form10q.htm

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

INDEX

PART I.	FINANCIAL INFORMATION
	ITEM 1	Financial Statements

		Condensed consolidated balance sheets at January 31, 2010 (unaudited) and April 30, 2009	3-4

		Condensed consolidated statements of income for the three and nine months ended January 31, 2010 and 2009 (unaudited)	5

		Condensed consolidated statement of equity for the nine months ended January 31, 2010 (unaudited)	6

		Condensed consolidated statements of cash flows for the nine months ended January 31, 2010 and 2009 (unaudited)	7-8

		Notes to unaudited condensed consolidated financial statements	9-22

	ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23-36

	ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	37

	ITEM 4	Controls and Procedures	38

PART II.	OTHER INFORMATION

	ITEM 1	Legal proceedings	39

	ITEM 1A	Risk factors	39

	ITEM 2	Unregistered sales of equity securities and use of proceeds	39

	ITEM 3	Defaults upon senior securities	39

	ITEM 4	Reserved	39

	ITEM 5	Other information	39

	ITEM 6	Exhibits	39

	SIGNATURES		40

	January 31,		April 30,
ASSETS	2010		2009
	(Unaudited)		(Note 1)
CURRENT ASSETS:

Cash and cash equivalents	$	3,973,653	$	6,396,810
Accounts receivable, net of allowance of $96,051 and $155,458 at January 31, 2010 and April 30, 2009, respectively		27,539,260		25,662,784
Costs and estimated earnings in excess of billings on uncompleted contracts		6,176,827		5,229,043
Inventory		2,973,199		2,481,383
Prepaid expenses and other current assets		1,470,810		1,674,952
Prepaid income taxes		306,933		295,683
Deferred tax assets		299,481		70,413
Total current assets		42,740,163		41,811,068

PROPERTY AND EQUIPMENT, net		6,521,029		6,668,032

OTHER INTANGIBLE ASSETS, net		2,204,955		1,983,879

GOODWILL		34,914,822		32,549,186

OTHER ASSETS		132,589		132,948

Total assets	$	86,513,558	$	83,145,113

LIABILITIES AND EQUITY	January 31,		April 30,
	2010		2009
	(Unaudited)		(Note 1)
CURRENT LIABILITIES:

Current portion of loans payable	$	89,401	$	89,210
Borrowings under line of credit		5,626,056		5,626,056
Current portion of capital lease obligations		88,317		96,001
Accounts payable and accrued expenses		9,076,906		8,997,296
Billings in excess of costs and estimated earnings on uncompleted contracts		2,334,186		2,511,220
Deferred revenue		646,403		507,650
Due to shareholders		3,947,559		2,951,008
Total current liabilities		21,808,828		20,778,441

Due to shareholders, net of current portion		803,722		-
Loans payable, net of current portion		38,654		71,634
Capital lease obligations, net of current portion		87,508		151,425
Deferred tax liabilities		1,737,619		1,467,971
Total liabilities		24,476,331		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, 6,948,516 and 6,942,266 shares issued and outstanding at January 31, 2010 and April 30, 2009, respectively		700		694
Additional paid-in capital		50,301,320		50,175,479
Retained earnings		10,223,719		9,381,189
Accumulated other comprehensive income (loss) on foreign currency translation		352,956		(321,798	)

Total WPCS shareholders' equity		60,878,695		59,235,564

Noncontrolling interest		1,158,532		1,440,078

Total equity		62,037,227		60,675,642

Total liabilities and equity	$	86,513,558	$	83,145,113

	Three Months Ended						Nine Months Ended
	January 31,						January 31,
	2010			2009			2010			2009


REVENUE	$	26,972,380		$	25,323,422		$	76,557,723		$	82,358,634

COSTS AND EXPENSES:
Cost of revenue		20,561,172			18,369,219			55,471,468			59,975,397
Selling, general and administrative expenses		5,660,707			5,904,094			17,800,852			17,787,254
Depreciation and amortization		662,705			614,699			1,970,848			1,954,880

Total costs and expenses		26,884,584			24,888,012			75,243,168			79,717,531

OPERATING INCOME		87,796			435,410			1,314,555			2,641,103

OTHER EXPENSE (INCOME):
Interest expense		53,294			85,480			193,931			333,764
Interest income		(5,821	)		(3,042	)		(9,352	)		(51,155	)


