ITEM 1. BUSINESS
This Annual Report on Form 10-K (including the section regarding Management's Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including statements using terminology such as "can", "may", "believe", "designated to", "will", "expect", "plan", "anticipate", "estimate", "potential" or "continue", or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. You should read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, forward looking statements involve risks and uncertainties and our actual results and the timing of certain events could differ materially from those discussed in forward-looking statements as a result of certain factors, including those set forth under "Risk Factors," "Business" and elsewhere in this report. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to us as of the date thereof, and we assume no obligations to update any forward-looking statement or risk factor, unless we are required to do so by law.
Marketing Worldwide Corporation
Marketing Worldwide Corporation, a Delaware corporation ("MWWC” "We" "Us" "Our" or the "Company"), was incorporated on July 21, 2003. MWWC's headquarters are in Howell, Michigan. MWWC operates through the holding company structure and conducts its business operations through our wholly owned subsidiaries Colortek, Inc. (“CT”) and Marketing Worldwide, LLC (“MWW”).
In previous reporting periods, the Company had a 100 % German subsidiary, Modelworxx, GmbH (“MWX”). As the direct result from the world-wide economic recession, MWX was forced to file insolvency in the German legal system. This filing was done in February, 2010 and MWWC has not been provided any final determination from the German courts and does not expect to receive any further communication.. The Company reported this transaction as discontinued operations in the reported consolidated financial statements.
Marketing Worldwide, LLC (“MWW”)
MWW is a global design, engineering, manufacturer and fulfillment firm serving some of the world’s leading automotive and industrial manufacturers, providing products and services to Automotive and Industrial Original Equipment Manufacturers along with accessories for the customization of vehicles and delivers its products to certain Vehicle Processing Centers primarily in North America. MWW operates in a 23,000 square foot leased building in Howell Michigan.
The primary automotive accessory products provided by MWW are blow-molded spoilers (bridge and lip), front and rear fascia systems, side skirts, door panels, extruded body-side moldings and interior dash components. During 2011, we have identified several new business partners to drive more product sales and expect fiscal year 2012 to be greater than 2011.
MWW’s programs are sold not only to Automotive and Industrial Original Equipment Manufacturers but also directly to vehicle processing centers and distributors located primarily in North America. These vehicle processing centers and distributors receive a continuous stream of new vehicles from the foreign and domestic automobile manufacturers for accessorization, customization, and subsequently, distribution into the domestic dealer distribution network. Distributors also sell MWW’s accessories directly to their dealers and end customers. The industrial partners are expecting just-in time inventory delivery to their large assembly plants in the U.S. and Europe.
MWW's business model empowers its customers to make the selection of various accessories (sold by MWW) later in the production cycle, thus improving time to market for their automobiles and faster reaction to the dynamically changing demand of its customers. The principal MWW products sold during the last two fiscal years include Automotive Body Components such as:
* Rear Deck Spoilers
* Body Side Moldings
* Front Fascia Systems
* Side Skirts
* Door Panels
* Interior Components
Several of the vehicles MWW currently provides accessories to are changing models next year and will provide additional growth opportunities. Based on expertise and space available in its Baroda plant, MWW is also negotiating to provide fulfillment activities for new customers, going beyond the Company’s original business plan, meaning MWW will receive, store and ship products that are designed and manufactured by other unrelated companies.
Colortek, Inc. (“CT”)
CT is a wholly owned Class A Original Equipment painting facility and operates in a 46,000 square foot owned building in Baroda, which is in South Western Michigan. We invested approximately $2 million into this paint facility and expect the majority of our future growth to come from this business. We have restructured the management of this subsidiary and have successfully gained more business opportunities than ever before. CT is aggressively beginning to diversify to non-automotive paint applications (household goods and construction equipment) which we believe will help stabilize the Company going forward during 2012.
RECENT DEVELOPMENTS
In September, 2009, the Company entered into a new loan agreement with Summit Financial to borrow up to $1,000,000. MWW pledged all of its inventory, equipment, accounts receivable, chattel paper, instruments, and letters of credit, documents, deposit accounts, investment property, money, rights to payment and general intangibles to secure the Loan. The financing arrangement expires on August 31, 2012, unless extended by both parties.
Effective February, 2010, the Company’s German subsidiary, ModelWorxx GmbH filed insolvency. The Company has not received final resolution of this matter from the German courts. The net liabilities of the 100 % owned subsidiary are included in the reported consolidated financial statements of the Company. The income and expense accounts of ModelWorxx have been reclassified and its operations have been treated as a loss from discontinued operations in these consolidated financial statements.
As part of the continued restructuring of the Company, the Board hired a new Chief Executive Officer, Charles Pinkerton, to further and accelerate the turnaround efforts. To date, the Company has reduced labor by 40 % and occupancy cost by 80 %. Under the new leadership of Mr. Pinkerton, the Company has increased new revenue opportunities ten-fold.
PRODUCTS IN DEVELOPMENT
During 2010, MWW significantly expanded its customer base securing new automotive projects for Chevrolet, Ford, Mazda, Subaru, and Hyundai. One of the most important developments is our recent move into the automotive interior supply chain, securing programs for both the Ford truck line and the Chevrolet Sonic. These are two very crucial developments in the MWW market diversification effort and a corner stone for future revenue generation.
During 2010, MWW began and has partially concluded the certification and approval process with GSI International providing us with substantial Industrial opportunities well into the future.
In January 2009 MWW was awarded the 4Runner running board program for Toyota Canada. This program launched in September of 2009 and should continue through 2014.
In December of 2009 the new Yaris HB package was approved by Southeast Toyota which included a spoiler, interior trim, lighted door sills and the new Bongiovi Acoustics sound system embedded in a special built JVC stereo system.
During the spring and summer of 2009 a full line of newly designed carbon fiber seat heater systems was developed and launched in July 2009. This expands the product line to 7 configurations, expanding the spectrum of applications in different vehicles.
In addition to its internal development programs, MWW is in various stages of joint program developments on a number of new programs with several other suppliers. These development efforts were undertaken to expand our product offering and customer base, while reducing our development costs. These products are either currently being designed, prototyped or in various stages of tooling with expected launch dates in the second or third quarter of fiscal year 2011.
Colortek, Inc. is currently manufacturing products for several domestic and import automotive manufacturers along with negotiating to provide painting services to both the industrial and construction industries. Colortek satisfies a growing marketplace market where lower volume painting releases and Class A production quality are demanded.
THE MARKET
The global automobile accessory market is highly fragmented and not dominated by a few large participants. Competitive pressures among vehicle manufacturers have evolved so that the manufacturers add options to their vehicles at the vehicle processing centers and not during the initial manufacturing process at the assembly line. In addition many manufacturers have switched to smaller vehicle production runs which can be accommodated by MWW’s business model. These options packages are commonly referred to as "port installed" or "dealer installed" option packages. MWW accessory programs are a crucial part of the option packages installed at the vehicle processing centers in North America. Accordingly, MWW receives its revenue directly from the vehicle processing centers and not from the automobile manufacturers or the automotive dealer.
The vehicle processing centers, which MWW sells to, do not design or manufacture the option packages. Instead, they have well-trained employees who install virtually any accessory for all vehicles they distribute. As such, any vehicle received by the vehicle processing centers can be accessorized before it goes into the respective domestic retail dealer distribution network. MWW's accessory programs that are sold to the vehicle processing centers include the individual components, parts, installation instructions and training, fixtures, templates, and warranty.
Vehicle manufacturers and the vehicle processing centers rely on MWW to propose, design, manufacture and deliver the accessory programs. The vehicle processing centers operate under quality control programs similar or equal to the manufacturer's on-line production facilities. Therefore, process stability, quality control issues and other related procedures are a crucial component of a successful relationship with the processing centers. The vehicle processing centers that will market particular vehicles into the dealer network are responsible for requesting, approving, and ultimately paying for the accessory programs.
A large part of the fulfillment program is enhanced by the fact that MWW owns CT, the Class A paint facility. MWW, through its relationship with CT, provides painted products to their customers at the Vehicle Processing Centers as well as through other customers. CT has continued developing its own customers independent of MWW and MWW’s customers, hence providing more diversification. It now seems that MWW’s capacity to produce products efficiently in this segment of the market and satisfy the need for smaller but more frequent production runs is happening as large faculties are considering shutting down their robotic facilities and moving their business to small manufacturers such as MWW, who can execute these production runs cost effectively. We are in negotiations with several of these types of opportunities.
MAJOR CUSTOMERS
MWW's major customers in North America are the Toyota Vehicle Processing Centers, Domestic and Imported Automobile Manufacturers, Industrial Equipment Manufactures as well as a variety of tier 2 and tier 3 manufacturers to the auto industry.
Colortek paints for MWW as well as several tier one and two companies and continued growth is expected to be achieved from the Colortek niche Class A paint facility.
For the year ended September 30, 2011, MWW was dependent upon four (4) customers for 95.18% of its revenue. Customer #1, Customer #2, Customer #3, and Customer #4 represented 36.57%, 32.70%, 20.37% and 5.53% of revenue, respectively. Moreover, 96.51% of our accounts receivable at September 30, 2011 were due from these four (4) customers. For the year ended September 30, 2010, MWW was dependent upon four customers for 99.5% of its revenue. Customer #1, Customer #2, Customer #3, and Customer #4 represented 35.3%, 24%, 20.4%, and 19.8% of revenue, respectively. Moreover, 97.2% of our accounts receivable at September 30, 2010 were due from four customers.
PRODUCT WARRANTIES
MWW generally warranties its products to be free from material defects and to conform to material specifications for a period of three (3) years. MWW has not experienced significant returns to date. MWW suppliers provide warranties for each product manufactured covering manufacturing defects for the same period that MWW offers to its customers. Therefore, a majority of the claims made under product warranties by MWW's customers are covered by our supplier partners and sub-suppliers.
TECHNOLOGY
MWW has an experienced design team whose members have launched successful programs with a variety of customers. MWW applies the latest design tools and technologies during this process and covers the entire range of the design process from the initial sketch to computer aided design (“CAD”), full size clay modeling to fully functional show cars to finally preparing automobiles for production. This experience is expected to accelerate the development of accessory programs for sale in the European and North American markets.
PORTABLE DIGITIZING SYSTEM
In order to produce its products and at the same time expedite the design and development, MWW uses the latest in digital recognition and design technology. Digital recognition refers to the use of up to date digital imaging equipment to capture data for manipulation, using CAD programs to assist the process. MWW uses portable equipment to obtain surface and/or component data acceptable for CAD, either in the field or at the processing center's location. This allows MWW to create highly accurate full-scale parts that can be used for development, presentations and sales and marketing, should the CAD data for a particular vehicle not be available in advance.
SOURCING
All MWW contract suppliers and production facilities are original equipment manufacturers, approved and certified by the International Standards Organization ("ISO") with the ISO 9000 certification. ISO 9000 certification refers to the objectively measurable set of quality management standards and guidelines that form the basis for establishing quality management systems adopted by the ISO. The ISO is a non-governmental organization comprised of the national standards institutes of 146 countries. The facilities have been strategically selected to minimize transportation cost and logistics. Suppliers are required to participate in quality assurance audits and submit the appropriate documentation for the components it processes for MWW.
SUPPLIERS
MWW has established relationships with a group of global suppliers that deliver quality materials for the production of add-on components to MWW. MWW believes there are numerous sources for the raw materials used in its products and a loss of any of these suppliers would not impact MWW’s performance negatively. For the year ended September 30, 2011 MWW had 5 suppliers that aggregating 71.54% represented greater than 10% of our total purchases. Supplier 1, Supplier 2, Supplier 3, Supplier 4 and Supplier 5 represented 21.75%, 15.99%, 13.27%, 10.28% and 10.26% of purchases made from suppliers respectively. For the year ended September 30, 2010, MWW made 60.64% of its purchases from five suppliers; Supplier 1, Supplier 2, Supplier 3, Supplier 4 and Supplier 5 represented 13.11%, 12.63%, 12.09%, 12.08%, and 10.74% respectively.
