XOTC:MWWC Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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 March 31, 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, May 14, 2012: 475,901,400

 

 
 

 

MARKETING WORLDWIDE CORPORATION

 

Form 10-Q for the Quarter ended March 31, 2012

 

Table of Contents

 

  PAGE
   
PART I - FINANCIAL INFORMATION  
   
ITEM 1 - FINANCIAL STATEMENTS  
Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and September 30, 2011 F-1
Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2012 and 2011 (unaudited) F-2
Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2012 and 2011 (unaudited) F-3
Notes to Condensed Consolidated Financial Statements (unaudited) F-4
   
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2
   
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 9
   
ITEM 4T - CONTROLS AND PROCEDURES 10
   
PART II - OTHER INFORMATION 10
   
ITEM 1 - LEGAL PROCEEDINGS 10
   
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 10
   
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 10
   
ITEM 4 - MINING SAFETY DISCLOSURES 10
   
ITEM 5 - OTHER INFORMATION 10
   
ITEM 6 - EXHIBITS 11
   
SIGNATURES 13

 

Page 1
 

 

MARKETING WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   March 31,   September 30, 
   2012   2011 
   (unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents  $18,650   $5,012 
Accounts receivable, net   196,734    201,476 
Inventories, net   83,980    93,303 
 Total current assets   299,364    299,791 
           
Property, plant and equipment, net   994,755    1,092,686 
           
Other assets:          
Capitalized finance costs, net   18,971    111,496 
           
Total assets  $1,313,090   $1,503,973 
           
LIABILITIES AND STOCKHOLDERS' DEFICIENCY          
Current liabilities:          
Bank line of credits  $7,910   $21,428 
Notes payable and capital leases, current portion   1,415,558    1,518,944 
Accounts payable   1,833,632    1,497,101 
Warranty liability   75,000    75,000 
Other current liabilities   970,423    769,458 
Current liabilities of discontinued operations   492,006    492,006 
 Total current liabilities   4,794,529    4,373,937 
           
Long term debt:          
Derivative liability   803,870    1,258,634 
Warrant liability   264,186    427,266 
           
Total liabilities   5,862,585    6,059,837 
           
Temporary equity:          
Series A convertible preferred stock, $0.001 par value; 1,691,901 and 3,500,000 shares issued and outstanding as of March 31, 2012 and September 30, 2011, respectively   1,691,851    3,499,950 
           
Permanent equity:          
Stockholders' 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; 1,192,308 shares issued and outstanding as of March 31, 2012 and September 30, 2011   1,192    1,192 
Series C convertible preferred stock, $0.001 par value, 1,000,000 shares designated; nil and 100 issued and outstanding as of March 31, 2012 and September 30, 2011, respectively   -    - 
Common stock, $0.001 par value, 500,000,000 shares authorized; 341,946,808 and 71,494,819 shares issued and outstanding as of March 31, 2012 and September 30, 2011, respectively   341,948    71,495 
Additional paid in capital   12,304,254    9,455,051 
Accumulated deficit   (18,232,232)   (16,947,859)
Accumulated other comprehensive income (loss)   (148,873)   (148,873)
 Total Marketing Worldwide Corporation stockholders' deficiency   (5,733,711)   (7,568,994)
Non controlling interest   (507,635)   (486,820)
 Total stockholders' deficiency   (6,241,346)   (8,055,814)
           
Total Liabilities and Stockholders' Deficiency  $1,313,090   $1,503,973 

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

F-1
 

 

MARKETING WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three months ended March 31,   Six months ended March 31, 
   2012   2011   2012   2011 
Revenue  $174,558   $265,354   $398,147   $859,863 
                     
Total cost of sales   306,616    304,559    621,889    755,044 
                     
Gross (loss) profit   (132,058)   (39,205)   (223,742)   104,819 
                     
Operating expenses:                    
Selling, general and administrative expenses   363,541    675,033    616,567    1,002,259 
Total operating expenses   363,541    675,033    616,567    1,002,259 
                     
Loss from operations   (495,599)   (714,238)   (840,309)   (897,440)
                     
Other income (expense)                    
Gain (loss) on change in fair value of derivative liability   2,225,672    (166,461)   1,085,021    605,866 
Financing expenses   (858,102)   (221,244)   (1,435,766)   (292,052)
Loss on settlement of debt   -    (58,410)   -    (58,410)
Other income (expense), net   2,976    53,393    5,684    61,314 
                     
Net income (loss)   874,947    (1,106,960)   (1,185,370)   (580,722)
                     
(Loss) income attributable to Non-controlling interest   (10,407)   (10,406)   (20,815)   24,242 
                     
