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, 2009

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
(Address of principal executive office)
19341   
(Postal Code)   
(610) 903-0400
(Issuer's telephone number)
 
 
          
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class 
Name of each exchange on which registered
 Common Stock, $0.0001 par value
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. Yeso   Nox

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yeso   Nox

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. Yesx    Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o   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).Yeso Nox

The aggregate market value of the voting common equity held by non-affiliates as of October 31, 2008, based on the closing sales price of the Common Stock as quoted on the Nasdaq Global Market was $21,753,249. 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, 2009, there were 6,942,266 shares of registrant’s common stock outstanding.


1



TABLE OF CONTENTS

       
PAGE
 
PART I
 
       
Item 1.
 
Description of Business
 
3
 
Item 1A.
 
Risk Factors
 
8
 
Item 1B.
 
Unresolved Staff Comments
 
13
 
Item 2.
 
Properties
 
13
 
Item 3.
 
Legal Proceedings
 
13
 
Item 4.
 
Submission of Matters to a Vote of Security Holders
 
13
 
           
PART II
 
       
Item 5.
 
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
14
 
Item 6.
 
Selected Financial Data
 
14
 
Item 7.
 
Managements Discussion and Analysis of Financial Condition and Results of Operations
 
15
 
Item 7A.
 
Quantitative and Qualitative Disclosures about Market Risk
 
25
 
Item 8.
 
Financial Statements and Supplementary Data
 
F1-F31
 
Item 9.
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
 
26
 
Item 9A(T).
 
Controls and Procedures
 
26
 
Item 9B.
 
Other Information
 
26
 
           
PART III
 
       
Item 10.
 
Directors, Executive Officers and Corporate Governance
 
27
 
Item 11.
 
Executive Compensation
 
30
 
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
35
 
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
 
37
 
Item 14.
 
Principal Accountant Fees and Services
 
37
 
           
PART IV
 
       
Item 15.
 
Exhibits and Financial Statement Schedules
 
38
 
           
   
Signatures
 
42
 
 
 
 
2

 
 

 
PART I

ITEM 1 - DESCRIPTION OF BUSINESS

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 and Recent Developments

We are a global provider of design-build engineering services for communications infrastructure, with over 500 employees in 20 locations on three continents.  We provide our engineering capabilities including wireless communication, specialty construction and electrical power to a diversified customer base in the public services, healthcare, energy and corporate enterprise markets worldwide.

Historically, each of our wholly-owned subsidiaries has operated and was known primarily by our customers and vendors through a variety of subsidiary legal names, while our investors know us primarily by our “WPCS” name.  In order to better serve our diversified customer base, we launched a key initiative in the third and fourth quarter of fiscal 2009 to brand each of our subsidiaries with the “WPCS” name.  We believe this branding strategy will position our company to better pursue national contracts with existing customers, further develop our relationships with technology providers, improve our purchasing power and achieve certain cost reductions under one integrated name.  This branding strategy has included, among other things, changing our subsidiary’s legal names, company website, email, promotional and advertising materials and signage.  However, our overall management structure remains unchanged.  The total cost for the branding initiative is expected to be approximately $100,000 of which approximately $40,000 was incurred during the fiscal year ended April 30, 2009.

The following table summarizes the new subsidiary legal names compared to the old legal name, and their reference names that are used throughout the remainder of this Annual Report on Form 10-K.


Legal Name
Old Name
Referred As
WPCS International – Auburn, Inc.
Clayborn Contracting Group, Inc.
Auburn Operations
WPCS International – Sacramento, Inc.
Gomes and Gomes, Inc. dba Empire Electric
Sacramento Operations
WPCS International – St. Louis, Inc.
Heinz Corporation
St. Louis Operations
WPCS International – Seattle, Inc.
Major Electric, Inc.
Seattle Operations
WPCS International – Houston, Inc.
Max Engineering LLC
Houston Operations
WPCS International – Portland, Inc.
Midway Electric Company
Portland Operations
WPCS International – Hartford, Inc.
New England Communications Systems, Inc.
Hartford Operations
WPCS International – Lakewood, Inc.
Quality Communications & Alarm Company, Inc.
Lakewood Operations
WPCS International – Sarasota, Inc.
Southeastern Communication Service, Inc.
Sarasota Operations
WPCS International – Trenton, Inc.
Voacolo Electric Incorporated
Trenton Operations
WPCS International – Suisun City, Inc.
Walker Comm, Inc.
Suisun City Operations
WPCS International – Brendale, Pty Ltd.
RL & CA MacKay Pty Ltd. dba Energize Electrical
Brendale Operations
WPCS International – Brisbane, Pty Ltd.
James Design Pty Ltd
Brisbane Operations
 
 
 
3


 

This Annual Report on Form 10-K includes the accounts of WPCS International Incorporated, the subsidiaries listed above which completed a legal name change, and the following wholly and majority-owned subsidiaries that did not complete a legal name change and includes WPCS Incorporated, Invisinet, Inc., WPCS Australia Pty Ltd, Taian AGS Pipeline Construction Co. Ltd (Beijing Operations) and WPCS Asia Limited, collectively “we”, “us”, as the “Company”.

Furthermore, as part of our branding strategy and to better represent our comprehensive design-build engineering capabilities, we have reorganized our operating segments to correspond to our primary service lines:  wireless communication, specialty construction and electrical power.  Accordingly, we are reporting our results under these three business segments in this Form 10-K for the fiscal years ended April 30, 2009 and 2008.

The global economy depends on efficient voice, data and video communication. Old communication infrastructure needs to be replaced and new technology needs to be implemented. We believe we have the design-build capabilities to address the demand.   For communication infrastructure projects that are significant in scope, we have the ability to offer wireless communication, specialty construction and electrical power.  Because we are technology independent, we can integrate multiple products and services across a variety of communication requirements.  This gives our customers the flexibility to obtain the most appropriate solution for their communication needs on a cost effective basis.     In wireless communication, we can design and deploy all types of wireless systems in a variety of applications for mobile communications, asset tracking and video surveillance. In specialty construction, we have provided building design services for mechanical, electrical and hydraulic systems as well as construction services for energy including solar power systems and wind turbines. In specialty construction, we have installed traffic control systems and smart message signs for transportation infrastructure. On the electrical power side, we are capable of all types of commercial and industrial electrical work including the integration of advanced building communications technology for voice and data, life safety, security and HVAC.

Since our inception in 2001, we have grown organically and through strategic acquisitions to establish a presence in addressing the global needs of communications technology.  For the fiscal year ended April 30, 2009, we generated revenues of approximately $107 million, an increase of 5.6% from the fiscal year ended April 30, 2008.  Our backlog at April 30, 2009 and 2008 was approximately $38.4 million $59.8 million, respectively.

Industry Trends

We have chosen to offer our services in high growth markets that have shown some resiliency during these challenging economic times.  We focus on markets such as public services, healthcare, energy and international which continue to show strong growth potential.


 
·
Public services.  We provide communications infrastructure for public services (which includes police, fire and emergency systems), public utilities (which includes water treatment and sewage), education, military and transportation infrastructure. In the public services, according to a report from First Research, there are 30,000 state and local municipalities in the U.S. that are scheduled to spend approximately $7 billion per year on communications infrastructure and it is a market that has received federal funding support through the fiscal stimulus package legislated in February 2009.
 
 
·
Healthcare.  We provide communications infrastructure for hospitals, medical centers and healthcare networks. In the healthcare market, according to a report from Market Research, the aging population and the need to reduce labor costs through the implementation of advanced communications technology is driving projected expenditures of $3 billion per year over the next few years.
 
 
·
Energy.  We provide communications infrastructure for petrochemical, natural gas, electric utilities and alternative energy (solar and wind). According to a report from the Energy Information Administration of the U.S. Department of Energy, the need to deliver more efficient basic energy and new alternative energy is creating communications infrastructure demand at an estimated $2 billion per year in expenditures.
 
 
·
International.  We provide communications infrastructure internationally for a variety of companies and government entities. China is spending on building its internal infrastructure and Australia is upgrading their infrastructure.  Both countries are expecting positive GDP growth rates ranging from 2% to 6% over the next few years per China’s National Bureau of Statistics and Australia Department of Foreign Affairs and Trade.
 
