess of costs and estimated earnings
on uncompleted contracts (1,407,155)
---------------
$ (460,497)
===============
NOTE 4 - RELATED PARTY TRANSACTIONS
In connection with the acquisition of Walker, an additional $500,000 is payable
to the Walker shareholders, provided Walker achieves certain net profits, to be
paid in quarterly distributions equal to 75% of net income. For the three months
ended July 31, 2003, an additional $150,000 was payable to the Walker
shareholders against this earn-out provision, accordingly, the goodwill was
increased by $150,000. At July 31, 2003, the total payable to the Walker
shareholders under this earn-out provision was $208,207.
In connection with the acquisition of Walker, the Company assumed a ten-year
lease with trusts, of which, certain officers of the Company are the trustees,
for a building and land located in Fairfield, California, which is occupied by
its Walker subsidiary. For the three months ended July 31, 2003, $14,000 was
paid as rent for this lease.
NOTE 5 - STOCK OPTION PLAN
The Company established a nonqualified stock option plan pursuant to which
options to acquire a maximum of 5,000,000 shares of the Company's common stock
were reserved for grant (the "2002 Plan"). Under the terms of the 2002 Plan, the
options, which expire five years after grant, are exercisable at prices equal to
the fair market value of the stock at the date of the grant and become
exercisable in accordance with terms established at the time of the grant. At
July 31, 2003, there were 2,362,000 shares available for grant under the 2002
Plan. No options were granted as of July 31, 2002.
The Company applies the intrinsic value method in accounting for its stock-based
compensation plan pursuant to the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, and, accordingly, when the exercise price of an employee stock
option granted by the Company is equal to or greater than the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.
13
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - STOCK OPTION PLAN ( Continued)
The Company has elected the disclosure only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation- Transition and Disclosure, an amendment to of FASB Statement 123".
Had the Company measured compensation under the fair value based method for
stock options granted, the Company's net loss attributable to common
shareholders and net loss per share attributable to common shareholders for the
three months ended July 31, 2003 would have been as follows:
Net loss attributable to common shareholders
As reported $ (122,744)
Pro forma $ (192,990)
Net loss per share attributable to common shareholders
As reported $ (0.01)
Pro forma $ (0.01)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes Option pricing model with the following assumptions for the three
months ended July 31, 2003: Risk-free interest rate of 2%, dividend yield of 0%,
expected life of 5 years and volatility of 71.6%.
NOTE 6 - SHAREHOLDERS' EQUITY
On June 25, 2003, (and amended on July 24, 2003), the Company offered in a
private placement, up to 100 units (the Units) for sale to accredited investors
at a price of $25,000 per Unit (the Offering). The Offering was on a "best
efforts" basis of a minimum offering of $1,000,000 and a maximum offering of
$2,500,000. Each Unit consists of (i) 44,444 shares of the Company's common
stock, and (ii) warrants to purchase 44,444 shares of common stock, exercisable
for a period of three years at an exercise price of $0.90 per share (the
Warrants). The Warrants may be redeemed in whole or in part at the option of the
Company, if the closing price of the Company's common stock is at least $1.25
per share on average for 10 consecutive trading days, ending not earlier than 30
days before the Warrants are called for redemption. In connection with the
offering, the placement agent was issued warrants to purchase 665,000 shares of
the Company's common stock, exercisable for a period of three years, at an
exercise price of $0.75 per share. Through July 31, 2003, the Company sold 40
Units and received proceeds of $898,000, net of placement agents commission from
the Offering and issued 1,777,760 shares.
On May 1, 2003 and May 27, 2003, the Company granted options to purchase
1,350,000 shares of its common stock to certain consultants. The options have
exercise prices ranging from $0.45 to $1.50. Of this, 50,000 options expire on
May 1, 2005 and the remaining 1,300,000 options expire on May 27, 2004. The
Company has valued these options and recorded $129,965 of expense for the three
months ended July 31, 2003.