Income (loss) attributable to Company   885,354    (1,096,554)   (1,164,555)   (604,964)
                     
Preferred stock dividend   (41,068)   (78,750)   (119,818)   (157,500)
                     
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS  $844,286   $(1,175,304)  $(1,284,373)  $(762,464)
                     
Income (loss) per common share, basic  $0.00   $(0.03)  $(0.01)  $(0.02)
                     
Income (loss) per common share, diluted  $0.00   $(0.03)  $(0.01)  $(0.02)
                     
Weighted average common stock outstanding, basic   206,869,659    40,087,286    150,327,210    35,586,726 
                     
Weighted average common stock outstanding, diluted   811,905,723    40,087,286    150,327,210    35,586,726 

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

F-2
 

 

MARKETING WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   Six months ended March 31, 
   2012   2011 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net (loss)  $(1,185,370)  $(580,722)
Adjustments to reconcile net (loss) to cash (used in) provided by operations:          
Depreciation and amortization   110,790    126,449 
Amortization of deferred financing costs   92,525    65,965 
Amortization of debt discounts   785,412    34,955 
Non cash interest   521,561    152,146 
Loss on settlement of debt   -    58,410 
Change in fair value of derivative liability   (1,085,021)   (605,866)
Fair value of vested employee options   11,000    3,140 
Common stock issued for services rendered   30,000    106,514 
Cancelation of previously issued common stock for services   (120,000)   - 
(Increase) decrease in operating assets:          
Accounts receivable   4,742    121,794 
Inventory   9,323    33,673 
Other current assets   -    9,328 
Other assets   -    19,400 
Increase (decrease) in operating liabilities:          
Accounts payable and other current liabilities   602,180    500,591 
Net cash (used in) provided by operating activities   (222,858)   45,777 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (12,859)   (7,547)
Net cash used in investing activities   (12,859)   (7,547)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from (repayments of) lines of credit   (13,518)   (116,339)
Proceed from issuance of notes   290,500    75,000 
Proceeds from (repayments of) notes payable and capital leases   (27,627)   - 
Net cash provided by (used in) financing activities   249,355    (41,339)
           
Net increase (decrease) in cash and cash equivalents   13,638    (3,109)
Cash and cash equivalents, beginning of period   5,012    3,847 
           
Cash and cash equivalents, end of period  $18,650   $738 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:          
Cash paid during year for interest  $-   $94,543 
Cash paid during year for income taxes  $-   $- 
           
NON-CASH INVESTING AND FINANCING TRANSACTIONS:          
Common stock issued in settlement of debt and accrued interest  $831,330   $108,840 
Common stock issued in settlement of preferred stock dividends  $50,000   $472,500 
Common stock issued upon conversion of Series A preferred stock  $1,808,099   $- 
Settlement of debt via sale of property  $-   $739,301 
Accounts payable settled via sale of property  $-   $60,699 
Accounts payable settled via issuance of notes payable  $134,500   $- 
Dividends declared  $119.818   $157,500 
Note payable issued in exchange for Series C preferred stock  $100,000   $- 

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

F-3
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

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 six month period ended March 31, 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 six month ended March 31, 2011 and for the six months ended March 31, 2012, all primary dilutive common shares have been excluded since the inclusion would be anti-dilutive.

 

Such shares consist of the following at March 31, 2012 and 2011:

 

   2012   2011 
Convertible debt   594,965,513    34,847,888 
Conversion of Series A preferred stock   10,379,761    20,743,533 
Options   2,690,000    100,000 
Warrants   4,875,000    590,000 
Totals   612,910,274    56,281,421 

 

F-4
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

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 six months ended March 31, 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 March 31, 2012 and September 30, 2011 approximated $20,000.

 

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.

 

F-5
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

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 six month periods ended March 31, 2012 was $46,263 and $92,525, respectively, and for the three and six months ended March 31, 2011 was $32,620 and $65,965, respectively.  Accumulated amortization of deferred financing costs was $693,744 and $601,219 at March 31, 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 six month period ended March 31, 2012, the Company incurred a net loss attributable to common stockholders of approximately $1,284,000. The Company has available cash of approximately $19,000 at March 31, 2012.  During the six months ended March 31, 2012, the Company’s operating activities used cash of approximately $223,000.  The Company’s working capital deficiency was approximately $4,495,000 and $4,074,000 as of March 31, 2012 and September 30, 2011, respectively.  The Company’s accumulated deficit was approximately $18,232,000 and $16,948,000 as of March 31, 2012 and September 30, 2011, respectively.  In addition, the Company has a stockholders’ deficit of approximately $6,241,000 and $8,056,000 at March 31, 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.

