MWWC Marketing Worldwide Corporation (PK)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

 (Mark one)

x

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

¨

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to _____________

 

Commission File Number: 000-50586

 

MARKETING WORLDWIDE CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE		68-0566295
(State of incorporation)		(IRS Employer ID Number)

 

2212 GRAND COMMERCE DR.

HOWELL, MICHIGAN 48855

(Address of principal executive offices)

 

631-444- 8090

(Registrant's telephone number, including area code)

 

NOT APPLICABLE

(Former name, former address and former fiscal year,

if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x Yes   o  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o No  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes     x No

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date, August 16, 2012: 4,246,397

 

MARKETING WORLDWIDE CORPORATION

 

Form 10-Q for the Quarter ended June 30, 2012

 

Table of Contents

 

	PAGE
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and September 30, 2011	3
Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2012 and 2011 (unaudited)	4
Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2012 and 2011 (unaudited)	5
Notes to Condensed Consolidated Financial Statements (unaudited)	6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	39
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	46
ITEM 4T - CONTROLS AND PROCEDURES	47
PART II - OTHER INFORMATION	47
ITEM 1 - LEGAL PROCEEDINGS	47
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	47
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES	47
ITEM 4 - MINING SAFETY DISCLOSURES	47
ITEM 5 - OTHER INFORMATION	47
ITEM 6 - EXHIBITS	48
SIGNATURES	50

 

 

MARKETING WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		June 30,				September 30,
		2012				2011
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	15,868			$	5,012
Accounts receivable, net			84,016				201,476
Inventories, net			83,862				93,303
Total current assets			183,746				299,791
Property, plant and equipment, net			957,018				1,092,686
Other assets:
Capitalized finance costs, net			-				111,496
Total assets		$	1,140,764			$	1,503,973
LIABILITIES AND  DEFICIENCY
Current liabilities:
Bank line of credits		$	-			$	21,428
Notes payable and capital leases, current portion			1,433,736				1,518,944
Accounts payable			1,789,767				1,497,101
Warranty liability			75,000				75,000
Other current liabilities			1,004,809				769,458
Current liabilities of discontinued operations			492,006				492,006
Total current liabilities			4,795,318				4,373,937
Long term debt:
Derivative liability			6,637,168				1,258,634
Warrant liability			513,636				427,266
Total liabilities			11,946,122				6,059,837
Temporary equity:
Series A convertible preferred stock, $0.001 par value;3,500,000 shares designated;  nil and 3,500,000 shares issued and outstanding as of June 30, 2012 and September 30, 2011, respectively			-				3,499,950
Permanent equity:
Deficiency
Preferred stock, $0.001 par value; 10,000,000 shares authorized
Series B convertible preferred stock, $0.001 par value, 1,200,000 shares designated; nil and 1,192,308 shares issued and outstanding as of June 30, 2012 and September 30, 2011, respectively			-				1,192
Series C convertible preferred stock, $0.001 par value, 1,000,000 shares designated; nil and 100 shares issued and outstanding as of June 30, 2012 and September 30, 2011, respectively			-				-
Series D super voting preferred stock, $0.001 par value, 1,000,000 shares designated,  90,002 and nil issued and outstanding as of June 30, 2012 and September 30, 2011, respectively			90				-
Series E 6% convertible preferred stock, $0.001 par value, 15,000 shares designated, 11,563.5 and nil shares issued and outstanding as of June 30, 2012 and September 30, 2011, respectively			12				-
Common stock, $0.00001 par value, 5,900,000,000 and 500,000,000 shares authorized as of June 30, 2012 and September 30, 2011, respectively; 2,539,879 and 238,316 shares issued and outstanding as of June 30, 2012 and September 30, 2011, respectively			25				2
Additional paid in capital			13,233,796				9,526,544
Deficit			(23,372,366	)			(16,947,859	)
Accumulated other comprehensive loss			(148,873	)			(148,873	)
Total Marketing Worldwide Corporation stockholders' deficiency			(10,287,316	)			(7,568,994	)
Non controlling interest			(518,042	)			(486,820	)
Total  deficiency			(10,805,358	)			(8,055,814	)
Total Liabilities and  Deficiency		$	1,140,764			$	1,503,973

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

 

MARKETING WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

		Three months ended June 30,								Nine months ended June 30,
		2012				2011				2012				2011
Revenue		$	175,871			$	449,235			$	574,018			$	1,309,098
Total cost of sales			291,673				370,469				913,562				1,125,513
Gross (loss) profit			(115,802	)			78,766				(339,544	)			183,585
Operating expenses:
Selling, general and administrative expenses			292,342				359,580				908,909				1,267,348
Total operating expenses			292,342				359,580				908,909				1,267,348
Loss from operations			(408,144	)			(280,814	)			(1,248,453	)			(1,083,763	)
(Loss) gain on change in fair value of derivative liability			(3,623,835	)			317,837				(2,538,814	)			923,703
Financing expenses			(718,466	)			(585,146	)			(2,154,232	)			(971,688	)
Loss on settlement of debt			(382,596	)			-				(382,596	)			(58,410	)
Other income (expense), net			-				8,130				5,684				69,443
Net loss			(5,133,041	)			(539,993	)			(6,318,411	)			(1,120,715	)
(Loss) income attributable to Non-controlling interest			(10,407	)			(10,407	)			(31,222	)			13,835
Loss attributable to Company			(5,122,634	)			(529,586	)			(6,287,189	)			(1,134,550	)
Preferred stock dividend			(17,500	)			(78,750	)			(137,318	)			(236,250	)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS		$	(5,140,134	)		$	(608,336	)		$	(6,424,507	)		$	(1,370,800	)
Loss per common share, basic and diluted		$	(3.09	)		$	(3.64	)		$	(7.24	)		$	(9.94	)
Weighted average common stock outstanding, basic and diluted			1,663,183				167,142				887,041				137,946

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

 

MARKETING WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		Nine months ended June 30,
		2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss		$	(6,318,411	)		$	(1,120,715	)
Adjustments to reconcile net loss to cash used in operations:
Depreciation and amortization			148,527				186,977
Amortization of deferred financing costs			111,496				98,948
Amortization of debt discounts			1,064,112				126,084
Non cash interest			888,736				364,836
Loss on settlement of debt			382,596				58,410
Change in fair value of derivative liability			2,538,814				(923,703	)
Fair value of vested employee options			16,500				6,148
Stock based compensation			70,500				273,209
Cancelation of previously issued common stock for services			(120,000	)			-
(Increase) decrease in operating assets:
Accounts receivable			117,460				100,093
Inventory			9,441				44,035
Other current assets			-				9,328
Other assets			-				19,400
Increase (decrease) in operating liabilities:
Accounts payable and other current liabilities			672,820				583,336
Cash used in operating activities			(417,409	)			(173,614	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment			(12,859	)			(7,547	)
Cash used in investing activities			(12,859	)			(7,547	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of Series C preferred stock			-				100,000
Repayments of lines of credit			(21,428	)			(154,759	)
Proceed from issuance of notes			495,500				355,000
Repayments of notes payable			(32,948	)			(11,764	)
Cash provided by financing activities			441,124				288,477
Net increase in cash and cash equivalents			10,856				107,316
Cash and cash equivalents, beginning of period			5,012				3,847
Cash and cash equivalents, end of period		$	15,868			$	111,163
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during year for interest		$	-			$	51,039
Cash paid during year for income taxes		$	-			$	-
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Common stock issued in settlement of debt		$	1,783,509			$	160,286
Common stock issued in settlement of preferred stock dividends		$	80,000			$	472,500
Accounts payable settled via issuance of notes payable		$	134,500			$	387,120
Preferred dividends declared		$	137,318			$	157,500
Note payable issued in exchange for Series C preferred stock		$	100,000			$	-
Issuance of Series E Preferred Stock in settlement of Series A and Series B Preferred Stocks		$	2,095,413			$	-
Common stock issued upon conversion of Series A preferred stock		$	1,808,099			$	-
Common stock issued upon conversion of Series E preferred stock		$	89,118			$	-

 

See the accompanying notes to the unaudited condensed consolidated financial statements

  

 

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

Nature of Operations

 

Marketing Worldwide Corporation (the "Company"), was incorporated under the laws of the State of Delaware in July 2003. The Company is engaged in North America through its wholly-owned subsidiaries, Marketing Worldwide LLC ("MWW"), and Colortek, Inc. (“CT”) in the design, manufacturing, painting and distribution of automotive accessories for motor vehicles in the automotive aftermarket industry and provides design services for large automobile manufacturers.  The Company has a wholly owned subsidiary in Germany, Modelworxx, GmbH, which, in February, 2010, filed insolvency in the German courts.  As of the date of this filing, the Company has not received the final determination from the German Courts. The Company has reclassified Modelworxx, GmbH fiscal year ended September 30, 2011 balances to reflect them as discontinued operations.

 

Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation have been included. Accordingly, the results from operations for the nine month period ended June 30, 2012, are not necessarily indicative of the results that may be expected for the year ending September 30, 2012. The unaudited condensed consolidated financial statements should be read in conjunction with the September 30, 2011 consolidated financial statements and footnotes thereto included in the Company's SEC Form 10-K.

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and Variable Interest Entity (“VIE”), JCMD, LLC (See note 11). All significant inter-company transactions and balances, including those involving the VIE, have been eliminated in consolidation.

 

  NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Net income (loss) per share

 

Basic and diluted income (loss) per common share is based upon the weighted average number of common shares outstanding during the period computed under the provisions of Accounting Standards Codification subtopic 260-10, Earnings per Share (“ASC 260-10”).  For the three and nine months ended June 30, 2012 and 2011, all primary dilutive common shares have been excluded since the inclusion would be anti-dilutive.

 

Such shares consist of the following at June 30, 2012 and 2011:

 

		2012				2011
Convertible debt			23,818,435				155,746
Conversion of Series A preferred stock			-				68,926
Conversion of Series B preferred stock			-				39,733
Conversion of Series C preferred stock			-				2
Conversion of Series E preferred stock			38,480,865				-
Options			8,967				9,300
Warrants			16,250				333
Totals			62,324,517				274,040

 

 

Foreign currency

 

The functional currency of the Company is the U. S. dollar. When a transaction is executed in a foreign currency, it is re-measured into U. S. dollars based on appropriate rates of exchange in effect at the time of the transaction. At each balance sheet date, recorded balances that are denominated in a currency other than the functional currency of the Companies are adjusted to reflect the current exchange rate. The related translation adjustments are included in other comprehensive income and were not material during the nine months ended June 30, 2012. The resulting foreign currency transactions gains (losses), which were not material, are included in selling, general and administration expenses in the accompanying unaudited condensed consolidated statements of operations.

 

Fair value of financial instruments

 

Cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of their short-term nature. The fair value of notes payable and short-term debt is estimated to approximate fair market value based on the current rates available to companies such as MWW.

 

Accounting for bad debt and allowances

 

Bad debts and allowances are provided based on historical experience and management's evaluation of outstanding accounts receivable. Management evaluates past due or delinquency of accounts receivable based on the open invoices aged on due date basis. The allowance for doubtful accounts at June 30, 2012 and September 30, 2011 approximated $17,200 and $20,000, respectively.

 

Reclassification

 

Certain reclassifications have been made to conform the prior period’s data to the current presentation. These reclassifications had no effect on reported net loss.

 

Accounting for variable interest entities

 

Accounting Standards Codification subtopic 810-10, Consolidation (“ASC 810-10”) discusses 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. ASC 810-10 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 entity’s 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 ASC 810-10.  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 Variable Interest Entity included in these unaudited condensed consolidated financial statements sold the only asset it owned, which was real estate subject to a lease with the Company, for $800,000 on November 30, 2010.  This sale resulted in a loss of approximately $400,000 and left a remaining liability to the Small Business Administration of approximately $500,000 which is guaranteed by the Company.  As of the date of this filing, the Company has not received any specific demands or requests for payment on this loan. This loss was recorded as an impairment loss in the September 30, 2010 consolidated financial statements.

 

 

Deferred financing costs

 

Deferred financing costs represent costs incurred in connection with obtaining the debt financing.  These costs are amortized to financing expenses over the term of the related debt using the interest rate method. The amortization for the three and nine month periods ended June 30, 2012 was $18,971 and $111,496, respectively, and for the three and nine months ended June 30, 2011 was $32,983 and $98,948, respectively.  Accumulated amortization of deferred financing costs was $712,715 and $601,219 at June 30, 2012 and September 30, 2011, respectively.

 

Recent accounting pronouncements

 

There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's unaudited condensed consolidated financial position, results of operations or cash flows.