 

4

 
 
Business Strategy
 
Our goal is to become the recognized design-build engineering leader for communications infrastructure on a global scale. Our business strategy focuses on both organic growth and the pursuit of acquisitions that add to our engineering capacity and geographic coverage. We believe that our financial strength, geographic coverage and repeat customer base presents the opportunity to grow the company substantially from a revenue and earnings perspective.   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 revenue producing projects and increased profitability.
 
 
Maintain and expand our focus in strategic markets. We have designed and deployed successful and innovative communications infrastructure solutions for multiple customers in a number of strategic markets, such as public services, healthcare, energy and corporate enterprise. We will continue to seek additional customers in these targeted markets and look for new ways in which we can design and deploy communications infrastructure for increased productivity.
 
 
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. We have worked with these providers in testing new communications technology. Our technicians are trained and maintain certifications on a variety of leading communications technology products which exhibits our commitment in providing advanced solutions for our customers.
 
 
Seek strategic acquisitions.  We will continue to look for additional acquisitions of compatible businesses that can be readily assimilated into our organization, increase our engineering capabilities, expand our geographic coverage and add accretive earnings to our business. Our preferred acquisition candidates will have experience in the wireless communication, specialty construction and/or electrical power markets. A specific goal is to expand our international operations, primarily in Australia and China.
 
Design-Build Services

We operate in three business segments which include wireless communication, specialty construction and electrical power. For the fiscal year ended April 30, 2009, wireless communication represented approximately 31.9% of our total revenue, specialty construction represented approximately 15.5% of our total revenue and electrical power represented approximately 52.6% of our revenue. For the fiscal year ended April 30, 2008, wireless communication represented approximately 45.4% of our total revenue, specialty construction represented approximately 12.9% of our total revenue and electrical power represented approximately 41.7% of our revenue. See Note 12 to the Consolidated Financial Statements for the financial results of each segment for the fiscal years ended April 30, 2009 and 2008.
 
Wireless Communication
 
Throughout the community or around the world, in remote and urban locations, wireless networks provide the connections that keep information flowing. The design and deployment of a wireless network solution requires an in-depth knowledge of radio frequency engineering so that wireless networks are free from interference with other signals and amplified sufficiently to carry data, voice or video with speed and accuracy. We have extensive experience and methodologies that are well suited to address these challenges for our customers. We are capable of designing wireless networks and providing the technology integration necessary to meet goals for enhanced communication, increased productivity and reduced costs. We have the engineering expertise to utilize all facets of wireless technology or combination of various technologies to develop a cost effective network for a customer's wireless communication requirements. This includes Wi-Fi networks, WiMAX networks, point-to-point systems, mesh networks, microwave systems, cellular networks, in-building systems and two-way communication systems.
 
 

5

 
 
Specialty Construction
 
 
We offer specialty construction services for building design including the design and integration of mechanical, electrical, hydraulic and life safety systems in an environmentally safe manner. We work through all phases of the building design and construction to evaluate the design for cost, flexibility, efficiency, productivity and overall environmental impact.
 
 
We have established capabilities in transportation infrastructure. In the developing world, urbanization has created increased mobility, placing great demands on transportation infrastructure. Governments are responding by making the construction of safe and efficient roads a priority. New systems are needed for traffic monitoring, traffic signaling, video surveillance and smart message signs to communicate information advisories. We are  providing design-build engineering services for these technologically advanced systems.
 
 
As world economies continue to grow and standards of living improve, energy supplies are dwindling. It is a scenario that has accelerated the search for new energy sources and better ways of delivery existing supply. We are contributing in both of these critical areas. We design and deploy alternative energy solutions in wind and solar power. Through a unique combination of scientific, geologic, engineering and construction expertise, we offer solutions in site design, solar installation, meteorological towers and wind turbine installation. In addition, we support energy companies as they maximize the efficiency of their energy supply infrastructure, by providing a range of services from pipeline trenching to the deployment of wireless solutions.
 
 
Electrical Power
 
 
Electrical power transmission and distribution networks built years ago often cannot fulfill the growing technological needs of today's end users. We provide complete electrical contracting services to help commercial and industrial facilities of all types and sizes to upgrade their power systems. Our capabilities include power transmission, switchgear, underground utilities, outside plant, instrumentation and controls. We provide an integrated approach to project coordination that creates cost-effective solutions. In addition, corporations, government entities, healthcare organizations and educational institutions depend on the reliability and accuracy of voice, data and video communications. However, the potential for this new technology cannot be realized without the right electrical infrastructure to support the convergence of technology.  In this regard, we create integrated building systems, including the installation of advanced structured cabling systems and electrical networks. We support the integration of telecommunications, fire protection, security and HVAC in an environmentally safe manner and design for future growth by building in additional capacity for expansion as new capabilities are added.
 
 
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 the scope of the contract, 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 be delays 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 public services, healthcare, energy and corporate enterprise customers. For the fiscal years ended April 30, 2009 and 2008, there were no customers which accounted for more than 10% of our revenue.
 
 
6


 
 
Sales and Marketing
 
We have dedicated sales and marketing resources that develop opportunities within our existing customer base, and identify new customers through our strategic 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.
 
Backlog
 
As of April 30, 2009, we had a backlog of unfilled orders of approximately $38.4 million compared to approximately $59.8 million at April 30, 2008. 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 an executed 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. 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 communications infrastructure market but we would classify Quanta Services, Inc. (NYSE:PWR), Dycom Industries, Inc. (NYSE:DY) and Tetra Tech, Inc. (NASDAQ:TTEK) as national competitors. The principal competitive advantage in these markets is establishing a reputation of delivering projects on time and within budget. Other factors of importance include accountability, engineering capability, certifications, project management expertise, industry experience and financial strength. We believe that the ability to provide comprehensive communications infrastructure design-build services including wireless communication, specialty construction and electrical power 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 communications infrastructure, 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 and the ability and willingness of the competition to finance projects on favorable terms.
 
Employees

As of April 30, 2009, we employed 558 full time employees, of whom 311 are project engineers, 80 are project managers, 66 are technicians, 94 are in administration and sales and seven 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 217 union employees whom are covered by contracts that expire at various times as follows:

Operations
# of Employees
Union Contract expiration date
     
St. Louis
1
September 1, 2009
Portland
2
December 31, 2009
Suisun City
8
December 31, 2009
Suisun City
69
January 1, 2010
Trenton
39
May 1, 2010
St. Louis
1
May 5, 2010
Sacramento
32
May 31, 2010
Seattle
62
May 31, 2010
St. Louis
3
October 31, 2010
Total Union Employees
217
 
 
 
 
7

 
 
ITEM 1A - RISK FACTORS
 
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 project 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.
 
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 design-build services 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.
 
 
 
8

 
 
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 seventeen 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 six 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.
 
Amounts included in our backlog may not result in actual revenue or translate into profits.
 
As of April 30, 2009, we had a backlog of unfilled orders of approximately $38.4 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 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, Polulak, Heinz, Walker, or Madenford, 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. Myron Polulak, James Heinz, Donald Walker, and Charles Madenford, our Executive Vice Presidents. Mr. Hidalgo has overseen our company since inception and provides leadership for our growth and operations strategy. Messrs. Polulak, Heinz, Walker, and Madenford oversee the day-to-day operations of our operating subsidiaries. Loss of the services of Messrs. Hidalgo, Polulak, Heinz, Walker, or Madenford 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, Polulak, Heinz, Walker, or Madenford.
 
 
 
9

 
 
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 39% 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. Each of reporting units 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.
 
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 design-build projects and technology upgrades by our customers;
 
 
fluctuations in demand for outsourced design-build 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 collectability 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.
 
10


 
 
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, 2008 and April 30, 2009, our common stock has traded as low as $1.32 and as high as $7.60 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.
 
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.
 
If we are unsuccessful in renewing our credit facility, we may not be able to obtain additional financing if needed.
 
