UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________________________
 
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended April 30, 2008
______________________________________________________________
 
Commission File Number 000-262771

WPCS INTERNATIONAL INCORPORATED
(Exact name of registrant as specified in its charter)

Delaware
                  98-0204758
(State or other jurisdiction of incorporation
or organization)
                         (IRS Employer Identification No.)
 
 
One East Uwchlan Avenue, Suite 301
Exton, Pennsylvania
 19341
(610) 903-0400
(Address of principal executive office)
   (Postal Code) 
(Issuer's telephone number)
    
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Common Stock, $0.0001 par value 
Name of each exchange on which registered
The NASDAQ Stock Market LLC
(NASDAQ Global Market)
 
Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes  o   No  x

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  o   No  x

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 preceding 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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 Large accelerated filer o
 Accelerated filer o 
 Non-accelerated filer o 
 Smaller reporting company x
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes  o  No   x

The aggregate market value of the voting common equity held by non-affiliates as of October 31, 2007, based on the closing sales price of the Common Stock as quoted on the Nasdaq Global Market was $59,522,365.76. For purposes of this computation, all officers, directors, and 5 percent beneficial owners of the registrant are deemed to be affiliates.  Such determination should not be deemed an admission that such directors, officers, or 5 percent beneficial owners are, in fact, affiliates of the registrant.

As of July 17, 2008, there were 7,251,083 shares of registrant’s common stock outstanding.


1



TABLE OF CONTENTS

   
PAGE
 
PART I
 
     
 
 
 
 
 
 
       
PART II
 
     
 
 
 
 
 
 
 
 
       
PART III
 
     
 
 
 
 
 
       
PART IV
 
     
 
       
   
 
 
 
2

 
PART I

ITEM 1. -  DESCRIPTION OF BUSINESS

This Annual Report on Form 10-K includes the accounts of WPCS International Incorporated (WPCS) and its wholly and majority-owned subsidiaries, WPCS Incorporated, Invisinet Inc. (Invisinet), Walker Comm Inc. (Walker Comm), Clayborn Contracting Group, Inc. (Clayborn), Heinz Corporation (Heinz), Quality Communications & Alarm Company, Inc. (Quality), New England Communications Systems, Inc. (NECS) from June 1, 2006 (date of acquisition), Southeastern Communication Services, Inc.  (SECS) from July 19, 2006 (date of acquisition), Voacolo Electric Incorporated (Voacolo) from March 30, 2007 (date of acquisition), Taian AGS Pipeline Construction Co. Ltd (TAGS) from April 5, 2007 (date of acquisition), Major Electric, Inc. (Major) from August 1, 2007 (date of acquisition), Max Engineering LLC (Max) from August 2, 2007 (date of acquisition), Gomes and Gomes, Inc. dba Empire Electric (Empire) from November 1, 2007 (date of acquisition), WPCS Australia Pty Ltd  from November 12, 2007 (date of formation),  James Design Pty Ltd (James) from November 30, 2007 (date of acquisition), WPCS Asia Limited from January 24, 2008 (date of formation) and RL & CA MacKay Pty Ltd. dba Energize Electrical (Energize) from April 4, 2008 (date of acquisition), collectively “we”, us” or the "Company".

This Annual Report on Form 10-K (including the section regarding Management's Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this Annual Report on Form 10-K.  Additionally, statements concerning future matters are forward-looking statements.

Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our Management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading "Risks Related to Our Business" below, as well as those discussed elsewhere in this Annual Report on Form 10-K. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We file reports with the Securities and Exchange Commission ("SEC"). We make available on our website under "Investor Relations/SEC Filings," free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such materials with or furnish them to the SEC. Our website address is www.wpcs.com. You can also read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549.  You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

Overview

The increasing demand for wireless services has become the driving force behind the recent growth in the global communications industry. Wireless technology has advanced substantially to the point where wireless networks have proven to be an effective alternative to land line networks, a key factor in its broad acceptance. The advantages of wireless over land line communication are apparent in the aspects of mobility, cost, and deployment. The use of dedicated wireless networks for specified applications has improved productivity for individuals and organizations alike. We provide design-build engineering services that focus on the implementation requirements of wireless technology.  We serve the specialty communication systems and wireless infrastructure sectors. Our range of services includes site design, technology integration, electrical contracting, construction and project management for corporations, government entities and educational institutions worldwide. Because we are technology independent, we can integrate multiple products and services across a variety of communication requirements. This ability gives our customers the flexibility to obtain the most appropriate solution for their communication needs on a cost effective basis.
 
With fifteen offices across the United States, one office in China and two offices in Australia, we provide our services to our customers on a global basis.   Our rapid revenue growth since we commenced operations in November 2001 is attributable to a combination of acquisitions and organic growth. For the fiscal year ended April 30, 2008, we generated revenues of approximately $101 million, an increase of 44.9% from the fiscal year ended April 30, 2007. Our backlog at April 30, 2008 was approximately $59.8 million.
 
 
3


 
Advantages of Wireless Technology

Various improvements in wireless technologies have resulted in an environment where wireless solutions provide a number of key advantages over traditional land line solutions, including:

 
Mobility. Mobile communications and computing are among the driving forces behind the demand for wireless connectivity. The increased functionality and declining cost of mobile wireless devices has fueled further growth. Mobile connectivity has led to greater productivity as organizations transmit data and gather information from remote staff and locations where land line connectivity is unavailable. Such mobile connectivity has created significant cost savings in data collection, increased responsiveness, enabled greater access to enterprise resources and improved controls.
 
 
Cost. Wireless networks cost less than comparable land line networks both to deploy and to operate. Wireless deployment is less expensive because the installation of a land line network is more labor-intensive, requires more time and may involve substantial right-of-way expenditures.  We expect the main cost component of wireless networks and equipment  to continue to decline as technology advances and production volumes increase. Operating costs of wireless networks are also lower because land lines require extensive troubleshooting to execute repairs. In addition, wireless networks bypass local service providers, eliminating recurring monthly charges.
 
 
Deployment. Because enterprise wireless networks do not require negotiating rights of way, substantial infrastructure engineering, time-consuming third party coordination efforts or additional FCC licensing, they can be deployed quickly and less expensively. Rapid deployment allows organizations to install networks more closely in line with immediate needs rather than having to commit to time-consuming engineering projects in anticipation of future growth.
 
Industry Trends
 
The demand for wireless networks can be tied to the following key trends:
 
 
Increased security of wireless data transmission;
 
 
Introduction of new technologies;
 
 
Increasing accessibility and affordability of wireless mobile devices; and
 
 
Increased capacity of wireless networks, making them a legitimate substitute for land line communications.
 
The advantages gained through wireless communications have expanded the scope of possible applications, creating demand for specialty communication systems.
 
Business Strategy
 
Our goal is to become a recognized leader in the design and deployment of wireless networks for specialty communication systems and wireless infrastructure. We have designed and deployed many systems incorporating innovative uses of wireless technology in various vertical markets. Our strategy focuses on both organic growth and the pursuit of acquisitions that add to our engineering capacity and geographic coverage. Specifically, we will endeavor to:
 
 
Provide additional services for our customers. Each acquisition we make expands our customer base. We seek to expand these new customer relationships by making them aware of the diverse products and services we offer. We believe that providing these customers the full range of our services will lead to new projects or revenue opportunities and increased profitability.
 
 
Maintain and expand our focus in vertical markets. We have deployed successful, innovative wireless solutions for multiple customers in a number of vertical markets, such as public safety, healthcare, gaming and energy. We will continue to seek additional customers in these targeted vertical markets who can benefit from our expertise and look for new ways in which we can deploy wireless networks to enhance productivity within these markets. We also look to expand our vertical market coverage and include these new markets as appropriate.
 

4

 
 
 
Strengthen our relationships with technology providers. We will continue to strengthen the relationships we have with technology providers. These companies rely on us to deploy their technology products within their customer base. We have worked with these providers in testing new equipment they develop and our personnel maintain certifications on our technology providers’ products. We also look for innovative products that can be of benefit to our customers, and endeavor to establish similar relationships with new technology providers as part of our commitment to offering the most advanced solutions.
 
 
Seek strategic acquisitions.  We will continue to look for additional acquisitions of compatible businesses that can be assimilated into our organization, expand our geographic coverage and add accretive earnings to our business. Our preferred acquisition candidates will have experience with specialty communication systems.  We are also focused on expanding in the international sector with an emphasis in China, Australia and surrounding Pacific Rim countries.
 
Services

We operate in two segments, specialty communication systems and wireless infrastructure services. Specialty communication systems are wireless networks designed to improve productivity for a specified application by communicating data, voice or video information in situations where land line networks are non-existent, more difficult to deploy or too expensive. Wireless infrastructure services include the engineering, installation, integration and maintenance of wireless carrier equipment. For the fiscal year ended April 30, 2008, specialty communication systems represented approximately 88% of our total revenue, and wireless infrastructure services represented approximately 12% of our total revenue. For the fiscal year ended April 30, 2007, specialty communication systems represented approximately 81% of our total revenue, and wireless infrastructure services represented approximately 19% of our total revenue.
 
Specialty Communication Systems
 
The types of specialty communication systems that we implement are used for mobile computing and general wireless connectivity purposes. We design and deploy networks that allow entities to reduce their dependence on high cost and inflexible leased land lines. We have the engineering expertise to utilize any facet of wireless technology or a combination of various wireless technologies to engineer a cost effective network for a customer’s wireless communication requirement. In addition, the design and deployment of a specialty communication system is a comprehensive effort that requires an in-depth knowledge of radio frequency engineering so that the wireless network is free from interference with other signals and amplified sufficiently to carry data, voice or video with speed and accuracy.  In specialty communications, we focus on four primary vertical markets to provide our services.  These vertical sectors include public safety, healthcare, gaming and energy.
 
 
Public safety.  We provide communication systems for public services ( which includes police, fire and emergency systems), asset tracking, transportation and security, where the conversion of older analog systems to advanced digital systems is the driving force.
 
 
Healthcare. We provide communication systems for data management, asset tracking and security for use in new hospital construction and renovation projects.
 
 
Gaming.  We provide communication systems for asset tracking and security for use in new casino construction and renovation of existing properties.
 
 
Energy. We provide communication systems for utility, oil, gas, and alternative energy companies such as solar and wind energy companies.
 
 
5


We are technology and vendor independent. As wireless networks evolve, customers are increasingly showing a tendency to select independent service providers, allowing our independence to become an important differentiator. We believe that the strength of our experience in the design and deployment of these specialty communication systems gives us a competitive advantage and has supported our rapid growth, both organically and through acquisitions.
 
Wireless Infrastructure Services
 
We provide wireless infrastructure services to major wireless carriers, which are services that include the engineering, installation, integration and maintenance of wireless carrier equipment. Wireless carriers are focused on building and expanding their networks, increasing capacity, upgrading their networks with new technologies and maintaining their existing infrastructure. Our engineers install, test and commission base station equipment at the carrier cell site, including installations of new equipment, technology upgrades, equipment modifications and reconfigurations. These services may also include tower construction.
 
