UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the Quarterly Period Ended October 31, 2009

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

For the transition period from _________ to __________

Commission file number: 0-26277

WPCS INTERNATIONAL INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware
98-0204758
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)

One East Uwchlan Avenue
Suite 301
Exton, Pennsylvania 19341
 (Address of principal executive offices) (zip code)

(610) 903-0400
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No  o 

Indicate by check mark 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 (§232.405 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 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. (Check one):
 
 Large accelerated filer o
 Accelerated filer o
 Non-accelerated filer o
 Smaller reporting company x
(Do not check if a smaller reporting company)
 

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

As of December 10, 2009, there were 6,942,266 shares of registrant’s common stock outstanding.


 
1

 

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES



INDEX
       
PART I. FINANCIAL INFORMATION  
       
 
ITEM 1.
Condensed consolidated balance sheets at October 31, 2009 (unaudited) and April 30, 2009
 
3-4
       
   
Condensed consolidated statements of income for the three and six months ended October 31, 2009 and 2008 (unaudited)
 
5
       
   
Condensed consolidated statement of equity for the six months ended October 31, 2009 (unaudited)
 
6
       
   
Condensed consolidated statements of cash flows for the six months ended October 31, 2009 and 2008 (unaudited)
 
7-8
       
   
Notes to unaudited condensed consolidated financial statements
9-21
       
 
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
22-35
       
 
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
36
       
 
ITEM 4T.
Controls and Procedures
37
       
PART II. OTHER INFORMATION  
       
 
ITEM 1
Legal proceedings
38
 
ITEM 1A
Risk factors
38
 
ITEM 2
Unregistered sales of equity securities and use of proceeds
38
 
ITEM 3
Defaults upon senior securities
38
 
ITEM 4
Submission of matters to a vote of security holders
38
 
ITEM 5
Other information
38
 
ITEM 6
Exhibits
38
       
 
SIGNATURES
39



 
2

 
 

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS

   
October 31,
   
April 30,
 
ASSETS
 
2009
   
2009
 
   
(Unaudited)
   
Note 1
 
CURRENT ASSETS:
           
             
Cash and cash equivalents
  $ 8,511,319     $ 6,396,810  
Accounts receivable, net of allowance of $105,889 and $155,458 at October 31, 2009 and April 30, 2009, respectively
    24,728,415       25,662,784  
Costs and estimated earnings in excess of billings on uncompleted contracts
    4,034,783       5,229,043  
Inventory
    3,093,949       2,481,383  
Prepaid expenses and other current assets
    2,344,190       1,674,952  
Prepaid income taxes
    -       295,683  
Deferred tax assets
    268,922       70,413  
Total current assets
    42,981,578       41,811,068  
                 
PROPERTY AND EQUIPMENT, net
    6,498,162       6,668,032  
                 
OTHER INTANGIBLE ASSETS, net
    1,823,932       1,983,879  
                 
GOODWILL
    33,094,959       32,549,186  
                 
OTHER ASSETS
    132,204       132,948  
                 
Total assets
  $ 84,530,835     $ 83,145,113  

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


 
3

 
 
 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
 

LIABILITIES AND EQUITY
 
October 31,
   
April 30,
 
   
2009
   
2009
 
   
(Unaudited)
   
Note 1
 
CURRENT LIABILITIES:
           
             
Current portion of loans payable
  $ 54,662     $ 89,210  
Borrowings under line of credit
    5,626,056       5,626,056  
Current portion of capital lease obligations
    93,298       96,001  
Accounts payable and accrued expenses
    8,894,587       8,997,296  
Billings in excess of costs and estimated earnings on uncompleted contracts
    2,164,517       2,511,220  
Deferred revenue
    640,156       507,650  
Due to shareholders
    2,988,674       2,951,008  
Income taxes payable
    190,423       -  
Total current liabilities
    20,652,373       20,778,441  
                 
Loans payable, net of current portion
    51,511       71,634  
Capital lease obligations, net of current portion
    106,786       151,425  
Deferred tax liabilities
    1,565,866       1,467,971  
Total liabilities
    22,376,536       22,469,471  
                 
                 
                 
COMMITMENTS AND CONTINGENCIES
               
                 
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 shares issued and outstanding at October 31, 2009 and April 30, 2009, respectively
    694       694  
Additional paid-in capital
    50,246,439       50,175,479  
Retained earnings
    10,152,893       9,381,189  
Accumulated other comprehensive income (loss) on foreign currency translation
    488,933       (321,798 )
                 
Total WPCS shareholders' equity
    60,888,959       59,235,564  
                 
Noncontrolling interest
    1,265,340       1,440,078  
                 
Total equity
    62,154,299       60,675,642  
                 
Total liabilities and equity
  $ 84,530,835     $ 83,145,113  

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




 
4

 


 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

   
Three Months Ended
   
Six Months Ended
 
   
October 31,
   
October 31,
 
   
2009
   
2008
   
2009
   
2008
 
                         
                         
REVENUE
  $ 24,301,560     $ 28,767,681     $ 49,585,343     $ 57,035,212  
                                 
COSTS AND EXPENSES:
                               
Cost of revenue
    16,752,484       21,421,304       34,910,296       41,606,178  
Selling, general and administrative expenses
    6,286,661       5,945,671       12,140,145       11,883,160  
Depreciation and amortization
    658,199       651,039       1,308,143       1,340,181  
                                 
Total costs and expenses
    23,697,344       28,018,014       48,358,584       54,829,519  
                                 