 

NOTE 3 - GOING CONCERN MATTERS AND TRIGGERING EVENTS

 

The Company has incurred substantial recurring losses.  The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business.  As shown in the accompanying unaudited condensed consolidated financial statements during the nine month period ended June 30, 2012, the Company incurred a net loss attributable to common stockholders of approximately $6,287,000. The Company has available cash of approximately $16,000 at June 30, 2012.  During the nine months ended June 30, 2012, the Company’s operating activities used cash of approximately $417,000.  The Company’s working capital deficiency was approximately $4,612,000 and $4,074,000 as of June 30, 2012 and September 30, 2011, respectively.  The Company’s accumulated deficit was approximately $23,372,000 and $16,948,000 as of June 30, 2012 and September 30, 2011, respectively.  In addition, the Company has a stockholders’ deficit of approximately $10,805,000 and $8,056,000 at June 30, 2012 and September 30, 2011, respectively.  The Company has pledged all of its assets to Summit Financial Resources (Summit) as security for the Summit loan agreement.

 

The Company has reduced cash required for operations by reducing operating costs and reducing staff levels. In addition, the Company is working to manage its current liabilities while it continues to make changes in operations to improve its cash flow and liquidity position.

 

CT is a Class A Original Equipment painting facility and operates in a 46,000 square foot owned building in Baroda, which is in South Western Michigan. The Company invested approximately $2 million into this paint facility and expects the majority of future growth to come from this business.  The Company has restructured the management of this subsidiary and even though revenues are down, the Company has successfully gained more business opportunities than ever before.  These opportunities take time to develop before converted to revenue. CT is aggressively beginning to diversify to non-automotive paint applications (industrial equipment) which we believe will help stabilize the Company going forward.  CT currently has submitted quotes for new business opportunities aggregating approximately $20 million in revenue.

 

If the Company runs out of available capital, it might be required to pursue additional highly dilutive equity or debt issuances to finance its business in a difficult and hostile market, including possible equity financings at a price per share that might be much lower than the per share price invested by current shareholders.  No assurance can be given that any source of additional cash would be available to the Company.  If no source of additional cash is available to the Company, then the Company would be forced to significantly reduce the scope of its operations.

 

There can be no assurance that such funding initiatives will be successful and any equity placement could result in substantial dilution to current stockholders.  The above factors raise substantial doubt about the Company’s ability to continue as a going concern.  The unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

 

 

NOTE 4 – INVENTORIES

 

The inventories are stated at the lower of cost or market using the first-in, first-out method of valuation. The inventories at June 30, 2012 and September 30, 2011 are as follows:

 

		June 30,				September 30,
		2012				2011
Work in process		$	290,772			$	294,568
Finished goods			61,724				67,369
Total inventory before reserve			352,496				361,937
Less inventory reserve			(268,634	)			(268,634	)
Net inventory		$	83,862			$	93,303

 

The inventory reserve is determined after an exhaustive review and analysis of all inventories on hand.  The Company examines the likelihood of salability of each inventory item, and if there is more than 6 months supply of an item on hand, an appropriate reserve is recorded against such inventory; for cancelled or completed programs, existing inventory is 100 % reserved for.  At June 30, 2012 and September 30, 2011, the majority of the inventory reserve is for supply of product no longer in production or demand from existing customers.

 

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT

 

At June 30, 2012 and September 30, 2011, property, plant and equipment consist of the following:

 

		June 30,   2012				September 30,   2011				Range of  Estimated Life
Land		$	150,000			$	150,000			N/A
Building			800,000				800,000			40 years
Office equipment			34,645				34,645			3 – 7 years
Tooling and other equipment			1,430,499				1,417,640			7 – 10 years
Subtotal			2,415,144				2,402,285
Less accumulated depreciation			(1,458,126	)			(1,309,599	)
Net property, plant and equipment		$	957,018			$	1,092,686

 

Depreciation expense included as a charge to operations of $37,737 and $148,527 for the three and nine months ended June 30, 2012, respectively, and $60,528 and $186,977 for the three and nine months ended June 30, 2011 respectively.

 

NOTE 6 - LINE OF CREDIT

 

In August, 2009, the Company entered into a financing agreement with Summit Financial Resources L.P. (Summit) for a maximum borrowing of up to $1,000,000 maturing August 31, 2010. The arrangement is based on recourse factoring of the Company’s accounts receivables. Substantially all assets within the consolidation group have been pledged as collateral for the Summit facility.   The financing agreement was extended for one year through August 31, 2012.  The Company is evaluating the necessity of continuing this agreement and may terminate the relationship by August 31, 2012.

 

Under the arrangement, Summit typically advances to the Company 75% of the total amount of accounts receivable factored. Summit retains 25% of the outstanding factored accounts receivable as a reserve, which it holds until the customer pays the factored invoice to Summit. The cost of funds for the accounts receivable portion of the borrowings with Summit includes: (a) a collateral management fee of 0.65% of the face amount of factored accounts receivable for each period of fifteen days, or portion thereof, that the factored accounts receivable remains outstanding until payment in full is applied and (b) interest charged at the Wall Street Journal prime rate plus 1% divided by 360.  The Summit default rate is the Wall Street Journal prime rate plus 10%. The Company may be obligated to purchase the receivable back from Summit at the end of 90 days.

 

 

Under the terms of the recourse provision, the Company is required to repurchase factored receivables if they are not paid in full or are deemed no longer acceptable. Accordingly, the Company has accounted for the financing agreement as a secured borrowing arrangement and not a sale of financial assets.

 

As of June 30, 2012, the advance balance due to Summit was $nil.

 

NOTE 7 - NOTES PAYABLE

 

At June 30, 2012 and September 30, 2011, notes payable consists of the following:

 

		June 30, 2012				September 30, 2011
JCMD Mortgage loan payable in 240 monthly principal installments plus interest. The loan was secured by a second deed of trust on real property and improvements located in Howell, MI. In addition to the Company the JCMD General Partners personally guarantee the loan. The note is in default. (*)		$	489,755			$	489,755
Colortek Mortgage loan payable in monthly principal installments of $5,961 with a fixed interest rate of 6.75% per annum.  Note based on a 20 year amortization. Note is secured by first priority security interest in the business property of Colortek, Inc, the Company's wholly owned subsidiary.  (**)			561,579				587,026
Note payable issued February 19, 2011, due contingent on certain events with interest at 5% per annum, unsecured, net of unamortized debt discount of  $66,214			-				118,008
Note payable issued March 22, 2011, due on December 28, 2011 with interest at 8% per annum, unsecured, net of unamortized debt discount of $7,918			-				17,082
Note payable issued May 6, 2011, due February 10, 2012 with interest at 8% per annum, unsecured, net of unamortized debt discount of $14,250			-				15,750
Note payable issued on June 29, 2011, due July 1, 2012, with interest at 8% per annum, unsecured, net of unamortized debt discount of $nil and $186,821, respectively.			138,000				63,179
Note payable, issued on January 10, 2011, due July 10, 2011, with interest at 7% per annum, unsecured			-				127,000
Note payable issued on July 1, 2011, due  July 1, 2012, with interest at 16% per annum, unsecured, net of unamortized debt discount of $nil and $18,135, respectively.			25,000				6,865
Note payable issued on July 15, 2011, due  July 15, 2012, with interest at 16% per annum, unsecured, net of unamortized debt discount of $78,904			-				21,096
Note payable issued on July 20, 2011, due  July 20, 2012, with interest at 16% per annum, unsecured, net of unamortized debt discount of $781 and $12,041, respectively			14,219				2,959
Note payable issued on July 21, 2011, due  July 21, 2012, with interest at 16% per annum, unsecured, net of unamortized debt discount of $1,918 and $28,192, respectively			33,082				6,808
Note payable issued on July 20, 2011, due  January 31, 2012, with interest at 5% per annum, unsecured, net of unamortized debt discount of nil and  $19,720, respectively			-				57,005
Note payable issued August 16, 2011, due August 15, 2012 with interest at 16% per annum, unsecured, net of unamortized debt discount of $23,753			-				6,247
Note payable issued September 28, 2011, due  September 27, 2012 with interest at 16% per annum, unsecured, net of unamortized debt discount of $29,836			-				164
Note payable, issued December 6, 2011, due September 8, 2012, with interest at 8% per annum, unsecured, net of unamortized debt discount of $6,191			18,309				-

 

 

		June 30, 2012				September 30, 2011
Note payable, issued on February 1, 2012, November 2, 2012, with interest at 8% per annum, unsecured, net of unamortized debt discount of $16,434			31,066				-
Note payable, issued on February 15, 2012, due February 15, 2013, with interest at 10% per annum, unsecured, net of unamortized debt discount of $31,370			18,630				-
Note payable, issued on February 22, 2012, due November 22, 2012, with interest at 8% per annum, unsecured, net of unamortized debt discount of $54,418			48,082				-
Note payable, issued on April 25, 2012, due January 30, 2013, with interest at 8% per annum, unsecured, net of unamortized debt discount of $34,393			10,607
Note payable, issued on May 16, 2012, due December 31, 2012, with interest at 6% per annum, unsecured, net of unamortized debt discount of $64,279			15,721				-
Note payable, issued on May 16, 2012, due December 31, 2012, with interest at 6% per annum, unsecured, net of unamortized debt discount of $64,279			15,721				-
Note payable, issued on May 22, 2012, due on demand, with interest at 6% per annum, unsecured			1,000
Notes payable, issued on June 1, 2012, due December 31, 2012, with interest at 6% per annum, unsecured, net of unamortized debt discount of $82,264			12,965
Total			1,433,736				1,518,944
Less current portion			(1,433,736	)			(1,518,944	)
Long term portion		$	-			$	-

 

(*) In accordance with the Forbearance Agreement, the secured lender of the JCMD Mortgage Loans increased the interest rate on unpaid balances to bear interest at a floating rate of two and quarter percent (2.25%) in excess of the Bank’s Prime Rate, and upon default shall bear interest at a rate of five and one quarter percent (5.25%) in excess of the Bank’s Prime Rate.  On November 30, 2010, the real estate securing the mortgage loan payable was sold and the first deed of trust was fully retired.  The proceeds from the sale of real estate did not retire the balance of the loan secured by the second deed of trust.  There is a shortfall of approximately $490,000 that will continue to be carried as a liability to SBA and will be adjusted once the offer in compromise has been accepted.  The sale of real estate for $800,000 which was less than the carrying value of $1,210,000, resulted in the Company recording an impairment charge of approximately $410,000 for the year ended September 30, 2010.

 

(**) In accordance with the mortgage loan agreement, the Company is currently in default of certain loan covenants.

 

Note issued October 7, 2011

 

On October 7, 2011, the Company issued a $53,000 Convertible Promissory Note that matures on July 11, 2012. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 55% of the lowest three trading days 10 days prior to notice of conversion.

 

The Company identified embedded derivatives related to the Convertible Promissory Note entered into on October 7, 2011.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $91,801 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:

 

Dividend yield:			-0-	%
Volatility			425.63	%
Risk free rate:			0.11	%

 

 

The initial fair value of the embedded debt derivative of $91,801 was allocated as a debt discount up to the proceeds of the note ($53,000) with the remainder ($38,801) charged to current period operations as interest expense.

 

During the three and nine months ended June 30, 2012, the Company amortized $19,446 and $53,000 to current period operations as interest expense, respectively.

 

During the nine months ended June 30, 2012, the Company issued an aggregate of 231,838 shares of its common stock in settlement of the note payable and accrued interest.

 

Note issued November 28, 2011

 

On November 28, 2011, the Company issued a $127,000 Convertible Promissory Note payable on demand. The note bears interest at a rate of 7% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 25% of the average bid price 5 days prior to notice of conversion with a floor of $2.10 per share.

 

The Company identified embedded derivatives related to the Convertible Promissory Note entered into on November 28, 2011.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $146,682 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:

 

Dividend yield:			-0-	%
Volatility			403.66	%
Risk free rate:			0.20	%

 

The initial fair value of the embedded debt derivative of $146,682 was allocated as a debt discount up to the proceeds of the note ($127,000) with the remainder ($19,682) charged to current period operations as interest expense.

 

During the three and nine months ended June 30, 2012, the Company amortized and wrote off (upon conversion) a total of $1,086 and $127,000 to current period operations as interest expense, respectively.

 

During the nine months ended June 30, 2012, the Company issued an aggregate of 195,229 shares of common stock in settlement the convertible note and related interest.

 

Note issued November 29, 2011

 

On November 29, 2011, the Company issued a $19,005 Convertible Promissory Note that matures on November 28, 2012. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the fixed conversion rate of $0.66 per share.

 

Due to the nature of other existing convertible promissory notes, the Company could not insure sufficient shares available upon conversion demands, therefore the Company identified embedded derivatives related to the Convertible Promissory Note entered into on November 29, 2011.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $43,572 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:

 

 

Dividend yield:			-0-	%
Volatility			398.61	%
Risk free rate:			0.14	%

 

The initial fair value of the embedded debt derivative of $43,572 was allocated as a debt discount up to the proceeds of the note ($19,005) with the remainder ($24,567) charged to current period operations as interest expense.

 

During the three and nine months ended June 30, 2012, the Company amortized and wrote off (upon conversion) $ nil and $19,005 to current period operations as interest expense, respectively.

 

During the nine months ended June 30, 2012, the Company issued an aggregate of 28,796 shares of common stock in full settlement of the convertible note and related interest.

 

Note issued December 6, 2011

 

On December 6, 2011, the Company issued a $37,500 Convertible Promissory Note that matures on September 8, 2012. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 51% of the lowest three trading days 10 days prior to notice of conversion.

 

The Company identified embedded derivatives related to the Convertible Promissory Note entered into on December 6, 2011.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $76,924 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:

 

Dividend yield:			-0-	%
Volatility			399.15	%
Risk free rate:			0.11	%

 

The initial fair value of the embedded debt derivative of $76,924 was allocated as a debt discount up to the proceeds of the note ($37,500) with the remainder ($39,424) charged to current period operations as interest expense.

 

During the three and nine months ended June 30, 2012, the Company amortized and wrote off (upon conversion) $15,605 and $31,309 to current period operations as interest expense, respectively.

 

The fair value of the described embedded derivative of $74,872 at June 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:

 

Dividend yield:			-0-	%
Volatility			277.93	%
Risk free rate:			0.095	%

 

During the nine months ended June 30, 2012, the Company issued an aggregate of 149,840 shares of common stock in settlement of $13,000 of the convertible note.

 

At June 30, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $18,725 for the three months ended June 30, 2012.

 

 

Note issued December 27, 2011

 

On December 27, 2011, the Company issued a $10,887 Convertible Promissory Note that matures on December 26, 2012. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the fixed conversion rate of $0.60 per share.

 

Due to the nature of other existing convertible promissory notes, the Company could not insure sufficient shares available upon conversion demands, therefore the Company identified embedded derivatives related to the Convertible Promissory Note entered into on December 27, 2011.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $47,591 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:

 

Dividend yield:			-0-	%
Volatility			376.40	%
Risk free rate:			0.12	%

 

The initial fair value of the embedded debt derivative of $47,591 was allocated as a debt discount up to the proceeds of the note ($10,887) with the remainder ($36,704) charged to current period operations as interest expense.

 

During the three and nine months ended June 30, 2012, the Company amortized and wrote off (upon conversion) $nil and $10,887 to current period operations as interest expense, respectively.

 

During the nine months ended June 30, 2012, the Company issued an aggregate of 18,145 shares of common stock in full settlement of the convertible note and related interest.

 

Note issued January 3, 2012

 

On January 3, 2012, the Company issued a $8,998 Convertible Promissory Note that matures on January 3, 2013. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the fixed conversion rate of $0.90 per share.

 

Due to the nature of other existing convertible promissory notes, the Company could not insure sufficient shares available upon conversion demands, therefore the Company identified embedded derivatives related to the Convertible Promissory Note entered into on January 3, 2012.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $20,206 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:

 

Dividend yield:			-0-	%
Volatility			379.14	%
Risk free rate:			0.12	%

 

The initial fair value of the embedded debt derivative of $20,206 was allocated as a debt discount up to the proceeds of the note ($8,998) with the remainder ($11,208) charged to current period operations as interest expense.

 

During the three and nine months ended June 30, 2012, the Company amortized and wrote off (upon conversion) $nil and $8,998 to current period operations as interest expense, respectively.

 

 

During the nine months ended June 30, 2012, the Company issued an aggregate of 10,000 shares of common stock in full settlement of the convertible note and related interest.

 

Note issued January 17, 2012

 

On January 17, 2012, the Company issued a $11,212 Convertible Promissory Note that matures on January 17, 2013. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the fixed conversion rate of $0.90 per share.

 

Due to the nature of other existing convertible promissory notes, the Company could not insure sufficient shares available upon conversion demands, therefore the Company identified embedded derivatives related to the Convertible Promissory Note entered into on January 17, 2012.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $36,112 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:

 

Dividend yield:			-0-	%
Volatility			372.71	%
Risk free rate:			0.11	%

 

The initial fair value of the embedded debt derivative of $36,112 was allocated as a debt discount up to the proceeds of the note ($11,212) with the remainder ($24,900) charged to current period operations as interest expense.

   

During the three and nine months ended June 30, 2012, the Company amortized and wrote off (upon conversion) $nil and $11,212 to current period operations as interest expense, respectively.

 

During the nine months ended June 30, 2012, the Company issued an aggregate of 12,667 shares of common stock in full settlement of the convertible note and related interest.

 

Note issued February 1, 2012

 

On February 1, 2012, the Company issued a $47,500 Convertible Promissory Note that matures on November 2, 2012. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 51% of the lowest three trading days 10 days prior to notice of conversion.

 

The Company identified embedded derivatives related to the Convertible Promissory Note entered into on February 1, 2012.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $121,282 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:  

 

Dividend yield:			-0-	%
Volatility			350.13	%
Risk free rate:			0.13	%

 

The initial fair value of the embedded debt derivative of $121,282 was allocated as a debt discount up to the proceeds of the note ($47,500) with the remainder ($73,282) charged to current period operations as interest expense.

 

 

During the three and nine months ended June 30, 2012, the Company amortized $11,964 and $19,721 to current period operations as interest expense, respectively.

 

The fair value of the described embedded derivative of $152,254 at June 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:

 

Dividend yield:			-0-	%
Volatility			277.93	%
Risk free rate:			0.09	%

 

At June 30, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $76,455 for the three months ended June 30, 2012.

 

Note issued February 2, 2012

 

On February 2, 2012, the Company issued a $20,000 Convertible Promissory Note that matures on February 1, 2013. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the fixed conversion rate of $0.90 per share.

 

Due to the nature of other existing convertible promissory notes, the Company could not insure sufficient shares available upon conversion demands, therefore the Company identified embedded derivatives related to the Convertible Promissory Note entered into on February 2, 2012.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $50,783 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:  

 

Dividend yield:			-0-	%
Volatility			350.18	%
Risk free rate:			0.31	%

 

The initial fair value of the embedded debt derivative of $50,783 was allocated as a debt discount up to the proceeds of the note ($20,000) with the remainder ($30,783) charged to current period operations as interest expense.

 

During the three and nine months ended June 30, 2012, the Company amortized and wrote off (upon conversion) $nil and $20,000 to current period operations as interest expense, respectively.

 

During the nine months ended June 30, 2012, the Company issued an aggregate of 22,333 shares of common stock in full settlement of the convertible note and related interest.

 

Note issued February 15, 2012

 

On February 15, 2012, the Company issued a $100,000 Convertible Promissory Note that matures on December 31, 2012 in exchange for 100 shares of Series C Preferred stock. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the fixed conversion rate of $2.25 per share.

 

 

Due to the nature of other existing convertible promissory notes, the Company could not insure sufficient shares available upon conversion demands, therefore the Company identified embedded derivatives related to the Convertible Promissory Note entered into on February 15, 2012.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $52,677 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:  

 

Dividend yield:			-0-	%
Volatility			325.00	%
Risk free rate:			0.18	%

 

The initial fair value of the embedded debt derivative of $52,677 was allocated as a debt discount up to the proceeds of the note.

 

During the three and nine months ended June 30, 2012, the Company amortized and wrote off (upon conversion) $nil and $52,677 to current period operations as interest expense, respectively.

 

During the nine months ended June 30, 2012, the Company issued an aggregate of 44,649 shares of common stock in full settlement of the convertible note and related interest.

 

Note issued February 15, 2012

 

On February 15, 2012, the Company issued a $50,000 Convertible Promissory Note that matures on February 15, 2013. The note bears interest at a rate of 10% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 65% of the lowest two trading days 10 days prior to notice of conversion.

 

The Company identified embedded derivatives related to the Convertible Promissory Note entered into on February 15, 2012.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $72,072 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:  

  

Dividend yield:			-0-	%
Volatility			325.00	%
Risk free rate:			0.18	%

 

The initial fair value of the embedded debt derivative of $72,072 was allocated as a debt discount up to the proceeds of the note ($50,000) with the remainder ($22,072) charged to current period operations as interest expense.

 

During the three and nine months ended June 30, 2012, the Company amortized $12,466 and $18,630 to current period operations as interest expense, respectively.

 

The fair value of the described embedded derivative of $131,307 at June 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:

 

Dividend yield:			-0-	%
Volatility			277.93	%
Risk free rate:			0.16	%

 

 

At June 30, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $61,702 for the three months ended June 30, 2012.

 

Note issued February 21, 2012

 

On February 21, 2012, the Company issued a $64,398 Convertible Promissory Note that matures on February 1, 2013. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 52% of the lowest trading day 10 days prior to notice of conversion.

 

The Company identified embedded derivatives related to the Convertible Promissory Note entered into on February 21, 2012.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $123,822 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:  

  

Dividend yield:			-0-	%
Volatility			318.85	%
Risk free rate:			0.17	%

 

The initial fair value of the embedded debt derivative of $123,822 was allocated as a debt discount up to the proceeds of the note ($64,398) with the remainder ($59,424) charged to current period operations as interest expense.

 

During the three and nine months ended June 30, 2012, the Company amortized and wrote off (upon conversion) $nil and $64,398 to current period operations as interest expense, respectively.

 

During the nine months ended June 30, 2012, the Company issued an aggregate of 113,667 shares of common stock in full settlement of the convertible note and related interest.

 

Note issued February 22, 2012

 

On February 22, 2012, the Company issued a $102,500 Convertible Promissory Note that matures on February 22, 2013. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 65% of the lowest three trading days 10 days prior to notice of conversion.

 

The Company identified embedded derivatives related to the Convertible Promissory Note entered into on February 22, 2012.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $204,223 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:  

  

Dividend yield:			-0-	%
Volatility			318.85	%
Risk free rate:			0.17	%

 

The initial fair value of the embedded debt derivative of $204,223 was allocated as a debt discount up to the proceeds of the note ($102,500) with the remainder ($101,723) charged to current period operations as interest expense.

 

 

During the three and nine months ended June 30, 2012, the Company amortized $33,918 and $48,082 to current period operations as interest expense, respectively.

 

The fair value of the described embedded derivative of $338,472 at June 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:

 

Dividend yield:			-0-	%
Volatility			277.93	%
Risk free rate:			0.16	%

 

At June 30, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $171,572 for the three months ended June 30, 2012.

 

Note issued April 10, 2012

 

On April 10, 2012, the Company issued a $16,615 Convertible Promissory Note that matures on April 9, 2013. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the fixed conversion rate of $0.2931 per share.

 

Due to the nature of other existing convertible promissory notes, the Company could not insure sufficient shares available upon conversion demands, therefore the Company identified embedded derivatives related to the Convertible Promissory Note entered into on April 10, 2012.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $27,192 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:

 

Dividend yield:			-0-	%
Volatility			240.82	%
Risk free rate:			0.19	%

 

The initial fair value of the embedded debt derivative of $27,192 was allocated as a debt discount up to the proceeds of the note ($16,615) with the remainder ($10,577) charged to current period operations as interest expense.

   

During the three and nine months ended June 30, 2012, the Company amortized and wrote off (upon conversion) $16,615 to current period operations as interest expense.

 

During the nine months ended June 30, 2012, the Company issued an aggregate of 56,667 shares of common stock in full settlement of the convertible note and related interest.

 

Note issued April 25, 2012

 

On April 25, 2012, the Company issued a $45,000 Convertible Promissory Note that matures on January 30, 2013. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 51% of the lowest three trading days 10 days prior to notice of conversion.

 

The Company identified embedded derivatives related to the Convertible Promissory Note entered into on April 25, 2012.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $84,798 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:  

 

 

Dividend yield:			-0-	%
Volatility			257.63	%
Risk free rate:			0.18	%

 

The initial fair value of the embedded debt derivative of $84,798 was allocated as a debt discount up to the proceeds of the note ($45,000) with the remainder ($39,798) charged to current period operations as interest expense.

  

During the three and nine months ended June 30, 2012, the Company amortized $10,607 to current period operations as interest expense.

 

The fair value of the described embedded derivative of $153,595 at June 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:

 

Dividend yield:			-0-	%
Volatility			277.93	%
Risk free rate:			0.16	%

 

At June 30, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $68,797 for the three months ended June 30, 2012.

 

Note issued May 16, 2012

 

On May 16, 2012, the Company issued a $80,000 Convertible Promissory Note that matures on December 31, 2012. The note bears interest at a rate of 6% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 50% of the lowest bid price 5 trading days prior to notice of conversion. The note includes a redemption premium up to 120% of the face of the note for early payoff.

 

The Company identified embedded derivatives related to the Convertible Promissory Note entered into on May 16, 2012.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $174,938 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:  

 

Dividend yield:			-0-	%
Volatility			258.13	%
Risk free rate:			0.20	%

 

The initial fair value of the embedded debt derivative of $174,938 was allocated as a debt discount up to the proceeds of the note ($80,000) with the remainder ($94,938) charged to current period operations as interest expense.

  

During the three and nine months ended June 30, 2012, the Company amortized $15,721 to current period operations as interest expense.

 

The fair value of the described embedded derivative of $274,010 at June 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:

 

Dividend yield:			-0-	%
Volatility			277.93	%
Risk free rate:			0.16	%

 

 

At June 30, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $99,072 for the three months ended June 30, 2012.

 

Note issued May 16, 2012

 

On May 16, 2012, the Company issued a $80,000 Convertible Promissory Note that matures on December 31, 2012. The note bears interest at a rate of 6% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 50% of the lowest bid price 5 trading days prior to notice of conversion. The note includes a redemption premium up to 120% of the face of the note for early payoff.

 

The Company identified embedded derivatives related to the Convertible Promissory Note entered into on May 16, 2012.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $174,938 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:  

 

Dividend yield:			-0-	%
Volatility			258.13	%
Risk free rate:			0.20	%

 

The initial fair value of the embedded debt derivative of $174,938 was allocated as a debt discount up to the proceeds of the note ($80,000) with the remainder ($94,938) charged to current period operations as interest expense.

  

During the three and nine months ended June 30, 2012, the Company amortized $15,721 to current period operations as interest expense.

 

The fair value of the described embedded derivative of $274,010 at June 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:

 

Dividend yield:			-0-	%
Volatility			277.93	%
Risk free rate:			0.16	%

 

At June 30, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $99,072 for the three months ended June 30, 2012.

 

Note issued May 22, 2012

 

On May 22, 2012, the Company issued a $25,000 Convertible Promissory Note that is due on demand. The note bears interest at a rate of 5% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 50% of the average of the three lowest bid prices, 10 trading days prior to notice of conversion.

 

The Company identified embedded derivatives related to the Convertible Promissory Note entered into on May 22, 2012.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $24,478 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:  

 

 

Dividend yield:			-0-	%
Volatility			271.22	%
Risk free rate:			0.08	%

 

The initial fair value of the embedded debt derivative of $24,478 was allocated as a debt discount of the note.

  

During the three and nine months ended June 30, 2012, the Company amortized $24,478 to current period operations as interest expense.

 

During the nine months ended June 30, 2012, the Company issued an aggregate of 281,351 shares of common stock in settlement of $24,000 of the outstanding note payable.

 

The fair value of the described embedded derivative of $3,192 at June 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:

 

Dividend yield:			-0-	%
Volatility			277.93	%
Risk free rate:			0.09	%

 

At June 30, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $22,058 for the three months ended June 30, 2012.

 

Notes issued June 1, 2012

 

On June 1, 2012, the Company issued an aggregate of $95,229 of Convertible Promissory Notes that matures on December 31, 2012. The notes bear interest at a rate of 6% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 50% of the lowest bid price 5 trading days prior to notice of conversion. The note includes a redemption premium up to 120% of the face of the note for early payoff.

 

The Company identified embedded derivatives related to the Convertible Promissory Notes entered into on June 1, 2012.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Notes and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Notes, the Company determined a fair value of $222,153 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:  

 

Dividend yield:			-0-	%
Volatility			272.05	%
Risk free rate:			0.12	%

 

The initial fair value of the embedded debt derivative of $222,153 was allocated as a debt discount up to the proceeds of the note ($95,229) with the remainder ($126,924) charged to current period operations as interest expense.

  

During the three and nine months ended June 30, 2012, the Company amortized $12,965 to current period operations as interest expense.

 

The fair value of the described embedded derivative of $326,172 at June 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:

 

 

Dividend yield:			-0-	%
Volatility			277.93	%
Risk free rate:			0.16	%

 

At June 30, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $104,019 for the three months ended June 30, 2012.

 

Settlement of previously issued Convertible Promissory Notes

 

During the nine months ended June 30, 2012, the Company issued an aggregate of 690,105 shares of common stock in full settlement of $729,340 of convertible notes and related accrued interest.

 

NOTE 8 – OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following at June 30, 2012 and September 30, 2011:

 

		June 30, 2012				September 30, 2011
Preferred dividends payable		$	393,750			$	315,000
Consulting fees			109,153				69,500
Interest			219,000				225,530
Payroll and other			282,906				159,428
Total		$	1,004,809			$	769,458

 

NOTE 9 - WARRANT LIABILITY

 

The Company issued warrants in conjunction with the issuance with certain convertible promissory notes.  These warrants contained certain reset provisions. Therefore, in accordance with ASC 815-40 , the Company reclassified the fair value of the warrant from equity to a liability at the date of issuance.  Subsequent to the initial issuance date, the Company is required to adjust to fair value the warrant as an adjustment to current period operations.

 

The Company estimated the fair value at date of issue of the warrants issued in connection with the issuance of the convertible promissory notes to be $187,496 using the Binomial Lattice formula assuming no dividends, a risk-free interest rate of 0.99% to 1.80%, expected volatility of 406.84% to 430.39%, and expected warrant life of five years. Since the warrants have reset provisions, pursuant to ASC 815-40, the Company has recorded the fair value of the warrants as a derivative liability. The net value of the warrants at the date of issuance was recorded as a warrant liability in the amount of $187,496. Until conversion and expiration of the warrants, changes in fair value were recorded as non-operating, non-cash income or expense at each reporting date.

 

The fair value of the warrant liability of $513,636 as of June 30, 2012 was determined using the Binomial Lattice formula assuming no dividends, a risk-free interest rate of 0.72%, expected volatility of 277.93%, and expected remaining warrant life of 4.00 to 4.24 years.

 

The Company adjusted the recorded fair values of the warrants to market from September 30, 2011 resulting in a non-cash, non-operating gain of $185,784 for the nine months ended June 30, 2012.

 

 

NOTE 10 - CAPITAL STOCK

 

On May 1, 2011, the Company, by agreement of a majority of shareholders, amended the Certificate of Incorporation to increase the authorized shares of common stock .The total number of shares of stock which the corporation shall have authority to issue is: Five Hundred Ten Million (510,000,000) of which Five Hundred Million (500,000,000) shares of the par value of $.001 each shall be common stock and of which Ten Million (10,000,000) shares of the par value of $.001 each shall be preferred stock.  Further, the board of directors of this corporation, by resolution only and without further action or approval, may cause the corporation to issue one or more classes or one or more series of preferred stock within any class thereof and which classes or series may have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the board of directors, and to fix the number of shares constituting any classes or series and to increase or decrease the number of shares of any such class or series.

 

On May 1, 2012, four persons holding majority voting power of the Company took action by written consent to increase the authorized capital stock of the Company to consist of Five Billion Nine Hundred Ten Million (5,910,000,000) shares of which stock Five Billion Nine Hundred Million (5,900,000,000) shares of the par value of $.00001 each shall be common stock and of which Ten Million (10,000,000) shares of the par value of $.001 each shall be preferred stock. 

 

On July 9, 2012, subsequent to these financial statements, the Company affected a three hundred-to-one (300 to 1) reverse stock split of its issued and outstanding shares of common stock, $0.00001 par value (whereby every three hundred shares of Company’s common stock will be exchanged for one share of the Company's common stock). All references in the unaudited condensed consolidated financial statements and the notes to unaudited condensed consolidated financial statements, number of shares, and share amounts have been retroactively restated to reflect the reverse split.

 

Series A Preferred stock

 

As of June 30, 2012 and September 30, 2011, the Company had nil and 3,500,000 shares issued and outstanding, respectively.

  

On January 5, 2012, the Company issued an aggregate of 15,000 shares of common stock in exchange for 1,808,099 shares of Series A Preferred Stock.

 

On May 22, 2012, the Company entered a Securities Exchange Agreement with two investors. The Company exchanged the remaining outstanding shares of Series A Convertible Preferred Stock (1,691,901shares) and Series B Convertible Preferred Stock (1,192,308 shares) for 11,923 shares of the Company’s Series E 6% Convertible Preferred Stock.

 

In connection with the settlement of the remaining Series A Preferred stock, the Company recorded a loss on settlement of debt of $382,596. The fair value of the issued Series E Preferred stock of $2,095,401 was determined using the Binomial Lattice Model with the following assumptions:

 

Dividend yield:			-0-	%
Volatility			271.65	%
Risk free rate:			0.21	%

 

Payment of Dividends: Commencing on the date of issuance of the Series A Preferred Stock, the holders of record of shares of Series A Preferred Stock shall be entitled to receive, out of any assets at the time legally available therefore and as declared by the Board of Directors, dividends at the rate of nine percent (9%) of the stated Liquidation Preference Amount (see below) per share per annum payable quarterly. On March 5, 2012 and April 18, 2012, the Company issued an aggregate of 83,333 shares of common stock in payment of $80,000 of accrued dividends.

 

 

In accordance with Accounting Standards Codification subtopic 470-20, Debt, Debt with Conversions and Other Options (“ASC 470-20”), the Company recognized an imbedded beneficial conversion feature present in the Convertible Series A Preferred Stock. The Company allocated a portion of the proceeds equal to the fair value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $3,500,000 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature to additional paid-in capital and a charge as preferred stock dividend. The fair value of the imbedded beneficial conversion feature was determined using the Black-Scholes Option Pricing Model which approximates the fair value measured using the Binomial Lattice Model with the following assumptions: Dividend yield: $-0-; Volatility: 434.88%, risk free rate: 0.06%.

 

The Series A Preferred Stock included certain redemption features allowing the holders the right, at the holder’s option, to require the Company to redeem all or a portion of the holder’s shares of Series A Preferred Stock upon the occurrence of a Major Transaction or Triggering Event.  Major Transaction is defined as a consolidation or merger; sale or transfer of more than 50% of the Company assets or transfer of more than 50% of the Company’s common stock.  A Triggering Event is defined as a lapse in the effectiveness of the related registration statement; suspension from listing; failure to honor for conversion or going private.

 

In accordance with ASC 470-20, the Company has classified the Series A Preferred Stock outside of permanent equity.

 

In June 2008, the FASB finalized ACS 815, “Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock.” Under ASC 815, instruments which do not have fixed settlement provisions are deemed to be derivative instruments.  The Company has determined that it needs to account for these imbedded beneficial conversion features, issued to investors in 2007 for its Series A Convertible Preferred Stock, as derivative liabilities, and apply the provisions of ASC 815.  The instruments have a ratchet provision (that adjusts the exercise price in the event of a subsequent offering of equity at a lower exercise price).  As a result, the ratchet provision has been accounted for as derivative liabilities, in accordance with ASC 815.  ASC 815, “Accounting for Derivative Instruments and Hedging Activities” (“ASC 815”) requires that the fair value of these liabilities be re-measured at the end of every reporting period with the change in fair value reported in the consolidated statement of  operations.

 

ASC 815 was implemented in the first quarter of Fiscal 2010 and is reported as the cumulative effect of a change in accounting principles. At October 1, 2009, the cumulative effect on the embedded conversion feature was recorded as decrease in accumulated deficit of $1,971,115. During the nine months ended June 30, 2012, the Company converted/settled all the Series A Preferred Stock. As of the date of the conversion /settlement, derivative liability associated with the embedded conversion features of the Series A Preferred stock was revalued, the gain in the derivative liability of $141,740 for the nine months ended June 30, 2012 is included as a decrease of a loss on change of fair value of derivative liabilities in the Company’s unaudited condensed consolidated statement of operations.

 

Series B Convertible Preferred stock

 

As of June 30, 2012 and September 30, 2011, the Company had nil and 1,192,308 shares of Series B Convertible Preferred stock issued and outstanding, respectively.

 

As described above under Series A Preferred stock, On May 22, 2012, the Company exchanged all the outstanding Series B Preferred stock for Series E 6% Convertible Preferred Stock.

 

 

Series C Preferred stock

 

On May 4, 2011, the Company designated the issuance of a Series C preferred stock with the following attributes:

 

Par value:			$0.001 per share
Stated value:			$1,000 per share
Voting rights:			None

 

On February 15, 2012, the Company issued a $100,000 convertible note payable in exchange for all the outstanding Series C Preferred stock.

 

As of June 30, 2012 and September 30, 2011, the Company has nil and 100 shares of Series C Preferred stock issued and outstanding, respectively.  

 

Conversion rights:  Each share of Series C Preferred stock is convertible at a conversion price of $45.00 per share based on the initial stated value at issuance.

 

Liquidation rights:  Upon any liquidation, dissolution or winding up of the Company, the holders shall be entitled to receive out of the assets an amount equal to the Stated Value, plus any accrued and unpaid dividends before payment is made to the holders of junior securities.   Junior securities is defined as common stock or all other common stock equivalents of the Company other than those securities which are explicitly senior or pari passu to the preferred stock.

 

Series D Super Voting Preferred stock

 

On April 11, 2012. the Company designated 1,000,000 authorized preferred shares as Series D Super Voting Preferred stock with the following attributes:

 

Par value:	$0.001 per share
Stated value:	$0.001 per share
Voting rights:	10,000 votes per share when  voting on matters with the Company's common stockholders

 

Conversion rights:  none.

 

Dividend rights: none

 

Liquidation rights:  Upon any liquidation, dissolution or winding up of the Company, the holders shall be entitled to receive out of the assets an amount equal to the Stated Value.

 

On April 12, 2012, the Company issued 90,002 shares of Series D Super Voting Preferred stock to key officers, employees and consultants, valued at $40,501.

 

Series E 6% Convertible Preferred Stock

 

On May 24, 2012. the Company designated 15,000 authorized preferred shares as Series E Convertible Preferred Stock with the following attributes:.

 

Par value:			$0.001 per share
Stated value:			$100 per share
Voting rights:			None

 

 

Conversion rights:  Each share of Series E 6% Convertible Preferred stock is convertible at any time at the election of the holder into that number of shares of the Company's common stock determined by dividing the Stated value of such shares of preferred stock into the conversion price. The conversion price is defined as fifty percent (50%) of the lowest closing bid price of the Company's common stock during five (5) trading days immediately preceding a conversion date.

 

Dividend rights: Holders share be entitled to receive cumulative dividends at a rate per share of 6% per annum, payable in arrears on June 30 and December 31 and on each conversion date in cash or at the Company's irrevocable option, shares of the Company's common stock. The number of shares issuable is defined as 50% of the previous ten (10) day variable weighted average price of the Company's common stock, with certain limitations

 

Dividends on the Series E 6% Convertible Preferred stock shall accrue daily commencing on the original issuance date and shall be deemed to accrue from such date whether or not earned or declared and whether or not there are profits, surplus or other funds of the Company legally available for the payment of dividends.

 

Liquidation rights:  Upon any liquidation, dissolution or winding up of the Company, the holders shall be entitled to receive out of the assets an amount equal to the Stated Value, plus any accrued and unpaid dividends before payment is made to the holders of junior securities.   Junior securities is defined as common stock or all other common stock equivalents of the Company other than those securities which are explicitly senior or pari passu to the preferred stock.

 

On May 24, 2012, the Company issued an aggregate of 11,923 shares of Series E 6% Convertible Preferred stock in exchange for all of the outstanding Series A Preferred stock and Series B Preferred stock.

 

The Company identified embedded derivatives related to the Series E 6% Convertible Preferred stock issued on May 24, 2012.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the issuance date of the Series E 6% Convertible Preferred stock and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Note, the Company determined a fair value of $2,095,401 of the embedded derivative.  The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:  

 

Dividend yield:			-0-	%
Volatility			271.65	%
Risk free rate:			0.21	%

 

The Company allocated the determined fair value of the Series E 6% Convertible Preferred stock based on the carrying value of the Series B preferred stock and the fair value of the Series A preferred stock (based on the underlying conversion feature) and accordingly recorded a loss on settlement of debt associated Series A preferred stock (debt) of $382,596 and a charge to equity of $19,774 associated with the Series B preferred stock.

 

During the nine months ended June 30, 2012, the Company issued an aggregate of 336,970 shares of its common stock in exchange for 359.5 shares of Series E 6% Convertible Preferred stock.

 

At June 30, 2012, the fair value of the described embedded derivative of $4,256,068 was determined using the Binomial Lattice Model with the following assumptions:

 

Dividend yield:			-0-	%
Volatility			277.93	%
Risk free rate:			0.21	%

 

At June 30, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $2,160,667 for the three months ended June 30, 2012.

 

 

Common stock

 

On October 3, 2011, the Company issued 6,494 shares of common stock in exchange for a convertible note and related accrued interest of $15,000.  These shares were valued at $4.20 per share, which was the trading price on October 3, 2011.

 

On October 5, 2011, the Company issued 5,556 shares of common stock in exchange for a convertible note and related accrued interest of $10,000.  These shares were valued at $3.60 per share, which was the trading price on October 5, 2011.

 

On October 7, 2011, the Company issued 11,087 shares of common stock in exchange for a convertible note and related accrued interest of $28,000.  These shares were valued at $3.61 per share, which was the trading price on October 7, 2011.

 

On October 26, 2011, the Company issued 12,064 shares of common stock in exchange for a convertible note and related accrued interest of $26,160.  These shares were valued at $3.10 per share, which was the trading price on October 26, 2011.

 

On October 27, 2011, the Company issued 2,075 shares of common stock in exchange for a convertible note and related accrued interest of $4,500.  These shares were valued at $3.10 per share, which was the trading price on October 27, 2011.

 

On November 8, 2011, the Company issued 6,667 shares of common stock in exchange for services valued at $10,000.  These shares were valued at $1.50 per share, which was the trading price on November 8, 2011

 

On November 11, 2011, the Company issued 10,000 shares of common stock in exchange for a convertible notes and related accrued interest of $30,000.  These shares were valued at $3.10 per share, which was the trading price on November 11, 2011.

 

On November18, 2011, the Company received 2,000 shares of common stock previously issued for services valued at $120,000.  These returned shares were canceled and returned to authorized and were valued at $60.00 per share, which was the trading price at initial issuance on February 17, 2010.

 

On November 21, 2011, the Company issued an aggregate of 18,931 shares of common stock in exchange for convertible notes and related accrued interest of $19,800.  These shares were valued at $2.10 per share, which was the trading price on November 21, 2011.

 

On November 22, 2011, the Company issued 8,642 shares of common stock in exchange for a convertible note and related accrued interest of $7,000.  These shares were valued at $1.50 per share, which was the trading price on November 22, 2011.

 

On November 28, 2011, the Company issued 8,000 shares of common stock in exchange for a convertible note and related accrued interest of $6,000.  These shares were valued at $1.53 per share, which was the trading price on November 28, 2011.

 

On November 29, 2011, the Company issued an aggregate of 33,462 shares of common stock in exchange for convertible notes and related accrued interest of $22,505.  These shares were valued at $1.50 per share, which was the trading price on November 29, 2011.

 

On November 30, 2011, the Company issued an aggregate of 14,227 shares of common stock in exchange for convertible notes and related accrued interest of $11,500.  These shares were valued at $1.74 per share, which was the trading price on November 29, 2011.

 

 

On December 6, 2011, the Company issued an aggregate of 2,464 shares of common stock in exchange for convertible notes and related accrued interest of $500.  These shares were valued at $1.20 per share, which was the trading price on December 6, 2011.

 

On December 15, 2011, the Company issued 6,667 shares of common stock in exchange for services valued at $20,000.  These shares were valued at $3.00 per share, which was the trading price on December 15, 2011

 

On December 19, 2011, the Company issued an aggregate of 8,791 shares of common stock in exchange for convertible notes and related accrued interest of $6,000.  These shares were valued at $1.02 per share, which was the trading price on December 19, 2011.

 

On December 19, 2011, the Company issued an aggregate of 8,791 shares of common stock in exchange for convertible notes and related accrued interest of $6,000.  These shares were valued at $1.56 per share, which was the trading price on December 19, 2011.

 

On December 27, 2011, the Company issued 18,145 shares of common stock in exchange for a convertible note and related accrued interest of $10,887.  These shares were valued at $2.70 per share, which was the trading price on December 27, 2011.

 

On January 3, 2012, the Company issued 12,554 shares of common stock in exchange for a convertible note and related accrued interest of $14,500.  These shares were valued at $2.10 per share, which was the trading price on January 3, 2012.

 

On January 5, 2012, the Company issued an aggregate of 15,000 shares of common stock in exchange for 1,808,099 shares of Series A Preferred stock.

 

On January 12, 2012, the Company issued 17,460 shares of common stock in exchange for a convertible note and related accrued interest of $22,000.  These shares were valued at $3.00 per share, which was the trading price on January 12, 2012.

 

On January 12, 2012, the Company issued 10,000 shares of common stock in exchange for a convertible note and related accrued interest of $8,998.  These shares were valued at $3.00 per share, which was the trading price on January 12, 2012.

 

On January 24, 2012, the Company issued 12,667 shares of common stock in exchange for a convertible note and related accrued interest of $11,212.  These shares were valued at $2.25 per share, which was the trading price on January 24, 2012.

 

On January 24, 2012, the Company issued 44,309 shares of common stock in exchange for a convertible note and related accrued interest of $58,760.  These shares were valued at $2.25 per share, which was the trading price on January 24, 2012.

 

On February 2, 2012, the Company issued 22,333 shares of common stock in exchange for a convertible note and related accrued interest of $20,000.  These shares were valued at $2.10 per share, which was the trading price on February 2, 2012.

 

On February 10, 2012, the Company issued 49,069 shares of common stock in exchange for a convertible note and related accrued interest of $58,000.  These shares were valued at $1.80 per share, which was the trading price on February 10, 2012.

 

On February 16, 2012, the Company issued 25,000 shares of common stock in exchange for a convertible note and related accrued interest of $19,744.  These shares were valued at $1.50 per share, which was the trading price on February 16, 2012.

 

 

On February 21, 2012, the Company issued 30,000 shares of common stock in exchange for a convertible note and related accrued interest of $18,000.  These shares were valued at $1.50 per share, which was the trading price on February 21, 2012.

  

On February 23, 2012, the Company issued 88,265 shares of common stock in exchange for a convertible note and related accrued interest of $107,990.  These shares were valued at $1.20 per share, which was the trading price on February 23, 2012.

 

On February 27, 2012, the Company issued 26,423 shares of common stock in exchange for a convertible note and related accrued interest of $23,781.  These shares were valued at $1.23 per share, which was the trading price on February 27, 2012.

 

On February 28, 2012, the Company issued 17,027 shares of common stock in exchange for a true up of a convertible note and related accrued interest.  These shares were valued at $1.20 per share, which was the trading price on February 28, 2012.

 

On February 29, 2012, the Company issued 27,333 shares of common stock in exchange for a convertible note and related accrued interest of $19,988.  These shares were valued at $1.20 per share, which was the trading price on February 29, 2012.

 

On March 5, 2012, the Company issued 32,110 shares of common stock in exchange for a convertible note and related accrued interest of $72,249.  These shares were valued at $1.41 per share, which was the trading price on March 5, 2012.

 

On March 5, 2012, the Company issued 33,333 shares of common stock as payment on Series A Preferred stock dividend of $50,000.  These shares were valued at $1.50 per share, which was the trading price on March 5, 2012.

 

On March 7, 2012, the Company issued 35,667 shares of common stock in exchange for a convertible note and related accrued interest of $21,398.  These shares were valued at $1.50 per share, which was the trading price on March 7, 2012.

 

On March 15, 2012, the Company issued 26,667 shares of common stock in exchange for a convertible note and related accrued interest of $12,740.  These shares were valued at $0.78 per share, which was the trading price on March 15, 2012.

 

On March 15, 2012, the Company issued 12,539 shares of common stock in exchange for a convertible note and related accrued interest of $28,214.  These shares were valued at $0.78 per share, which was the trading price on March 15, 2012.

 

On March 19, 2012, the Company issued 48,000 shares of common stock in exchange for a convertible note and related accrued interest of $25,000.  These shares were valued at $1.02 per share, which was the trading price on March 19, 2012.

 

On March 19, 2012, the Company issued 44,397 shares of common stock in exchange for a convertible note and related accrued interest of $21,000.  These shares were valued at $1.02 per share, which was the trading price on March 19, 2012.

 

On March 19, 2012, the Company issued 11,121 shares of common stock in exchange for a convertible note and related accrued interest of $5,260.  These shares were valued at $1.02 per share, which was the trading price on March 19, 2012.

 

On March 27, 2012, the Company issued 23,333 shares of common stock in exchange for a convertible note and related accrued interest of $8,645.  These shares were valued at $0.90 per share, which was the trading price on March 27, 2012.

 

 

 On March 27, 2012, the Company issued 56,834 shares of common stock in exchange for a convertible note and related accrued interest of $20,000.  These shares were valued at $0.90 per share, which was the trading price on March 27, 2012.

 

On April 16, 2012, the Company issued 26,799 shares of common stock in exchange for a convertible note and related accrued interest of $8,884.  These shares were valued at $0.60 per share, which was the trading price on April 16, 2012.

 

On April 18, 2012, the Company issued 54,545 shares of common stock in exchange for a convertible note and related accrued interest of $18,000.  These shares were valued at $1.35 per share, which was the trading price on April 18, 2012.

 

On April 18, 2012, the Company issued 50,000 shares of common stock as payment on Series A Preferred stock dividend of $30,000.  These shares were valued at $0.60 per share, which was the trading price on April 18, 2012.

 

On April 18, 2012, the Company issued 56,667 shares of common stock in exchange for a convertible note and related accrued interest of $16,615.  These shares were valued at $1.05 per share, which was the trading price on April 18, 2012.

 

On April 23, 2012, the Company issued 28,070 shares of common stock in exchange for a convertible note and related accrued interest of $8,000.  These shares were valued at $0.52 per share, which was the trading price on April 23, 2012.

 

On April 25, 2012, the Company issued 28,736 shares of common stock in exchange for a convertible note and related accrued interest of $7,500.  These shares were valued at $0.47 per share, which was the trading price on April 25, 2012.

 

On April 26, 2012, the Company issued 28,736 shares of common stock in exchange for a convertible note and related accrued interest of $7,500.  These shares were valued at $0.47 per share, which was the trading price on April 26, 2012.

 

On April 27, 2012, the Company issued 27,027 shares of common stock in exchange for a convertible note and related accrued interest of $6,000.  These shares were valued at $0.40 per share, which was the trading price on April 27, 2012.

