Marketing Worldwide Corporation (the "Company"),
was incorporated under the laws of the State of Delaware in July 2003. The Company is engaged in North America through its wholly-owned
subsidiaries, Marketing Worldwide LLC ("MWW"), and Colortek, Inc. (“CT”) in the design, manufacturing, painting
and distribution of automotive accessories for motor vehicles in the automotive aftermarket and industrial components for the
commercial machinery industries. The Company had a wholly owned subsidiary in Germany, Modelworxx, GmbH, which, in February, 2010,
filed insolvency in the German courts. The Company has reclassified Modelworxx, GmbH fiscal year ended September 30, 2011 balances
to reflect them as discontinued operations and upon final liquidation, recognized a net gain on disposal of international subsidiary
of $349,322 during the year ended September 30, 2012.
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.
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, 2012 and 2011, 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.
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, 2012 and 2011. 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.
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.
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, 2012 and 2011 approximated $nil and $20,000, respectively.
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. During the year ended September 30,
2012, the Company write-off from reserve $128,905. At September 30, 2012 and 2011 the majority of the inventory reserve is for
supply of product no longer in production or demand from existing customers.
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.
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.
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, 2012 and 2011.
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, 2012 and 2011:
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, 2010, 2011 and 2012 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.
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.
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.
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.
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.
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 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 statement.
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, 2012 and 2011 was $111,496
and $145,211, respectively. Accumulated amortization of deferred financing costs were $712,715 and $601,219 at September
30, 2012 and 2011, respectively.
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 for the year ended September 30, 2011 and subsequently liquidated during the year ended September
30, 2012.
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 nil employee options
during the year ended September 30, 2012 and 2,200,000 (7,333 post reverse stock split of 1:300) during the year ended September
30, 2011. The Company recorded the fair value of the vested portion of issued employee options of $22,000 and $11,648 for the years
ended September 30, 2012 and 2011, respectively.
There were various updates recently issued, most of which represented
technical corrections to the accounting literature or application to specific industries and are not expected to a have a material
impact on the Company's consolidated financial position, results of operations or cash flows.
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, 2012, the Company incurred a net loss attributable to common stockholders of $11,075,096.
The Company has incurred substantial recurring
losses. The Company has available cash of $25,266 at September 30, 2012 and during the year ended September 30,
2012, the Company used cash of $515,077 in operating activities. The Company’s working capital deficiency was
approximately $4,516,000 and $4,074,000 as of September 30, 2012 and 2011 respectively. The Company’s accumulated
deficit was approximately $28,000,000 and $17,000,000 as of September 30, 2012 and 2011 respectively. In addition, the
Company has a deficit of approximately $15,000,000 at September 30, 2012.
The Company has reduced cash required for
operations by reducing operating costs and reducing staff levels. In addition, the Company is working to manage its current liabilities
while it continues to make changes in operations to improve its cash flow and liquidity position.
CT is a Class A Original Equipment painting
facility and operates in a 46,000 square foot owned building in Baroda, which is in South Western Michigan. The Company invested
approximately $2 million into this paint facility and 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 significant new business opportunities. . These opportunities take time to develop before converted to revenue.
CT is aggressively beginning to diversify to non-automotive paint applications (industrial equipment) which Management believes
will help stabilize the Company going forward.
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.
Depreciation expense included as a charge
to operations of $184,080 and $236,603 for the years ended September 30, 2012 and 2011 respectively.
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 financing agreement was terminated by the company on June 5,2012
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.
NOTE 6 – CONVERTIBLE NOTES PAYABLE
At September 30, 2012 and 2011, convertible notes payable consists
of the following:
|
|
2012
|
|
|
2011
|
|
JCMD Mortgage loan payable in 240 monthly principal installments plus interest. The loan was secured by a second deed of trust on real property and improvements located in Howell, MI. In addition to the Company the JCMD General Partners personally guarantee the loan The note is in default. (*)
|
|
$
|
489,755
|
|
|
$
|
489,755
|
|
Colortek Mortgage loan payable in monthly principal installments of $5,961 with a fixed interest rate of 6.75% per annum. Note based on a 20 year amortization. Note is secured by first priority security interest in the business property of Colortek, Inc, the Company's wholly owned subsidiary. (**)
|
|
|
553,646
|
|
|
|
587,026
|
|
Note payable issued February 19, 2011, due contingent on certain events with interest at 5% per annum, unsecured, net of unamortized debt discount of $66,214
|
|
|
-
|
|
|
|
118,008
|
|
Note payable issued March 22, 2011, due on December 28, 2011 with interest at 8% per annum, unsecured, net of unamortized debt discount of $7,918
|
|
|
-
|
|
|
|
17,082
|
|
Note payable issued May 6, 2011, due February 10, 2012 with interest at 8% per annum, unsecured, net of unamortized debt discount of $14,250
|
|
|
-
|
|
|
|
15,750
|
|
Note payable issued on June 29, 2011, due July 1, 2012, with interest at 8% per annum, unsecured, net of unamortized debt discount of $186,821
|
|
|
138,000
|
|
|
|
63,179
|
|
Note payable, issued on January 10, 2011, due July 10, 2011, with interest at 7% per annum, unsecured
|
|
|
-
|
|
|
|
127,000
|
|
Note payable issued on July 1, 2011, due July 1, 2012, with interest at 16% per annum, unsecured, net of unamortized debt discount of $18,135
|
|
|
25,000
|
|
|
|
6,865
|
|
Note payable issued on July 15, 2011, due July 15, 2012, with interest at 16% per annum, unsecured, net of unamortized debt discount of $78,904
|
|
|
-
|
|
|
|
21,096
|
|
Note payable issued on July 20, 2011, due July 20, 2012, with interest at 16% per annum, unsecured, net of unamortized debt discount of $12,041
|
|
|
15,000
|
|
|
|
2,959
|
|
Note payable issued on July 21, 2011, due July 21, 2012, with interest at 16% per annum, unsecured, net of unamortized debt discount of $28,192
|
|
|
35,000
|
|
|
|
6,808
|
|
Note payable issued on July 20, 2011, due January 31, 2012, with interest at 5% per annum, unsecured, net of unamortized debt discount of $19,720
|
|
|
-
|
|
|
|
57,005
|
|
Note payable issued August 16, 2011, due August 15, 2012 with interest at 16% per annum, unsecured, net of unamortized debt discount of $23,753
|
|
|
-
|
|
|
|
6,247
|
|
Note payable issued September 28, 2011, due September 27, 2012 with interest at 16% per annum, unsecured, net of unamortized debt discount of $29,836
|
|
|
-
|
|
|
|
164
|
|
Note payable, issued December 6, 2011, due September 27, 2012, with default interest At 22% per annum, unsecured, Note is in default
|
|
|
12,350
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 – CONVERTIBLE NOTES PAYABLE (CONTINUED)
Note payable, issued on February 1, 2012, due November 2, 2012, with interest at 8% per annum, unsecured, net of unamortized debt discount of $4,338
|
|
|
43,162
|
|
|
|
-
|
|
Note payable, issued on February 15, 2012, due February 15, 2013, with interest At 10% per annum, unsecured, net of unamortized debt discount of $18,767
|
|
|
31,233
|
|
|
|
-
|
|
Note payable, issued on February 22, 2012, due November 22, 2012, with interest at 8% per annum, unsecured, net of unamortized debt discount of $17,973
|
|
|
74,643
|
|
|
|
-
|
|
Note payable, issued on April 25, 2012, due January 30, 2013, with interest at 8% per annum, unsecured, net of unamortized debt discount of $19,607
|
|
|
25,393
|
|
|
|
-
|
|
Note payable, issued on May 16, 2012, due December 31, 2012, with interest at 6% per annum, unsecured, net of unamortized debt discount of $32,140
|
|
|
47,860
|
|
|
|
-
|
|
Note payable, issued on May 16, 2012, due December 31, 2012, with interest at 6% per annum, unsecured, net of unamortized debt discount of $32,140
|
|
|
47,860
|
|
|
|
-
|
|
Note payable, issued on June 1, 2012, due December 31, 2012, with interest at 6% per annum, unsecured, net of unamortized debt discount of $41,132
|
|
|
54,098
|
|
|
|
-
|
|
Note payable, issued on July 30, 2012, due March 31, 2013, with interest at 8% per annum, unsecured, net of unamortized debt discount of $37,500
|
|
|
12,500
|
|
|
|
-
|
|
Note payable, issued on August 2, 2012, due May 6, 2013, with interest at 8% per annum, unsecured, net of unamortized debt discount of $15,740
|
|
|
4,260
|
|
|
|
-
|
|
Notes payable, issued on September 12, 2012, due March 31, 2013, with interest at 8% per annum, unsecured, net of unamortized debt discount of $40,950
|
|
|
4,050
|
|
|
|
-
|
|
Note payable, issued on September 30, 2012, due December 31, 2012, with interest at 6% per annum, unsecured, net of unamortized debt discount of $40,775
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
1,613,810
|
|
|
|
1,518,944
|
|
Less Current portion
|
|
|
(1,613,810
|
)
|
|
|
(1,518,944
|
)
|
Long term portion
|
|
$
|
-
|
|
|
$
|
-
|
|
(*) In accordance with the Forbearance
Agreement, the secured lender of the JCMD Mortgage Loans increased the interest rate on unpaid balances to bear interest at a floating
rate of two and quarter percent (2.25%) in excess of the Bank’s Prime Rate, and upon default shall bear interest at a rate
of five and one quarter percent (5.25%) in excess of the Bank’s Prime Rate. On November 30, 2010, the real estate
securing the mortgage loan payable was sold and the first deed of trust was fully retired. The proceeds from the sale
of real estate did not retire the balance of the loan secured by the second deed of trust. There is a shortfall of approximately
$490,000 that will continue to be carried as a liability to SBA and will be adjusted once the offer in compromise has been accepted. The
sale of real estate for $800,000 which was less than the carrying value of $1,210,000, resulted in the Company recording an impairment
charge of approximately $410,000 for the year ended September 30, 2010.
(**) In accordance with the mortgage loan agreement, the Company
is currently in default of certain loan covenants.
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.
NOTE 6 - NOTES PAYABLE (CONTINUED)
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:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
390.68
|
%
|
Risk free rate:
|
|
|
0.28
|
%
|
The initial fair value of the embedded
debt derivative of $240,321 was allocated as a debt discount.
During the years ended September 30, 2012
and 2011, the Company amortized and wrote off $66,214 and $174,107 to current period operations as interest expense, respectively.During
the years ended September 30, 2012 and 2011, the Company issued an aggregate of 134,744 and 26,342 shares of its common stock in
settlement of $184,223 and $75,897 of notes payable, respectively.
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:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
426.05
|
%
|
Risk free rate:
|
|
|
0.25
|
%
|
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 years ended September 30, 2012 and 2011, the Company
amortized $7,918 and $17,082 to current period operations as interest expense, respectively.
During the year ended September 30, 2012, the Company issued
an aggregate of 12,049 shares of its common stock in settlement of the notes payable.
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.
NOTE 6 - NOTES PAYABLE (CONTINUED)
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:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
438.48
|
%
|
Risk free rate:
|
|
|
0.7
|
%
|
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 operations as
interest expense in September 30, 2011.
During the year ended September 30, 2012 and 2011, the Company
amortized $14,250 and $15,750 to current period operations as interest expense, respectively.
During the year ended September 30, 2012, the Company issued
an aggregate of 39,319 shares of its common stock in settlement of the notes payable.
