SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X ] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2006.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to .
Commission file number: 000-26927
WWA GROUP INC.
(Exact name of small business issuer as specified in its charter)
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2465 West 12th Street, Suite 2 Temple, Arizona 85281
(Address of Principal Executive Office) (Zip Code)
(480) 505-0070
(Issuer’s telephone number)
Check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
The number of outstanding shares of the registrant’s common stock, $0.001 par value (the only class of voting stock), as of November 10, 2006 was 16,670,803.
TABLE OF CONTENTS
As used herein the terms “WWA Group,” “we,” “our”, and “us” refer to WWA Group, Inc., a Nevada corporation, unless otherwise indicated. In the opinion of management, the accompanying unaudited financial statements included in this Form 10-QSB reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
WWA GROUP, INC.
Consolidated Balance Sheets
Unaudited Audited
Assets September 30, 2006 December 31, 2005
Current assets:
Cash $ 5,608,802 $ 8,539,958
Marketable securities 73,000 73,000
Receivables, net 3,777,647 3,785,840
Inventories 1,997,948 584,385
Prepaid expenses 257,044 67,505
Deposit on purchases 1,000,000 232,105
Notes receivable 980,670 3,550,903
Other current assets 261,130 143,770
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Total current assets 13,956,241 16,977,466
Property and equipment, net 4,546,773 1,288,466
Investment in unconsolidated entity 0 250,000
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$ 18,503,014 $ 18,515,932
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Liabilities and Stockholders' Equity
Current liabilities:
Auction proceeds payable $ 10,294,670 $ 9,907,821
Accounts payable 1,072,062 1,288,569
Accrued expenses 315,090 153,581
Line of credit 2,498,748 4,268,651
Current maturities of long-term debt 160,725 178,674
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Total current liabilities 14,341,295 15,797,296
Long-term debt 82,483 182,264
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Total liabilities 14,423,778 15,979,560
Commitments and contingencies 0 0
Stockholders' equity:
Common stock, $0.001 par value, 50,000,000
shares authorized; 16,670,803 and 15,970,803
shares issued and outstanding, respectively 16,671 15,971
Additional paid-in capital 1,509,460 1,013,523
Retained earnings 2,553,106 1,506,878
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Total stockholders' equity: 4,079,237 2,536,372
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$ 18,503,014 $
18,515,932
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See accompanying condensed notes to consolidated reviewed financial statements.
WWA GROUP, INC.
Consolidated Statements of Income
Three months ended Sept. 30, Nine months ended Sept. 30,
Unaudited 2006 Unaudited 2005 Unaudited 2006 Unaudited 2005
Revenues from commissions and services $ 1,522,389 $ 1,197,276 $ 5,377,818 $ 4,844,435
Revenue from shipping operations 460,000 0 1,360,000 0
Revenues from sales of equipment 1,772,347 2,649,145 6,486,393 6,776,128
Total revenues 3,754,736 3,846,421 13,224,211 11,620,563
Direct costs - commissions and services 659,812 507,306 2,175,763 2,080,739
Direct costs - sales of equipment 1,749,790 2,486,123 6,325,587 6,502,867
Gross profit 1,345,133 852,992 4,722,860 3,036,957
Operating expenses:
General, selling and admin expenses 499,684 375,057 1,901,238 1,307,445
Salaries and wages 397,744 312,252 1,149,884 978,869
Selling expenses 79,403 0 163,895 55,022
Depreciation and amortization expense 198,539 109,083 513,948 325,911
Total operating expenses 1,175,369 796,393 3,728,964 2,667,248
Income from operations 169,764 56,599 993,896 369,709
Other income (expense):
Interest expense (27,621) (57,519) (133,990) (172,982)
Interest income 11,072 151,800 72,218 455,400
Other income 24,933 9,216 119,838 41,893
Total other income (expense) 8,384 103,497 58,067 324,311
Income before income taxes 178,148 160,096 1,051,963 694,020
Provision for income taxes
- - - -
Net income $ 178,148 $ 160,096 $ 1,051,963 $ 694,020
Basic and diluted earnings per common share
$ $ $ 0.06 $ 0.04
0.01 0.01
Weighted average shares - basic and diluted
16,670,803 15,970,803 16,259,038 15,970,803
See accompanying condensed notes to consolidated reviewed financial statements.
WWA GROUP, INC.
Consolidated Statements of Cash Flow
Nine months ended September 30,
2006 unaudited 2005 unaudited
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Cash flows from operating activities:
Net income $ 1,051,963 $ 694,017
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 438,948 325,912
Loss on disposition of assets 82,759 0
Loss on consolidated entity (5,735) 0
Gain on securities 250,000 18,208
Value of options granted
146,637 0
Changes in operating Assets and Liabilities:
Decrease (increase) in:
Accounts receivable 8,193 1,595,810
Inventories (1,413,563) (499,983)
Prepaid expenses (189,539) (90,914)
Other current assets (117,360) (63,715)
Deposits on purchases (767,895) 8,592
Increase (decrease) in:
Auction proceeds payable 386,849 (470,055)
Accounts payable (216,507) (1,927,842)
Accrued liabilities 161,509 (547,648)
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Net cash provided by (used in) operating activities (183,741) (957,618)
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Cash flows from investing activities:
Purchase of property and equipment (3,780,015) (177,402)
(Increase) decrease in note receivable 2,570,233 (504,147)
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Net cash (used in) investing activities (1,209,782) (681,549)
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Cash flows from financing activities:
Increase (Decrease) in line of credit (1,769,903) 0
Proceeds from short-term notes payable 0 2,108,675
Payments on short-term notes 0 (2,128,675)
Payments of long-term debt (117,730) (60,998)
Proceeds from issuance of common stock 350,000 0
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Net cash (used in) financing activities (1,537,633) (80,998)
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Net (decrease) in cash and cash equivalents (2,931,156) (1,720,165)
Cash and cash equivalents at beginning of year 8,539,958 4,635,553
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Cash and cash equivalents at end of period $ 5,608,802 $ 2,915,388
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See accompanying condensed notes to consolidated reviewed financial statements.
WWA GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
Note 1 – Organization and Basis of Presentation
WWA Group, Inc., (WWA Group”), through a subsidiary, operates in Jebel Ali, Dubai, United Arab Emirates under a trade license from the Jebel Ali Free Zone Authority. WWA Group’s operations primarily consist of the auctioning of used and new heavy construction equipment, transportation equipment and marine equipment, the majority of which is on a consignment basis.
WWA Group, Inc. includes the accounts of WWA Group, Inc., and its wholly owned subsidiaries World Wide Auctioneers, Ltd. (“WWA”), a company incorporated in the territory of the British Virgin Islands on March 20, 2000, which operates in Dubai, U.A.E., and Crown Diamond Holding Company. (Note 7.)
On August 8, 2003, the WWA Group and WWA executed a stock exchange agreement, whereby WWA Group agreed to acquire 100% of the issued and outstanding shares of WWA, in exchange for 13,887,447 shares of WWA Group’s common stock. Because the owners of WWA became the principal shareholders of WWA Group through the merger, WWA is considered the acquirer for accounting purposes and this merger is accounted for as a reverse acquisition or recapitalization of WWA.
The accompanying unaudited financial statements have been prepared by management in accordance with the instructions in Form 10-QSB and, therefore, do not include all information and footnotes required by generally accepted accounting principles and should, therefore, be read in conjunction with WWA Group’s Form 10-KSB for the year ended December 31, 2005. These statements do include all normal recurring adjustments which WWA Group believes necessary for a fair presentation of the statements. The interim operations are not necessarily indicative of the results to be expected for the full year ended December 31, 2006.
Note 2 – Summary of Significant Accounting Policies
Net Earnings Per Common Share — The computation of basic earnings per common share is based on the weighted average number of shares outstanding during each year. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the year, plus the common stock equivalents that would arise from the exercise of stock options and warrants outstanding, using the treasury stock method and the average market price per share during the year. There are no common stock equivalents at September 30, 2006.
Revenue Recognition — Revenues from commissions and services consist of revenues earned in WWA Group’s capacity as agent for consignors of equipment, incidental interest income, internet and proxy purchase fees, and handling fees on the sale of certain lots. All commission revenue is recognized when the auction sale is complete and WWA Group has determined that the auction proceeds are collectible.
Revenue from shipping operations is originated from chartering of vessel MV Iron Butterfly on a long term charter at a daily rate agreed upon.
Revenues from sales of equipment originate from the auctioned and private sale of equipment inventory owned by WWA Group. WWA Group recognizes the revenue from such sales when the sale has been invoiced, and collectibility is reasonably assured. All costs of goods sold are accounted for under direct costs.