COMPETITION
The general aftermarket automotive industry is highly competitive. In MWW's market niche, defined as selling directly to the vehicle processing centers, competition is somewhat limited and is occasionally represented by smaller divisions of larger companies. MWW competes for a share of the overall global automotive aftermarket and potential new customers. In general, competition is based on proprietary product design capabilities and product quality, features, price and satisfactory after sale support. MWW's competitors include companies that offer a broad range of products and services, such as urethane molded parts, running boards, ground effects, and design.
The competitive landscape has changed during the last twelve months, the market is more fragmented than ever before, a number of competitors have ceased to exist and consolidation is ongoing. MWW has entered into several strategic alliances with Tier 1 companies. During the next twelve months a clearer picture of main competitors will emerge again.
MWW believes that its competitive edge lies in its extensive resources in design, engineering, Class A painting and sales. MWW focuses on the expansion of its internal capabilities and improved utilization of resources between its headquarters and its wholly owned subsidiaries and the careful cultivation of long-term relationships, in contrast to simply selling products to multiple anonymous customers. By making sure MWW customers will remain satisfied clients, MWW is not only stabilizing and growing its client roster and assuring revenue growth, but also simultaneously building and maintaining barriers of entry for competitors.
MWW spent many years cultivating the relationships that led to (i) the design work for BMW, Rolls Royce and Mini automobiles and (ii) the sale of accessory programs to the vehicle processing centers for Toyota, Hyundai and KIA vehicles. As part of the process, MWW built a strong commercial relationship with the automotive manufacturers that supply MWW with the advance data required to develop new products in a timely fashion for new Toyota, Hyundai and KIA vehicle models. With this information, MWW can prepare new programs for its customers and make those products available at the launch of new automobile models and have them correspond to the 3-5 year life cycles of each vehicle model. Moreover, as MWW manages its supplier and customer relationships effectively, it is creating significant barriers of entry for competitors. MWW expects to establish similar relationships with additional foreign and domestic manufacturers in future periods.
PROPRIETARY RIGHTS
MWW primarily relies upon a combination of trade secret laws, nondisclosure agreements and purchase order forms to establish and protect proprietary rights in the design of its products and in the products. However, it may be possible for third parties to develop similar products independently, provided they have not violated any contractual agreements or intellectual property laws.
COST OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
The Company currently has no costs associated with compliance with environmental regulations. However, there can be no assurances that we will not incur such costs with our paint facilities in the future.
EMPLOYEES
MWW has an elastic work-force, with as few as 10 employees, and as many as 50 employees, depending on the number of projects currently being worked on. Management believes that the structure of its workforce allows MWW to scale its overhead according to the scope of its design, tooling, assembly and manufacturing requirements throughout the year. MWW plans to add employees in the future.
ITEM 1A.
ITEM 1A. RISK FACTORS
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE MARKET PRICE OF OUR SECURITIES.
If any of the following material risks actually occur, our business, financial condition, or results of operations could be materially adversely affected, the trading prices and volume of our common stock could decline, and you could lose all or part of your investment. You should buy shares of Marketing Worldwide Corporation common stock only if you can afford to lose your entire investment. success is dependent on the creative, technical, financial, administrative, logistical, design, engineering, manufacturing and other contributions of the current employees and officers of the Company. Founders of Marketing Worldwide Corporation, Michael Winzkowski and James Marvin have taken on different roles. Winzkowski has relinquished the role of CEO and is now active as Chairman of the Board and President of MWW. Mr. Marvin has resigned and no longer has any management activities at MWW. These individuals originally established the relationships with our customers and suppliers and have turned this role over to the new CEO, Charles Pinkerton and CFO, James Davis. The loss of either Pinkerton or Davis could cause a disruption in our operations that could cause a decline in the level of revenue and the operating margins reported by the company. In the short term, it would be difficult to duplicate the relationships, industry experience, and creativity of Mr. Pinkerton and Mr. Davis. The loss of one or both might substantially reduce our revenues and growth potential, although the recent departure of Mr. Davis had been compensated for with existing management resources.
OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED BY GLOBAL ECONOMIC AND FINANCIAL MARKETS CONDITIONS.
Current global economic and financial markets conditions, including severe disruptions in the credit markets and the prolonged global economic recession has materially and adversely affected our results of operations and financial condition. These conditions have also materially impacted our customers, suppliers and other parties with which we do business. Economic and financial market conditions that adversely affect our customers cause them to terminate existing purchase orders or to reduce the volume of products they purchase from us in the future. We have seen a decline in certain volumes over the last year, but are now seeing an increase due to what appears to be a strengthening economic environment. In connection with the sale of products, we normally do not require collateral as security for customer receivables and do not purchase credit insurance. We may have significant balances owing from customers that operate in cyclical industries and under leveraged conditions that may impair the collectability of those receivables.
Failure to collect a significant portion of amounts due on those receivables could have a material adverse effect on our results of operations and financial condition. Adverse economic and financial markets conditions may also cause our suppliers to be unable to meet their commitments to us or may cause suppliers to make changes in the credit terms they extend to us, such as shortening the required payment period for outstanding accounts receivable or reducing the maximum amount of trade credit available to us. Changes of this type could significantly affect our liquidity and could have a material adverse effect on our results of operations and financial condition. If we are unable to successfully anticipate changing economic and financial market conditions, we may be unable to effectively plan for and respond to those changes, and our business could be negatively affected. We have been fortunate in that we have not had any significant negative effect from not being able to collect on our billings.
OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S REPORT CONTAINS AN EXPLANATORY PARAGHRAPH WHICH HAS EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN, WHICH MAY HINDER OUR ABILITY TO OBTAIN FUTURE FINANCING
In their report dated January 17, 2012, our independent registered public accounting firm stated that our consolidated financial statements for the year ended September 30, 2011 were prepared assuming that we would continue as a going concern, and that they have substantial doubt about our ability to continue as a going concern. Our auditors' doubts are based on our recurring net losses, deficits in cash flows from operations and stockholders’ deficiency. We continue to experience net operating losses. Our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including by the sale of our securities, or obtaining loans from financial institutions, where possible. Our continued net operating losses and our auditors' doubts increase the difficulty of our meeting such goals and our efforts to continue as a going concern may not prove successful.
OUR BUSINESS DEPENDS ON OUR DESIGNS, BUT WE HAVE NOT SOUGHT COPYRIGHT OR PATENT PROTECTION FOR ALL OUR PRODUCTS. IF OUR UNPROTECTED ACCESSORY PROGRAMS BECOME WIDELY AVAILABLE BECAUSE WE FAILED TO USE CERTAIN LEGAL MEANS TO PROTECT OUR DESIGNS, IT MAY HURT OUR BUSINESS.
Our success is dependent, in part, upon the designs for our principal products such as our rear deck spoilers, body-side moldings, carbon fiber seat heaters, and expanding the paint shop business levels. We have not taken steps to obtain copyright or patent protection for all of our designs. Instead, we mostly rely on confidentiality agreements with our customers, employees, vendors and consultants to protect our proprietary technology. If our unprotected accessory programs become widely available because we did not adequately protect the designs, intellectual property and trade secrets, it may cause a material adverse change in our business, financial condition and results of operations.
WE DO NOT HAVE LONG-TERM WRITTEN AGREEMENTS WITH OUR KEY CUSTOMERS OR KEY SUPPLIERS; THEREFORE, OUR REVENUE STREAM AND OUR SUPPLY CHAIN ARE SUBJECT TO GREATER UNCERTAINTY.
The vehicle processing centers for Toyota are all key customers. These customers issue short term contracts (12 months) or blanket purchase orders to us that remain open during the life of an accessory program or the extended term.
The customer then places delivery releases against these blanket purchase orders or short term agreements generally in 30 day intervals. However, none of our key customers have any binding obligations beyond payment of our most recent purchase order and adherence to the terms and conditions of the blanket purchase order or short term agreement. The lack of long-term written agreements that specify a fixed dollar amount of the total purchase amount for our accessory programs or services means that we cannot predict with any certainty that these customers will generate a specific level of revenue in any specific accounting period. Our blanket purchase orders or short term agreements with customers provide for a fixed per unit cost, but do not contain any fixed purchase commitments for a specific dollar amount. A delivery release under the blanket purchase order does specify the dollar amount to be paid by our customer for that release. We record revenue when products are shipped, legal title has passed, and all our significant obligations have been satisfied.
We cannot predict with certainty that we will be able to replace a significant customer or significant supplier without a decline in our revenue and net income. Stated differently, we have to constantly justify our value proposition to our customers and our suppliers because even though the per unit price of our accessory programs is covered in the blanket purchase order, our customers are not obligated to buy the goods and services specified in the blanket purchase order. On the positive side their relative freedom to stop dealing with us keeps us in close contact with them. On the negative side, their freedom to stop dealing with us means that our revenue and our ability to generate revenue is in constant jeopardy, as well as difficult to predict with certainty.
WE USE PAINT AND PLASTIC MATERIALS. OUR BUSINESS COULD BE AFFECTED BY ENVIROMENTAL RISKS.
Colortek, Inc. is a paint company using abrasives and paint solvents. Although we have approval from the governmental agencies to paint, there is no guaranty that laws won’t change to adversely affect us, nor is there absolute certainty we will continue to operate without interference from governmental agencies or environmental groups.
We have not experienced any issues as yet, however the potential exists we may in the future.
LOSS OF FACILITIES COULD IMPAIR OUR ABILITY TO PROVIDE PRODUCTS TO OUR CUSTOMERS.
As in most businesses, if we lost both our facilities in Howell and Baroda Michigan, we would be in a short term bind. The Howell facility would cause less disruption, as we could easily move our offices and the fulfillment activities elsewhere in quick fashion.
Loss of the Baroda facility would require us to rebuild, which we could do with the insurance coverage we maintain. In the short term, we would transfer painting to one of our strategic partners until we got the facility back up and running.
Although the Baroda facility is more critical, we feel the likelihood of a total disaster is remote. Our insurance and strategic relationships with other paint facilities should provide continuity of the supply chain to our customers.
ADVERSE RULING FROM THE BANKRUPTCY JUDGE IN GERMANY COULD NEGATIVELY IMPACT OUR BUSINESS AND CASH FLOW.
As mentioned throughout this filing, our German subsidiary filed for insolvency in February, 2010. We have not received any adverse notifications from the bankruptcy court or judge and have no reason to believe we will, but the possibility exists that we could receive an adverse ruling.
If we were to receive an adverse ruling, we would challenge it through the legal systems available to us.
LOSS OF MAJOR SUPPLIERS COULD AFFECT OUR ABILITY TO GET PRODUCT.
We have a concentration of risk with a few suppliers providing most of our product requirements. If we were to lose anyone of them, this could negatively impact our ability to get product on a timely basis. We have an internal policy to have back-up suppliers to our major product offerings, and are moving in the direction of having a back-up for each of our suppliers.
WARRANTY CLAIMS COULD ADVERSLY IMPACT OUR FINANCIAL POSITION IF OUR CUSTOMERS REQUIRE A RECALL OF VEHICLES DUE TO PRODUCTS WE PROVIDE.
We review warranty reserves on a regular basis and record expense as deemed appropriate for the products sold to our customers. We also purchase product liability insurance to cover large claims.
