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| MWWC.OB > SEC Filings for MWWC.OB > Form 10-K/A on 4-Jun-2009 | All Recent SEC Filings |
4-Jun-2009
Annual Report
The following discussion and analysis should be read in conjunction with our financial statements. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future.
GENERAL OVERVIEW
MWW operates in a niche of the supply chain for new passenger motor vehicles in the United States, Canada and Europe. MWW participates in the design of new automobiles and the building of show cars and is a designer and manufacturer of accessories for the customization of cars, sport utility vehicles and light trucks. MWW's revenues are derived through the sales of its products and services to large automotive companies. As a consequence, MWW is dependent upon the acceptance of its products in the first instance by the automotive industry. As a result of this dependence MWW's business is vulnerable to actions which impact the automotive industry in general, including but not limited to, current consumer interest rates, fuel costs, and new environmental regulations. Growth opportunities for the Company include expanding its geographical coverage and increasing its penetration of existing markets in the US, Canada and Europe through internal growth and expanding into new product markets, adding additional customers and acquiring companies in its core industry that supplement and compliment the currently existing capabilities, and at the same time supply access to additional markets and customers. Challenges currently facing the Company include managing its growth, controlling costs and completing the integration of the acquisitions it has executed during the last quarter of 2007. Escalating costs of audits, Sarbanes-Oxley compliance, health care and commercial insurance are also challenges for the Company at this time.
The following specific factors could affect our revenues and earnings in a particular quarter or over several quarterly or annual periods:
The requirements for our products are complex, and before buying them, customers spend a great deal of time reviewing and testing them. Our customers' evaluation and purchase cycles do not necessarily match our report periods, and if by the end of any quarter or year we have not sold enough new products, our orders and revenues could fall below our plan for a period of time. Like many companies in the automotive accessory industry, a large proportion of our business is attributable to our largest customers. As a result, if any order, and especially a large order, is delayed beyond the end of a fiscal period, our orders and revenue for that period could be below our plan.
The accounting rules we are required to follow permit us to recognize revenue only when certain criteria are met.
CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various others assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:
o Accounting for variable interest entities
o Revenue recognition
o Inventories
o Allowance for doubtful accounts
o Stock based compensation
ACCOUNTING FOR VARIABLE INTEREST ENTITIES
In December 2003, the FASB issued a revision to FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities" (FIN No. 46R). FIN No. 46R clarifies the application of ARB No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity risk for the entity to finance its activities without additional subordinated financial support. FIN No. 46R requires the consolidation of these entities, known as variable interest entities, by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entities expected losses, receive a majority of the entity's expected residual returns or both.
Pursuant to the effective date of a related party lease obligation, the Company adopted FIN 46R on January 1, 2005. This resulted in the consolidation of one variable interest entity (VIE) of which the Company is considered the primary beneficiary. The Company's variable interest in this VIE is the result of providing certain secured debt mortgage guarantees on behalf of a limited liability company that leases warehouse and general offices located in the city of Howell, Michigan.
The consolidation of the VIE resulted in net income of $35,422 for the year ending September 30, 2008 and $25,799 for the year ended September 30, 2007. Since the consolidation of the VIE was performed as of January 1, 2005, there was no significant impact to the Consolidated Statements of Income and Consolidated Statements of Cash Flows. The construction loans have been converted into two mortgage loans. As of September 30, 2008, the balance of the JCMD Properties LLC mortgage loan with Key Bank National Association was $1,276,652. The mortgage note payable has been collateralized by the substantially all of the Company's assets.
REVENUE RECOGNITION
For revenue from products and services, the Company recognizes revenue in
accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services have been rendered;
(3) the selling price is fixed and determinable; and (4) collectability is
reasonably assured. Determination of criteria (3) and (4) are based on
management's judgments regarding the fixed nature of the selling prices of the
products delivered/services rendered and the collectability of those amounts.
Provisions for discounts and rebates to customers, estimated returns and
allowances, and other adjustments are provided for in the same period the
related sales are recorded. The Company defers any revenue for which the product
has not been delivered or services has not been rendered or is subject to refund
until such time that the Company and the customer jointly determine that the
product has been delivered or services has been rendered or no refund will be
required.
On December 17, 2003, the SEC staff released Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. The staff updated and revised the existing revenue recognition in Topic 13, Revenue Recognition, to make its interpretive guidance consistent with current accounting guidance, principally EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." Also, SAB 104 incorporates portions of the Revenue Recognition in Financial Statements - Frequently Asked Questions and Answers document that the SEC staff considered relevant and rescinds the remainder. The company's revenue recognition policies are consistent with this guidance; therefore, this guidance will not have an immediate impact on the company's consolidated financial statements.