WWA GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
Note 2 – Summary of Significant Accounting Policies (continued)
Stock Based Compensation – WWA Group has traditionally accounted for stock-based compensation under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, no compensation cost was recognized in the 2005 financial statements, when options granted under those plans have an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. WWA Group issued no compensatory options to its employees during the quarter ended September 30, 2006.
In April 2006 the Company adopted The 2006 Benefit Plan of WWA Group, Inc. (the “Plan”), considered by the board of directors in December 2005, which approved the registration of 2,500,000 shares of the common stock to be available for issuance under the Plan. The Company granted 700,000 options to purchase shares of common stock registered under the Plan at $0.50 a share for a term of twelve months to an independent consultant for services rendered. The options were exercised during the second quarter of 2006. The Company recorded an expense of $146,637 for the value of the options granted upon applying the Black-Scholes option valuation model. The Company received $350,000 from the exercise of the options on June 6, 2006. There are no unexercised options outstanding at September 30, 2006.
The Company used the Black-Scholes option price calculation to value its options granted during the second quarter of 2006, using the following assumptions: risk free rate of 4%, volatility of 67% and a 1 year term.
In December 2005, WWA Group adopted the provisions of Statement of Financial Accounting Standards No. 123R, although this statement had no effect on WWA Group’s 2005 financial statements.
Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts. Accordingly, actual results could differ from those estimates.
Newly Issued Accounting Pronouncements — In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. Where applicable, SFAS No. 157 simplifies and codifies related guidance within GAAP and does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier adoption is encouraged. The Company does not expect the adoption of SFAS No. 157 to have a significant effect on its financial position or results of operation
WWA GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
Note 2 – Summary of Significant Accounting Policies (continued)
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109", which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect the adoption of FIN 48 to have a material impact on its financial reporting, and the Company is currently evaluating the impact, if any, the adoption of FIN 48 will have on its disclosure requirements.
In February 2006, the FASB issued Statement No. 155, “Accounting for Certain Hybrid Financial Instruments”, an amendment of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” and FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This Statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This Statement is effective for accounting changes and corrections of errors made in fiscal periods that begin after September 15, 2006. Management does not anticipate this Statement will impact the Company’s consolidated financial position or consolidated results of operations and cash flows.
In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets”, an amendment of FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This Statement amends Statement No. 140 with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement is effective for accounting changes and corrections of errors made in fiscal periods that begin after September 15, 2006. Management does not anticipate this Statement will impact the Company’s consolidated financial position or consolidated results of operations and cash flows.
Note 3 – Notes Receivable
Notes receivable amounting to $ 980,670, as on September 30, 2006, remain due to WWA Group from its trading partners. Amounts in this category are a receivable to WWA Group from one of its regular consignors, from its Australia auction franchise and a U.A.E. based crushing company.
WWA GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
Note 4 – Income Taxes
WWA operates in the Jebel Ali Free Zone of Dubai, which is an income tax free zone. Therefore, the profits of WWA are not taxable in Dubai. During the fourth quarter of 2004, WWA Group determined that undistributed earnings from Dubai will be reinvested in the business indefinitely and that such earnings will not be distributed to WWA Group. Therefore, in accordance with APB Opinion No. 23, Accounting for Income Taxes — Special Areas, no income tax provision has been recorded for the undistributed earnings.
Note 5 — Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts. Accordingly, actual results could differ from those estimates.
Note 6 – Risks Related to Our Business and Stock
Due to the proximity of Iran, Sudan and Syria to our auction site, sales records and statistics on regional spending on used construction equipment, there is reason to believe that some percentage of the equipment sold at our auctions ultimately ends up in Iran, Sudan or Syria. The U.S. State Department or OFAC could impose fines upon us or cause us to restrict certain of our sales based on this possibility. Any such action could have a negative impact on our reputation which might decrease shareholder value.
Note 7 – Acquisition of Crown Diamond
In July 2006, the Company acquired all of the shares of Crown Diamond Holding Company (CDHC) by exercising the option to convert its secured loan in to equity amounting to $ 3,000,000. Accordingly, CDHC has become a wholly owned subsidiary of the Company. The results of CDHC are consolidated in the financial statements in third quarter as at September 30, 2006. The primary asset of CDHC is a shipping vessel. The Company has recorded the shipping vessel on its books at its cost of $3,250,000. The Company assumed no liabilities in the transaction. The vessel is contracted on a long term charter up to December 31, 2009.