Project Characteristics
 
Our contracts are primarily service-based projects providing installation and engineering services, which include providing labor, materials and equipment for a complete installation. The projects are generally staffed with a project manager who manages multiple projects and a field supervisor who is responsible for an individual project. Depending on contract scope, project staff size could range from two to four engineers to as high as 25 to 30 engineers. A project may also include subcontracted services along with our direct labor.
 
The project manager coordinates the daily activities of direct labor and subcontractors and works closely with our field supervisors. Project managers are responsible for job costing, change order tracking, billing, and customer relations. Executive management monitors the performance of all projects regularly through work-in-progress reporting or percentage-of-completion, and reviews this information with each project manager.
 
Our projects are primarily executed on a contract basis. These contracts can be awarded through a competitive bidding process, an informal bidding process, or a simple quote request. Upon award of a contract, there can often be a delay of several months before work begins. The active work time on our projects can range in duration from a few days up to as long as two years. Once services under the contract commence, our average project length is approximately two months.
 
Customers
 
We serve a variety of corporate, government and education customers in various market segments. In our specialty communication systems segment, we believe our design and deployment of innovative wireless networks specific to the needs of customers in certain vertical markets has brought us recognition. In our wireless infrastructure segment, our customers are major wireless carriers.
 
For the fiscal year ended April 30, 2008, there were no customers who accounted for more than 10% of our revenue. For the fiscal year ended April 30, 2007, we had revenue from two customers, Genentech and Sprint Nextel, of approximately $12.7 million and $8.2 million or 18.1% and 11.7%, respectively.
 
Sales and Marketing
 
We have dedicated sales and marketing resources that develop opportunities within our existing customer base, and identify new customers through our vertical market focus and our relationships with technology providers. In addition, our project managers devote a portion of their time to sales and marketing. When an opportunity is identified, we assess the opportunity to determine our level of interest in participation. After qualifying an opportunity, our sales and marketing resources work with the internal project management teams to prepare a cost estimate and contract proposal for a particular project. We keep track of bids submitted and bids that are awarded. Once a bid is awarded to us, it is assigned to a project management team and included in our backlog.
 
 
 
6

 
 
Backlog
 
As of April 30, 2008, we had a backlog of unfilled orders of approximately $59.8 million compared to approximately $34.9 million at April 30, 2007. We define backlog as the value of work-in-hand to be provided for customers as of a specific date where the following conditions are met (with the exception of engineering change orders): (i) the price of the work to be done is fixed; (ii) the scope of the work to be done is fixed, both in definition and amount; and (iii) there is a written contract, purchase order, agreement or other documentary evidence which represents a firm commitment by the customer to pay us for the work to be performed. These backlog amounts are based on contract values and purchase orders and may not result in actual receipt of revenue in the originally anticipated period or at all. We have experienced variances in the realization of our backlog because of project delays or cancellations resulting from external market factors and economic factors beyond our control and we may experience such delays or cancellations in the future. Backlog does not include new firm commitments that may be awarded to us by our customers from time to time in future periods. These new project awards could be started and completed in this same future period. Accordingly, our backlog does not necessarily represent the total revenue that could be earned by us in future periods.
 
Competition
 
We face competition from numerous service organizations, ranging from small independent regional firms to larger firms servicing national markets. We also face competition from existing or prospective customers that employ in-house personnel to perform some of the same types of services that we provide. Historically, there have been relatively few significant barriers to entry into the markets in which we operate, and, as a result, any organization that has adequate financial resources and access to technical expertise may become a competitor. At the present time, we believe that there are no dominant competitors in the specialty communication systems or wireless infrastructure segment but we would classify Quanta Services, Inc. (NYSE:PWR) and Dycom Industries, Inc. (NYSE:DY) as specialty communication systems competitors and LCC International Incorporated (NASDAQ-LCCI) as a wireless infrastructure services competitor.
 
The principal competitive advantage in these markets is the ability to deliver results on time and within budget. Other factors of importance include reputation, accountability, staffing capability, project management expertise, industry experience and competitive pricing. In addition, expertise in new and evolving technologies has become increasingly important. We believe that the ability to design, deploy and maintain all facets of wireless technology for various vertical sectors gives us a competitive advantage. We maintain a trained and certified staff of engineers that have developed proven methodologies for the design and deployment of wireless networks, and can provide these services on an international basis. In addition, we offer both a union and non-union workforce that allow us to bid on either labor requirement, creating yet another competitive advantage.
 
However, our ability to compete effectively also depends on a number of additional factors that are beyond our control. These factors include competitive pricing for similar services, the ability and willingness of the competition to finance projects on favorable terms, the ability of customers to perform the services internally and the responsiveness of our competitors to customer needs.
 
Employees
 
As of April 30, 2008, we employed 540 full time employees, of whom 380 are project engineers, 40 are project managers, 113 are in administration and sales and 7 are executives.  A majority of the project engineers are represented by the International Brotherhood of Electrical Workers. We also have non-union employees. We believe our relations with all of our employees are good. We have 241 union employees whom are covered by contracts that expire at various times as follows:

 
Subsidiary
 
# of Employees
 
Contract Termination Date
         
Empire
    61  
December 31, 2008
Walker
    8  
December 31, 2008
Heinz
    1  
November 30, 2009
Walker
    62  
January 1, 2010
Voacolo
    22  
May 1, 2010
Major
    80  
May 31, 2010
Heinz
    6  
October 31, 2010
Heinz
    1  
May 2, 2012
           
Total Union Employees
    241    

 
 
7

 
ITEM 1A - RISK FACTORS
 
Our success is dependent on growth in the deployment of wireless networks, and to the extent that such growth slows down, our revenues may decrease and our ability to continue operating profitably may be harmed.
 
Customers are constantly re-evaluating their network deployment plans in response to trends in the capital markets, changing perceptions regarding industry growth, the adoption of new wireless technologies, increasing pricing competition and general economic conditions in the United States and internationally. If the rate of network deployment growth slows and customers reduce their capital investments in wireless technology or fail to expand their networks, our revenues and profits could be reduced.
 
If we fail to accurately estimate costs associated with our fixed-price contracts using percentage-of-completion, our actual results may vary from our assumptions, which may reduce our profitability or impair our financial performance.
 
A substantial portion of our revenue is derived from fixed price contracts. Under these contracts, we set the price of our services on an aggregate basis and assume the risk that the costs associated with our performance may be greater than we anticipated. We recognize revenue and profit on these contracts as the work on these projects progresses on a percentage-of-completion basis. Under the percentage-of-completion method, contracts in process are valued at cost plus accrued profits less earned revenues and progress payments on uncompleted contracts.
 
The percentage-of-completion method therefore relies on estimates of total expected contract costs. These costs may be affected by a variety of factors, such as lower than anticipated productivity, conditions at work sites differing materially from what was anticipated at the time we bid on the contract and higher costs of materials and labor. Contract revenue and total cost estimates are reviewed and revised monthly as the work progresses, such that adjustments to profit resulting from revisions are made cumulative to the date of the revision. Adjustments are reflected in contract revenue for the fiscal period affected by these revised estimates. If estimates of costs to complete long-term contracts indicate a loss, we immediately recognize the full amount of the estimated loss. Such adjustments and accrued losses could result in reduced profitability and liquidity.
 
Failure to properly manage projects may result in unanticipated costs or claims.
 
Our wireless network engagements may involve large scale, highly complex projects. The quality of our performance on such projects depends in large part upon our ability to manage the relationship with our customers, and to effectively manage the project and deploy appropriate resources, including third-party contractors and our own personnel, in a timely manner. Any defects or errors or failure to meet customers’ expectations could result in claims for substantial damages against us. Our contracts generally limit our liability for damages that arise from negligent acts, errors, mistakes or omissions in rendering services to our customers. However, we cannot be sure that these contractual provisions will protect us from liability for damages in the event we are sued. In addition, in certain instances, we guarantee customers that we will complete a project by a scheduled date or that the network will achieve certain performance standards. If the project or network experiences a performance problem, we may not be able to recover the additional costs we would incur, which could exceed revenues realized from a project.
 
The industry in which we operate has relatively low barriers to entry and increased competition could result in margin erosion, which would make profitability even more difficult to sustain.
 
Other than the technical skills required in our business, the barriers to entry in our business are relatively low. We do not have any intellectual property rights to protect our business methods and business start-up costs do not pose a significant barrier to entry. The success of our business is dependent on our employees, customer relations and the successful performance of our services. If we face increased competition as a result of new entrants in our markets, we could experience reduced operating margins and loss of market share and brand recognition.
 
 
8

 
 
Our business depends upon our ability to keep pace with the latest technological changes, and our failure to do so could make us less competitive in our industry.
 
The market for our services is characterized by rapid change and technological improvements. Failure to respond in a timely and cost-effective way to these technological developments may result in serious harm to our business and operating results. We have derived, and we expect to continue to derive, a substantial portion of our revenues from deploying wireless networks that are based upon today’s leading technologies and that are capable of adapting to future technologies. As a result, our success will depend, in part, on our ability to develop and market service offerings that respond in a timely manner to the technological advances of our customers, evolving industry standards and changing preferences.
 
Our failure to attract and retain engineering personnel or maintain appropriate staffing levels could adversely affect our business.
 
Our success depends upon our attracting and retaining skilled engineering personnel. Competition for such skilled personnel in our industry is high and at times can be extremely intense, especially for engineers and project managers, and we cannot be certain that we will be able to hire sufficiently qualified personnel in adequate numbers to meet the demand for our services. We also believe that our success depends to a significant extent on the ability of our key personnel to operate effectively, both individually and as a group. Additionally, we cannot be certain that we will be able to hire the requisite number of experienced and skilled personnel when necessary in order to service a major contract, particularly if the market for related personnel is competitive. Conversely, if we maintain or increase our staffing levels in anticipation of one or more projects and the projects are delayed, reduced or terminated, we may underutilize the additional personnel, which could reduce our operating margins, reduce our earnings and possibly harm our results of operations. If we are unable to obtain major contracts or effectively complete such contracts due to staffing deficiencies, our revenues may decline and we may experience a drop in net income.
 
If we are unable to identify and complete future acquisitions, we may be unable to continue our growth.
 
Since November 1, 2001, we have acquired fourteen companies and we intend to further expand our operations through targeted strategic acquisitions. However, we may not be able to identify suitable acquisition opportunities. Even if we identify favorable acquisition targets, there is no guarantee that we can acquire them on reasonable terms or at all. If we are unable to complete attractive acquisitions, the growth that we have experienced over the last five fiscal years may decline.
 
Future acquired companies could be difficult to assimilate, disrupt our business, diminish stockholder value and adversely affect our operating results.
 
Completing acquisitions may require significant management time and financial resources because we may need to assimilate widely dispersed operations with distinct corporate cultures. Our failure to manage future acquisitions successfully could seriously harm our operating results. Also, acquisitions could cause our quarterly operating results to vary significantly. Furthermore, our stockholders would be diluted if we financed the acquisitions by issuing equity securities. In addition, acquisitions expose us to risks such as undisclosed liabilities, increased indebtedness associated with an acquisition and the potential for cash flow shortages that may occur if anticipated financial performance is not realized or is delayed from such acquired companies.
 
We derive a significant portion of our revenues from a limited number of customers, the loss of which would significantly reduce our revenues.
 