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:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
406.84
|
%
|
Risk free rate:
|
|
|
0.19
|
%
|
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 operations
as interest expense in September 30, 2011.
During the years ended September 30, 2012 and 2011, the Company
amortized $186,821 and $63,179 to current period operations as interest expense, respectively.
During the year ended September 30, 2012, the Company issued
an aggregate of 367,824 shares of its common stock in settlement of $112,000 of the notes payable.
The fair value of the described embedded derivative of $696,514
at September 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
482.68
|
%
|
Risk free rate:
|
|
|
0.06
|
%
|
NOTE 6 - NOTES PAYABLE (CONTINUED)
At September 30, 2012, the Company adjusted the recorded fair
value of the derivative liability to market resulting in non-cash, non-operating loss of $262,242 for the year ended September
30, 2012
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 (approx. 25,700 shares post reverse split of 1:300) 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:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
411.17
|
%
|
Risk free rate:
|
|
|
0.19
|
%
|
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 operations as interest expense in September 30, 2011.
During the year ended September 30, 2011,
the Company amortized $127,000 to current period operations as interest expense.
This note was assigned on November 28,
2011 (see below).
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:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
406.84 to 411.17
|
%
|
Risk free rate:
|
|
|
0.2
|
%
|
In conjunction with the issuance of the
Convertible Promissory Notes, the Company issued an aggregate of 4,375,000 detachable warrants (14,583 post reverse stock split
of 1:300) exercisable five years from the date of issuance with an initial exercise price of $0.04 per share ($12 per share post
reverse stock split of 1:300).
NOTE 6 - NOTES PAYABLE (CONTINUED)
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:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
406.84 to 411.17
|
%
|
Risk free rate:
|
|
|
1.46 to 1.80
|
%
|
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 operations as interest expense in September 30, 2011.
During the years ended September 30, 2012 and 2011, the Company
amortized $137,272 and $36,975 to current period operations as interest expense, respectively.
During the year ended September 30, 2012, the Company issued
an aggregate of 88,265 shares of its common stock in settlement of $100,000 of the outstanding notes and related accrued interest
The fair value of the described embedded derivative of $336,418
at September 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
482.68
|
%
|
Risk free rate:
|
|
|
0.06
|
%
|
At September 30, 2012, the Company adjusted the recorded
fair value of the derivative liability to market resulting in non-cash, non-operating loss of $31,086 for the year ended September
30, 2012.
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 ($12 per share post reverse
split of 1:300). This is convertible into approximately 1.9 million shares (approx. 6,333 shares post reverse split
of 1:300) 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 Bi
n
omial Lattice Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
411.17
|
%
|
Risk free rate:
|
|
|
0.2
|
%
|
NOTE 6 - NOTES PAYABLE (CONTINUED)
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, 2012 and 2011, the Company
amortized $19,720 and $11,544 to current period operations as interest expense, respectively.
During the year ended September 30, 2012, the Company paid $7,500
principal balance and issued a convertible note in settlement of the outstanding balance.
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 Notes 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 ($6 per share post reverse split of 1:300).
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:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
410.08 to 430.39
|
%
|
Risk free rate:
|
|
|
0.99
|
%
|
In conjunction with the issuance of the
Convertible Promissory Notes, the Company issued an aggregate of 3,000,000 detachable warrants (10,000 post reverse split of 1:300)
exercisable five years from the date of issuance with an initial exercise price of $0.02 per share ($6 per share post reverse split
of 1:300).
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 Bi
n
omial Lattice Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
410.08 to 430.39
|
%
|
Risk free rate:
|
|
|
0.99
|
%
|
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 operations as interest expense in September 30, 2011.
During the year ended September 30, 2012
and 2011, the Company amortized $53,589 and $6,411 to current period operations as interest expense, respectively.
During the year ended September 30, 2012,
the Company issued an aggregate of 10,000 shares of its common stock in settlement of the outstanding notes payable.
Note issued October 7, 2011
On October 7, 2011, the Company issued
a $53,000 Convertible Promissory Note that matures on July 11, 2012. The note bears interest at a rate of 8% and is convertible
into the Company’s common stock at any time at the holder’s option, at the conversion rate of 55% of the lowest three
trading days 10 days prior to notice of conversion.
NOTE 6 - NOTES PAYABLE (CONTINUED)
The Company identified embedded derivatives
related to the Convertible Promissory Note entered into on October 7, 2011. These embedded derivatives included certain
conversion features. The accounting treatment of derivative financial instruments requires that the Company record the
fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each
subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company determined a fair value
of $91,801 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice
Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
425.63
|
%
|
Risk free rate:
|
|
|
0.11
|
%
|
The initial fair value of the embedded
debt derivative of $91,801 was allocated as a debt discount up to the proceeds of the note ($53,000) with the remainder ($38,801)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized $53,000 to current period operations as interest expense.
During the year ended September 30, 2012,
the Company issued an aggregate of 231,838 shares of its common stock in settlement of the note payable and accrued interest;
Note issued November 28, 2011
On November 28, 2011, the Company issued
a $127,000 Convertible Promissory Note payable on demand. The note bears interest at a rate of 7% and is convertible into the Company’s
common stock at any time at the holder’s option, at the conversion rate of 25% of the average bid price 5 days prior to notice
of conversion with a floor of $2.10 per share.
The Company identified embedded derivatives
related to the Convertible Promissory Note entered into on November 28, 2011. These embedded derivatives included certain
conversion features. The accounting treatment of derivative financial instruments requires that the Company record the
fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each
subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company determined a fair value
of $146,682 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial
Lattice Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
403.66
|
%
|
Risk free rate:
|
|
|
0.20
|
%
|
The initial fair value of the embedded
debt derivative of $146,682 was allocated as a debt discount up to the proceeds of the note ($127,000) with the remainder ($19,682)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized and wrote off (upon conversion) a total of $127,000 to current period operations as interest expense, respectively.
During the year ended September 30, 2012,
the Company issued an aggregate of 195,229 shares of common stock in settlement the convertible note and related interest.
Note issued November 29, 2011
On November 29, 2011, the Company issued
a $19,005 Convertible Promissory Note that matures on November 28, 2012. The note bears interest at a rate of 8% and is convertible
into the Company’s common stock at any time at the holder’s option, at the fixed conversion rate of $0.66 per share.
Due to the nature of other existing convertible
promissory notes, the Company could not insure sufficient shares available upon conversion demands, therefore the Company identified
embedded derivatives related to the Convertible Promissory Note entered into on November 29, 2011. These embedded derivatives
included certain conversion features. The accounting treatment of derivative financial instruments requires that the
Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the
fair value as of each subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company
determined a fair value of $43,572 of the embedded derivative. The fair value of the embedded derivative was determined
using the Binomial Lattice
NOTE 6 - NOTES PAYABLE (CONTINUED)
Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
398.61
|
%
|
Risk free rate:
|
|
|
0.14
|
%
|
The initial fair value of the embedded
debt derivative of $43,572 was allocated as a debt discount up to the proceeds of the note ($19,005) with the remainder ($24,567)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized and wrote off (upon conversion) $19,005 to current period operations as interest expense.
During the year ended September 30, 2012,
the Company issued an aggregate of 28,796 shares of common stock in full settlement of the convertible note and related interest.
Note issued December 6, 2011
On December 6, 2011, the Company issued
a $37,500 Convertible Promissory Note that matures on September 8, 2012. The note bears interest at a rate of 8% and is convertible
into the Company’s common stock at any time at the holder’s option, at the conversion rate of 51% of the lowest three
trading days 10 days prior to notice of conversion.
The Company identified embedded derivatives
related to the Convertible Promissory Note entered into on December 6, 2011. These embedded derivatives included certain
conversion features. The accounting treatment of derivative financial instruments requires that the Company record the
fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each
subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company determined a fair value
of $76,924 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice
Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
399.15
|
%
|
Risk free rate:
|
|
|
0.11
|
%
|
The initial fair value of the embedded
debt derivative of $76,924 was allocated as a debt discount up to the proceeds of the note ($37,500) with the remainder ($39,424)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized and wrote off (upon conversion) $37,500 to current period operations as interest expense.
During the year ended September 30, 2012,
the Company issued an aggregate of 2,553,686 shares of common stock in full settlement of the $25,150 of the convertible note.
The fair value of the described embedded
derivative of $34,052 at September 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
482.68
|
%
|
Risk free rate:
|
|
|
0.06
|
%
|
At September 30, 2012, the Company adjusted
the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $42,872 for the year
ended September 30, 2012.
Note issued December 27, 2011
On December 27, 2011, the Company issued
a $10,887 Convertible Promissory Note that matures on December 26, 2012. The note bears interest at a rate of 8% and is convertible
into the Company’s common stock at any time at the holder’s option, at the fixed conversion rate of $0.60 per share.
Due to the nature of other existing convertible
promissory notes, the Company could not insure sufficient shares available upon conversion demands, therefore the Company identified
embedded derivatives related to the Convertible Promissory Note entered into on December 27, 2011. These embedded derivatives
included certain conversion features.
NOTE 6 - NOTES PAYABLE (CONTINUED)
The accounting treatment of derivative
financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible
Promissory Note and to adjust the fair value as of each subsequent balance sheet date. At the inception of the Convertible
Promissory Note, the Company determined a fair value of $47,591 of the embedded derivative. The fair value of the embedded
derivative was determined using the Binomial Lattice Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
376.40
|
%
|
Risk free rate:
|
|
|
0.12
|
%
|
The initial fair value of the embedded
debt derivative of $47,591 was allocated as a debt discount up to the proceeds of the note ($10,887) with the remainder ($36,704)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized and wrote off (upon conversion) $10,887 to current period operations as interest expense.
During the year ended September 30, 2012,
the Company issued an aggregate of 18,145 shares of common stock in full settlement of the convertible note and related interest.
Note issued January 3, 2012
On January 3, 2012, the Company issued
a $8,998 Convertible Promissory Note that matures on January 3, 2013. The note bears interest at a rate of 8% and is convertible
into the Company’s common stock at any time at the holder’s option, at the fixed conversion rate of $0.90 per share.
Due to the nature of other existing convertible
promissory notes, the Company could not insure sufficient shares available upon conversion demands, therefore the Company identified
embedded derivatives related to the Convertible Promissory Note entered into on January 3, 2012. These embedded derivatives
included certain conversion features. The accounting treatment of derivative financial instruments requires that the
Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the
fair value as of each subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company
determined a fair value of $20,206 of the embedded derivative. The fair value of the embedded derivative was determined
using the Binomial Lattice Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
379.14
|
%
|
Risk free rate:
|
|
|
0.12
|
%
|
The initial fair value of the embedded
debt derivative of $20,206 was allocated as a debt discount up to the proceeds of the note ($8,998) with the remainder ($11,208)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized and wrote off (upon conversion) $8,998 to current period operations as interest expense.
During the year ended September 30, 2012,
the Company issued an aggregate of 10,000 shares of common stock in full settlement of the convertible note and related interest.
Note issued January 17, 2012
On January 17, 2012, the Company issued
a $11,212 Convertible Promissory Note that matures on January 17, 2013. The note bears interest at a rate of 8% and is convertible
into the Company’s common stock at any time at the holder’s option, at the fixed conversion rate of $0.90 per share.