 

On April 27, 2012, the Company issued 27,397 shares of common stock in exchange for a convertible note and related accrued interest of $6,000.  These shares were valued at $0.40 per share, which was the trading price on April 27, 2012.

 

On May 1, 2012, the Company issued 27,397 shares of common stock in exchange for a convertible note and related accrued interest of $6,000.  These shares were valued at $0.40 per share, which was the trading price on May 1, 2012.

 

On May 2, 2012, the Company issued 27,397 shares of common stock in exchange for a convertible note and related accrued interest of $6,000.  These shares were valued at $0.40 per share, which was the trading price on May 2, 2012.

 

On May 3, 2012, the Company issued 25,114 shares of common stock in exchange for a convertible note and related accrued interest of $5,500.  These shares were valued at $0.40 per share, which was the trading price on May 3, 2012.

 

On May 4, 2012, the Company issued 11,963 shares of common stock in exchange for a convertible note and related accrued interest of $500.  These shares were valued at $0.40 per share, which was the trading price on May 4, 2012.

 

 

On May 8, 2012, the Company issued 26,667 shares of common stock in exchange for a convertible note and related accrued interest of $6,600.  These shares were valued at $0.45 per share, which was the trading price on May 8, 2012.

 

On May 17, 2012, the Company issued 26,794 shares of common stock in exchange for a convertible note and related accrued interest of $8,400.  These shares were valued at $0.81 per share, which was the trading price on May 17, 2012.

 

On May 25, 2012, the Company issued 27,273 shares of common stock in exchange for a convertible note and related accrued interest of $12,000.  These shares were valued at $0.81 per share, which was the trading price on May 25, 2012.

 

On May 30, 2012, the Company issued 77,519 shares of common stock in exchange for a convertible note and related accrued interest of $12,000.  These shares were valued at $0.45 per share, which was the trading price on May 30, 2012.

 

On May 30, 2012, the Company issued 146,970 shares of common stock in exchange for 242.50 shares of Series E 6% Convertible Preferred stock.  These shares were valued at $0.39 per share, which was the trading price on May 30, 2012.

 

On June 5, 2012, the Company issued 131,313 shares of common stock in exchange for a convertible note and related accrued interest of $26,000.  These shares were valued at $0.36 per share, which was the trading price on June 5, 2012.

 

On June 14, 2012, the Company issued 72,917 shares of common stock in exchange for a convertible note and related accrued interest of $7,000.  These shares were valued at $0.15 per share, which was the trading price on June 14, 2012.

 

On June 15, 2012, the Company issued 100,000 shares of common stock in exchange for 90.0 shares of Series E 6% Convertible Preferred stock.  These shares were valued at $0.21 per share, which was the trading price on June 15, 2012.

 

On June 18, 2012, the Company issued 88,889 shares of common stock in exchange for a convertible note and related accrued interest of $8,000.  These shares were valued at $0.21 per share, which was the trading price on June 18, 2012.

 

On June 18, 2012, the Company issued 76,923 shares of common stock in exchange for a convertible note and related accrued interest of $6,000.  These shares were valued at $0.15 per share, which was the trading price on June 18, 2012.

 

On June 26, 2012, the Company issued 114,943 shares of common stock in exchange for a convertible note and related accrued interest of $4,000.  These shares were valued at $0.12 per share, which was the trading price on June 26, 2012.

 

On June 26, 2012, the Company issued 90,000 shares of common stock in exchange for 27.0 shares of Series E 6% Convertible Preferred stock.  These shares were valued at $0.12 per share, which was the trading price on June 26, 2012.

 

As of June 30, 2012 and September 30, 2011, the Company has 2,539,879 and 238,316 shares of common stock issued and outstanding, respectively.

 

 

NOTE 11 - STOCK OPTIONS AND WARRANTS

 

Employee Stock Options

 

The following table summarizes the options outstanding and the related prices for the shares of the Company's common stock issued to employees of the Company as of June 30, 2012:

 

								Options Outstanding				Options Exercisable
Exercise Price				Number Outstanding				Weighted Average Remaining Contractual Life (Years)				Weighted Average Exercise Price				Number Exercisable
$	5.10				7,333				8.90			$	5.10				3,667
$	90.00				1,633				5.15			$	90.00				1,633
$	20.57				8,966				8.22			$	20.55				5,300

 

The fair value of all employee options vesting charged to operations in the three and nine months ended June 30, 2012 was $5,500 and $16,500, respectively and $3,008 and $6,148 for the three and nine months ended June 30, 2011.

 

Transactions involving options issued to employees are summarized as follows:

 

		Weighted Average				Weighted Average Exercise
		Number of Options				Price per Share
Outstanding, September 30, 2010			1,967			$	90.00
Granted			7,333				5.10
Exercised			-				-
Canceled or expired			(334	)			(90.00	)
Outstanding, September 30, 2011			8,966				20.55
Granted			-				-
Exercised			-				-
Canceled or expired			-				-
Outstanding, June 30, 2012			8,966			$	20.55

 

Warrants

 

The following table summarizes the warrants outstanding as of June 30, 2012:

 

				Warrants Outstanding												Warrants Exercisable
								Weighted Average Remaining				Weighted Average				Weighted
				Number				Contractual				Exercise				Number				Average
Exercise Price				Outstanding				Life (Years)				Price				Exercisable				Exercise Price
$	6.00				10,000				4.18			$	6.00				10,000			$	6.00
$	12.00				6,250				4.03			$	12.00				6,250			$	12.00
$	8.31				16,250				4.13			$	8.31				16,250			$	8.31

 

 

Transactions involving warrants are summarized as follows:

 

		Weighted Average Number of Shares				Price per Share
Outstanding, September 30, 2010			333			$	90.00
Granted			41,250				6.90
Exercised			(16,667	)			3.00
Canceled or expired			(333	)			(90.00	)
Outstanding, September  30, 2011			24,583				9.00
Granted			-				-
Exercised			-				-
Canceled or expired			(8,333	)			(12.00	)
Outstanding, June 30, 2012			16,250			$	8.31

 

In connection with the issuance of promissory notes, the Company issued an aggregate of 16,250 warrants (net of cancelations of 8,333) exercisable five years from the date of issuance at $6.00 to $12.00 per share with certain reset provisions. The fair value of the warrants were determined at the date of issuance and adjusted to fair value to current period operations at June 30, 2012 with the offset to warrant liability using the binomial lattice model.

 

NOTE 12 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES

 

On June 6, 2005 and August 8, 2005, JCMD Properties LLC, an entity controlled by the Company's former Chief Executive and Chief Operating officers respectively ("JCMD"), entered into a Secured Loan Agreement with a financial institution, in connection with the financing of real property and improvements ("property"). This agreement is guaranteed by the Company.

 

The property was leased to the Company under a long term operating lease beginning on January 1, 2005. Under the loan agreements, JCMD is obligated to make periodic payments of principal repayments and interest. The Company has no equity interest in JCMD or the property.

 

Based on the terms of the lending agreement, the Company determined that JCMD was a variable interest entity ("VIE") and the Company was the primary beneficiary under ASC 810-10 since JCMD did not have sufficient equity at risk for the entity to finance its activities.

 

 ASC 810-10 requires that an enterprise consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the entity's expected losses if they occur. Accordingly, the Company adopted ASC 810-10 and consolidated JCMD as a VIE, regardless of the Company not having an equity interest in JCMD.  Since JCMD is owned by two of the former principals of MWW, MWW has guaranteed the indebtedness of JCMD for the real estate occupied by MWW, and the two principals of JCMD do not have the ability to repay the loan, the Company, in accordance with ASC 810-10 has consolidated the activities of JCMD into the presented unaudited condensed consolidated financial statements.

 

Included in the Company's unaudited condensed consolidated balance sheets at June 30, 2012 and September 30, 2011are the following net assets of JCMD:

 

 

		June 30, 2012				September 30, 2011
ASSETS (JCMD)
Accounts receivable, prepaid expenses and other current assets		$	193,433			$	193,433
Total current assets			193,433				193,433
Total assets		$	193,433			$	193,433
LIABILITIES:
Current portion of long term debt		$	489,755			$	489,755
Accounts payable and accrued liabilities			221,720				190,498
Total current liabilities			711,475				680,253
Total deficit			(518,042	)			(486,820	)
Total liabilities and deficit		$	193,433			$	193,433

 

Consolidated results of operations for the three months ended June 30, 2012 and 2011 include the following:

 

		2012				2011
Revenues		$	-			$	-
Cost and expenses - real estate: Operating expenses, net			-				(9,011	)
Interest, net			(10,407	)			(19,418	)
Total costs and expenses			10,407				(10,407	)
Operating (loss) income-Real estate		$	(10,407	)		$	(10,407	)

 

Consolidated results of operations for the nine months ended June 30, 2012 and 2011 include the following:

 

		2012				2011
Revenues		$	-			$	34,000
Cost and expenses - real estate: Operating expenses, net			-				755
Interest, net			(31,222	)			19,410
Total costs and expenses			31,222				(20,165	)
Operating (loss) income-Real estate		$	(31,222	)		$	13,835

 

The Variable Interest Entity owned by JCMD and included in these unaudited condensed consolidated financial statements sold the only asset it owned, which was real estate that was under a lease with the Company, for $800,000 on November 30, 2010.  This sale resulted in a net loss of approximately $400,000 and left a remaining liability to the Small Business Administration of approximately $500,000 which is guaranteed by the Company.  This loss of $409,823 was recorded as an impairment loss in the September 30, 2010 consolidated financial statements.

 

NOTE 13- FAIR VALUE OF FINANCIAL INSTRUMENTS

 

ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value: 

 

 

 Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

  

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.

 

Items recorded or measured at fair value on a recurring basis in the accompanying unaudited condensed consolidated financial statements consisted of the following items as of June 30, 2012:  

 

						Fair Value Measurements at June 30, 2012 using:
		June 30, 2012				Quoted Prices  in Active  Markets for  Identical  Assets  (Level 1)				Significant  Other  Observable  Inputs (Level 2)				Significant  Unobservable  Inputs  (Level 3)
Liabilities:
Debt derivative liabilities		$	6,637,168				-				-			$	6,637,168
Warrant liabilities		$	513,636				-				-			$	513,636

 

The debt derivative  and warrant liabilities are measured at fair value using quoted market prices and estimated volatility factors based on historical prices for the Company’s common stock and are classified within Level 3 of the valuation hierarchy.

 

 

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of June 30, 2012:

 

		Debt Derivative Liability				Warrant Liability
Balance, October 1, 2010		$	1,186,670			$	-
Initial fair value of debt derivatives at note issuances			1,484,806				-
Initial fair value of warrant liability			-				187,496
Mark-to market at September 30, 2011:
-Embedded debt derivatives			(367,912	)			-
-Reset provisions relating to Series A preferred stock			(1,044,930	)			-
-Reset provisions related to warrants			-				239,770
Balance, September 30, 2011			1,258,634				427,266
Transfers to (from) liabilities due to conversions			(866,141	)			(99,414	)
Initial fair value of debt derivatives at note and preferred stock issuances			3,891,645				-
Mark-to-market at June 30, 2012:
- Embedded debt derivatives			334,103				-
- Reset provisions relating to Series A preferred stock			(141,740	)			-
-Reset provisions relating to Series E preferred stock			2,160,667
-Reset provisions relating to warrants			-				185,784
Balance, June 30, 2012		$	6,637,168			$	513,636
Net loss for the period included in earnings relating to the liabilities held at June 30, 2012		$	(2,353,030	)		$	(185,784	)

 

Level 3 Liabilities are comprised of our bifurcated convertible debt features on our convertible notes and reset provisions contained within our Series A Preferred stock, Series E Preferred stock and certain warrants.

 

NOTE 14– DISCONTINUED OPERATIONS

 

On February 25, 2010, the Company discontinued operations of its wholly owned subsidiary; MW Global Limited which owns 100% of the outstanding ownership and economic interest in Modelworxx GmbH.  The financial results of MW Global are presented separately in the consolidated statements of operations as discontinued operations for all periods presented. The assets and liabilities of this business are reflected as assets and liabilities from discontinued operations in the consolidated balance sheets for all periods presented.  The Company does not expect to incur any ongoing costs associated with this discontinued operations.

 

The assets and liabilities of the discontinued operations as of June 30, 2012 and September 30, 2011 were as follows:

 

Assets:  

 

		June 30, 2012				September 30, 2011
Cash		$	-			$	-
Accounts receivable			-				-
Inventories			-				-
Prepaid expenses and other assets			-				-
Total current assets		$	-			$	-
Other assets of discontinued operations			-				-
Assets of discontinued operations		$	-			$	-
Liabilities:
Accounts payable			492,006				492,006
Line of credit			-				-
Liabilities of discontinued operations		$	492,006			$	492,006

 

 

There were no operation activities for operations for the periods presented.

 

NOTE 15 - SUBSEQUENT EVENTS

 

 In July and August 2012, the Company issued an aggregate of 588,327 shares of its common stock in settlement of $7,450 of convertible notes and related interest.