We have derived, and believe that we will continue to derive, a significant portion of our revenues from a limited number of customers. To the extent that any significant customer uses less of our services or terminates its relationship with us, our revenues could decline significantly. As a result, the loss of any significant customer could seriously harm our business. For the year ended April 30, 2008, we had no customers who accounted for more than 10% of our revenue. Although for the fiscal year ended April 30, 2007, we had two separate customers which accounted for 18.1% and 11.7% of our revenues.  Other than under existing contractual obligations, none of our customers is obligated to purchase additional services from us. As a result, the volume of work that we perform for a specific customer is likely to vary from period to period, and a significant customer in one period may not use our services in a subsequent period.
 
 
9

 
 
Amounts included in our backlog may not result in actual revenue or translate into profits.
 
As of April 30, 2008, we had a backlog of unfilled orders of approximately $59.8 million. This backlog amount is based on contract values and purchase orders and may not result in actual receipt of revenue in the originally anticipated period or at all. In addition, contracts included in our backlog may not be profitable. We have experienced variances in the realization of our backlog because of project delays or cancellations resulting from external market factors and economic factors beyond our control and we may experience delays or cancellations in the future. If our backlog fails to materialize, we could experience a reduction in revenue, profitability and liquidity.
 
Our business could be affected by adverse weather conditions, resulting in variable quarterly results.
 
Adverse weather conditions, particularly during the winter season, could affect our ability to perform outdoor services in certain regions of the United States. As a result, we might experience reduced revenue in the third and fourth quarters of our fiscal year. Natural catastrophes such as the recent hurricanes in the United States could also have a negative impact on the economy overall and on our ability to perform outdoor services in affected regions or utilize equipment and crews stationed in those regions, which in turn could significantly impact the results of any one or more of our reporting periods.
 
If we are unable to retain the services of Messrs. Hidalgo, Schubiger, Heinz, Walker, Madenford or James, operations could be disrupted.
 
Our success depends to a significant extent upon the continued services of Mr. Andrew Hidalgo, our Chief Executive Officer and Messrs. Richard Schubiger, James Heinz, Donald Walker, Charles Madenford and Steven James, our Executive Vice Presidents. Mr. Hidalgo has overseen our company since inception and provides leadership for our growth and operations strategy. Messrs. Schubiger, Heinz, Walker, Madenford and James oversee the day-to-day operations of our operating subsidiaries. Loss of the services of Messrs. Hidalgo, Schubiger, Heinz, Walker, Madenford or James could disrupt our operations and harm our growth, revenues, and prospective business. We do not maintain key-man insurance on the lives of Messrs. Hidalgo, Schubiger, Heinz, Walker, Madenford or James.
 
Employee strikes and other labor-related disruptions may adversely affect our operations.
 
Our business is labor intensive, with certain projects requiring large numbers of engineers. Over 44% of our workforce is unionized. Strikes or labor disputes with our unionized employees may adversely affect our ability to conduct our business. If we are unable to reach agreement with any of our unionized work groups on future negotiations regarding the terms of their collective bargaining agreements, or if additional segments of our workforce become unionized, we may be subject to work interruptions or stoppages. Any of these events could be disruptive to our operations and could result in negative publicity, loss of contracts and a decrease in revenues.
 
We may incur goodwill impairment charges in our reporting entities which could harm our profitability.
 
In accordance with Statement of Financial Accounting Standards, or SFAS, No. 142, “Goodwill and Other Intangible Assets,” we periodically review the carrying values of our goodwill to determine whether such carrying values exceed the fair market value. Except for TAGS, each of our acquired companies, of which each is a reporting unit, is subject to an annual review for goodwill impairment. If impairment testing indicates that the carrying value of a reporting unit exceeds its fair value, the goodwill of the reporting unit is deemed impaired. Accordingly, an impairment charge would be recognized for that reporting unit in the period identified, which could reduce our profitability.
 
 
 
10

 
Our quarterly results fluctuate and may cause our stock price to decline.
 
Our quarterly operating results have fluctuated in the past and will likely fluctuate in the future. As a result, we believe that period to period comparisons of our results of operations are not a good indication of our future performance. A number of factors, many of which are beyond our control, are likely to cause these fluctuations. Some of these factors include:
 
 
the timing and size of network deployments and technology upgrades by our customers;
 
 
fluctuations in demand for outsourced network services;
 
 
the ability of certain customers to sustain capital resources to pay their trade accounts receivable balances and required changes to our allowance for doubtful accounts based on periodic assessments of the collectibility of our accounts receivable balances;
 
 
reductions in the prices of services offered by our competitors;
 
 
our success in bidding on and winning new business; and
 
 
our sales, marketing and administrative cost structure.
 
Because our operating results may vary significantly from quarter to quarter, our operating results may not meet the expectations of securities analysts and investors, and our common stock could decline significantly which may expose us to risks of securities litigation, impair our ability to attract and retain qualified individuals using equity incentives and make it more difficult to complete acquisitions using equity as consideration.
 
Our stock price may be volatile, which may result in lawsuits against us and our officers and directors.
 
The stock market in general, and the stock prices of technology and telecommunications companies in particular, have experienced volatility that has often been unrelated to or disproportionate to the operating performance of those companies. The market price of our common stock has fluctuated in the past and is likely to fluctuate in the future. Between April 30, 2007 and April 30, 2008, our common stock has traded as low as $5.15 and as high as $14.25 per share, based upon information provided by the NASDAQ Global Market. Factors which could have a significant impact on the market price of our common stock include, but are not limited to, the following:
 
 
quarterly variations in operating results;
 
 
announcements of new services by us or our competitors;
 
 
the gain or loss of significant customers;
 
 
changes in analysts’ earnings estimates;
 
 
rumors or dissemination of false information;
 
 
pricing pressures;
 
 
short selling of our common stock;
 
 
impact of litigation;
 
 
general conditions in the market;
 
 
changing the exchange or quotation system on which we list our common stock for trading;
 
 
political and/or military events associated with current worldwide conflicts; and
 
 
events affecting other companies that investors deem comparable to us.
 
 
 
11

 
 
 
Companies that have experienced volatility in the market price of their stock have frequently been the object of securities class action litigation. Class action and derivative lawsuits could result in substantial costs to us and a diversion of our management’s attention and resources, which could materially harm our financial condition and results of operations.
 
Future changes in financial accounting standards may adversely affect our reported results of operations.
 
A change in accounting standards could have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New pronouncements and varying interpretations of pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.
 
Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.
 
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, newly enacted SEC regulations and NASDAQ Stock Market rules, have created additional burdens for companies such as ours. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest appropriate resources to comply with evolving standards. This investment will result in increased general and administrative costs and a diversion of management time and attention from revenue-generating activities to compliance activities.
 
We can issue shares of preferred stock without shareholder approval, which could adversely affect the rights of common shareholders.
 
Our certificate of incorporation permits us to establish the rights, privileges, preferences and restrictions, including voting rights, of future series of our preferred stock and to issue such stock without approval from our stockholders. The rights of holders of our common stock may suffer as a result of the rights granted to holders of preferred stock that we may issue in the future. In addition, we could issue preferred stock to prevent a change in control of our company, depriving common shareholders of an opportunity to sell their stock at a price in excess of the prevailing market price.
 
There may be an adverse effect on the market price of our shares as a result of shares being available for sale in the future.

As of April 30, 2008, holders of our outstanding options and warrants have the right to acquire 2,529,614 shares of common stock issuable upon the exercise of stock options and warrants, at exercise prices ranging from $4.80 to $14.40 per share, with a weighted average exercise price of $7.00. The sale or availability for sale in the market of the shares underlying these options and warrants could depress our stock price. We have registered substantially all of the underlying shares described above for resale. Holders of registered underlying shares may resell the shares immediately upon issuance upon exercise of an option or warrant.

If our stockholders sell substantial amounts of our shares of common stock, including shares issued upon the exercise of outstanding options and warrants, the market price of our common stock may decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.
 
We are subject to the risks associated with doing business in the People’s Republic of China (PRC).
 
We conduct certain business in China through our TAGS joint venture, which is organized under the laws of the PRC. Our China operations are directly related to and dependent on the social, economic and political conditions in this country, many of which we have no control over, and are influenced by many factors, including:

 
changes in the region’s economic, social and political conditions or government policies;

 
changes in trade laws, tariffs and other trade restrictions or licenses;

 
changes in foreign exchange regulation in China may limit our ability to freely convert currency to make dividends or other payments in U.S. dollars;

 
fluctuation in the value of the RMB (Chinese Yuan) could adversely affect the value of our investment in China;

 
limitations on the repatriation of earnings or assets, including cash;
 
 
 
12

 

 
 
adverse changes in tax laws and regulations;

 
difficulties in managing or overseeing our China operations, including the need to implement appropriate systems, policies, benefits and compliance programs; and

 
different liability standards and less developed legal systems that may be less predictable than those in the United States.

The occurrence or consequences of any of these conditions may restrict our ability to operate and/or decrease the profitability of our operations in China.
 
ITEM 1B – UNRESOLVED STAFF COMMENTS

None.
 
ITEM 2 – PROPERTIES
 
Our principal executive office is located in approximately 2,550 square feet of office space in Exton, Pennsylvania. We operate our business under office leases in the following locations:
 
           
Minimum
 
       
Lease
 
Annual
 
Location
 
Subsidiary
 
Expiration Date
 
Rent
 
Exton, Pennsylvania
 
WPCS Corporate headquarters
 
February 1, 2011
  $ 52,594  
Auburn, California (1)
 
Clayborn
 
Month-to-month
  $ 68,306  
West Sacramento, California
 
Empire
 
July 31, 2010
  $ 74,847  
St. Louis, Missouri
 
Heinz
 
August 31, 2010
  $ 61,405  
Exton, Pennsylvania
 
Heinz
 
July 31, 2009
  $ 9,072  
Brisbane, Australia
 
James
 
July 31, 2012
  $ 75,240  
Woodinville, Washington
 
Major
 
May 31, 2010
  $ 9,470  
Houston, Texas
 
Max
 
August 31, 2009
  $ 20,432  
Windsor, Connecticut
 
NECS
 
April 30, 2014
  $ 85,484  
Chicopee, Massachusetts
 
NECS
 
August 31, 2008
  $ 4,000  
Lakewood, New Jersey
 
Quality
 
August 31, 2010
  $ 125,661  
Sarasota, Florida
 
SECS
 
July 31, 2011
  $ 52,897  
Trenton, New Jersey (2)
 
Voacolo
 
April 1, 2009
  $ 60,000  
Fairfield, California (3)
 
Walker Comm
 
February 28, 2011
  $ 94,128  
Rocklin, California
 
Walker Comm
 
January 31, 2010
  $ 29,940  
San Leandro, California
 
Walker Comm
 
July 31, 2011
  $ 13,824  
 
(1)
The lease for our Auburn, California location is month to month; therefore the minimum annual rental price assumes we rent the property for the entire year.
 
 
13

 
 
(2) 
We lease our Trenton, New Jersey location from Voacolo Properties LLC, of which the former shareholders of Voacolo Electric, Inc., are the members.
 
(3)
We lease our Fairfield, California location from a trust, of which Gary Walker, one of our Directors, is the trustee.
 
We believe that our existing facilities are suitable and adequate to meet our current business requirements.