Due to the nature of other existing convertible
promissory notes, the Company could not insure sufficient shares available upon conversion demands, therefore the Company identified
embedded derivatives related to the Convertible Promissory Note entered into on January 17, 2012. These embedded derivatives
included certain conversion features. The accounting treatment of derivative financial instruments requires that the
Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the
fair value as of each subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company
determined a fair value of $36,112 of the embedded derivative. The fair value of the embedded derivative was determined
using the Binomial Lattice Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
372.71
|
%
|
Risk free rate:
|
|
|
0.11
|
%
|
NOTE 6 - NOTES PAYABLE (CONTINUED)
The initial fair value of the embedded
debt derivative of $36,112 was allocated as a debt discount up to the proceeds of the note ($11,212) with the remainder ($24,900)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized and wrote off (upon conversion) $11,212 to current period operations as interest expense.
During the year ended September 30, 2012,
the Company issued an aggregate of 12,667 shares of common stock in full settlement of the convertible note and related interest.
Note issued February 1, 2012
On February 1, 2012, the Company issued
a $47,500 Convertible Promissory Note that matures on November 2, 2012. The note bears interest at a rate of 8% and is convertible
into the Company’s common stock at any time at the holder’s option, at the conversion rate of 51% (subsequently amended
to 36%) of the lowest three trading days 10 days prior to notice of conversion.
The Company identified embedded derivatives
related to the Convertible Promissory Note entered into on February 1, 2012. These embedded derivatives included certain
conversion features. The accounting treatment of derivative financial instruments requires that the Company record the
fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each
subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company determined a fair value
of $121,282 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial
Lattice Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
350.13
|
%
|
Risk free rate:
|
|
|
0.13
|
%
|
The initial fair value of the embedded
debt derivative of $121,282 was allocated as a debt discount up to the proceeds of the note ($47,500) with the remainder ($73,782)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized $31,816 to current period operations as interest expense.
The fair value of the described embedded
derivative of $206,756 at September 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
482.68
|
%
|
Risk free rate:
|
|
|
0.06
|
%
|
At September 30, 2012, the Company adjusted
the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $90,049 for the year
ended September 30, 2012.
In connection with the modification of
the debt as described above, the Company recognized a loss of $40,908 for the year ended September 30, 2012.
Note issued February 2, 2012
On February 2, 2012, the Company issued
a $20,000 Convertible Promissory Note that matures on February 1, 2013. The note bears interest at a rate of 8% and is convertible
into the Company’s common stock at any time at the holder’s option, at the fixed conversion rate of $0.90 per share.
Due to the nature of other existing convertible
promissory notes, the Company could not insure sufficient shares available upon conversion demands, therefore the Company identified
embedded derivatives related to the Convertible Promissory Note entered into on February 2, 2012. These embedded derivatives
included certain conversion features. The accounting treatment of derivative financial instruments requires that the
Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the
fair value as of each subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company
determined a fair value of $50,783 of the embedded derivative. The fair value of the embedded derivative was determined
using the Binomial Lattice
NOTE 6 - NOTES PAYABLE (CONTINUED)
Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
350.18
|
%
|
Risk free rate:
|
|
|
0.31
|
%
|
The initial fair value of the embedded
debt derivative of $50,783 was allocated as a debt discount up to the proceeds of the note ($20,000) with the remainder ($30,783)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized and wrote off (upon conversion) $20,000 to current period operations as interest expense.
During the year ended September 30, 2012,
the Company issued an aggregate of 22,333 shares of common stock in full settlement of the convertible note and related interest.
Note issued February 15, 2012
On February 15, 2012, the Company issued
a $100,000 Convertible Promissory Note that matures on December 31, 2012 in exchange for 100 shares of Series C Preferred stock.
The note bears interest at a rate of 8% and is convertible into the Company’s common stock at any time at the holder’s
option, at the fixed conversion rate of $2.25 per share.
Due to the nature of other existing convertible
promissory notes, the Company could not insure sufficient shares available upon conversion demands, therefore the Company identified
embedded derivatives related to the Convertible Promissory Note entered into on February 15, 2012. These embedded derivatives
included certain conversion features. The accounting treatment of derivative financial instruments requires that the
Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the
fair value as of each subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company
determined a fair value of $52,677 of the embedded derivative. The fair value of the embedded derivative was determined
using the Binomial Lattice Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
325.00
|
%
|
Risk free rate:
|
|
|
0.18
|
%
|
The initial fair value of the embedded
debt derivative of $52,677 was allocated as a debt discount up to the proceeds of the note.
During the year ended September 30, 2012,
the Company amortized and wrote off (upon conversion) $52,677 to current period operations as interest expense.
During the year ended September 30, 2012,
the Company issued an aggregate of 44,649 shares of common stock in full settlement of the convertible note and related interest.
Note issued February 15, 2012
On February 15, 2012, the Company issued
a $50,000 Convertible Promissory Note that matures on February 15, 2013. The note bears interest at a rate of 10% and is convertible
into the Company’s common stock at any time at the holder’s option, at the conversion rate of 65% of the lowest two
trading days 10 days prior to notice of conversion.
The Company identified embedded derivatives
related to the Convertible Promissory Note entered into on February 15, 2012. These embedded derivatives included certain
conversion features. The accounting treatment of derivative financial instruments requires that the Company record the
fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each
subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company determined a fair value
of $72,072 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice
Model based on the following assumptions:
NOTE 6 - NOTES PAYABLE (CONTINUED)
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
325.00
|
%
|
Risk free rate:
|
|
|
0.18
|
%
|
The initial fair value of the embedded
debt derivative of $72,072 was allocated as a debt discount up to the proceeds of the note ($50,000) with the remainder ($22,072)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized $31,233 to current period operations as interest expense.
The fair value of the described embedded
derivative of $160,526 at September 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
482.68
|
%
|
Risk free rate:
|
|
|
0.10
|
%
|
At September 30, 2012, the Company adjusted
the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $88,454 for the year
ended September 30, 2012.
Note issued February 21, 2012
On February 21, 2012, the Company issued
a $64,398 Convertible Promissory Note that matures on February 20, 2013. The note bears interest at a rate of 8% and is convertible
into the Company’s common stock at any time at the holder’s option, at the conversion rate of 52% of the lowest trading
day 10 days prior to notice of conversion.
The Company identified embedded derivatives
related to the Convertible Promissory Note entered into on February 21, 2012. These embedded derivatives included certain
conversion features. The accounting treatment of derivative financial instruments requires that the Company record the
fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each
subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company determined a fair value
of $123,822 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial
Lattice Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
318.85
|
%
|
Risk free rate:
|
|
|
0.17
|
%
|
The initial fair value of the embedded
debt derivative of $123,822 was allocated as a debt discount up to the proceeds of the note ($64,398) with the remainder ($59,424)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized and wrote off (upon conversion) $64,398 to current period operations as interest expense.
During the year ended September 30, 2012,
the Company issued an aggregate of 113,667 shares of common stock in full settlement of the convertible note and related interest.
Note issued February 22, 2012
On February 22, 2012, the Company issued
a $102,500 Convertible Promissory Note that matures on February 22, 2013. The note bears interest at a rate of 8% and is convertible
into the Company’s common stock at any time at the holder’s option, at the conversion rate of 51% of the lowest three
trading days 10 days prior to notice of conversion.
The Company identified embedded derivatives
related to the Convertible Promissory Note entered into on February 22, 2012. These embedded derivatives included certain
conversion features. The accounting treatment of derivative financial instruments requires that the Company record the
fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each
subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company determined a fair value
of $204,223 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial
Lattice Model based on the following assumptions:
NOTE 6 - NOTES PAYABLE (CONTINUED)
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
318.85
|
%
|
Risk free rate:
|
|
|
0.17
|
%
|
The initial fair value of the embedded
debt derivative of $204,223 was allocated as a debt discount up to the proceeds of the note ($102,500) with the remainder ($101,723)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized or wrote off (upon conversion) $84,527 to current period operations as interest expense.
During the year ended September 30, 2012,
the Company issued an aggregate of 3,400,000 shares of common stock in settlement of $9,884 of the convertible note.
The fair value of the described embedded
derivative of $291,655 at September 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
482.68
|
%
|
Risk free rate:
|
|
|
0.10
|
%
|
At September 30, 2012, the Company adjusted
the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $87,432 for the year
ended September 30, 2012.
Note issued April 10, 2012
On April 10, 2012, the Company issued a
$16,615 Convertible Promissory Note that matures on April 9, 2013. The note bears interest at a rate of 8% and is convertible into
the Company’s common stock at any time at the holder’s option, at the fixed conversion rate of $0.2931 per share.
Due to the nature of other existing convertible
promissory notes, the Company could not insure sufficient shares available upon conversion demands, therefore the Company identified
embedded derivatives related to the Convertible Promissory Note entered into on April 10, 2012. These embedded derivatives
included certain conversion features. The accounting treatment of derivative financial instruments requires that the
Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the
fair value as of each subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company
determined a fair value of $27,192 of the embedded derivative. The fair value of the embedded derivative was determined
using the Binomial Lattice Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
240.82
|
%
|
Risk free rate:
|
|
|
0.19
|
%
|
The initial fair value of the embedded
debt derivative of $27,192 was allocated as a debt discount up to the proceeds of the note ($16,615) with the remainder ($10,577)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized and wrote off (upon conversion) $16,615 to current period operations as interest expense.
During the year ended September 30, 2012,
the Company issued an aggregate of 56,667 shares of common stock in full settlement of the convertible note and related interest.
Note issued April 25, 2012
On April 25, 2012, the Company issued a
$45,000 Convertible Promissory Note that matures on January 30, 2013. The note bears interest at a rate of 8% and is convertible
into the Company’s common stock at any time at the holder’s option, at the conversion rate of 51% of the lowest three
trading days 10 days prior to notice of conversion.
NOTE 6 - NOTES PAYABLE (CONTINUED)
The Company identified embedded derivatives
related to the Convertible Promissory Note entered into on April 25, 2012. These embedded derivatives included certain
conversion features. The accounting treatment of derivative financial instruments requires that the Company record the
fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each
subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company determined a fair value
of $84,798 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice
Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
257.63
|
%
|
Risk free rate:
|
|
|
0.18
|
%
|
The initial fair value of the embedded
debt derivative of $84,798 was allocated as a debt discount up to the proceeds of the note ($45,000) with the remainder ($39,798)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized $25,393 to current period operations as interest expense.
The fair value of the described embedded
derivative of $150,879 at September 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
482.68
|
%
|
Risk free rate:
|
|
|
0.10
|
%
|
At September 30, 2012, the Company adjusted
the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $66,081 for the year
ended September 30, 2012.
Note issued May 16, 2012
On May 16, 2012, the Company issued a $80,000
Convertible Promissory Note that matures on December 31, 2012. The note bears interest at a rate of 6% and is convertible into
the Company’s common stock at any time at the holder’s option, at the conversion rate of 50% of the lowest bid price
5 trading days prior to notice of conversion. The note includes a redemption premium up to 120% of the face of the note for early
payoff.
The Company identified embedded derivatives
related to the Convertible Promissory Note entered into on May 16, 2012. These embedded derivatives included certain
conversion features. The accounting treatment of derivative financial instruments requires that the Company record the
fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each
subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company determined a fair value
of $174,938 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial
Lattice Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
258.13
|
%
|
Risk free rate:
|
|
|
0.20
|
%
|
The initial fair value of the embedded
debt derivative of $174,938 was allocated as a debt discount up to the proceeds of the note ($80,000) with the remainder ($94,938)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized $47,860 to current period operations as interest expense.