We believe the risk, although it exists, is minimal as the primary products we sell (plastic rear-deck spoilers, plastic body-side moldings and electric seat heaters) are not likely to give birth to a large massive recall. In any event, we do provide a reserve in our financial statements plus we feel we would have a claim against the actual manufacturer of the product should a massive recall initiative be instituted, which we believe would reduce our financial risk. CONTINUED INCREASES IN PETROLEUM COSTS COULD ADVERSELY IMPACT OUR COST STRUCTURE.
Considering we use paint, which is petroleum based, and ship products via trucks that use gasoline for power, we are at risk of seeing higher costs as petroleum costs increase. Although we have not seen this as yet, we recognize this as a possible risk.
WE ARE VULNERABLE BECAUSE OF OUR CUSTOMER CONCENTRATION, BUT THERE IS NO GUARANTY THAT WE CAN ADD CUSTOMERS. FAILURE TO ADD NEW CUSTOMERS MAY LIMIT OUR REVENUE IN FUTURE PERIODS.
Our revenue depends on a few key customers, the loss of which would have a negative impact on our revenues and results from operations.
Our annual operating results are likely to fluctuate significantly in the future as a result of our dependence on our four or five major customers.
Moreover, the actual purchasing decisions of our customers are often outside our control. Consequently, our customer's purchase decisions are influenced by factors beyond our control, like general economic conditions and economic conditions specific to the automobile industry.
Further, since the majority of our revenue is from four or five key customers instead of from a multitude of individual customers, a significant change in the amount or timing of purchase decisions by a single customer creates a wider fluctuation in our operating results for any given accounting period.
WE HAVE PLEDGED ALL OF OUR ASSETS TO ONE CREDITOR. OUR BUSINESS COULD BE AFFECTED BY OUR RELATIONSHIP WITH THIS CREDITOR.
In September, 2009, we entered into a new loan agreement with Summit Financial to borrow up to $1,000,000. MWW pledged all of its inventory, equipment, accounts receivable, chattel paper, instruments, and letters of credit, documents, deposit accounts, investment property, money, rights to payment and general intangibles to secure the Loan. If we are unable to renew the Loan when it comes due or find other sources of capital, the lender could foreclose on all of our assets. This would have a material adverse effect on our financial condition and results from operations.
MANAGEMENT INTENDS TO INCREASE REVENUE THROUGH ACQUISITIONS FINANCED WITH EQUITY WHICH WILL DECREASE THE EQUITY PERCENTAGE OF THE COMPANY OWNED BY EXISTING STOCKHOLDERS.
Management may consider increasing the Company's revenues through additional acquisitions of other operations in the automotive accessory industry. We have no plans for a reverse merger, change in control or spin off. The Company currently has no plans to engage in a transaction with an entity outside the automotive industry. Management is aware of several operating companies in the automotive accessory market that are candidates for additional merger or acquisition. While we may consider financing any business combination with common stock, we do not expect any business combination to result in a change in control or constitute a reverse merger.
WE LACK INDEPENDENT DIRECTORS WHICH LIMITS THE NATURE AND TYPE OF GUIDANCE GIVEN BY THE BOARD TO THE MANAGEMENT TEAM AND MAY AFFECT THE PRICE OF OUR STOCK.
Shareholders should be aware of and familiar with the recent issues concerning corporate governance and lack of independent directors as a specific topic. Our two directors are not independent because they are employed by the Company. The OTC Bulletin Board does not have any listing requirements concerning the independence of a company's board of directors.
THERE IS A GRADUALLY EMERGING PUBLIC MARKET FOR MWW'S SECURITIES AND YOU MAY HAVE DIFFICULTIES TO LIQUIDATE YOUR INVESTMENT.
Trading volume of MWW stock (MWWC) has been increasing, with a closing ask price of $0.01 on December 31, 2011. If a market for MWW's common stock continues to develop slowly; the stock price may be volatile. No assurance can be given that any market for MWW's common stock will be maintained. The sale of "unregistered" and "restricted" shares of common stock pursuant to Rule 144 of the Securities Act Rules by members of management or others may have a substantial adverse impact on any such market.
WE HAVE IDENTIFIED WEAKNESSES IN OUR INTERNAL CONTROLS.
Our management has concluded that our internal control over financial reporting was not effective as of September 30, 2011, as a result of several material weaknesses in our internal control over financial reporting. Descriptions of the material weaknesses are included in Item 9A (T), "Control and Procedures", in this Form 10-K.
As a result of these material weaknesses, we performed additional work to obtain reasonable assurance regarding the reliability of our financial statements, have hired a CPA as our new CFO to manage the financial department and financial statement process. However, the remaining material weaknesses could result in a misstatement of substantially all accounts and disclosures, which would result in a misstatement of annual or interim financial statements that would not be prevented or detected. Errors in our financial statements could require a restatement or prevent us from timely filing our periodic reports with the Securities and Exchange Commission ("SEC"). Additionally, ineffective internal control over financial reporting could cause investors to lose confidence in our reported financial information.
Our inability to remediate all weaknesses or any additional material weaknesses that may be identified in the future could, among other things, cause us to fail to timely file our periodic reports with the SEC and require us to incur additional costs and divert management resources. Additionally, the effectiveness of our or any system of disclosure controls and procedures is subject to inherent limitations, and therefore we cannot be certain that our internal control over financial reporting or our disclosure controls and procedures will prevent or detect future errors or fraud in connection with our financial statements.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We have received no written comments regarding our periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of our 2011 fiscal year and that remained unresolved.
ITEM 2.
ITEM 2. PROPERTIES
MWW's principal executive office is located at 2212 Grand Commerce Dr., Howell, MI 48855. The facility has three truck wells, two ground doors, a technical development enclosure, 20 foot ceilings, additional office space and more parking. The land for the executive office consists of 2.3 acres. The building is approximately 24,000 square feet.
The facility was built to suit MWW's requirements and specifications. JCMD, the Limited Liability Company owned by the previous two founders of MWW, built the facility and leased the property to MWW under the terms of a three year lease agreement. JCMD borrowed funds to build the facility, and due to the downturn in the overall economic environment and MWW’s inability to remain current on the rent payments to JCMD, JCMD was not able to continue making its mortgage payments and defaulted on the loan. JCMD negotiated the sale of the real estate to a third party, whom has entered into a lease agreement with MWW. The Company entered into a three (3) year lease with the buyer of the property described above. The general terms of the lease calls for monthly payments beginning December 1, 2010 of $6,666.67 ($80,000 annually) for the first year; $7,083.34 ($85,000 annually) per month for the second year; $7,416.67 ($89,000 annually) per month for the third, or final, year of the lease. The total rent due over the three year period is $254,000. The Company is responsible for all property taxes, maintenance and utilities associated with the property. As of November 16, 2011 has reduced the size of the space required at this facility and is no longer responsible for the property taxes, maintenance and utilities associated with the property.
Our subsidiary, Colortek, Inc. has a 42,000 square foot facility on 20 acres located in Baroda, Michigan. The facility is owned by MWW and is financed by Edgewater Bank. The mortgage is scheduled for a balloon payment in July of 2013. The Mortgage note balance at September 30, 2011 was $587,026 with a 180 month term and a fixed interest rate of 6.75%. The current monthly payment is $5,962. In accordance with the mortgage loan agreement, we are currently in default.
We believe that our current office space and facilities are sufficient to meet our present and near term expansion needs and do not anticipate any difficulty securing alternative or additional space, as needed, on terms acceptable to us.
ITEM 3.
ITEM 3. 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.
ITEM 4.
ITEM 4. REMOVED AND RESERVED
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
At January 17, 2012, there were 148,758,612 shares of common stock issued and outstanding. There are 10,065,000 shares of common stock that are subject to outstanding options and warrants to purchase common stock. On January 17, 2012 the closing ask price of our common stock was $0.01 per share.
The common stock of MWW commenced trading on the OTCBB on September 14, 2006. The following table sets forth, for the calendar quarters indicated, the reported high and low bid quotations per share of the Common Stock as reported on the OTCBB. Such quotations reflect inter-dealer quotations without retail mark-up, markdowns or commissions, and may not necessarily represent actual transactions.
At December 31, 2011 MWW had 53 common stockholders of record and the share price was $0.01. MWW has not declared any cash dividends on its common equity for the last two years. It is unlikely that MWW will pay dividends on its common equity in the future and is likely to retain earnings and issue additional common equity in the future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial statements. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future.
GENERAL OVERVIEW
MWW operates in a niche market of the supply chain for new passenger motor vehicles primarily in the United States and Canada. MWW participates in the design of new automobiles and the building of show cars and is a designer and manufacturer of accessories for the customization of cars, sport utility vehicles and light trucks.
MWW's revenues are derived through the sales of its products and services to large automotive companies. As a consequence, MWW is dependent upon the acceptance of its products in the first instance by the automotive industry. As a result of this dependence MWW's business is vulnerable to actions which impact the automotive industry in general, including but not limited to, current fuel costs, and new environmental regulations. Growth opportunities for the Company include expanding its geographical coverage and increasing its penetration of existing markets through internal growth and expanding into new product markets, adding additional customers and acquiring companies in its core industry that supplement and compliment the currently existing capabilities.
Challenges currently facing the Company include managing its growth and controlling costs. Escalating costs of audits, Sarbanes-Oxley compliance, health care and commercial insurance are also challenges for the Company at this time.
The following specific factors could affect our revenues and earnings in a particular quarter or over several quarterly or annual periods:
·
Ability to continue increasing sales opportunities
·
Ability to convert sales opportunities to actual revenue
·
Ability to continue controlling our selling, general and administrative costs
·
Ability to obtain funding adequate to satisfy past obligations and grow future opportunities
The requirements for our products are complex, and before buying them, customers spend a great deal of time reviewing and testing them. Our customers' evaluation and purchase cycles do not necessarily match our report periods, and if by the end of any quarter or year we have not sold enough new products, our orders and revenues could fall below our plan for a period of time. Like many companies in the automotive accessory industry, a large proportion of our business is attributable to our largest customers. As a result, if any order, and especially a large order, is delayed beyond the end of a fiscal period, our orders and revenue for that period could be below our plan.
The accounting rules we are required to follow permit us to recognize revenue only when certain criteria are met.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various others assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:
o Accounting for variable interest entities
o Revenue recognition
o Inventories
o Allowance for doubtful accounts
o Stock based compensation
o Derivative liabilities
ACCOUNTING FOR VARIABLE INTEREST ENTITIES
Accounting Standards Codification subtopic 810-10, Consolidation (“ASC 810-10”) discusses certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity risk for the entity to finance its activities without additional subordinated financial support. ASC 810-10 requires the consolidation of these entities, known as variable interest entities, by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entities expected losses, receive a majority of the entity’s expected residual returns or both.
Pursuant to the effective date of a related party lease obligation, the Company adopted ASC 810-10. This resulted in the consolidation of one variable interest entity (VIE) of which the Company is considered the primary beneficiary. The Company’s variable interest in this VIE is the result of providing certain secured debt mortgage guarantees on behalf of a limited liability company that leases warehouse and general offices located in the city of Howell, Michigan.
REVENUE RECOGNITION
For revenue from products and services, the Company recognizes revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10”). ASC 605-10 requires that four basic criteria must be met before revenue can be recognized; (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered/services rendered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.
The Company defers any revenue for which the product has not been delivered or services has not been rendered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or services has been rendered or no refund will be required.
ASC 605-10 incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arrangements (“ASC 605-25”). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing 605-25 on the Company’s financial position and results of operations was not significant.