OPERATING INCOME
    604,216       749,667       1,226,759       2,205,693  
                                 
OTHER EXPENSE (INCOME):
                               
Interest expense
    78,277       136,681       140,637       248,284  
Interest income
    (1,612 )     (22,073 )     (3,531 )     (48,112 )
                                 
INCOME BEFORE INCOME TAX PROVISION
    527,551       635,059       1,089,653       2,005,521  
                                 
Income tax provision
    254,605       253,299       492,687       744,204  
                                 
NET INCOME
    272,946       381,760       596,966       1,261,317  
                                 
Less: Net (loss) income attributable to noncontrolling interest
    (63,841 )     19,950       (174,738 )     61,196  
                                 
NET INCOME ATTRIBUTABLE TO WPCS
  $ 336,787     $ 361,810     $ 771,704     $ 1,200,121  
                                 
Basic net income per common share attributable to WPCS
  $ 0.05     $ 0.05     $ 0.11     $ 0.17  
                                 
Diluted net income per common share attributable to WPCS
  $ 0.05     $ 0.05     $ 0.11     $ 0.17  
                                 
Basic weighted average number of common shares outstanding
    6,942,266       7,251,083       6,942,266       7,251,083  
                                 
Diluted weighted average number of common shares outstanding
    6,976,256       7,262,419       6,968,524       7,259,353  

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

 
5

 


WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
 SIX MONTHS ENDED OCTOBER 31, 2009
(Unaudited)

                                       
Accumulated
             
                                       
Other Compre-
             
   
Preferred Stock
   
Common Stock
   
Additional
Paid-In
   
Retained
   
hensive
Income
   
Noncontrolling
   
Total
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Earnings
   
(Loss)
   
Interest
   
Equity
 
                                                       
BALANCE, MAY 1, 2009
    -     $ -       6,942,266     $ 694     $ 50,175,479     $ 9,381,189     $ (321,798 )   $ 1,440,078     $ 60,675,642  
                                                                         
Fair value of stock options granted to employees
    -       -       -       -       70,960       -       -       -       70,960  
                                                                         
Accumulated other comprehensive income
    -       -       -       -       -       -       810,731       -       810,731  
                                                                         
Net loss attributable to noncontrolling interest
    -       -       -       -       -       -       -       (174,738 )     (174,738 )
                                                                         
Net income attributable to WPCS
    -       -       -       -       -       771,704       -       -       771,704  
                                                                         
BALANCE, OCTOBER 31, 2009
    -     $ -       6,942,266     $ 694     $ 50,246,439     $ 10,152,893     $ 488,933     $ 1,265,340     $ 62,154,299  

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

 
6

 
 

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Six Months Ended
 
   
October 31,
 
   
2009
   
2008
 
             
OPERATING ACTIVITIES :
           
Net income
  $ 596,966     $ 1,261,317  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,308,143       1,340,181  
Fair value of stock options granted to employees
    70,960       56,339  
Provision for doubtful accounts
    46,826       52,932  
Amortization of debt issuance costs
    21,326       5,161  
Loss (gain) on sale of fixed assets
    12,117       (3,822 )
Deferred income taxes
    (110,186 )     (87,146 )
Changes in operating assets and liabilities, net of effects of acquisitions:
               
Accounts receivable
    1,088,550       2,299,194  
Costs and estimated earnings in excess of billings on uncompleted contracts
    1,230,573       (1,004,154 )
Inventory
    (602,546 )     (475,630 )
Prepaid expenses and other current assets
    (803,592 )     (454,208 )
Other assets
    6,080       471,681  
Accounts payable and accrued expenses
    (118,385 )     1,511,588  
Billings in excess of costs and estimated earnings on uncompleted contracts
    (354,528 )     2,488,644  
Deferred revenue
    132,507       205,653  
Income taxes payable
    490,496       350,351  
NET CASH PROVIDED BY OPERATING ACTIVITIES
    3,015,307       8,018,081  

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


 
7

 
 


WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)

INVESTING ACTIVITIES:
           
Acquisition of property and equipment, net
    (804,384 )     (714,151 )
Acquisition of Trenton Operations, net of cash received
    -       (2,500,000 )
Acquisition of Seattle Operations, net of cash received
    119,092       -  
Acquisition of Max Engineering and Lincoln Wind, net of cash received
    -       (707,645 )
Acquisition of Sacramento Operations, net of cash received
    -       (7,521 )
Acquisition of Brisbane Operations, net of cash received
    -       (287,735 )
Acquisition of Brendale Operations, net of cash received
    (1,750 )     (24,516 )
Acquisition of Portland Operations, net of cash received
    (104,154 )     -  
NET CASH USED IN INVESTING ACTIVITIES
    (791,196 )     (4,241,568 )
                 
FINANCING ACTIVITIES:
               
Equity issuance costs
    -       (5,000 )
Borrowings under lines of credit
    -       2,500,000  
Repayments under loans payable, net
    (54,671 )     (1,217,195 )
Borrowings of amounts due to shareholders
    -       827,678  
Repayments of capital lease obligations
    (47,342 )     (25,887 )
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    (102,013 )     2,079,596  
                 
Effect of exchange rate changes on cash
    (7,589 )     (69,759 )
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    2,114,509       5,786,350  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    6,396,810       7,449,530  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 8,511,319     $ 13,235,880  

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

 


 
8

 
 

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for quarterly reports on Form 10-Q of Article 10 of Regulation S-X and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. Accordingly, the unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended April 30, 2009 included in the Company’s Annual Report on Form 10-K.  The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of the management, considered necessary for a fair presentation of condensed consolidated financial position, results of operations and cash flows for the interim periods. Operating results for the three and six month periods ended October 31, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2010. The amounts for the April 30, 2009 balance sheet have been extracted from the audited consolidated financial statements included in Form 10-K for the year ended April 30, 2009.

