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 January 31, 2010

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:
 
 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 March 15, 2010, there were 6,954,766 shares of registrant’s common stock outstanding.


 
 

 

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES



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  



 
2

 

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 

   
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  

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
 
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  

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
   
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  

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

 
5

 
 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY
 NINE MONTHS ENDED JANUARY 31, 2010
(Unaudited)

                                       
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  

 
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)


   
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  
                 

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)

   
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 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 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.

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”, 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

Goodwill represents the value of the Company's wholly-owned subsidiaries that are in excess of the fair value of identifiable net assets as of date of acquisition.  Other intangible assets have finite useful lives and are comprised of customer lists and backlog.
 
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.
 
 
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.
 
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.

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 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  

Other intangible assets consist of the following at January 31, 2010 and April 30, 2009:

   
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  
 

 
 
10

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
Amortization expense for other intangible assets for the nine months ended January 31, 2010 and 2009 was $441,698 and $638,885, 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.

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

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.

Earning Per Common 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 nine months ended January 31, 2010 and 2009, respectively:
 
 
 
11

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 

 
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.

Noncontrolling Interest

Noncontrolling interest for the nine months ended January 31, 2010 and 2009 consists of the following:

   
January 31,
 
   
2010
   
2009
 
Balance, beginning of period
  $ 1,440,078     $ 1,331,850  
Net (loss) income attributable to noncontrolling interest
    (192,988 )     135,037  
Distribution to noncontrolling interest
    (88,558 )     -  
Balance, end of period
  $ 1,158,532     $ 1,466,887  
 
 
12

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
Other Comprehensive Income

Comprehensive income for the three and nine months ended January 31, 2010 and 2009 consists of the following:

                         
   
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  

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 the date these condensed consolidated financial statements were filed with the Securities and Exchange Commission.

Recently Issued Accounting Pronouncements

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.
 
 
13

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
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.

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

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.

 Lincoln Wind LLC

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.
 
 
14

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
The purchase price allocation has been determined as follows:

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

 BRT Electrical Pty Ltd. and The Pride Group (QLD) Pty Ltd.

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.

The purchase price allocation has been determined as follows:

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  
 
 
15

 
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  

Midway Electric Company

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.

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
    64,164  
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  

Consolidated Pro Forma Information

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.
 
 
16

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
   
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  

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 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  

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 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.
 
 
17

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
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.

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 January 31, 2010, loans payable and capital lease obligations totaled $303,880 with interest rates ranging from 0% to 12.67%.

Due to Shareholders

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.

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 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 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 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.
 
 
18

 
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 

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.

The following table summarizes stock option activity for the nine months ended January 31, 2010, during which there were 6,250 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
    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  
 
 
 
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WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
   
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 recorded stock-based compensation of $108,598 and $92,119 for the nine months ended January 31, 2010 and 2009, respectively.

At January 31, 2010, the total compensation cost related to unvested stock options granted under the Company’s stock option plans but not yet recognized was approximately $253,000 and is expected to be recognized over a weighted-average period of 2.12 years.

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.
 
 
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WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
Common Stock Purchase Warrants

In connection with a private placement of common stock on November 16, 2004, the Company issued common stock purchase warrants, exercisable for a period of five years at an exercise price of $6.99 per share. These 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.  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 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.


 
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WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9 – SUBSEQUENT EVENT

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.
 
 

 
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WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES