WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
July 31,
|
|
|
April 30,
|
|
|
|
2017
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,880,549
|
|
|
$
|
1,659,318
|
|
Restricted cash
|
|
|
500,100
|
|
|
|
500,026
|
|
Accounts receivable, net of allowance of $247,000 at July 31, 2017 and April 30, 2017, respectively
|
|
|
4,002,248
|
|
|
|
4,199,674
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
334,956
|
|
|
|
410,826
|
|
Prepaid expenses and other current assets
|
|
|
50,899
|
|
|
|
41,135
|
|
Total current assets
|
|
|
6,768,752
|
|
|
|
6,810,979
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
296,675
|
|
|
|
322,643
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
11,484
|
|
|
|
11,484
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,076,911
|
|
|
$
|
7,145,106
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of loans payable
|
|
$
|
52,271
|
|
|
$
|
52,946
|
|
Accounts payable and accrued expenses
|
|
|
1,369,097
|
|
|
|
1,790,256
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
2,911,882
|
|
|
|
2,105,797
|
|
Total current liabilities
|
|
|
4,333,250
|
|
|
|
3,948,999
|
|
|
|
|
|
|
|
|
|
|
Loans payable, net of current portion
|
|
|
112,191
|
|
|
|
124,559
|
|
Total liabilities
|
|
|
4,445,441
|
|
|
|
4,073,558
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Preferred stock - $0.0001 par value, 5,000,000 shares authorized at July 31, 2017 and April 30, 2017, respectively
|
|
|
|
|
|
|
|
|
Convertible Series H, 8,500 shares designated- 8 shares issued and outstanding at July 31, 2017 and April 30, 2017, respectively; liquidation preference of $1,000
|
|
|
1,242
|
|
|
|
1,242
|
|
Convertible Series H-1, 9,488 shares designated - 4,289 shares issued and outstanding at July 31, 2017 and April 30, 2017, respectively; liquidation preference of $712,000
|
|
|
437,530
|
|
|
|
437,530
|
|
Convertible Series H-2, 3,500 shares designated - 3,305 shares issued and outstanding at July 31, 2017 and April 30, 2017, respectively; liquidation preference of $400,000
|
|
|
230,721
|
|
|
|
230,721
|
|
Convertible Series H-3, 9,500 shares designated - 7,017 shares issued and outstanding at July 31, 2017 and April 30, 2017, respectively; liquidation preference of $968,000
|
|
|
475,185
|
|
|
|
475,185
|
|
Common stock - $0.0001 par value, 100,000,000 shares authorized, 3,352,159 shares issued and outstanding as of July 31, 2017 and April 30, 2017, respectively
|
|
|
335
|
|
|
|
335
|
|
Additional paid-in capital
|
|
|
89,003,669
|
|
|
|
89,003,669
|
|
Accumulated deficit
|
|
|
(87,517,212
|
)
|
|
|
(87,077,134
|
)
|
Total stockholders' equity
|
|
|
2,631,470
|
|
|
|
3,071,548
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
7,076,911
|
|
|
$
|
7,145,106
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(UNAUDITED)
|
|
For the three months ended
|
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,523,347
|
|
|
$
|
3,416,453
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
2,754,550
|
|
|
|
2,635,508
|
|
Selling, general and administrative expenses
|
|
|
1,184,501
|
|
|
|
1,352,986
|
|
Depreciation and amortization
|
|
|
30,073
|
|
|
|
20,666
|
|
|
|
|
3,969,124
|
|
|
|
4,009,160
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(445,777
|
)
|
|
|
(592,707
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,051
|
)
|
|
|
(1,981
|
)
|
Income from arbitration settlements
|
|
|
7,750
|
|
|
|
1,150,000
|
|
Other income
|
|
|
-
|
|
|
|
4,487
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations before income tax provision
|
|
|
(440,078
|
)
|
|
|
559,799
|
|
Income tax provision
|
|
|
-
|
|
|
|
2,618
|
|
(Loss) income from operations
|
|
|
(440,078
|
)
|
|
|
557,181
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(440,078
|
)
|
|
$
|
557,181
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per common share
|
|
$
|
(0.13
|
)
|
|
$
|
0.21
|
|
Diluted (loss) income per common share
|
|
$
|
(0.13
|
)
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
3,352,159
|
|
|
|
2,701,404
|
|
Weighted average shares outstanding - diluted
|
|
|
3,352,159
|
|
|
|
3,937,628
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(UNAUDITED)
|
|
For the three months ended
|
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(440,078
|
)
|
|
$
|
557,181
|
|
Adjustments to reconcile consolidated net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
30,073
|
|
|
|
20,666
|
|
Shares based compensation
|
|
|
-
|
|
|
|
22,501
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
197,426
|
|
|
|
(1,441,964
|
)
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
75,870
|
|
|
|
(79,975
|
)
|
Prepaid expenses and other current assets
|
|
|
(9,764
|
)
|
|
|
(57,721
|
)
|
Other assets
|
|
|
-
|
|
|
|
(3,778
|
)
|
Accounts payable and accrued expenses
|
|
|
(421,159
|
)
|
|
|
204,952
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
806,085
|
|
|
|
543,006
|
|
Net cash provided by (used in) operating activities
|
|
|
238,453
|
|
|
|
(235,132
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(4,105
|
)
|
|
|
(30,803
|
)
|
Net cash used in investing activities
|
|
|
(4,105
|
)
|
|
|
(30,803
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Repayment under loan payable obligations
|
|
|
(13,043
|
)
|
|
|
(29,762
|
)
|
Net cash used in financing activities
|
|
|
(13,043
|
)
|
|
|
(29,762
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash, cash equivalents and restricted cash
|
|
|
221,305
|
|
|
|
(295,697
|
)
|
Cash, cash equivalents and restricted cash beginning of the year
|
|
|
2,159,344
|
|
|
|
2,235,597
|
|
Cash, cash equivalents and restricted cash end of the year
|
|
$
|
2,380,649
|
|
|
$
|
1,939,900
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (CONTINUED)
(UNAUDITED)
|
|
For the three months ended
|
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
Schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
Automobile financing
|
|
$
|
-
|
|
|
$
|
50,622
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
WPCS International Incorporated, a Delaware
corporation (“WPCS”) and its wholly and majority-owned subsidiaries (collectively, the “Company”) currently
specializes in low voltage communications, audio-visual and security contracting services, conducting business in one segment at
one operations center, through its wholly-owned domestic subsidiary, WPCS International - Suisun City, Inc. (“Suisun City
Operations”). During the year ended April 30, 2017 the Company also conducted operations from its wholly-owned Texas subsidiary,
WPCS International-Texas, Inc. (“Texas Operations”), however, as of April 30, 2017, the Texas Operations has been closed.