The accompanying condensed consolidated financial statements include the accounts of WPCS International Incorporated (WPCS) and its wholly and majority-owned subsidiaries, WPCS International – Suisun City, Inc. (Suisun City 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 – Sacramento, Inc. (Sacramento Operations), WPCS International – Brisbane, Pty Ltd. (Brisbane Operations), WPCS International – Brendale, Pty Ltd. (Brendale Operations), and 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

In June 2009, the Financial Accounting Standards Board (FASB) issued guidance that establishes the Accounting Standards Codification (ASC) Topic No. 105, “Codification” (ASC 105), 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, and only one level of authoritative U.S. GAAP will exist. All other literature will be considered non-authoritative. The Codification does not change U.S. 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. The Company has applied the new Codification references in our financial statements.

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

Principles of Consolidation

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

Cash and Cash Equivalents

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

Goodwill and Other Intangible Assets

In accordance with FASB ASC Topic No. 350, “Intangibles - Goodwill and Other” (ASC 350), goodwill and indefinite-lived intangible assets are no longer amortized but are assessed for impairment on at least an annual basis. ASC 350 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.

GAAP 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.
 
 
 
9

 
 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

The Company determines the fair value of the businesses acquired (reporting units) for purposes of this test primarily by using a discounted cash flow valuation technique. Significant estimates used in the valuation include estimates of future cash flows, both future short-term and long-term growth rates, and estimated cost of capital for purposes of arriving at a discount factor. The Company expects to perform its annual impairment test at April 30 absent any interim impairment indicators. Adverse changes in general economic conditions could impact the Company's valuation of its reporting units.  However, the Company considered current economic conditions, and concluded that indicators did not suggest testing goodwill or intangible assets for impairment on an interim basis in advance of the tests it performs annually at the end of the fourth quarter of each year.

Effective May 1, 2009, in connection with the change in the structure of the Company’s internal organization, the Company reclassed certain operations from the specialty construction segment to the electrical power segment.  The reorganized composition of these two segments was completed in conjunction with the Company’s branding strategy and to better represent the Company’s design-build engineering capabilities.  In addition, through this reorganization the Company consolidated certain operations to reduce administrative overhead expenses and improve operating efficiencies. Changes in goodwill consist of the following during the six months ended October 31, 2009:

   
Wireless
   
Specialty
   
Electrical
       
   
Communication
   
Construction
   
Power
   
Total
 
                         
Beginning balance, May 1, 2009
  $ 10,921,998     $ 5,956,201     $ 15,670,987     $ 32,549,186  
                                 
Reclass: segment reorganization
    -       (1,824,249 )     1,824,249       -  
Brendale Operations acquisition
    -       -       1,750       1,750  
Portland Operations acquisition
    -       -       92,154       92,154  
Foreign currency translation adjustments
    -       192,582       259,287       451,869  
                                 
Ending balance, October 31, 2009
  $ 10,921,998     $ 4,324,534     $ 17,848,427     $ 33,094,959  

Other intangible assets consist of the following at October 31, 2009 and April 30, 2009:

   
Estimated useful life
   
October 31,
   
April 30,
 
   
(years)
   
2009
   
2009
 
                   
Customer list
    3-9     $ 3,983,493     $ 3,969,240  
Less accumulated amortization expense
            (2,173,353 )     (2,084,302 )
            $ 1,810,140     $ 1,884,938  
                         
Contract backlog
    1-3     $ 915,598     $ 893,009  
Less accumulated amortization expense
            (901,806 )     (794,068 )
            $ 13,792     $ 98,941  

Amortization expense for other intangible assets for the six months ended October 31, 2009 and 2008 was $300,046 and $468,081, respectively. There are no expected residual values related to these intangible assets.

Revenue Recognition

The Company generates its revenue by providing design-build engineering services for communications infrastructure. The Company’s design-build services report revenue pursuant to customer contracts that span varying periods of time. The Company reports revenue from contracts when persuasive evidence of an arrangement exists, fees are fixed or determinable, and collection is reasonably assured.

The Company records revenue and profit from long-term contracts on a percentage-of-completion basis, measured by the percentage of contract costs incurred to date to the estimated total costs for each contract.  Contracts in process are valued at cost plus accrued profits less earned revenues and progress payments on uncompleted contracts. Contract costs include direct materials, direct labor, third party subcontractor services and those indirect costs related to contract performance.  Contracts are generally considered substantially complete when engineering is completed and/or site construction is completed.
 
 
10

 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

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

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

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

Income Taxes

Income taxes are accounted for in accordance with FASB ASC Topic No. 740, "Income Taxes” (ASC 740).  Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The recognition of deferred tax assets is reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible.

ASC 740 also clarifies the accounting for uncertainty in income taxes is subject to significant and varied interpretations that have resulted in diverse and inconsistent accounting practices and measurements. Addressing such diversity, ASC 740 prescribes a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring changes in such tax positions for financial statement purposes. ASC 740 also requires expanded disclosure with respect to the uncertainty in income taxes. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in selling, general and administrative expenses. For the six months ended October 31, 2009, and 2008, the Company recognized no interest or penalties, respectively.