ITEM 3 - LEGAL PROCEEDINGS

We are currently not a party to any material legal proceedings or claims.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

               None.
 
 
 
14

 
PART II

ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
PRICE RANGE OF COMMON STOCK
 
Our common stock is currently traded on the NASDAQ Global Market under the symbol “WPCS.” Prior to December 21, 2006, our common stock traded on the NASDAQ Capital Market.
 
For the period from May 1, 2006 to date, the following table sets forth the high and low sale prices of our common stock as reported by the NASDAQ Capital Market and NASDAQ Global Market.
 
Period
 
High
   
Low
 
 
Fiscal Year Ended April 30, 2008:
           
First Quarter
  $ 14.25     $ 11.14  
Second Quarter
    12.37       9.51  
Third Quarter
    11.67       8.05  
Fourth Quarter
    8.96       5.15  
 
Fiscal Year Ending April 30, 2007:
               
First Quarter
  $ 9.80     $ 6.53  
Second Quarter
    10.75       6.60  
Third Quarter
    10.58       8.64  
Fourth Quarter
    13.74       9.30  

On July 25, 2008, the closing sale price of our common stock, as reported by the NASDAQ Global Market, was $5.56 per share. On July 17, 2008, there were 72 holders of record of our common stock.

DIVIDEND POLICY

We have never paid any cash dividends on our capital stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future.   We intend to retain future earnings to fund ongoing operations and future capital requirements of our business. Any future determination to pay cash dividends will be at the discretion of the Board and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board deems relevant.
 
ITEM 6 – SELECTED FINANCIAL DATA

Not required under Regulation S-K for “smaller reporting companies.”



15



ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words.  Those statements include statements regarding the intent, belief or current expectations of us and members of its management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission.  Important  factors  currently  known  to Management  could  cause  actual  results  to differ  materially  from  those in forward-looking  statements.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that its assumptions are based upon reasonable data derived from and known about our business and operations and the business and operations of the Company.  No assurances are made that actual results of operations or the results of our future activities will not differ materially from its assumptions.  Factors that could cause differences include, but are not limited to, expected market demand for the Company’s services, fluctuations in pricing for materials, and competition.

Overview

The increasing demand for wireless services has become the driving force behind the recent growth in the global communications industry. Wireless technology has advanced substantially to the point where wireless networks have proven to be an effective alternative to land line networks, a key factor in its broad acceptance. The advantages of wireless over land line communication are apparent in the aspects of mobility, cost, and deployment. The use of dedicated wireless networks for specified applications has improved productivity for individuals and organizations alike. We provide design-build engineering services that focus on the implementation requirements of wireless technology.  We serve the specialty communication systems and wireless infrastructure sectors. Our range of services includes site design, technology integration, electrical contracting, construction and project management for corporations, government entities and educational institutions worldwide. Because we are technology independent, we can integrate multiple products and services across a variety of communication requirements. This ability gives our customers the flexibility to obtain the most appropriate solution for their communication needs on a cost effective basis.

Specialty Communication Systems

We provide specialty communication systems which are wireless networks designed to improve productivity for a specified application by communicating data, voice or video information in situations where land line networks are non-existent, more difficult to deploy or too expensive. The types of specialty communication systems that we implement are used for mobile communication and general wireless connectivity purposes. We design and deploy networks that allow entities to reduce their dependence on high cost and inflexible leased land lines. We have the engineering expertise to utilize any facet of wireless technology or a combination of various wireless technologies to engineer a cost effective network for a customer’s wireless communication requirement. In addition, the design and deployment of a specialty communication system is a comprehensive effort that requires an in-depth knowledge of radio frequency engineering so that the wireless network is free from interference with other signals and amplified sufficiently to carry data, voice or video with speed and accuracy.  In specialty communications, we focus on four primary vertical markets to provide our services.  These vertical sectors include public safety, healthcare, gaming and energy.   For the years ended April 30, 2008 and 2007, specialty communication systems represented approximately 88% and 81% of our total revenue, respectively.
 
Wireless Infrastructure Services

We provide wireless infrastructure services to major wireless carriers, which are services that include the engineering, installation, integration and maintenance of wireless carrier equipment. Wireless carriers continue to be focused on building and expanding their networks, increasing capacity, upgrading their networks with new technologies and maintaining their existing infrastructure. Our engineers install and test base station equipment at the carrier cell site, including installation of new equipment, technology upgrades, equipment modifications and reconfigurations. These services may also include tower construction. For the years ended April 30, 2008 and 2007, wireless infrastructure services represented approximately 12% and 19% of our total revenue, respectively.
 
 
16

 
Significant Events, Trends and Financial Highlights

Management currently considers the following events, trends and uncertainties to be important in understanding our results of operations and financial condition:

 
·
For the year ended April 30, 2008, the specialty communication systems segment represented approximately 88% of total revenue, and the wireless infrastructure services segment represented approximately 12% of total revenue.  This revenue mix remains consistent with our historical performance and focus, in which over 80% of our total revenue has been derived from specialty communication systems.

 
·
As we continue to search for acquisitions, our primary goal is to identify companies which are performing well financially and are compatible with the services that we perform in the specialty communication systems segment. This trend could lead to a further shift in our revenue composition towards the specialty communication systems segment. We believe that the strength of our experience in the design and deployment of specialty communication systems gives us a competitive advantage.

 
·
With regard to our acquisition strategy, we are also focused on expanding in the international sector with an emphasis on China, Australia and surrounding Pacific Rim countries.  This trend could lead to a change of revenue composition in which a greater percentage of our revenue could be generated from international sales in the future, compared to the current level of approximately 3%.

 
·
We also seek to achieve organic growth in our existing business by maximizing the value of our existing customer base, maintaining and expanding our focus in vertical markets and developing our relationships with technology providers.

 
·
We believe that the wireless market continues to display strong growth and the demand for our engineering services remains favorable domestically and in China and Australia, particularly in public safety and healthcare.  We believe that the advancement of wireless technology will create additional opportunities for us to design and deploy wireless solutions. Also, we continue to identify new vertical sectors for wireless technology.

 
·
We believe that our two most important economic indicators for measuring our future revenue producing capability are our backlog and bid list.  At April 30, 2008, our backlog of unfilled orders was approximately $60 million and our bid list, which represents project bids under proposal for new and existing customers, was approximately $145 million, which indicates  demand for our services remains high.
     
  · In general, we plan for our consolidated cost of revenue to fall in the range of 70 to 72% of revenue.  For the year ended April 30, 2008, consolidated cost of revenue was 72% compared to 68% for the same period in the prior year.  We have experienced modest gross margin pressure compared to the same period in the prior year due to: (1) the subprime credit issues and the lack of residential housing projects, where in certain markets there are a growing number of general contractors competing for  certain projects and bidding down prices. While we are primarily focused on the high-end wireless design and deployment market, we have a modest exposure to competition for lower-end contracting work; and (2) delays or postponements of certain projects with wireless carriers, principally Sprint Nextel, resulting in contractors  bidding down prices on remaining work.  Management is addressing these issues through continued focus and diversification to specialty communications systems projects.
     
  · We continue to maintain a healthy balance sheet with approximately $26 million in working capital and credit facility borrowings of approximately $4.4 million.  We expect to use our working capital and availability under the credit facility to fund our continued growth.
 
Results of Operations for the Fiscal Year Ended April 30, 2008 Compared to Fiscal Year Ended April 30, 2007
 
The accompanying consolidated financial statements include the accounts of WPCS International Incorporated (WPCS) and its wholly and majority-owned subsidiaries, WPCS Incorporated , Invisinet Inc. (Invisinet), Walker Comm, Inc. (Walker), Clayborn Contracting Group, Inc. (Clayborn), Heinz Corporation (Heinz), Quality Communications & Alarm Company, Inc. (Quality), New England Communications Systems, Inc. (NECS) from June 1, 2006 (date of acquisition), Southeastern Communication Services, Inc. (SECS) from July 19, 2006 ( date of acquisition), Voacolo Electric Incorporated (Voacolo) from March 30, 2007 ( date of acquisition), Taian AGS Pipeline Construction Co. Ltd (TAGS) from April 5, 2007 ( date of acquisition), Major Electric, Inc. (Major) from August 1, 2007 (date of acquisition), Max Engineering LLC (Max) from August 2, 2007 (date of acquisition), Gomes and Gomes, Inc. dba Empire Electric (Empire) from November 1, 2007 (date of acquisition), WPCS Australia Pty Ltd  from November 12, 2007 (date of formation), James Design Pty Ltd (James) from November 30, 2007 (date of acquisition), WPCS Asia Limited from January 24, 2008 (date of formation)  and RL & CA MacKay Pty Ltd. dba Energize Electrical (Energize) from April 4, 2008 (date of acquisition), collectively the "Company".
 
 
 
17

 
Consolidated results for the years ended April 30, 2008 and 2007 were as follows:

       
Year Ended
       
April 30,
       
2008
 
2007
                 
REVENUE
$101,431,128
100.0%
 
$70,000,070
100.0%
                 
COSTS AND EXPENSES:
         
 
Cost of revenue
73,084,310
72.0%
 
47,781,351
68.3%
 
Selling, general and administrative expenses
19,302,773
19.0%
 
13,244,909
18.9%
 
Depreciation and amortization
2,398,603
2.4%
 
1,239,486
1.8%
                 
   
Total costs and expenses
94,785,686
93.4%
 
62,265,746
89.0%
                 
OPERATING INCOME
6,645,442
6.6%
 
7,734,324
11.0%
                 
OTHER EXPENSE (INCOME):
         
 
Interest expense
522,984
0.5%
 
496,330
0.7%
 
Interest income
          (511,122)
(0.5%)
 
          (525,524)
(0.8%)
 
Minority interest
            (22,115)
0.0%
 
             23,099
0.0%
                 
INCOME BEFORE INCOME TAX PROVISION
6,655,695
6.6%
 
7,740,419
11.1%
                 
Income tax provision
        2,577,348
2.5%
 
        3,146,818
4.5%
                 
NET INCOME
$4,078,347
4.1%
 
$4,593,601
6.6%
 
Revenue

Revenue for the year ended April 30, 2008 was approximately $101,431,000, as compared to $70,000,000 for the year ended April 30, 2007.  The increase in revenue for the year was primarily attributable to the acquisitions of NECS, SECS, Voacolo, TAGS, Major, Max, Empire, James, and Energize.  Including the pro forma revenue effect of these acquisitions as if they had occurred on May 1, 2006, the pro forma consolidated organic revenue growth rate was approximately 3% in fiscal 2008.   For the year ended April 30, 2008, there were no customers which comprised more than 10% of total revenue.  For the year ended April 30, 2007, we had two separate customers which comprised 18.1% and 11.7% of total revenue.

Total revenue from the specialty communication segment for the years ended April 30, 2008 and 2007 was approximately $89,612,000 or 88.3% and $56,750,000 or 81.1% of total revenue, respectively.  The increase in revenue was primarily attributable to the acquisitions of NECS, Voacolo, TAGS, Major, Empire, James and Energize. Including the pro forma revenue effect of these acquisitions as if they had occurred on May 1, 2006, the pro forma organic revenue growth rate for specialty communication was approximately 9% in fiscal 2008.