The fair value of the described embedded
derivative of $443,576 at September 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
482.68
|
%
|
Risk free rate:
|
|
|
0.10
|
%
|
At September 30, 2012, the Company adjusted
the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $252,828 for the year
ended September 30, 2012.
NOTE 6 - NOTES PAYABLE (CONTINUED)
Note issued May 16, 2012
On May 16, 2012, the Company issued a $80,000
Convertible Promissory Note that matures on December 31, 2012. The note bears interest at a rate of 6% and is convertible into
the Company’s common stock at any time at the holder’s option, at the conversion rate of 50% of the lowest bid price
5 trading days prior to notice of conversion. The note includes a redemption premium up to 120% of the face of the note for early
payoff.
The Company identified embedded derivatives
related to the Convertible Promissory Note entered into on May 16, 2012. These embedded derivatives included certain
conversion features. The accounting treatment of derivative financial instruments requires that the Company record the
fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each
subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company determined a fair value
of $174,938 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial
Lattice Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
258.13
|
%
|
Risk free rate:
|
|
|
0.20
|
%
|
The initial fair value of the embedded
debt derivative of $174,938 was allocated as a debt discount up to the proceeds of the note ($80,000) with the remainder ($94,938)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized $47,860 to current period operations as interest expense.
The fair value of the described embedded
derivative of $443,576 at September 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
482.68
|
%
|
Risk free rate:
|
|
|
0.10
|
%
|
At September 30, 2012, the Company adjusted
the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $268,638 for the year
ended September 30, 2012.
Note issued May 22, 2012
On May 22, 2012, the Company issued a $25,000
Convertible Promissory Note that is due on demand. The note bears interest at a rate of 5% and is convertible into the Company’s
common stock at any time at the holder’s option, at the conversion rate of 50% of the average of the three lowest bid prices,
10 trading days prior to notice of conversion.
The Company identified embedded derivatives
related to the Convertible Promissory Note entered into on May 22, 2012. These embedded derivatives included certain
conversion features. The accounting treatment of derivative financial instruments requires that the Company record the
fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each
subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company determined a fair value
of $24,478 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice
Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
271.22
|
%
|
Risk free rate:
|
|
|
0.08
|
%
|
The initial fair value of the embedded
debt derivative of $24,478 was allocated as a debt discount of the note.
During the year ended September 30, 2012,
the Company amortized $24,478 to current period operations as interest expense.
During the year ended September 30, 2012,
the Company issued an aggregate of 431,351 shares of common stock in settlement of the outstanding note payable.
NOTE 6 - NOTES PAYABLE (CONTINUED)
Notes issued June 1, 2012
On June 1, 2012, the Company issued an
aggregate of $95,229 of Convertible Promissory Notes that matures on December 31, 2012. The notes bear interest at a rate of 6%
and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 50%
of the lowest bid price 5 trading days prior to notice of conversion. The note includes a redemption premium up to 120% of the
face of the note for early payoff.
The Company identified embedded derivatives
related to the Convertible Promissory Notes entered into on June 1, 2012. These embedded derivatives included certain
conversion features. The accounting treatment of derivative financial instruments requires that the Company record the
fair value of the derivatives as of the inception date of the Convertible Promissory Notes and to adjust the fair value as of each
subsequent balance sheet date. At the inception of the Convertible Promissory Notes, the Company determined a fair value
of $222,153 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial
Lattice Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
272.05
|
%
|
Risk free rate:
|
|
|
0.12
|
%
|
The initial fair value of the embedded
debt derivative of $222,153 was allocated as a debt discount up to the proceeds of the note ($95,229) with the remainder ($126,924)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized $54,097 to current period operations as interest expense.
The fair value of the described embedded
derivative of $526,349 at September 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
482.68
|
%
|
Risk free rate:
|
|
|
0.10
|
%
|
At September 30, 2012, the Company adjusted
the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $304,196 for the year
ended September 30, 2012.
Note issued July 30, 2012
On July 30, 2012, the Company issued a
$50,000 Convertible Promissory Note that matures on March 31, 2013. The note bears interest at a rate of 8% and is convertible
into the Company’s common stock at any time at the holder’s option, at the conversion rate of 50% of the average of
the two lowest bid prices 5 trading days prior to notice of conversion. The note includes a redemption premium up to 120% of the
face of the note for early payoff.
The Company identified embedded derivatives
related to the Convertible Promissory Note entered into on July 30, 2012. These embedded derivatives included certain
conversion features. The accounting treatment of derivative financial instruments requires that the Company record the
fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each
subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company determined a fair value
of $187,051 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial
Lattice Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
363.95
|
%
|
Risk free rate:
|
|
|
0.15
|
%
|
The initial fair value of the embedded
debt derivative of $187,051 was allocated as a debt discount up to the proceeds of the note ($50,000) with the remainder ($137,051)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized $12,500 to current period operations as interest expense.
NOTE 6 - NOTES PAYABLE (CONTINUED)
The fair value of the described embedded
derivative of $165,015 at September 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
482.68
|
%
|
Risk free rate:
|
|
|
0.14
|
%
|
At September 30, 2012, the Company adjusted
the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $22,036 for the year
ended September 30, 2012.
Note issued August 2, 2012
On August 2, 2012, the Company issued a
$20,000 Convertible Promissory Note that matures on May 6, 2013. The note bears interest at a rate of 8% and is convertible into
the Company’s common stock at any time at the holder’s option, at the conversion rate of 36% of the average three lowest
trading prices 10 trading days prior to notice of conversion.
The Company identified embedded derivatives
related to the Convertible Promissory Note entered into on August 2, 2012. These embedded derivatives included certain
conversion features. The accounting treatment of derivative financial instruments requires that the Company record the
fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each
subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company determined a fair value
of $78,599 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice
Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
366.04
|
%
|
Risk free rate:
|
|
|
0.14
|
%
|
The initial fair value of the embedded
debt derivative of $78,599 was allocated as a debt discount up to the proceeds of the note ($20,000) with the remainder ($58,599)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized $4,260 to current period operations as interest expense.
The fair value of the described embedded
derivative of $100,557 at September 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
482.68
|
%
|
Risk free rate:
|
|
|
0.14
|
%
|
At September 30, 2012, the Company adjusted
the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $21,958 for the year
ended September 30, 2012.
Notes issued September 12, 2012
On September 12, 2012, the Company issued
an aggregate of $45,000 Convertible Promissory Notes that matures on March 31, 2013. The note bears interest at a rate of 8% and
is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 50% of
the lowest bid price 10 trading days prior to notice of conversion for $10,000 and lower of $0.01 or 50% of the lowest bid price
15 trading days prior to notice of conversion for $35,000. The note includes a redemption premium up to 120% of the face of the
note for early payoff.
The Company identified embedded derivatives
related to the Convertible Promissory Notes entered into on September 12, 2012. These embedded derivatives included
certain conversion features. The accounting treatment of derivative financial instruments requires that the Company
record the fair value of the derivatives as of the inception date of the Convertible Promissory Notes and to adjust the fair value
as of each subsequent balance sheet date. At the inception of the Convertible Promissory Notes, the Company determined
a fair value of $63,040 of the embedded derivative. The fair value of the embedded derivative was determined using the
Binomial Lattice Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
472.85
|
%
|
Risk free rate:
|
|
|
0.13
|
%
|
NOTE 6 - NOTES PAYABLE (CONTINUED)
The initial fair value of the embedded
debt derivative of $63,040 was allocated as a debt discount up to the proceeds of the note ($45,000) with the remainder ($18,040)
charged to current period operations as interest expense.
During the year ended September 30, 2012,
the Company amortized $4,050 to current period operations as interest expense.
The fair value of the described embedded
derivative of $260,837 at September 30, 2012 was determined using the Binomial Lattice Model with the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
482.68
|
%
|
Risk free rate:
|
|
|
0.14
|
%
|
At September 30, 2012, the Company adjusted
the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $197,797 for the year
ended September 30, 2012.
Note issued September 30, 2012
On September 30, 2012, the Company issued
a $40,775 Convertible Promissory Note that matures on December 31, 2012 for services rendered. The note bears interest at a rate
of 6% and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate
of 50% of the lowest bid price 5 trading days prior to notice of conversion. The note includes a redemption premium up to 120%
of the face of the note for early payoff.
The Company identified embedded derivatives
related to the Convertible Promissory Note entered into on September 30, 2012. These embedded derivatives included certain
conversion features. The accounting treatment of derivative financial instruments requires that the Company record the
fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each
subsequent balance sheet date. At the inception (and at September 30, 2012) of the Convertible Promissory Note, the
Company determined a fair value of $225,371 of the embedded derivative. The fair value of the embedded derivative was
determined using the Binomial Lattice Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
482.68
|
%
|
Risk free rate:
|
|
|
0.10
|
%
|
The initial fair value of the embedded
debt derivative of $225,371 was allocated as a debt discount up to the proceeds of the note ($40,775) with the remainder ($184,596)
charged to current period operations as interest expense.
During
the year ended September 30, 2012, the Company amortized $nil to current period operations as interest expense
.
MARKETING WORLDWIDE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND 2011
NOTE 7 - 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, 2012 and 2011 is as follows:
|
|
2012
|
|
|
2011
|
|
Warranty liability, beginning of year
|
|
$
|
75,000
|
|
|
$
|
95,000
|
|
Expense for the year
|
|
|
10,781
|
|
|
|
20,000
|
|
Amount incurred
|
|
|
(10,781
|
)
|
|
|
(40,000
|
)
|
Warranty liability, end of year
|
|
$
|
75,000
|
|
|
$
|
75,000
|
|
NOTE 8 – OTHER CURRENT LIABILITIES
Other current liabilities consist of the following at September
30, 2012 and 2011:
|
|
2012
|
|
|
2011
|
|
Preferred dividends payable
|
|
$
|
386,493
|
|
|
$
|
315,000
|
|
Consulting fees
|
|
|
394,779
|
|
|
|
69,500
|
|
Interest
|
|
|
7,364
|
|
|
|
225,530
|
|
Payroll and other
|
|
|
309,253
|
|
|
|
159,428
|
|
Total
|
|
$
|
1,097,889
|
|
|
$
|
769,458
|
|
NOTE 9 - WARRANT LIABILITY
The Company issued warrants in conjunction
with the issuance with certain convertible promissory notes. These warrants contained certain reset provisions. Therefore,
in accordance with ASC 815-40
,
the Company reclassified the fair value of the warrant from equity to a liability at the
date of issuance. Subsequent to the initial issuance date, the Company is required to adjust to fair value the warrant
as an adjustment to current period operations.
The Company estimated the fair value at
date of issue of the warrants issued in connection with the issuance of the convertible promissory notes to be $187,496 using the
Binomial Lattice formula assuming no dividends, a risk-free interest rate of 0.99% to 1.80%, expected volatility of 406.84% to
430.39%, and expected warrant life of five years. Since the warrants have reset provisions, pursuant to ASC 815-40, the Company
has recorded the fair value of the warrants as a derivative liability. The net value of the warrants at the date of issuance was
recorded as a warrant liability in the amount of $187,496. Until conversion and expiration of the warrants, changes in fair
value were recorded as non-operating, non-cash income or expense at each reporting date.