The Company is a full-service low voltage
contractor that specializes in the installation and service of Voice & Data Networks, Security Systems, Audio-Visual Solutions,
and Distributed Antenna Systems and provides experienced project management and delivers complex projects to key vertical markets
that include Healthcare, Education, Transportation, Energy & Utilities, Oil & Gas, Manufacturing, Commercial Real Estate,
Financial, Government, etc.
Basis of Presentation
The condensed consolidated financial statements
of WPCS and its wholly and majority-owned subsidiaries included in this Report for the three months ended July 31, 2017 and 2016,
reflect the accounts of current entities as continued operations, as discussed below.
Results of operations for the three months
ended July 31, 2017 and 2016 include the results of: (i) WPCS (which primarily reflects corporate operating expenses and nonoperating
income); (ii) Suisun City Operations and the Texas Operations, (the Texas Operations were closed in February 2017 and therefore
the Suisun Operation remains the Company’s only active operating subsidiary); (iii) WPCS Incorporated, an inactive subsidiary;
and (iv) WPCS International – Trenton, Inc. (“Trenton Operations”), which operations were closed in September
2013.
The unaudited condensed consolidated financial
information furnished herein reflects all adjustments (consisting of normal recurring accruals) which are, in the opinion of management,
considered necessary for a fair presentation of the financial position and the results of operations and cash flows of the Company
for the periods presented. All intercompany accounts and transactions have been eliminated in consolidation. These unaudited condensed
consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles
("GAAP") for interim financial information. Accordingly, they do not include all of the information and notes required
by GAAP for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction
with the financial statements included in the Annual Report on Form 10-K for the fiscal year ended April 30, 2017.
The results of operations for the three
months ended July 31, 2017 are not necessarily indicative of the results to be expected for the full fiscal year.
NOTE 2 – LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 2017, the Company had a
working capital surplus of approximately $2,436,000 and cash, cash equivalents and restricted cash of approximately $2,381,000.
The Company's future plans and growth are
dependent on its ability to increase revenues and continue its business development efforts surrounding its contract award backlog.
If the Company continues to incur losses and revenues do not generate from the backlog as expected, the Company may need to raise
additional capital to expand its business and continue as a going concern. The Company currently anticipates that its current cash
position will be sufficient to meet its working capital requirements to continue its sales and marketing efforts for at least 12
months from the filing date of this report. If in the future the Company’s plans or assumptions change or prove to be inaccurate,
the Company may need to raise additional funds through public or private debt or equity offerings, financings, corporate collaborations,
or other means. The Company may also be required to reduce operating expenditures or investments in its infrastructure.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Accounting Policies
There have been no material changes in
the Company’s significant accounting policies to those previously disclosed in the Form 10-K for the year ended April
30, 2017.
Recent Accounting Standards
Leases
In February 2016, FASB issued ASU No. 2016-02,
Leases
(Topic 842)
which supersedes FASB ASC Topic 840,
Leases (Topic 840)
and provides principles for the recognition,
measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual
approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively
a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective
interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use
asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with
a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard will be effective
for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is currently
evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and related disclosures.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 amends the guidance for
revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the
International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that
focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding
the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include
the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction
price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances.
The amendments of ASU 2014-09 were effective for reporting periods beginning after December 15, 2016, with early adoption prohibited.
Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.
Subsequent to issuing ASU 2014-09, the
FASB issued the following amendments concerning the adoption and clarification of ASU 2014-09. In August 2015, the FASB issued
ASU No. 2015-14 “Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date” (“ASU 2015-14”),
which deferred the effective date one year. As a result, the amendments of ASU 2014-09 are effective for reporting periods beginning
after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016. In
March 2016, the FASB issued ASU No. 2016-08 “Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations
(Reporting Revenue versus Net)” (“ASU 2016-08”), which clarifies the implementation guidance on principal versus
agent considerations in the new revenue recognition standard. ASU 2016-08 clarifies how an entity should identify the unit of accounting
(i.e. the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to
certain types of arrangements.
In April 2016, the FASB issued ASU No. 2016-10 “Revenue from Contracts with Customers (Topic
606), Identifying Performance Obligations and Licensing” (“ASU 2016-10”), which reduces the complexity when applying
the guidance for identifying performance obligations and improves the operability and understandability of the license implementation
guidance. In May 2016, the FASB issued ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements
and Practical Expedients” (“ASU 2016-12”), which amends the guidance on transition, collectability, noncash consideration
and the presentation of sales and other similar taxes. ASU 2016-12 clarifies that, for a contract to be considered completed at
transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies
how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received
as revenue if an arrangement does not meet the standard’s contract criteria. In December 2016, the FASB issued an update
(“ASU 2016-20”) to ASC 606, Technical Corrections and Improvements, which outlines technical corrections to certain
aspects of the new revenue recognition standard such as provisions for losses on construction type contracts and disclosure of
remaining performance obligations, among other aspects.
The Company is currently evaluating the potential impact the adoption of
these ASUs may have on its financial statements and related disclosures.
Business Combinations
In January 2017, the FASB issued an ASU
2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. The amendments in this Update is to clarify
the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should
be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting
including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December
15, 2017, including interim periods within those periods. The Company is currently evaluating the impact of adopting this guidance.
Accounting standards that have been issued or proposed by the
Financial Accounting Standards Board (“FASB”), SEC or other standard setting bodies that do not require adoption until
a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
NOTE 4 – CONCENTRATIONS
Accounts Receivable
The concentration of
accounts receivable as of July 31, 2017 and April 30, 2017, respectively are as follows:
|
|
As of
|
|
|
|
July 31, 2017
|
|
|
April 30, 2017
|
|
Customer A
|
|
|
21
|
%
|
|
|
24
|
%
|
Customer B
|
|
|
17
|
%
|
|
|
12
|
%
|
Customer C
|
|
|
-
|
|
|
|
10
|
%
|
The accounts receivable also included retainage
receivable of $999,000 and $326,000 at July 31, 2017 and April 30, 2017, respectively, and both the retainage and aged accounts
receivable are expected to be collected.
Revenue Recognition
The concentration of
revenue recognition for the three months ended July 31, 2017 and 2016, respectively are as follows:
|
|
For the three months ended
|
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
Customer A
|
|
|
24
|
%
|
|
|
-
|
|
Customer B
|
|
|
15
|
%
|
|
|
-
|
|
Customer C
|
|
|
10
|
%
|
|
|
-
|
|
|
-
|
Represents less than 10%
|
NOTE 5 – BASIC AND DILUTED NET
(LOSS) INCOME PER COMMON SHARE
Basic and diluted net (loss) income per
common share is computed as net (loss) income 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 the exercise of
stock options and warrants and note conversions.
|
|
For the three months ended
|
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income, basic and diluted
|
|
$
|
(440,078
|
)
|
|
$
|
557,181
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic
|
|
|
3,352,159
|
|
|
|
2,701,404
|
|
Stock options
|
|
|
-
|
|
|
|
160,524
|
|
Series H and H-1 convertible preferred stock
|
|
|
-
|
|
|
|
1,075,700
|
|
Weighted average shares outstanding – diluted
|
|
|
3,352,159
|
|
|
|
3,937,628
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per common share
|
|
$
|
(0.13
|
)
|
|
$
|
0.21
|
|
Diluted (loss) income per common share
|
|
$
|
(0.13
|
)
|
|
$
|
0.14
|
|
The following securities were excluded
from the weighted average dilutive common shares outstanding because their inclusion would have been antidilutive.
|
|
As of July 31,
|
|
|
|
2017
|
|
|
2016
|
|
Common stock equivalents:
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
3,253,000
|
|
|
|
865,000
|
|
Series H, H-1, H-2 and H-3 preferred stock
|
|
|
1,462,000
|
|
|
|
-
|
|
Common stock purchase warrants
|
|
|
2,893,000
|
|
|
|
1,295,000
|
|
Totals
|
|
|
7,608,000
|
|
|
|
2,160,000
|
|
NOTE 6 – 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. Costs and estimated earnings on uncompleted contracts consist of the following at July 31, 2017 and April 30, 2017:
|
|
July 31, 2017
|
|
|
April 30, 2017
|
|
|
|
|
|
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
17,191,287
|
|
|
$
|
16,362,011
|
|
Estimated contract earnings
|
|
|
3,849,901
|
|
|
|
3,714,584
|
|
|
|
|
21,041,188
|
|
|
|
20,076,595
|
|
Less: Billings to date
|
|
|
23,618,114
|
|
|
|
21,771,566
|
|
Total
|
|
$
|
(2,576,926
|
)
|
|
$
|
(1,694,971
|
)
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
334,956
|
|
|
$
|
410,826
|
|
Billings in excess of cost and estimated earnings on uncompleted contracts
|
|
|
2,911,882
|
|
|
|
2,105,797
|
|
Total
|
|
$
|
(2,576,926
|
)
|
|
$
|
(1,694,971
|
)
|
Revisions in the estimated gross profits
on contracts and contract amounts are made in the period in which circumstances requiring the revisions become known. Although
management believes it has established adequate procedures for estimating costs to complete on open contracts, it is at least reasonably
possible that additional significant costs could occur on contracts prior to completion.
NOTE 7 – LOANS PAYABLE
The following tables summarize outstanding loans
payable related to automobiles as of July 31, 2017 and April 30, 2017, respectively:
|
|
|
|
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
Stated
|
|
|
as of
|
|
|
Estimated Future Payment
|
|
|
|
Maturity Date
|
|
Interest Rate
|
|
|
July 31, 2017
|
|
|
Within 1 Year
|
|
|
After 1 year
|
|
0% automobile loan payable
|
|
May 2019 - June 2019
|
|
|
0.0
|
%
|
|
$
|
16,000
|
|
|
$
|
9,000
|
|
|
$
|
7,000
|
|
1% automobile loan payable
|
|
November 2022
|
|
|
1.0
|
%
|
|
|
22,000
|
|
|
|
5,000
|
|
|
|
17,000
|
|
3% automobile loan payable
|
|
November 2022
|
|
|
3.0
|
%
|
|
|
23,000
|
|
|
|
5,000
|
|
|
|
18,000
|
|
4% automobile loan payable
|
|
December 2016 - January 2020
|
|
|
4.0
|
%
|
|
|
21,000
|
|
|
|
8,000
|
|
|
|
13,000
|
|
5% automobile loan payable
|
|
January 2020 - February 2020
|
|
|
5.0
|
%
|
|
|
46,000
|
|
|
|
17,000
|
|
|
|
29,000
|
|
7% automobile loan payable
|
|
June 2019
|
|
|
7.0
|
%
|
|
|
22,000
|
|
|
|
5,000
|
|
|
|
17,000
|
|
8% automobile loan payable
|
|
October 2021
|
|
|
8.0
|
%
|
|
|
14,000
|
|
|
|
3,000
|
|
|
|
11,000
|
|
|
|
|
|
|
|
|
|
$
|
164,000
|
|
|
$
|
52,000
|
|
|
$
|
112,000
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
Stated
|
|
|
as of
|
|
|
Estimated Future Payment
|
|
|
|
Maturity Date
|
|
Interest Rate
|
|
|
April 30, 2017
|
|
|
Within 1 Year
|
|
|
After 1 year
|
|
0% automobile loan payable
|
|
April 2018 - June 2019
|
|
|
0.0
|
%
|
|
$
|
18,000
|
|
|
$
|
9,000
|
|
|
$
|
9,000
|
|
1% automobile loan payable
|
|
November 2022
|
|
|
1.0
|
%
|
|
|
23,000
|
|
|
|
5,000
|
|
|
|
18,000
|
|
3% automobile loan payable
|
|
November 2022
|
|
|
3.0
|
%
|
|
|
24,000
|
|
|
|
5,000
|
|
|
|
19,000
|
|
4% automobile loan payable
|
|
December 2016 - January 2020
|
|
|
4.0
|
%
|
|
|
25,000
|
|
|
|
9,000
|
|
|
|
16,000
|
|
5% automobile loan payable
|
|
January 2020 - February 2020
|
|
|
5.0
|
%
|
|
|
50,000
|
|
|
|
17,000
|
|
|
|
33,000
|
|
7% automobile loan payable
|
|
June 2019
|
|
|
7.0
|
%
|
|
|
23,000
|
|
|
|
5,000
|
|
|
|
18,000
|
|
8% automobile loan payable
|
|
October 2021
|
|
|
8.0
|
%
|
|
|
15,000
|
|
|
|
3,000
|
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
$
|
178,000
|
|
|
$
|
53,000
|
|
|
$
|
125,000
|
|
NOTE 8 – INCOME FROM ARBITRATION SETTLEMENTS
For the three months ended July 31, 2017,
the Company received approximately $8,000 in a settlement related to its former subsidiary, BTX Trader, Inc.
On June 16, 2016, the Company entered into
a global settlement agreement and mutual release to resolve all disputes and claims regarding the construction of the Cooper Medical
School at Rowan University, located in Camden, New Jersey, in which the Company served as an electrical prime contractor. As a
result of such settlement, the Company received proceeds of $1,150,000 and recorded a gain in the Condensed Consolidated Statement
of Operations for the three months ended July 31, 2016. The Cooper Medical School contract was performed under the electrical services
segment and is no longer part of the Company’s ongoing operation.
NOTE 9 – BANK LINE OF CREDIT
On May 20, 2015, the Company entered into
an asset-based revolving credit line agreement with a California-based bank, which provides a $1,000,000 line of credit (the “Credit
Line”) for its Suisun City Operations. The Credit Line has an interest rate of prime plus 2%, is subject to a monthly borrowing
base calculation based upon eligible accounts receivable and had an original expiration date of August 15, 2017. Subsequent to
July 31, 2017, the expiration date of the Credit Line was extended to August 15, 2018. (See Note 10, below.) As of July 31, 2017,
the monthly borrowing base calculation supported the entire $1,000,000 of available credit under the Credit Line. The Credit Line
is secured by all of the assets of the Company. In addition, the Credit Line requires the Suisun City Operations to monthly
comply with certain financial and operational covenants, such as, amongst other things, maintaining a certain quick ratio and a
minimum net worth. The Suisun City Operations is currently in compliance with all such covenants.
As of the filing date of this quarterly
report on Form 10-Q, the Company has not drawn down on the Credit Line.
NOTE 10 – SUBSEQUENT EVENT
On August 15, 2017, the Company extended
the expiration date of the Credit Line to August 15, 2018.
On September 6, 2017, the Company, DC Acquisition Corporation,
a Delaware corporation and a wholly-owned subsidiary of the Company (“Merger Sub”), and DropCar, Inc., a Delaware corporation
(“DropCar”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”),
pursuant to which, among other things, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement,
Merger Sub will merge with and into DropCar, with DropCar becoming a wholly-owned subsidiary of the Company and the surviving corporation
of the merger (the “Merger”). The Merger is intended to qualify for federal income tax purposes as a tax-free reorganization
under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended.
Subject to the terms and conditions of the Merger Agreement,
at the closing of the Merger (the “Closing”), (a) each outstanding share of DropCar common stock and DropCar preferred
stock will be converted into the right to receive a number of shares of the Company’ common stock (“WPCS Common Stock”)
equal to the Exchange Ratio (as defined below); and (b) each outstanding DropCar warrant that has not previously been exercised
prior to the Closing will be assumed by the Company.
Under the exchange ratio formula in the Merger Agreement (the
“Exchange Ratio”), as of immediately after the Merger, the former DropCar securityholders (including the investors
in the Company Closing Financing (as defined below) and certain DropCar advisors) are expected to own approximately 85% of the
outstanding shares of the Company Common Stock on a fully-diluted basis and securityholders of the Company as of immediately prior
to the Merger are expected to own approximately 15% of the outstanding shares of WPCS Common Stock on a fully-diluted basis. The
Exchange Ratio and respective ownership of the DropCar securityholders and existing WPCS equity holders is subject to adjustment
in the event that the Company’s “Net Cash” (as defined in the Merger Agreement) is less than, or greater than,
$419,000 as of the Closing. For purposes of calculating the Exchange Ratio, the number of outstanding shares of WPCS Common Stock
immediately before the Merger takes into account the dilutive effect, calculated using the Treasury Method under U.S. GAAP, of
the shares of WPCS Common Stock underlying options (but not warrants) outstanding as of the date of the Merger Agreement using
an assumed value of $2.50 per share of WPCS Common Stock. In addition, the shares underlying warrants to purchase DropCar common
stock will be included in the DropCar 85% allocation. All the shares of the Company’s convertible preferred stock and options
and warrants to purchase shares of WPCS Common Stock will remain outstanding after the Merger and all outstanding DropCar warrants
will be exchanged for warrants to purchase WPCS Common Stock based upon the Exchange Ratio. No fractional shares will be issued
in the Merger; rather, the Company will pay cash in lieu of any such fractional shares.
As a condition to the Closing, DropCar is obligated to raise
up to $5 million, but not less than $4 million, in equity financing (the “Company Closing Financing”). The Company
Closing Financing is expected to close immediately prior to or simultaneously with the Closing. In addition, the consummation of
the Merger is subject to customary conditions, including, without limitation, (a) approval by the Company and DropCar stockholders
of the Merger Agreement and the transactions contemplated thereby; (b) the absence of any law, order, injunction or other legal
restraint prohibiting the Merger; and (c) receipt of approval from NASDAQ to list the shares of WPCS common stock on the NASDAQ
Capital Market post-Merger. Moreover, each party’s obligation to consummate the Merger is subject to certain other conditions,
including, without limitation, (i) the accuracy of the other party’s representations and warranties (subject to customary
qualifiers), and (ii) the other party’s compliance with its covenants and agreements contained in the Merger Agreement (subject
to customary qualifiers). The Merger Agreement contains specified termination rights for both the Company and DropCar, and further
provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the
other party a termination fee of $250,000, which, under specified circumstances, may include reimbursement for various expenses
incurred in connection with the proposed Merger up to a maximum of $125,000.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis
of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current
views with respect to future events and financial performance. You can identify these statements by forward-looking words such
as “may” “will,” “expect,” “anticipate,” “believe,” “estimate”
and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations
of us and members of its management team as well as the assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties,
and that actual results may differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review
and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange
Commission. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking
statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence
of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable
data derived from and known about our business and operations. No assurances are made that actual results of operations or the
results of our future activities will not differ materially from its assumptions. Factors that could cause differences include,
but are not limited to, expected market demand for our services, fluctuations in pricing for materials, and competition.
Overview
WPCS International Incorporated, a Delaware
corporation, and its wholly and majority-owned subsidiaries (collectively referred to as “we”, “us” or
“our”) currently specialize in contracting services offering communications, security and audio-visual infrastructure
through our only operating subsidiary, WPCS International - Suisun City, Inc. (“Suisun City Operations”). We previously
announced that we launched WPCS International-Texas, Inc. (“Texas Operations”), in San Antonio, Texas in January 2016
and then commenced operations in Dallas, Texas in April 2016. During the year ended April 30, 2017, the Texas Operations generated
approximately $1,006,000 in revenue, while incurring approximately $1,980,000 in cost of revenue and selling, general and administrative
expenses in starting these two offices. During November 2016, we instituted some changes and cost reductions in the Texas Operations
staffing and related expenses to better align our operational costs with short-term projected revenue expectations. We initially
anticipated expending approximately $750,000 to develop these markets and the Texas Operations were taking longer than anticipated
to begin generating the expected level of revenue to warrant continued operation. Therefore, in late December 2016, we decided
to close the Texas Operations and, at the end of February 2017, the San Antonio and Dallas offices were closed.
Our Suisun City Operations communication
infrastructure services offers low voltage communications infrastructure contracting services to the public services, healthcare,
energy and corporate enterprise markets. We provide an integrated approach to project coordination that creates cost-effective
solutions. Corporations, government entities, healthcare organizations and educational institutions depend on the reliability and
accuracy of voice, data and video communications. However, the potential for this new technology cannot be realized without the
right infrastructure to support the convergence of technology. In this regard, we create integrated building systems, including
the installation of advanced structured cabling systems. We specialize in wireless technology and a combination of various technologies
to develop a cost effective network for a customer's wireless communication requirements. This includes Wi-Fi networks, point-to-point
systems, cellular networks, in-building systems and two-way communication systems. We support the integration of telecommunications,
life safety, security and HVAC and design for future growth by building in additional capacity for expansion as new capabilities
are added.