Wireless infrastructure segment revenue for the years ended April 30, 2008 and 2007 was approximately $11,819,000 or 11.7% and $13,250,000 or 18.9% of total revenue, respectively.  The decrease in revenue was due primarily to delays or postponement of certain projects with wireless carriers, principally Sprint Nextel, offset by increases in revenue from the acquisitions of SECS and Max. Including the pro forma revenue effect of these acquisitions as if they had occurred on May 1, 2006, the pro forma organic revenue decline in wireless infrastructure was approximately 28% in fiscal 2008.

 
18


Cost of Revenue

Cost of revenue consists of direct costs on contracts, materials, direct labor, third party subcontractor services, union benefits and other overhead costs.  Our cost of revenue was approximately $73,084,000 or 72.0% of revenue for the year ended April 30, 2008, compared to $47,781,000 or 68.3% for the prior year.  The dollar increase in our total cost of revenue is due to the corresponding increase in revenue during the year ended April 30, 2008 as a result of the acquisition of NECS, SECS, Voacolo, TAGS, Major, Max, Empire, James, and Energize.  The increase in cost of revenue as a percentage of revenue is due primarily to the revenue blend attributable to our existing subsidiaries and recent acquisitions.

The specialty communication segment cost of revenue and cost of revenue as a percentage of revenue for the years ended April 30, 2008 and 2007 was approximately $64,462,000 and 71.9% and $38,145,000 and 67.2%, respectively.  As discussed above, the dollar increase in our total cost of revenue is due to the corresponding increase in revenue during the year ended April 30, 2008, primarily attributable to the acquisitions completed within the last year. The increase as a percentage of revenue is due primarily to the revenue blend attributable to Walker, Clayborn, Quality, NECS and the recent acquisitions of Voacolo, TAGS, Major, Empire, James and Energize.  Secondarily, we have experienced modest gross margin pressure in certain markets from more general contractors competing for certain projects and bidding down prices on the lower-end contracting work.

Wireless infrastructure segment cost of revenue and cost of revenue as a percentage of revenue for the years ended April 30, 2008 and 2007 was approximately $8,622,000 and 72.9% and $9,636,000 and 72.7%, respectively.   The dollar decrease in our cost of revenue is due to the corresponding decrease in revenue during the year ended April 30, 2008.  The slight increase as a percentage of revenue during the year ended April 30, 2008 was due primarily to the completion of a specific project at greater than normal gross margin during the first quarter of fiscal 2008, and secondarily from the revenue blend from Heinz and SECS and the acquisition of Max.  These decreases were offset by modest gross margin pressure as the wireless carriers, primarily Sprint Nextel, delay or postpone projects, which results in contractors bidding down prices on remaining work.

Selling, General and Administrative Expenses

For the year ended April 30, 2008, total selling, general and administrative expenses were approximately $19,303,000, or 19.0% of total revenue compared to $13,245,000, or 18.9% of revenue for the prior year. The dollar increase in the selling, general and administrative expenses is due primarily to the acquisitions of NECS, SECS, Voacolo, TAGS, Major, Max, Empire, James and Energize. Included in selling, general and administrative expenses for the year ended April 30, 2008 are $11,210,000 for salaries, commissions, payroll taxes and other employee benefits. The $3,523,000 increase in salaries and payroll taxes compared to the prior year is due primarily to the increase in headcount as a result of the acquisitions of Voacolo, Major, Max, Empire, James and Energize. Professional fees were $991,000, which include accounting, legal and investor relation fees. Insurance costs were $2,163,000 and rent for office facilities was $786,000.  Automobile and other travel expenses were $1,820,000 and telecommunication expenses were $513,000. Other selling, general and administrative expenses totaled $1,820,000.  For the year ended April 30, 2008, total selling, general and administrative expenses for the specialty communication and wireless infrastructure segments were $14,110,000 and $2,851,000, respectively, with the balance of  $2,342,000  pertaining to corporate expenses.

For the year ended April 30, 2007, total selling, general and administrative expenses were approximately $13,245,000, or 18.9% of total revenue. Included in selling, general and administrative expenses for the year ended April 30, 2007 are $7,687,000 for salaries, commissions, payroll taxes and other employee benefits. Professional fees were $653,000, which include accounting, legal and investor relation fees. Insurance costs were $1,872,000 and rent for office facilities was $559,000.  Automobile and other travel expenses were $959,000 and telecommunication expenses were $311,000. Other selling, general and administrative expenses totaled $1,204,000.  For the year ended April 30, 2007, total selling, general and administrative expenses for the specialty communication and wireless infrastructure segments were $9,247,000 and $2,400,000, respectively, with the balance of $1,598,000 pertaining to corporate expenses.
 
Depreciation and Amortization

For the years ended April 30, 2008 and 2007, depreciation was approximately $1,539,000 and $776,000, respectively.  The increase in depreciation is due to the purchase of property and equipment and the acquisition of fixed assets from acquiring NECS, SECS, Voacolo, TAGS, Major, Max, Empire, James and Energize. The amortization of customer lists and backlog for the year ended April 30, 2008 was $859,000 as compared to $463,000 for the same period of the prior year.  The increase in amortization was due to the acquisition of customer lists from NECS, SECS, Voacolo, Major, Max, Empire, James and Energize and backlog from SECS, Voacolo, Major, Empire and James. All customer lists are amortized over a period of five to nine years from the date of their acquisitions. Backlog is amortized over a period of one to three years from the date of acquisition based on the expected completion period of the related contracts.
 
 
 
19


Interest Expense and Interest Income

For the years ended April 30, 2008 and 2007, interest expense was approximately $523,000 and $496,000, respectively. The slight increase in interest expense is due principally from increased borrowings on lines of credit.

           For the years ended April 30, 2008 and 2007, interest income was approximately $511,000 and $526,000, respectively. The slight decrease in interest earned is due primarily to the decrease in cash and cash equivalents balance during fiscal 2008 and secondarily from lower interest rates.

Net Income

The net income was approximately $4,078,000 for the year ended April 30, 2008. Net income was net of Federal and state income tax expense of approximately $2,577,000. The decrease in the effective tax rate is primarily the result of the mix of pre-tax income generated by the various operating subsidiaries.

The net income was approximately $4,594,000 for the year ended April 30, 2007. Net income was net of Federal and state income tax expense of approximately $3,147,000.

Liquidity and Capital Resources

At April 30, 2008, we had working capital of approximately $26,458,000, which consisted of current assets of approximately $44,382,000 and current liabilities of $17,924,000.

Operating activities utilized approximately $1,245,000 in cash for the year ended April 30, 2008. The sources of cash from operating activities total approximately $6,765,000, comprised of $4,078,000 net income, $2,419,000 in net non-cash charges, a $170,000 decrease in costs and estimated earnings in excess of billings on uncompleted contracts, and a $98,000 increase in deferred revenue. The uses of cash from operating activities total approximately $8,010,000, comprised of a $5,379,000 increase in accounts receivable, a $397,000 increase in inventory, a $115,000 increase in prepaid expenses and other current assets, a $536,000 increase in other assets, a $328,000 decrease in billings in excess of costs and estimated earnings on uncompleted contracts , an $803,000 decrease in income taxes payable and a $452,000 decrease in accounts payable and accrued expenses. Net earnings adjusted for non-cash items provided cash of $6,497,000 versus $5,888,000 in fiscal 2007, offset by an increase in cash used for working capital.  Working capital used cash of approximately $7,742,000 in 2008 versus providing cash of $281,000 in 2007.  Working capital components used cash in fiscal 2008 reflecting higher levels of accounts receivable and inventory in connection with overall sales growth.
 
Our investing activities utilized approximately $10,478,000 in cash during the year ended April 30, 2008, which consisted of $716,000 paid for property and equipment, and $9,762,000 paid for the acquisitions of NECS, SECS, Voacolo, Major, Max, Empire, James, and Energize, net of cash acquired of $389,000. Fiscal 2008 acquisitions were funded primarily from the $9.3 million of cash received in the third quarter of 2007 from the issuance of our common stock.
 
Our financing activities utilized cash of approximately $2,431,000 during the year ended April 30, 2008.  Financing activities included  net  line of credit repayments of $1,815,000, repayment of loan payables and capital lease obligations of approximately $1,029,000 and equity issuance costs of $14,000, offset by net proceeds from the exercise of stock options of $61,000, and a $16,000 tax benefit from the exercise of stock options, and $350,000 in net  borrowings from shareholders. Financing activities used cash of $2.4 million in 2008 versus providing cash of $11.7 million in fiscal 2007.   2007 financing activities included net proceeds of $9,338,000 received from the issuance of common stock, which were raised to fund 2008 acquisitions described above.
 
Our capital requirements depend on numerous factors, including the market for our services, the resources we devote to developing, marketing, selling and supporting our business, the timing and extent of establishing additional markets and other factors.
 
On April 10, 2007, we entered into a loan agreement with Bank of America, N.A. (BOA). The loan agreement (Loan Agreement) provides for a revolving line of credit in an amount not to exceed $12,000,000, together with a letter of credit facility not to exceed $2,000,000. We also entered into security agreements with BOA, pursuant to which we granted a security interest to BOA in all of our assets.   The Loan Agreement contains customary covenants, including but not limited to (i) funded debt to tangible net worth, and (ii) minimum interest coverage ratio. The loan commitment shall expire on April 10, 2010, and we may prepay the loan at any time.  Loans under the Loan Agreement bear interest at a rate equal to BOA’s prime rate, minus one percentage point, or we have the option to elect to use the optional interest rate of LIBOR plus one hundred seventy-five basis points.  As of April 30, 2008, interest rates ranged from 4.00% to 4.82% on outstanding borrowings of approximately $4,376,000 under the Loan Agreement with BOA.
 
 
20

 
At April 30, 2008, we had cash and cash equivalents of approximately $7,450,000 and working capital of approximately $26,458,000. With internally available funds and funds available from the Loan Agreement, we believe that we have sufficient capital to meet our short term needs. Our future operating results may be affected by a number of factors including our success in bidding on future contracts and our continued ability to manage controllable costs effectively. To the extent we grow by future acquisitions that involve consideration other than stock, our cash requirements may increase.

On March 30, 2007, we acquired Voacolo.  Through April 30, 2008, the aggregate consideration paid by us, including acquisition transaction costs of $31,389, was $2,563,863 of which $1,281,389 was paid in cash, and we issued 116,497 shares of common stock valued at $1,282,473.  In June 2008, we settled and paid aggregate additional cash consideration of $2,500,000 to the former Voacolo shareholders for the earnout settlement for the twelve months ended March 31, 2008. The acquisition of Voacolo expands our geographic presence in the Mid-Atlantic region and provides additional  electrical contracting services  in both high and low voltage applications, structured cabling and voice/data/video solutions, as well as the expansion of our operations into wireless video surveillance.