Note 8 – Sale of Investment in Unconsolidated Entity
During the third quarter WWA sold its investment of $250,000 in a 19% equity position of IAM Jakarta at a sale price of $265,000 and realized a gain of $15,000. However WWA will continue to provide necessary support required by IAM Jakarta to continue to hold auctions under the WWA name without any financial obligations on our part.
Note 9 – Deposit on Purchases
During the third quarter WWA paid $1,000,000 as a deposit against equipment to be sold in its auctions. WWA received the equipment subsequent to September 30, 2006 and recorded the deposit as cost of sales for the equipment sold during auctions held subsequent to the end of the quarter.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following discussion and analysis of our financial condition and results of operation should be read in conjunction with the financial statements and accompanying notes and the other financial information appearing elsewhere in this report. WWA Group’s fiscal year end is December 31.
General
WWA Group’s business strategy is to continue to grow the number and size of auctions held during the year, to increase the cash flow generated from such auctions, and to expand operations to new auction sites. WWA Group intends to focus on formalizing new joint venture relationships, management arrangements, new wholly owned facilities, and expanded auctions as a means by which to increase net cash flow. During the current three month period WWA Group held one successful construction equipment auction in Dubai, and recorded private sales of owned equipment. Subsequent to September 30, 2006, WWA Group held a one night equipment auction.
Implementation of WWA Group’s growth model will include (i) expanding our lower cost auction methods, such as on-line auctions and video auctions, and (ii) diversifying into lower cost transportation equipment only auctions, which can be held on a more frequent basis than the larger equipment auctions. While smaller in size, these auctions will not interfere with or detract from our major equipment auctions, and the economics of scale at the Dubai facility are efficient for this purpose.
WWA Group is also now offering higher margin buyer and seller services, such as transport and logistics. WWA Group’s control over a large volume of equipment being moved around the world by our regular consignors provides vertical integration opportunities that could combine auction services with the ability to meet transportation needs.
In line with WWA Group’s growth model, in July 2006, WWA Group acquired Crown Diamond Holdings Ltd. by exercising an option to convert our $3,000,000 loan into 100% ownership of the company. Crown Diamond Ltd. owns the RO vessel MV Iron Butterfly which is engaged under an existing carriage charter for the next twelve months. In connection with the transaction WWA Group paid a commission of $250,000 to an individual for arranging the long term charter of the shipping vessel through December 31, 2009.
WWA Group’s business development strategy is prone to significant risks and uncertainties certain of which can have an immediate impact on our efforts to increase positive net cash flow and deter future prospects for the expansion of our business. WWA Group’s financial condition and results of operation depend primarily upon the volume of industrial equipment auctioned, the prices we obtain at auction for such equipment, and the commission rates we can attract from consignors. Industrial equipment prices historically have been volatile and are likely to continue to be volatile, and the commission rates in WWA Group’s primary market are becoming more competitive. This price volatility and commission rate pressure can immediately affect WWA Group’s available cash flow that can in turn impact the availability of net cash flow for future capital expenditures. Our future success will depend on our ability to increase the size of our auctions and to optimize commissions and prices realized at auction.
Should WWA Group be unable to increase gross auction sales and obtain competitive pricing at auction, we can expect a reduction in revenue that may in turn affect the profitability of our business.
Results of Operations
During the period from January 1, 2006 through September 30, 2006, WWA Group was engaged in conducting un-reserved auctions for industrial equipment through our subsidiary, World Wide Auctioneers, Ltd., from our auction site located in the Jebel Ali Free Trade Zone, Dubai, United Arab Emirates. The Company also held a one day equipment auction in Doha Qatar in June 2006. WWA Group expects that over the next twelve months we will continue to hold industrial equipment auctions at established sites and anticipates the opening of new jointly managed auction locations. To date, we have acted as a consultant to strategic partners in the auctions outside of Dubai but have not received any fees from such auctions.
For the three months ended September 30, 2006 and the nine months ended September 30, 2006, WWA Group increased net income as compared to the prior three and nine months ended September 30, 2005 due to increased auction revenue and additional revenue from shipping operations. WWA Group believes that in order to continue to increase profitability we must expand the number and the size of our auctions in future periods.
Three and nine months periods ended September 30, 2006 and 2005
Revenue
Revenue for the three months ended September 30, 2006 is $3,754,736 as compared to $3,846,421 for the three months ended September 30, 2005, a decrease of 2%. Revenue for the nine months ended September 30, 2006 increased to $13,224,211 from $11,620,563 for the nine months ended September 30, 2005, an increase of 14%. The increase in revenues over the nine month periods is mainly due to an increase in auction revenue and shipping revenue in 2006 that included a one day auction in Qatar. The one major auction conducted in the 3rd quarter of 2006 in Dubai was higher in terms of gross auction sales and revenue as compared to those auctions held in the 3rd quarter of 2005. WWA Group anticipates that auction events combined with increased shipping revenue will result in continued growth and keep us on track to increase gross revenues in 2006 over those in 2005. The increase in revenue reflects our efforts to expand our position in the international auction market.