The fair value of the warrant liability
of $809,967 as of September 30, 2012 was determined using the Binomial Lattice formula assuming no dividends, a risk-free interest
rate of 0.31%, expected volatility of 482.68%, and expected remaining warrant life of 3.75 to 3.99 years.
The Company adjusted the recorded fair
values of the warrants to market from September 30, 2011 resulting in a non-cash, non-operating loss of $482,115 for the year ended
September 30, 2012.
NOTE 10 - CAPITAL STOCK
On May 1, 2011, the Company, by agreement
of a majority of shareholders, amended the Certificate of Incorporation to increase the authorized shares of common stock .The
total number of shares of stock which the corporation shall have authority to issue is: Five Hundred Ten Million (510,000,000)
of which Five Hundred Million (500,000,000) shares of the par value of $.001 each shall be common stock and of which Ten Million
(10,000,000) shares of the par value of $.001 each shall be preferred stock. Further, the board of directors of this
corporation, by resolution only and without further action or approval, may cause the corporation to issue one or more classes
or one or more series of preferred stock within any class thereof and which classes or series may have such voting powers, full
or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights,
and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution
or resolutions adopted by the board of directors, and to fix the number of shares constituting any classes or series and to increase
or decrease the number of shares of any such class or series.
NOTE 10 - CAPITAL STOCK (CONTINUED)
On May 1, 2012, four persons holding majority
voting power of the Company took action by written consent to increase the authorized capital stock of the Company to consist of
Five Billion Nine Hundred Ten Million (5,910,000,000) shares of which stock Five Billion Nine Hundred Million (5,900,000,000) shares
of the par value of $.00001 each shall be common stock and of which Ten Million (10,000,000) shares of the par value of $.001 each
shall be preferred stock.
On July 9, 2012, the Company affected a
three hundred-to-one (300 to 1) reverse stock split of its issued and outstanding shares of common stock, $0.00001 par value (whereby
every three hundred shares of Company’s common stock will be exchanged for one share of the Company's common stock).
All references in the consolidated financial statements and the notes to consolidated financial statements, number of shares, and
share amounts have been retroactively restated to reflect the reverse split.
Series A Preferred stock
As of September 30, 2012 and 2011, the
Company had nil and 3,500,000 shares issued and outstanding, respectively.
On January 5, 2012, the Company issued
an aggregate of 15,000 shares of common stock in exchange for 1,808,099 shares of Series A Preferred Stock.
On May 22, 2012, the Company entered a
Securities Exchange Agreement with two investors. The Company exchanged the remaining outstanding shares of Series A Convertible
Preferred Stock (1,691,901shares) and Series B Convertible Preferred Stock (1,192,308 shares) for 11,923 shares of the Company’s
Series E 6% Convertible Preferred Stock.
In connection
with the settlement of the remaining Series A Preferred stock, the Company recorded a loss on settlement of debt of $382,596. The
fair value of the issued Series E Preferred stock of $2,095,401 was determined using the
Binomial Lattice Model with the
following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
271.65
|
%
|
Risk free rate:
|
|
|
0.21
|
%
|
Payment of Dividends: Commencing on the
date of issuance of the Series A Preferred Stock, the holders of record of shares of Series A Preferred Stock shall be entitled
to receive, out of any assets at the time legally available therefore and as declared by the Board of Directors, dividends at the
rate of nine percent (9%) of the stated Liquidation Preference Amount (see below) per share per annum payable quarterly. On March
5, 2012 and April 18, 2012, the Company issued an aggregate of 83,333 shares of common stock in payment of $80,000 of accrued dividends.
In accordance with Accounting Standards
Codification subtopic 470-20, Debt, Debt with Conversions and Other Options (“ASC 470-20”), the Company recognized
an imbedded beneficial conversion feature present in the Convertible Series A Preferred Stock. The Company allocated a portion
of the proceeds equal to the fair value of that feature to additional paid-in capital. The Company recognized and measured an aggregate
of $3,500,000 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature to additional
paid-in capital and a charge as preferred stock dividend. The fair value of the imbedded beneficial conversion feature was
determined using the Black-Scholes Option Pricing Model which approximates the fair value measured using the Binomial Lattice Model
with the following assumptions: Dividend yield: $-0-; Volatility: 434.88%, risk free rate: 0.06%.
The Series A Preferred Stock 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.
NOTE 10 - CAPITAL STOCK (CONTINUED)
In June 2008, the FASB finalized ACS 815,
“Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock.” Under ASC 815,
instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The Company has determined
that it needs to account for these imbedded beneficial conversion features, issued to investors in 2007 for its Series A Convertible
Preferred Stock, as derivative liabilities, and apply the provisions of ASC 815. The instruments have a ratchet provision
(that adjusts the exercise price in the event of a subsequent offering of equity at a lower exercise price). As
a result, the ratchet provision has been accounted for as derivative liabilities, in accordance with ASC 815. ASC
815, “Accounting for Derivative Instruments and Hedging Activities” (“ASC 815”) requires that the fair
value of these liabilities be re-measured at the end of every reporting period with the change in fair value reported in the consolidated
statement of operations.
ASC 815 was implemented in the first quarter of Fiscal 2010
and is reported as the cumulative effect of a change in accounting principles. At October 1, 2009, the cumulative effect on the
embedded conversion feature was recorded as decrease in accumulated deficit of $1,971,115. During the year ended September 30,
2012, the Company converted/settled all the Series A Preferred Stock. As of the date of the conversion /settlement, derivative
liability associated with the embedded conversion features of the Series A Preferred stock was revalued, the gain in the derivative
liability of $141,740 for the year ended September 30, 2012 is included as a decrease of a loss on change of fair value of derivative
liabilities in the Company’s consolidated statement of operations
Series B Preferred stock
As of September 30, 2012 and 2011, the
Company had nil and 1,192,308 shares of Series B Convertible Preferred stock issued and outstanding, respectively.
As described above under Series A Preferred
stock, On May 22, 2012, the Company exchanged all the outstanding Series B Preferred stock for Series E 6% Convertible Preferred
Stock.
Series C Preferred stock
On May 4, 2011, the Company designated
the issuance of a Series C preferred stock with the following attributes:
Par value:
|
$0.001 per share
|
|
|
Stated value:
|
$1,000 per share
|
|
|
Voting rights:
|
None
|
On February 15, 2012, the Company issued
a $100,000 convertible note payable in exchange for all the outstanding Series C Preferred stock.
As of September 30, 2012 and 2011, the
Company has nil and 100 shares of Series C Preferred stock issued and outstanding, respectively.
Conversion rights: Each share
of Series C Preferred stock is convertible at a conversion price of $45.00 per share based on the initial stated value at issuance.
Liquidation rights: Upon any
liquidation, dissolution or winding up of the Company, the holders shall be entitled to receive out of the assets an amount equal
to the Stated Value, plus any accrued and unpaid dividends before payment is made to the holders of junior securities. Junior
securities is defined as common stock or all other common stock equivalents of the Company other than those securities which are
explicitly senior or pari passu to the preferred stock.
NOTE 10 - CAPITAL STOCK (CONTINUED)
Series D Super Voting Preferred stock
On April 11, 2012. the Company designated
1,000,000 authorized preferred shares as Series D Super Voting Preferred stock with the following attributes:
Par value:
|
$0.001 per share
|
|
|
Stated value:
|
$0.001 per share
|
|
|
Voting rights:
|
10,000 votes per share when voting on matters with the Company's common stockholders
|
Conversion rights: none.
Dividend rights: none
Liquidation rights: Upon any
liquidation, dissolution or winding up of the Company, the holders shall be entitled to receive out of the assets an amount equal
to the Stated Value.
On April 12, 2012, the Company issued 90,002
shares of Series D Super Voting Preferred stock to key officers, employees and consultants, valued at $40,501.
Series E 6% Convertible Preferred Stock
On May 24, 2012. the Company designated
15,000 authorized preferred shares as Series E Convertible Preferred Stock with the following attributes:.
Par value:
|
$0.001 per share
|
|
|
Stated value:
|
$100 per share
|
|
|
Voting rights:
|
None
|
Conversion rights: Each share
of Series E 6% Convertible Preferred stock is convertible at any time at the election of the holder into that number of shares
of the Company's common stock determined by dividing the Stated value of such shares of preferred stock into the conversion price.
The conversion price is defined as fifty percent (50%) of the lowest closing bid price of the Company's common stock during five
(5) trading days immediately preceding a conversion date.
Dividend rights: Holders share be entitled
to receive cumulative dividends at a rate per share of 6% per annum, payable in arrears on June 30 and December 31 and on each
conversion date in cash or at the Company's irrevocable option, shares of the Company's common stock. The number of shares issuable
is defined as 50% of the previous ten (10) day variable weighted average price of the Company's common stock, with certain limitations
Dividends on the Series E 6% Convertible
Preferred stock shall accrue daily commencing on the original issuance date and shall be deemed to accrue from such date whether
or not earned or declared and whether or not there are profits, surplus or other funds of the Company legally available for the
payment of dividends.
Liquidation rights: Upon any
liquidation, dissolution or winding up of the Company, the holders shall be entitled to receive out of the assets an amount equal
to the Stated Value, plus any accrued and unpaid dividends before payment is made to the holders of junior securities. Junior
securities is defined as common stock or all other common stock equivalents of the Company other than those securities which are
explicitly senior or pari passu to the preferred stock.
On May 24, 2012, the Company issued an
aggregate of 11,923 shares of Series E 6% Convertible Preferred stock in exchange for all of the outstanding Series A Preferred
stock and Series B Preferred stock.
NOTE 10 - CAPITAL STOCK (CONTINUED)
The Company identified embedded derivatives
related to the Series E 6% Convertible Preferred stock issued on May 24, 2012. These embedded derivatives included certain
conversion features. The accounting treatment of derivative financial instruments requires that the Company record the
fair value of the derivatives as of the issuance date of the Series E 6% Convertible Preferred stock and to adjust the fair value
as of each subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company determined
a fair value of $2,095,401 of the embedded derivative. The fair value of the embedded derivative was determined using
the Binomial Lattice Model based on the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
271.65
|
%
|
Risk free rate:
|
|
|
0.21
|
%
|
The Company allocated the determined fair
value of the Series E 6% Convertible Preferred stock based on the carrying value of the Series B preferred stock and the fair value
of the Series A preferred stock (based on the underlying conversion feature) and accordingly recorded a loss on settlement of debt
associated Series A preferred stock (debt) of $382,596 and a charge to equity of $19,774 associated with the Series B preferred
stock.
During the year ended September 30, 2012,
the Company issued an aggregate of 15,859,403 shares of its common stock in exchange for 810.5 shares of Series E 6% Convertible
Preferred stock.
At September 30, 2012, the fair value of
the described embedded derivative of $6,620,806 was determined using the Binomial Lattice Model with the following assumptions:
Dividend yield:
|
|
|
-0-
|
%
|
Volatility
|
|
|
482.68
|
%
|
Risk free rate:
|
|
|
0.17
|
%
|
At September 30, 2012, the Company adjusted
the recorded fair value of the derivative liability to market resulting in non-cash, non-operating loss of $4,525,405 for the year
ended September 30, 2012.
Common stock
On October 25, 2010, the Company issued 2,000,000 shares (6,667
shares post reverse stock split of 1:300) of common stock in exchange for services valued at $40,000. These shares were
valued at $0.02 per share ($6 per share post reverse stock split of 1:300), which was the trading price on October 25, 2010.