 

In July and August 2012, the Company issued an aggregate of 1,117,941 shares of its common stock in conversion of 134.35 shares of the Company's Series E 6% Convertible Preferred stock.

 

On July 31, 2012, the Company issued a $50,000 convertible promissory note due March 31, 2013 with interest at 8% per annum, due at maturity.

 

On August 2, 2012, the Company issued a $20,000 convertible promissory note due May 6, 2013 with interest at 8% per annum, due at maturity.

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

THIS REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE INDICATED BY WORDS SUCH AS "ANTICIPATES," "EXPECTS," "BELIEVES," "INTENDS," "PLANS," "ESTIMATES," "PROJECTS" AND SIMILAR EXPRESSIONS. THESE STATEMENTS REPRESENT OUR EXPECTATIONS BASED ON CURRENT INFORMATION AND ASSUMPTIONS. FORWARD-LOOKING STATEMENTS ARE INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE  WHICH ARE ANTICIPATED OR PROJECTED AS A RESULT OF CERTAIN RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO A NUMBER OF FACTORS, SUCH AS ECONOMIC AND MARKET CONDITIONS; THE PERFORMANCE OF THE AUTOMOTIVE AFTERMARKET SECTOR; CHANGES IN BUSINESS RELATIONSHIPS WITH OUR MAJOR CUSTOMERS AND IN THE TIMING, SIZE AND CONTINUATION OF OUR CUSTOMERS' PROGRAMS; THE ABILITY OF OUR CUSTOMERS TO ACHIEVE THEIR PROJECTED SALES; COMPETITIVE PRODUCT AND PRICING PRESSURES; INCREASES IN PRODUCTION OR MATERIAL COSTS THAT CANNOT BE RECOUPED IN PRODUCT PRICING; SUCCESSFUL INTEGRATION OF ACQUIRED BUSINESSES; PRODUCT LIABILITY, AS WELL AS OTHER RISKS AND UNCERTAINTIES, SUCH AS THOSE DESCRIBEDUNDER QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND THOSE DETAILED HEREIN AND FROM TIME TO TIME IN OUR FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THOSE FORWARD-LOOKING STATEMENTS ARE MADE ONLY AS OF THE DATE HEREOF, AND WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE THE FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS FORM 10-Q

 

Marketing Worldwide Corporation

 

Marketing Worldwide Corporation, a Delaware corporation ("MWWC” "We" "Us" "Our" or the "Company"), was incorporated on July 21, 2003. MWWC's headquarters are in Howell, Michigan. MWWC operates through the holding company structure and conducts its business operations through our wholly owned subsidiaries Colortek, Inc. (“CT”) and Marketing Worldwide, LLC (“MWW”).

 

In previous reporting periods, the Company had a 100 % German subsidiary, Modelworxx, GmbH (“MWX”).  As the direct result from the world-wide economic recession, MWX was forced to file insolvency in the German legal system.  This filing was done in February, 2010 and MWWC has not been provided any final determination from the German courts and does not expect to receive any further communication..  The Company reported this transaction as discontinued operations in the reported consolidated financial statements.

 

Marketing Worldwide, LLC (“MWW”)

 

MWW is a global design, engineering, manufacturer and fulfillment firm serving some of the world’s leading automotive and industrial manufacturers, providing products and services to Automotive and Industrial Original Equipment Manufacturers along with accessories for the customization of vehicles and delivers its products to certain Vehicle Processing Centers primarily in North America.  MWW operates in a 23,000 square foot leased building in Howell Michigan.

 

The primary automotive accessory products provided by MWW are blow-molded spoilers (bridge and lip), front and rear fascia systems, side skirts, door panels, extruded body-side moldings and interior dash components.  During 2011, we have identified several new business partners to drive more product sales and expect fiscal year 2012 to be greater than 2011.

 

 

MWW’s programs are sold not only to Automotive and Industrial Original Equipment Manufacturers but also directly to vehicle processing centers and distributors located primarily in North America. These vehicle processing centers and distributors receive a continuous stream of new vehicles from the foreign and domestic automobile manufacturers for accessorization, customization, and subsequently, distribution into the domestic dealer distribution network. Distributors also sell MWW’s accessories directly to their dealers and end customers.  The industrial partners are expecting just-in time inventory delivery to their large assembly plants in the U.S. and Europe.

 

MWW's business model empowers its customers to make the selection of various accessories (sold by MWW) later in the production cycle, thus improving time to market for their automobiles and faster reaction to the dynamically changing demand of its customers. The principal MWW products sold during the last two fiscal years include Automotive Body Components such as:

 

* Rear Deck Spoilers

* Body Side Moldings

* Front Fascia Systems

* Side Skirts

* Door Panels

* Interior Components 

 

Several of the vehicles MWW currently provides accessories to are changing models next year and will provide additional growth opportunities. Based on expertise and space available in its Baroda plant,  MWW is also negotiating to provide fulfillment activities for new customers, going beyond the Company’s original business plan, meaning MWW will receive, store and ship products that are designed and manufactured by other unrelated companies.

 

Colortek, Inc. (“CT”)

 

CT is a wholly owned Class A Original Equipment painting facility and operates in a 46,000 square foot owned building in Baroda, which is in South Western Michigan. We invested approximately $2 million into this paint facility and expect the majority of our future growth to come from this business.  We have restructured the management of this subsidiary and have successfully gained more business opportunities than ever before.  CT is aggressively beginning to diversify to non-automotive paint applications (household goods and construction equipment) which we believe will help stabilize the Company going forward during 2012.

 

GENERAL OVERVIEW

 

MWW operates in a niche market of the supply chain for new passenger motor vehicles primarily in the United States and Canada. 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 fuel costs, and new environmental regulations. Growth opportunities for the Company include expanding its geographical coverage and increasing its penetration of existing markets 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.

 

Challenges currently facing the Company include managing its growth and controlling costs. 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:

 

·            Ability to continue increasing sales opportunities

·            Ability to convert sales opportunities to actual revenue

·            Ability to continue controlling our selling, general and administrative costs

·            Ability to obtain funding adequate to satisfy past obligations and grow future opportunities

 

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 consolidated 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

o      Derivative liabilities

 

ACCOUNTING FOR VARIABLE INTEREST ENTITIES

 

Accounting Standards Codification subtopic 810-10, Consolidation (“ASC 810-10”) discusses 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. ASC 810-10 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 ASC 810-10.  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.

 

 

REVENUE RECOGNITION

 

For revenue from products and services, the Company recognizes revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10”).  ASC 605-10 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.

 

ASC 605-10 incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arrangements (“ASC 605-25”).  ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.  The effect of implementing 605-25 on the Company’s financial position and results of operations was not significant.

 

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 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. There was $17,200 and $20,000 allowance for doubtful accounts at June 30, 2012 and September 30, 2011, respectively.

  

STOCK BASED COMPENSATION

 

At times we issue stock in exchange for payment of certain liabilities or payment of services, including employees in the form of compensation or professional service providers in the form of consulting or other fees.  We value the stock issued at the price in which it is trading on the open market.

 

DERIVATIVE LIABILITIES

 

The Company’s Series A and E Preferred Stock, convertible debt and certain warrants have reset provisions to the exercise price if the Company issues equity, or a right to receive equity, at a price less than the exercise prices. The Company utilizes the Binomial Lattice Model formula for determining the estimated fair value.

 

COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2012 TO THE THREE MONTHS ENDED JUNE 30, 2011

 

REVENUES

 

Net revenues were $175,871 for the three months ended June 30, 2012. Our revenues decreased by $273,364 from the three months ended June 30, 2011. This decrease is attributable to the fact that some of the new programs that had already been awarded have been significantly delayed.  We are re-focusing on our core business, have restructured certain divisions of the Company and accordingly had lower production output during this transitional period. The Company is now quoting again on numerous new paint projects and has commenced production with new programs for the 2012 and 2013 periods that are expected to provide continued revenue growth.

 

GROSS LOSS

 

For the three months ended June 30, 2012, MWW's gross loss was $115,802 (65.8%) compared to gross profit of $78,766 (17.5%) for the three months ended June 30, 2011. MWW sold a greater percentage of its lower margin products in 2012 than in 2011, had significant “start-up” costs for new projects that have not been offset by revenues yet and did not recognize any profit from the re-evaluation of derivatives compared to the same period the year before. 

 

The primary components of cost of sales are direct labor and cost of parts and materials.  The cost of parts and materials has been consistent from year to year.

 

OPERATING EXPENSES

 

Selling, general, and administrative expenses were $292,342 (166.2% of revenues) in 2012 compared to $359,580 (80.0% of revenues) during 2011. The decrease in costs is attributable to management’s stringent efforts to reduce overhead costs throughout the Company. Management intends to keep costs low, so increasing product volume and revenue will result in improving profit margins and eventually net profits. Significant components of operating expenses consist of professional fees, salaries, and impairment losses. 

 

 

OTHER INCOME (EXPENSES)

 

Financing expenses were $718,466 for the three months ended June 30, 2012 compared to $585,146 during same period last year. We incurred non cash interest expense and amortization of debt discounts and non cash interest costs relating to our convertible notes of $278,700 for the three months ended June 30, 2012 compared to $91,129 for the three months ended June 30, 2011.

 

(LOSS) GAIN ON CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY.   As described in our accompanying unaudited condensed consolidated financial statements, we issued convertible notes with certain conversion features, reset warrants and Series A and E Preferred Stock that have certain reset provisions.  All of which, we are required to bifurcate from the host financial instrument and mark to market each reporting period. We recorded the initial fair value of the reset provision as a liability with an offset to equity or debt discount and subsequently mark to market the reset provision liability at each reporting cycle.

 

For the three months ended June 30, 2012, we recorded a net loss of $3,623,835 in change in fair value of the derivative liability as compared to a gain of $317,837 for the same period the previous year.  The changes in the market price of our common stock have affected the fair value of the derivative liability.

 

COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 2012 TO THE NINE MONTHS ENDED JUNE 30, 2011

 

REVENUES

 

Net revenues were $574,018 for the nine months ended June 30, 2012. Our revenues decreased by $735,080 from the nine months ended June 30, 2011. This 56.2% decrease is attributable to the fact that some of the new programs that had already been awarded have been significantly delayed.  We are re-focusing on our core business, have restructured certain divisions of the Company and accordingly had lower production output during this transitional period. The Company is now quoting again on numerous new paint projects and has commenced production with new programs for the 2012 and 2013 periods that are expected to provide continued revenue growth.

 

GROSS (LOSS) PROFIT

 

For the nine months ended June 30, 2012, MWW's gross loss was $(339,544) (59.2%) compared to gross profit of $183,585 (14.0%) for the nine months ended June 30, 2011. MWW sold a greater percentage of its lower margin products in 2012 than in 2011, had significant “start-up” costs for new projects that have not been offset by revenues yet and did not recognize any profit from the re-evaluation of derivatives compared to the same period the year before. 

 

The primary components of cost of sales are direct labor and cost of parts and materials.  The cost of parts and materials has been consistent from year to year.

 

OPERATING EXPENSES

 

Selling, general, and administrative expenses were $908,909 (158.3 % of revenues) in 2012 compared to $1,267,348 (96.8 % of revenues) during 2011. The decrease in costs is attributable to management’s stringent efforts to reduce overhead costs throughout the Company. Management intends to keep costs low, so increasing product volume and revenue will result in improving profit margins and eventually net profits. Significant components of operating expenses consist of professional fees, salaries, and impairment losses. 

 

Significant components of operating expenses consist of professional fees, salaries, and impairment losses.

 

 

OTHER INCOME (EXPENSES)

 

Financing expenses were $2,154,232 for the nine months ended June 30, 2012 compared to $971,688 during same period last year. We incurred non cash interest expense and amortization of debt discounts and non cash interest costs relating to our convertible notes of $1,064,112 for the nine months ended June 30, 2012 compared to $126,084 for the nine months ended June 30, 2011.

 

(LOSS) GAIN ON CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY.   As described in our accompanying unaudited condensed consolidated financial statements, we issued convertible notes with certain conversion features, reset warrants and Series A Preferred Stock that have certain reset provisions.  All of which, we are required to bifurcate from the host financial instrument and mark to market each reporting period. We recorded the initial fair value of the reset provision as a liability with an offset to equity or debt discount and subsequently mark to market the reset provision liability at each reporting cycle.

 

For the nine months ended June 30, 2012, we recorded a net loss of $2,538,814 in change in fair value of the derivative liability as compared to a gain of $923,703 for the same period the previous year.  The changes in the market price of our common stock have affected the fair value of the derivative liability.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of June 30, 2012 we had working capital deficit of $4,611,572. We reported negative cash flow from operating activities of ($417,409), cash used in investing of $(12,859) and positive cash flow from financing activities of $441,124.

