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 December 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, February 15, 2013: 1,564,092,108.

 

 

MARKETING WORLDWIDE CORPORATION

 

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

 

Table of Contents

 

	PAGE
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of December 31, 2012 (unaudited) and September 30, 2012	3
Condensed Consolidated Statements of Operations for the three months ended December 31, 2012 and 2011 (unaudited)	4
Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2012 and 2011 (unaudited)	5
Notes to Condensed Consolidated Financial Statements (unaudited)	6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	16
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	22
ITEM 4 - CONTROLS AND PROCEDURES	22
PART II - OTHER INFORMATION	22
ITEM 1 - LEGAL PROCEEDINGS	22
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	22
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES	23
ITEM 4 - MINING SAFETY DISCLOSURES	23
ITEM 5 - OTHER INFORMATION	23
ITEM 6 - EXHIBITS	23
SIGNATURES	25

 

 

MARKETING WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		December 31,				September 30,
		2012				2012
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	9,777			$	25,266
Accounts receivable, net			180,061				162,144
Inventories, net			82,883				82,443
Total current assets			272,721				269,853
Property, plant and equipment, net			886,802				921,466
Total assets		$	1,159,523			$	1,191,319
LIABILITIES AND DEFICIENCY
Current liabilities:
Notes payable and capital leases, current portion		$	1,886,597			$	1,613,810
Accounts payable			2,079,779				1,999,403
Warranty liability			75,000				75,000
Other current liabilities			1,191,862				1,097,889
Total current liabilities			5,233,238				4,786,102
Long term debt:
Derivative liability			6,088,028				10,649,266
Warrant liability			562,486				809,967
Total liabilities			11,883,752				16,245,335
Deficiency
Preferred stock, $0.001 par value; 10,000,000 shares authorized
Series D super voting preferred stock, $0.001 par value, 1,000,000 shares designated, 90,002 shares issued and outstanding as of December 31, 2012 and September 30, 2012			90				90
Series E 6% convertible preferred stock, $0.001 par value, 15,000 shares designated, 10,748.52 and 11,112.5 shares issued and outstanding as of December 31, 2012 and September 30, 2012, respectively			11				11
Common stock, $0.00001, 5,900,000,000 shares authorized; 470,667,013 and 52,796,157 shares issued and outstanding as of December 31, 2012 and September 30, 2012, respectively			4,707				528
Additional paid in capital			13,946,340				13,657,583
Accumulated deficit			(24,136,521	)			(28,183,779	)
Total Marketing Worldwide Corporation deficiency			(10,185,373	)			(14,525,567	)
Non controlling interest			(538,856	)			(528,449	)
Total deficiency			(10,724,229	)			(15,054,016	)
Total liabilities and deficiency		$	1,159,523			$	1,191,319

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

 

MARKETING WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

		Three months ended December 31,
		2012				2011
Revenue		$	193,974			$	223,589
Cost of sales			220,223				315,273
Gross loss			(26,249	)			(91,684	)
Operating expenses:
Selling, general and administrative expenses			350,176				253,026
Total operating expenses			350,176				253,026
Loss from operations			(376,425	)			(344,710	)
Other income (expense):
Gain (loss) on change in fair value of derivative liability			5,556,172				(1,140,651	)
Financing expenses			(1,126,944	)			(577,664	)
Other income (expense), net			6				2,708
Total other income (expense)			4,429,234				(1,715,607	)
Net income (loss)			4,052,809				(2,060,317	)
Loss attributable to Non-controlling interest			(10,407	)			(10,408	)
Income (loss) attributable to Company			4,063,216				(2,049,909	)
Preferred stock dividend			(15,958	)			(78,750	)
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS		$	4,047,258			$	(2,128,659	)
Income (loss) per common share, basic		$	0.02			$	(0.02	)
Loss per common share, diluted		$	(0.00	)		$	(0.02	)
Weighted average common stock outstanding, basic			213,031,741				93,467,442
Weighted average common stock outstanding, diluted			22,742,306,936				93,467,442

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

 