Revenues on the sale of products, net of estimated costs of returns and allowance, are recognized at the time products are shipped to customers, legal title has passed, and all significant contractual obligations of the Company have been satisfied. Products are generally sold on open accounts under credit terms customary to the geographic region of distribution. The Company performs ongoing credit evaluations of the customers and generally does not require collateral to secure the accounts receivable.
The Company generally warrants its products to be free from material defects and to conform to material specifications for a period of three (3) years. The cost of replacing defective products and product returns have been immaterial and within management's expectations. In the future, when the company deems warranty reserves are appropriate that such costs will be accrued to reflect anticipated warranty costs.
INVENTORIES
We value our inventories, which consist primarily of automotive body components, at the lower of cost or market. Cost is determined on the weighted average cost method and includes the cost of merchandise and freight. A periodic review of inventory quantities on hand is performed in order to determine if inventory is properly valued at the lower of cost or market. Factors related to current inventories such as future consumer demand and trends in MWW's core business, current aging, and current and anticipated wholesale discounts, and class or type of inventory is analyzed to determine estimated net realizable values. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if required. Any significant unanticipated changes in the factors noted above could have a significant impact on the value of our inventories and our reported operating results.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
We are required to estimate the collectability of our trade receivables. A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past due balances. In order to assess the collectability of these receivables, we perform ongoing credit evaluations of our customers' financial condition. Through these evaluations we may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to us and are reevaluated and adjusted as additional information is received.
Our reserves are also based on amounts determined by using percentages applied to certain aged receivable categories. These percentages are determined by a variety of factors including, but are not limited to, current economic trends, historical payment and bad debt write-off experience. We are not able to predict changes in the financial condition of our customers and if circumstances related to our customers deteriorate, our estimates of the recoverability of our receivables could be materially affected and we may be required to record additional allowances. Alternatively, if we provided more allowances than are ultimately required, we may reverse a portion of such provisions in future periods based on our actual collection experience. There was $20,000 and $20,000 allowance for doubtful accounts at September 30, 2011 and 2010, respectively.
STOCK BASED COMPENSATION
At times we issue stock in exchange for payment of certain liabilities or payment of services, including employees in the form of compensation or professional service providers in the form of consulting or other fees. We value the stock issued at the price in which it is trading on the open market.
DERIVATIVE LIABILITIES
The Company’s Series A 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 YEAR ENDED SEPTEMBER 30, 2011 TO THE YEAR ENDED SEPTEMBER 30, 2010
Revenues
Net revenues were approximately $1.9 million for the year ended September 30, 2011. Our revenues decreased $2,116,102 from the year ended September 30, 2010. This 52.58% 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 PROFIT
For the fiscal year ended September 30, 2011, MWW's gross profit was $64,890 (3.40%) compared to $ 1,142,616 (28.39%) for the fiscal year ended September 30, 2010. MWW sold a greater percentage of its lower margin products in 2011 than in 2010. 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 Company has reduced head count which has driven the improvement in gross profit. The cost of parts and materials have been consistent from year to year.
OPERATING EXPENSES
Selling, general, and administrative expenses were $1,712,760 (89.76 % of revenues) in 2011 compared to $3,129,648 (77.77 % of revenues) during 2010. 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.
OTHER INCOME (EXPENSES)
Financing expenses were $1,770,169 in 2011 compared to $367,760 during 2010. The increase is due to forbearance charges by our bank while in default of our real estate mortgage plus the change on the working capital portion of our debt from a traditional bank to a factoring company. The factoring company charges a much higher rate on the borrowings. In addition, we incurred non cash interest expense and amortization of debt discounts relating to our convertible notes of $1,268,616 compared to $6,250 for the year ended September 31, 2010.
GAIN ON CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY. As described in our accompanying 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 year ended September 30, 2011, we recorded a net gain of $1,173,072 in change in fair value of the derivative liability as compared to a gain of $784,445 for the same period the previous year. The changes in the market price of our common stock has affected the fair value of the derivative liability.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2011 we had working capital deficit of $4,074,146. We reported negative cash flow from operating activities of ($413,751), negative cash flow from investing activities of ($16,832) and positive cash flow from financing of $431,748.
The negative cash flow from operating activities consists of $2,270,617 net loss, net with $236,603 depreciation and amortization expenses, $145,211 in amortization of deferred financing costs, $502,045 in amortization of debt discounts, $766,571 non cash interest paid, $311,357 stock based compensation, $58,410 loss on settlement of debt, net with gain on change in fair value of derivative liability of $1,173,072, Changes in operating assets were a $114,443 decrease in accounts receivable, $51,097 decrease in inventory, $28,728 decrease in other current assets, $815,473 increase in accounts payable.
Negative cash flow from investing activities of ($16,832) occurred primarily due to purchase of assets.
Cash flows from financing activities were primarily from issuance of notes payable of $538,750, net with repayments of $207,002 and proceeds from the sale of our Series C preferred stock of $100,000.
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 B, the Company has entered into a Forbearance Agreement through August 31, 2009. As of September 30, 2009, the Key Bank line of credit was repaid through the Company securing the below financing with Summit Financial Resources, L.P.
In September, 2009, Marketing Worldwide, LLC entered into a financing agreement with Summit Financial Resources L.P. (Summit) for a maximum borrowing of up to $1 million maturing August 31, 2011. The arrangement is based on recourse factoring of the Company’s accounts receivables. Substantially all assets of Marketing Worldwide, LLC have been pledged as collateral for the Summit facility. Marketing Worldwide Corp., has guaranteed the financing arrangement. The financing arrangement has been extended through August 31, 2012.
Under the arrangement, Summit typically advances to the Company 75% of the total amount of accounts receivable factored. Summit retains 25% of the outstanding factored accounts receivable as a reserve, which it holds until the customer pays the factored invoice to Summit. The cost of funds for the accounts receivable portion of the borrowings with Summit includes: (a) a collateral management fee of 0.65% of the face amount of factored accounts receivable for each period of fifteen days, or portion thereof, that the factored accounts receivable remains outstanding until payment in full is applied and (b) interest charged at the Wall Street Journal prime rate plus 1% divided by 360. The Summit default rate is the Wall Street Journal prime rate plus 10%. The Company may be obligated to purchase the receivable back from Summit at the end of 90 days.
MWW expects its regular capital expenditures to be approximately $100,000 for fiscal 2012. These anticipated expenditures are for continued investments in tooling and equipment used in our business.
The independent registered public accounting firm’s report on our September 30, 2011 consolidated financial statements included in this Form 10-K states that our difficulty in generating sufficient cash flow to meet our obligations and sustain operations raise substantial doubts about the our ability to continue as a going concern. The 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 B of the Notes to Consolidated Financial Statements contained herein.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not maintain off-balance sheet arrangements nor does it participate in non-exchange traded contracts requiring fair value accounting treatment.
INFLATION
The effect of inflation on the Company's revenue and operating results was not significant.
ITEM 7A.
ITEM 7A. 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 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
See pages through following:
MARKETING WORLDWIDE CORPORATION
SEPTEMBER 30, 2011
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Marketing Worldwide Corporation
Howell, Michigan
We have audited the accompanying consolidated balance sheets of Marketing Worldwide Corporation as of September 30, 2011 and 2010, and the related consolidated statements of operations, deficiency in stockholders' equity and cash flows for each of the two year in the period ended September 30, 2011. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based upon our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Marketing Worldwide Corporation as of September 30, 2011 and 2010, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2011, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3, the Company has generated negative cash flows from operating activities, experienced recurring net operating losses, is in default of loan certain covenants, and is dependent on securing additional equity and debt financing to support its business efforts. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to this matter are described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
MARKETING WORLDWIDE CORPORATION
CONSOLIDATED BALANCE SHEETS
See the accompanying notes to the consolidated financial statements
MARKETING WORLDWIDE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED SEPTEMBER 30, 2011 AND 2010
See the accompanying notes to the consolidated financial statements
MARKETING WORLDWIDE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
TWO YEARS ENDED SEPTEMBER 30, 2011 AND 2010
See the accompanying notes to the consolidated financial statements
MARKETING WORLDWIDE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
TWO YEARS ENDED SEPTEMBER 30, 2011 AND 2010
See the accompanying notes to the consolidated financial statements
MARKETING WORLDWIDE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 2011 AND 2010
See the accompanying notes to the consolidated financial statements
MARKETING WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
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 and 2010 balances to reflect them as discontinued operations
Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for annual financial statements and with Form 10-K and article 8 of the Regulation S-X of the United States Securities and Exchange Commission (“SEC”). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and Variable Interest Entity (“VIE”). All significant inter-company transactions and balances, including those involving the VIE, have been eliminated in consolidation.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
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 uncollectible accounts receivable are recorded in the financial statements.
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 have been rendered or no refund will be required. As of September 30, 2011 and 2010, these types of transactions are not material.
ASC 605-10 incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arraignments (“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.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a maturity of less than three months at purchase to be cash equivalents. The Company did not have any cash equivalents at September 30, 2011 and 2010. Cash balances at financial institutions are insured by the Federal Deposit Insurance Corporation (“FDIC”). At times, cash and cash equivalents may be uninsured or in deposit accounts that exceed the FDIC insurance limits. Periodically, the Company evaluates the credit worthiness of the financial institutions and has determined the credit exposure to be negligible.
MARKETING WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Warranty
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. Warranty expense is estimated based primarily on historical experience and is reflected in the financial statements.
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 September 30, 2011 and 2010 approximated $20,000 and $20,000, respectively.
Inventories
The inventories are stated at the lower of cost or market using the first-in, first-out method of valuation. The inventories at September 30, 2011 and 2010 are as follows:
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 September 30, 2011 and 2010 the majority of the inventory reserve is for supply of product no longer in production or demand from existing customers.
Long lived assets
The Company follows Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”). ASC 360-10 requires those long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.
MARKETING WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Property, plant and equipment
Property, plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets. Gains and losses from the retirement or disposition of property and equipment are included in operations in the period incurred. Maintenance and repairs are expensed as incurred.
Research and development costs
The Company accounts for research and development cost in accordance with Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”). ASC 730-10, requires research and development costs to be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Total research and development cost charged to income was immaterial for both years ended September 30, 2011 and 2010.
Net income (loss) per share
Basic and diluted loss per common share is based upon the weighted average number of common shares outstanding during the fiscal year computed under the provisions of Accounting Standards Codification subtopic 260-10, Earnings per Share (“ASC 260-10”). All primary dilutive common shares have been excluded since the inclusion would be anti-dilutive. Such shares consist of the following at September 30, 2011 and 2010:
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. The benefit of tax positions taken or expected to be taken in the Company’s income tax returns are recognized in the consolidated financial statements if such positions are more likely than not of being sustained.
In accordance with 740-10, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting this standard, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company will classify as income tax expense any interest and penalties recognized in accordance with ASC Topic 740. The tax years ending September 30, 2008, 2009, 2010 and 2011 are still open for review by the various tax jurisdictions. The state tax jurisdictions the Company files in are South Carolina, Florida, California and Michigan.
MARKETING WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting year. The Company deems its critical estimates to be the determination of inventory values, the allowance for doubtful accounts, stock based compensation, derivative liabilities, and impairment losses. Actual results could differ from those estimates.
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. The resulting foreign currency transactions gains (losses), which were not material, are included in selling, general and administration expenses in the accompanying consolidated statements of operations.
Fair value of financial instruments
Cash, accounts receivable, accounts payable and accrued expenses approximates 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.
Derivative financial instruments
Accounting Standards Codification subtopic 815-40, Derivatives and Hedging, Contracts in Entity’s own Equity (“ASC 815-40”) became effective for the Company on October 1, 2009. The Company’s Series A Preferred Stock, convertible debt and certain warrant 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.