 

F-6
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

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 March 31, 2012 and 2011 are as follows:

 

   March 31,   September 30, 
   2012   2011 
Work in process  $291,640   $294,568 
Finished goods   60,974    67,369 
Total inventory before reserve   352,614    361,937 
Less inventory reserve   (268,634)   (268,634)
Net inventory  $83,980   $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 March 31, 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 March 31, 2012 and September 30, 2011, property, plant and equipment consist of the following:

 

   March 31,  
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   (1,420,389)   (1,309,599)     
Net property, plant and equipment  $994,755   $1,092,686      

 

Depreciation expense included as a charge to operations of $54,090 and $110,790 for the three and six months ended March 31, 2012, respectively, and $60,581 and $126,649 for the three and six months ended March 31, 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.

 

F-7
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 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 March 31, 2012, the advance balance due to Summit was $7,910. The interest rate at March 31, 2012 was 4.25%.

 

NOTE 7 - NOTES PAYABLE

 

At March 31, 2012 and September 30, 2011, notes payable consists of the following:

 

   March 31,
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.  (**)   566,900    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 $69,665 and $186,821, respectively   139,335    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 $5,979 and $18,135, respectively   19,021    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 $4,521 and $12,041, respectively   10,479    2,959 

 

F-8
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

   March 31,
2012
   September 30,
2011
 
         
Note payable issued on July 21, 2011, due  July 21, 2012, with interest at 16% per annum, unsecured, net of unamortized debt discount of $10,644 and $28,192, respectively  $24,356   $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   69,225    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 October 7, 2011, due July 11, 2012 with interest at 8% per annum, unsecured, net of unamortized debt discount of $19,446   33,554    - 
Note payable, issued December 6, 2011, due September 8, 2012, with interest at 8% per annum, unsecured, net of unamortized debt discount of $21,796   15,704    - 
Note payable, issued on November 28, 2011, due on demand, with interest at 7% per annum, unsecured, net of unamortized debt discount of $1,086   7,797    - 
Note payable, issued on February 1, 2012, November 2, 2012, with interest at 22% per annum, unsecured, net of unamortized debt discount of $28,397   19,103    - 
Note payable, issued on February 15, 2012, due February 15, 2013, with interest at 10% per annum, unsecured, net of unamortized debt discount of $43,835   6,165    - 
Note payable, issued on February 22, 2012, due November 22, 2012, with interest at 8% per annum, unsecured, net of unamortized debt discount of $88,336   14,164    - 
Total   1,415,558    1,518,944 
Less current portion   (1,415,558)   (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.

 

F-9
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

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 six months ended March 31, 2012, the Company amortized $17,349 and $33,554 to current period operations as interest expense, respectively.

 

The fair value of the described embedded derivative of $65,352 at March 31, 2012 was determined using the Binomial Lattice Model with the following assumptions:

 

Dividend yield:   -0-%
Volatility   260.88%
Risk free rate:   0.07%

 

At March 31, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $109,810 for the three months ended March 31, 2012.

 

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 $0.007 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.

 

F-10
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

During the three and six months ended March 31, 2012, the Company amortized and wrote off (upon conversion) a total of $56,795 and $125,914 to current period operations as interest expense.

 

During the six months ended March 31, 2012, the Company issued an aggregate of 50,529,060 shares of common stock in settlement of $119,117 of 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 $0.0022 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 six months ended March 31, 2012, the Company amortized and wrote off (upon conversion) $19,005 to current period operations as interest expense.

 

During the six months ended March 31, 2012, the Company issued an aggregate of 8,638,705 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.

 

F-11
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

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 six months ended March 31, 2012, the Company amortized $12,319 and $15,704 to current period operations as interest expense, respectively.

 

The fair value of the described embedded derivative of $56,147 at March 31, 2012 was determined using the Binomial Lattice Model with the following assumptions:

 

Dividend yield:   -0-%
Volatility   260.88%
Risk free rate:   0.15%

 

At March 31, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $81,542 for the three months ended March 31, 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 $0.002 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 six months ended March 31, 2012, the Company amortized and wrote off (upon conversion) $10,887 to current period operations as interest expense.

 

F-12
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

During the six months ended March 31, 2012, the Company issued an aggregate of 5,443,540 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 $0.003 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 six months ended March 31, 2012, the Company amortized and wrote off (upon conversion) $8,998 to current period operations as interest expense.

 

During the six months ended March 31, 2012, the Company issued an aggregate of 3,000,000 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 $0.003 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.

 

F-13
 

 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

During the six months ended March 31, 2012, the Company amortized and wrote off (upon conversion) $11,212 to current period operations as interest expense.