Gross Profit
Gross margin percentages from auction commission revenue and shipping operations during the three months ended September 30, 2006 increased to approximately 67% while the gross margin percentage on the sales of equipment was decreased to approximately 1%. Due to decreases in direct auction and shipping expenses and an increase in shipping revenue, overall gross profit increased from $852,992 in the three months ended September 30, 2005 to $1,345,133 in the three months ended September 30, 2006. The gross margin from the sale of equipment historically has ranged from approximately 1% to 6%, whereas the gross margin from auction commission revenue has ranged from approximately 40% to 70%.
Expenses
Total operating expenses for the three months ended September 30, 2006 were $1,175,369 as compared to total operating expenses of $796,393 for the three month period ended September 30, 2005, an increase of 48%, due primarily to an increase of general, selling and administrative expenses, salaries, wages and depreciation. The total operating expenses for the nine months ended September 30, 2006 were $3,728,964 as compared to $2,667,248 for the nine months ended September 30, 2005, an increase of 40%, due primarily to increased general, selling and administrative expenses, salaries, wages and depreciation expenses.
Management has worked to control administrative expenses by maintaining constant staffing levels. Nonetheless, WWA Group expects that direct costs and selling, general and administrative expenses may rise with the number and size of anticipated auctions to be held over the next three months. However, revenue growth is expected to outpace increases in expenses. Depreciation and amortization expense expenses for the three months ended September 30, 2006 and September 30, 2005 were $198,539 and $109,083 respectively. Depreciation and amortization expenses are expected to continue to increase as WWA Group acquires additional assets Specifically, we intend to expand our physical facilities in 2007 by building a new modern auction yard and offices.
Net Income
Net income for the three months ended September 30, 2006 is $178,148 as compared to net income of $160,096 for the three months period ended September 2005, an increase of 11% due primarily to income from shipping operations. Net income for the nine months ended September 30, 2006 increased to $1,051,963 from $694,020 for the nine months ended September 30, 2005, an increase of 52%. WWA Group anticipates net income growth over the next twelve months, based on our current accelerated auction schedule. WWA Group held an auction in Dubai on October 11, 2006 which generated gross auction proceeds of $5.76 Million. The Company is holding an on-line auction in November 2006 and a major equipment auction in early December 2006. In addition, WWA Group plans to realize sales revenue from owned inventory acquired in a U.S. Military disposal joint venture. Historically the 4th quarter of the year has produced better financial results than the 3rd quarter for WWA Group. The quarter ending December 31, 2006 is expected to produce the better results.
Income Tax Expense (Benefit)
WWA Group’s subsidiary, World Wide Auctioneers, Ltd., operates in the Jebel Ali Free Zone — an income tax free zone. Therefore, the profits of World Wide Auctioneers, Ltd. are not taxable in Dubai. WWA Group has determined that undistributed earnings from Dubai will be reinvested in the business indefinitely and that such earnings will not be distributed to WWA Group. Therefore, in accordance with APB Opinion No. 23, Accounting for Income Taxes — Special Areas, no income tax provision has been recorded for the undistributed earnings. If, in the future, World Wide Auctioneers, Ltd.‘s earnings are distributed to WWA Group, the earnings will be taxable at the applicable U.S. tax rates
Impact of Inflation
WWA Group believes that inflation has had a negligible effect on operations over the past three years. WWA Group believes that it can offset inflationary increases in the cost of auctions and labor by increasing sales and improving operating efficiencies.
Liquidity and Capital Resources
Cash flow used in operating activities was $183,741 for the nine months ended September 30, 2006 as compared to cash flow used in operating activities $957,618 for the nine months ended September 30, 2005. Negative cash flows from operating activities in the nine months ended September 30, 2006, are primarily attributable to a significant increase in inventory and accounts receivables. Anticipated increases in net revenues and decreases in accounts receivable are expected to produce an increase in cash flow from operations in future periods; however, there can be no assurance that revenues will increase or that increases in revenues will result in positive cash flow from operating activities.