Reclassification
Certain reclassifications have been made to conform the prior period 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 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.
The Variable Interest Entity included in these consolidated financial statements sold the only asset it owned, which was real estate subject to a lease with the Company, for $800,000 on November 30, 2010. This sale resulted in a loss of approximately $400,000 and left a remaining liability to the Small Business Administration of approximately $500,000 which is guaranteed by the Company. As of the date of this filing, the Company has not received any specific demands or requests for payment on this loan. This loss was recorded as an impairment loss in the September 30, 2010 consolidated financial statements.
Deferred financing costs
Deferred financing costs represent costs incurred in connection with obtaining the debt financing. These costs are amortized to financing expenses over the term of the related debt using the interest rate method. The amortization for the years ended September 30, 2011 and 2010 was $145,211 and $132,293, respectively. Accumulated amortization of deferred financing costs were $601,219 and $456,008 at September 30, 2011 and 2010, respectively.
Segment information
Accounting Standards Codification subtopic 280-10, Segment Reporting (“ASC 280-10”) establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The information disclosed therein materially represents all of the financial information related to the Company's principal operating segments.
The Company has one reportable business segment which is operated in the United States. In previous years the Company had financial activity in Germany, but in February, 2010 the German affiliate filed bankruptcy and all activity has been classified as discontinued operations in the presented financial statements.
MARKETING WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Stock based compensation
The Company accounts for stock based awards issued to employees in accordance with FASB guidance. Such awards consist of options to purchase common stock. The fair value of stock based awards is determined on the grant date using a valuation model. The fair value is recognized as compensation expense, net of estimated forfeitures, on a straight-line basis over the service period, which is normally the vesting period.
The Company granted 2,200,000 employee options during the year ended September 30, 2011 and nil during the year ended September 30, 2010. The Company recorded the fair value of the vested portion of issued employee options of $11,648 and $7,796 for the years ended September 30, 2011 and 2010, respectively.
Recent accounting pronouncements
In May 2011, FASB issued Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. FASB ASU No. 2011-04 amends and clarifies the measurement and disclosure requirements of FASB ASC 820, resulting in common requirements for measuring fair value and for disclosing information about fair value measurements, clarification of how to apply existing fair value measurement and disclosure requirements, and changes to certain principles and requirements for measuring fair value and disclosing information about fair value measurements. The new requirements are effective for fiscal years beginning after December 15, 2011. The Company plans to adopt this amended guidance on October 1, 2012 and at this time does not anticipate that it will have a material impact on the Company’s consolidated results of operations, cash flows or financial position.
In June 2011, FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which amends the disclosure and presentation requirements of Comprehensive Income. Specifically, FASB ASU No. 2011-05 requires that all nonowner changes in shareholders’ equity be presented either in 1) a single continuous statement of comprehensive income or 2) two separate but consecutive statements, in which the first statement presents total net income and its components, and the second statement presents total other comprehensive income and its components. These new presentation requirements, as currently set forth, are effective for the Company beginning October 1, 2012, with early adoption permitted. The Company plans to adopt this amended guidance on October 1, 2012 and at this time does not anticipate that it will have a material impact on the Company’s consolidated results of operations, cash flows or financial position.
In September 2011, FASB issued ASU No. 2011-08, Testing Goodwill for Impairment, which amended goodwill impairment guidance to provide an option for entities to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. After assessing the totality of events and circumstances, if an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, performance of the two-step impairment test is no longer required. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. Adoption of this guidance is not expected to have any impact on the Company’s consolidated results of operations, cash flow or financial position.
There were various other 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 consolidated financial position, results of operations or cash flows.
MARKETING WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
NOTE 3 - GOING CONCERN MATTERS AND TRIGGERING EVENTS
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements during the year ended September 30, 2011, the Company incurred a loss of $2,270,617.
The Company has incurred substantial recurring losses. The accompanying 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. The Company has available cash of $5,012 at September 30, 2011 and during the year ended September 30, 2011, the Company used cash of $413,751 in operating activities. The Company’s working capital deficiency was approximately $4,074,000 and $4,373,000 as of September 30, 2011 and 2010 respectively. The Company’s accumulated deficit was approximately $17,000,000 and $14,400,000 as of September 30, 2011 and 2010 respectively. In addition, the Company has a stockholders’ deficit of approximately $8,000,000 at September 30, 2011. 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.
MARKETING WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
NOTE 3 - GOING CONCERN MATTERS AND TRIGGERING EVENTS (CONTINUED)
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 expect the majority of future growth to come from this business. The Company has restructured the management of this subsidiary and even though revenues are down, the Company has successfully gained more business opportunities than ever before. These opportunities take time to develop before converted to revenue. CT is aggressively beginning to diversify to non-automotive paint applications (industrial equipment) which we believe will help stabilize the Company going forward. CT currently has submitted quotes for new business opportunities aggregating approximately $20 million in revenue.
If the Company runs out of available capital, it might be required to pursue additional highly dilutive equity or debt issuances to finance its business in a difficult and hostile market, including possible equity financings at a price per share that might be much lower than the per share price invested by current shareholders. No assurance can be given that any source of additional cash would be available to the Company. If no source of additional cash is available to the Company, then the Company would be forced to significantly reduce the scope of its operations.
There can be no assurance that such funding initiatives will be successful and any equity placement could result in substantial dilution to current stockholders. The above factors raise substantial doubt about the Company’s ability to continue as a going concern. The 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 - INTANGIBLE ASSETS
The Company had intangible assets as a result of previous acquisition of Colortek, Inc. The intangible assets were representative of value assigned to an existing customer list at the time of acquisition. The Company reviewed the list at September 30, 2010 and deemed the remaining balance or $50,000 to be worthless. This amount was charged to operations as impairment in the year ended September 30, 2010. The Company did not have any intangible assets as of September 30, 2011.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
At September 30, 2011 and 2010, property, plant and equipment consist of the following:
Depreciation expense included as a charge to operations of $236,603 and $357,452 for the years ended September 30, 2011 and 2010 respectively.
MARKETING WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
NOTE 6 - LINE OF CREDIT
In August, 2009, the Company entered into a financing agreement with Summit Financial Resources L.P. (Summit) for a maximum borrowing of up to $1,000,000 maturing August 31, 2010. The arrangement is based on recourse factoring of the Company’s accounts receivables. Substantially all assets within the consolidation group have been pledged as collateral for the Summit facility. The financing agreement was extended for one year through August 31, 2012. The Company is evaluating the necessity of continuing this agreement and may terminate the relationship by August 31, 2012.
Under the arrangement, Summit typically advances to the Company 75% of the total amount of accounts receivable factored. Summit retains 25% of the outstanding factored accounts receivable as a reserve, which it holds until the customer pays the factored invoice to Summit. The cost of funds for the accounts receivable portion of the borrowings with Summit includes: (a) a collateral management fee of 0.65% of the face amount of factored accounts receivable for each period of fifteen days, or portion thereof, that the factored accounts receivable remains outstanding until payment in full is applied and (b) interest charged at the Wall Street Journal prime rate plus 1% divided by 360. The Summit default rate is the Wall Street Journal prime rate plus 10%. The Company may be obligated to purchase the receivable back from Summit at the end of 90 days.
Under the terms of the recourse provision, the Company is required to repurchase factored receivables if they are not paid in full or are deemed no longer acceptable. Accordingly, the Company has accounted for the financing agreement as a secured borrowing arrangement and not a sale of financial assets.
As of September 30, 2011, the advance balance due to Summit was $21,428. The interest rate at September 30, 2011 was 4.25%.
NOTE 7 - NOTES PAYABLE
At September 30, 2011 and 2010, notes payable consists of the following:
MARKETING WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
NOTE 7 - NOTES PAYABLE CONTINUED
(*) 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 February 16, 2011
On February 16, 2011, the Company issued a $50,000 Convertible Promissory Note that matured on November 18, 2011. The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 55% of the lowest three trading days 10 days prior to notice of conversion.
The Company identified embedded derivatives related to the Convertible Promissory Note entered into on February 16, 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 $143,402 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:
The initial fair value of the embedded debt derivative of $143,402 was allocated as a debt discount up to the proceeds of the note ($50,000) with the remainder ($93,402) charged to current period operations as interest expense.
During the year ended September 30, 2011, the Company amortized $50,000 to current period operations as interest expense.
MARKETING WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
In September 2011, the Company issued an aggregate of 8,726,190 shares of its common stock in settlement of the Convertible Promissory Note and related accrued interest.
Promissory Note issued February 19, 2011
On February 19, 2011, the Company issued a Promissory Note for $260,120 in exchange for previously accrued consulting services. The Note bears an interest rate of 5% per annum, payable semi-annually beginning November 1, 2011 and is due upon the occurrence of certain bankruptcy or reorganization events. The Promissory Note is convertible into the Company’s common stock at any time at the holder’s option, into common stock at the conversion rate of 90% 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 19, 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 $240,321 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:
The initial fair value of the embedded debt derivative of $240,321 was allocated as a debt discount.
During the year ended September 30, 2011, the Company issued an aggregate of 7,902,552 shares of its common stock in settlement of $75,897 of notes payable.
During the year ended September 30, 2011, the Company amortized and wrote off $174,107 to current period operations as interest expense.
The fair value of the described embedded derivative of $198,065 at September 30, 2011 was determined using the Binomial Lattice Model with the following assumptions:
At September 30, 2011, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $42,256 for the year ended September 30, 2011.
Note issued March 22, 2011
On March 22, 2011, the Company issued a $25,000 Convertible Promissory Note that matures on December 28, 2011. The note bears interest at a rate of 8% and will be convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 55% of the lowest three trading days 10 days prior to notice of conversion.
The Company identified embedded derivatives related to the Convertible Promissory Note entered into on March 22, 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 $83,744 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:
The initial fair value of the embedded debt derivative of $83,744 was allocated as a debt discount up to the proceeds of the note ($25,000) with the remainder ($58,744) charged to current period operations as interest expense.
During the year ended September 30, 2011, the Company amortized $17,082 to current period operations as interest expense.
The fair value of the described embedded derivative of $36,409 at September 30, 2011 was determined using the Binomial Lattice Model with the following assumptions:
At September 30, 2011, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $47,335 for the year ended September 30, 2011.
Note issued May 6, 2011
On May 6, 2011, the Company issued a $30,000 Convertible Promissory Note that matures on February 10, 2012. The note bears interest at a rate of 8% and will be convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 55% of the lowest three trading days 10 days prior to notice of conversion.
The Company identified embedded derivatives related to the Convertible Promissory Note entered into on May 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 $52,318 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:
The initial fair value of the embedded debt derivative of $52,318 was allocated as a debt discount up to the proceeds of the note ($30,000) with the remainder ($22,318) charged to current period operations as interest expense.
During the year ended September 30, 2011, the Company amortized $15,750 to current period operations as interest expense.
The fair value of the described embedded derivative of $52,113 at September 30, 2011 was determined using the Binomial Lattice Model with the following assumptions:
At September 30, 2011, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $205 for the year ended September 30, 2011.
Note issued June 29, 2011
On June 29, 2011, the Company issued a $250,000 Convertible Promissory Note that matures on July 1, 2012. The note bears interest at a rate of 8% and will be convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of the lower of the lowest of a) conversion rate offered for any other financial instrument or b) $0.04 per share.
The Company identified embedded derivatives related to the Convertible Promissory Note entered into on March 22, 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 $440,372 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:
The initial fair value of the embedded debt derivative of $440,372 was allocated as a debt discount up to the proceeds of the note ($250,000) with the remainder ($190,372) charged to current period operations as interest expense.