 

During the six months ended March 31, 2012, the Company issued an aggregate of 3,800,000 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 six months ended March 31, 2012, the Company amortized $7,757 to current period operations as interest expense, respectively.

 

The fair value of the described embedded derivative of $75,799 at March 31, 2012 was determined using the Binomial Lattice Model with the following assumptions:

 

Dividend yield:   -0-%
Volatility   260.88%
Risk free rate:   0.15%

 

At March 31, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $28,299 for the three months ended March 31, 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 $0.003 per share.

 

F-14
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

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 six months ended March 31, 2012, the Company amortized and wrote off (upon conversion) $20,000 to current period operations as interest expense.

 

During the six months ended March 31, 2012, the Company issued an aggregate of 6,700,000 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 $0.0075 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 six months ended March 31, 2012, the Company amortized and wrote off (upon conversion) $52,677 to current period operations as interest expense.

 

During the six months ended March 31, 2012, the Company issued an aggregate of 13,394,703 shares of common stock in full settlement of the convertible note and related interest.

 

F-15
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

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 six months ended March 31, 2012, the Company amortized $6,164 to current period operations as interest expense.

 

The fair value of the described embedded derivative of $69,604 at March 31, 2012 was determined using the Binomial Lattice Model with the following assumptions:

 

Dividend yield:   -0-%
Volatility   260.88%
Risk free rate:   0.19%

 

At March 31, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $2,468 for the three months ended March 31, 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%

 

F-16
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

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 six months ended March 31, 2012, the Company amortized and wrote off (upon conversion) $64,398 to current period operations as interest expense.

 

During the six months ended March 31, 2012, the Company issued an aggregate of 34,100,000 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 six months ended March 31, 2012, the Company amortized $14,164 to current period operations as interest expense.

 

The fair value of the described embedded derivative of $166,890 at March 31, 2012 was determined using the Binomial Lattice Model with the following assumptions:

 

Dividend yield:   -0-%
Volatility   260.88%
Risk free rate:   0.15%

 

At March 31, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $37,323 for the three months ended March 31, 2012.

 

Settlement of previously issued Convertible Promissory Notes

 

During the six months ended March 31, 2012, the Company issued an aggregate of 126,945,983 shares of common stock in full settlement of $658,340 of convertible notes and related accrued interest.

 

F-17
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

NOTE 8 – OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following at March 31, 2012 and September 30, 2011:

 

   March 31,
2012
   September 30,
2011
 
Preferred dividends payable  $384.818   $315,000 
Consulting fees   -    69,500 
Interest   249,383    225,530 
Payroll and other   336,222    159,428 
Total  $970.423   $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 $264,186 as of March 31, 2012 was determined using the Binomial Lattice formula assuming no dividends, a risk-free interest rate of 0.19%, expected volatility of 260.88%, and expected remaining warrant life of 4.25 to 4.49 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 $63,666 for the six months ended March 31, 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.

  

Series A Preferred stock

 

As of March 31, 2012 and September 30, 2011, the Company had 1,691,901 and 3,500,000 shares issued and outstanding, respectively.

 

F-18
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

On January 5, 2012, the Company issued an aggregate of 4,499,998 shares of common stock in exchange for 1,808,099 shares of Series A Preferred Stock.

 

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, the Company issued an aggregate of 10,000,000 shares of common stock in payment of $50,000 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 includes 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.

 

The fair value of the embedded conversion features were measured using the Black-Scholes option pricing model as of the date of issuance and as of March 31, 2012 and at September 30, 2011, the fair value was  measured using the Binomial Lattice Model and the following assumptions:

 

   March 31,   September 30,   Date of 
   2012   2011   issuance 
Imbedded Beneficial Conversion Feature:               
Risk-free rate   0.05%   0.06%   4.55%
Annual rate of dividends   0%   0%   0%
Volatility   260.88%   434.88%   146.64%
Weighted Average life (years)   0.07    0.57    5.0 
                
Fair Value  $-   $141,740   $1,971,115 

 

F-19
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

The risk-free interest rate was based on rates established by the Federal Reserve.  The Company based expected volatility on the historical volatility for its common stock.  The expected life of the embedded beneficial conversion features was based on their full term.  The expected dividend yield was based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the future.

 

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.  As of March 31, 2012 the derivative liability associated with the embedded conversion features of the Series A Preferred stock was revalued, the decrease in the derivative liability of $141,740 for the six months ended March 31, 2012 is included as a increase of a gain on change of fair value of derivative liabilities in the Company’s unaudited condensed consolidated statement of operations.

 

Series B Preferred stock

 

As of March 31, 2012 and September 30, 2011, the Company has 1,192,308 shares of Series B Preferred Stock issued and outstanding.