On April 5, 2007, we acquired a 60% Equity Interest and a 60% Profit Interest (together the Interest) in TAGS, a joint venture enterprise in the City of Taian, Shandong province, the People's Republic of China, from American Gas Services, Inc. and American Gas Services, Inc. Consultants, respectively. The aggregate consideration paid by us , including acquisition transaction costs of $185,409, was $1,785,409 of which $985,409 was paid in cash, and we issued 68,085 shares of common stock valued at approximately $800,000.   Founded in 1997, TAGS is a communications infrastructure engineering company serving the China market. TAGS is certified by the People's Republic of China as both a Construction Enterprise of Reform Development company and a Technically Advanced Construction Enterprise company for the Province of Shandong. TAGS is also licensed in 17 other provinces and has completed projects for a diverse customer base of businesses and government institutions in over 30 cities in China.  The acquisition of TAGS provides us international expansion into China consistent with our emphasis on China and surrounding Pacific Rim countries.

On August 1, 2007, we acquired Major. The aggregate consideration paid by us, including acquisition transaction costs of $44,226, was $6,663,717, of which $4,215,701 was paid in cash and we issued 242,776 shares of common stock valued at $2,448,016.  The acquisition of Major expands our geographic presence in the Pacific Northwest region and provides additional wireless and electrical contracting services in direct digital controls, security, wireless SCADA applications and wireless infrastructure.

On August 2, 2007, we acquired Max. The aggregate consideration paid by us,, including acquisition transaction costs of $30,498, was $830,498, of which $630,498 was paid in cash and we issued 17,007 shares of common stock valued at $200,000. In addition, we shall pay an additional: (i) $350,000 in cash or our common stock if Max’s earnings before interest and taxes for the twelve months ending August 1, 2008 shall equal or exceed $275,000; and (ii) $375,000 in cash or our common stock if Max’s earnings before interest and taxes for the twelve months ending August 1, 2009 shall equal or exceed $375,000.   The acquisition of Max expands our geographic expansion into Texas and provides additional engineering services that specialize in the design of specialty communication systems and wireless infrastructure for the telecommunications, oil, gas and wind energy markets.

On November 1, 2007, we acquired Empire. The aggregate consideration paid by us, including acquisition transaction costs of $40,154, was $2,511,154 in cash. The acquisition of Empire expands our geographic presence in California and provides additional electrical contractor services that specialize in low voltage applications for healthcare, state government and military customers.

On November 30, 2007, we acquired James.   Through April 30, 2008, the aggregate consideration paid by us, including acquisition transaction costs of $74,151, was $1,145,151 in cash.  In May 2008, we settled and  paid aggregate additional cash consideration of $281,725 to the former James shareholders for final settlement of the net tangible asset adjustment.   James is a design engineering services company specializing in building automation including mechanical, electrical, hydraulic, fire protection, lift, security access and wireless systems.  The acquisition of James provides us international expansion into Australia consistent with our emphasis on Australia, China and surrounding Pacific Rim countries.

On April 4, 2008, we acquired Energize. The aggregate consideration paid by us, including acquisition transaction costs of $84,175, was $1,627,297 in cash, subject to adjustment.  Energize is an electrical contractor specializing in underground utilities, maintenance and low voltage applications including voice, data and video for commercial and building infrastructure companies, and is expanding its wireless deployment capabilities.  The acquisition of Energize provides  further international expansion into Australia.
 
 
21

 
On June 26, 2008, we acquired all the assets of Lincoln Wind LLC (Lincoln Wind) for aggregate consideration of $400,000 in cash. Lincoln Wind is an engineering company focused on the implementation of meteorological towers that measure the wind capacity of geographic areas prior to the construction of a wind farm.  The acquisition of Lincoln Wind provides additional engineering services that specialize in the design of specialty communication systems for the wind energy market.
 
Backlog
 
As of April 30, 2008, we had a backlog of unfilled orders of approximately $59.8 million compared to approximately $34.9 million at April 30, 2007. We define backlog as the value of work-in-hand to be provided for customers as of a specific date where the following conditions are met (with the exception of engineering change orders): (i) the price of the work to be done is fixed; (ii) the scope of the work to be done is fixed, both in definition and amount; and (iii) there is a written contract, purchase order, agreement or other documentary evidence which represents a firm commitment by the customer to pay us for the work to be performed. These backlog amounts are based on contract values and purchase orders and may not result in actual receipt of revenue in the originally anticipated period or at all. We have experienced variances in the realization of our backlog because of project delays or cancellations resulting from external market factors and economic factors beyond our control and we may experience such delays or cancellations in the future. Backlog does not include new firm commitments which may be awarded to us by our customers from time to time in future periods. These new project awards could be started and completed in this same future period. Accordingly, our backlog does not necessarily represent the total revenue that could be earned by us in future periods.
 
Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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 our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.

We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our 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 revenue and expenses during the reporting period. The most significant estimates relate to revenue recognition based on the estimation of percentage of completion on uncompleted contracts, valuation of inventory, allowance for doubtful accounts, amortization methods and estimated lives of customer lists and estimates of the fair value of reporting units and discounted cash flows used in determining whether goodwill has been impaired. Actual results could differ from those estimates.
 
Accounts Receivable

Accounts receivable are due within contractual payment terms and are stated at amounts due from customers net of an allowance for doubtful accounts. Credit is extended based on evaluation of a customer's financial condition. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible against the allowance for doubtful accounts, and payment subsequently received on such receivables are credited to the allowance for doubtful accounts.
 
 
22

 
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 as of April 30 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. Some of the factors we consider include a significant decrease in the market value of an asset, significant changes in the extent or manner for which the asset is being used or in its physical condition, a significant change, delay or departure in our business strategy related to the asset, significant negative changes in the business climate, industry or economic condition, or current period operating losses, or negative cash flow combined  with a history of similar losses or a forecast that indicates continuing losses associated with the use of an asset.

Our annual review for goodwill impairment for the fiscal years 2008 and 2007 found that no impairment existed. 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 Heinz/Invisinet, SECS and Max within our wireless infrastructure segment and Walker, Clayborn, Quality, NECS, Voacolo, Major, Empire, James and Energize within our specialty communications 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.

Deferred Income Taxes

We determine deferred tax liabilities and assets at the end of each period based on the future tax consequences that can be attributed to net operating loss carryovers and differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, using the tax rate expected to be in effect when the taxes are actually paid or recovered. The recognition of deferred tax assets is reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible.

We consider past performance, expected future taxable income and prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. Our forecast of expected future taxable income is based over such future periods that we believe can be reasonably estimated. Changes in market conditions that differ materially from our current expectations and changes in future tax laws in the U.S. may cause us to change our judgments of future taxable income. These changes, if any, may require us to adjust our existing tax valuation allowance higher or lower than the amount we have recorded.

Revenue Recognition

We generate our revenue by providing design-build engineering services for specialty communication systems and wireless infrastructure services. We provide services that include site design, technology integration, electrical contracting, construction and project management. Our engineering services report revenue pursuant to customer contracts that span varying periods of time. We report revenue from contracts when persuasive evidence of an arrangement exists, fees are fixed or determinable, and collection is reasonably assured.

We record revenue and profit from long-term contracts on a percentage-of-completion basis, measured by the percentage of contract costs incurred to date to the estimated total costs for each contracts.  Contracts in process are valued at cost plus accrued profits less earned revenues and progress payments on uncompleted contracts. Contract costs include direct materials, direct labor, third party subcontractor services and those indirect costs related to contract performance.  Contracts are generally considered substantially complete when engineering is completed and/or site construction is completed.

We have numerous contracts that are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. Cost estimates are reviewed monthly on a contract-by-contract basis, and are revised periodically throughout the life of the contract such that adjustments to profit resulting from revisions are made cumulative to the date of the revision.  Significant management judgments and estimates, including the estimated cost to complete projects, which determines the project’s percent complete, must be made and used in connection with the revenue recognized in the accounting period.  Current estimates may be revised as additional information becomes available. If estimates of costs to complete long-term contracts indicate a loss, provision is made currently for the total loss anticipated.
 
 
23


 
We also recognize certain revenue from short-term contracts when equipment is delivered or the services have been provided to the customer.  For maintenance contracts, revenue is recognized ratably over the service period.
 
Recently Issued Accounting Pronouncements
 
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FAS No. 109” (FIN 48), which clarifies the accounting for uncertainty in income taxes is subject to significant and varied interpretations that have resulted in diverse and inconsistent accounting practices and measurements. Addressing such diversity, FIN 48 prescribes a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring changes in such tax positions for financial statement purposes. FIN 48 also requires expanded disclosure with respect to the uncertainty in income taxes. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 on May 1, 2007 had no impact on our consolidated financial position, results of operations, cash flows or financial statement disclosures.

On September 15, 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157), which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. On February 12, 2008, the FASB issued staff position No. SFAS 157-2, “effective date of FASB No. 157 Fair Value Measurements”, which delays the effective date of SFAS 157 for non-financial assets and liabilities to fiscal years beginning after November 15, 2008. We are currently evaluating the potential impact, if any, of the adoption of SFAS 157 on our consolidated financial position, results of operations and cash flows or financial statement disclosures.

In September 2006, the SEC issued SAB No. 108 “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (SAB 108), which is effective for fiscal years beginning after November 15, 2006 provides interpretive guidance on how registrants should quantify financial statement misstatements. Under SAB 108 registrants are required to consider both a “rollover” method, which focuses primarily on the income statement impact of misstatements, and the “iron curtain” method, which focuses primarily on the balance sheet impact of misstatements. The effects of prior year uncorrected errors include the potential accumulation of improper amounts that may result in a material misstatement on the balance sheet or the reversal of prior period errors in the current period that result in a material misstatement of the current period income statement amounts. Adjustments to current or prior period financial statements would be required in the event that after application of various approaches for assessing materiality of a misstatement in current period financial statements and consideration of all relevant quantitative factors, a misstatement is determined to be material. The application of the provisions of SAB 108 did not have a material effect on our consolidated financial position, results of operations,cash flows or financial statement disclosures.

In February, 2007, the FASB issued FASB Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159), which permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the potential impact, if any, of the adoption of  SFAS 159 on our consolidated  financial position, results of operations, cash flows or financial statement disclosures.

On December 4, 2007, the FASB issued SFAS No. 141(R) “Business Combinations” (SFAS 141(R)), and SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160).  These new standards will significantly change the accounting for and reporting for business combination transactions and noncontrolling (minority) interests in consolidated financial statements. SFAS 141(R) and SFAS 160 are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. We will evaluate the impact of adopting SFAS 141(R) and SFAS 160 on our consolidated financial position, results of operations, cash flows or financial statement disclosures.

No other recently issued accounting pronouncement issued or effective after the end of the fiscal year is expected to have a material impact on our consolidated financial statements.


24


ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required under Regulation S-K for “smaller reporting companies.”
 