 

The negative cash flow from operating activities consists of $6,318,411 net loss, net with $148,527 depreciation and amortization expenses, $111,496 in amortization of deferred financing costs, $1,064,112 in amortization of debt discounts, $888,736 non cash interest,  $16,500 stock based compensation, a loss on change in fair value of derivative liability of $2,538,814, a loss on settlement of debt of $382,596, common stock issued for services of $70,500, net with cancelation of previously issued common stock for services of $120,000. Changes in operating assets were a $117,460 decrease in accounts receivable, $9,441 decrease in inventory, $672,820 increase in accounts payable and other current liabilities.

 

Cash flows used in investing activities of $12,859 was primarily acquisition of property and equipment.

 

Cash flows from financing activities were primarily from issuance of notes payable of $495,500, net with repayments of $54,376.

 

On January 27, 2009, the Key Bank notified the Company it was in default of its obligations under the line of credit agreement and commercial mortgage loan secured by second deed of trust on real property to JCMD Properties, LLC. The notification is declaring the debt obligations in default and is therefore entitling the lender to exercise certain rights and remedies, including but not limited to, increasing the interest rate to the default rate and demanding immediate repayment in full of the principal, interest and interest swap outstanding liability.  Further, the lender notified the Company that the line of credit maturing on February 1, 2009 will not be renewed and no further advances are available on the line of credit.  As discussed in Note 7, the Company has entered into a Forbearance Agreement through August 31, 2009. As of September 30, 2009, the Key Bank line of credit was repaid through the Company securing the below financing with Summit Financial Resources, L.P.

 

In September, 2009, Marketing Worldwide, LLC entered into a financing agreement with Summit Financial Resources L.P. (Summit) for a maximum borrowing of up to $1 million maturing August 31, 2011. The arrangement is based on recourse factoring of the Company’s accounts receivables. Substantially all assets of Marketing Worldwide, LLC have been pledged as collateral for the Summit facility. Marketing Worldwide Corp. has guaranteed the financing arrangement. The financing arrangement has been extended through August 31, 2012.

 

 

Under the arrangement, Summit typically advances to the Company 75% of the total amount of accounts receivable factored. Summit retains 25% of the outstanding factored accounts receivable as a reserve, which it holds until the customer pays the factored invoice to Summit. The cost of funds for the accounts receivable portion of the borrowings with Summit includes: (a) a collateral management fee of 0.65% of the face amount of factored accounts receivable for each period of fifteen days, or portion thereof, that the factored accounts receivable remains outstanding until payment in full is applied and (b) interest charged at the Wall Street Journal prime rate plus 1% divided by 360.  The Summit default rate is the Wall Street Journal prime rate plus 10%. The Company may be obligated to purchase the receivable back from Summit at the end of 90 days.

 

MWW expects its regular capital expenditures to be approximately $100,000 for fiscal 2012. These anticipated expenditures are for continued investments in tooling and equipment used in our business.

 

The independent registered public accounting firm’s report on our September 30, 2011 consolidated financial statements included in our 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 consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

 

The Company has reduced cash required for operations by reducing operating costs and reducing staff levels. In addition, the Company is working to manage its current liabilities while it continues to make changes in operations to improve its cash flow and liquidity position.

 

The Company's existence is dependent upon management's ability to continue developing profitable business opportunities and their ability to obtain adequate financing to fund anticipated growth.

 

The Company's existence is dependent upon management's ability to raise additional financing and develop profitable operations. Additional financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and the downturn in the U.S. stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

For information regarding recent accounting pronouncements and their effect on the Company, see “Recent Accounting Pronouncements” in Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements contained herein.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any off-balance sheet arrangements.

 

ITEM 3. – Quantitative and Qualitative Disclosures about Market Risk

 

The Company is a smaller reporting company as defined by Rule 12b-2 under the Exchange Act and is not required to provide the information required under this item.

 

 

ITEM 4T. Controls and Procedures

 

a) Evaluation of Disclosure Controls and Procedures. As of June 30, 2012, the Company's management carried out an evaluation, under the supervision of the Company's Chief Executive Officer and the Chief Financial Officer of the effectiveness of the design and operation of the Company's system of disclosure controls and procedures pursuant to the Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses previously found in our internal controls, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective.

 

b) Changes in internal controls. There were no changes in internal controls over financial reporting, known to the Chief Executive Officer or Chief Financial Officer that occurred during the period covered by this report that has materially affected, or is likely to materially effect, the Company's internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

There are no current legal proceedings.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

ITEM 3. Defaults upon Senior Securities

 

None.

 

ITEM 4.Mine Safety Disclosures

 

Not applicable

 

Item 5. Other Information

 

Material Modification to Rights of Security Holders

 

On May 1, 2012, four persons holding majority voting power of Marketing Worldwide Corporation (the “Company”) took action by written consent to increase the authorized capital stock of the Company to consist of Five Billion Nine Hundred Ten Million (5,910,000,000) shares of which stock Five Billion Nine Hundred Million (5,900,000,000) shares of the par value of $.00001 each shall be common stock and of which Ten Million (10,000,000) shares of the par value of $.001 each shall be preferred stock. A copy of the Certificate of Amendment to the Certificate of Incorporation of Marketing Worldwide Corporation is attached to this report as Exhibit.

 

Based upon covenants in certain Securities Purchase Agreements and Convertible Promissory Notes, the Company is required to reserve shares of its common stock for future issuance. The significant increase in the amount of authorized shares was made by the four persons holding majority voting power to accommodate the requirements of the covenants in certain Securities Purchase Agreements and Convertible Promissory Notes. For example, the Company has secured cash for operations under several Securities Purchase Agreements and Convertible Promissory Notes entered between the Company and Asher Enterprises Inc. that require the Company to reserve shares of common stock for future issuance.

 

 

On April 17, 2012, the Company received funding of $47,500 from Asher Enterprises Inc. and was required to reserve 1,366,667 shares of common stock for future issuance under the conversion features of the Convertible Promissory Note. Moreover, the Company had 475,333 shares of common stock reserved pursuant three prior convertible promissory notes in favor of Asher Enterprises Inc. dated October 7, 2011, December б, 2011, and February 1, 2012, respectively. Even though as of May 1, 2012, the total debt due in favor of Asher Enterprises Inc. is $183,000, the Company is required to reserve 1,842,000 shares of common stock (with approximate value, based upon May 1, 2012 closing price of $0.48, being $884,160) to honor the Company’s covenants under the Securities Purchase Agreements and Convertible Promissory Notes.

 

At May 1, 2012, the Company had 1,327,733 shares issued and outstanding and 1,842,000 shares reserved for possible future issuances to Asher Enterprises Inc. Moreover, at May 1, 2012, the Company has outstanding debt to seven Investors with conversion terms that (based upon May 1, 2012 closing price) might require the future issuance of 2,394,354 or more shares of common stock. Under the terms of the Company’s Series A Convertible Preferred Stock owned by Vision Opportunity Master Fund, Ltd. and Vision Capital Advantage Fund, L.P., the Company will need to issue 156,540 shares of common stock to pay accrued dividends and convert the Series A shares into common stock.

 

The Company’s Series D stockholders, who hold majority voting power, the board and management are taking actions based upon their informed business judgment to continue operations for the benefit of the creditors and shareholders of the Company. Since the Company is in the zone of insolvency, the Company must consider the interests of both shareholders and creditors. As the Company strives to repay its debt and secure capital to support higher revenue in future periods, there will be dilution to existing stockholders caused by the issuance of common stock for cash and in exchange for debt. While management seeks to minimize the dilution to existing stockholders, multiple factors beyond management’s control, such as general economic conditions, the availability of and terms available for debt and equity funding, and the trading price of the Company’s common stock, have a significant impact on this effort. The Company’s effort to restructure its operations and to report positive cash flow and profits is expected to take 6-18 months. Investors are cautioned that these efforts may not be successful.

 

ITEM 6. Exhibits

 

(a) EXHIBIT(S) DESCRIPTION

 

(3)(i) Certificate of Incorporation * (3)(ii) Bylaws *

(4)(1) Form of Common Stock Certificate *

(4)(2) Common Stock Purchase Warrant with Wendover Investments Limited *

(4)(3) Stock Option Agreement with Richard O. Weed *

(5) Opinion on Legality *****

(10)(1) Consulting Agreement with Rainer Poertner ***

(10)(2) Fee Agreement with Weed & Co. LLP *

(10)(3) Purchase Agreement MWW and MWWLLC *

(10)(4) Amendment to Purchase Agreement between MWW and MWWLLC **

(10)(5) Employment Agreement with CEO Michael Winzkowski **

(10)(6) Employment Agreement with COO/CFO James Marvin **

(10)(7) Loan Agreement with Key Bank N.A. ***

(10)(8) Amendment to Consulting Agreement with Rainer Poertner ***

(10)(10) Real Property Lease Agreement for 11224 Lemen Road, Suite A ****

(10)(11) Real Property Lease Agreement for 11236 Lemen Road ****

(10)(12) Supplier and Warranty Agreement ****

(10)(13) Business Loan Agreement April 4, 2006 with KeyBank N.A. ******

(10)(14) Supplier and Warranty Agreement ****

(10)(15) Blanket Purchase Order, Non-Disclosure and Confidentiality Agreement ******

(10)(16) Lease Agreement and Amendment to Lease Agreement with JCMD Properties, LLC ******

(10)(17) Consulting Agreement with Rainer Poertner dated July 1, 2006 ******

 

 

(10)(18) Waiver of Cashless Exercise Provisions in Warrant by Wendover Investments Ltd. *******

(10)(19) Waiver of Cashless Exercise Provisions in Stock Option by Richard O. Weed *******

(10)(20) Extension of Employment Agreement with Michael Winzkowski dated October 15, 2006

(10)(21) Extension of Employment Agreement with James Marvin dated (21) Subsidiaries of Registrant *

(31)(1) Certification of Chief Executive Officer pursuant to Section302 of the Sarbanes-Oxley Act of 2002.

(31)(2) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(32)(1) Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished under Exhibit 32 of Item 601 of Regulation S-K.

(32)(2) Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished under Exhibit 32 of Item 601 of Regulation S-K.

 

* Previously filed on February 11, 2005 as part of the Registration Statement on Form 10-SB12G of Marketing Worldwide Corporation SEC File 0-50586 Accession Number 1019687-4-279.

 

** previously filed on August 10, 2005 as part of the Registration Statement on Form 10-SB12G/A Amendment No. 1 of Marketing Worldwide Corporation SEC File 0-50586 Accession Number 0001019687-04-001719.

 

*** previously filed on November 9, 2005 as part of the Registration Statement on Form 10-SB12G/A Amendment No. 2 of Marketing Worldwide Corporation SEC File 0-50586 Accession Number 0001019687-04-002436.

 

**** Previously filed on January 31, 2006 as part of the Form 10-KSB for the year ended September 30, 2005 of Marketing Worldwide Corporation SEC File 0-50586 Accession Number 0001019687-05-000207.

 

***** previously filed on March 17, 2006 as part of the Form SB-2 of Marketing Worldwide Corporation SEC File 333-123380 Accession Number 0001019687-05-000728.

 

****** previously filed on September 15, 2006 as part of the Form SB-2 of Marketing Worldwide Corporation SEC File 333-123380 Accession Number 0001019687-05-002649.

 

******* previously filed on December 7, 2006 as part of the Form SB-2 of Marketing Worldwide Corporation SEC File 333-123380 Accession Number 0001019687-05-003367.

 

(31)(1) Certification of Chief Executive Officer pursuant to Section302 of the Sarbanes-Oxley Act of 2002.

 

(31)(2) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

(32)(1) Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished under Exhibit 32 of Item 601 of Regulation S-K.

 

(32)(2) Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished under Exhibit 32 of Item 601 of Regulation S-K.

 

(10)(22) $50,000 convertible note, dated Feb 16, 2011, Asher

(10)(23) $25,000 convertible note, dated March 22, 2011, Asher

(10)(24) $30,000 convertible note, dated May 6, 2011, Asher

(10)(25) $127,000 convertible promissory note, dated Jan. 10, 2011, RBSM, LLP

(10)(26) $250,000 senior convertible debenture, dated June 29, 2011, Hillair

(10)(27) $260,120 promissory note and stock pledge agreement, dated Feb 19, 2011, Rainer Poertner

(10)(28) Series C convertible preferred stock agreement, dated April 29, 2011, Southridge

(10)(29) Series C convertible preferred stock agreement, dated May 17, 2011, Southridge

(10)(30) Public relations, promotion and marketing agreement, April 28, 2011 – August 28, 2011, Stock Vest

(10)(31) $45,000 convertible note, dated April 17, 2012, Asher

(10)(32) Certificate of Amendment to the Certificate of Incorporation

 

 

SIGNATURES

 

Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MARKETING WORLDWIDE CORPORATION
BY:	/s/ CHARLES PINKERTON
	NAME: CHARLES PINKERTON
	TITLE: CHIEF EXECUTIVE OFFICER/CHIEF FINANCIAL OFFICER
	Date: August 20, 2012

 

 Pursuant to requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

BY:	/s/ CHARLES PINKERTON
	NAME: CHARLES PINKERTON
	TITLE: CHIEF EXECUTIVE OFFICER/CHIEF FINANCIAL OFFICER
	Date: August 20, 2012