 On April 10, 2007, we entered into a loan agreement with Bank of America, N.A., as amended. The loan agreement (Loan Agreement) provides for a revolving line of credit in an amount not to exceed $15,000,000, together with a letter of credit facility not to exceed $2,000,000. The loan commitment expires on April 10, 2010, and we may prepay the loan at any time.   As of April 30, 2009, there was approximately $5,626,000 of outstanding borrowings under the loan agreement.  The recent tightening of the credit markets could make it difficult for us to renew the Loan Agreement or obtain additional financing.  We do not have any contracts or commitments for  additional funding, and there can be no assurance that financing will be available in amounts or  on terms acceptable to us, if at all. The inability to obtain additional capital will restrict our ability to grow and make strategic acquisitions and may reduce our ability to continue to conduct our business operations as we currently operate, which could have a material adverse impact on our business 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.

 
 
11

 
 
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 (SOX), 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, including potential increased audit fees for SOX compliance, 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, 2009, holders of our outstanding options and warrants have the right to acquire 2,513,748 shares of common stock issuable upon the exercise of stock options and warrants, at exercise prices ranging from $2.37 to $12.10 per share, with a weighted average exercise price of $6.66. 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 Beijing Operations, 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;

 
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 our operations in China.

 
 
12

 
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:
 
   
Lease
 
Annual
 
Location
Operations
Expiration Date
 
Rent
 
Exton, Pennsylvania
WPCS Corporate headquarters
February 1, 2011
  $ 53,869  
Auburn, California (1)
Auburn
Month-to-month
  $ 55,263  
West Sacramento, California
Sacramento
July 31, 2010
  $ 77,097  
Brendale, Queensland, Australia
Brendale
August 17, 2011
  $ 31,209  
St. Louis, Missouri
St. Louis
August 31, 2010
  $ 70,177  
Exton, Pennsylvania
St. Louis
July 31, 2009
  $ 2,268  
West Chester, Pennsylvania
St. Louis
May 31, 2010
  $ 14,850  
Buranda, Queensland,  Australia
Brisbane
July 31, 2012
  $ 57,940  
Woodinville, Washington
Seattle
May 31, 2010
  $ 9,720  
Houston, Texas
Houston
August 31, 2009
  $ 6,895  
Hempstead, Texas
Houston
March 31, 2010
  $ 8,250  
Moline, Illinois
Houston
October 31, 2011
  $ 32,000  
Windsor, Connecticut
Hartford
April 30, 2014
  $ 87,038  
Chicopee, Massachusetts
Hartford
August 31, 2009
  $ 3,000  
West Greenwich, Rhode Island
Hartford
November 30, 2009
  $ 10,153  
Lakewood, New Jersey
Lakewood
August 31, 2010
  $ 129,600  
Sarasota, Florida
Sarasota
July 31, 2011
  $ 55,714  
Trenton, New Jersey (2)
Trenton
April 30, 2010
  $ 66,000  
Suisun City, California (3)
Suisun City
February 28, 2011
  $ 93,660  
Lincoln, California
Suisun City
December 31, 2011
  $ 56,040  
Rocklin, California
Suisun City
January 31, 2010
  $ 23,355  
Reno, Nevada
Suisun City
May 31, 2010
  $ 4,290  
San Leandro, California
Suisun City
July 31, 2011
  $ 14,139  
St. Helens, Oregon  Portland  
May 11, 2010 
  $ 26,225  
 
                                                                                                                           
 
(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.
(2)  We lease our Trenton, New Jersey location from Voacolo Properties LLC, of which the former shareholders of Voacolo Electric, Inc. (Trenton Operations) are the members.
(3) We lease our Suisun City, 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.
 
 
13

 
 
 
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.” For the period from May 1, 2007 to date, the following table sets forth the high and low sale prices of our common stock as reported by NASDAQ Global Market.
 
Period
 
High
   
Low
 
Fiscal Year Ended April 30, 2009:
           
First Quarter
  $ 7.60     $ 5.25  
Second Quarter
    6.08       2.05  
Third Quarter
    3.38       1.63  
Fourth Quarter
    2.13       1.32  
 
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  

On July 17, 2009, the closing sale price of our common stock, as reported by the NASDAQ Global Market, was $2.93 per share. On July 17, 2009, there were 63 holders of record of our common stock.

On November 24, 2008, we adopted a share repurchase program of up to 2,000,000 shares of our common stock until December 1, 2009.  The share repurchase program authorizes us to repurchase shares, from time to time, through open market or privately negotiated transactions.  Since November 24, 2008, a total of 308,817 shares have been purchased and retired by us under the share repurchase program, none of which occurred in the fourth fiscal quarter.

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.”
 
14

 

 
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.

Business Overview and Recent Developments

We are a global provider of design-build engineering services for communications infrastructure, with over 500 employees in 20 locations on three continents.  We provide our engineering capabilities including wireless communication, specialty construction and electrical power to a diversified customer base in the public services, healthcare, energy and corporate enterprise markets worldwide.

Historically, each of our wholly-owned subsidiaries has operated and was known primarily by our customers and vendors through a variety of subsidiary legal names, while our investors know us primarily by our “WPCS” name.  In order to better serve our diversified customer base, we launched a key initiative in the third and fourth quarter of fiscal 2009 to brand each of our subsidiaries with the “WPCS” name.  We believe this branding strategy will position our company to better pursue national contracts with existing customers, further develop our relationships with technology providers, improve our purchasing power and achieve certain cost reductions under one integrated name.  This branding strategy has included, among other things, changing our subsidiary’s legal names, company website, email, promotional and advertising materials and signage.  However, our overall management structure remains unchanged. The total cost for the branding initiative is expected to be approximately $100,000 of which approximately $40,000 was incurred during the fiscal year ended April 30, 2009.

Furthermore, as part of our branding strategy and to better represent our comprehensive design-build engineering capabilities, we have reorganized our operating segments to correspond to our primary service lines:  wireless communication, specialty construction and electrical power.  Accordingly, we are reporting our results under these three business segments in this Form 10-K for the fiscal years ended April 30, 2009 and 2008.
 
 Wireless Communication
 
Throughout the community or around the world, in remote and urban locations, wireless networks provide the connections that keep information flowing. The design and deployment of a wireless network solution requires an in-depth knowledge of radio frequency engineering so that wireless networks are free from interference with other signals and amplified sufficiently to carry data, voice or video with speed and accuracy. WPCS has extensive experience and methodologies that are well suited to address these challenges for our customers. WPCS is capable of designing wireless networks and providing the technology integration necessary to meet goals for enhanced communication, increased productivity and reduced costs. We have the engineering expertise to utilize all facets of wireless technology or combination of various technologies to develop a cost effective network for a customer's wireless communication requirements. This includes Wi-Fi networks, WiMAX networks, point-to-point systems, mesh networks, microwave systems, cellular networks, in-building systems and two-way communication systems.
 
 
15


 
Specialty Construction
 
 
We offer specialty construction services for building design including the design and integration of mechanical, electrical, hydraulic and life safety systems in an environmentally safe manner. We work through all phases of the building design and construction to evaluate the design for cost, flexibility, efficiency, productivity and overall environmental impact.
 
 
Next, we have established capabilities in transportation infrastructure. In the developing world, urbanization has created increased mobility, placing great demands on transportation infrastructure. Governments are responding by making the construction of safe, efficient roads a priority. New systems are needed for traffic monitoring, traffic signaling, video surveillance and smart message signs to communicate information advisories. WPCS is a providing design-build engineering services for these technologically advanced systems.
 
 
Lastly, world economies are growing, standards of living are improving and energy supplies are dwindling. It is a scenario that has accelerated the search for new energy sources and better ways of delivery existing supply. WPCS is contributing in both of these critical areas. We design and deploy alternative energy solutions in wind and solar power. Through a unique combination of scientific, geologic, engineering and construction expertise, we offer solutions in site design, solar installation, meteorological towers and wind turbine installation. In addition, we support energy companies as they maximize the efficiency of their energy supply infrastructure, by providing a range of services from pipeline trenching to the deployment of wireless solutions.
 
Electrical Power
 
 
Electrical power transmission and distribution networks built years ago often cannot fulfill the growing technological needs of today's end users. We provide complete electrical contracting services to help commercial and industrial facilities of all types and sizes to upgrade their power systems. Our capabilities include power transmission, switchgear, underground utilities, outside plant, instrumentation and controls. We provide an integrated approach to project coordination that creates cost-effective solutions. In addition, corporations, government entities, healthcare organizations and educational institutions depend on the reliability and accuracy of voice, data and video communications. However, the potential for this new technology cannot be realized without the right electrical infrastructure, to support the convergence of technology.  In this regard, we create integrated building systems, including the installation of advanced structured cabling systems and electrical networks. We support the integration of telecommunications, fire protection, security and HVAC in an environmentally safe manner and design for future growth by building in additional capacity for expansion as new capabilities are added.
 