 
 
 
 
 
 
 
 
 
 
 
 
 
25

 
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
 
 
 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
 
INDEX TO FINANCIAL STATEMENTS

   
Page
     
Report of Independent Registered Public Accounting Firm
 
F-2
     
Consolidated Balance Sheets as of April 30, 2008 and 2007
 
F-3 – F-4
     
Consolidated Statements of Income for the years ended April 30, 2008 and 2007
 
F-5
     
Consolidated Statements of Shareholders' Equity for the years ended April 30, 2008 and 2007
 
F-6 – F-7
     
Consolidated Statements of Cash Flows for the years ended April 30, 2008 and 2007
 
F-8 – F-10
     
Notes to Consolidated Financial Statements
 
F-11 – F-32
 
 
F-1


 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 

 

The Board of Directors and Shareholders
WPCS International Incorporated and Subsidiaries

We have audited the accompanying consolidated balance sheets of WPCS International Incorporated and Subsidiaries as of April 30, 2008 and 2007, and the related consolidated statements of income, shareholders' equity and cash flows for each of the two years in the period ended April 30, 2008. Our audits also included the consolidated financial statement schedule for the years ended April 30, 2008 and 2007 listed in the Index at Item 15 (Schedule II).  These consolidated financial statements and schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of WPCS International Incorporated and Subsidiaries as of April 30, 2008 and 2007, and their consolidated results of operations and cash flows for each of the two years in the period ended April 30, 2008, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, the related consolidated financial statement schedule for the years ended April 30, 2008 and 2007, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, WPCS International Incorporated and Subsidiaries adopted Statement of Financial Accounting Standard No. 123(R) ''Share-Based Payment'' effective May 1, 2006.


 / s / J.H. COHN LLP

July 28, 2008





F-2

 

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS




   
April 30,
   
April 30,
 
ASSETS
 
2008
   
2007
 
         
(Note 1)
 
CURRENT ASSETS:
           
             
Cash and cash equivalents
  $ 7,449,530     $ 21,558,739  
Accounts receivable, net of allowance of $98,786 at April 30, 2008 and April 30, 2007
    29,092,488       16,560,636  
Costs and estimated earnings in excess of billings on uncompleted contracts
    3,887,152       2,499,940  
Inventory
    2,791,782       2,260,082  
Prepaid expenses and other current assets
    1,002,993       732,043  
Prepaid income tax
    122,342       -  
Deferred tax assets
    35,939       27,000  
Total current assets
    44,382,226       43,638,440  
                 
PROPERTY AND EQUIPMENT, net
    6,828,162       5,488,920  
                 
OTHER INTANGIBLE ASSETS, net
    2,929,937       1,683,349  
                 
GOODWILL
    28,987,501       20,469,608  
                 
OTHER ASSETS
    820,315       273,353  
                 
Total assets
  $ 83,948,141     $ 71,553,670  

 


The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
F-3

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
 

LIABILITIES AND SHAREHOLDERS' EQUITY
 
April 30,
   
April 30,
 
   
2008
   
2007
 
         
(Note 1)
 
CURRENT LIABILITIES:
           
             
Current portion of loans payable
  $ 1,272,112     $ 1,881,682  
Borrowings under line of credit
    750,000       -  
Current portion of capital lease obligations
    91,491       -  
Accounts payable and accrued expenses
    9,305,791       6,802,110  
Billings in excess of costs and estimated earnings on uncompleted contracts
    3,602,422       2,272,688  
Deferred revenue
    602,560       504,458  
Due to shareholders
    2,300,083       1,424,190  
Income taxes payable
    -       433,361  
Total current liabilities
    17,924,459       13,318,489  
                 
Borrowings under line of credit
    4,376,056       4,454,217  
Loans payable, net of current portion
    156,978       284,016  
Capital lease obligations, net of current portion
    215,780       -  
Deferred tax liabilities
    1,173,786       611,000  
Total liabilities
    23,847,059       18,667,722  
                 
Minority interest in subsidiary
    1,331,850       1,353,965  
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS' EQUITY:
               
Preferred stock - $0.0001 par value, 5,000,000 shares authorized, none issued
    -       -  
                 
Common stock - $0.0001 par value, 75,000,000 shares authorized, 7,251,083 and 6,971,698 shares issued and outstanding at April 30, 2008 and April 30, 2007, respectively
    725       697  
Additional paid-in capital
    50,775,938       47,901,159  
Retained earnings
    7,709,562       3,631,215  
Accumulated other comprehensive income (loss) on foreign currency translation
    283,007       (1,088 )
                 
Total shareholders' equity
    58,769,232       51,531,983  
                 
Total liabilities and shareholders' equity
  $ 83,948,141     $ 71,553,670  

 
The accompanying notes are an integral part of these consolidated financial statements.
 
F-4

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

   
Year Ended
 
   
April 30,
 
   
2008
   
2007
 
             
             
REVENUE
  $ 101,431,128     $ 70,000,070  
                 
COSTS AND EXPENSES:
               
Cost of revenue
    73,084,310       47,781,351  
Selling, general and administrative expenses
    19,302,773       13,244,909  
Depreciation and amortization
    2,398,603       1,239,486  
                 
Total costs and expenses
    94,785,686       62,265,746  
                 
OPERATING INCOME
    6,645,442       7,734,324  
                 
OTHER EXPENSE (INCOME):
               
Interest expense
    522,984       496,330  
Interest income
    (511,122 )     (525,524 )
Minority interest
    (22,115 )     23,099  
                 
INCOME BEFORE INCOME TAX PROVISION
    6,655,695       7,740,419  
                 
Income tax provision
    2,577,348       3,146,818  
                 
NET INCOME
  $ 4,078,347     $ 4,593,601  
                 
Basic net income per common share
  $ 0.58     $ 0.80  
                 
Diluted net income per common share
  $ 0.52     $ 0.72  
                 
Basic weighted average number of common shares outstanding
    7,090,789       5,772,423  
                 
Diluted weighted average number of common shares outstanding
    7,840,852       6,409,333  


The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
F-5

 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


                                       
Accumulated
       
                           
Additional Paid-In Capital
         
Other Compre-
   
Total Shareholders' Equity
 
   
Preferred Stock
   
Common Stock
   
Retained
   
hensive
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Earnings
   
Loss
 
                                                 
BALANCE, MAY 1, 2006
    -     $ -       5,264,284     $ 526     $ 33,525,130     $ (962,386 )     -     $ 32,563,270  
                                                                 
Net issuance of common stock, acquisition of
                                                               
 Southeastern Communication Service, Inc.
    -       -       200,288       20       1,349,631       -       -       1,349,651  
                                                                 
Net issuance of common stock, acquisition of
                                                               
Voacolo Electric, Inc
    -       -       113,534       11       1,249,869       -       -       1,249,880  
                                                                 
Net issuance of common stock, acquisition of
                                                               
TAGS
    -       -       61,277       6       719,864       -       -       719,870  
                                                                 
Net issuance of common stock
    -       -       1,109,023       111       9,337,780       -       -       9,337,891  
                                                                 
Net proceeds from exercise of warrants
    -       -       30,281       3       197,873       -       -       197,876  
                                                                 
Fair value of stock options granted to employees
    -       -       -       -       37,526       -       -       37,526  
                                                                 
Net proceeds from exercise of stock options
    -       -       193,011       20       1,225,486       -       -       1,225,506  
                                                                 
Excess tax benefit from exercise of stock options
    -       -       -       -       258,000       -       -       258,000  
                                                                 
Accumulated other comprehensive loss
    -       -       -       -       -       -       (1,088 )     (1,088 )
                                                                 
Net income
    -       -       -       -       -     $ 4,593,601       -       4,593,601  
                                                                 
BALANCE, April 30, 2007
    -     $ -       6,971,698     $ 697     $ 47,901,159     $ 3,631,215     $ (1,088 )   $ 51,531,983  

The accompanying notes are an integral part of these consolidated financial statements.
 
F-6

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY – CONTINUED

                                       
Accumulated
       
                           
Additional Paid-In Capital
         
Other Compre-
   
Total Shareholders' Equity
 
   
Preferred Stock
   
Common Stock
   
Retained
   
hensive
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Earnings
   
Income (Loss)
 
                                                 
                                                 
BALANCE, May 1, 2007
    -     $ -       6,971,698     $ 697     $ 47,901,159     $ 3,631,215     $ (1,088 )   $ 51,531,983  
                                                                 
Net issuance of common stock, acquisitions
                                                               
of TAGS, Voacolo, Major and Max
    -       -       269,554       27       2,760,462       -       -       2,760,489  
                                                                 
Fair value of stock options granted to employees
    -       -       -       -       51,717       -       -       51,717  
                                                                 
Proceeds from exercise of stock options
    -       -       9,831       1       60,531       -       -       60,532  
                                                                 
Equity issuance cost
    -       -       -       -       (13,931 )     -       -       (13,931 )
                                                                 
Excess tax benefit from exercise of stock options
    -       -       -       -       16,000       -       -       16,000  
                                                                 
Accumulated other comprehensive income
    -       -       -       -       -       -       284,095       284,095  
                                                                 
Net income
    -       -       -       -       -     $ 4,078,347       -       4,078,347  
                                                                 
BALANCE, APRIL 30, 2008
    -     $ -       7,251,083     $ 725     $ 50,775,938     $ 7,709,562     $ 283,007     $ 58,769,232  

 


The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-7

 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS


   
Year Ended
 
   
April 30,
 
   
2008
   
2007
 
         
(Note 1)
 
OPERATING ACTIVITIES :
           
Net income
  $ 4,078,347     $ 4,593,601  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    2,398,603       1,239,486  
Fair value of stock options granted to employees
    51,717       37,526  
Recovery of doubtful accounts
    -       (6,000 )
Amortization of debt issuance costs
    -       111,091  
Excess tax benefit from exercise of stock options
    (16,000 )     (258,000 )
Minority interest
    (22,115 )     23,099  
Gain on sale of fixed assets
    (4,668 )     (13,675 )
Deferred income taxes
    11,668       161,000  
Changes in operating assets and liabilities, net of effects of acquisitions:
               
Accounts receivable
    (5,378,553 )     2,320,439  
Costs and estimated earnings in excess of billings on uncompleted contracts
    170,020       (421,204 )
Inventory
    (397,020 )     229,358  
Prepaid expenses and other current assets
    (115,019 )     89,273  
Other assets
    (536,157 )     (180,187 )
Accounts payable and accrued expenses
    (452,234 )     (2,345,468 )
Billings in excess of costs and estimated earnings on uncompleted contracts
    (328,318 )     329,544  
Deferred revenue
    97,934       222,092  
Income taxes payable
    (803,479 )     37,244  
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
    (1,245,274 )     6,169,219  

 

The accompanying notes are an integral part of these consolidated financial statements.



F-8

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS – CONTINUED

   
Year Ended
 
   
April 30,
 
   
2008
   
2007
 
         
(Note 1)
 
             
INVESTING ACTIVITIES:
           
Acquisition of property and equipment, net
    (715,849 )     (673,237 )
Acquisition of NECS, net of cash received
    (3,534 )     (4,607,268 )
Acquisition of SECS, net of cash received
    60,892       (1,882,321 )
Acquisition of Voacolo, net of cash received
    (69,601 )     (627,694 )
Acquisition of TAGS, net of cash received
    -       (841,252 )
Acquisition of Major, net of cash received
    (4,268,320 )     -  
Acquisition of Max, net of cash received
    (524,572 )     -  
Acquisition of Empire, net of cash received
    (2,427,999 )     -  
Acquisition of James, net of cash received
    (922,763 )     -  
Acquisition of Energize, net of cash received
    (1,605,868 )     -  
NET CASH USED IN INVESTING ACTIVITIES
    (10,477,614 )     (8,631,772 )
                 
FINANCING ACTIVITIES:
               
Net proceeds from exercise of warrants
    -       197,876  
Net proceeds from issuance of common stock
    -       9,337,891  
Net proceeds from exercise of stock options
    60,532       1,225,506  
Excess tax benefit from exercise of stock options
    16,000       258,000  
Equity issuance costs
    (13,931 )     (50,613 )
Debt issuance costs
    -       (10,000 )
(Repayments)/borrowings under lines of credit, net
    (1,814,935 )     1,454,217  
Repayments under loans payable, net
    (921,779 )     (456,405 )
Borrowings/(repayments) of amounts due to shareholders
    350,259       (189,000 )
Payments of capital lease obligations
    (107,558 )     (24,738 )
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    (2,431,412 )     11,742,734  
                 
Effect of exchange rate changes on cash
    45,091       (1,088 )
                 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (14,109,209 )     9,279,093  
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    21,558,739       12,279,646  
CASH AND CASH EQUIVALENTS, END OF THE YEAR
  $ 7,449,530     $ 21,558,739  
 

The accompanying notes are an integral part of these consolidated financial statements.