MARKETING WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		Three months ended December 31,
		2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	4,052,809			$	(2,060,317	)
Adjustments to reconcile net income (loss) to cash used in operations:
Depreciation and amortization			34,664				56,700
Amortization of deferred financing costs			-				46,262
Amortization of debt discounts			295,053				358,428
Non cash interest			748,638				159,178
Change in fair value of derivative liability			(5,556,172	)			1,140,651
Fair value of vested employee options			5,500				5,500
Notes payable issued for services rendered			75,000				-
Stock based compensation			22,204				30,000
Cancelation of previously issued common stock for services			-				(120,000	)
(Increase) decrease in operating assets:
Accounts receivable			(17,917	)			(102,853	)
Inventory			(440	)			8,103
Increase (decrease) in operating liabilities:
Accounts payable and other current liabilities			158,391				410,239
Cash used in operating activities			(182,272	)			(68,109	)
CASH FLOWS FROM INVESTING ACTIVITIES:			-				-
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of lines of credit			-				(6,452	)
Proceed from issuance of notes			169,500				90,500
Repayments of notes payable and capital leases			(2,717	)			(8,548	)
Cash provided by financing activities			166,783				75,500
Net (decrease) increase in cash and cash equivalents			(15,489	)			7,391
Cash and cash equivalents, beginning of period			25,266				5,012
Cash and cash equivalents, end of period		$	9,777			$	12,403
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during year for interest		$	-			$	-
Cash paid during year for income taxes		$	-			$	-
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Common stock issued in settlement of debt and accrued interest		$	132,846			$	375,164
Accounts payable settled via issuance of notes payable		$	-			$	29,892
Preferred dividends declared		$	15,958			$	78,750
Common stock issued upon conversion of Series E preferred stock		$	132,386			$	-

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 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 and industrial components for the commercial machinery industries. The Company had a wholly owned subsidiary in Germany, Modelworxx, GmbH, which, in February, 2010, filed insolvency in the German courts. The Company has reclassified Modelworxx, GmbH fiscal year ended September 30, 2011 balances to reflect them as discontinued operations and upon final liquidation, recognized a net gain on disposal of international subsidiary of $349,322 during the year ended September 30, 2012.

 

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 three month period ended December 31, 2012, are not necessarily indicative of the results that may be expected for the year ending September 30, 2013. The unaudited condensed consolidated financial statements should be read in conjunction with the September 30, 2012 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 months ended December 31, 2011, all primary dilutive common shares have been excluded since the inclusion would be anti-dilutive.

 

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

 

		2012				2011
Convertible debt			11,780,755,195				1,207,724
Conversion of Series A preferred stock			-				71,575
Conversion of Series C preferred stock			-				2,223
Conversion of Series E preferred stock			10,748,520,000				-
Options			-				8,967
Warrants			-				24,584
Totals			22,529,275,195				1,315,073

 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

 

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 December 31, 2012 and September 30, 2012 approximated $nil.

 

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.

 

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 three month period ended December 31, 2012, the Company incurred a loss from operations of approximately $376,000. The Company has available cash of approximately $10,000 at December 31, 2012.  During the three months ended December 31, 2012, the Company’s operating activities used cash of approximately $182,000.  The Company’s working capital deficiency was approximately $4,961,000 and $4,516,000 as of December 31, 2012 and September 30, 2012, respectively.

 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

 

The Company’s accumulated deficit was approximately $24,137,000 and $28,184,000 as of December 31, 2012 and September 30, 2012, respectively.  In addition, the Company has a stockholders’ deficit of approximately $10,724,000 and $15,054,000 at December 31, 2012 and September 30, 2012, 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 still slightly down, the Company has successfully gained more business opportunities and has concluded several significant preproduction processes.. 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 over the next three years.

 

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

 

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

 

NOTE 4 – INVENTORIES

 

The inventories are stated at the lower of cost or market using the first-in, first-out method of valuation. The inventories at December 31, 2012 and September 30, 2012 are as follows:

 

		December 31,				September 30,
		2012				2012
Work in process		$	197,926			$	197,486
Finished goods			24,686				24,686
Total inventory before reserve			222,612				222,172
Less inventory reserve			(139,729	)			(139,729	)
Net inventory		$	82,883			$	82,443

 

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 December 31, 2012 and September 30, 2012, the majority of the inventory reserve is for supply of product no longer in production or demand from existing customers.