For the fiscal year ended April 30, 2009, wireless communication represented approximately 31.9% of our total revenue, specialty construction represented approximately 15.5% of our total revenue and electrical power represented approximately 52.6% of our revenue. For the fiscal year ended April 30, 2008, wireless communication represented approximately 45.4% of our total revenue, specialty construction represented approximately 12.9% of our total revenue and electrical power represented approximately 41.7% of our revenue.
 
Industry Trends

We have chosen to offer our services in high growth markets that have shown some resiliency during these challenging economic times.  We focus on markets such as public services, healthcare, energy and international which continue to show strong growth potential.
 
 
·
Public services.  We provide communications infrastructure for public services (which includes police, fire and emergency systems), public utilities (which includes water treatment and sewage), education, military and transportation infrastructure. In the public services, according to a report from First Research, there are 30,000 state and local municipalities in the U.S. that are scheduled to spend approximately $7 billion per year on communications infrastructure and it is a market that has received Federal funding support through the fiscal stimulus package legislated in February 2009.
 
 
·
Healthcare.  We provide communications infrastructure for hospitals, medical centers and healthcare networks. In the healthcare market, according to a report from Market Research, the aging population and the need to reduce labor costs through the implementation of advanced communications technology is driving projected expenditures of $3 billion per year over the next few years.
 
 
·
Energy.  We provide communications infrastructure for petrochemical, natural gas, electric utilities and alternative energy (solar and wind). According to a report from the Energy Information Administration of the U.S. Department of Energy, the need to deliver more efficient basic energy and new alternative energy is creating communications infrastructure demand at an estimated $2 billion per year in expenditures.
 
 
·
International.  We provide communications infrastructure internationally for a variety of companies and government entities. China is spending on building its internal infrastructure and Australia is upgrading their infrastructure.  Both countries are expecting positive GDP growth rates ranging from 2% to 6% over the next few years per China’s National Bureau of Statistics and Australia Department of Foreign Affairs and Trade.
 

16


Current Operating 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 during the current fiscal year:

 
·
Over the past fiscal year, current economic conditions have adversely affected certain markets of our business, primarily related to the public services sector of our business.  General spending has temporarily slowed at the state and local government level due to a decrease in tax revenue and credit impediments as well as a pull back in bid solicitations due to uncertainty regarding Federal funding that would be made available through the legislation of the Federally funded stimulus package.  This slowdown has caused our revenue to be lower than expected, resulting in net income and earnings per share for the year to be lower than expected.
 
 
·
Although general spending is currently down at the state and local government level for public services projects, we believe the demand for communications infrastructure remains high, which is indicated by our backlog and bids discussed below.  Now that the new presidential administration has recently passed the Federally funded stimulus package, $90 billion has been set aside for public services, which includes transportation, education and communications infrastructure projects.  As a result, we are beginning to see an increase in bid solicitations based on the evidence of Federal government funding support.
 
In the healthcare market, we continue to receive bid requests and complete new projects, as the primary drivers in this market continue to be the need to provide healthcare infrastructure for an aging population and to cut costs through healthcare reform.  The Federal stimulus package also provides $32 billion for healthcare infrastructure spending.
 
In the energy market, we continue to receive bid solicitations and complete new projects as oil, gas, water and electric utility companies continue to upgrade their communications infrastructure, while in alternative energy the growth in wind and solar power development is expected to continue.  The Federal stimulus package also provides $20 billion for energy infrastructure spending.
 
 Our opportunity to obtain work related to the Federal stimulus package depends on the timing of funding allocations and our ability to receive bid requests and be awarded new projects; however, we believe that our experience in performing work in each of these sectors will result in increased bid activity in the near future.   In this regard, we retained most of our project managers and engineers to respond to this expected increased bid activity.
 
 
·
We continue to focus on expanding our international presence in China and Australia, and we believe that these markets have not been as impacted by recent economic conditions.  In China, our focus is primarily in the energy market, and in Australia primarily on the corporate enterprise market.  Although our international operations represent approximately 6% of total revenue year-to-date, positive economic growth rate estimates for these countries may lead to a greater percentage of our future revenue being generated internationally.
 
 
 
 
·
We believe our engineering service focus on public services, healthcare and energy infrastructure will create additional opportunities both domestically and internationally for us to design and deploy communications infrastructure solutions. We believe that the ability to provide comprehensive communications infrastructure design-build services including wireless communication, specialty construction and electrical power gives WPCS a competitive advantage.
 
This trend is supported by our backlog and bid list, which are our two most important economic indicators for measuring our future revenue producing capability and demand for our services.  At April 30, 2009, our backlog of unfilled orders was approximately $38 million.  Of the backlog of projects awarded and in process, approximately 68%, 20% and 3% were represented by the public services, healthcare, and energy markets, respectively, and the balance represented by corporate enterprise.  Our bid list, which represents project bids under proposal for new and existing customers, was approximately $169 million.  With regards to the bid list, approximately 60%, 7% and 4% are represented by the public services, healthcare and energy markets, respectively.
 
 
·
Although we continue to search for acquisitions, our current goal is to identify smaller companies which are performing well financially which can enhance our existing engineering capabilities, and can be integrated easily within our existing subsidiaries.
 
 
·
We continue to maintain a healthy balance sheet with approximately $21.0 million in working capital, net of credit facility borrowings of approximately $5.6 million. The ratio of credit facility borrowings to working capital is approximately 27%.  We believe this is an important measure of our current financial strength. We expect to use our working capital and availability under the credit facility to fund our continued growth.
 
 
17

 
 

Results of Operations for the Fiscal Year Ended April 30, 2009 Compared to Fiscal Year Ended April 30, 2008


This Annual Report on Form 10-K includes the accounts of WPCS International Incorporated (WPCS) and its wholly and majority-owned subsidiaries, WPCS International – Suisun City, Inc. (Suisun City Operations), WPCS International – Auburn, Inc. (Auburn Operations), WPCS International – St. Louis, Inc. (St. Louis Operations), WPCS International – Lakewood, Inc. (Lakewood Operations), WPCS International – Hartford, Inc. (Hartford Operations), WPCS International – Sarasota, Inc. (Sarasota Operations), WPCS International – Trenton, Inc. (Trenton Operations), Taian AGS Pipeline Construction Co. Ltd (Beijing Operations), WPCS International – Seattle, Inc. (Seattle Operations), WPCS International – Houston, Inc. (Houston Operations), WPCS International – Sacramento, Inc (Sacramento Operations), WPCS International – Brisbane, Pty Ltd. (Brisbane Operations), WPCS International – Brendale, Pty Ltd. (Brendale Operations), WPCS International – Portland, Inc. (Portland Operations), WPCS Incorporated, Invisinet Inc., WPCS Australia Pty Ltd and WPCS Asia Limited, collectively “we”, “us” or the "Company".

Consolidated results for the years ended April 30, 2009 and 2008 were as follows.

   
Year Ended
 
   
April 30,
 
   
2009
   
2008
 
                         
REVENUE
  $ 107,101,360       100.0 %   $ 101,431,128       100.0 %
                                 
COSTS AND EXPENSES:
                               
  Cost of revenue     78,334,115       73.2 %     73,084,310       72.0 %
  Selling, general and administrative expenses     23,052,464       21.5 %     19,302,773       19.0 %
  Depreciation and amortization     2,578,824       2.4 %     2,398,603       2.4 %
                                 
  Total costs and expenses     103,965,403       97.1 %     94,785,686       93.4 %
                                 
OPERATING INCOME
    3,135,957       2.9 %     6,645,442       6.6 %
                                 
OTHER EXPENSE (INCOME):
                               
  Interest expense     421,022       0.4 %     522,984       0.5 %
  Interest income     (53,947 )     (0.1 %)     (511,122 )     (0.5 %)
  Minority interest     108,228       0.1 %     (22,115 )     0.0 %
                                 
INCOME BEFORE INCOME TAX PROVISION
    2,660,654       2.5 %     6,655,695       6.6 %
                                 
Income tax provision
    989,027       0.9 %     2,577,348       2.5 %
                                 
NET INCOME
  $ 1,671,627       1.6 %   $ 4,078,347       4.1 %
 

 
18



Revenue

Revenue for the year ended April 30, 2009 was approximately $107,101,000, as compared to $101,431,000 for the year ended April 30, 2008.  The increase in revenue for the year was primarily attributable to the acquisitions of the Seattle, Houston, Sacramento, Brisbane, Brendale and Portland Operations.     For the years ended April 30, 2009 and 2008, there were no customers which comprised more than 10% of total revenue.