For the three months ended July 31, 2017,
we generated revenues of $3,523,000 as compared to $3,416,000 for the same period in fiscal year 2017. Our backlog at July 31,
2017 was $14,275,000 as compared to $14,596,000 at April 30, 2017.
Company Strategy
During the past two fiscal years, our strategy
in the contracting services segment included divesting certain operations through the sale of our China Operations and closing
of our Texas Operations.
We divested and/or closed these operations
either because they were not profitable, or were part of our plan to reduce expenses and liabilities, improve operational performance,
as well as to generate cash for working capital and general corporate purposes.
Meanwhile, our ongoing plan continues to
be to strengthen our balance sheet as well as to increase revenue, profit and cash flow at our Suisun City Operations and
seeking viable acquisition and/or merger candidate(s).
After completing our restructuring plan
in fiscal year 2016, we launched a series of initiatives targeting revenue enhancement, including:
|
·
|
Strengthening our operations team with proven audio-visual professionals;
|
|
·
|
Uniformly deploying full-service low voltage capabilities for developing, installing and servicing structured cabling, audio-visual and security systems in our California market; and,
|
|
·
|
Developing strategic alliances with contractors who have significant presence in our geographic operating area.
|
We believe that these initiatives have
the potential to improve our business and provide more opportunities for growth.
Historically, our Suisun City Operations
operated primarily as a subcontractor for low-voltage structured cabling systems, which were generally secured through the competitive
bidding process. We were not adequately positioned with the resources to deliver a fully integrated offering to include audio-visual
and security. As a result, such opportunities had either been lost, or had to be subcontracted to others. However, with the recent
additions we have instituted, we are now able to offer a full turnkey service in our Suisun City Operations that will allow us
to be fully engaged with our customers well after an initial installation is completed.
In addition to broadening our contracting
revenue potential and offering higher margin recurring service capabilities, we are also pursuing and securing more corporate affiliations
and strategic alliances that have the potential to create more direct relationships capable of advancing our business opportunities
even further.
Furthermore, we continue to aggressively
explore other viable growth opportunities. (See Note 10 - Subsequent Events).
Recent Development
On September 6, 2017, we, along with, DC Acquisition Corporation,
a Delaware corporation and a wholly-owned subsidiary of the Company (“Merger Sub”), and DropCar, Inc., a Delaware corporation
(“DropCar”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”),
pursuant to which, among other things, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement,
Merger Sub will merge with and into DropCar, with DropCar becoming a wholly-owned subsidiary of the Company and the surviving corporation
of the merger (the “Merger”). The Merger is intended to qualify for federal income tax purposes as a tax-free reorganization
under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended.
Subject to the terms and conditions of the Merger Agreement,
at the closing of the Merger (the “Closing”), (a) each outstanding share of DropCar common stock and DropCar preferred
stock will be converted into the right to receive a number of shares of the Company’ common stock (“WPCS Common Stock”)
equal to the Exchange Ratio (as defined below); and (b) each outstanding DropCar warrant that has not previously been exercised
prior to the Closing will be assumed by the Company.
Under the exchange ratio formula in the Merger Agreement (the
“Exchange Ratio”), as of immediately after the Merger, the former DropCar securityholders (including the investors
in the Company Closing Financing (as defined below) and certain DropCar advisors) are expected to own approximately 85% of the
outstanding shares of the Company Common Stock on a fully-diluted basis and securityholders of the Company as of immediately prior
to the Merger are expected to own approximately 15% of the outstanding shares of WPCS Common Stock on a fully-diluted basis. The
Exchange Ratio and respective ownership of the DropCar securityholders and existing WPCS equity holders is subject to adjustment
in the event that the Company’s “Net Cash” (as defined in the Merger Agreement) is less than, or greater than,
$419,000 as of the Closing. For purposes of calculating the Exchange Ratio, the number of outstanding shares of WPCS Common Stock
immediately before the Merger takes into account the dilutive effect, calculated using the Treasury Method under U.S. GAAP, of
the shares of WPCS Common Stock underlying options (but not warrants) outstanding as of the date of the Merger Agreement using
an assumed value of $2.50 per share of WPCS Common Stock. In addition, the shares underlying warrants to purchase DropCar common
stock will be included in the DropCar 85% allocation. All the shares of the Company’s convertible preferred stock and options
and warrants to purchase shares of WPCS Common Stock will remain outstanding after the Merger and all outstanding DropCar warrants
will be exchanged for warrants to purchase WPCS Common Stock based upon the Exchange Ratio. No fractional shares will be issued
in the Merger; rather, the Company will pay cash in lieu of any such fractional shares.
As a condition to the Closing, DropCar is obligated to raise
up to $5 million, but not less than $4 million, in equity financing (the “Company Closing Financing”). The Company
Closing Financing is expected to close immediately prior to or simultaneously with the Closing. In addition, the consummation of
the Merger is subject to customary conditions, including, without limitation, (a) approval by the Company and DropCar stockholders
of the Merger Agreement and the transactions contemplated thereby; (b) the absence of any law, order, injunction or other legal
restraint prohibiting the Merger; and (c) receipt of approval from NASDAQ to list the shares of WPCS common stock on the NASDAQ
Capital Market post-Merger. Moreover, each party’s obligation to consummate the Merger is subject to certain other conditions,
including, without limitation, (i) the accuracy of the other party’s representations and warranties (subject to customary
qualifiers), and (ii) the other party’s compliance with its covenants and agreements contained in the Merger Agreement (subject
to customary qualifiers). The Merger Agreement contains specified termination rights for both the Company and DropCar, and further
provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the
other party a termination fee of $250,000, which, under specified circumstances, may include reimbursement for various expenses
incurred in connection with the proposed Merger up to a maximum of $125,000.