14
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - SEGMENT REPORTING
The Company's reportable segments are determined based upon the nature of the
products and services, the external customers and customer industries and the
sales and distribution methods used to market the products. The Company has two
reportable segments: WPCS and Walker. WPCS includes WPCS Incorporated and
Invisinet, which provides wireless solutions. Walker is in the business of
structured cabling. The Company evaluates performance based upon profit or loss
from operations. Segment reporting commenced after the Company acquired Walker
in December 2002. Prior to that date, the Company operated as only one segment.
Segment results for the three months ending July 31, 2003 are as follows:
CORPORATE WPCS WALKER Total
Sales $ - $ 620,589 $ 2,475,894 $ 3,096,483
Net (loss) income before income taxes $ (215,890) $ (14,401) 148,547 (81,744)
Goodwill $ 1,627,044 $ 3,911,838 $ 5,538,882
Total assets $ 955,898 $ 3,694,575 $ 7,298,805 $ 11,949,278
NOTE 10 - SUBSEQUENT EVENTS
On August 13, 2003, all 1,000 Series C Preferred shares were converted into
1,786,000 shares of the Company's common stock.
On August 22, 2003, the Company entered into an agreement and completed a merger
with Clayborn Contracting Group, Inc, a California corporation ("Clayborn"). The
Company acquired all of the issued and outstanding shares of Clayborn in
exchange for $900,000 cash consideration and 826,446 newly issued shares of the
Company's common stock with a fair value of approximately $868,000 based on the
average value of the Company's common stock as of a few days before and after
the merger terms were agreed to and announced. An additional $1,100,000 is
payable by the delivery to the Clayborn shareholders of 50% of the post tax
profits of Clayborn, payable in quarterly distributions, which would increase
the purchase price. Based on the historical net assets acquired from Clayborn of
approximately $1,007,000, the Company preliminarily expects to recognize
goodwill of approximately $760,000. Upon completion of a formal purchase price
allocation there may be a decrease in the amount assigned to goodwill and a
corresponding increase in tangible or intangible assets. The acquisition of
Clayborn will provide the Company additional wireless opportunities, expansion
of the current customer base, and access to additional project engineers.
15
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - SUBSEQUENT EVENTS( Continued)
Through September 5, 2003, the Company sold the remaining 60 Units in connection
with the Offering, received additional proceeds of $1,347,500, net of placement
agents commission from the Offering and issued 2,666,640 shares of its common
stock.
16
Item 2. Management's Discussion and Analysis
The following discussion should be read in conjunction with the unaudited
condensed 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 Incorporated is a project engineering company that focuses on
the implementation requirements of specialty communication systems, wireless
fidelity (WiFi) deployment and fixed wireless deployment. WPCS offers the
ability to integrate superior solutions across a vast majority of communication
requirements. The Company defines 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. The Company generates its 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.
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 ("Holdings") by issuing 5,500,000 shares of its
common stock to shareholders of Holdings in exchange of all the outstanding
shares of Holdings. The shareholders of Holdings, 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,
Holdings is the accounting acquirer and PSVI is the accounting acquiree.
Concurrently with the acquisition, PSVI, the parent company, changed its name to
WPCS International Incorporated ("WPCS" or the Company).
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. ("Invisinet"), 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, by
issuing 1,000,000 shares of the Company's common stock with a fair value of
$1,750,000, based on the average value of the Company's common stock as of a few
days before and after the merger was announced. Based on the net assets acquired
of Invisinet, the Company recognized goodwill of approximately $1,627,000.
Subsequently, Invisinet Acquisitions Inc. was merged into Invisinet with
Invisinet being the surviving company. Invisinet is in the same business as the
Company, providing fixed wireless technology solutions to its customers.