 
F-9


WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS – CONTINUED

   
April 30, 2008
   
April 30, 2007
 
             
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
           
Cash paid during the year for:
           
Interest
    522,984     $ 433,742  
Income taxes
    2,049,667     $ 2,897,944  
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
                 
Issuance of common stock for net non-cash assets received in acquisitions
  $ 2,760,489     $ 3,370,011  
                 
                 
Issuance of notes for property and equipment
  $ 172,532     $ 74,382  
 

The accompanying notes are an integral part of these consolidated financial statements
 
 
 
F-10

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 

 NOTE 1 - BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of WPCS International Incorporated (WPCS) and its wholly and majority-owned subsidiaries, WPCS Incorporated , Invisinet Inc. (Invisinet), Walker Comm, Inc. (Walker), Clayborn Contracting Group, Inc. (Clayborn), Heinz Corporation (Heinz), Quality Communications & Alarm Company, Inc. (Quality), New England Communications Systems, Inc. (NECS) from June 1, 2006 (date of acquisition), Southeastern Communication Services, Inc. (SECS) from July 19, 2006 ( date of acquisition), Voacolo Electric Incorporated (Voacolo) from March 30, 2007 ( date of acquisition), Taian AGS Pipeline Construction Co. Ltd (TAGS) from April 5, 2007 ( date of acquisition), Major Electric, Inc. (Major) from August 1, 2007 (date of acquisition), Max Engineering LLC (Max) from August 2, 2007 (date of acquisition), Gomes and Gomes, Inc. dba Empire Electric (Empire) from November 1, 2007 (date of acquisition), WPCS Australia Pty Ltd  from November 12, 2007 (date of formation), James Design Pty Ltd (James) from November 30, 2007 (date of acquisition), WPCS Asia Limited from January 24, 2008 (date of formation)  and RL & CA MacKay Pty Ltd. dba Energize Electrical (Energize) from April 4, 2008 (date of acquisition), collectively the “Company”.  Certain reclassifications have been made to prior period consolidated financial statements to conform to the current presentation.

The Company provides design-build engineering services that focus on the implementation requirements of wireless technology.  The Company serves the specialty communication systems and wireless infrastructure sectors.  The Company provides services that include site design, technology integration, electrical contracting, construction, and project management for corporations, government entities and educational institutions worldwide.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:

Principles of Consolidation

All significant intercompany transactions and balances have been eliminated in these consolidated financial statements.

Cash and Cash Equivalents

Cash and cash equivalents include all cash and highly-liquid investments with an original maturity at time of purchase of three months or less.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.  The Company reduces credit risk by placing its temporary cash and investments with major financial institutions with high credit ratings.  At times, such amounts may exceed Federally insured limits.  The Company reduces credit risk related to accounts receivable by routinely assessing the financial strength of its customers and maintaining an appropriate allowance for doubtful accounts based on its history of write-offs, current economic conditions and an evaluation of the credit risk related to specific customers.

Accounts Receivable

Accounts receivable are due within contractual payment terms and are stated at amounts due from customers net of an allowance for doubtful accounts. Credit is extended based on evaluation of a customer's financial condition. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Included in the accounts receivable is retainage receivable of $2,626,788 and $750,249 at April 30, 2008 and 2007, respectively, which is expected to be collected within one year.

Inventory
 
Inventory consists of materials, parts and supplies principally valued at the lower of cost using the first-in-first-out (FIFO) method, or market.
 
 
 
F-11

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are provided for, using straight-line methods, in amounts sufficient to charge the cost of depreciable assets to operations over their estimated service lives. Repairs and maintenance costs are charged to operations as incurred.

Goodwill and Other Intangible Assets

In accordance with Statement of Financial Standards (SFAS No. 142), “Goodwill and Other Intangible Assets,” 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 definite 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 at least annually, 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 is 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, based on the excess, if any, of the reporting unit’s carrying value of goodwill over its implied value.
 
The Company determines the fair value of the businesses acquired (reporting units) 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. The fair value of the Company’s reporting units derived using discounted cash flow models exceeded the carrying values of the reporting units at April 30, 2008 and 2007. Accordingly, step two was unnecessary and no impairment charge was recognized in the consolidated statements of income for the years ended April 30, 2008 and 2007. On an ongoing basis, the Company expects to perform its annual impairment test at April 30 absent any interim impairment indicators.

Goodwill through the years ended April 30, 2008 and 2007 consisted of the following:

   
Wireless
 Infrastructure
   
Specialty
Communication
   
Total
 
                   
Beginning balance, May 1, 2006
  $ 2,482,084     $ 11,757,834     $ 14,239,918  
                         
Additional transaction costs for prior acquisitions
    13,780       -       13,780  
NECS acquisition
    -       3,380,112       3,380,112  
SECS acquisition
    1,823,205       -       1,823,205  
Voacolo acquisition
    -       1,012,593       1,012,593  
Ending balance, April 30, 2007
    4,319,069     $ 16,150,539       20,469,608  
                         
Voacolo acquisition - purchase price adjustment
    -       476,139       476,139  
NECS acquisition - purchase price adjustment
    -       35,595       35,595  
SECS acquisition - purchase price adjustment
    (39,775 )     -       (39,775 )
Major acquisition
    -       4,505,562       4,505,562  
Max acquisition
    304,407       -       304,407  
Empire acquisition
    -       1,796,709       1,796,709  
James acquisition
    -       434,835       434,835  
Energize acquisition
    -       961,201       961,201  
Foreign currency translation adjustments - Australia
    -       43,220       43,220  
                         
Ending balance, April 30, 2008
  $ 4,583,701     $ 24,403,800     $ 28,987,501  
 
 
F-12

 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At April 30, 2008 and 2007, the total amount of goodwill expected to be deducted for tax purposes is $15,427,560 and $10,926,178 , respectively,  related to the Quality, NECS, SECS, and Major acquisitions.

Other intangible assets consist of the following at April 30:

   
Estimated useful life (years)
   
 
2008
   
 
2007
 
                   
Customer lists
   
5-9
    $ 4,119,269     $ 2,607,000  
Contract backlog
   
1-3
      919,722       325,200  
              5,038,991       2,932,200  
Less accumulated amortization expense
            2,109,054       1,248,851  
            $ 2,929,937     $ 1,683,349  

Amortization expense for other intangible assets for the years ended April 30, 2008 and 2007 was approximately $859,000 and $463,000, respectively.

At April 30, 2008, the weighted average amortization period for customer lists, backlog, and total other intangible assets was 6.9, 1.6, and 5.9 years, respectively. At April 30, 2007, the weighted average amortization period for customer lists, backlog, and total other intangible assets was 6.2, 1.7 and 5.7 years, respectively.

There are no expected residual values related to these intangible assets. Estimate future amortization expense by fiscal year is as follows:

Year ending April 30,
     
2009
  $ 811,745  
2010
    527,445  
2011
    388,224  
2012
    331,836  
2013
    337,618  
Thereafter
    533,069  
Total Intangible Assets
  $ 2,929,937  

 
Revenue Recognition

The Company generates its revenue by providing design-build engineering services for specialty communication systems and wireless infrastructure services. The Company provides services that include site design, technology integration, electrical contracting, construction, and project management. The Company’s engineering and deployment services report revenue pursuant to customer contracts that span varying periods of time. The Company reports revenue from contracts when persuasive evidence of an arrangement exists, fees are fixed or determinable, and collection is reasonably assured.

The Company records revenue and profit from long-term contracts on a percentage-of-completion basis, measured by the percentage of contract costs incurred to date to the estimated total costs for each contract.  Contracts in process are valued at cost plus accrued profits less earned revenues and progress payments on uncompleted contracts. Contract costs include direct materials, direct labor, third party subcontractor services and those indirect costs related to contract performance.  Contracts are generally considered substantially complete when engineering is completed and/or site construction is completed.

The Company has numerous contracts that are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. Cost estimates are reviewed monthly on a contract-by-contract basis, and are revised periodically throughout the life of the contract such that adjustments to profit resulting from revisions are made cumulative to the date of the revision.  Significant management judgments and estimates, including the estimated cost to complete projects, which determines the project’s percent complete, must be made and used in connection with the revenue recognized in the accounting period.  Current estimates may be revised as additional information becomes available. If estimates of costs to complete long-term contracts indicate a loss, provision is made currently for the total loss anticipated.
 
 
F-13

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company also recognizes certain revenue from short-term contracts when equipment is delivered or the services have been provided to the customer.  For maintenance contracts, revenue is recognized ratably over the service period.

Other Concentrations

For the year ended April 30, 2008, the Company did not have any customers whose revenue was more than 10% of revenue. For the year ended April 30, 2007, the Company had two separate customers totaling approximately $12.7 million and $8.2 million, which comprised 18.1% and 11.7% of total revenue.  Management believes there is no significant business vulnerability regarding the concentration of revenue due to the Company’s strong relationship with these customers and their financial strength.

The Company has 241 union employees. A contract with 61 union employees at Empire expires on December 31, 2008. Two contracts with 70 union employees at Walker expire from December 31, 2008 to November 30, 2009. Three contracts with eight union employees at Heinz expire from May 1, 2009 to May 2, 2012.  A contract with 22 union employees at Voacolo expires on January 1, 2010. A contract with 80 union employees at Major expires on May 31, 2010. At April 30, 2008, approximately 45% of the Company’s labor force is subject to collective bargaining agreements, of which 29% will expire within one year.

Income Taxes

Income taxes are accounted for in accordance with SFAS No. 109, "Accounting of Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The recognition of deferred tax assets is reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible.

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FAS No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income taxes is subject to significant and varied interpretations that have resulted in diverse and inconsistent accounting practices and measurements. Addressing such diversity, FIN 48 prescribes a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring changes in such tax positions for financial statement purposes. FIN 48 also requires expanded disclosure with respect to the uncertainty in income taxes. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 on May 1, 2007 had no impact on the Company’s consolidated financial position, results of operations, cash flows or financial statement disclosures.

Earnings Per Common Share

Earnings per common share is computed pursuant to SFAS No. 128, "Earnings Per Share" (EPS). Basic net income per common share is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur from common stock issuable through stock options and warrants.  The table below presents the computation of basic and diluted net income per common share for the years ended April 30, 2008 and 2007, respectively:


F-14



WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
Basic earnings per share computation
     
       
Numerator:
 
2008
   
2007
 
             
     Net Income