Wireless communication segment revenue for the years ended April 30, 2009 and 2008 was approximately $34,161,000 or 31.9% and $46,021,000 or 45.4% of total revenue, respectively. The decrease in revenue was due primarily to reductions, delays or postponements of projects at the state and local government level for public services projects.

Specialty construction segment revenue for the years ended April 30, 2009 and 2008 was approximately $16,581,000 or 15.5% and $13,059,000 or 12.9% of total revenue, respectively. The increase in revenue was primarily attributable to the acquisitions of the Brisbane and Houston Operations. Including the pro forma revenue effect of these acquisitions as if they had occurred on May 1, 2007, the pro forma organic revenue growth rate for specialty construction was approximately 8% in fiscal 2009.

Electrical power segment revenue for the years ended April 30, 2009 and 2008 was approximately $56,359,000 or 52.6% and $42,351,000 or 41.7% of total revenue, respectively.  The increase in revenue was due primarily to the acquisition of the Seattle, Sacramento, Brendale and Portland Operations. Including the pro forma revenue effect of these acquisitions as if they had occurred on May 1, 2007, the pro forma organic revenue growth rate for electrical power was approximately 5% in fiscal 2009.


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 $78,334,000 or 73.2% of revenue for the year ended April 30, 2009, compared to $73,084,000 or 72.0% 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, 2009 as a result of the acquisitions of the Seattle, Houston, Sacramento, Brisbane, Brendale and Portland Operations.  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.

Wireless communication segment cost of revenue and cost of revenue as a percentage of revenue for the years ended April 30, 2009 and 2008 was approximately $24,198,000 and 70.8% and $33,807,000 and 73.5%, respectively.   The dollar decrease in our cost of revenue is due to the corresponding decrease in revenue during the year ended April 30, 2009.  The decrease in cost of revenue as a percentage of revenue was due primarily to the revenue blend attributable to our existing subsidiaries.

Specialty construction segment cost of revenue and cost of revenue as a percentage of revenue for the years ended April 30, 2009 and 2008 was approximately $12,449,000 and 75.1% and $9,554,000 and 73.2%, 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, 2009, 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 the St. Louis and Auburn Operations and the recent acquisitions of the Houston and Brisbane Operations.

Electrical power segment cost of revenue and cost of revenue as a percentage of revenue for the years ended April 30, 2009 and 2008 was approximately $41,687,000 and 74.0% and $29,723,000 and 70.2%, respectively.  The dollar increase in our cost of revenue is due to the corresponding increase in revenue during the year ended April 30, 2009, primarily attributable to the acquisitions of the Seattle, Sacramento, Brendale and Portland Operations.   The increase as a percentage of revenue is due primarily to the revenue blend attributable to the Suisun City and Trenton Operations and the recent acquisitions of the Seattle, Sacramento, Brendale and Portland Operations.
 
 
 
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Selling, General and Administrative Expenses

For the year ended April 30, 2009, total selling, general and administrative expenses were approximately $23,052,000, or 21.5% of total revenue compared to $19,303,000, or 19.0% of revenue for the prior year. The dollar increase in the selling, general and administrative expenses is due primarily to the acquisitions of Seattle, Houston, Sacramento, Brisbane, Brendale and Portland Operations. Included in selling, general and administrative expenses for the year ended April 30, 2009 are $13,304,000 for salaries, commissions, payroll taxes and other employee benefits. The $2,094,000 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 Seattle, Houston, Sacramento, Brisbane, Brendale and Portland Operations. Professional fees were $1,402,000, which include accounting, legal and investor relation fees. Insurance costs were $2,559,000 and rent for office facilities was $988,000.  Automobile and other travel expenses were $1,956,000 and telecommunication expenses were $610,000. Other selling, general and administrative expenses totaled $2,233,000.  For the year ended April 30, 2009, total selling, general and administrative expenses for the wireless communication, specialty construction and electrical power segments were approximately $8,307,000, $3,220,000 and $8,511,000, respectively, with the balance of approximately $3,014,000 pertaining to corporate 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. 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. 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 wireless communication, specialty construction and electrical power segments were approximately $7,833,000, $2,939,000 and $6,189,000, respectively, with the balance of approximately $2,342,000 pertaining to corporate expenses.
 
Depreciation and Amortization

For the years ended April 30, 2009 and 2008, depreciation was approximately $1,783,000 and $1,539,000, respectively.  The increase in depreciation is due to the purchase of property and equipment and the acquisition of fixed assets from acquiring Seattle, Houston, Sacramento, Brisbane, Brendale and Portland Operations. The amortization of customer lists and backlog for the year ended April 30, 2009 was $796,000 as compared to $860,000 for the same period of the prior year.  The net decrease in amortization was due primarily to certain customer lists and backlog being fully amortized in the current year from earlier acquisitions. 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.
 
Interest Expense and Interest Income

For the years ended April 30, 2009 and 2008, interest expense was approximately $421,000 and $523,000, respectively. The decrease in interest expense is due principally to an increase in total borrowings on the line of credit, offset by a reduction in interest rates on outstanding borrowings compared to the year ended April 30, 2008.

           For the years ended April 30, 2009 and 2008, interest income was approximately $54,000 and $511,000, respectively. The decrease in interest earned is due principally to the decrease in our cash and cash equivalent balance and to a decrease in interest rates compared to the same period in the prior year.

Net Income

The net income was approximately $1,672,000 for the year ended April 30, 2009. Net income was net of Federal and state income tax expense of approximately $989,000. 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 $4,078,000 for the year ended April 30, 2008. Net income was net of Federal and state income tax expense of approximately $2,577,000.

Liquidity and Capital Resources

At April 30, 2009, we had working capital of approximately $21,033,000, which consisted of current assets of approximately $41,811,000 and current liabilities of $20,778,000.  Our working capital needs are influenced by our level of operations, and generally increase with higher levels of revenue.  Our sources of cash have historically come from operating activities, equity offerings, and credit facility borrowings.

Operating activities provided approximately $5,038,000 in cash for the year ended April 30, 2009. The sources of cash from operating activities total approximately $8,660,000, comprised of approximately $1,672,000 in net income, $2,868,000 in net non-cash charges, a $3,260,000 decrease in accounts receivable, a $299,000 decrease in inventory and a $561,000 decrease in other assets. The uses of cash from operating activities total approximately $3,622,000, comprised of an approximately $1,393,000 increase in costs and estimated earnings in excess of billings on uncompleted contracts, a $514,000 increase in prepaid expenses and other current assets, a $295,000 decrease in accounts payable and accrued expenses, a $1,148,000 decrease in billings in excess of costs and estimated earnings on uncompleted contracts, a $95,000 decrease in deferred revenue and a $177,000 decrease in income taxes payable.  Net earnings adjusted for non-cash items provided cash of approximately $4,540,000 versus approximately $6,498,000 in fiscal 2008.  Working capital provided cash of approximately $498,000 in 2009 versus using cash of approximately $7,743,000 in 2008.  Working capital components provided cash in fiscal 2009 reflecting lower levels of accounts receivable and inventory in connection with overall sales growth.
 
 
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Our investing activities utilized approximately $5,027,000 in cash during the year ended April 30, 2009, which consisted of approximately $1,234,000 paid for property and equipment, and approximately $3,793,000 paid for the acquisitions of the Trenton, Seattle, Houston, Sacramento, Brisbane, Brendale and Portland Operations net of cash received. The additional payment for the Trenton Operations was funded from borrowings on the line of credit discussed below, while the acquisition payments for all other operations were funded from working capital.