During the year ended September 30, 2011, the Company amortized $63,179 to current period operations as interest expense.
The fair value of the described embedded derivative of $434,272 at September 30, 2011 was determined using the Binomial Lattice Model with the following assumptions:
At September 30, 2011, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $6,100 for the year ended September 30, 2011.
Note issued January 10, 2011
On January 10, 2011, the Company issued a Promissory Note for $127,000 in exchange for previously accrued services. The Note bears an interest rate of 7% per annum and matured on July 10, 2011. Upon maturity of the note, since the Company has not pay the holder the principal and interest due, the holder has the right to convert all principal and interest into the Company's common stock at 75% of the average closing bid price of the Company's common stock during the five days preceding the date of maturity. This is convertible into approximately 7.7 million shares of the Company’s common stock.
The Company identified embedded derivatives related to the Convertible Promissory Note entered into in January 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 $133,073 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:
The initial fair value of the embedded debt derivative of $133,073 was allocated as a debt discount up to the proceeds of the note ($127,000) with the remainder ($6,073) charged to current period operations as interest expense.
During the year ended September 30, 2011, the Company amortized $127,000 to current period operations as interest expense.
The fair value of the described embedded derivative of $50,332 at September 30, 2011 was determined using the Binomial Lattice Model with the following assumptions:
At September 30, 2011, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $82,741 for the year ended September 30, 2011.
Notes issued during in July 2011:
During the month of July 2011, the Company issued an aggregate of $175,000 Convertible Promissory Note that matures one year from the date of issuance. These notes bear interest at a rate of 16% and will be convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of the lower of the lowest of a) conversion rate offered for any other financial instrument or b) $0.04 per share.
The Company identified embedded derivatives related to the Convertible Promissory Notes entered into in July 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 $365,839 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:
In conjunction with the issuance of the Convertible Promissory Notes, the Company issued an aggregate of 4,375,000 detachable warrants exercisable five years from the date of issuance with an initial exercise price of $0.04 per share.
The Company identified embedded derivatives related to the warrants issued July 2011. These embedded derivatives included certain reset provisions. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date to adjust the fair value as of each subsequent balance sheet date. At the date of issuance, the Company determined a fair value of $112,497 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:
The initial fair values of the embedded debt derivative of $365,839 and warrants of $112,497 was allocated as a debt discount up to the proceeds of the note ($174,247) with the remainder ($304,089) charged to current period operations as interest expense.
During the year ended September 30, 2011, the Company amortized $36,975 to current period operations as interest expense.
The fair value of the described embedded derivative of $305,332 at September 30, 2011 was determined using the Binomial Lattice Model with the following assumptions:
At September 30, 2011, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $60,506 for the year ended September 30, 2011.
The fair value of the described warrant liability of $318,176 at September 30, 2011 was determined using the Binomial Lattice Model with the following assumptions:
At September 30, 2011, the Company adjusted the recorded fair value of the warrant liability to market resulting in non-cash, non-operating loss of $205,679 for the year ended September 30, 2011.
Notes issued during in August and September 2011:
During the months of August and September 2011, the Company issued an aggregate of $60,000 Convertible Promissory Note that matures one year from the date of issuance. These notes bear interest at a rate of 16% and will be convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of the lower of the lowest of a) conversion rate offered for any other future financial instrument or b) $0.02 per share.
The Company identified embedded derivatives related to the Convertible Promissory Notes entered into in August and September 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 $72,338 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:
In conjunction with the issuance of the Convertible Promissory Notes, the Company issued an aggregate of 3,000,000 detachable warrants exercisable five years from the date of issuance with an initial exercise price of $0.02 per share.
The Company identified embedded derivatives related to the warrants issued in August and September 2011. These embedded derivatives included certain reset provisions. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date to adjust the fair value as of each subsequent balance sheet date. At the date of issuance, the Company determined a fair value of $74,999 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:
The initial fair values of the embedded debt derivative of $72,338 and warrants of $74,999 was allocated as a debt discount up to the proceeds of the note ($60,000) with the remainder ($87,337) charged to current period operations as interest expense.
During the year ended September 30, 2011, the Company amortized $6,411 to current period operations as interest expense.
The fair value of the described embedded derivative of $28,431 at September 30, 2011 was determined using the Binomial Lattice Model with the following assumptions:
At September 30, 2011, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $43,907 for the year ended September 30, 2011.
The fair value of the described warrant liability of $109,090 at September 30, 2011 was determined using the Binomial Lattice Model with the following assumptions:
At September 30, 2011, the Company adjusted the recorded fair value of the warrant liability to market resulting in non-cash, non-operating loss of $34,091 for the year ended September 30, 2011.
Note issued on July 20, 2011
On July 20, 2011, the Company issued a Promissory Note for $76,725 in exchange for previously accrued legal services. The Note bears an interest rate of 5% per annum and matures on January 31, 2012. Upon maturity of the note, since the Company has not pay the holder the principal and interest due, the holder has the right to convert all principal and interest into the Company's common stock at $0.04 per share. This is convertible into approximately 1.9 million shares of the Company’s common stock.
The Company identified embedded derivatives related to the Convertible Promissory Note entered into in July 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 $31,264 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:
The initial fair value of the embedded debt derivative of $31,264 was allocated as a debt discount up to the proceeds of the note.
During the year ended September 30, 2011, the Company amortized $11,544 to current period operations as interest expense.
The fair value of the described embedded derivative of $11,940 at September 30, 2011 was determined using the Binomial Lattice Model with the following assumptions:
At September 30, 2011, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $19,324 for the year ended September 30, 2011.
MARKETING WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
NOTE 8 - WARRANTY LIABILITY
The Company provides for estimated costs to fulfill customer warranty obligations upon recognition of the related revenue in accordance with Accounting Standards Codification subtopic 460-10, Guarantees (“ASC 460-10”) as a charge in the current period cost of goods sold. The range for the warranty coverage for the Company's products is up to 18 to 36 months. The Company estimates the anticipated future costs of repairs under such warranties based on historical experience and any known specific product information. These estimates are reevaluated periodically by management and based on current information, are adjusted accordingly. The Company's determination of the warranty obligation is based on estimates and as such, actual product failure rates may differ significantly from previous expectations. The warranty reconciliation as of September 30, 2011 and 20010 is as follows:
NOTE 9 - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following at September 30, 2011 and 2010:
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 September 30, 2011 and 2010, the Company had 3,500,000 shares issued and outstanding.
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.
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 September 30, 2010 and at September 30, 2011, the fair value was measured using the Binomial Lattice Model and the following assumptions:
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 September 30, 2011 the derivative liability associated with the embedded conversion features of the Series A Preferred stock was revalued, the decrease in the derivative liability of $1,044,930 for the year ended September 30, 2011 is included as an increase of a gain on change of fair value of derivative liabilities in the Company’s consolidated statement of operations.
Series B Preferred stock
As of September 30, 2011 and 2010, 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:
As of September 30, 2011, the Company has 100 shares of Series C Preferred stock issued and outstanding.
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.
During the year ended September 30, 2011, the Company issued an aggregate of 100 shares of Series C preferred stock for $100,000.
Common stock
On October 9, 2009, the Company issued 500,000 shares of common stock in settlement of outstanding accounts payable of $30,000.
On October 9, 2009, the Company issued an aggregate of 80,000 shares of common stock in exchange for services valued at $12,000. These shares were valued at $0.15 per share which represents the fair value of services received which did not differ materially from the value of the stock issued.
On February 17, 2010, the Company issued an aggregate of 1,520,000 shares of common stock in exchange for services valued at $304,000. These shares were valued at $0.20 per share which represents the fair value of services received which did not differ materially from the value of the stock issued. Of the 1,520,000 shares, 600,000 shares are expected to be returned to the Company because the agreement for the services that were contemplated when the shares were issued has been cancelled.
On March 10, 2010, the Company issued an aggregate of 1,075,000 shares of common stock in exchange for services valued at $118,250. These shares were valued at $0.11 per share which represents the fair value of services received which did not differ materially from the value of the stock issued.
On August 13, 2010, the Company issued an aggregate of 5.5 million shares of common stock in exchange for services and retirement of debt valued at $110,000. These shares were valued at $0.02 per share, which was the trading price on August 13, 2010.
On August 16, 2010, the Company issued 3 million shares of common stock in partial settlement of an intercompany debt with JCMD, the Variable Interest Entity. This transaction was valued at $.02 per share, the value at which the stock was trading on this date, and resulted in a $60,000 reduction in the payable to JCMD.
On October 25, 2010, the Company issued 2,000,000 shares of common stock in exchange for services valued at $40,000. These shares were valued at $0.02 per share, which was the trading price on October 25, 2010.
On January 11, 2011, the Company issued an aggregate of 554,108 shares of common stock in exchange for services valued at $25,914. The shares were valued at the $.04 per share, which was the trading price as of January 11, 2011.
On January 11, 2011, the Company issued 5,137,500 shares of common stock in exchange for accumulated Series A preferred stock dividend of $472,500. The shares were valued at the underlying terms of the Series A preferred stock.
On January 17, 2011, the Company issued 375,000 shares of common stock in exchange for services valued at $7,500. These shares were valued at $0.02 per share, which was the trading price on January 17, 2011
On February 1, 2011, the Company issued 800,000 shares of common stock in exchange for accrued compensation valued at $16,000. These shares were valued at $0.02 per share, which was the trading price on February 1, 2011.
On February 12, 2011, the Company issued 4,150,000 shares of common stock in exchange for previously incurred debt of $49,566. These shares were valued at $0.02 per share, which was the trading price on February 12, 2011. The Company recorded a $33,434 loss on settlement of debt at the date of issuance.
On February 22, 2011, the Company issued 600,000 shares of common stock in exchange for services valued at $9,600. These shares were valued at $0.02 per share, which was the trading price on February 22, 2011
On February 23, 2011, the Company issued 375,000 shares of common stock in exchange for services valued at $7,500. These shares were valued at $0.019 per share, which was the trading price on February 23, 2011
On March 24, 2011, the Company issued 2,540,787 shares of common stock in exchange for previously incurred debt of $25,840. These shares were valued at $0.02 per share, which was the trading price on March 24, 2011. The Company recorded a $24,976 loss on settlement of debt at the date of issuance.
On April 27, 2011, the Company issued an aggregate of 3,621,362 shares of common stock in exchange for services valued at $108,641. These shares were valued at $0.03 per share, which was the trading price on April 27, 2011.
On May 17, 2011, the Company issued 2,902,657 shares of common stock in exchange for services valued at $58,053. These shares were valued at $0.02 per share, which was the trading price on May 17, 2011
On May 25, 2011, the Company issued 378,143 shares of common stock in exchange for a convertible note and related accrued interest of $26,470. These shares were valued at $0.07 per share, which was the effective conversion rate of the underlying note.
On August 1, 2011, the Company issued 100,000 shares of common stock in exchange for services valued at $1,000. These shares were valued at $0.01 per share, which is the trading price on August 1, 2011.
On August 22, 2011, the Company issued 2,646,666 shares of common stock in exchange for a convertible note and related accrued interest of $33,692. These shares were valued at $0.013 per share, which was the trading price on August 22, 2011.
On August 26, 2011, the Company issued 833,333 shares of common stock in exchange for a convertible note and related accrued interest of $8,000. These shares were valued at $0.017 per share, which was the trading price on August 26, 2011.
On September 7, 2011, the Company issued 1,964,286 shares of common stock in exchange for a convertible note and related accrued interest of $11,000. These shares were valued at $0.0108 per share, which was the trading price on September 7, 2011.