Earning Per Common Share

Earning per common share is computed pursuant to FASB ASC Topic No. 260, "Earnings Per Share". Basic net income per common share is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur from common stock issuable through stock options and warrants.  The table below presents the computation of basic and diluted net income per common share for the three and six months ended October 31, 2009 and 2008, respectively:
 
 
 
11

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 

Basic earnings per share computation
 
Three Months Ended
   
Six Months Ended
 
   
October 31,
   
October 31,
 
 
 
2009
   
2008
   
2009
   
2008
 
Numerator:
                       
                         
     Net income attributable to WPCS
  $ 336,787     $ 361,810     $ 771,704     $ 1,200,121  
                                 
Denominator:
                               
                                 
     Basic weighted average shares outstanding
    6,942,266       7,251,083       6,942,266       7,251,083  
                                 
Basic net income per common share attributable to WPCS
  $ 0.05     $ 0.05     $ 0.11     $ 0.17  
                                 
                                 
Diluted earnings per share computation                                
 
 
Three Months Ended
   
Six Months Ended
 
   
October 31,
   
October 31,
 
 
    2009       2008       2009       2008  
Numerator:
                               
                                 
     Net income attributable to WPCS
  $ 336,787     $ 361,810     $ 771,704     $ 1,200,121  
                                 
Denominator:
                               
                                 
     Basic weighted average shares outstanding
    6,942,266       7,251,083       6,942,266       7,251,083  
                                 
     Incremental shares from assumed conversion:
                               
                                 
                                 
          Conversion of stock options
    33,990       11,336       26,258       8,270  
                                 
          Conversion of common stock warrants
    -       -       -       -  
                                 
     Diluted weighted average shares
    6,976,256       7,262,419       6,968,524       7,259,353  
                                 
Diluted net income per common share attributable to WPCS
  $ 0.05     $ 0.05     $ 0.11     $ 0.17  

At October 31, 2009 and 2008, the Company had 627,858 and 691,475 stock options, respectively, and 1,883,796 warrants outstanding in both years, respectively, which are potentially dilutive securities. For the three months ended October 31, 2009 and 2008, 510,436 and 667,759 stock options, respectively, were not included in the computation of diluted earnings per share.  For the six months ended October 31, 2009 and 2008, 513,958 and 642,400 stock options, respectively, were not included in the computation of diluted earnings per share. For the three and six months ended October 31, 2009 and 2008, 1,883,796 warrants were not included in the computation of diluted earnings per share. These potentially dilutive securities were excluded because the stock warrant exercise prices exceeded the average market price of the common stock and, therefore, the effects would be option antidilutive.

Noncontrolling Interest

Noncontrolling interest for the six months ended October 31, 2009 and 2008 consists of the following:

   
October 31,
 
   
2009
   
2008
 
Balance, beginning of period
  $ 1,440,078     $ 1,331,850  
                 
Net (loss) income attributable to noncontrolling interest
    (174,738 )     61,196  
                 
Balance, end of period
  $ 1,265,340     $ 1,393,046  
 
 
12

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Other Comprehensive Income

Comprehensive income for the three and six months ended October 31, 2009 and 2008 consists of the following:

   
Three Months Ended
   
Six Months Ended
 
   
October 31,
   
October 31,
 
   
2009
   
2008
   
2009
   
2008
 
Net income attributable to WPCS
  $ 336,787     $ 361,810     $ 771,704     $ 1,200,121  
Other comprehensive income - foreign currency translation adjustments, net
    361,513       (735,868 )     810,731       (662,137 )
Comprehensive income (loss) attributable to WPCS
  $ 698,300     $ (374,058 )   $ 1,582,435     $ 537,984  

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 the calculation of percentage-of-completion on uncompleted contracts, allowance for doubtful accounts, valuation of inventory, amortization method and 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.

Subsequent Events

The Company has evaluated subsequent events through December 15, 2009, which is the date these condensed consolidated financial statements were filed with the Securities and Exchange Commission.

Recently Issued Accounting Pronouncements

On May 1, 2009, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 141(R) (SFAS 141(R)) “Business Combinations”, which is codified in FASB ASC Topic No. 805, “Business Combinations”, (ASC 805). This statement significantly changes the accounting for and reporting for business combination transactions in consolidated financial statements. The adoption of this pronouncement had no impact on the Company’s consolidated financial position, results of operations, cash flows or financial statement disclosures, and its effects on future periods will depend on the nature and significance of business combinations subject to this statement.

On May 1, 2009, the Company adopted SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements, an amendment to ARB No.51” (SFAS 160), which is codified in FASB ASC Topic No. 810 “Consolidation” (ASC 810). This statement significantly changes the accounting for noncontrolling (minority) interests in consolidated financial statements. The adoption of this pronouncement had no impact on the Company’s consolidated financial position, results of operations or cash flows.  However, the Company reclassified minority interest as noncontrolling interest and is reported as a component of equity separate from WPCS shareholders’ equity in the condensed consolidated balance sheets, and net (loss) income from noncontrolling interest is presented separately on the face of the condensed consolidated statements of income to conform to this standard.

On May 1, 2009, the Company adopted SFAS No. 161,  “Disclosures About Derivative Instruments and Hedging Activities” (SFAS 161), which is codified in FASB ASC Topic No. 815 “Derivatives and Hedging” (ASC 815). This statement is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures. The adoption of this pronouncement had no impact on the Company’s consolidated financial position, results of operations, cash flows or financial statement disclosures.