 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

 

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT

 

At December 31, 2012 and September 30,2012, property, plant and equipment consist of the following:

 

		December 31, 2012				September 30, 2012				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				1,430,499				7 – 10 years
Subtotal			2,415,144				2,415,144
Less land and building depreciation			(1,528,342	)			(1,493,678	)
Net property, plant and equipment		$	886,802			$	921,466

 

Depreciation expense included as a charge to operations of $34,664 and $56,700 for the three months ended December 31, 2012 and 2011 respectively.

 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

 

NOTE 6 – CONVERTIBLE NOTES PAYABLE

 

At December 31, 2012 and September 30, 2012, convertible notes payable consists of the following:

 

		December 31, 2012				September 30, 2012
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.  (**)			550,930				553,646
Note payable issued on June 29, 2011, due July 1, 2012, with interest at 8% per annum, unsecured. Note is in default			138,000				138,000
Note payable issued on July 1, 2011, due  July 1, 2012, with interest at 16% per annum, unsecured. Note is in default			25,000				25,000
Note payable issued on July 20, 2011, due  July 20, 2012, with interest at 16% per annum, unsecured. Note is in default			15,000				15,000
Note payable issued on July 21, 2011, due  July 21, 2012, with interest at 16% per annum, unsecured. Note is in default			35,000				35,000
Note payable, issued December 6, 2011, due September 27, 2012, with default interest At 22% per annum, unsecured			-				12,350
Note payable, issued on February 1, 2012, due November 2, 2012, with interest at 8% per annum, unsecured, net of unamortized debt discount of $4,338, Note is default			47,500				43,162
Note payable, issued on February 15, 2012, due February 15, 2013, with interest At 10% per annum, unsecured, net of unamortized debt discount of $6,164 and $18,767, respectively			43,836				31,233
Note payable, issued on February 22, 2012, due November 22, 2012, with interest at 8% per annum, unsecured, net of unamortized debt discount of $17,973. Note is in default			87,274				74,643
Note payable, issued on April 25, 2012, due January 30, 2013, with interest at 8% per annum, unsecured, net of unamortized debt discount of $4,821 and $19,607, respectively			40,179				25,393
Note payable, issued on May 16, 2012, due December 31, 2012, with interest at 6% per annum, unsecured, net of unamortized debt discount of $32,140. Note is in default			80,000				47,860
Note payable, issued on May 16, 2012, due December 31, 2012, with interest at 6% per annum, unsecured, net of unamortized debt discount of $32,140. Note is in default.			80,000				47,860
Note payable, issued on June 1, 2012, due December 31, 2012, with interest at 6% per annum, unsecured, net of unamortized debt discount of $41,132			64,125				54,098
Note payable, issued on June 1, 2012, due December 31, 2012, with interest at 6% per annum, unsecured (assumed from note above on October 11, 2012)			24,044				-
Note payable, issued on July 30, 2012, due March 31, 2013, with interest at 8% per annum, unsecured, net of unamortized debt discount of $18,648 and $37,500, respectively			31,352				12,500
Note payable, issued on August 2, 2012, due  May 6, 2013, with interest at  8% per annum, unsecured, net of unamortized debt discount of $9,097 and $15,740, respectively			10,903				4,260
Notes payable, issued on September 12, 2012, due March 31, 2013, with interest at 8% per annum, unsecured, net of unamortized debt discount of $20,250 and $40,950, respectively			24,750				4,050
Note payable, issued on September 30, 2012, due December 31, 2012, with interest at 6% per annum, unsecured, net of unamortized debt discount of $40,775			40,775				-
Note payable, issued on October 1, 2012, due December 31, 2012, with interest at nil% per annum, unsecured, net of unamortized debt discount of $15,889			9,111				-
Note payable, issued on October 11, 2012, due March 31, 2013, with interest at nil% per annum, unsecured, net of unamortized debt discount of $11,512			10,488				-
Note payable, issued on October 26, 2012, due March 31, 2013, with interest at nil% per annum, unsecured, net of unamortized debt discount of $14,423			10,577				-
Note payable, issued on November 1, 2012, due December 31, 2013, with interest at nil% per annum, unsecured, net of unamortized debt discount of $21,471			3,529				-
Note payable, issued November 9, 2012, due March 31, 2013, with interest at nil% per annum, unsecured, net of unamortized debt discount of $22,183			12,817				-
Note payable, issued November 29, 2012, due May 31, 2013, with interest at nil% per annum, unsecured, net of unamortized debt discount of $24,725			5,275				-
Note payable, issued December 1, 2012, due December 31, 2013, with interest at nil% per annum, unsecured, net of unamortized debt discount of $23,101			1,899				-
Note payable, issued December 12, 2012, due June 30, 2013, with interest at nil% per annum, unsecured, net of unamortized debt discount of $22,625			2,375				-
Note payable, issued December 12, 2012, due September 17, 2013, with interest at 8% per annum, unsecured, net of unamortized debt discount of $30,395			2,105				-
Total			1,886,598				1,613,810
Less Current portion			(1,886,598	)			(1,613,810	)
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.