Our financing activities utilized cash of approximately $1,014,000 during the year ended April 30, 2009.  Financing activities included the line of credit borrowings of $3,250,000, repayment of the line of credit of $2,750,000, repayment of loan payables and capital lease obligations of approximately $1,361,000 and equity issuance costs of $5,000, offset by the repurchase of common stock of $730,000, and $582,000 in net borrowings from shareholders.
 
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), as amended. The loan agreement (Loan Agreement) provides for a revolving line of credit in an amount not to exceed $15,000,000, 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, 2009, the interest rate was 2.25% on outstanding borrowings of approximately $5,626,000 under the Loan Agreement with BOA.

At April 30, 2009, we had cash and cash equivalents of approximately $6,397,000 and working capital of approximately $21,033,000. With internally available funds and funds available from the Loan Agreement, we believe that we have sufficient capital to meet our short term needs.   The Loan Agreement expires on April 10, 2010 and has  approximately $5,626,000  currently outstanding that will need to be repaid by that time, if not prepaid earlier. We believe that if we maintain our current financial strength and working capital  levels over the next twelve months, we should be able to either renew a Loan Agreement with BOA or obtain other financing to repay the existing Loan Agreement. We expect that our existing working capital will be sufficient if we are required to repay the Loan Agreement.

  The Beijing Operations has outstanding loans due within the next twelve months to a related party, Taian Gas Group (TGG), of approximately $2,950,000.  We expect to repay these borrowings from working capital and for TGG to renew any remaining unpaid loan balances in its continued support of  the Beijing Operations. 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 Electric Incorporated (Trenton Operations). The aggregate consideration paid by us, including acquisition transaction costs of $31,389, was $5,063,863 of which $3,781,389 was paid in cash, and we issued 116,497 shares of common stock valued at $1,282,474. Included in aggregate purchase price consideration was additional cash consideration of $2,500,000 paid in June 2008 to the former shareholders regarding the earnout settlement for the twelve months ended March 31, 2008. The acquisition of the Trenton Operations 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 August 1, 2007, we acquired Major Electric, Inc. (Seattle Operations). The aggregate consideration paid by us, including acquisition transaction costs of $44,226, was $6,292,151 of which $3,844,135 was paid in cash and we issued 242,776 shares of common stock valued at $2,448,016.  In connection with the additional purchase price adjustments to settle earnout and working capital adjustments, we recorded a receivable from the former shareholders of $371,566. Through April 30, 2009, we have received payments of $240,565 related to this receivable with the remaining balance of $131,001 due by September 1, 2009. The acquisition of the Seattle Operations expands our geographic presence in the Pacific Northwest region and provides additional electrical contracting services in direct digital controls, security, wireless SCADA applications and other communications infrastructure.
 
 
 
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On August 2, 2007, we acquired Max Engineering LLC (Houston Operations). The aggregate consideration paid by us, including acquisition transaction costs of $30,498, was $1,117,679, of which $917,679 was paid in cash and we issued 17,007 shares of common stock valued at $200,000. Included in aggregate purchase price consideration was additional cash consideration of $287,181 paid to the former members regarding the earnout settlement for the twelve months ended August 1, 2008. In addition, we shall pay an additional $375,000 in cash or our common stock if the Houston Operations’ earnings before interest and taxes for the twelve months ending August 1, 2009 shall equal or exceed $375,000.  The acquisition of the Houston Operations expands our geographic expansion into Texas and provides additional engineering services that specialize in the design of communications infrastructure for the telecommunications, oil, gas and wind energy markets.

On November 1, 2007, we acquired Gomes and Gomes, Inc. dba Empire Electric (Sacramento Operations). The aggregate consideration paid by us, including acquisition transaction costs of $47,674, was $2,518,675 in cash. The acquisition of the Sacramento Operations 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 Design Pty Ltd (Brisbane Operations). The aggregate consideration paid by us, including acquisition transaction costs of $81,153 was $1,562,879 in cash, and includes additional cash consideration of $281,725 paid in May 2008 to the former shareholders for settlement of the net tangible asset adjustment. The Brisbane Operations is a design engineering services company specializing in building automation including mechanical, electrical, hydraulic, fire protection,  security access and wireless systems.  The acquisition of the Brisbane Operations provides us international expansion into Australia consistent with our emphasis on Australia, China and surrounding Pacific Rim countries.

On April 4, 2008, we acquired RL & CA MacKay Pty Ltd. dba Energize Electrical (Brendale Operations). The aggregate consideration paid by us, including acquisition transaction costs of $114,112 was $1,689,756 in cash, and includes additional cash consideration of $32,522 paid in July 2008 to the former shareholders for the settlement of the net tangible asset adjustment. The Brendale Operations 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 the Brendale Operations provides further international expansion into Australia.

On June 26, 2008, we acquired all the assets of Lincoln Wind LLC for aggregate consideration of $422,359 in cash, including acquisition transaction costs of $22,359. Lincoln Wind LLC is part of our Houston Operations and 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 LLC provides additional engineering services that specialize in the design of communication systems for the wind energy market.

Effective November 30, 2008, we acquired all the assets of BRT Electrical PTY Ltd (BRT). The aggregate consideration of paid by us, including acquisition transaction costs of $59,712, was $170,653 in cash. BRT is part of our Brendale Operations and is an electrical contractor specializing in low voltage applications including voice, data, security and energy management for commercial and building infrastructure companies.  The acquisition of BRT provides further international expansion into Australia.

Effective March 9, 2009, we acquired Midway Electric Company (Portland Operations). The aggregate consideration paid by us, including acquisition transaction costs of $26,616, was $426,616 in cash.  The acquisition of the Portland Operations expands our geographic presence in the Pacific Northwest and provides additional electrical contractor services in both high and low voltage applications for corporate enterprise, healthcare, state and local government and educational institutions.

On November 24, 2008, we adopted a share repurchase program of up to 2,000,000 shares of our common stock until December 1, 2009.  The share repurchase program authorizes us to repurchase shares, from time to time, through open market or privately negotiated transactions. A Rule 10b5-1 repurchase plan will allow us to purchase our shares at times when we ordinarily would not be in the market because of self-imposed trading blackout periods. The number of shares to be purchased and the timing of the purchases will be based on market conditions, share price and other factors. The stock repurchase program does not require us to repurchase any specific dollar value or number of shares and may be modified, extended or terminated by our Board of Directors at any time.  Since November 24, 2008, we have purchased and retired a total of 308,817 shares at a total cost of $729,730 including transaction costs, or an average cost per common share of $2.36, leaving 1,691,183 shares remaining to purchase under the share repurchase program. The stock repurchase program is expected to be funded from working capital. Based on current market price we believe our common stock is undervalued, so the stock repurchase program should provide greater shareholder value.
 

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Backlog
 
As of April 30, 2009, we had a backlog of unfilled orders of approximately $38.4 million compared to approximately $59.8 million at April 30, 2008. 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 an executed 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.

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.
 
 
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Our annual review for goodwill impairment for the fiscal years 2009 and 2008 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 the Auburn, Brendale, Brisbane, Hartford, Houston, Lakewood, Portland, Sacramento, Sarasota, Seattle, St. Louis, Suisun City and  Trenton Operations.  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.

Additionally, we evaluated the reasonableness of the estimated fair value of our reporting units by reconciling to our market capitalization. This reconciliation allowed us to consider market expectations in corroborating the reasonableness of the fair value of our reporting units.    In addition, we compared our market capitalization, including an estimated control premium that an investor would be willing to pay for a controlling interest in the company and the discount our common stock trades compared to our peer group of companies.   The determination of a control premium and trading discount requires the use of judgment and is based primarily on comparable industry and deal-size transactions, related synergies and other benefits. Our market capitalization declined during the third quarter of fiscal 2009, and subsequently, as a result of market-driven declines in our stock trading price. This decline is consistent with overall market conditions and is not a result of changes in our expectations of future cash flows. Our reconciliation of the gap between our market capitalization and the aggregate fair value of us depends on various factors, some of which are qualitative and involve management judgment, including high backlog coverage of future revenue and experience in meeting operating cash flow targets.


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 communications infrastructure. 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.
 