On May 1, 2009, the Company adopted EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5), which is codified primarily in FASB ASC Subtopic No. 815-40 “Contracts in Entity’s Own Equity” (ASC 815-40). The primary objective of this statement 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 ASC 815, “Derivatives and Hedging.” 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. This statement 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. The adoption of this pronouncement had no impact on the Company’s consolidated financial position, results of operations, cash flows or financial statement disclosures.

On May 1, 2009, the Company adopted SFAS 165, “Subsequent Events”, which is codified in FASB ASC Topic No. 855, "Subsequent Events" (ASC 855). This statement established principles and requirements for subsequent events. It also details the period after the balance sheet date during which the Company should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which the Company should recognize events or transactions occurring after the balance sheet date in its financial statements and the required disclosures for such events. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial position, results of operations, cash flows or financial statement disclosures.
 
 
13

 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

In June 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 112 (SAB 112). SAB 112 revises or rescinds portions of the interpretative guidance included in the codification of SABs in order to make the interpretive guidance consistent with current U.S. GAAP. The Company does not expect the adoption of this pronouncement to have a material impact on its consolidated financial statements.

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

NOTE 3 - ACQUISITIONS

In accordance with ASC 805, “Business Combinations,” acquisitions consummated prior to the adoption of ASC 805 on May 1, 2009 have been accounted for under the purchase method of accounting.  Under the purchase method of accounting, assets acquired and liabilities assumed were recorded at their estimated fair values.  Goodwill was recorded to the extent the purchase price consideration, including certain acquisition and closing costs, exceeded the fair value of the net identifiable assets acquired at the date of the acquisition.

 Max Engineering LLC and Lincoln Wind LLC

On August 2, 2007, the Company acquired Max Engineering LLC. The aggregate consideration paid by the Company, including acquisition transaction costs of $30,498, was $1,117,679 of which $917,679 was paid in cash and the Company issued 17,007 shares of common stock valued at $200,000. The aggregate purchase price includes additional cash consideration of $287,181 paid to the former members regarding the earnout settlement for the twelve months ended August 1, 2008. No earnout settlement is payable for the twelve months ended August 1, 2009.  Max Engineering LLC was acquired pursuant to a Membership Interest Purchase Agreement among the Company and the former members, dated and effective as of August 2, 2007. The acquisition of Max Engineering LLC expands the Company’s 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 June 26, 2008, the Company acquired all the assets of Lincoln Wind LLC for aggregate consideration of $422,359 in cash, including acquisition transaction costs of $22,359. The assets of Lincoln Wind LLC were acquired pursuant to an Asset Purchase Agreement among the Company, Lincoln Wind LLC and the former member. Lincoln Wind LLC 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.

A valuation of certain assets was completed, including property and equipment and list of major customers, and the Company internally determined the fair value of other assets and liabilities. In determining the fair value of acquired assets, standard valuation techniques were used including the market and income approach.

The purchase price allocation has been determined as follows:

   
Max Engineering LLC
   
Lincoln Wind LLC
   
Total
 
Assets purchased:
                 
Cash
  $ 105,926     $ -     $ 105,926  
Accounts receivable
    256,829       -       256,829  
Costs and estimate earnings in excess of billings
    4,500       -       4,500  
Fixed assets
    21,890       139,970       161,860  
Other assets
    1,950       -       1,950  
Customer lists
    216,000       30,000       246,000  
Goodwill
    591,588       252,389       843,977  
      1,198,683       422,359       1,621,042  
Liabilities assumed:
                       
Accrued expenses
    (59,186 )     -       (59,186 )
Payroll and other payable
    (19,318 )     -       (19,318 )
Accrued tax payable
    (2,500 )     -       (2,500 )
      (81,004 )     -       (81,004 )
Purchase price
  $ 1,117,679     $ 422,359     $ 1,540,038  
 
 
14

 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
RL & CA MacKay Pty Ltd dba Energize Electrical and BRT Electrical Pty Ltd (Brendale Operations)

On April 4, 2008, the Company acquired Energize Electrical. The aggregate consideration paid by the Company, including acquisition transaction costs of $114,112, was $1,689,756 in cash.  Energize Electrical was acquired pursuant to a Share Purchase Agreement among the Company and the former shareholders dated as of April 4, 2008. Energize Electrical 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.

On November 30, 2008, the Company acquired all the assets of BRT Electrical Pty Ltd (BRT) for aggregate consideration of $172,403 in cash, including acquisition transaction costs of $61,462. The assets of BRT were acquired pursuant to an Asset Purchase Agreement among Energize Electrical, the Company, BRT and the former shareholder. BRT 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 the Brendale Operations provides further international expansion into Australia. A valuation of certain assets was completed, including property and equipment and list of major customers, and the Company internally determined the fair value of other assets and liabilities. In determining the fair value of acquired assets, standard valuation techniques were used including the market and income approach.