 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

 

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

 

Notes issued during the three months ended December 31, 2012

 

During the three months ended December 31, 2012, the Company issued an aggregate of $244,500 Convertible Promissory Notes (of which $75,000 for services) that mature from March 31, 2013 through December 31, 2013. The note bears interest at a rate of nil% to 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rates based on a defined discount to the Company's common stock.

 

The Company identified embedded derivatives related to the Convertible Promissory Notes issued during the three months ended December 31, 2012.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Notes and to adjust the fair value as of each subsequent balance sheet date.  At the inception of the Convertible Promissory Notes, the Company determined a fair value of $965,123 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	481.90% to 544.10	%
Risk free rate:	0.10% to 0.18	%

 

The initial fair value of the embedded debt derivative of $965,123 was allocated as a debt discount up to the proceeds of the notes ($239,297) with the remainder ($725,826) charged to current period operations as interest expense.

 

During the three months ended December 31, 2012 and 2011, the Company amortized $295,053 and $358,428 comprised of the debt discount of the aggregate of all outstanding convertible notes to current period operations as interest expense, respectively.

 

Settlement of previously issued Convertible Promissory Notes

 

During the three months ended December 31, 2012, the Company issued an aggregate of 186,541,136 shares of common stock in full settlement of $54,277 of convertible notes and related accrued interest.

 

The fair value of the described embedded derivative of $6,088,028 at December 31, 2012 was determined using the Binomial Lattice Model with the following assumptions:

 

Dividend yield:	-0- %
Volatility	546.18%
Risk free rate:	0.02 to 0.16%

 

At December 31, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $5,308,691 for the quarter ended December 31, 2012.

 

NOTE 7 – OTHER CURRENT LIABILITIES

 

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

 

		December 31, 2012				September 30, 2012
Preferred dividends payable		$	402,451			$	386,493
Consulting fees			96,000				394,779
Interest			293,985				7,364
Payroll and other			399,426				309,253
Total		$	1,191,862			$	1,097,889

 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

 

NOTE 8 - 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 $562,486 as of December 31, 2012 was determined using the Binomial Lattice formula assuming no dividends, a risk-free interest rate of 0.36%, expected volatility of 546.18%, and expected remaining warrant life of 3.50 to 3.74 years.

 

The Company adjusted the recorded fair values of the warrants to market from September 30, 2012 resulting in a non-cash, non-operating gain of $247,481 for the three months ended December 31, 2012.

 

NOTE 9 - CAPITAL STOCK

 

During the three months ended December 31, 2012, the Company issued an aggregate of 186,541,136 shares of its common stock fair valued at $132,846 for conversion of debt and accrued interest of $54,277.

 

During the three months ended December 31, 2012, the Company issued an aggregate of 199,322,802 shares of its common stock in exchange for 363.98 shares of Series E preferred stock.

 

During the three months ended December 31, 2012, the Company issued an aggregate of 32,006,668 shares of its common stock in exchange for services rendered valued at $22,204.

 

NOTE 10 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES

 

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

 

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

 

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

 

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

 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

 

Included in the Company's unaudited condensed consolidated balance sheets at December 31, 2012 and September 30, 2012 are the following net assets of JCMD:

 

		December 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			242,584				232,127
Total current liabilities			732,339				712,882
Total deficit			(538,906	)			(528,499	)
Total liabilities and deficit		$	193,433			$	193,433

 

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

 

		2012				2011
Revenues		$	-			$	-
Interest, net			10,407				10,408
Total costs and expenses			10,407				10,408
Total costs and expenses
Operating income (loss) -Real estate		$	(10,407	)		$	(10,408	)

 

The Variable Interest Entity owned by JCMD and included in these 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 11- 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.