 

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 March 31, 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 $0.15 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.

 

Common stock

 

On October 3, 2011, the Company issued 1,948,052 shares of common stock in exchange for a convertible note and related accrued interest of $15,000.  These shares were valued at $0.014 per share, which was the trading price on October 3, 2011.

 

On October 5, 2011, the Company issued 1,666,667 shares of common stock in exchange for a convertible note and related accrued interest of $10,000.  These shares were valued at $0.012 per share, which was the trading price on October 5, 2011.

 

F-20
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

On October 7, 2011, the Company issued 3,326,127 shares of common stock in exchange for a convertible note and related accrued interest of $28,000.  These shares were valued at $0.01203 per share, which was the trading price on October 7, 2011.

 

On October 26, 2011, the Company issued 3,619,158 shares of common stock in exchange for a convertible note and related accrued interest of $26,160.  These shares were valued at $0.01033 per share, which was the trading price on October 26, 2011.

 

On October 27, 2011, the Company issued 622,562 shares of common stock in exchange for a convertible note and related accrued interest of $4,500.  These shares were valued at $0.01033 per share, which was the trading price on October 27, 2011.

 

On November 8, 2011, the Company issued 2,000,000 shares of common stock in exchange for services valued at $10,000.  These shares were valued at $0.005 per share, which was the trading price on November 8, 2011

 

On November 11, 2011, the Company issued 3,000,000 shares of common stock in exchange for a convertible notes and related accrued interest of $30,000 each.  These shares were valued at $0.01033 per share, which was the trading price on November 11, 2011.

 

On November18, 2011, the Company received 600,000 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 $0.20 per share, which was the trading price at initial issuance on February 17, 2010.

 

On November 21, 2011, the Company issued an aggregate of 5,679,384 shares of common stock in exchange for convertible notes and related accrued interest of $19,800.  These shares were valued at $0.007 per share, which was the trading price on November 21, 2011.

 

On November 22, 2011, the Company issued 2,592,593 shares of common stock in exchange for a convertible note and related accrued interest of $7,000.  These shares were valued at $0.005 per share, which was the trading price on November 22, 2011.

 

On November 28, 2011, the Company issued 2,400,000 shares of common stock in exchange for a convertible note and related accrued interest of $6,000.  These shares were valued at $0.0051 per share, which was the trading price on November 28, 2011.

 

On November 29, 2011, the Company issued an aggregate of 10,038,705 shares of common stock in exchange for convertible notes and related accrued interest of $22,505.  These shares were valued at $0.005 per share, which was the trading price on November 29, 2011.

 

On November 30, 2011, the Company issued an aggregate of 4,268,207 shares of common stock in exchange for convertible notes and related accrued interest of $11,500.  These shares were valued at $0.0058 per share, which was the trading price on November 29, 2011.

 

On December 6, 2011, the Company issued an aggregate of 739,130 shares of common stock in exchange for convertible notes and related accrued interest of $500.  These shares were valued at $0.004 per share, which was the trading price on December 6, 2011.

 

On December 15, 2011, the Company issued 2,000,000 shares of common stock in exchange for services valued at $20,000.  These shares were valued at $0.01 per share, which was the trading price on December 15, 2011

 

F-21
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

On December 19, 2011, the Company issued an aggregate of 2,637,363 shares of common stock in exchange for convertible notes and related accrued interest of $6,000.  These shares were valued at $0.0034 per share, which was the trading price on December 19, 2011.

 

On December 19, 2011, the Company issued an aggregate of 2,637,363 shares of common stock in exchange for convertible notes and related accrued interest of $6,000.  These shares were valued at $0.0052 per share, which was the trading price on December 19, 2011.

 

On December 27, 2011, the Company issued 5,443,540 shares of common stock in exchange for a convertible note and related accrued interest of $10,887.  These shares were valued at $0.009 per share, which was the trading price on December 27, 2011.

 

On January 3, 2012, the Company issued 3,766,234 shares of common stock in exchange for a convertible note and related accrued interest of $14,500.  These shares were valued at $0.007 per share, which was the trading price on January 3, 2012.

 

On January 5, 2012, the Company issued an aggregate of 4,499,998 shares of common stock in exchange for 1,808,099 shares of Series A Preferred stock.

 

On January 12, 2012, the Company issued 5,238,095 shares of common stock in exchange for a convertible note and related accrued interest of $22,000.  These shares were valued at $0.01 per share, which was the trading price on January 12, 2012.

 

On January 12, 2012, the Company issued 3,000,000 shares of common stock in exchange for a convertible note and related accrued interest of $8,998.  These shares were valued at $0.01 per share, which was the trading price on January 12, 2012.