INCOME BEFORE INCOME TAX PROVISION		40,323			352,972			1,129,976			2,358,494

Income tax (benefit) provision		(12,253	)		101,036			480,434			845,240

NET INCOME		52,576			251,936			649,542			1,513,254

Less: Net (loss) income attributable to noncontrolling interest		(18,250	)		73,840			(192,988	)		135,037

NET INCOME ATTRIBUTABLE TO WPCS	$	70,826		$	178,096		$	842,530		$	1,378,217

Basic net income per common share attributable to WPCS	$	0.01		$	0.03		$	0.12		$	0.19

Diluted net income per common share attributable to WPCS	$	0.01		$	0.03		$	0.12		$	0.19

Basic weighted average number of common shares outstanding		6,944,032			7,077,249			6,942,855			7,193,138

Diluted weighted average number of common shares outstanding		6,968,587			7,077,249			6,966,054			7,213,744

													Accumulated
													Other Compre-
	Preferred Stock				Common Stock				Additional		Retained		hensive			Noncontrolling			Total
	Shares		Amount		Shares		Amount		Paid-In Capital		Earnings		Income (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		-		-		-		-		108,598		-		-			-			108,598

Distribution to noncontrolling interest		-		-		-		-		-		-		-			(88,558	)		(88,558	)

Net proceeds from exercise of stock options		-		-		6,250		6		17,243		-		-			-			17,249

Accumulated other comprehensive income		-		-		-		-		-		-		674,754			-			674,754

Net loss attributable to noncontrolling interest		-		-		-		-		-		-		-			(192,988	)		(192,988	)

Net income attributable to WPCS		-		-		-		-		-		842,530		-			-			842,530

BALANCE, JANUARY 31, 2010		-	$	-		6,948,516	$	700	$	50,301,320	$	10,223,719	$	352,956		$	1,158,532		$	62,037,227

	Nine Months Ended
	January 31,
	2010			2009
OPERATING ACTIVITIES :
Net income	$	649,542		$	1,513,254
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,970,848			1,954,880
Fair value of stock options granted to employees		108,598			92,119
Provision for doubtful accounts		47,057			74,883
Amortization of debt issuance costs		35,255			8,714
Loss on sale of fixed assets		5,464			22,942
Deferred income taxes		(48,132	)		(109,387	)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(635,950	)		5,702,216
Costs and estimated earnings in excess of billings on uncompleted contracts		(834,896	)		(772,277	)
Inventory		(389,449	)		(41,401	)
Prepaid expenses and other current assets		50,126			(400,126	)
Other assets		359			479,408
Accounts payable and accrued expenses		(440,890	)		(2,655,174	)
Billings in excess of costs and estimated earnings on uncompleted contracts		(371,371	)		(285,676	)
Deferred revenue		138,754			103,889
Income taxes payable		(73,506	)		(175,802	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		211,809			5,512,462

	Nine Months Ended
	January 31,
	2010			2009

INVESTING ACTIVITIES:
Acquisition of property and equipment, net		(1,060,019	)		(918,004	)
Acquisition of businesses, net of cash received		(1,538,718	)		(3,685,318	)
NET CASH USED IN INVESTING ACTIVITIES		(2,598,737	)		(4,603,322	)

FINANCING ACTIVITIES:
Net proceeds from exercise of stock options		17,249			-
Repurchase of common stock		-			(729,730	)
Equity issuance costs		-			(5,000	)
Borrowings under lines of credit		-			2,500,000
Repayments under loans payable, net		(80,645	)		(1,244,965	)
Borrowings from shareholders		155,161			962,965
Repayments of capital lease obligations		(71,601	)		(55,112	)
Distribution to noncontrolling interest		(88,558	)		-
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(68,394	)		1,428,158

Effect of exchange rate changes on cash		32,165			(121,190	)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(2,423,157	)		2,216,108
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		6,396,810			7,449,530
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,973,653		$	9,665,638

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 nine month periods ended January 31, 2010 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, as follows, collectively referred to as “we”, “us” or the "Company". Domestic operations include WPCS Incorporated, 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), WPCS International – Seattle, Inc. (Seattle Operations), and WPCS International – Portland, Inc. (Portland Operations). International operations include WPCS Asia Limited, Taian AGS Pipeline Construction Co. Ltd. (Beijing Operations), and WPCS Australia Pty Ltd, WPCS International – Brisbane, Pty Ltd., WPCS International – Brendale, Pty Ltd., and The Pride Group (QLD) Pty Ltd. (Pride), (collectively the Australia Operations).