On January 11, 2011, the Company issued an aggregate of 554,108
shares (1,847 shares post reverse stock split of 1:300) of common stock in exchange for services valued at $25,914. The
shares were valued at the $0.04 per share ($12 per share post reverse stock split of 1:300), which was the trading price as
of January 11, 2011.
On January 11, 2011, the Company issued 5,137,500 shares (17,125
shares post reverse stock split of 1:300) 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 (1,250
shares post reverse stock split of 1:300) of common stock in exchange for services valued at $7,500. These shares were
valued at $0.02 per share ($6 per share post reverse stock split of 1:300), which was the trading price on January 17, 2011
On February 1, 2011, the Company issued 800,000 shares (2,667
shares post reverse stock split of 1:300) of common stock in exchange for accrued compensation valued at $16,000. These
shares were valued at $0.02 per share ($6 per share post reverse stock split of 1:300), which was the trading price on February
1, 2011.
On February 12, 2011, the Company issued 4,150,000 shares (13,833
shares post reverse stock split of 1:300) of common stock in exchange for previously incurred debt of $49,566. These
shares were valued at $0.02 per share ($6 per share post reverse stock split of 1:300), 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 (2,000
shares post reverse stock split of 1:300) of common stock in exchange for services valued at $9,600. These shares were
valued at $0.02 per share ($6 per share post reverse stock split of 1:300), which was the trading price on February 22, 2011
On February 23, 2011, the Company issued 375,000 shares (1,250
shares post reverse stock split of 1:300) of common stock in exchange for services valued at $7,500. These shares were
valued at $0.019 per share ($5.7 per share post reverse stock split of 1:300), which was the trading price on February 23, 2011.
NOTE 10 - CAPITAL STOCK (CONTINUED)
On March 24, 2011, the Company issued 2,540,787 shares (8,469
shares post reverse stock split of 1:300) of common stock in exchange for previously incurred debt of $25,840. These
shares were valued at $0.02 per share ($6 per share post reverse stock split of 1:300), 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 (12,071 shares post reverse stock split of 1:300) of common stock in exchange for services valued at $108,641. These
shares were valued at $0.03 per share ($9 per share post reverse stock split of 1:300), which was the trading price on April 27,
2011.
On May 17, 2011, the Company issued 2,902,657 shares (9,676
shares post reverse stock split of 1:300) of common stock in exchange for services valued at $58,053. These shares were
valued at $0.02 per share ($6 per share post reverse stock split of 1:300), which was the trading price on May 17, 2011
On May 25, 2011, the Company issued 378,143 shares (1,260 shares
post reverse stock split of 1:300) 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 ($21 per share post reverse stock split of 1:300), which was the effective conversion rate
of the underlying note.
On August 1, 2011, the Company issued 100,000 shares (333 shares
post reverse stock split of 1:300) of common stock in exchange for services valued at $1,000. These shares were valued
at $0.01 per share ($3 per share post reverse stock split of 1:300), which is the trading price on August 1, 2011.
On August 22, 2011, the Company issued 2,646,666 shares (8,822
shares post reverse stock split of 1:300) 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 ($3.9 per share post reverse stock split of 1:300), which was the trading price on August
22, 2011.
On August 26, 2011, the Company issued 833,333 shares (2,778
shares post reverse stock split of 1:300) 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 ($5.1 per share post reverse stock split of 1:300), which was the trading price on August
26, 2011.
On September 7, 2011, the Company issued 1,964,286 shares (6,548
shares post reverse stock split of 1:300) 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 ($3.24 per share post reverse stock split of 1:300), which was the trading price on September
7, 2011.
On September 12, 2011, the Company issued 2,500,000 shares (8,333
shares post reverse stock split of 1:300) 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 ($3.66 per share post reverse stock split of 1:300), which was the trading price on September
12, 2011.
On September 14, 2011, the Company issued 2,000,000 shares (6,667
shares post reverse stock split of 1:300) 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 ($3.3 per share post reverse stock split of 1:300), which was the trading price on September
14, 2011.
On September 15, 2011, the Company issued 1,428,571 shares (4,762
shares post reverse stock split of 1:300) 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 ($3.41 per share post reverse stock split of 1:300), which was the trading price on September
15, 2011.
On September 15, 2011, the Company issued 1,821,429 shares (6,071
shares post reverse stock split of 1:300) of common stock in exchange for services valued at $25,500. These shares were
valued at $0.014 per share ($4.2 per share post reverse stock split of 1:300), which is the trading price on September 15, 2011.
On September 19, 2011, the Company issued 2,627,537 shares (8,758
shares post reverse stock split of 1:300) 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 ($3.18 per share post reverse stock split of 1:300), which was the trading price on September
19, 2011.
On September 21, 2011, the Company issued 2,628,349 shares (8,761
shares post reverse stock split of 1:300) 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 ($3.7 per share post reverse stock split of 1:300), which was the trading price on September
21, 2011.
On October 3, 2011, the Company issued
6,494 shares of common stock in exchange for a convertible note and related accrued interest of $15,000. These shares
were valued at $4.20 per share, which was the trading price on October 3, 2011.
On October 5, 2011, the Company issued
5,556 shares of common stock in exchange for a convertible note and related accrued interest of $10,000. These shares
were valued at $3.60 per share, which was the trading price on October 5, 2011.
NOTE 10 - CAPITAL STOCK (CONTINUED)
On October 7, 2011, the Company issued
11,087 shares of common stock in exchange for a convertible note and related accrued interest of $28,000. These shares
were valued at $3.61 per share, which was the trading price on October 7, 2011.
On October 26, 2011, the Company issued
12,064 shares of common stock in exchange for a convertible note and related accrued interest of $26,160. These shares
were valued at $3.10 per share, which was the trading price on October 26, 2011.
On October 27, 2011, the Company issued
2,075 shares of common stock in exchange for a convertible note and related accrued interest of $4,500. These shares
were valued at $3.10 per share, which was the trading price on October 27, 2011.
On November 8, 2011, the Company issued
6,667 shares of common stock in exchange for services valued at $10,000. These shares were valued at $1.50 per share,
which was the trading price on November 8, 2011
On November 11, 2011, the Company issued
10,000 shares of common stock in exchange for a convertible notes and related accrued interest of $30,000. These shares
were valued at $3.10 per share, which was the trading price on November 11, 2011.
On November 18, 2011, the Company received
2,000 shares of common stock previously issued for services valued at $120,000. These returned shares were canceled
and returned to authorized and were valued at $60.00 per share, which was the trading price at initial issuance on February 17,
2010.
On November 21, 2011, the Company issued
an aggregate of 18,931 shares of common stock in exchange for convertible notes and related accrued interest of $19,800. These
shares were valued at $2.10 per share, which was the trading price on November 21, 2011.
On November 22, 2011, the Company issued
8,642 shares of common stock in exchange for a convertible note and related accrued interest of $7,000. These shares
were valued at $1.50 per share, which was the trading price on November 22, 2011.
On November 28, 2011, the Company issued
8,000 shares of common stock in exchange for a convertible note and related accrued interest of $6,000. These shares
were valued at $1.53 per share, which was the trading price on November 28, 2011.
On November 29, 2011, the Company issued
an aggregate of 33,462 shares of common stock in exchange for convertible notes and related accrued interest of $22,505. These
shares were valued at $1.50 per share, which was the trading price on November 29, 2011.
On November 30, 2011, the Company issued
an aggregate of 14,227 shares of common stock in exchange for convertible notes and related accrued interest of $11,500. These
shares were valued at $1.74 per share, which was the trading price on November 29, 2011.
On December 6, 2011, the Company issued
an aggregate of 2,464 shares of common stock in exchange for convertible notes and related accrued interest of $500. These
shares were valued at $1.20 per share, which was the trading price on December 6, 2011.
On December 15, 2011, the Company issued
6,667 shares of common stock in exchange for services valued at $20,000. These shares were valued at $3.00 per share,
which was the trading price on December 15, 2011
On December 19, 2011, the Company issued
an aggregate of 8,791 shares of common stock in exchange for convertible notes and related accrued interest of $6,000. These
shares were valued at $1.02 per share, which was the trading price on December 19, 2011.
On December 19, 2011, the Company issued
an aggregate of 8,791 shares of common stock in exchange for convertible notes and related accrued interest of $6,000. These
shares were valued at $1.56 per share, which was the trading price on December 19, 2011.
On December 27, 2011, the Company issued
18,145 shares of common stock in exchange for a convertible note and related accrued interest of $10,887. These shares
were valued at $2.70 per share, which was the trading price on December 27, 2011.
On January 3, 2012, the Company issued
12,554 shares of common stock in exchange for a convertible note and related accrued interest of $14,500. These shares
were valued at $2.10 per share, which was the trading price on January 3, 2012.
On January 5, 2012, the Company issued
an aggregate of 15,000 shares of common stock in exchange for 1,808,099 shares of Series A Preferred stock.
On January 12, 2012, the Company issued
17,460 shares of common stock in exchange for a convertible note and related accrued interest of $22,000. These shares
were valued at $3.00 per share, which was the trading price on January 12, 2012.
On January 12, 2012, the Company issued
10,000 shares of common stock in exchange for a convertible note and related accrued interest of $8,998. These shares
were valued at $3.00 per share, which was the trading price on January 12, 2012.
NOTE 10 - CAPITAL STOCK (CONTINUED)
On January 24, 2012, the Company issued
12,667 shares of common stock in exchange for a convertible note and related accrued interest of $11,212. These shares
were valued at $2.25 per share, which was the trading price on January 24, 2012.
On January 24, 2012, the Company issued
44,309 shares of common stock in exchange for a convertible note and related accrued interest of $58,760. These shares
were valued at $2.25 per share, which was the trading price on January 24, 2012.
On February 2, 2012, the Company issued
22,333 shares of common stock in exchange for a convertible note and related accrued interest of $20,000. These shares
were valued at $2.10 per share, which was the trading price on February 2, 2012.
On February 10, 2012, the Company issued
49,069 shares of common stock in exchange for a convertible note and related accrued interest of $58,000. These shares
were valued at $1.80 per share, which was the trading price on February 10, 2012.
On February 16, 2012, the Company issued
25,000 shares of common stock in exchange for a convertible note and related accrued interest of $19,744. These shares
were valued at $1.50 per share, which was the trading price on February 16, 2012.
On February 21, 2012, the Company issued
30,000 shares of common stock in exchange for a convertible note and related accrued interest of $18,000. These shares
were valued at $1.50 per share, which was the trading price on February 21, 2012.
On February 23, 2012, the Company issued
88,265 shares of common stock in exchange for a convertible note and related accrued interest of $107,990. These shares
were valued at $1.20 per share, which was the trading price on February 23, 2012.
On February 27, 2012, the Company issued
26,423 shares of common stock in exchange for a convertible note and related accrued interest of $23,781. These shares
were valued at $1.23 per share, which was the trading price on February 27, 2012.
On February 28, 2012, the Company issued
17,027 shares of common stock in exchange for a true up of a convertible note and related accrued interest. These shares
were valued at $1.20 per share, which was the trading price on February 28, 2012.
On February 29, 2012, the Company issued
27,333 shares of common stock in exchange for a convertible note and related accrued interest of $19,988. These shares
were valued at $1.20 per share, which was the trading price on February 29, 2012.
On March 5, 2012, the Company issued 32,110
shares of common stock in exchange for a convertible note and related accrued interest of $72,249. These shares were
valued at $1.41 per share, which was the trading price on March 5, 2012.