17
On December 30, 2002, the Company through its wholly owned subsidiary Walker
Comm Merger Corp. ("Subsidiary") acquired all of the outstanding common stock of
Walker Comm, Inc. ("Walker"). The aggregate consideration paid by the Company
for the entire equity interest in Walker was approximately $5,113,000. As a
result of and at the effective time of the merger, all of the issued and
outstanding shares of common stock, par value $1.00 per share, of Walker were
exchanged for aggregate merger consideration consisting of $500,000 in cash and
the common stock of the Company with a value of approximately $4,574,000, or
2,486,000 shares valued at $1.84 per share based on the average value of the
Company's common stock as of a few days before and after the merger was
announced. Based on the net assets acquired of Walker, the Company recognized
goodwill of approximately $3,762,000. Subsequently on that date, the Subsidiary
was merged with and into Walker, with Walker being the surviving corporation.
Walker then became a wholly owned subsidiary of WPCS.
Results of Operations
WPCS started its operations in December of 2001. The Company did not
record any significant sales and operations for the three months ended July 31,
2002. Therefore, for the purpose of discussion of results of operations, limited
comparison is made to operations for those periods. The Company has two
reportable segments, Walker and WPCS. WPCS includes WPCS Incorporated and
Invisinet. Walker is a full service contractor specializing in the engineering
and installation of fiber optics, voice and data cabling, audio/visual systems,
and networking. WPCS specializes in WiFi deployment for indoor wireless
connectivity, mobile wireless connectivity and fixed wireless deployment.
Results for the Walker and WPCS segments are discussed as follows.
THREE MONTHS ENDED JULY 31, 2003 AND JULY 31, 2002
Sales
Net sales for the three months ended July 31, 2003 were approximately
$3,096,000, as compared to $393,000 in the three months ended July 31, 2002. The
increase in sales during the quarter ended July 31, 2003, compared to the same
period in 2002 is a result of the acquisitions of Invisinet and Walker, which
accounted for $3,049,000 of the total sales for the quarter.
Total sales from the Walker segment for the three months ended July
31, 2003 was approximately $2,476,000, or approximately 80% of total sales.
WPCS segment sales for the three months ended July 31, 2003 was approximately
$620,000 or 20% of total sales for the quarter.
Gross Profits
In the case of the WPCS segment, cost of sales consists of component
and material costs and direct labor cost payments to third party sub-contractors
for its installation. For the Walker segment, cost of sales consists of direct
costs on contract, including materials, labor, and other overhead costs. The
Company's gross profit margin varies from job to job. For the three months ended
July 31, 2003, the Company's gross profits were approximately $1,067,000,
reflecting a gross profit margin of 34.5%. For the three months ended July 31,
2002, gross profit was approximately $89,000, resulting in a gross profit margin
was 22.9%. The increase in total Company gross profit margin is due to the
increase in project service business relative to the product revenues, as a
result of the acquisitions of Invisinet and Walker.
The Walker segment gross profit for the three months ended July 31,
2003 was approximately $882,000, reflecting a gross profit margin of 35.6%. WPCS
segment gross profit for the three months ended July 31, 2003 was approximately
$185,000, resulting in a gross profit margin of 29.8%.
18
Selling expenses
Selling expenses include expenses incurred for marketing and
promotional activities. For the three months ended July 31, 2003, and 2002,
total selling expenses were $16,000 and $5,000, 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
For the three months ended July 31, 2003, total general and
administrative expenses were $1,069,000, or 34.5% of total sales. Included in
general and administrative expenses are $354,000 for salaries, commissions, and
payroll taxes and $197,000 in professional fees. Walker employs union employees
for whom it paid $227,000 in union benefits. Insurance costs were $129,000 and
rent for office facilities was $48,000. Other general and administrative
expenses totaled $114,000.
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 are $64,000 for salaries, commissions and payroll taxes
and $96,000 in professional fees. Rent for our office facilities amounted to
$8,000. Other general and administrative expenses totaled $16,000.
Net loss
We incurred a net loss of approximately $123,000 for the three months
ended July 31, 2003. The net loss for the quarter ended July 31, 2003 included a
non-cash charge of approximately $130,000 for the excess of fair value of
stock options granted to certain consultants over their exercise price, to
purchase 1,350,000 shares of the Company's common stock. In accordance with SFAS
No. 123, stock options granted to non-employees are required to be expensed
based on the fair value of the equity instruments or fair value of the
consideration received. The net loss also included income tax expense of $41,000
to provide for state income taxes and certain book-to-tax income permanent
differences.