Cash flows used in investing activities for the nine months ended September 30, 2006 were $1,209,782 as compared to cash flow used in investing activities of $681,549 for the nine months ended September 30, 2005. The cash flow for investing activities in the nine months ended September 30, 2006 was primarily due to acquisition of shipping vessel.
Cash flows used in financing activities were $1,537,633 for the nine months ended September 30, 2006 as compared to cash flow used in financing activities of $80,998 for the nine months ended September 30, 2005. The cash flows for financing activities in the nine months ended September 30, 2006 consisted primarily of repayment of working capital finance to banks of $1,769,903, repayment of long term debt of $117,730 less the proceeds from the exercise of options to purchase common stock $350,000.
WWA Group had a negative working capital of $385,054 as of September 30, 2006, compared to a working capital surplus of $1,180,170 as of December 31, 2005. Working capital is expected to increase in the three month period ended December 31, 2006.
On September 30, 2006 WWA Group had auction proceeds payable of $10,294,670 and accounts payable of $1,072,062. WWA Group had $5,608,802 in cash, and accounts receivable of $4,777,647 as at September 30, 2006. WWA Group believes that we have sufficient operational cash flow to meet our obligations. However, WWA Group may be required to obtain funding from alternative sources to accelerate the pay down of our auction proceeds to increase our customer retention. Sources for funding WWA Group’s working capital deficit consist of loans from shareholders, the sale of common stock or other equity instruments, or loans from other sources. WWA Group has funded our cash needs from inception through operations, increasing our payables, and a series of debt transactions. WWA Group can provide no assurance that we will be able to obtain additional financing, if needed, to meet our current obligations. If WWA Group is unable to increase our cash flows from operating activities or obtain additional financing, we may be required to delay payment of accounts payable or auction proceeds payable, which could negatively impact WWA Group’s ability to attract and retain consignors for future auctions.
During the 3rd quarter WWA sold its investment of $250,000 in a 19% equity position in IAM Jakarta at a sale price of $265,000, realizing a gain of $15,000.
Since earnings will be reinvested in operations, WWA Group does not expect to pay cash dividends in the foreseeable future.
WWA Group adopted “The 2006 Benefit Plan of WWA Group, Inc.” on April 26, 2006. Under the benefit plan, WWA Group may issue stock, or grant options to acquire up to 2,500,000 shares of WWA Group’s common stock to employees. The board of directors, at its own discretion may also issue stock or grant options to other individuals, including consultants or advisors, who render services to WWA Group or our subsidiaries, provided that the services rendered are not in connection with the offer or sale of securities in a capital-raising transaction. Further, no stock may be issued, or options granted under the benefit plan to consultants, advisors, or other persons who directly or indirectly promote or maintain a market for WWA Group’s stock. WWA Group granted 700,000 options pursuant to the benefit plan during the nine months ended September 30, 2006, which options have been exercised. The benefit plan is registered on Form S-8 with the Securities and Exchange Commission.
WWA Group has no contractual commitment with any of our officers or directors.
WWA Group intends to expand physical facilities in middle of 2007 by building a new modern auction yard and offices in Dubai. WWA Group has no plans to increase the number of employees.
Critical Accounting Policies
In Note 1 to the audited consolidated financial statements for the year ended December 31, 2005, included in our Form 10-KSB, we discussed those accounting policies that are considered to be significant in determining the results of operations and our financial position. We believe that the accounting principles utilized by us conform to accounting principles generally accepted in the United States of America.
The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue, and income taxes. We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions. We apply the following critical accounting policies in the preparation of our financial statements:
Revenue Recognition
Auction Revenues earned in WWA Group’s capacity as agent for consignors of equipment are comprised mainly of auction commissions in the form of flat selling fees or fixed or sliding percentages of the gross auction sale price of any consigned equipment. The majority of auction commissions are earned as a fixed rate of the gross selling price. Auction Revenues also include any preparation, shipping, clearing, transport and handling charges and fees applicable to certain items of consigned equipment; incidental interest income; buyers’ commission applicable on certain sales of items. All revenue is recognized when the auction sale is complete and we have determined that the auction proceeds are collectible.
Trading revenues are defined as gross proceeds on sales of WWA Group owned or underwritten inventory sold at auction or privately. All costs of goods sold are accounted for under direct costs. Trading revenue can be earned and direct costs can be incurred when WWA Group guarantees a certain net level of proceeds to a consignor. This type of revenue includes a percentage of proceeds in excess of the guaranteed amount. If actual auction proceeds are less than the guaranteed amount, WWA Group can incur a net loss on the sale. Therefore, sales of equipment on a guarantee contracts are to be treated the same as inventory for accounting purposes. Our exposure from these guarantee contracts can vary over each guarantee contract. Losses, if any, resulting from guarantee contracts are recorded in the period in which the relevant auction is held.