The purchase price allocation has been determined as follows:

   
Energize Electrical
   
BRT
   
Total
 
Assets purchased:
                 
Cash
  $ 21,429     $ -     $ 21,429  
    Accounts receivable
    189,197       -       189,197  
Inventory
    55,084       4,328       59,412  
Costs and estimated earnings in excess of billings
    415       7,775       8,190  
Fixed assets
    106,165       37,820       143,985  
Deferred tax assets
    2,108       -       2,108  
Customer lists
    509,740       -       509,740  
    Goodwill
    1,176,582       122,480       1,299,062  
      2,060,720       172,403       2,233,123  
Liabilities assumed:
                       
Accounts payable
    (69,562 )     -       (69,562 )
Accrued expenses
    (7,444 )     -       (7,444 )
Payroll and other payable
    (37,175 )     -       (37,175 )
Sales and use tax payable
    (12,449 )     -       (12,449 )
Income tax payable
    (91,412 )     -       (91,412 )
Deferred tax liabilities
    (152,922 )     -       (152,922 )
      (370,964 )     -       (370,964 )
Purchase price
  $ 1,689,756     $ 172,403     $ 1,862,159  

Midway Electric Company (Portland Operations)

On March 9, 2009, the Company acquired Midway Electric Company (Portland Operations).  The aggregate consideration paid by the Company, including acquisition transaction costs of $31,674, was $530,770 in cash.  The Portland Operations was acquired pursuant to a Stock Purchase Agreement among the Company and the former shareholders, dated as of March 9, 2009. 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.

 
15

 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
A valuation of certain assets was completed, including property and equipment and list of major customers, and the Company internally determined the fair value of other assets and liabilities. In determining the fair value of acquired assets, standard valuation techniques were used including the market and income approach.

The purchase price allocation has been determined as follows:
       
Assets purchased:
     
    Cash
  $ 93,247  
Accounts receivable
    86,555  
Inventory
    64,165  
Prepaid expenses
    13,469  
    Costs and estimated earnings in excess of billings
    10,182  
Fixed assets
    205,615  
    Customer lists
    12,000  
    Goodwill
    110,042  
      595,275  
Liabilities assumed:
       
Accounts payable
    (30,842 )
Accrued expenses
    (2,189 )
Payroll and other payable
    (23,292 )
Billings in excess of costs and estimated earnings
    (3,249 )
Capital lease obligation
    (4,933 )
      (64,505 )
Purchase price
  $ 530,770  

Consolidated Pro Forma Information

The following unaudited consolidated pro forma financial information presents the combined results of operations of the Company, Lincoln Wind, BRT and the Portland Operations for the three and six months ended October 31, 2008 as if the acquisitions had occurred at May 1, 2008. The consolidated pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company, Lincoln Wind, BRT and the Portland Operations been a single entity during these periods.

 
     
Consolidated Pro Forma
 
             
   
Three Months Ended
   
Six Months Ended
 
   
October 31,
   
October 31,
 
   
2008
    2008  
             
Revenue
  $ 29,237,350     $ 58,189,560  
                 
Net income attributable to WPCS
  377,410     1,109,648  
                 
Basic weighted average shares
    7,251,083       7,251,083  
Diluted weighted average shares
    7,262,419       7,259,353  
                 
Basic net income per share attributable to WPCS
  $ 0.05     $ 0.15  
Diluted net income per share attributable to WPCS
  $ 0.05     $ 0.15  

 
 
16

 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts”, represents revenue recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts”, represents billings in excess of revenue recognized. Although management believes it has established adequate procedures for estimating costs to complete on open contracts, additional costs could occur on contracts prior to completion. Costs and estimated earnings on uncompleted contracts consist of the following at October 31, 2009 and April 30, 2009:

   
October 31, 2009
   
April 30, 2009
 
Costs incurred on uncompleted contracts
  $ 68,354,964     $ 66,056,622  
Estimated contract profit
    22,550,910       21,903,172  
 
    90,905,874       87,959,794  
Less: billings to date
    89,035,608       85,241,971  
                           Net excess of costs
  $ 1,870,266     $ 2,717,823  
                 
Costs and estimated earnings in excess of billings
  on uncompleted contracts
  $ 4,034,783     $ 5,229,043  
Billings in excess of costs and estimated earnings
               
  on uncompleted contracts
    (2,164,517 )     (2,511,220 )
                           Net excess of costs
  $ 1,870,266     $ 2,717,823  

NOTE 5 – DEBT

Lines of Credit

On April 10, 2007, the Company 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. The Company and its subsidiaries also entered into security agreements with BOA, pursuant to which the Company granted a security interest to BOA in all of its 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. As of October 31, 2009, the Company is in compliance with the Loan Agreement covenants. The loan commitment shall expire on April 10, 2010, and the Company may repay 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 the Company has the option to elect to use the optional interest rate of LIBOR plus one hundred seventy-five basis points.  As of October 31, 2009, the interest rate was 2.25% on outstanding borrowings of $5,626,056 under the Loan Agreement.

Loans Payable

The Company’s long-term debt also consists of notes issued by the Company for the purchase of property and equipment in the ordinary course of business. At October 31, 2009, loans payable and capital lease obligations totaled $306,257 with interest rates ranging from 0% to 12.67%.

Due to Shareholders

As of October 31, 2009, the Beijing Operations had outstanding loans due to a related party, Taian Gas Group (TGG), totaling $2,988,674, of which $2,636,388 matures on December 31, 2009, and bears interest at 6.83%. The remaining balance of $352,286 represents working capital loans from TGG to the Beijing Operations in the normal course of business.

NOTE 6 - RELATED PARTY TRANSACTIONS

In connection with the acquisition of the Suisun City Operations, the Company assumed a ten-year lease with a trust, of which a certain officer of the Company is the trustee, for a building and land located in Suisun City, California which is occupied by its Suisun City Operations.  For the six months ended October 31, 2009 and 2008, the rent paid for this lease was $46,830 in both years.
 