Current Operating Trends and Financial
Highlights
Management currently considers the following
events, trends and uncertainties to be important in understanding our results of operations and financial condition during the
current fiscal year.
With regards to our financial results for
the quarter ended July 31, 2017, we generated revenue of approximately $3,523,000 as compared to revenue of $3,416,000 for the
same period last year. This $107,000 increase in revenue was due primarily to a $380,000 increase in revenue in our Suisun City
Operations and a decrease of approximately $273,000 in revenue from our Texas Operations. Also, the composition of our current
revenue is less reliant on one large customer contract than had been the case during previous fiscal quarters. We have closed our
Texas Operations and will no longer recognize any revenues from those operations.
We generated a net loss for the three months
ended July 31, 2017 of approximately $440,000, or ($0.13) per common share (basic and fully diluted), which includes income from
our Suisun City Operations of approximately $182,000 and which was partially offset by: (i) a loss from our corporate division
of approximately $615,000, which is mainly comprised of corporate operating expenses; and (ii) a loss from our Texas Operations
of approximately $7,000.
The net loss for the three months ended
July 31, 2017 compares to net income of approximately $557,000, or $0.21 per common share (basic) and $0.14 (fully diluted) for
the three months ended July 31, 2016, which was comprised primarily of income from our : (i) Suisun City Operations of approximately
$207,000; (ii) corporate division, of approximately $657,000 (which is comprised of corporate operating expenses of approximately
$493,000, offset by a one-time legal settlement of $1,150,000); and (iii) a loss from our Texas Operations of approximately $307,000.
We believe that our integrated, full service
low-voltage communication infrastructure contracting services strategy will create additional opportunities. We believe that the
ability to provide comprehensive communications infrastructure contracting services gives us a competitive advantage. In regard
to strategic development, our focus is on identifying organic growth and selected acquisition opportunities. We are optimistic
about our opportunities in the markets we currently serve, as evidenced by our new contract awards and customers continuing to
seek bids from us, due to our experience and strong reputation in these markets.
Results of
Operations for the Three Months Ended July 31, 2017 Compared to the Three Months Ended July 31, 2016
|
|
For the three months ended
|
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,523,347
|
|
|
|
100.0
|
%
|
|
$
|
3,416,453
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
2,754,550
|
|
|
|
78.2
|
%
|
|
|
2,635,508
|
|
|
|
77.1
|
%
|
Selling, general and administrative expenses
|
|
|
1,184,501
|
|
|
|
33.6
|
%
|
|
|
1,352,986
|
|
|
|
39.6
|
%
|
Depreciation and amortization
|
|
|
30,073
|
|
|
|
0.9
|
%
|
|
|
20,666
|
|
|
|
0.6
|
%
|
|
|
|
3,969,124
|
|
|
|
112.7
|
%
|
|
|
4,009,160
|
|
|
|
117.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(445,777
|
)
|
|
|
-12.7
|
%
|
|
|
(592,707
|
)
|
|
|
-17.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,051
|
)
|
|
|
-0.1
|
%
|
|
|
(1,981
|
)
|
|
|
-0.1
|
%
|
Income from arbitration settlements
|
|
|
7,750
|
|
|
|
0.2
|
%
|
|
|
1,150,000
|
|
|
|
33.7
|
%
|
Other income
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
4,487
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations before income tax provision
|
|
|
(440,078
|
)
|
|
|
-12.5
|
%
|
|
|
559,799
|
|
|
|
16.4
|
%
|
Income tax provision
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
2,618
|
|
|
|
0.1
|
%
|
(Loss) income from operations
|
|
|
(440,078
|
)
|
|
|
-12.5
|
%
|
|
|
557,181
|
|
|
|
16.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(440,078
|
)
|
|
|
-12.5
|
%
|
|
$
|
557,181
|
|
|
|
16.3
|
%
|
Operating Loss
We had an operating loss of approximately
$446,000 for the three months ended July 31, 2017. This quarter’s operating loss was comprised primarily of $184,000 in operating
income from our Suisun City Operations, which was offset by an operating loss of approximately $7,000 from our Texas Operations
(final closing expenses) and $623,000 of corporate overhead expenses. For the three months ended July 31, 2016, we had an operating
loss of approximately $593,000 which was comprised primarily of $208,000 in operating income from our Suisun City Operations and
which was offset by approximately $496,000 of corporate overhead and $305,000 loss from our Texas Operation. The details of the
operating loss are as follows:
Revenue
Revenue for the three months ended July
31, 2017 increased approximately $107,000, or 3.1%, to approximately $3,523,000, as compared to approximately $3,416,000 for same
period last year due to an approximately $380,000 increase in revenue in our Suisun City Operations offset by an approximately
$273,000 decrease in revenue from our Texas Operations. This increase in our Suisun City Operations’ revenue was primarily
the result of the addition of lower revenue contracts which reduced our reliance on a few large customers. We closed our Texas
Operations in the fourth quarter of fiscal 2017 and do not expect to have any further revenue from that operation.
Cost of Revenue
Cost of revenue, which consists of direct
costs on contracts: materials, direct labor, third party subcontractor services, union benefits and other overhead costs increased
approximately $119,000, or 4.5%, to approximately $2,755,000, or 78.2% of revenue, for the three months ended July 31, 2017, as
compared to approximately $2,636,000, or 77.2% of revenue, for the same period in 2016. This 1% percent increase in the cost of
revenue is due to the different combination of contracts in process as compared to last year.