Allowance for Doubtful Accounts
WWA Group makes estimates of the collectability of accounts receivable. In doing so, WWA Group analyzes accounts receivable and historical bad debts, customer credit-worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts.
Forward Looking Statements and Factors That May Affect Future Results and Financial Condition
The statements contained in the section titled Management’s Discussion and Analysis, with the exception of historical facts, are forward looking statements within the meaning of Section 27A of the Securities Act. A safe-harbor provision may not be applicable to the forward looking statements made in this Form 10-QSB because of certain exclusions under Section 27A(b). Forward looking statements reflect our current expectations and beliefs regarding our future results of operations, performance, and achievements. These statements are subject to risks and uncertainties and are based upon assumptions and beliefs that may or may not materialize. These statements include, but are not limited to, statements concerning:
|X| the sufficiency of existing capital resources and WWA Group’s ability to raise additional capital to fund cash requirements for future operations;
|X| uncertainties involved in the rate of growth of WWA Group’s business and acceptance of products and services;
|X| the ability of WWA Group to achieve and maintain a sufficient customer base to have sufficient revenues to fund and maintain operations;
|X| volatility of the stock market; and
|X| general economic conditions.
We wish to caution readers that WWA Group’s operating results are subject to various risks and uncertainties that could cause our actual results to differ materially from those discussed or anticipated in this report. We also wish to advise readers not to place any undue reliance on the forward looking statements contained in this report, which reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update or revise these forward looking statements to reflect new events or circumstances or any changes in our beliefs or expectations, other that is required by law.
Risks Related to Our Business and Stock
Our future operating results are highly uncertain. Before deciding to invest in us or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this annual report. If any of these risks actually occur, our business, financial condition or results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose all or part of your investment. Sales of equipment from our auctions may ultimately end up in Iran, Sudan or Syria
Due to the proximity of Iran, Sudan and Syria to our auction site, sales records and statistics on regional spending on used construction equipment, there is reason to believe that some percentage of the equipment sold at our auctions ultimately ends up in Iran, Sudan or Syria. Although we sell no equipment to Iran, Sudan or Syria, countries which the U.S. State Department and the Office of Foreign Assets Control (“OFAC”) have identified as state sponsors of terrorism, and we make no effort to attract consignors or bidders from any country recognized as a state sponsor of terrorism, it is possible that some equipment at our auctions is sold to entities that re-export to these countries, particularly to Iran. Our own records indicate that registered bidders with Iranian addresses bought $7,300,000 worth of equipment, registered bidders with Sudanese addresses bought $1,847,950 worth of equipment and registered bidders with Syrian addresses bought $202,300 worth of equipment at our Dubai auctions between 2001 and 2005, from a total of over $371,600,000 in sales during this period or approximately 2.5% of our total sales. We do not believe that this percentage of our sales has any impact on our operations, reputation or shareholder value.
However, despite the fact that we have no knowledge of delivery of equipment purchased at our auctions into Iran, Sudan or Syria nor any means to control any such sales, the U.S. State Department or OFAC could impose fines upon us or cause us to restrict certain of our sales based on this possibility. Any such action on the part of the U.S. State Department or OFAC could have a negative impact on our reputation which might decrease shareholder value.
The market for our stock is limited and our stock price may be volatile.
The market for our common stock has been limited due to low trading volume and the small number of brokerage firms acting as market makers. Because of the limitations of our market and volatility of the market price of our stock, investors may face difficulties in selling shares at attractive prices when they want to. The average daily trading volume for our stock has varied significantly from week to week and from month to month, and the trading volume often varies widely from day to day. We may incur significant expenses as a result of being quoted on the Over the Counter Bulletin Board, which may negatively impact our financial performance.
We may incur significant legal, accounting and other expenses as a result of being listed on the Over the Counter Bulletin Board.
The Sarbanes-Oxley Act of 2002, as well as related rules implemented by the Securities and Exchange Commission (“Commission”), has required changes in corporate governance practices of public companies. We expect that compliance with these laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 as discussed in the following risk factor, may substantially increase our expenses, including our legal and accounting costs, and make some activities more time-consuming and costly. As a result, there may be a substantial increase in legal, accounting and certain other expenses in the future, which would negatively impact our financial performance and could have a material adverse effect on our results of operations and financial condition.