 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

 

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 December 31, 2012:

 

						Fair Value Measurements at December 31, 2012 using:
		December 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		$	6,088,028				-				-			$	6,088,028
Warrant liabilities		$	562,486				-				-			$	562,486

 

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

 

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of December 31, 2012:

 

		Debt Derivative Liability				Warrant Liability
Balance, October 1, 2012		$	10,649,266			$	809,967
Initial fair value of debt derivatives at note issuances			965,123				-
Transfers to (from) liabilities due to conversions			(217,669	)
Mark-to market at December 31, 2012:
-Embedded debt derivatives			(1,899,199	)			-
-Reset provisions relating to Series E preferred stock			(3,409,493	)			-
-Reset provisions related to warrants			-				(247,481	)
Balance, December 31, 2012			6,088,028				562,486
Net loss for the period included in earnings relating to the liabilities held at December 31, 2012		$	5,308,692			$	247,481

 

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

 

NOTE 12 - COMMITMENTS AND CONTINGENCIES

 

On July 11, 2012 the Company and SR-V Advisors, LLC entered into a Settlement Agreement and Stipulation for SV-R to purchase not less than $860,000 of the bona fide and outstanding liabilities of the Company's past due debt, subject to an annexed Claim Purchase Agreement. The validity of this Settlement Agreement is subject to and would only become binding upon entry of an order by the Court, substantially in the form as agreed upon in the annex of the Settlement Agreement.

 

In settlement of the claims, Company shall initially issue and deliver to SRV, in one or more tranches if necessary, Fifteen Million (15,000,000) shares of Common Stock, subject to ownership limitations and two hundred thousand shares (200,000) as settlement fee. Additional shares that may become necessary to issue in satisfaction of the claim purchase amounts, are being valued during an evaluation period and issued at a 20% discount to the market price during such evaluation period. The number of shares issued are subject to ownership limitations of 9.9%.

 

Subsequent to a hearing before the court on December 10, 2012, the Superior Court of Connecticut granted an order on February 7, 2013 (Docket No: DBDCV126010826S) making the Agreement between SV-R and Marketing Worldwide binding.

 

 

 

MARKETING WORLDWIDE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

 

 

NOTE 13 - SUBSEQUENT EVENTS

 

In January and February 2013, the Company issued an aggregate of 611,928,542 shares of its common stock in settlement of $57,071 of convertible notes and related interest.

 

January and February 2013, the Company issued an aggregate of 481,496,523 shares of its common stock in exchange for 288.165 shares of Series E preferred stock.

 

In January and February 2013, the Company issued an aggregate of $135,000 of convertible notes.

 

 

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”).

 

Marketing Worldwide, LLC (“MWW”)

 

The MWW Automotive Group (OTCQB: MWWC) administration office is located in Howell, Michigan, with a 46,000 square foot Class A manufacturing and logistics facility in Baroda, Michigan for the production of high quality OE automotive and industrial products. MWW delivers its products and Class A painting, assembly and logistics services directly to major US and Foreign automobile manufacturers' Vehicle Processing Centers (VPC), leading edge show car and performance accessory design firms, and/or assembly lines in North America. MWW's industrial products are delivered directly to the industrial manufacturers for installation in their facilities.

 

MWW’s programs are sold not only to Automotive and Industrial Original Equipment Manufacturers but also directly to vehicle processing centers, manufacturers and distributors located primarily in North America and through its Tier 1 partner companies. These companies 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 delivering components from the US and European market to MWW, expecting refinishing and just-in time inventory delivery to their large assembly plants in the U.S. and Europe. Special design vehicle components are delivered to MWW from within the US and delivered directly to the design firms extended client distribution network.

 

MWW's business model empowers its customers, some of the largest brands in the U.S., to make the selection of various accessories and components (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:

 

* Hood Scoops

* Grills

* Rear Deck Spoilers

* Body Side Moldings

* Front and Rear Fascia Systems

* Side Skirts

* Engine Components

* Interior Dash Components

* Large industrial components

 

Based on expertise and space available in its Baroda plant, MWW is also providing logistics support for new customers, going beyond the Company’s original business plan, meaning MWW receives, stores and distributes 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, implemented rigid cost down exercises and streamlining of production processes and have successfully gained substantial new business opportunities.. CT is aggressively beginning to diversify to non-automotive paint applications and has secured its first industrial client, (construction and agricultural equipment) which we believe will help stabilize the Company going forward during 2013.