We incurred a net loss attributable to common shareholders of
approximately $274,000 for the three months ended July 31, 2002, which included
a non-cash charge of $173,000 for imputed dividends on preferred stock.
Liquidity and capital resources
At July 31, 2003, we had working capital of $2,158,000, which consisted
of current assets of approximately $5,303,000 and current liabilities of
$3,145,000. Current assets included $929,000 in cash, $4,017,000 in accounts
receivable and costs and estimated earnings in excess of billings on uncompleted
contracts, $90,000 in inventories, $197,000 in prepaid expenses, and $70,000 in
deferred tax assets. Current liabilities included $2,552,000 in accounts
payable, accrued expenses and billings in excess of costs and estimated earnings
on uncompleted contracts, $100,000 payable to an officer of the Company,
$208,000 payable to shareholders of the Company, $143,000 income taxes payable,
$129,000 in current portion of deferred income taxes, and $13,000 in other
current liabilities.
We utilized $124,000 in cash from operating activities during the three
months ended July 31, 2003. This was mainly comprised of a $123,000 net loss for
the quarter, offset by $100,000 in net non-cash charges, a $672,000 net increase
in accounts receivable, $538,000 increase in costs and estimated earnings in
excess of billings on uncompleted contracts, $133,000 decrease in accounts
payable and accrued expenses, $1,191,000 increase in billings in excess of costs
and estimated earnings on uncompleted contracts, $119,000 increase in income
taxes payable and a $67,000 net increase in other current assets and
liabilities.
19
The Company's financing activities generated cash of $887,000 during
the three months ended July 31, 2003. This was comprised primarily of net
proceeds of $898,000 received from the sale of the Company's common stock in a
private placement. On June 25, 2003, (and amended on July 24, 2003), the Company
offered in a private placement memorandum, up to 100 units (the Units) for sale
to accredited investors at a price of $25,000 per Unit (the Offering). The
Offering was on a "best efforts" basis of a minimum offering of $1,000,000 and a
maximum offering of $2,500,000. Each Unit consists of (i) 44,444 shares of the
Company's common stock, and (ii) warrants to purchase 44,444 shares of common
stock, exercisable for a period of three years at an exercise price of $0.90 per
share (the Warrants). The Warrants may be redeemed in whole or in part at the
option of the Company, if the closing price of the Company's common stock is at
least $1.25 per share on average for 10 consecutive trading days, ending not
earlier than 30 days before the Warrants are called for redemption. Through
September 5, 2003, the Company sold the remaining 60 Units in connection with
the Offering, and received additional proceeds of $1,347,500, net of placement
agent's commission from the Offering. In connection with the offering, the
placement agent was issued warrants to purchases 665,000 shares of the Company's
common stock at an exercise price of $0.75 per share.
On August 22, 2003, the Company entered into an agreement
and completed a merger with Clayborn Contracting Group, Inc., a California
corporation ("Clayborn"). The Company acquired all of the issued and outstanding
shares of Clayborn in exchange for $900,000 cash consideration and 826,446
newly issued shares of the Company's common stock with a fair value of
approximately $868,000 based on the average value of the Company's common stock
as of a few days before and after the merger terms were agreed to and announced.
An additional $1,100,000 is payable by the delivery to the Clayborn shareholders
of 50% of the post tax profits of Clayborn, payable in quarterly distributions,
which would increase the purchase price. Based on the historical net assets
acquired from Clayborn of approximately $1,007,000, the Company preliminarily
expects to recognize goodwill of approximately $760,000. Upon completion of a
formal purchase price allocation there may be a decrease in the amount assigned
to goodwill and a corresponding increase in tangible or intangible assets. The
acquisition of Clayborn will provide the Company additional wireless
opportunities, expansion of the current customer base, and access to additional
project engineers.
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 and Walker without using much 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.