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.

In June 2009, the Financial Accounting Standards Board (FASB) issued guidance that establishes the Accounting Standards Codification (ASC) Topic No. 105, “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, 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.

Goodwill is tested annually for impairment, utilizing a two-step methodology. The initial step requires the Company to determine the fair value of the business acquired (reporting unit) and compare it to the carrying value, including goodwill, of such business (reporting unit). If the fair value exceeds the carrying value, no impairment loss is recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of the unit may be impaired. The amount, if any, of the impairment is then measured in the second step, based on the excess, if any, of the reporting unit’s carrying value of goodwill over its implied value.

The Company determines the fair value of the businesses acquired (reporting units) for purposes of this test primarily by using a discounted cash flow valuation technique. Significant estimates used in the valuation include estimates of future cash flows, both future short-term and long-term growth rates, and estimated cost of capital for purposes of arriving at a discount factor. The 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.

The Company reviews its other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing a review for impairment, the Company compares the carrying value of the assets with their estimated future undiscounted cash flows from the use of the asset and eventual disposition. If the estimated undiscounted future cash flows are less than carrying value, an impairment loss is charged to operations based on the difference between the carrying amount and the fair value of the asset.

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 nine months ended January 31, 2010:

	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		-		(2,616,359	)		2,616,359		-
Portland Operations acquisition		-		-			94,270		94,270
Australia Operations acquisitions		-		-			1,916,257		1,916,257
Foreign currency translation adjustments		-		-			355,109		355,109

Ending balance, January 31, 2010	$	10,921,998	$	3,339,842		$	20,652,982	$	34,914,822

	Estimated useful life		January 31,			April 30,
	(years)		2010			2009
Customer list		3-10	$	4,326,639		$	3,969,240
Less accumulated amortization expense				(2,288,466	)		(2,084,302	)
			$	2,038,173		$	1,884,938

Contract backlog		1-3	$	1,089,440		$	893,009
Less accumulated amortization expense				(922,658	)		(794,068	)
			$	166,782		$	98,941

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.

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 Company accounts for income taxes pursuant to the asset and liability method which requires deferred income tax assets and liabilities to be computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. 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. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. 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. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

The Company performed a review for uncertainty in income tax positions in accordance with authoritative guidance. This review did not result in the recognition of any material unrecognized tax benefits. Management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in selling, general and administrative expenses. For the nine months ended January 31, 2010, and 2009, the Company recognized no interest or penalties, respectively.

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 nine months ended January 31, 2010 and 2009, respectively:

Basic earnings per share computation	Three Months Ended				Nine Months Ended
	January 31,				January 31,
	2010		2009		2010		2009
Numerator:

Net income attributable to WPCS	$	70,826	$	178,096	$	842,530	$	1,378,217

Denominator:

Basic weighted average shares outstanding		6,944,032		7,077,249		6,942,855		7,193,138

Basic net income per common share attributable to WPCS	$	0.01	$	0.03	$	0.12	$	0.19

Diluted earnings per share computation
	Three Months Ended				Nine Months Ended
	January 31,				January 31,
		2010		2009		2010		2009
Numerator:

Net income attributable to WPCS	$	70,826	$	178,096	$	842,530	$	1,378,217

Denominator:

Basic weighted average shares outstanding		6,944,032		7,077,249		6,942,855		7,193,138

Incremental shares from assumed conversion:

Conversion of stock options		24,555		-		23,199		20,606

Diluted weighted average shares		6,968,587		7,077,249		6,966,054		7,213,744

Diluted net income per common share attributable to WPCS	$	0.01	$	0.03	$	0.12	$	0.19

At January 31, 2010 and 2009, the Company had 617,065 and 646,300 stock options, respectively, which are potentially dilutive securities. For the three months ended January 31, 2010 and 2009, 502,024 and 646,300 stock options, respectively, were not included in the computation of diluted earnings per share. For the nine months ended January 31, 2010 and 2009, 515,887 and 600,899 stock options, respectively, were not included in the computation of diluted earnings per share. These potentially dilutive securities were excluded because the stock option exercise prices exceeded the average market price of the common stock and, therefore, the effects would be antidilutive.