On March 5, 2012, the Company issued 33,333
shares of common stock as payment on Series A Preferred stock dividend of $50,000. These shares were valued at $1.50
per share, which was the trading price on March 5, 2012.
On March 7, 2012, the Company issued 35,667
shares of common stock in exchange for a convertible note and related accrued interest of $21,398. These shares were
valued at $1.50 per share, which was the trading price on March 7, 2012.
On March 15, 2012, the Company issued 26,667
shares of common stock in exchange for a convertible note and related accrued interest of $12,740. These shares were
valued at $0.78 per share, which was the trading price on March 15, 2012.
On March 15, 2012, the Company issued 12,539
shares of common stock in exchange for a convertible note and related accrued interest of $28,214. These shares were
valued at $0.78 per share, which was the trading price on March 15, 2012.
On March 19, 2012, the Company issued 48,000
shares of common stock in exchange for a convertible note and related accrued interest of $25,000. These shares were
valued at $1.02 per share, which was the trading price on March 19, 2012.
On March 19, 2012, the Company issued 44,397
shares of common stock in exchange for a convertible note and related accrued interest of $21,000. These shares were
valued at $1.02 per share, which was the trading price on March 19, 2012.
On March 19, 2012, the Company issued 11,121
shares of common stock in exchange for a convertible note and related accrued interest of $5,260. These shares were
valued at $1.02 per share, which was the trading price on March 19, 2012.
On March 27, 2012, the Company issued 23,333
shares of common stock in exchange for a convertible note and related accrued interest of $8,645. These shares were
valued at $0.90 per share, which was the trading price on March 27, 2012.
On March 27, 2012, the Company issued
56,834 shares of common stock in exchange for a convertible note and related accrued interest of $20,000. These shares
were valued at $0.90 per share, which was the trading price on March 27, 2012.
NOTE 10 - CAPITAL STOCK (CONTINUED)
On April 16, 2012, the Company issued 26,799
shares of common stock in exchange for a convertible note and related accrued interest of $8,884. These shares were
valued at $0.60 per share, which was the trading price on April 16, 2012.
On April 18, 2012, the Company issued 54,545
shares of common stock in exchange for a convertible note and related accrued interest of $18,000. These shares were
valued at $1.35 per share, which was the trading price on April 18, 2012.
On April 18, 2012, the Company issued 50,000
shares of common stock as payment on Series A Preferred stock dividend of $30,000. These shares were valued at $0.60
per share, which was the trading price on April 18, 2012.
On April 18, 2012, the Company issued 56,667
shares of common stock in exchange for a convertible note and related accrued interest of $16,615. These shares were
valued at $1.05 per share, which was the trading price on April 18, 2012.
On April 23, 2012, the Company issued 28,070
shares of common stock in exchange for a convertible note and related accrued interest of $8,000. These shares were
valued at $0.52 per share, which was the trading price on April 23, 2012.
On April 25, 2012, the Company issued 28,736
shares of common stock in exchange for a convertible note and related accrued interest of $7,500. These shares were
valued at $0.47 per share, which was the trading price on April 25, 2012.
On April 26, 2012, the Company issued 28,736
shares of common stock in exchange for a convertible note and related accrued interest of $7,500. These shares were
valued at $0.47 per share, which was the trading price on April 26, 2012.
On April 27, 2012, the Company issued 27,027
shares of common stock in exchange for a convertible note and related accrued interest of $6,000. These shares were
valued at $0.40 per share, which was the trading price on April 27, 2012.
On April 27, 2012, the Company issued 27,397
shares of common stock in exchange for a convertible note and related accrued interest of $6,000. These shares were
valued at $0.40 per share, which was the trading price on April 27, 2012.
On May 1, 2012, the Company issued 27,397
shares of common stock in exchange for a convertible note and related accrued interest of $6,000. These shares were
valued at $0.40 per share, which was the trading price on May 1, 2012.
On May 2, 2012, the Company issued 27,397
shares of common stock in exchange for a convertible note and related accrued interest of $6,000. These shares were
valued at $0.40 per share, which was the trading price on May 2, 2012.
On May 3, 2012, the Company issued 25,114
shares of common stock in exchange for a convertible note and related accrued interest of $5,500. These shares were
valued at $0.40 per share, which was the trading price on May 3, 2012.
On May 4, 2012, the Company issued 11,963
shares of common stock in exchange for a convertible note and related accrued interest of $500. These shares were valued
at $0.40 per share, which was the trading price on May 4, 2012.
On May 8, 2012, the Company issued 26,667
shares of common stock in exchange for a convertible note and related accrued interest of $6,600. These shares were
valued at $0.45 per share, which was the trading price on May 8, 2012.
On May 17, 2012, the Company issued 26,794
shares of common stock in exchange for a convertible note and related accrued interest of $8,400. These shares were
valued at $0.81 per share, which was the trading price on May 17, 2012.
On May 25, 2012, the Company issued 27,273
shares of common stock in exchange for a convertible note and related accrued interest of $12,000. These shares were
valued at $0.81 per share, which was the trading price on May 25, 2012.
On May 30, 2012, the Company issued 77,519
shares of common stock in exchange for a convertible note and related accrued interest of $12,000. These shares were
valued at $0.45 per share, which was the trading price on May 30, 2012.
On May 30, 2012, the Company issued 146,970
shares of common stock in exchange for 242.50 shares of Series E 6% Convertible Preferred stock. These shares were valued
at $0.39 per share, which was the trading price on May 30, 2012.
On June 5, 2012, the Company issued 131,313
shares of common stock in exchange for a convertible note and related accrued interest of $26,000. These shares were
valued at $0.36 per share, which was the trading price on June 5, 2012.
On June 14, 2012, the Company issued 72,917
shares of common stock in exchange for a convertible note and related accrued interest of $7,000. These shares were
valued at $0.15 per share, which was the trading price on June 14, 2012.
NOTE 10 - CAPITAL STOCK (CONTINUED)
On June 15, 2012, the Company issued 100,000
shares of common stock in exchange for 90.0 shares of Series E 6% Convertible Preferred stock. These shares were valued
at $0.21 per share, which was the trading price on June 15, 2012.
On June 18, 2012, the Company issued 88,889
shares of common stock in exchange for a convertible note and related accrued interest of $8,000. These shares were
valued at $0.21 per share, which was the trading price on June 18, 2012.
On June 18, 2012, the Company issued 76,923
shares of common stock in exchange for a convertible note and related accrued interest of $6,000. These shares were
valued at $0.15 per share, which was the trading price on June 18, 2012.
On June 26, 2012, the Company issued 114,943
shares of common stock in exchange for a convertible note and related accrued interest of $4,000. These shares were
valued at $0.12 per share, which was the trading price on June 26, 2012.
On June 26, 2012, the Company issued 90,000
shares of common stock in exchange for 27.0 shares of Series E 6% Convertible Preferred stock. These shares were valued
at $0.12 per share, which was the trading price on June 26, 2012.
On July 1, 2012, the Company issued 279,167
shares of common stock in exchange for 83.75 shares of Series E 6% Convertible Preferred stock. These shares were valued
at $0.09 - $0.12 per share, which was the trading price on July 1, 2012.
On July 2, 2012, the Company issued 77,778
shares of common stock in exchange for a convertible note and related accrued interest of $2,800. These shares were
valued at $0.09 per share, which was the trading price on July 2, 2012.
On July 9, 2012, the Company issued 76,667 shares of common
stock in exchange for a convertible note and related accrued interest of 2,300. These shares were valued at $0.09 per
share, which was the trading price on July 9, 2012.
On July 18, 2012, the Company issued 141,026
shares of common stock in exchange for a convertible note and related accrued interest of $550. These shares were valued
at $0.011 per share, which was the trading price on July 18, 2012.
On July 23, 2012, the Company issued 129,167
shares of common stock for reset provisions relating to the conversion of the Series E 6% Convertible Preferred Stock. These
shares were valued at $0.03 per share, which was the trading price on July 23, 2012.
On July 23, 2012, the Company issued 113,334
shares of common stock in exchange for 17 shares of Series E 6% Convertible Preferred stock. These shares were valued
at $0.01 per share, which was the trading price on July 23, 2012
On July 25, 2012, the Company issued 157,273
shares of common stock in exchange for 8.65 shares of Series E 6% Convertible Preferred stock. These shares were valued
at $0.0399 per share, which was the trading price on July 25, 2012
On July 26, 2012, the Company issued 142,857
shares of common stock in exchange for a convertible note and related accrued interest of $800. These shares were valued
at $0.011 per share, which was the trading price on July 26, 2012.
On August 1, 2012, the Company issued 150,000
shares of common stock in exchange for a convertible note and related accrued interest of $1,000. These shares were
valued at $0.015 per share, which was the trading price on August 1, 2012.
On August 3, 2012, the Company issued 120,000
shares of common stock in exchange for 9 shares of Series E 6% Convertible Preferred stock. These shares were valued
at $0.0131 per share, which was the trading price on August 3, 2012.
On August 7, 2012, the Company issued 319,000
shares of common stock in exchange for 15.95 shares of Series E 6% Convertible Preferred stock. These shares were valued
at $0.015 per share, which was the trading price on August 7, 2012.
On August 20, 2012, the Company issued
640,000 shares of common stock in exchange for 12.15 shares of Series E 6% Convertible Preferred stock. These shares
were valued at $0.074 per share, which was the trading price on August 20, 2012.
On August 21, 2012, the Company issued
206,897 shares of common stock in exchange for a convertible note and related accrued interest of $600. These shares
were valued at $0.02 per share, which was the trading price on August 21, 2012.
On August 27, 2012, the Company issued
411,765 shares of common stock in exchange for 10.5 shares of Series E 6% Convertible Preferred stock. These shares
were valued at $0.0063 per share, which was the trading price on August 27, 2012.
On September 4, 2012, the Company issued
3,606,897 shares of common stock in exchange for a convertible notes and related accrued interest of $10,484. These
shares were valued at $0.015 per share, which was the trading price on September 4, 2012.
On September 7, 2012, the Company issued
28,770,000 shares of common stock in exchange for services rendered. These shares were valued at $0.006 per share, which was the
trading price on September 7, 2012.
NOTE 10 - CAPITAL STOCK (CONTINUED)
On September 11, 2012, the Company issued
10,152,727 shares of common stock in exchange for 294.0 shares of Series E 6% Convertible Preferred stock. These shares
were valued at $0.0055 per share, which was the trading price on September 11, 2012.
On September 13, 2012, the Company issued
10,000 shares of common stock in exchange for services rendered. These shares were valued at $0.006 per share, which was the trading
price on September 13, 2012.
On September 18, 2012, the Company issued
1,551,724 shares of common stock in exchange for a convertible notes and related accrued interest of $4,500. These shares
were valued at $0.0063 per share, which was the trading price on September 18, 2012.
On September 21, 2012, the Company issued
3,200,000 shares of common stock for reset provisions relating to the conversion of the Series E 6% Convertible Preferred Stock. These
shares were valued at $0.0018 per share, which was the trading price on September 21, 2012.
As of September 30, 2012 and 2011, the
Company has 52,796,407 and 238,316 shares of common stock issued and outstanding, respectively.