20
Critical Accounting Policies
Financial Reporting Release No. 60, published by the SEC, recommends
that all companies include a discussion of critical accounting policies used in
the preparation of their 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 consolidated financial statements and require management to use a
greater degree of judgment and 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:
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. The most significant estimates relate to estimation of
percentage of completion on uncompleted contracts, valuation of inventory,
allowance for doubtful accounts and estimated life of customer lists. Actual
results could differ from those estimates.
Goodwill and other Long-lived Assets
We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that their carrying value may not be recoverable from the
estimated future cash flows expected to result from their use and eventual
disposition. Our long-lived assets subject to this evaluation include property
and equipment and amortizable intangible assets. We assess the impairment of
goodwill annually in our fourth fiscal quarter and whenever events or changes in
circumstances indicate that it is more likely than not that an impairment loss
has been incurred. Intangible assets other than goodwill are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value may not be fully recoverable. We are required to make judgments
and assumptions in identifying those events or changes in circumstances that may
trigger impairment.
Our impairment review is based on comparing the fair value to the
carrying value of the reporting units with goodwill. The fair value of a
reporting unit is measured at the business unit level using a discounted cash
flow approach that incorporates our estimates of future revenues and costs for
those business units. Reporting units with goodwill include our Invisinet
business unit, which are operating segments within our fixed wireless reportable
segment, and our Walker Comm structured cabling reporting unit, which is a
reportable segment. Our estimates are consistent with the plans and estimates
that we are using to manage the underlying businesses. If we fail to deliver
products and services for these business units, or market conditions for these
businesses fail to improve, our revenue and cost forecasts may not be achieved
and we may incur charges for goodwill impairment, which could be significant and
could have a material adverse effect on our net equity and results of
operations.
21
Revenue recognition
Wireless sales
Revenue consists of the sale of wireless products and services
associated with their deployment. Product sales are recognized when installed
and service revenues are recognized when services are provided.
Contracts
The Company records profits on contracts on a percentage-of-completion
basis on the cost to cost method. Contracts in process are valued at cost plus
accrued profits less earned revenues and progress payments on uncompleted
contracts. Contracts are generally considered substantially complete when
engineering is completed and/or site construction is completed. The Company
includes pass-through revenue and costs on cost-plus contracts, which are
customer-reimbursable materials, equipment and subcontractor costs, when the
Company determines that it is responsible for the engineering specification,
procurement and management of such cost components on behalf of the customer.
The Company has numerous contracts that are in various stages of
completion. Such contracts require estimates to determine the appropriate cost
and revenue recognition. The Company has a history of making reasonably
dependable estimates of the extent of progress towards completion, contract
revenues and contract costs. However, 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 elapsed time from award of a contract to completion of
performance may be up to two years.
Recently issued accounting pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective
for years beginning after June 15, 2002. SFAS No. 143 addresses legal
obligations associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development or normal operation of a
long-lived asset. The standard requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. Any associated
asset retirement costs are to be capitalized as part of the carrying amount of
the long-lived asset and expensed over the life of the asset. The impact of the
adoption of SFAS No. 143 is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 clarifies accounting and
reporting for assets held for sale, scheduled for abandonment or other disposal,
and recognition of impairment loss related to the carrying value of long-lived
assets. The Company has adopted SFAS No. 144 for the year beginning May 1, 2002.
The adoption of SFAS 144 did not have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No.146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No.146 nullifies Emerging
Issues Task Force Issue No. 94-3 and requires that a liability for a cost
associated with and exit or disposal activity be recognized when the liability
is incurred. This statement also establishes that fair value is the objective
for initial measurement of the liability.
22
SFAS No.146 is effective for exit or disposal activities that are initiated
after December 31, 2002. The impact of the adoption of SFAS No. 146 is not
expected to have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No.148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No.123." SFAS No.148 amends SFAS No.123,"Accounting for Stock-Based
Compensation," to provide alternative methods of transition for an entity that
voluntarily changes to the fair value-based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in APB
Opinion No.25 and the related SFAS No. 123. The adoption of SFAS 148 did not
have a material effect on the Company's consolidated financial position, results
of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No.45, ("FIN No.