 

On January 24, 2012, the Company issued 3,800,000 shares of common stock in exchange for a convertible note and related accrued interest of $11,212.  These shares were valued at $0.0075 per share, which was the trading price on January 24, 2012.

 

On January 24, 2012, the Company issued 13,292,614 shares of common stock in exchange for a convertible note and related accrued interest of $58,760.  These shares were valued at $0.0075 per share, which was the trading price on January 24, 2012.

 

On February 2, 2012, the Company issued 6,700,000 shares of common stock in exchange for a convertible note and related accrued interest of $20,000.  These shares were valued at $0.007 per share, which was the trading price on February 2, 2012.

 

On February 10, 2012, the Company issued 14,720,812 shares of common stock in exchange for a convertible note and related accrued interest of $58,000.  These shares were valued at $0.006 per share, which was the trading price on February 10, 2012.

 

On February 16, 2012, the Company issued 7,500,000 shares of common stock in exchange for a convertible note and related accrued interest of $19,744.  These shares were valued at $0.005 per share, which was the trading price on February 16, 2012.

 

On February 21, 2012, the Company issued 9,000,000 shares of common stock in exchange for a convertible note and related accrued interest of $18,000.  These shares were valued at $0.005 per share, which was the trading price on February 21, 2012.

 

F-22
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

On February 23, 2012, the Company issued 26,479,633 shares of common stock in exchange for a convertible note and related accrued interest of $107,990.  These shares were valued at $0.004 per share, which was the trading price on February 23, 2012.

 

On February 27, 2012, the Company issued 7,926,941 shares of common stock in exchange for a convertible note and related accrued interest of $23,781.  These shares were valued at $0.0041 per share, which was the trading price on February 2, 2012.

 

On February 28, 2012, the Company issued 5,108,248 shares of common stock in exchange for a true up of a convertible note and related accrued interest.  These shares were valued at $0.004 per share, which was the trading price on February 28, 2012.

 

On February 29, 2012, the Company issued 8,200,000 shares of common stock in exchange for a convertible note and related accrued interest of $19,988.  These shares were valued at $0.004 per share, which was the trading price on February 29, 2012.

 

On March 5, 2012, the Company issued 9,632,877 shares of common stock in exchange for a convertible note and related accrued interest of $72,249.  These shares were valued at $0.0047 per share, which was the trading price on March 5, 2012.

 

On March 5, 2012, the Company issued 10,000,000 shares of common stock as payment on Series A Preferred stock dividend of $50,000.  These shares were valued at $0.005 per share, which was the trading price on March 5, 2012.

 

On March 7, 2012, the Company issued 10,700,000 shares of common stock in exchange for a convertible note and related accrued interest of $21,398.  These shares were valued at $0.005 per share, which was the trading price on March 7, 2012.

 

On March 15, 2012, the Company issued 8,000,000 shares of common stock in exchange for a convertible note and related accrued interest of $12,740.  These shares were valued at $0.0026 per share, which was the trading price on March 15, 2012.

 

On March 15, 2012, the Company issued 3,761,826 shares of common stock in exchange for a convertible note and related accrued interest of $28,214.  These shares were valued at $0.0026 per share, which was the trading price on March 15, 2012.

 

On March 19, 2012, the Company issued 14,400,000 shares of common stock in exchange for a convertible note and related accrued interest of $25,000.  These shares were valued at $0.0034 per share, which was the trading price on March 19, 2012.

 

On March 19, 2012, the Company issued 13,319,239 shares of common stock in exchange for a convertible note and related accrued interest of $21,000.  These shares were valued at $0.0034 per share, which was the trading price on March 19, 2012.

 

On March 19, 2012, the Company issued 3,336,323 shares of common stock in exchange for a convertible note and related accrued interest of $5,260.  These shares were valued at $0.0034 per share, which was the trading price on March 19, 2012.

 

On March 27, 2012, the Company issued 7,000,000 shares of common stock in exchange for a convertible note and related accrued interest of $8,645.  These shares were valued at $0.003 per share, which was the trading price on March 27, 2012.

 

F-23
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

On March 27, 2012, the Company issued 17,050,298 shares of common stock in exchange for a convertible note and related accrued interest of $20,000.  These shares were valued at $0.003 per share, which was the trading price on March 27, 2012.