	Three Months Ended						Nine Months Ended
	January 31,						January 31,
	2010			2009			2010		2009
Net income attributable to WPCS	$	70,826		$	178,096		$	842,530	$	1,378,217
Other comprehensive (loss) income -
Foreign currency translation adjustments, net		(135,977	)		(99,021	)		674,754		(761,159	)
Comprehensive (loss) income attributable to WPCS	$	(65,151	)	$	79,075		$	1,517,284	$	617,058

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.

The Company has adopted the authoritative guidance issued by the FASB concerning the FASB Accounting Standards Codification (ASC)(Codification) as the source of authoritative accounting and reporting standards to be applied by nongovernmental entities to financial statements that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The FASB ASC is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of the FASB Codification did not have a material impact on the Company’s consolidated financial statements. The GAAP references in the accompanying consolidated financial statements reflect the FASB Codification.

On May 1, 2009, the Company adopted authoritative guidance issued by the FASB on business combinations. The guidance retains the fundamental requirements that the acquisition method of accounting (previously referred to as the purchase method of accounting) be used for all business combinations, but requires a number of changes, including changes in the way assets and liabilities are recognized and measured as a result of business combinations. It also requires the expensing of acquisition-related costs as incurred. The Company applied this statement to account for the acquisition of The Pride Group (QLD) Pty Ltd. in November 2009.

On May 1, 2009, the Company adopted the authoritative guidance issued that changes the accounting and reporting for noncontrolling interests. Noncontrolling interests are to be reported as a component of equity separate from the parent's equity, and purchases or sales of equity interests that do not result in a change in control are to be accounted for as equity transactions. In addition, net income attributable to a noncontrolling interest is to be included in net income and, upon a loss of control, the interest sold, as well as any interest retained, is to be recorded at fair value with any gain or loss recognized in net income. 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, which is reported as a component of equity separate from WPCS shareholders’ equity in the condensed consolidated balance sheets. Additionally, the net (loss) income attributable to 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 FASB ASC Topic No. 815 “Derivatives and Hedging”. 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 FASB ASC Subtopic No. 815-40 “Contracts in Entity’s Own Equity”. 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 the standards of “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 FASB ASC Topic No. 855, “Subsequent Events”. 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.

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.

The Company has accounted for acquisitions under the purchase method of accounting through April 30, 2009 and the acquisition method for business combinations after such date. Under the purchase method of accounting, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. Goodwill was recorded to the extent the purchase price consideration exceeded the fair value of the net identifiable assets acquired at the date of the acquisition.

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, and these operations are included in the St. Louis Operations.

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.

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.

On November 4, 2009, the Company acquired The Pride Group (QLD) Pty Ltd., an Australian corporation (Pride). The purchase price represents an amount up to $3,494,056 of which $1,838,977 was paid upon closing. Additional purchase price will be paid by the Company to the former Pride shareholders over each of the next two years based upon the achievement of future earnings before interest and taxes (EBIT) targets. This contingent consideration arrangement requires the Company to pay the former Pride shareholders $919,488 if Pride’s EBIT for the twelve month period ending October 31, 2010 equal or exceed $1,103,386 (the Target Amount) and another $919,488 if Pride’s EBIT for the twelve month period ending October 31, 2011 equal or exceed the Target Amount. In the event that Pride’s EBIT are less than the Target Amount for either measuring period, such $919,488 payment will be reduced by the percentage of the shortfall between the actual EBIT and the Target Amount. The fair value of the contingent consideration is $1,655,080 and is based on management’s estimate of expected EBIT. The acquisition accounting is preliminary pending completion of a final valuation.

Pride was acquired pursuant to a Share Purchase Agreement among the Company and the former Pride shareholders. Pride is an electrical and security services provider specializing in the commercial and government sectors and focuses on low voltage security installations, alarm systems, video surveillance and access controls.