Revenues on the sale of products, net of estimated costs of returns and allowance, are recognized at the time products are shipped to customers, legal title has passed, and all significant contractual obligations of the Company have been satisfied. Products are generally sold on open accounts under credit terms customary to the geographic region of distribution. The Company performs ongoing credit evaluations of the customers and generally does not require collateral to secure the accounts receivable.
The separation of Revenues (Product/Services) was determined to be material for the fiscal year 2008. The nature of revenue generated from "services" was derived from the revenue generating activities from the acquisition of Modelworxx GmbH. Modelworxx revenue is mainly generated from the sales of engineering and design services to the automotive manufactures. Modelworxx was acquired on September 28, 2007; therefore having no impact on the 2007 fiscal year. Colortek revenues include product sales only with no revenues generated from services.
The Company generally warrants its products to be free from material defects and to conform to material specifications for a period of three (3) years. The cost of replacing defective products and product returns have been immaterial and within management's expectations. In the future, when the company deems warranty reserves are appropriate that such costs will be accrued to reflect anticipated warranty costs.
INVENTORIES
We value our inventories, which consist primarily of automotive body components, at the lower of cost or market. Cost is determined on the weighted average cost method and includes the cost of merchandise and freight. A periodic review of inventory quantities on hand is performed in order to determine if inventory is properly valued at the lower of cost or market. Factors related to current inventories such as future consumer demand and trends in MWW's core business, current aging, and current and anticipated wholesale discounts, and class or type of inventory is analyzed to determine estimated net realizable values. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if required. Any significant unanticipated changes in the factors noted above could have a significant impact on the value of our inventories and our reported operating results.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
We are required to estimate the collectability of our trade receivables. A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past due balances. In order to assess the collectability of these receivables, we perform ongoing credit evaluations of our customers' financial condition. Through these evaluations we may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to us and are reevaluated and adjusted as additional information is received.
Our reserves are also based on amounts determined by using percentages applied to certain aged receivable categories. These percentages are determined by a variety of factors including, but are not limited to, current economic trends, historical payment and bad debt write-off experience. We are not able to predict changes in the financial condition of our customers and if circumstances related to our customers deteriorate, our estimates of the recoverability of our receivables could be materially affected and we may be required to record additional allowances. Alternatively, if we provided more allowances than are ultimately required, we may reverse a portion of such provisions in future periods based on our actual collection experience. As of September 30, 2008 and 2007, we determined there was no reserve required against our account receivables.
STOCK-BASED COMPENSATION
Prior to January 1, 2006, we accounted for the Plans under the recognition and measurement provisions of APB Opinion No. 25, as permitted by SFAS No. 123. Consequently, no stock-based compensation cost relating to stock options was recognized in the consolidated statement of income for any period prior to 2006, as all options granted under the Plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, we adopted the fair value provisions for share-based awards pursuant to SFAS No. 123(R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized in 2006 includes (a) compensation cost for all share-based awards granted prior to, but not yet vested as of January 1, 2006, based on the attribution method and grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based awards granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R), all recognized on a straight line basis as the requisite service periods are rendered. Results for prior periods have not been restated.
COMPARISON OF THE YEAR ENDED SEPTEMBER 30, 2008 TO THE YEAR ENDED SEPTEMBER 30,
2007
Our overall revenue increased to $8,305,661 for the year ended September 30, 2008 from $7,454,053 for the same period last year, an increase of $851,608. The increase in revenue is attributable to the acquisition of Modelworxx GmbH in September 2007 of $1,873,552, net with a decrease in our existing operations of $1,021,944.
With the acquisition of Modelworxx GmbH, we began to provide services in addition to product sales. Our services provided are mainly from the sale of engineering and design activities at Modelworxx GmbH. For the year ended September 30, 2008, we generated $1,676,082 in services revenue and $197,470 in product sales in our German segment.
Our revenue (product sales) for our United States segment (including Canada) decreased from $7,454,053 in fiscal year ended September 30, 2007 to $6,432,109 for the current year; a $1,021,944 or 13.7% decrease. The decrease is primarily attributable to the slowing of the US auto market. We are actively pursuing additional product lines to add to our mix with our expectation that we can negate some the slowing domestic auto market.