 

As of March 31, 2012 and September 30, 2011, the Company has 341,946,808 and 71,494,819 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 March 31, 2012:

 

        Options Outstanding   Options Exercisable 
Exercise
Price
   Number
Outstanding
   Weighted
Average
Remaining
Contractual
Life (Years)
   Weighted
Average
Exercise
Price
   Number
Exercisable
 
$0.017    2,200,000    9.15   $0.017    550,000 
$0.30    490,000    5.40   $0.30    490,000 
$0.07    2,690,000    8.47   $0.15    1,040,000 

 

The fair value of all employee options vesting charged to operations in the three and six months ended March 31, 2012 was $5,500 and $11,000, respectively and $1,175 and $3,140 for the three and six months ended March 31, 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   590,000   $0.30 
Granted   2,200,000    0.017 
Exercised   -    - 
Canceled or expired   (100,000)   (0.30)
Outstanding, September 30, 2011   2,690,000    0.07 
Granted   -    - 
Exercised   -    - 
Canceled or expired   -    - 
Outstanding, March 31, 2012   2,690,000   $0.07 

 

Warrants

 

The following table summarizes the warrants outstanding as of March 31, 2012:

 

F-24
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 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 
$0.02    3,000,000    4.43   $0.02    3,000,000   $0.02 
$0.04    1,875,000    4.28   $0.04    1,875,000   $0.04 
$0.03    4,875,000    4.38   $0.03    4,875,000   $0.03 

 

Transactions involving warrants are summarized as follows:

 

   Weighted
Average
Number of
Shares
   Price per
Share
 
Outstanding, September 30, 2010   100,000   $0.30 
Granted   12,375,000    0.023 
Exercised   (5,000,000)   0.01 
Canceled or expired   (100,000)   (0.30)
Outstanding, September  30, 2011   7,375,000    0.03 
Granted   -    - 
Exercised   -    - 
Canceled or expired   (2,500,000)   (0.04)
Outstanding, March 31, 2012   4,875,000   $0.03 

 

In connection with the issuance of promissory notes, the Company issued an aggregate of 4,875,000 warrants (net of cancelations of 2,500,000) exercisable five years from the date of issuance at $0.02 to $0.04 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 March 31, 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.

 

F-25
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

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 March 31, 2012 and September 30, 2011are the following net assets of JCMD:

 

   March 31, 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   211,313    190,498 
Total current liabilities   701,068    680,253 
Total deficit   (507,635)   (486,820)
Total liabilities and deficit  $193,433   $193,433 

 

Consolidated results of operations for the three months ended March 31, 2012 and 2011 include the following:

 

   2012   2011 
Revenues  $-   $- 
Cost and expenses - real estate: Operating expenses, net   -    - 
Interest, net   (10,407)   (10,406)
Total costs and expenses   (10,407)   (10,406)
           
Operating (loss) income-Real estate  $(10,407)  $(10.406)

 

Consolidated results of operations for the six months ended March 31, 2012 and 2011 include the following:

 

   2012   2011 
Revenues  $-   $34,000 
Cost and expenses - real estate: Operating expenses, net   -    (9,766)
Interest, net   (20,815)   (8)
Total costs and expenses   (20,815)   (9,758)
           
Operating (loss) income-Real estate  $(20,815)  $24,242 

 

F-26
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

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 March 31, 2012:

  

       Fair Value Measurements at March 31, 2012 using: 
   March 31,
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  $803,870    -    -   $803,870 
Warrant liabilities  $264,186    -    -   $264,186 

 

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.

 

F-27
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of March 31, 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   (521,156)   (99,414)
Initial fair value of debt derivatives at note issuances   1,087,747    - 
Mark-to-market at March 31, 2012:          
- Embedded debt derivatives   (879,615)   - 
- Reset provisions relating to Series A preferred stock   (141,740)   - 
-Reset provisions relating to warrants   -    (63,666)
           
Balance, March 31, 2012  $803,870   $264,186 
           
Net income for the period included in earnings relating to the liabilities held at March 31, 2012  $1,021,355   $63,666 

 

Level 3 Liabilities are comprised of our bifurcated convertible debt features on our convertible notes and reset provisions contained within our Series A 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 March 31, 2012 and September 30, 2011 were as follows:

 

F-28
 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

 

Assets:  

 

   March 31,
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

 

During the month of April and May 2012, the Company issued an aggregate of 133,954,592 shares of common stock in settlement of $103,099 of convertible notes payable, accrued preferred dividend and accrued interest.

 

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. 

 

F-29
 

 

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.

 

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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.

 

3
 

 

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.

 

4
 

 

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.

 

5
 

 

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 $20,000 allowance for doubtful accounts at March 31, 2012 and September 30, 2011.