The acquisitions of BRT and Pride provide further international expansion into Australia. Both of these operations are included in our Australia Operations. For BRT, 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. For Pride, a preliminary purchase price allocation has been made resulting in goodwill and other intangible assets of approximately $1,915,000. Upon completion of a final purchase price allocation for Pride, there may be an increase or decrease in the amount of goodwill and a corresponding increase or decrease in other intangible assets.

Assets purchased:	Pride		BRT		Total
Cash	$	282,307		-	$	282,307
Accounts receivable		1,160,419		-		1,160,419
Inventory		96,819		4,328		101,147
Costs and estimated earnings in excess of billings		81,369		7,775		89,144
Fixed assets		257,811		37,820		295,631
Other assets		2,049		-		2,049
Customer list		367,795		-		367,795
Backlog		181,139		-		181,139
Goodwill		1,914,507		122,480		2,036,987
		4,344,215		172,403		4,516,618

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Liabilities assumed:
Accounts payable		194,984		-		194,984
Loans payable		50,277		-		50,277
Accrued expenses		171,633		-		171,633
Payroll and other payable		48,909		-		48,909
Sales and use tax payable		48,761		-		48,761
Income tax payable		55,650		-		55,650
Billings in excess of costs and estimated earnings		205,062		-		205,062
Deferred tax liabilities		74,883		-		74,883
		850,159		-		850,159
Purchase price	$	3,494,056	$	172,403	$	3,666,459

On March 9, 2009, the Company acquired Midway Electric Company, which is our 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.

Assets purchased:
Cash	$	93,247
Accounts receivable		86,555
Inventory		64,164
Prepaid expenses		13,469
Costs and estimated earnings in excess of billings		10,182
Fixed assets		205,615
Customer lists		12,000
Goodwill		112,158
		597,390
Liabilities assumed:

Accounts payable		(30,842	)
Accrued expenses		(4,304	)
Payroll and other payable		(23,292	)
Billings in excess of costs and estimated earnings		(3,249	)
Capital lease obligation		(4,933	)
		(66,620	)
Purchase price	$	530,770

The following unaudited consolidated pro forma financial information presents the combined results of operations of the Company, Lincoln Wind, BRT, the Portland Operations and Pride for the three and nine months ended January 31, 2010 and 2009 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, the Portland Operations and Pride been a single entity during these periods.

	Consolidated Pro Forma

	Three Months Ended		Nine Months Ended
	January 31,		January 31,
	2009		2010		2009

Revenue	$	27,519,304	$	81,521,608	$	88,095,293

Net income attributable to WPCS	$	355,679	$	955,854	$	1,501,255

Basic weighted average shares		7,077,249		6,942,855		7,193,138
Diluted weighted average shares		7,077,249		6,966,054		7,213,744

Basic net income per share attributable to WPCS	$	0.05	$	0.14	$	0.21
Diluted net income per share attributable to WPCS	$	0.05	$	0.14	$	0.21

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 January 31, 2010 and April 30, 2009:

	January 31, 2010			April 30, 2009
Costs incurred on uncompleted contracts	$	72,530,464		$	66,056,622
Estimated contract profit		23,284,058			21,903,172
		95,814,522			87,959,794
Less: billings to date		91,971,881			85,241,971
Net excess of costs	$	3,842,641		$	2,717,823

Costs and estimated earnings in excess of billings on uncompleted contracts	$	6,176,827		$	5,229,043

Billings in excess of costs and estimated earnings on uncompleted contracts		(2,334,186	)		(2,511,220	)
Net excess of costs	$	3,842,641		$	2,717,823

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 January 31, 2010, 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 January 31, 2010, the interest rate was 2.25% on outstanding borrowings of $5,626,056 under the Loan Agreement.

The Company has received approval from BOA for the renewal of the $15,000,000 revolving line of credit for three more years under terms similar to the existing Loan Agreement, including the same customary covenants. The primary changes to the new revolving line of credit include the following revisions. Borrowings will bear interest at BOA’s prime rate (currently 3.25%) or at the optional interest rate of LIBOR plus two hundred seventy-five basis points, an unused loan commitment fee of .0375%, and a one-time loan commitment fee of $25,000 due at closing. The Company expects to complete the closing of this revolving line of credit renewal on or before April 10, 2010.