 
 
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The length of our contracts varies. Assets and liabilities related to long-term contracts are included in current assets and current liabilities as they will be liquidated in the normal course of contract completion, although this may require more than one year.

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 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 adopted SFAS 159 effective May 1, 2008.  The adoption of SFAS 159 did not have a material effect 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 adopt and utilize the methods stipulated in SFAS 141(R) and SFAS 160 for all future transactions of this nature effective May 1, 2009.

On March 19, 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities (SFAS 161). This statement is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We are currently evaluating the impact that SFAS 161 will have on our consolidated financial position, results of operations, cash flows or financial statement disclosures.

In June 2008, the FASB ratified EITF Issue 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5). The primary objective of EITF 07-5 is to provide guidance for determining whether an equity-linked financial instrument or embedded feature within a contract is indexed to an entity’s own stock, which is a key criterion of the scope exception to paragraph 11(a) of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” An equity-linked financial instrument or embedded feature within a contract that is not considered indexed to an entity’s own stock could be required to be classified as an asset or liability and marked-to-market through earnings. EITF 07-5 specifies a two-step approach in evaluating whether an equity-linked financial instrument or embedded feature within a contract is indexed to its own stock. The first step involves evaluating the instrument’s contingent exercise provisions, if any, and the second step involves evaluating the instrument’s settlement provisions. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and must be applied to all instruments outstanding as of the effective date. The adoption of EITF 07-5 on May 1, 2009 is expected to have no  impact on our consolidated financial position, results of operations, cash flows or financial statement disclosures.

                   In May 2009, the FASB issued SFAS 165, "Subsequent Events", which established principles and requirements for subsequent events. SFAS 165 details the period after the balance sheet date during which we should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which we should recognize events or transactions occurring after the balance sheet date in its financial statements and the required disclosures for such events. SFAS 165 is effective for interim or annual reporting periods ending after June 15, 2009. We will adopt SFAS 165 beginning in the first quarter of fiscal 2010.

In June 2009, the FASB issued SFAS 168, “Codification”, which confirmed that the FASB Accounting Standards Codification will become the single official source of authoritative U.S. Generally Accepted Accounting Principles (GAAP) (other than guidance issued by the SEC), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force ("EITF"), and related literature. After that date, only one level of authoritative US GAAP will exist. All other literature will be considered non-authoritative. The Codification does not change US GAAP; instead, it introduces a new structure that is organized in an easily accessible, user-friendly online research system. The Codification becomes effective for interim and annual periods ending on or after September 15, 2009. We will apply the Codification beginning in the second quarter of fiscal 2010.
 
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.
 
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required under Regulation S-K for “smaller reporting companies.”
 
 
 
 
 
 
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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, 2009 and 2008
 
F-3 – F-4
     
Consolidated Statements of Income for the years ended April 30, 2009 and 2008
 
F-5
     
Consolidated Statements of Shareholders' Equity for the years ended April 30, 2009 and 2008
 
F-6 – F-7
     
Consolidated Statements of Cash Flows for the years ended April 30, 2009 and 2008
 
F-8 – F-10
     
Notes to Consolidated Financial Statements
 
F-11 – F-31

 
 

 

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Shareholders
WPCS International Incorporated

We have audited the accompanying consolidated balance sheets of WPCS International Incorporated and Subsidiaries as of April 30, 2009 and 2008, and the related consolidated statements of income, shareholders' equity and cash flows for each of the two years in the period ended April 30, 2009. Our audits also included the consolidated financial statement schedule for the year ended April 30, 2009 and 2008 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the  financial position of WPCS International Incorporated and Subsidiaries as of April 30, 2009 and 2008, and their  results of operations and cash flows for each of the two years in the period ended April 30, 2009, 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, 2009 and 2008, 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.




 /s/ J.H. COHN LLP


July 24, 2009


F-2


 

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


             
   
April 30,
   
April 30,
 
ASSETS
 
2009
   
2008
 
             
CURRENT ASSETS:
           
             
Cash and cash equivalents
  $ 6,396,810     $ 7,449,530  
Accounts receivable, net of allowance of $155,458 and $98,786 at April 30, 2009 and April 30, 2008, respectively
    25,662,784       29,092,488  
Costs and estimated earnings in excess of billings on uncompleted contracts
    5,229,043       3,887,152  
Inventory
    2,481,383       2,791,782  
Prepaid expenses and other current assets
    1,674,952       1,002,993  
Prepaid income taxes
    295,683       122,342  
Deferred tax assets
    70,413       35,939  
Total current assets
    41,811,068       44,382,226  
                 
PROPERTY AND EQUIPMENT, net
    6,668,032       6,828,162  
                 
OTHER INTANGIBLE ASSETS, net
    1,983,879       2,929,937  
                 
GOODWILL
    32,549,186       28,987,501  
                 
OTHER ASSETS
    132,948       820,315  
                 
Total assets
  $ 83,145,113     $ 83,948,141  
                 
 

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,
 
   
2009
   
2008
 
             
CURRENT LIABILITIES:
           
             
Current portion of loans payable
  $ 89,210     $ 1,272,112  
Borrowings under line of credit
    5,626,056       750,000  
Current portion of capital lease obligations
    96,001       91,491  
Accounts payable and accrued expenses
    8,997,296       9,305,791  
Billings in excess of costs and estimated earnings on uncompleted contracts
    2,511,220       3,602,422  
Deferred revenue
    507,650       602,560  
Due to shareholders
    2,951,008       2,300,083  
Total current liabilities
    20,778,441       17,924,459  
                 
Borrowings under line of credit
    -       4,376,056  
Loans payable, net of current portion
    71,634       156,978  
Capital lease obligations, net of current portion
    151,425       215,780  
Deferred tax liabilities
    1,467,971       1,173,786  
Total liabilities
    22,469,471       23,847,059  
                 
Minority interest in subsidiary
    1,440,078       1,331,850  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS' EQUITY:
               
Preferred stock - $0.0001 par value, 5,000,000 shares authorized, none issued
    -       -  
                 
Common stock - $0.0001 par value, 25,000,000 shares authorized, 6,942,266 and 7,251,083 shares issued and outstanding at April 30, 2009 and April 30, 2008, respectively
    694       725  
Additional paid-in capital
    50,175,479       50,775,938  
Retained earnings
    9,381,189       7,709,562  
Accumulated other comprehensive (loss) income on foreign currency translation
    (321,798 )     283,007  
                 
Total shareholders' equity
    59,235,564       58,769,232  
                 
Total liabilities and shareholders' equity
  $ 83,145,113     $ 83,948,141  
                 
 


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,
 
   
2009
   
2008
 
             
             
REVENUE
  $ 107,101,360     $ 101,431,128  
                 
COSTS AND EXPENSES:
               
Cost of revenue
    78,334,115       73,084,310  
Selling, general and administrative expenses
    23,052,464       19,302,773  
Depreciation and amortization
    2,578,824       2,398,603  
                 
Total costs and expenses
    103,965,403       94,785,686  
                 
OPERATING INCOME
    3,135,957       6,645,442  
                 
OTHER EXPENSE (INCOME):
               
Interest expense
    421,022       522,984  
Interest income
    (53,947 )     (511,122 )
Minority interest
    108,228       (22,115 )
                 
INCOME BEFORE INCOME TAX PROVISION
    2,660,654       6,655,695  
                 
Income tax provision
    989,027       2,577,348  
                 
NET INCOME
  $ 1,671,627     $ 4,078,347  
                 
Basic net income per common share
  $ 0.23     $ 0.58  
                 
Diluted net income per common share
  $ 0.23     $ 0.52  
                 
Basic weighted average number of common shares outstanding
    7,131,967       7,090,789  
                 
Diluted weighted average number of common shares outstanding
    7,154,285       7,848,341  
 


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
   
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 Beijing, Trenton, Seattle and Houston Operations
    -       -       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-6

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


                                       
Accumulated
       
                                       
Other Compre-
   
Total
 
   
Preferred Stock
   
Common Stock
   
Additional
   
Retained
   
hensive
   
Shareholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Paid-In Capital
   
Earnings
   
Income (Loss)
   
Equity
 
                                                 
BALANCE, MAY 1, 2008
    -     $ -       7,251,083     $ 725     $ 50,775,938     $ 7,709,562     $ 283,007     $ 58,769,232  
                                                                 