Management improved MWW's gross profit margin by 7.63% compared to the prior year. For the fiscal year ended September 30, 2008, MWW's gross profit was $2,661,594 (32%) compared to $ 2,219,689 (29.8%) for the fiscal year ended September 30, 2007. The overall gross profit was higher due to the positive change in our product sales mix. MWW sold a greater percentage of its higher margin spoiler products in 2008 than in 2007. Further, our successful efforts to reduce manufacturing costs contributed to higher margins. MWW's gross profit margin is influenced by a number of factors and gross margin may fluctuate based on changes in the cost of supplies, product mix, currency exchange, and competition. For fiscal 2008, our gross profit margin on products was 37% and 14% on services. By geographic segment, our gross profit margin was 37% in the United States and 15% in Germany.
We consider our revenues from Canada and to our customer, Toyota Canada, Inc. as part of the United States geographic segment. Our revenues from outside North America are included as part of the Germany geographic segment Beginning October 2007 and for the fiscal year 2008, the acquisition of Modelworxx GmbH warranted geographic segment reporting for international revenues which is principally service revenue.
OPERATING EXPENSES
Our operating expenses decreased from $5,166,246 to $4,818,937, a $347,309 or 6.73% decrease, from the year ended September 30, 2007 to 2008. The decrease was attributable to a non cash impairment charge of $1,584,552 relating to the acquisitions of Colortek, Inc. and Modelworxx GmbH in fiscal 2007, partially offset by increased operating costs related to the acquisitions of Colortek, Inc. and Modelworxx GmbH.
The impairment charge recorded in fiscal 2007 reduced our carrying value of goodwill acquired from the acquisitions of Colortek, Inc. and Modelworxx GmbH to $0.0.
Domestic operational losses were 75% and international operational losses were 25% of the total losses for fiscal year 2008. We did not have international operations in fiscal year 2007.
OTHER INCOME (EXPENSES)
Financial expenses were $177,878 in 2008 compared to $371,687 during 2007. The decrease is a reduction our debt and decreased interest rate on our borrowings Other income (expense), net was $90,863 in 2008 compared to ($158,827) in 2007; a change of $249,690. Other income (expense) represents interest income $56,237 and other income of 34,625. While not a recurring activity, the Company's management from time to time assesses its foreign currency risks in connection with its agreements to acquire inventory and materials from its vendors and enters into contracts to hedge such risks. The Company currently has no foreign currency contracts.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2008, we had working capital of $183,108. We reported negative cash flow from operating activities of $2,325,619, negative cash flow from investing activities of $(487,267) and positive cash flow from financing of $1,630,416.
The negative cash flow from operating activities consists of $2,275,188 net loss, net with $382,470 depreciation and amortization expenses, $133,381 in amortization of deferred financing costs, $105,688 stock based compensation and fair value of re-pricing of warrants, $458,800 increase in accounts receivable, $249,494 increase in inventory, $32,149 decrease in other current liabilities, and $212,242 reduction of accounts payable.
Negative cash flow from investing activities of $(487,267) occurred primarily from acquiring additional property and equipment of $487,267 and a distribution from our variable interest entity. We reported generating net cash of $2,525,000 from stock subscriptions net with a $600,000 reduction in our line of credit and $152,691 repayment of notes payable and capital leases.
On July 11, 2008, we entered an Exchange Agreement with holders of Series F Common Stock Purchase Warrants and Series J Common Stock Purchase Warrants. Under the Exchange Agreement, the Company issued 750,000 shares of Series B Convertible Preferred Stock for the cancellation of 3,500,000 Series A Common Stock Purchase Warrants, 3,500,000 Series B Common Stock Purchase Warrants, 3,500,000 Series C Common Stock Purchase Warrants, 2,500,000 Series D Common Stock Purchase Warrants, and 2,500,000 Series E Common Stock Purchase Warrants. In addition, holders exercised 1,000,000 Series J Warrants and 2,500,000 Series F Warrants for $525,000 in exchange for 442,308 shares of Series B Convertible Preferred Stock.
In order to finance its expanding operations, the Company obtained conventional bank and lease financing, which provided the liquidity to meet its on-going and anticipated working capital requirements, as well as increase its inventory levels and invest in equipment utilized in the ordinary course of its business operations.
Based on the application of FIN 46-R, the Company is consolidating its financial statements with those of JCMD Properties LLC. The assets, liabilities, revenues, and costs and expenses of JCMD Properties LLC that are included in the combined financial statements are not the Company's. The liabilities of the VIE's will be satisfied from the cash flows of the VIE's assets and revenues belong to the VIE. However, the Company has unconditionally guaranteed to repay the mortgage loan of this consolidated entity. At September 30, 2008, the total outstanding mortgage loan balances of JCMD Properties LLC were $1,276,652.