Our internal controls over financial reporting may not be considered effective, which could result in a loss of investor confidence in our financial reports and in turn have an adverse effect on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our annual report for the year ending December 31, 2008, we may be required to furnish a report by our management on our internal controls over financial reporting. Such report will contain, among other matters, an assessment of the effectiveness of our internal controls over financial reporting as of the end of the year, including a statement as to whether or not our internal controls over financial reporting are effective. This assessment must include disclosure of any material weaknesses in our internal controls over financial reporting identified by management. The report will also contain a statement that our independent registered public accounting firm has issued an attestation report on management’s assessment of internal controls. If we are unable to assert that our internal controls are effective as of December 31, 2008, or if our independent registered public accounting firm is unable to attest that our management’s report is fairly stated or they are unable to express an opinion on our management’s evaluation or on the effectiveness of our internal controls, investors could lose confidence in the accuracy and completeness of our financial reports, which in turn could cause our stock price to decline.
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of September 30, 2006. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective and adequately designed to ensure that the information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms.
(b) Changes in internal controls over financial reporting.
During the quarter ended September 30, 2006 there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGSNone.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIESNone.
ITEM 3. DEFAULTS UPON SENIOR SECURITIESNone.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNone.
ITEM 5. OTHER INFORMATIONNone.
ITEM 6. EXHIBITSExhibits required to be attached by Item 601 of Regulation S-B are listed in the Index to Exhibits on page 20 of this Form 10-QSB, and are incorporated herein by this reference.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, hereunto duly authorized, this 10th day of November, 2006.
WWA Group, Inc.
/s/ Eric Montandon
Eric Montandon
Chief Executive Officer and Director
/s/ Digamber Naswa
Digamber Naswa
Chief Financial Officer, Principal Accounting Officer and Director
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Exhibit No. |
Page No. |
Description |
|
3(i)(a) |
* |
Articles of Incorporation of WWA Group formally known as Conceptual Technologies, Inc. a Nevada corporation dated November 26, 1996 (incorporated herein by reference from Exhibit No. 2(i) to WWA Group's Form 10SB12G/A as filed with the Commission on November 29, 1999). |
|
3(i)(b) |
* |
Certificate of Amendment of the Articles of Incorporation of WWA Group filed on August 29, 1997 effecting a 1-for-14 reverse split and rounding each fractional share to one whole share (incorporated herein by reference from Exhibit 2(ii) of WWA Group's Form 10SB12G/A as filed with the Commission on November 29, 1999). |
|
3(i)(c) |
* |
Certificate of Amendment of the Articles of Incorporation of WWA Group changing the name of WWA Group from Conceptual Technologies, Inc. to NovaMed, Inc. (incorporated herein by reference from Exhibit 2(iii) of WWA Group's Form 10SB12G/A as filed with the Commission on November 29, 1999). |
|
3(i)(d) |
* |
Certificate of Amendment to the Articles of Incorporation of WWA Group changing the name of WWA Group from NovaMed, Inc. to WWA Group, Inc. (incorporated herein with reference from Exhibit 3(i)(d) of WWA Group's Form 10-QSB as filled with the Commission on November 20, 2003). |
|
3(ii) |
* |
Bylaws of WWA Group adopted on November 12, 1996 (incorporated herein by reference from Exhibit 2(iv) of WWA Group's Form 10SB12G/A as filed with the Commission on November 29, 1999). |
|
10(i) |
* |
Stock Exchange Agreement between WWA Group, Inc. and World Wide Auctioneers Ltd. dated August 5, 2003 (incorporated herein by reference from the Form 8-K filed with the Commission on August 25, 2004). |
|
10(ii) |
* |
Purchase Agreement between World Wide Auctioneers, Ltd., Geoffrey Greenless and Crown Diamond Holdings, Inc. dated June 30, 2006 (incorporated herein by reference from the Form 8-K filed with the Commission on July 19, 2006. |
|
14 |
* |
Code of Ethics adopted on March 28, 2004 (incorporated by herein by reference from the 10-KSB filed with the Commission on March 30, 2004). |
|
31(a) |
Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Commissionurities and Exchange Act of 1934 as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
31(b) |
Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Commissionurities and Exchange Act of 1934 as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
32(a) |
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
|
32(b) |
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* Incorporated by reference from previous filings of WWA Group, Inc.