As of January 31, 2010, included in this balance are outstanding loans due by the Beijing Operations to a related party, Taian Gas Group (TGG), totaling $3,143,837, of which $2,636,676 matures on December 31, 2010, and bears interest at 6.83%. The remaining balance of $507,161 represents interest accrued and working capital loans from TGG to the Beijing Operations in the normal course of business.

As of January 31, 2010, included in this balance is a non-interest bearing amount due to the former Pride shareholders for the preliminary estimated fair value of contingent consideration related to the acquisition totaling $1,607,444, of which $803,722 is due within one year, and $803,722 is due beyond one year from January 31, 2010, respectively.

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 nine months ended January 31, 2010 and 2009, the rent paid for this lease was $70,245 in both years.

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 nine months ended January 31, 2010 and 2009, the rent paid for this lease was $41,683 and $40,469, 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 the Trenton Operations are the members. For the nine months ended January 31, 2010 and 2009, the rent paid for this lease was $49,500 and $45,000, respectively.

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 January 31, 2010, options to purchase 248,750 shares were outstanding at exercise prices ranging from $2.37 to $6.33. At January 31, 2010, 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 January 31, 2010, options to purchase 288,102 shares were outstanding at exercise prices ranging from $6.14 to $12.10. At January 31, 2010, 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 January 31, 2010, options to purchase 80,213 shares were outstanding at exercise prices ranging from $2.37 to $12.10. At January 31, 2010, there were 193,937 shares available for grant under the 2002 Plan.

	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		18,000		$	3.08
Exercised		-		$	0.00
Forfeited/Expired		(99,137	)	$	6.41

Outstanding, January 31, 2010		80,213		$	5.40		1.4	$	6,952

Vested and expected to vest, January 31, 2010		74,896		$	5.48		2.6	$	6,618

Exercisable, January 31, 2010		40,966		$	6.24		1.5	$	3,026

	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, January 31, 2010		288,102		$	6.34		0.8	$	0

Vested and expected to vest, January 31, 2010		287,952		$	6.33		0.8	$	0

Exercisable, January 31, 2010		285,602		$	6.29		0.8	$	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		(6,250	)	$	2.37
Forfeited/Expired		-		$	0.00

Outstanding, January 31, 2010		248,750		$	3.81		3.8	$	63,650

Vested and expected to vest, January 31, 2010		223,664		$	3.76		3.8	$	61,712

Exercisable, January 31, 2010		70,000		$	3.48		3.5	$	31,350

The Company has elected to adopt the shortcut method for determining the initial pool of excess tax benefits available to absorb tax deficiencies related to stock-based compensation. 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. Excess tax benefits related to share-based compensation are reflected as financing cash inflows.

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 93,000 stock options granted during the nine months ended January 31, 2010. There were 130,900 stock options granted during the nine months ended January 31, 2009. The following assumptions were used to compute the fair value of stock option compensation expense during the three and nine months ended January 31, 2010 and 2009, respectively:

	Three Months Ended						Nine Months Ended
	January 31,						January 31,
	2010			2009			2010			2009

Risk-free interest rate		1.23	%		1.53	%		1.23 - 1.61	%		1.53 - 2.84	%
Expected volatility		60.1	%		49.7	%		59.9 - 60.1	%		49.7 - 53.3	%
Expected dividend yield		0.00	%		0.00	%		0.00	%		0.00	%
Expected term ( in years)		3.5			3.0			3.5			3.0 - 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.

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. 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.