  

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 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 MARCH 31, 2012 TO THE THREE MONTHS ENDED MARCH 31, 2011

 

REVENUES

 

Net revenues were $174,558 for the three months ended March 31, 2012. Our revenues decreased by $90,796 from the three months ended March 31, 2011. This 34.2% decrease is attributable to the fact we are focusing on our core business, which includes painting, seat heaters, spoilers and body-side moldings.   The Company is quoting on numerous paint projects and working on new programs for the 2012 and 2013 programs that are expected to provide continued revenue growth.

 

GROSS LOSS

 

For the three months ended March 31, 2012, MWW's gross loss was $132,058 (75.7%) compared to gross loss of $39,205 (14.8%) for the three months ended March 31, 2011. MWW sold a greater percentage of its lower margin products in 2012 than in 2011.  During the current period, our Revenues were insufficient to offset our overhead costs. MWW's gross profit margin is influenced by a number of factors and gross margin may fluctuate based on changes in the cost of supplies and product mix.

 

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 $363,541 (208.3 % of revenues) in 2012 compared to $675,033 (254.4 % of revenues) during 2011. The decrease in costs is attributable to management’s stringent efforts to reduce overhead costs.

 

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

 

6
 

 

OTHER INCOME (EXPENSES)

 

Financing expenses were $858,102 for the three months ended March 31, 2012 compared to $221,244 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 $789,367 compared to $187,101 for the three months ended March 31, 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 three months ended March 31, 2012, we recorded a net gain of $2,225,672 in change in fair value of the derivative liability as compared to a loss of $166,461 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 SIX MONTHS ENDED MARCH 31, 2012 TO THE THREE MONTHS ENDED MARCH 31, 2011

 

REVENUES

 

Net revenues were $398,147 for the six months ended March 31, 2012. Our revenues decreased by $461,716 from the six months ended March 31, 2011. This 53.7% decrease is attributable to the fact we are focusing on our core business, which includes painting, seat heaters, spoilers and body-side moldings.   The Company is quoting on numerous paint projects and working on new programs for the 2012 and 2013 programs that are expected to provide continued revenue growth.

 

GROSS (LOSS) PROFIT

 

For the six months ended March 31, 2012, MWW's gross loss was $(223,742) (56.1%) compared to gross profit of $104,819 (12.2%) for the six months ended March 31, 2011. MWW sold a greater percentage of its lower margin products in 2012 than in 2011.  During the current period, our Revenues were insufficient to offset our overhead costs. MWW's gross profit margin is influenced by a number of factors and gross margin may fluctuate based on changes in the cost of supplies and product mix.

 

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 $616,567 (154.9 % of revenues) in 2012 compared to $1,002,259 (116.6 % of revenues) during 2011. The decrease in costs is attributable to management’s stringent efforts to reduce overhead costs.

 

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

 

7
 

 

OTHER INCOME (EXPENSES)

 

Financing expenses were $1,435,766 for the six months ended March 31, 2012 compared to $605,866 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 $1,306,973 compared to $187,101 for the six months ended March 31, 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 six months ended March 31, 2012, we recorded a net gain of $1,085,021 in change in fair value of the derivative liability as compared to a gain of $605,866 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 March 31, 2012 we had working capital deficit of $4,495,165. We reported negative cash flow from operating activities of ($222,858), cash used in investing of $(12,859) and positive cash flow from financing activities of $249,355.

 

The negative cash flow from operating activities consists of $1,185,370 net loss, net with $110,790 depreciation and amortization expenses, $92,525 in amortization of deferred financing costs, $785,412 in amortization of debt discounts, $521,561 non cash interest paid,  $11,000 stock based compensation, , common stock issued for services of $30,000, net with cancelation of previously issued common stock for services of $120,000,  net with a gain on change in fair value of derivative liability of $1,085,021. Changes in operating assets were a $4,742 decrease in accounts receivable, $9,323 decrease in inventory, $602,180 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 $290,500, net with repayments of $41,145.

 

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.

 

8
 

 

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.

 

9
 

 

ITEM 4T. Controls and Procedures

 

a) Evaluation of Disclosure Controls and Procedures. As of March 31, 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 410,000,000 shares of common stock for future issuance under the conversion features of the Convertible Promissory Note. Moreover, the Company had 142,600,000 shares of

 

10
 

 

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 552,600,000 shares of common stock (with approximate value, based upon May 1, 2012 closing price of $.0016, 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 398,350,037 shares issued and outstanding and 552,600,000 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 718,306,250 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 46,962,091 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 ******

1(0)(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.

 

11
 

 

(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

 

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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: May 15, 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: May 15, 2012  

 

13

XOTC:MWWC Quarterly Report 10-Q Filling

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XOTC:MWWC Quarterly Report 10-Q Filing - 3/31/2012
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