MWW has a $800,000 line of credit, which is used to fund seasonal working capital requirements and other financing needs. The loan is due on January 31, 2009. MWW pledged its entire inventory, equipment, accounts, chattel paper, instruments, and letters of credit, documents, deposit accounts, investment property, money, rights to payment and general intangibles to secure the loan. The loan with Key Bank N.A. is a standard asset based loan agreement. The loan requires MWW to attain a ratio of Total Debt to Tangible Net Worth of less than 3.50 to 1.00 tested at the end of each fiscal year and a ratio of Operating Cash Flow to Fixed Charges of not less than 1.50 to 1.00 tested at the end of each fiscal year for the preceding 12- month period. MWW believes that it has satisfactory relationships with its creditors but in the current conditions of the credit market there are no guaranties that the agreement will be extended at the due date. As of September 30, 2008, the Company was in violation of the fixed charge ratio and change of ownership covenant. The Bank has concluded the Company was in compliance with the tangible net worth covenant assuming the tangible net worth is inclusive of the outstanding redeemable preferred stock.
MWW expects its regular capital expenditures to be approximately $160,000 for fiscal 2009. Further, MWW expects approximately $140,000 in additional capital expenditures during fiscal 2009 for Modelworxx GmbH. These anticipated expenditures are for continued investments in property, tooling, and equipment used in our business.
The independent auditors report on our September 30, 2008 financial statements included in this Form 10-K states that our difficulty in generating sufficient cash flow to meet our obligations and sustain operations raise substantial doubts about the our ability to continue as a going concern.
The Company's existence is dependent upon management's ability to develop profitable operations. In addition, at September 30, 2008, the Company was in default on its line of credit agreement with its primary secured lender. Management is devoting substantially all of its efforts to developing new markets for its products in the United States and Europe and reducing costs of operations, but there can be no assurance that the Company's efforts will be successful. The accompanying consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
In order to improve the Company's liquidity, the Company's management is actively pursuing additional equity financing through discussions with lenders, investment bankers and private investors. There can be no assurance the Company will be successful in its effort to secure additional debt or equity financing.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES - INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115 " ("SFAS No. 159"). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS No. 159 apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115 "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY Securities" applies to all entities with available-for-sale and trading securities. SFAS No. 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provision of SFAS No. 157, "FAIR VALUE Measurements". The adoption of SFAS No.159 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In June 2007, the Accounting Standards Executive Committee issued Statement of Position 07-1, "Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment
Companies" ("SOP 07-1"). SOP 07-1 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide Investment Companies (the "Audit Guide"). SOP 07-1 was originally determined to be effective for fiscal years beginning on or after December 15, 2007, however, on February 6, 2008, FASB issued a final Staff Position indefinitely deferring the effective date and prohibiting early adoption of SOP 07-1 while addressing implementation issues.
In June 2007, the FASB ratified the consensus in EITF Issue No. 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services to be Used in Future Research and Development Activities" (EITF 07-3), which requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development (R&D) activities be deferred and amortized over the period that the goods are delivered or the related services are performed, subject to an assessment of recoverability. EITF 07-3 is effective for fiscal years beginning after December 15, 2007. The Company does not expect that the adoption of EITF 07-3 did not have a material impact on its consolidated financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141(R), "BUSINESS COMBINATIONS" ("SFAS No. 141(R)"), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141R is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited and the Company is currently evaluating the effect, if any that the adoption will have on its consolidated financial position results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 160, "NON-CONTROLLING INTEREST IN CONSOLIDATED FINANCIAL STATEMENTS, AN AMENDMENT OF ARB NO. 51" ("SFAS No. 160"), which will change the accounting and reporting for minority interests, which will be re-characterized as non-controlling interests and classified as a component of equity within the consolidated balance sheets. SFAS No. 160 is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited and the Company is currently evaluating the effect, if any that the adoption will have on its consolidated financial position results of operations or cash flows.
In December 2007, the FASB ratified the consensus in EITF Issue No. 07-1, "Accounting for Collaborative Arrangements" (EITF 07-1). EITF 07-1 defines collaborative arrangements and requires collaborators to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) the other collaborators based on other applicable authoritative accounting literature, and in the absence of other applicable authoritative literature, on a reasonable, rational and consistent accounting policy is to be elected. EITF 07-1 also provides for disclosures regarding the nature and purpose of the arrangement, the entity's rights and obligations, the accounting policy for the arrangement and the income statement classification and amounts arising from the agreement. EITF 07-1 will be effective for fiscal years beginning after December 15, 2008, which will be the Company's fiscal year 2009, and will be applied as a change in accounting principle retrospectively for all collaborative arrangements existing as of the effective date. The Company has not yet evaluated the potential impact of . . .
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