 

GENERAL OVERVIEW

 

MWW operates in a niche market of the supply chain for new passenger motor vehicles primarily in the United States and Canada. MWW participates in the design of new automobiles and the building of show cars and is a designer and manufacturer of accessories for the customization of cars, sport utility vehicles and light trucks.

 

MWW's revenues are derived through the sales of its products and services to large automotive companies. As a consequence, MWW is dependent upon the acceptance of its products in the first instance by the automotive industry. As a result of this dependence MWW's business is vulnerable to actions which impact the automotive industry in general, including but not limited to, current fuel costs, and new environmental regulations. Growth opportunities for the Company include expanding its geographical coverage and increasing its penetration of existing markets through internal growth and expanding into new product markets, adding additional customers and acquiring companies in its core industry that supplement and compliment the currently existing capabilities.

 

Challenges currently facing the Company include managing its growth and controlling costs. Escalating costs of audits, Sarbanes-Oxley compliance, health care and commercial insurance are also challenges for the Company at this time.

 

 

The following specific factors could affect our revenues and earnings in a particular quarter or over several quarterly or annual periods:

 

·           Ability to continue increasing sales opportunities

·           Ability to convert sales opportunities to actual revenue

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

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

 

The requirements for our products are complex, and before buying them, customers spend a great deal of time reviewing and testing them. Our customers' evaluation and purchase cycles do not necessarily match our report periods, and if by the end of any quarter or year we have not sold enough new products, our orders and revenues could fall below our plan for a period of time. Like many companies in the automotive accessory industry, a large proportion of our business is attributable to our largest customers. As a result, if any order, and especially a large order, is delayed beyond the end of a fiscal period, our orders and revenue for that period could be below our plan.

 

The accounting rules we are required to follow permit us to recognize revenue only when certain criteria are met.

 

CRITICAL ACCOUNTING POLICIES

 

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various others assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions.  While there are a number of significant accounting policies affecting our consolidated financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:

 

o      Accounting for variable interest entities

o      Revenue recognition

o      Inventories

o      Allowance for doubtful accounts

o      Stock based compensation

o      Derivative liabilities

 

ACCOUNTING FOR VARIABLE INTEREST ENTITIES

 

Accounting Standards Codification subtopic 810-10, Consolidation (“ASC 810-10”) discusses certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity risk for the entity to finance its activities without additional subordinated financial support. ASC 810-10 requires the consolidation of these entities, known as variable interest entities, by the primary beneficiary of the entity.  The primary beneficiary is the entity, if any, that will absorb a majority of the entities expected losses, receive a majority of the entity’s expected residual returns or both.

 

Pursuant to the effective date of a related party lease obligation, the Company adopted ASC 810-10.  This resulted in the consolidation of one variable interest entity (VIE) of which the Company is considered the primary beneficiary.  The Company’s variable interest in this VIE is the result of providing certain secured debt mortgage guarantees on behalf of a limited liability company that leases warehouse and general offices located in the city of Howell, Michigan.

 

 

INVENTORIES

 

We value our inventories, which consist primarily of automotive body components, at the lower of cost or market. Cost is determined on the weighted average cost method and includes the cost of merchandise and freight. A periodic review of inventory quantities on hand is performed in order to determine if inventory is properly valued at the lower of cost or market. Factors related to current inventories such as future consumer demand and trends in MWW's core business, current aging, and current and anticipated wholesale discounts, and class or type of inventory is analyzed to determine estimated net realizable values. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if required. Any significant unanticipated changes in the factors noted above could have a significant impact on the value of our inventories and our reported operating results.

 

ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS

 

We are required to estimate the collectability of our trade receivables. A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past due balances. In order to assess the collectability of these receivables, we perform ongoing credit evaluations of our customers' financial condition. Through these evaluations we may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to us and are reevaluated and adjusted as additional information is received.