 
17

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
In connection with the acquisition of the Sarasota Operations, the Company leases its Sarasota, Florida location from a trust, of which one of the former shareholders of the Sarasota Operations is the trustee. For the six months ended October 31, 2009 and 2008, the rent paid for this lease was $27,653 and $26,847, respectively.

In connection with the acquisition of the Trenton Operations, the Company leases its Trenton, New Jersey location from Voacolo Properties LLC, of which the former shareholders of Voacolo Electric Incorporated are the members. For the six months ended October 31, 2009 and 2008, the rent paid for this lease was $33,000 and $30,000, respectively.

In connection with the acquisition of the Beijing Operations in fiscal 2007, the Company’s joint venture partner provided the office building for Beijing Operations rent free during fiscal year 2009.  The Company expects to enter into a lease with the joint venture partner in fiscal 2010.

NOTE 7 – SHAREHOLDERS’ EQUITY

Stock-Based Compensation Plans

In September 2006, the Company adopted the 2007 Incentive Stock Plan, under which officers, directors, key employees or consultants may be granted options.  Under the 2007 Incentive Stock Plan, 400,000 shares of common stock were reserved for issuance upon the exercise of stock options, stock awards or restricted stock.  These shares were registered under Form S-8. At October 31, 2009, options to purchase 255,000 shares were outstanding at exercise prices ranging from $2.37 to $6.33. At October 31, 2009, there were 145,000 options available for grant under the 2007 Incentive Stock Plan.

In September 2005, the Company adopted the 2006 Incentive Stock Plan, under which officers, directors, key employees or consultants may be granted options.  Under the 2006 Incentive Stock Plan, 400,000 shares of common stock were reserved for issuance upon the exercise of stock options, stock awards or restricted stock.  These shares were registered under Form S-8. Under the terms of the 2006 Incentive Stock Plan, stock options are granted at exercise prices equal to the fair market value of the common stock at the date of grant, and become exercisable and expire in accordance with the terms of the stock option agreement between the optionee and the Company at the date of grant.  These options generally vest based on between one to three years of continuous service and have five-year contractual terms. At October 31, 2009, options to purchase 288,102 shares were outstanding at exercise prices ranging from $6.14 to $12.10. At October 31, 2009, there were 40,322 options available for grant under the 2006 Incentive Stock Plan.

In March 2003, the Company established a stock option plan pursuant to which options to acquire a maximum of 416,667 shares of the Company's common stock were reserved for grant (the "2002 Plan"). These shares were registered under Form S-8. Under the terms of the 2002 Plan, the options are exercisable at prices equal to the fair market value of the stock at the date of the grant and become exercisable in accordance with terms established at the time of the grant. These options generally vest based on between one to three years of continuous service and have five-year contractual terms. At October 31, 2009, options to purchase 84,756 shares were outstanding at exercise prices ranging from $2.37 to $12.10. At October 31, 2009, there were 189,394 shares available for grant under the 2002 Plan.

The following table summarizes stock option activity for the six months ended October 31, 2009, during which there were no options exercised under the Company’s stock option plans:

   
2002 Plan
 
   
Number of Shares
   
Weighted-average Exercise Price
   
Weighted- average Remaining Contractual Term
   
Aggregate Intrinsic 
Value
 
 
 
 
 
                         
Outstanding, May 1, 2009
    161,350     $ 6.28              
                             
Granted
    8,000     $ 3.24              
Exercised
    -     $ 0.00              
Forfeited/Expired
    (84,594 )   $ 6.62              
                             
Outstanding, October 31, 2009
    84,756     $ 5.66       1.2     $ 5,785  
                                 
Vested and expected to vest, October 31, 2009
    80,936     $ 5.69       2.2     $ 5,611  
                                 
Exercisable, October 31, 2009
    54,277     $ 5.96       1.4     $ 2,893  
 
 
 
18

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

   
2006 Plan
 
   
Number of Shares
   
Weighted-average Exercise Price
   
Weighted-average Remaining Contractual Term
   
Aggregate Intrinsic Value
 
 
 
 
 
                         
Outstanding, May 1, 2009
    288,602     $ 6.34              
                             
Granted
    -     $ 0.00              
Exercised
    -     $ 0.00              
Forfeited/Expired
    (500 )   $ 7.04              
                             
Outstanding, October 31, 2009
    288,102     $ 6.34       1.0     $ 0  
                                 
Vested and expected to vest, October 31, 2009
    287,952     $ 6.33       1.0     $ 0  
                                 
Exercisable, October 31, 2009
    285,602     $ 6.29       1.0     $ 0  

   
2007 Plan
 
   
Number of Shares
   
Weighted-average Exercise Price
   
Weighted-average Remaining Contractual Term
   
Aggregate Intrinsic Value
 
 
 
 
 
                         
Outstanding, May 1, 2009
    180,000     $ 4.04              
                             
Granted
    75,000     $ 3.14              
Exercised
    -     $ 0.00              
Forfeited/Expired
    -     $ 0.00              
                             
Outstanding, October 31, 2009
    255,000     $ 3.77       4.1     $ 64,750  
                                 
Vested and expected to vest, October 31, 2009
    229,314     $ 3.72       4.1     $ 62,718  
                                 
Exercisable, October 31, 2009
    66,250     $ 3.49       3.8     $ 30,875  


In accordance with ASC 718, “Compensation –Stock Compensation”, the Company recognizes stock-based compensation expense. The Company recorded stock-based compensation of $70,960 and $56,339 for the six months ended October 31, 2009 and 2008, respectively.