Fair value of stock options granted to employees
    -       -       -       -       134,240       -       -       134,240  
                                                                 
Equity issuance cost
    -       -       -       -       (5,000 )     -       -       (5,000 )
                                                                 
Repurchase of common stock
    -       -       (308,817 )     (31 )     (729,699 )     -       -       (729,730 )
                                                                 
Accumulated other comprehensive loss
    -       -       -       -       -       -       (604,805 )     (604,805 )
                                                                 
Net income
    -       -       -       -       -       1,671,627       -       1,671,627  
                                                                 
BALANCE, APRIL 30, 2009
    -     $ -       6,942,266     $ 694     $ 50,175,479     $ 9,381,189     $ (321,798 )   $ 59,235,564  

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,
 
   
2009
   
2008
 
             
OPERATING ACTIVITIES :
           
Net income
  $ 1,671,627     $ 4,078,347  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    2,578,824       2,398,603  
Fair value of stock options granted to employees
    134,240       51,717  
Provision for doubtful accounts
    131,743       -  
Amortization of debt issuance costs
    12,266       -  
Excess tax benefit from exercise of stock options
    -       (16,000 )
Minority interest
    108,228       (22,115 )
Loss (gain) on sale of fixed assets
    29,649       (4,668 )
Deferred income taxes
    (126,583 )     11,668  
Changes in operating assets and liabilities, net of effects of acquisitions:
               
Accounts receivable
    3,260,420       (5,378,553 )
Costs and estimated earnings in excess of billings on uncompleted contracts
    (1,393,027 )     170,020  
Inventory
    299,260       (397,020 )
Prepaid expenses and other current assets
    (514,494 )     (115,019 )
Other assets
    560,890       (536,157 )
Accounts payable and accrued expenses
    (294,564 )     (452,234 )
Billings in excess of costs and estimated earnings on uncompleted contracts
    (1,148,341 )     (328,318 )
Deferred revenue
    (94,953 )     97,934  
Income taxes payable
    (176,998 )     (803,479 )
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    5,038,187       (1,245,274 )

 
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



INVESTING ACTIVITIES:
           
Acquisition of property and equipment, net
    (1,233,829 )     (715,849 )
Acquisition of Hartford Operations, net of cash received
    -       (3,534 )
Acquisition of Sarasota Operations, net of cash received
    -       60,892  
Acquisition of Trenton Operations, net of cash received
    (2,500,000 )     (69,601 )
Acquisition of Seattle Operations, net of cash received
    240,565       (4,268,320 )
Acquisition of Houston Operations, net of cash received
    (709,540 )     (524,572 )
Acquisition of Sacramento Operations, net of cash received
    (7,521 )     (2,427,999 )
Acquisition of Brisbane Operations, net of cash received
    (287,735 )     (922,763 )
Acquisition of Brendale Operations, net of cash received
    (195,170 )     (1,605,868 )
Acquisition of Portland Operations, net of cash received
    (333,368 )     -  
NET CASH USED IN INVESTING ACTIVITIES
    (5,026,598 )     (10,477,614 )
                 
FINANCING ACTIVITIES:
               
Net proceeds from exercise of stock options
    -       60,532  
Repurchase of common stock
    (729,730 )     -  
Excess tax benefit from exercise of stock options
    -       16,000  
Equity issuance costs
    (5,000 )     (13,931 )
Borrowings under lines of credit
    3,250,000       4,726,056  
Repayments under lines of credit
    (2,750,000 )     (6,540,991 )
Repayments under loans payable, net
    (1,273,179 )     (921,779 )
Borrowings of amounts due to shareholders
    581,642       350,259  
Repayments of capital lease obligations
    (88,069 )     (107,558 )
NET CASH USED IN FINANCING ACTIVITIES
    (1,014,336 )     (2,431,412 )
                 
Effect of exchange rate changes on cash
    (49,973 )     45,091  
                 
NET DECREASE IN CASH AND CASH EQUIVALENTS
    (1,052,720 )     (14,109,209 )
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    7,449,530       21,558,739  
CASH AND CASH EQUIVALENTS, END OF YEAR
  $ 6,396,810     $ 7,449,530  
 

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, 2009
   
April 30, 2008
 
             
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
           
Cash paid during the period for:
           
Interest
  $ 408,752     $ 522,984  
Income taxes
    1,284,710     $ 2,049,667  
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
                 
Issuance of common stock for net non-cash assets received in acquisition
  $ 0     $ 2,760,489  
                 
                 
Issuance of notes for property and equipment
  $ 28,244     $ 172,532  
 
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

This Annual Report on Form 10-K includes the accounts of WPCS International Incorporated (WPCS) and its wholly and majority-owned subsidiaries, WPCS International – Suisun City, Inc. (Suisun City Operations), WPCS International – Auburn, Inc. (Auburn Operations), WPCS International – St. Louis, Inc. (St. Louis Operations), WPCS International – Lakewood, Inc. (Lakewood Operations), WPCS International – Hartford, Inc. (Hartford Operations), WPCS International Sarasota, Inc. (Sarasota Operations), WPCS International – Trenton, Inc. (Trenton Operations), Taian AGS Pipeline Construction Co. Ltd (Beijing Operations), WPCS International – Seattle, Inc. (Seattle Operations), WPCS International – Houston, Inc. (Houston Operations), WPCS International – Sacramento, Inc (Sacramento Operations), WPCS International – Brisbane, Pty Ltd. (Brisbane Operations), WPCS International – Brendale, Pty Ltd. (Brendale Operations), WPCS International – Portland, Inc. (Portland Operations), WPCS Incorporated, Invisinet Inc., WPCS Australia Pty Ltd, and WPCS Asia Limited, collectively “we”, “us” or the "Company".

The Company provides design-build engineering services that focus on the implementation requirements of communications infrastructure.  The Company provides its engineering capabilities including wireless communication, specialty construction and electrical power to the public services, healthcare, energy and corporate enterprise markets 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 a 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 cash equivalents with major financial institutions.  At times, such amounts may exceed Federally insured limits.  The Company reduces credit risk related to accounts receivable by routinely assessing the financial strength of its customers and maintaining an appropriate allowance for doubtful accounts based on its history of write-offs, current economic conditions and an evaluation of the credit risk related to specific customers. The Company does not require collateral in most cases, but may file claims against the construction project if a default in payment occurs.
 
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 $3,499,161 and $2,626,788 at April 30, 2009 and 2008, respectively.
 
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. Leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful lives of the assets.

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 performed its annual impairment test as of April 30, 2009 and 2008 and determined that the goodwill was not impaired.
 
The Company determines the fair value of the businesses acquired (reporting units) for purposes of this test using the Income Approach, which utilizes a discounted cash flow model, as the Company believes that this approach best approximates the fair value of its reporting units. 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, 2009 and 2008.

Additionally, the Company evaluated the reasonableness of the estimated fair value of its reporting units by reconciling to its market capitalization. This reconciliation allowed the Company to consider market expectations in corroborating the reasonableness of the fair value of its reporting units.  In addition, the Company compared its market capitalization, including an estimated control premium that an investor would be willing to pay for a controlling interest in the Company and the discount the Company’s common stock trades compared to its peer group of companies.   The determination of a control premium and trading discount requires the use of judgment and is based primarily on comparable industry and deal-size transactions, related synergies and other benefits. The Company’s market capitalization declined during the third quarter of fiscal 2009, and subsequently, as a result of market-driven declines in its stock trading price. This decline is consistent with overall market conditions and is not a result of changes in its expectations of future cash flows. The Company’s reconciliation of the gap between its market capitalization and the aggregate fair value of the Company depends on various factors, some of which are qualitative and involve management judgment, including high backlog coverage of future revenue and experience in meeting operating cash flow targets.

Goodwill through the years ended April 30, 2009 and 2008 consisted of the following:

   
Wireless
   
Specialty
   
Electrical
       
   
Communication
   
Construction
   
Power
   
Total
 
                         
Beginning balance, May 1, 2007
  $ 10,926,178     $ 4,320,115     $ 5,223,315     $ 20,469,608  
                                 
Trenton Operations acquisition
    -    </