 

 

Our reserves are also based on amounts determined by using percentages applied to certain aged receivable categories. These percentages are determined by a variety of factors including, but are not limited to, current economic trends, historical payment and bad debt write-off experience. We are not able to predict changes in the financial condition of our customers and if circumstances related to our customers deteriorate, our estimates of the recoverability of our receivables could be materially affected and we may be required to record additional allowances. Alternatively, if we provided more allowances than are ultimately required, we may reverse a portion of such provisions in future periods based on our actual collection experience. There was $nil allowance for doubtful accounts at December 31, 2012 and September 30, 2012.

 

COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2012 TO THE THREE MONTHS ENDED DECEMBER 31, 2011

 

REVENUES

 

Net revenues were $193,974 for the three months ended December 31, 2012. Our revenues decreased by $29,615 from the three months ended December 31, 2011. This decrease is attributable to the fact that some of the new programs that had already been awarded have been significantly delayed.  We are re-focusing on our core business, have restructured certain divisions of the Company and accordingly had lower production output during this transitional period. The Company is now quoting again on numerous new paint projects and has commenced production with new programs for the 2013 and 2014 periods that are expected to provide continued revenue growth.

 

GROSS LOSS

 

For the three months ended December 31, 2012, MWW's gross loss was $26,249 (13.5%) compared to gross loss of $91,684 (41.05%) for the three months ended December 31, 2011. MWW sold a greater percentage of its higher margin products in 2012 than in 2011.

 

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 $350,176 (180.5% of revenues) in 2012 compared to $253,026 (113.2% of revenues) during 2011. The increase in costs is attributable to additional staffing added with our Colortek as we ramp up towards future revenue. Management intends to keep costs low, so increasing product volume and revenue will result in improving profit margins and eventually net profits. Significant components of operating expenses consist of professional fees and salaries.

 

 

OTHER INCOME (EXPENSES)

 

Financing expenses were $1,126,944 for the three months ended December 31, 2012 compared to $577,664 during same period last year. We incurred non cash interest expense and amortization of debt discounts relating to our convertible notes of $1,043,690 for the three months ended December 31, 2012 compared to $517,606 for the three months ended December 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 E Preferred Stock that have certain reset provisions.  All of which, we are required to bifurcate from the host financial instrument and mark to market each reporting period. We recorded the initial fair value of the reset provision as a liability with an offset to equity or debt discount and subsequently mark to market the reset provision liability at each reporting cycle.

 

For the three months ended December 31, 2012, we recorded a net gain of $5,556,172 in change in fair value of the derivative liability as compared to a loss of $1,140,651 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 December 31, 2012 we had working capital deficit of $4,960,517. We reported negative cash flow from operating activities of ($182,272) and positive cash flow from financing activities of $166,783.

 

The negative cash flow from operating activities consists of $4,052,809 net income, net with, a gain on change in fair value of derivative liability of $5,556,172, with adjustments for $34,664 depreciation and amortization expenses, $295,053 in amortization of debt discounts, $748,638 non cash interest,  $5,500 stock based compensation, common stock issued for services of $22,204, notes payable issued for services of $75,000. Changes in operating assets were a $17,917 increase in accounts receivable, $440 decrease in inventory and $158,391 increase in accounts payable and other current liabilities.

 

Cash flows from financing activities were primarily from issuance of notes payable of $169,500, net with repayments of $2,717.

 

MWW expects its regular capital expenditures to be approximately $100,000 for fiscal 2013. 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, 2012 consolidated financial statements included in our Form 10-K states that our difficulty in generating sufficient cash flow to meet our obligations and sustain operations raise substantial doubts about the our ability to continue as a going concern.  The consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

 

 

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

 

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

 

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

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

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

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any off-balance sheet arrangements.

 

ITEM 3. – Quantitative and Qualitative Disclosures about Market Risk

 

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

 

ITEM 4. Controls and Procedures

 

a) Evaluation of Disclosure Controls and Procedures. As of December 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

 

The Company is sometimes subject to certain legal proceedings and claims, which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity.