On September 12, 2011, the Company issued 2,500,000 shares of common stock in exchange for a convertible note and related accrued interest of $14,000. These shares were valued at $0.0122 per share, which was the trading price on September 12, 2011.
On September 14, 2011, the Company issued 2,000,000 shares of common stock in exchange for a convertible note and related accrued interest of $11,200. These shares were valued at $0.011 per share, which was the trading price on September 14, 2011.
On September 15, 2011, the Company issued 1,428,571 shares of common stock in exchange for a convertible note and related accrued interest of $8,000. These shares were valued at $0.01136 per share, which was the trading price on September 15, 2011.
On September 15, 2011, the Company issued 1,821,429 shares of common stock in exchange for services valued at $25,500. These shares were valued at $0.014 per share, which is the trading price on September 15, 2011.
On September 19, 2011, the Company issued 2,627,537 shares of common stock in exchange for a convertible note and related accrued interest of $19,496. These shares were valued at $0.0106 per share, which was the trading price on September 19, 2011.
On September 21, 2011, the Company issued 2,628,349 shares of common stock in exchange for a convertible note and related accrued interest of $22,709. These shares were valued at $0.01234 per share, which was the trading price on September 21, 2011.
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 September 30, 2011:
During the year ended September 30, 2011, the Company granted an aggregate of employee 2,200,000 stock options with an exercise price of $0.017 expiring ten years from the date of issuance and vesting at a rate of 25% every six months. The fair values were determined using the Black Scholes option pricing model with the following assumptions: Dividend yield: 0%; Volatility: 418.05%; and Risk free rate: 3.07%.
The fair value of all employee options vesting charged to operations in the years ended September 30, 2011 and 2010 were $11,648 and $7,796, respectively.
Transactions involving options issued to employees are summarized as follows:
Non employee options
As of September 30, 2011, all non employee options expired.
Transactions involving options issued to non-employees are summarized as follows:
Warrants
The following table summarizes the warrants outstanding as of September 30, 2011:
Transactions involving warrants are summarized as follows:
During the year ended September 30, 2011, the Company issued 5,000,000 warrants in connection for services rendered exercisable to July 31, 2011 at $0.01 per share. The Company issued an aggregate of 4,724,019 shares in connection with the cashless exercise of the warrant.
In connection with the issuance of promissory notes, the Company issued an aggregate of 7,375,000 warrants exercisable five years from the date of issuance at $0.02 to $0.04 per share with certain reset provisions. As described in Note 7 above, the fair value of the warrants were determined at the date of issuance and adjusted to fair value to current period operations at September 30, 2011 with the offset to warrant liability using the binomial lattice model.
NOTE 12 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES
On June 6, 2005 and August 8, 2005, JCMD Properties LLC, an entity controlled by the Company's former Chief Executive and Chief Operating officers respectively ("JCMD"), entered into a Secured Loan Agreement with a financial institution, in connection with the financing of real property and improvements ("property"). This agreement is guaranteed by the Company.
The property was leased to the Company under a long term operating lease beginning on January 1, 2005. Under the loan agreements, JCMD is obligated to make periodic payments of principal repayments and interest. The Company has no equity interest in JCMD or the property.
Based on the terms of the lending agreement, the Company determined that JCMD was a variable interest entity ("VIE") and the Company was the primary beneficiary under ASC 810-10 since JCMD did not have sufficient equity at risk for the entity to finance its activities.
ASC 810-10 requires that an enterprise consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the entity's expected losses if they occur. Accordingly, the Company adopted ASC 810-10 and consolidated JCMD as a VIE, regardless of the Company not having an equity interest in JCMD. Since JCMD is owned by two of the former principals of MWW, MWW has guaranteed the indebtedness of JCMD for the real estate occupied by MWW, and the two principals of JCMD do not have the ability to repay the loan, the Company, in accordance with ASC 810-10 has consolidated the activities of JCMD into the presented financial statements.
Included in the Company's consolidated balance sheets at September 30, 2011and 2010 are the following net assets of JCMD:
Consolidated results of operations include the following:
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 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 consolidated financial statements consisted of the following items as of September 30, 2011:
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 September 30, 2011:
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 September 30, 2011 and 2010 were as follows:
Assets:
The Results of Operations for the years ended September 30, 2011 and 2010 are as follows:
NOTE 15 - PROVISION FOR INCOME TAXES
The Company files income tax returns for Marketing Worldwide Corporation and its domestic subsidiaries (MWW Automotive, LLC and Colortek, Inc.) with the Internal Revenue Service and with various state jurisdictions, most notable Michigan. As of September 30, 2011, the tax returns for tax years 2008 - current remain open to examination by the Internal Revenue Service and various state authorities.
As of September 30, 2011, the Company had approximately $9,245,000 of federal and state net operating losses (“NOL”) available for income tax purposes that may be carried forward to offset future taxable income, if any. The federal carryforwards expire beginning in 2025.
A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
Deferred income taxes result from temporary differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes.
A full valuation allowance is being maintained resulting in a net deferred tax asset of zero until sufficient positive evidence exists to support the reversal of any portion or all of the valuation allowance net of appropriate reserves. Should the Company become profitable in future periods with supportable trends; the valuation allowance will be reduced accordingly.
NOTE 16- ECONOMIC DEPENDENCY
During the years ended September 30, 2011 and 2010, revenues were derived from the following customers:
During the years ended September 30, 2011 and 2010, purchases were made from the following suppliers:
NOTE 17 - COMMITMENTS AND CONTINGENCIES
Related party lease obligations and transactions
On March 5, 2004, MWW and MWWLLC entered into five year real property lease, beginning on January 1, 2005, with a related party (JCMD Properties LLC: See Note 7) for use of warehouse and general offices located in the city of Howell, Michigan. The lease was terminated at the time the real estate was sold to an unrelated party on November 30, 2010. The buyer of the property was known to the sellers, and the buyer’s Chief Financial Officer is the former wife of one of the partners of JCMD.
The Company entered into a three (3) year lease with the buyer on December 1, 2010 of the property described above. The general terms of the lease calls for monthly payments beginning December 1, 2010 of $6,666.67 for the first year($80,000 annually); $7,083.34 per month for the second year($85,000 annually); $7,416.67 per month($89,000 annually) for the third, or final, year of the lease, or an aggregate of $254,000. The Company is responsible for all property taxes, maintenance and utilities associated with the property.
Employment and Consulting Agreements
The Company has employment agreements with all of its employees. In addition to salary and benefit provisions, the agreements include non-disclosure and confidentiality provisions for the protection of the Company’s proprietary information.
The Company has consulting agreements with outside contractors to provide marketing and financial advisory services. The Agreements are generally for a term of 12 months from inception and renewable automatically from year to year unless either the Company or Consultant terminates such engagement by written notice.
Litigation
The Company is 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.
On October 19, 2010, the Company was served a Complaint from one of its suppliers that a loan in the amount of $217,000 was due and payable. The Company has recorded $195,000 in their accounts as of September 30, 2010 and expects to continue negotiations to settle this outside the legal system.
MARKETING WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
NOTE 18 - SUBSEQUENT EVENTS
There were 67,023,178 shares issued for note conversions and 6,000,000 shares issued for services rendered and 1,479,633 shares issued for interest conversion after September 30, 2011.
The Company is in negotiation with note holder for extensionof maturity dates relating to notes maturing after September 30, 2011 as per Note 7.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
RBSM LLP (“RBSM”) was engaged on November 28, 2011 as the Company’s independent registered public accounting firm. The decision to engage RBSM as the Company’s independent registered public accounting firm was approved by the Company’s Board of Directors. Prior to engaging RBSM, the Company did not consult with RBSM regarding the application of accounting principles to a specific completed or contemplated transaction or regarding the type of audit opinions that might be rendered by RBSM on the Company’s financial statements, and RBSM did not provide any written or oral advice that was an important factor considered by the Company in reaching a decision as to any such accounting, auditing or financial reporting issue. Previously, RBSM served as the Company’s independent registered public accounting firm for the fiscal years ended September 30, 2009 and 2008.
The Company notified Marcum LLP, (“Marcum”) of the dismissal on November 29, 2011. Except as noted below, the report of Marcum on the Company’s consolidated financial statements for the year ended September 30, 2010 did not contain an adverse opinion or disclaimer of opinion, and such report was not qualified or modified as to uncertainty, audit scope or accounting principle.
The report of the Marcum on the Company’s consolidated financial statements as of and for the year ended September 30, 2010, contained an explanatory paragraph which noted that there was substantial doubt as to the Company’s ability to continue as a going concern as the Company had generated negative cash outflows from operating activities, experienced recurring net operating losses, and is dependent on securing additional equity and debt financing to support its business efforts. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
During the year ended September 30, 2010 and the subsequent period through November 29, 2011, the Company has not had any disagreements with Marcum on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the Marcum’s satisfaction, would have caused them to make reference thereto in their reports on the Company’s consolidated financial statements for such years. Except for certain material weaknesses in internal controls identified by the Company as described in Item 4 of its Forms 10-Q for the fiscal quarters ended December 31, 2010, March 31, 2011 and June 30, 2011 and in Item 9A
ITEM 9A. CONTROLS AND PROCEDURES.
Not applicable
ITEM 9A (T)
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURE
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2011. Based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective.
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Under the supervision of our Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2011 using the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of September 30, 2011, we determined that control deficiencies existed that constituted material weaknesses, as described below:
O
lack of documented policies and procedures;
O
we have no audit committee;
O
There is a risk of management override given that our officers have a high degree of involvement in our day to day operations.
O
there is no policy on fraud and no code of ethics at this time, though we plan to implement such policies in fiscal 2012; and
O
There is no effective separation of duties, which includes monitoring controls, between the members of management.
Management is currently evaluating what steps can be taken in order to address these material weaknesses.
Accordingly, we concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company's internal controls.
As a result of the material weaknesses described above, Chief Executive Officer and Chief Financial Officer has concluded that the Company did not maintain effective internal control over financial reporting as of September 30, 2011 based on criteria established in Internal Control-Integrated Framework issued by COSO.
CHANGES IN INTERNAL CONTROLS
During the fiscal year ended September 30, 2011, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Michael Winzkowski, age 60 is the sole director of MWW. At present, MWW's directors serve without compensation for acting as directors and do not receive any special compensation for committee participation or special assignments.
MWW does not have a majority of independent directors, have a separately designated audit committee nor a person designated as an audit committee member financial expert. MWW does not have a majority of independent board members, separately designated audit committee or an audit committee member financial expert because the cost of identifying, interviewing, appointing, educating, and compensating such persons would outweigh the benefits to its stockholders at the present time. If MWW is successful in its efforts to secure additional capital, the resources may be available to appoint additional directors.
In August 1997, Mr. Winzkowski (age 60) became Director of the Inalfa Industries Global Aftermarket Operations, CEO of North America and a member of the Board of Directors. In September 2000, Mr. Winzkowski left his position with Inalfa to serve as the President of Marketing Worldwide. Mr. Winzkowski has served as Chief Executive Officer, President, Secretary and Director of MWW Corporation since October 2003. Mr. Winzkowski holds a degree in chemical Bio-Engineering and in addition studied Business, Marketing and Accounting Administration.
He is an accomplished commercial pilot with close to 10,000 Hrs. of flight experience, holding European and US Commercial, Air Transport Pilot and Instrument pilot certificates and a variety of Turboprop and Business Jet type ratings along with his single and multi-engine ratings. Mr. Winzkowski is a member and manager of JCMD Properties LLC. MWW moved into a new facility in Howell, Michigan as its principal business location, which was built to suit MWW's requirements by JCMD Properties LLC under a long term lease agreement. (See Certain Relationships and Related Transactions). JCMD LLC was formed in the state of Michigan on December 31, 2003 as a property development and management company.