Selling, General and Administrative
Expenses
For the three months ended July 31, 2017,
total selling, general and administrative expenses decreased approximately $168,000, or 12.4%, to approximately $1,185,000 as
compared to approximately $1,353,000 for the same period in 2016, which was primarily due to $371,000 of decreased expenses in
our Texas Operations, as a result of its closure during fiscal 2017, offset by an increase in expense in our Suisun City Operations
of $74,000, and an increase in corporate overhead expenses of $129,000. The increase in expense at our Suisun Operations was primarily
due to an increased salary expense for the addition of personnel while the increased corporate overhead expenses was comprised
primarily of higher consulting and legal costs associated with development activity.
Depreciation and Amortization
For the three months ended July 31, 2017,
depreciation and amortization was approximately $30,000 as compared to approximately $21,000 for the same quarter in 2016, due
primarily to the addition of vehicles and office furniture.
Loss from Operations
We had net loss from operations of approximately
$440,000 for the three months ended July 31, 2017 as compared to net income from operations of approximately $557,000 for the same
period in 2016. Loss from operations is determined by adjusting the operating loss by the following items:
Interest Expense
For the three months ended July 31, 2017
and 2016, interest expense was approximately $2,100 and $2,000, respectively.
Income from Arbitration Settlements
For the three months ended July 31, 2017,
we received approximately $7,800 in a settlement related to our former subsidiary, BTX Trader, Inc.
On June 16, 2016, we entered into a global
settlement agreement and mutual release to resolve all disputes and claims regarding the construction of the Cooper Medical School
at Rowan University, located in Camden, New Jersey, in which the Company served as an electrical prime contractor. As a result
of such settlement, we received proceeds of $1,150,000 during the three months ended July 31, 2016. The Cooper Medical School contract
was performed under the electrical services segment and is no longer part of the Company’s ongoing operation.
Other Income
For the three months ended July 31, 2017
and 2016, other income was $0 and approximately $5,000, respectively.
Effects of Inflation
Inflation has not had a material impact on our business.
Liquidity and Capital Resources
As of July 31, 2017, we had working capital
of approximately $2,436,000, which consisted of current assets of approximately $6,769,000 and current liabilities of approximately
$4,333,000. This compares to working capital of approximately $2,862,000 at April 30, 2017. The current liabilities as presented
in the balance sheet at July 31, 2017 primarily include approximately $1,369,000 of accounts payable and accrued expenses and approximately
$2,912,000 of billings in excess of costs and estimated earnings on uncompleted contracts.
Our cash and cash equivalents balance at
July 31, 2017 was approximately $2,381,000 of which approximately $500,000 is classified as restricted cash.
In addition, our Suisun Operations has
a $1,000,000 million operating line of credit (the “Credit Line”), which expires on August 15, 2018. As of September
12, 2017, we have no outstanding balance under the Credit Line.
Our future plans and growth are dependent
on its ability to increase revenues and continue its business development efforts surrounding its contract award backlog. If we
continue to incur losses and revenues do not generate from the backlog as expected, we may need to raise additional capital to
expand our business and continue as a going concern. We currently anticipate that our current cash position will be sufficient
to meet our working capital requirements to continue our sales and marketing efforts for at least 12 months from the filing date
of this Quarterly Report on Form 10-Q. If in the future our plans or assumptions change or prove to be inaccurate, we may need
to raise additional funds through public or private debt or equity offerings, financings, corporate collaborations, or other means.
We may also be required to reduce operating expenditures or investments in its infrastructure.
Backlog
As of July 31, 2017, we had a backlog of
unfilled orders of approximately $14,275,000 as compared to approximately $14,596,000 at April 30, 2017. We define backlog as the
value of work-in-hand to be provided for customers as of a specific date where the following conditions are met (with the exception
of engineering change orders): (i) the price of the work to be done is fixed; (ii) the scope of the work to be done is fixed, both
in definition and amount; and (iii) there is a written contract, purchase order, agreement or other documentary evidence which
represents a firm commitment by the customer to pay us for the work to be performed. These backlog amounts are based on contract
values and purchase orders and may not result in actual receipt of revenue in the originally anticipated period or at all. We have
experienced variances in the realization of our backlog because of project delays or cancellations resulting from external market
factors and economic factors beyond our control and we may experience such delays or cancellations in the future. Backlog does
not include new firm commitments that may be awarded to us by our customers from time to time in future periods. These new project
awards could be started and completed in this same future period. Accordingly, our backlog does not necessarily represent the total
revenue that could be earned by us in future periods.
Subsequent Event
On August 15, 2017, we extended the expiration
date of the Credit Line to August 15, 2018.
On September 6, 2017, we entered into an
Agreement and Plan of Merger and Reorganization with DC acquisition Corporation and Drop Car, Inc. The merger is intended to qualify
for federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code
of 1986, as amended.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements
other than operating lease commitments.
Critical Accounting Policies
Our discussion and analysis of our financial
condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. GAAP.
The preparation of these financial statements requires us to make estimates and judgments that affect our reported amounts of assets,
liabilities, revenues and expenses.
On an ongoing basis, we evaluate our estimates
and judgments, including those related to accrued expenses and stock-based compensation. We based our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that
are not readily apparent from other sources. Actual results may differ from these estimates.
Our critical accounting policies and significant
estimates are detailed in the Form 10-K for the year ended April 30, 2017. Our critical accounting policies and significant estimates
have not changed substantially from those previously disclosed in the Form 10-K.