At October 31, 2009, the total compensation cost related to unvested stock options granted under the Company’s stock option plans but not yet recognized was approximately $282,000 and is expected to be recognized over a weighted-average period of 2.27 years.

The Company has elected to adopt the shortcut method provided in Staff Position Updates, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards,” for determining the initial pool of excess tax benefits available to absorb tax deficiencies related to stock-based compensation subsequent to the adoption of ASC 718. The shortcut method includes simplified procedures for establishing the beginning balance of the pool of excess tax benefits (the APIC Tax Pool) and for determining the subsequent effect on the APIC Tax Pool and the Company’s consolidated statements of cash flows of the tax effects of share-based compensation awards. ASC 718 requires that excess tax benefits related to share-based compensation be reflected as financing cash inflows.
 
19

 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing model. Compensation cost is then recognized on a straight-line basis over the vesting or service period and is net of estimated forfeitures. There were 83,000 stock options granted during the six months ended October 31, 2009. There were 120,900 stock options granted during the six months ended October 31, 2008. The following assumptions were used to compute the fair value of stock option compensation expense during the three and six months ended October 31, 2009 and 2008, respectively:

   
Three Months Ended
   
Six Months Ended
 
   
October 31,
   
October 31,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Risk-free interest rate
    1.47 - 1.61 %     1.87 - 2.84 %     1.47 - 1.61 %     1.87 - 2.84 %
Expected volatility
    59.9 %     50.8 - 53.3 %     59.9 %     50.8 - 53.3 %
Expected dividend yield
    0.00 %     0.00 %     0.00 %     0.00 %
Expected term ( in years)
    3.5       3.25-3.5       3.5       3.25-3.5  

The risk-free rate is based on the rate of U.S Treasury zero-coupon issues with a remaining term equal to the expected term of the option grants.  Expected volatility is based on the historical volatility of the Company’s common stock using the weekly closing price of the Company’s common stock, pursuant to SEC Staff Accounting Bulletin No. 107. The expected dividend yield is zero based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was calculated using the simplified method pursuant to SEC Staff Accounting Bulletin Nos. 107 and 110.

Common Stock Purchase Warrants

In connection with a private placement of common stock on November 16, 2004, the Company issued common stock purchase warrants.  Each of these warrants was exercisable for a period of five years at an exercise price of $6.99 per share.  The exercise price of the warrants was subject to customary adjustment provisions for stock splits, combinations, dividends and the like. In April 2009, the Company and its warrant holders amended the warrant agreement to eliminate any adjustment provisions for lower price issuances. The warrants are callable by the Company, upon 30 days notice, should the common stock trade at or above $25.20 per share for 25 out of 30 consecutive trading days. A maximum of 20% of the warrants may be called in any three-month period.  1,883,796 common stock purchase warrants are outstanding at October 31, 2009 and April 30, 2009. These common stock warrants expired unexercised on November 16, 2009.

 Stock Repurchase Program

On November 24, 2008, the Company adopted a stock repurchase program of up to 2,000,000 shares of the Company’s common stock which expired on December 1, 2009.  Since November 24, 2008, a total of 308,817 shares were purchased and retired by the Company at a total cost of $729,730 including transaction costs, or an average cost per common share of $2.36.

NOTE 8 - SEGMENT REPORTING

The Company's reportable segments are determined and reviewed by management based upon the nature of the services, the external customers and customer industries and the sales and distribution methods used to market the products.  In order to better serve its diversified customer base, the Company launched a key initiative in fiscal 2009 to brand each of its subsidiaries with the “WPCS” name.  As part of this branding strategy and to better represent the Company’s design-build engineering capabilities, the Company reorganized its reportable segments to correspond with its primary service lines: wireless communications, specialty construction and electrical power.  Management evaluates performance based upon income (loss) before income taxes. Corporate includes corporate salaries and external professional fees, such as accounting, legal and investor relations costs which are not allocated to the other subsidiaries.  Corporate assets primarily include cash and prepaid expenses.  Segment results for the three and six months ended and as of October 31, 2009 and 2008 are as follows:


 
20

 
 

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
   
For the Three Months Ended October 31, 2009
   
For the Three Months Ended October 31, 2008
 
   
Corporate
   
Wireless Communications
   
Specialty Construction
   
Electrical Power
   
Total
   
Corporate
   
Wireless Communications
   
Specialty Construction
   
Electrical Power
   
Total
 
                                                             
Revenue
  $ -     $ 7,550,753     $ 1,765,705     $ 14,985,102     $ 24,301,560     $ -     $ 9,066,766     $ 3,169,857     $ 16,531,058     $ 28,767,681  
                                                                                 
Depreciation and amortization
  $ 17,494     $ 188,386     $ 194,886     $ 257,433     $ 658,199     $ 8,664     $ 177,006     $ 223,383     $ 241,986     $ 651,039  
                                                                                 
Income (loss)  before income taxes
  $ (1,261,806 )   $ 252,318     $ (292,098 )   $ 1,829,137     $ 527,551     $ (975,785 )   $ 598,688     $ 143,148     $ 869,008     $ 635,059  
                                                                                 
                                                                                 
   
As of and for the Six Months Ended October 31, 2009
   
As of and for the Six Months Ended October 31, 2008
 
   
Corporate
   
Wireless Communications