DIRECTORS, EXECUTIVE OFFICERS
Mr. Winzkowski and Mr. Marvin have been the members and managers of JCMD Properties LLC since its formation.
In August 1997 Mr. Marvin (age 56) became the COO and a member of the Board of Directors of the North American Aftermarket entity of Inalfa Industries. In November 2000, Mr. Marvin became the Managing Director of Operations and co-owner of Marketing Worldwide. Since October 2003, James C. Marvin has served as Chief Operating Officer, Chief Financial Officer and Director of MWW Corporation. Mr. Marvin attended Lake Superior and Cleary Universities majoring in Business and obtained degrees in Business Accounting and Business Administration. Mr. Marvin is a member and manager of JCMD Properties LLC. MWW moved into a new facility in Howell, Michigan as its principal business location, which was built to suit MWW's requirements by JCMD Properties LLC under a long term lease agreement. (See Certain Relationships and Related Transactions) JCMD LLC was formed in the state of Michigan on December 31, 2003 as a property development and management company. Mr. Winzkowski and Mr. Marvin have been the members and managers of JCMD LLC since its formation. During fiscal year ending September 30, 2010, Mr. Marvin resigned from MWW and no longer holds any management roles within the Company.
On July 20, 2010, Marketing Worldwide Corporation appointed Charles Pinkerton as the Company’s Chief Executive Officer. Mr. Pinkerton is 58 years old and has over 35 years’ experience working with Fortune 500 Corporations within the automotive, petroleum, retail and construction arenas. Within these companies, Mr. Pinkerton has held the positions as Vice President Sales & Marketing, Director of Business Development and Director of Operations and has established relationships with companies such as BP, Amoco, Citgo and others. From 1998 to 2001, in his position as Executive Vice President of Kux Manufacturing, Inc., a supplier of automotive products for the US market, he has established longstanding relationships with companies such as Honda, Nissan, GM, Toyota, Ford and Mazda among others. From 2001 until joining MWW, he served as President and CEO of Kux Architectural Products and as Director of Business for Engineered Tax Services. Mr. Pinkerton is also currently holding the position of Chief Financial Officer.
On October 10, 2009, Marketing Worldwide Corporation (the “Company”) appointed James E. Davis as the Company’s Chief Financial Officer. Mr. Davis replaced James Marvin, the Company’s former Chief Financial Officer. James Davis, 55, brings 30 years of experience in different positions in the financial and automotive sectors, including public accounting as Audit Manager at Coopers & Lybrand. In this capacity he audited middle market companies’ financial reporting and assisted in taking privately owned companies public. From 1999 through 2008, Mr. Davis was the Chief Financial Officer for the Epoch Restaurant Group and Wisne Holdings. The Epoch Restaurant Group owned and operated six restaurants and a full service catering company. Wisne Holdings was a real estate and investment entity specializing in a multitude of investments for profit. The Wisne Family created Wisne Holdings after selling Progressive Tool & Industry Company, a tier 1 automotive supplier, where Mr. Davis was the financial controller following his engagement with Coopers & Lybrand. As Controller for Progressive Tool & Industry Company, Mr. Davis was responsible for new business development, banking and investor relations and financial planning and reporting. From January 2008 through August 2009, Mr. Davis focused on troubled companies and participated in restructuring and turnaround efforts through CFO Associates, LLC. Mr. Davis resigned from MWW in November 2011 after the fiscal year end of September 30, 2011 and no longer holds any management roles within the Company.
Rainer Poertner, Business Development, has served as a consultant to the Company since its inception. Mr. Poertner has a 23-year record of accomplishments in founding, leading and consulting with private and publicly traded companies in the USA and Europe. As founder, CEO, Chairman and majority shareholder of two publicly traded companies; he was responsible for managing the companies' financial, technical and business development and secured funding for acquisitions and corporate working capital purposes through a network of private investors and US and overseas investment banking firms.
Section 16(a) Beneficial Ownership Reporting Compliance
MWW is not aware of any reporting person that failed to file on a timely basis, reports required by Section 16(a) of the Exchange Act during the most recent fiscal year.
Code of Ethics
MWW does not have a code of ethics but intends to implement a code of ethics in 2011.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The Summary Compensation Table below identifies the compensation to the officers of MWW.
SUMMARY COMPENSATION TABLE
MWW did not make any option or SAR grants in its last fiscal year and has not adopted a long term incentive compensation plan.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information regarding the beneficial ownership of our common stock and preferred stock as of September 30, 2011, by each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; o each of our officers and directors; and o all our officers and directors as a group.
Unless otherwise indicated, all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
Security Ownership of Certain Beneficial Owners and Management
* Wendover Investments Limited owns 4,000 shares of common stock and a common stock purchase warrant to acquire up to 1,000,000 shares of common stock at purchase price of $.50 per share. Mr. Robert Lyons is the principal of Wendover Investments Limited. Under Rule 13(d) (1) a person is deemed the beneficial owner if that person has the right to acquire the securities within 60 days pursuant to options, warrants, conversion privileges or other rights.
** Percentages are based upon the amount of outstanding securities at September 30, 2011 of 71,494,819 shares, plus for each person or group, any securities that person or group has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights.
(a) Does not include 1,000 shares purchased by Ms. Johanna Winzkowski in May 2004, the mother of Michael Winzkowski. Michael Winzkowski disclaims any beneficial ownership of the shares referred to in the preceding sentence.
(b) Does not include 10,000 shares purchased by Ms. Joanne Marvin or 770 shares purchased by Mr. Scott F. Marvin in May 2004, the mother and brother of James C. Marvin, respectively. James C. Marvin disclaims any beneficial ownership of the shares referred to in the preceding sentence.
(c) Warrants allow the holder to purchase up to 2,500,000 shares of common stock at a price of $.70 per share until June 23, 2012; the Series E Warrants allow the holder to purchase up to 2,500,000 shares of common stock at a price of $.85 per share until June 23, 2012; and the Series F Warrants allow the holder to purchase up to 2,500,000 shares of common stock at a price of $1.20 per share until April 23, 2012. All of the Warrants sold to Vision Opportunity Master Fund, Ltd. contain anti-dilution protection and other rights. Further, the transaction documents provided that Vision Opportunity Master Fund, Ltd. may not acquire common stock upon conversion of the Series A Convertible Preferred Stock or upon exercise of any warrants to the extent that, upon conversion or exercise the number of shares of common stock beneficially owned would exceed 9.99% of the issued and outstanding share of common stock of MWW. On September 27, 2007, the Fund entered into Amendment No.1 (the "Series F Amendment"), by and among the Issuer and the Fund whereby the Series F Warrant exercise price was reduced to $0.01 per share. All other terms and provisions of the Series F Warrant remain unmodified and in full force and effect. On September 27, 2007, the Fund entered into Amendment No. 1 (the "Series J Amendment"), by and among the Issuer and the Fund whereby the Series J Warrant exercise price was reduced to $0.50 per share and the Ownership Cap and Exercise Restriction of 9.99% was deleted in its entirety. All other terms and provisions of the Series J Warrant remain unmodified and in full force and effect. Subsequent to the Series J Amendment, the Fund exercised the Series J Warrant for four million (4,000,000) shares of Common Stock of the Issuer at an exercise price of $0.50 leaving the Series J Warrant with one million (1,000,000) shares of Common Stock available for exercise.
On July 11, 2008, the Company entered an Exchange Agreement with holders of Series F Common Stock Purchase Warrants and Series J Common Stock Purchase Warrants. Under the Exchange Agreement, the Company issued 750,000 shares of Series B Convertible Preferred Stock for the cancellation of 3,500,000 Series A Common Stock Purchase Warrants, 3,500,000 Series B Common Stock Purchase Warrants, 3,500,000 Series C Common Stock Purchase Warrants, 2,500,000 Series D Common Stock Purchase Warrants, and 2,500,000 Series E Common Stock Purchase Warrants. In addition, holders exercised 1,000,000 Series J Warrants and 2,500,000 Series F Warrants for $525,000 in exchange for 442,308 shares of Series B Convertible Preferred Stock.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORS INDEPENDENCE.
On October 1, 2003, MWW acquired 100% of the membership interests in Marketing Worldwide LLC, a Michigan limited liability company ("MWWLLC"), in a tax-free exchange whereby MWWLLC became a wholly owned subsidiary of MWW. Under the Purchase Agreement, the three selling members of MWWLLC were issued 9,600,000 shares of common stock. Michael Winzkowski received 4,564,800 shares, James C. Marvin received 4,564,800 shares and Gregory G. Green received 470,400 shares of MWW under the Purchase Agreement. Immediately following the transaction, Michael Winzkowski and James C. Marvin became the officers and directors of MWW. Mr. Winzkowski and Mr. Marvin serve as members of MWW's board of directors without compensation.
Michael Winzkowski, James C. Marvin, Gregory G. Green, Richard O. Weed and Rainer Poertner are defined as promoters by the Securities Act Rules since each directly or indirectly took initiative in founding and organizing the business of MWW. Mr. Weed served as the sole Director, President, Secretary and Treasurer of MWW from its inception on July 21, 2003 until the effective date of the acquisition of MWWLLC on October 1, 2003. Mr. Weed was granted a Stock Option to purchase 250,000 shares of MWW common stock at $1.00 per share that expires December 31, 2008 as an incentive to represent MWW as legal counsel. Mr. Weed is a partner in Weed & Co. LLP and has provided legal services to MWW under a Fee Agreement since August 15, 2003. Mr. Poertner has provided consulting services to MWWLLC since April 2003 and to MWW since August 2003. Under the Consulting Agreement with MWW dated July 1, 2005, Mr. Poertner receives $10,000 per month plus expenses, which has been increased to $15,000 per month in April of 2007.
On March 5, 2004, MWW and MWWLLC entered into a five year real property lease, beginning on January 1, 2005 with a related party (JCMD Properties LLC See Note K) for use of warehouse and general offices located in the city of Howell, Michigan. The lease was terminated at the time the real estate was sold to an unrelated party on November 30, 2010. The buyer of the property was known to the sellers and the buyer’s Chief Financial Officer is the former wife of one of the partners of JCMD.
MWW does not have any independent directors.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table sets forth fees billed to us by our auditors during the fiscal years ended September 30, 2011 and 2010 for: (i) services rendered for the audit of our annual consolidated financial statements and the review of our quarterly financial statements, (ii) services by our auditor that are reasonably related to the performance of the audit or review of our consolidated financial statements and that are not reported as Audit Fees, (iii) services rendered in connection with tax compliance, tax advice and tax planning, and (iv) all other fees for services rendered.
AUDIT FEES. Consists of fees billed for professional services rendered for the audit of our consolidated financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by the Company's auditor/s in connection with statutory and regulatory filings or engagements."
AUDIT-RELATED FEES. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of MWW's consolidated financial statements and are not reported under "Audit Fees." There were no Audit-Related services provided in fiscal 2010. There were fees incurred for 2011.
TAX FEES. Consists of fees billed for professional services for tax compliance, tax advice and tax planning.
ALL OTHER FEES. Consists of fees for products and services other than the services reported above.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS
The Company currently does not have a designated Audit Committee, and accordingly, the Company's Board of Directors' policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre- approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Company's Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) See the consolidated financial statements listed in Item 8.
(b) 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.
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.
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,
SECRETARY AND DIRECTOR
Date: January 18, 2012
BY:
/s/ Charles Pinkerton
NAME: Charles Pinkerton
TITLE: CHIEF FINANCIAL OFFICER
Date: January 18, 2012