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 as of and for the three and nine months ended January 31, 2010 and 2009 are as follows:

	For the Three Months Ended January 31, 2010												For the Three Months Ended January 31, 2009
	Corporate			Wireless Communications			Specialty Construction		Electrical Power		Total		Corporate			Wireless Communications			Specialty Construction		Electrical Power		Total

Revenue	$	-		$	7,920,731		$	4,148,871	$	14,902,778	$	26,972,380	$	-		$	6,516,126		$	2,791,946	$	16,015,353	$	25,323,425

Depreciation and amortization	$	16,659		$	186,502		$	180,202	$	279,342	$	662,705	$	7,564		$	179,579		$	187,215	$	240,341	$	614,699

Income (loss) before income taxes	$	(728,928	)	$	(54,064	)	$	420,724	$	402,591	$	40,323	$	(631,966	)	$	(547,650	)	$	112,141	$	1,420,447	$	352,972

	For the Three Months Ended January 31, 2010											For the Three Months Ended January 31, 2009
	Corporate			Wireless Communications		Specialty Construction		Electrical Power		Total		Corporate			Wireless Communications		Specialty Construction		Electrical Power		Total

Revenue	$	-		$	22,633,775	$	9,047,614	$	44,876,334	$	76,557,723	$	-		$	25,755,047	$	7,912,140	$	48,691,447	$	82,358,634

Depreciation and amortization	$	41,370		$	561,486	$	543,999	$	823,995	$	1,970,850	$	24,676		$	531,141	$	540,753	$	858,310	$	1,954,880

Income (loss) before income taxes	$	(2,788,321	)	$	62,916	$	492,261	$	3,363,120	$	1,129,976	$	(2,519,284	)	$	763,611	$	506,314	$	3,607,853	$	2,358,494

Goodwill	$	-		$	10,921,998	$	3,339,842	$	20,652,982	$	34,914,822	$	-		$	10,921,998	$	3,337,948	$	17,996,646	$	32,256,592

Total assets	$	4,568,268		$	22,925,943	$	13,996,715	$	45,022,632	$	86,513,558	$	10,818,396		$	21,233,355	$	13,092,027	$	38,406,730	$	83,550,508

As of and for the nine months ended January 31, 2010 and 2009, the specialty construction segment includes approximately $1,727,000 and $2,608,000 in revenue and $1,179,000 and $1,917,000 of net assets held in China related to the Company’s 60% interest in the Beijing Operations, respectively. As of and for the nine months ended January 31, 2010 and 2009, electrical power segment includes approximately $4,884,000 and $2,661,000 in revenue and $5,630,000 and $3,685,000 of net assets held in Australia related to the Company’s 100% ownership in the Australia Operations.

On February 24, 2010, the Company adopted a stockholder rights plan. The stockholder rights plan is embodied in the Rights Agreement dated as of February 24, 2010 (the Rights Agreement), between the Company and Interwest Transfer Co., Inc., the Rights Agent. In connection with the Rights Agreement, the Company declared a dividend of one preferred share purchase right (a Right) for each outstanding share of the Company’s common stock to stockholders of record at the close of business on March 8, 2010. Each Right entitles the registered holder, subject to the terms of the Rights Agreement, to purchase from the Company one one-thousandth (1/1000th) of a share of Series D Junior Participating Preferred Stock, $0.0001 par value (the Preferred Stock) at a purchase price of $15.00, subject to adjustment. The Rights will expire at the close of business February 24, 2020, unless earlier redeemed or exchanged by the Company. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends.

The Rights are not immediately exercisable. The Rights will initially trade only with the shares of the Company’s common stock to which they are attached, and generally become exercisable only if a person or group becomes an Acquiring Person (as defined in the Rights Agreement) by accumulating beneficial ownership (as defined in the Rights Agreement) of 15% or more of the Company’s outstanding common stock. If a person becomes an Acquiring Person, the holders of each Right (other than an Acquiring Person) are entitled to purchase shares of the Company’s preferred stock or, in some circumstances, shares of the Acquiring Person’s common stock, having a value equal to twice the exercise price of the Right, which is initially $15.00 per Right. The Rights Agreement provides that a person or group currently owning 15% or more of the Company’s outstanding common stock will not be deemed to be an Acquiring Person if the person or group does not subsequently accumulate an additional 1% of the Company’s outstanding common stock through open market purchases, expansion of the group or other means.

At any time prior to a person becoming an Acquiring Person, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.0001 per Right. The Rights Agreement requires a committee of independent directors to review and evaluate every five years whether the Rights Agreement remains in the best interests of the Company’s stockholders.

Delaware	98-0204758
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

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

Assets purchased:
Fixed assets	$	139,970
Customer lists		30,000
Goodwill		252,389
Purchase price	$	422,359