45") "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN No.45 requires
that upon issuance of a guarantee, a guarantor must recognize a liability for
the fair value of an obligation assumed under a guarantee. FIN No. 45 also
requires additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with guarantees issued.
The recognition provisions of FIN No.45 are effective for any guarantees issued
or modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim or annual periods ending December 15, 2002.
The adoption of the disclosure requirements of FIN No. 45 did not have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
In January 2003, the FASB issued FASB Interpretation No.46 ("FIN No.
46") "Consolidation of Variable Interest Entities." In general, a variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables real estate or other property. A variable interest entity may be
essentially passive or it may engage in activities on behalf of another company.
Until now, a company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN No.46 changes that by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN No. 46's consolidation
requirements apply immediately to variable interest entities created or acquired
after January 31, 2003. The consolidation requirements apply to older entities
in the first fiscal year on interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply to all financial statements issued
after January 31, 2003, regardless of when the variable interest entity was
established. The Company has not adopted FIN No.46 for the year ended April 30,
2003. The Company does not expect FIN 46 to have a material effect on its
consolidated financial position, results of operations or cash flows.
23
In May 2003, the Financial Accounting Standards Board issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 changes the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity. The new statement requires that those instruments be classified as
liabilities in statements of financial position. Most of the guidance in SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of our first
quarter for fiscal 2004. The Company does not expect the adoption of this
statement to have a material impact on its consolidated financial position,
results of operations or cash flows.
Forward Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements that
reflect Management's current views with respect to future events and financial
performance. Those statements include statements regarding the intent, belief or
current expectations of the Company and members of its management team as well
as the assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risk and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission. Important factors currently known to
Management could cause actual results to differ materially from those in
forward-looking statements. The Company undertakes no obligation to update or
revise forward-looking statements to reflect changed assumptions, the occurrence
of unanticipated events or changes in the future operating results over time.
The Company believes that its assumptions are based upon reasonable data derived
from and known about its business and operations and the business and operations
of the Company. No assurances are made that actual results of operations or the
results of the Company's future activities will not differ materially from its
assumptions.
24
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of disclosures. The Chief Executive Officer and the
Chief Financial Officer of the Company have evaluated the
effectiveness of the design and operation of the Company's
system of disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of
July 31, 2003. As a result of that evaluation, they have
concluded that the Company's disclosure controls and
procedures are effective to ensure that information required
to be disclosed in the Company's reports filed or submitted
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and
Exchange Commission rules and forms.
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. There were no
discoveries of any significant deficiencies or material weaknesses in such
controls that would require the Company to take corrective actions.
25
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.
During the quarter ended July 31, 2003, the Company sold an aggregate
of 40 units in a private placement conducted pursuant to Rule 506 of Regulation
D, for aggregate proceeds of $1,000,000. Each Unit consists of (i) 44,444 shares
of the Company's common stock, and (ii) warrants to purchase 44,444 shares of
common stock, exercisable for a period of three years at an exercise price of
$0.90 per share. The Warrants may be redeemed in whole or in part at the option
of the Company, if the closing price of the Company's common stock is at least
$1.25 per share on average for 10 consecutive trading days, ending not earlier
than 30 days before the Warrants are called for redemption. In connection with
the sale of the 40 units, the placement agent was issued warrants to purchases
266,000 shares of the Company's common stock at an exercise price of $0.75 per
share.
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.
31.1 - Certification of Principal Executive Officer pursuant to
Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities
and Exchange Act of 1934, as amended
31.2 - Certification of Principal Financial Officer pursuant to
Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities
and Exchange Act of 1934, as amended
32.1 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (Chief Executive Officer)
32.2 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (Chief Financial Officer)
(b) Reports on Form 8-K.
Report on Form 8-K, dated August 20, 2003
Report on Form 8-K, dated August 29, 2003
26
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 10, 2003 By: /s/ JOSEPH HEATER
------------------
Joseph Heater
Chief Financial Officer
27