 

As part of our mortgage guarantee for the Colortek mortgage proceedings by Edgewater Bank against Colortek (Case #120-0330-CK), Edgewater has requested the payment of a deficiency amount of $438,049.53 from Marketing Worldwide as a guarantor to the payment of this amount. We have conducted several settlement meetings with Edgewater and Edgewater has agreed to not to file a Motion for Summary Disposition to get a judgment. Based on the progress of the meetings, we believe settlement is probable. We are currently working on several well thought out settlement alternatives, which will get Edgewater paid and allow Colortek to continue operations in its facilities under a new lease agreement.

 

Marvin

 

Following the initial legal procedure with James Marvin/Michigan Department of Wage and Hour (Determination #156776), MWW and the State of Michigan has entered into a consent judgment for the payment of a wage and hour amount claimed by Marvin. Subsequent to this judgment, the Company has filed a third party complaint against Marvin as reported in our 10K annual report.

 

The State has agreed to hold the judgment in abeyance until the completion of the third party complaint and any amounts found due to MWW from Marvin will be deducted from the consent judgment. Marvin has not reacted in time to the company’s third party complaint, which would allow the Company to request entry of a default, judgment. Marvin’s counsel has asked for an extension of such judgment and MWW has granted such an extension in order to facilitate the quick resolution and settlement between the parties. MWW counsel feels MWW will either be awarded or settle for an amount equal to or greater than the amount due to Marvin.

 

On July 11, 2012 the Company and SR-V Advisors, LLC entered into a Settlement Agreement and Stipulation for SV-R to purchase not less than $860,000 of the bona fide and outstanding liabilities of the Company’s past due debt, subject to an annexed Claim Purchase Agreement. The validity of this Settlement Agreement is subject to and would only become binding upon entry of an order by the Court, substantially in the form as agreed upon in the annex of the Settlement Agreement.

 

In settlement of the claims, Company shall initially issue and deliver to SRV, in one or more tranches if necessary, Fifteen Million (15,000,000) shares of Common Stock, subject to ownership limitations and two hundred thousand shares (200,000) as settlement fee. Additional shares that may become necessary to issue in satisfaction of the claim purchase amounts, are being valued during an evaluation period and issued at a 20% discount to the market price during such evaluation period. The number of shares issued are subject to ownership limitations of 9.9%.

 

Subsequent to a hearing before the court on December 10, 2012, the Superior Court of Connecticut granted an order on February 7, 2013 (Docket No: DBDCV126010826S) making the Agreement between SV-R and Marketing Worldwide binding.

  

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

 

None.

 

 

ITEM 3. Defaults upon Senior Securities

 

Note payable issued on June 29, 2011, due July 1, 2012, with interest at 8% per annum, unsecured. Note is in default.

 

Note payable issued on July 1, 2011, due July 1, 2012, with interest at 16% per annum, unsecured. Note is in default.

 

Note payable issued on July 20, 2011, due July 20, 2012, with interest at 16% per annum, unsecured. Note is in default.

 

Note payable issued on July 21, 2011, due July 21, 2012, with interest at 16% per annum, unsecured. Note is in default.

 

Note payable, issued on February 1, 2012, due November 2, 2012, with interest at 8% per annum, unsecured, net of unamortized debt discount of $4,338. Note is default.

 

Note payable, issued on February 22, 2012, due November 22, 2012, with interest at 8% per annum, unsecured, net of unamortized debt discount of $17,973. Note is in default.

 

Note payable, issued on May 16, 2012, due December 31, 2012, with interest at 6% per annum, unsecured, net of unamortized debt discount of $32,140. Note is in default.

 

Note payable, issued on May 16, 2012, due December 31, 2012, with interest at 6% per annum, unsecured, net of unamortized debt discount of $32,140. Note is in default.

 

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.

 

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. 

 

ITEM 4. Mine Safety Disclosures

 

Not applicable

 

Item 5. Other Information

 

None

 

ITEM 6. Exhibits

 

(a) EXHIBIT(S) DESCRIPTION

 

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

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

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

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

(5) Opinion on Legality *****

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

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

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

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

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

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

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

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

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

 

 

SIGNATURES

 

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

 

MARKETING WORLDWIDE CORPORATION

 

BY:	/s/ CHARLES PINKERTON
	NAME: CHARLES PINKERTON
	TITLE: CHIEF EXECUTIVE OFFICER/CHIEF FINANCIAL OFFICER
	Date: February 19, 2013

 

 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: February 19, 2013