NOTE 11 - STOCK OPTIONS AND WARRANTS
Employee Stock Options
The following table summarizes the options outstanding and the
related prices for the shares of the Company's common stock issued to employees of the Company as of September 30, 2012:
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
$
|
5.10
|
|
|
|
7,333
|
|
|
|
8.65
|
|
|
$
|
5.10
|
|
|
|
5,500
|
|
$
|
90.00
|
|
|
|
1,633
|
|
|
|
4.90
|
|
|
$
|
90.00
|
|
|
|
1,633
|
|
$
|
20.57
|
|
|
|
8,966
|
|
|
|
7.97
|
|
|
$
|
24.54
|
|
|
|
7,133
|
|
The fair value of all employee options
vesting charged to operations in the year ended September 30, 2012 and 2011 was $22,000 and $11,648, respectively.
Transactions involving options issued to employees are summarized
as follows:
|
|
Weighted
Average
|
|
|
Weighted
Average
Exercise
|
|
|
|
Number
of Options
|
|
|
Price per
Share
|
|
Outstanding, September 30, 2010
|
|
|
1,967
|
|
|
$
|
90.00
|
|
Granted
|
|
|
7,333
|
|
|
|
5.10
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Canceled or expired
|
|
|
(334
|
)
|
|
|
(90.00
|
)
|
Outstanding, September 30, 2010
|
|
|
8,966
|
|
|
|
20.55
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Canceled or expired
|
|
|
-
|
)
|
|
|
-
|
)
|
Outstanding, September 30, 2011
|
|
|
8,966
|
|
|
$
|
20.57
|
|
NOTE 11 - STOCK OPTIONS AND WARRANTS (CONTINUED)
Warrants
The following table summarizes the warrants outstanding as of
September 30, 2012:
|
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
|
|
|
Weighted
Average
Remaining
|
|
|
Weighted
Average
|
|
|
Weighted
|
|
|
|
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Average
|
|
Exercise Price
|
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
$
|
6.00
|
|
|
|
10,000
|
|
|
|
3.93
|
|
|
$
|
6.00
|
|
|
|
10,000
|
|
|
$
|
6.00
|
|
$
|
12.00
|
|
|
|
6,250
|
|
|
|
3.78
|
|
|
$
|
12.00
|
|
|
|
6,250
|
|
|
$
|
12.00
|
|
$
|
8.31
|
|
|
|
16,250
|
|
|
|
3.88
|
|
|
$
|
8.31
|
|
|
|
16,250
|
|
|
$
|
8.31
|
|
Transactions involving warrants are summarized as follows:
|
|
Weighted
Average
Number of
Shares
|
|
|
Price per
Share
|
|
Outstanding, September 30, 2010
|
|
|
333
|
|
|
$
|
90.00
|
|
Issued
|
|
|
41,250
|
|
|
|
6.90
|
|
Exercised
|
|
|
(16,667
|
)
|
|
|
3.00
|
|
Canceled or expired
|
|
|
(333
|
)
|
|
|
(90.00
|
)
|
Outstanding, September 30, 2011
|
|
|
24,583
|
|
|
|
9.00
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Canceled or expired
|
|
|
(8,333
|
)
|
|
|
(12.00
|
)
|
Outstanding, September 30, 2012
|
|
|
16,250
|
|
|
$
|
8.31
|
|
During the year ended September 30, 2011,
the Company issued 16,667 warrants in connection for services rendered exercisable to July 31, 2011 at $0.01 per share. The Company
issued an aggregate of 15,747 shares in connection with the cashless exercise of the warrant.
In connection with the issuance of promissory
notes, the Company issued an aggregate of 16,250 warrants (net of cancelations of 8,333) exercisable five years from the date of
issuance at $6.00 to $12.00 per share with certain reset provisions. The fair value of the warrants were determined at the
date of issuance and adjusted to fair value to current period operations at September 30, 2012 with the offset to warrant liability
using the binomial lattice model.
NOTE 12 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES
On June 6, 2005 and August 8, 2005, JCMD
Properties LLC, an entity controlled by the Company's former Chief Executive and Chief Operating officers respectively ("JCMD"),
entered into a Secured Loan Agreement with a financial institution, in connection with the financing of real property and improvements
("property"). This agreement is guaranteed by the Company.
The property was leased to the Company
under a long term operating lease beginning on January 1, 2005. Under the loan agreements, JCMD is obligated to make periodic payments
of principal repayments and interest. The Company has no equity interest in JCMD or the property.
Based on the terms of the lending agreement,
the Company determined that JCMD was a variable interest entity ("VIE") and the Company was the primary beneficiary under
ASC 810-10 since JCMD did not have sufficient equity at risk for the entity to finance its activities.
ASC 810-10 requires that an enterprise
consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the entity's expected losses if they
occur. Accordingly, the Company adopted ASC 810-10 and consolidated JCMD as a VIE, regardless of the Company not having an equity
interest in JCMD. Since JCMD is owned by two of the former principals of MWW, MWW has guaranteed the indebtedness of
JCMD for the real estate occupied by MWW, and the two principals of JCMD do not have the ability to repay the loan, the Company,
in accordance with ASC 810-10 has consolidated the activities of JCMD into the presented financial statements.
NOTE 12 - CONSOLIDATION OF VARIABLE INTEREST ENTITIES
(CONTINUED)
Included in the Company's consolidated
balance sheets at September 30, 2012 and 2011 are the following net assets of JCMD:
|
|
2012
|
|
|
2011
|
|
ASSETS (JCMD)
|
|
|
|
|
|
|
|
|
Accounts receivable, prepaid expenses and other current assets
|
|
$
|
193,433
|
|
|
$
|
193,433
|
|
Total current assets
|
|
|
193,433
|
|
|
|
193,433
|
|
Total assets
|
|
|
193,433
|
|
|
|
193,433
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Current portion of long term debt
|
|
$
|
489,755
|
|
|
$
|
489,755
|
|
Accounts payable and accrued liabilities
|
|
|
232,127
|
|
|
|
190,498
|
|
Total current liabilities
|
|
|
712,882
|
|
|
|
680,253
|
|
Total deficit
|
|
|
(528,499
|
)
|
|
|
(486,820
|
)
|
Total liabilities and deficit
|
|
$
|
193,433
|
|
|
$
|
193,433
|
|
Consolidated results of operations include the following:
|
|
2012
|
|
|
2011
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
34,000
|
|
Interest, net
|
|
|
41,629
|
|
|
|
30,572
|
|
Total costs and expenses
|
|
|
41,629
|
|
|
|
30,572
|
|
Total costs an expenses
|
|
|
|
|
|
|
|
|
Operating income (loss) -Real estate
|
|
$
|
(41,629
|
)
|
|
$
|
3,428
|
|
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.
NOTE 13- FAIR VALUE OF FINANCIAL INSTRUMENTS
(CONTINUED)
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, 2012:
|
|
|
|
|
Fair Value Measurements at September 30, 2012 using:
|
|
|
|
September 30,
2012
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Derivative liabilities
|
|
$
|
10,649,266
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
10,649,266
|
|
Warrant liabilities
|
|
$
|
809,967
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
809,967
|
|
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, 2012:
|
|
Debt Derivative
Liability
|
|
|
Warrant
Liability
|
|
Balance, October 1, 2010
|
|
$
|
1,186,670
|
|
|
$
|
-
|
|
Initial fair value of debt derivatives at note issuances
|
|
|
1,484,806
|
|
|
|
-
|
|
Initial fair value of warrant liability
|
|
|
-
|
|
|
|
187,496
|
|
Mark-to market at September 30, 2011:
|
|
|
|
|
|
|
|
|
-Embedded debt derivatives
|
|
|
(367,912
|
|
|
|
-
|
|
-Reset provisions relating to Series A preferred stock
|
|
|
(1,044,930
|
)
|
|
|
-
|
|
-Reset provisions related to warrants
|
|
|
-
|
|
|
|
239,770
|
|
Balance, September 30, 2011
|
|
|
1,258,634
|
|
|
|
427,266
|
|
Transfers to (from) liabilities due to conversions
|
|
|
(1,089,216
|
)
|
|
|
(99,414
|
)
|
Transfers to liabilities due to debt modifications
|
|
|
40,908
|
|
|
|
-
|
|
Initial fair value of debt derivatives at note and preferred stock issuances
|
|
|
4,445,706
|
|
|
|
-
|
|
Mark-to-market at September 30, 2012
|
|
|
|
|
|
|
|
|
-Embedded debt derivatives
|
|
|
1,609,569
|
|
|
|
-
|
|
-Reset provisions relating to Series A preferred stock
|
|
|
(141,740
|
)
|
|
|
-
|
|
-Reset provisions relating to Series E preferred stock
|
|
|
4,525,405
|
|
|
|
-
|
|
-Reset provisions relating to warrants
|
|
|
-
|
|
|
|
482,115
|
|
Balance, September 30, 2012
|
|
$
|
10,649,266
|
|
|
$
|
809,967
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) for the period included in earnings relating to the liabilities held at September 30, 2012
|
|
$
|
(5,993,234
|
)
|
|
$
|
(482,115
|
)
|
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.
NOTE 14– DISCONTINUED OPERATIONS (CONTINUED)
The assets and liabilities of the discontinued
operations as of September 30, 2012 and 2011 were as follows:
Assets:
|
|
2012
|
|
|
2011
|
|
Cash
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounts receivable
|
|
|
-
|
|
|
|
-
|
|
Inventories
|
|
|
-
|
|
|
|
-
|
|
Prepaid expenses and other assets
|
|
|
-
|
|
|
|
-
|
|
Total current assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Other assets of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
Assets of discontinued operations
|
|
$
|
-
|
|
|
$
|
-
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
-
|
|
|
|
492,006
|
|
Line of credit
|
|
|
-
|
|
|
|
-
|
|
Liabilities of discontinued operations
|
|
$
|
-
|
|
|
$
|
492,006
|
|
During the year ended September 30, 2012,
the Company determined it no longer was obligated to the outstanding debt of the foreign subsidiary through German Court proceedings,
therefore recognized a gain of $492,006 in liquidation of international subsidiary.
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, 2012, the tax returns for tax years 2008
– current remain open to examination by the Internal Revenue Service and various state authorities.
Components of deferred tax assets as of September 30, 2012 and 2011
|
|
2012
|
|
|
2011
|
|
Net operating loss carryforward
|
|
$
|
4,431,000
|
|
|
$
|
3,698,000
|
|
Inventory reserve, expense for books, not on tax return
|
|
|
56,000
|
|
|
|
107,000
|
|
Warranty reserve, expense for books, not on tax return
|
|
|
30,000
|
|
|
|
38,000
|
|
Book-tax difference in Fixed Asset Depreciation
|
|
|
5,500
|
|
|
|
58,000
|
|
Sub total
|
|
|
4,522,500
|
|
|
|
3,901,000
|
|
Valuation allowance
|
|
|
(4,522,500
|
)
|
|
|
(3,901,000
|
)
|
|
|
|
|
|
|
|
|
|
Net tax benefit
|
|
$
|
0
|
|
|
$
|
0
|
|
As of September 30, 2012, the Company had
approximately $11,080,000 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:
|
|
As of September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Tax benefit at federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State statutory rate
|
|
|
(6.0
|
)%
|
|
|
(6.0
|
)%
|
Change in valuation allowance
|
|
|
42.0
|
%
|
|
|
42.0
|
%
|
Valuation of imbedded derivative
|
|
|
-
|
%
|
|
|
-
|
%
|
Impairment on sale of building
|
|
|
-
|
%
|
|
|
-
|
%
|
Other permanent items
|
|
|
(2.0
|
)%
|
|
|
(2.0
|
)%
|
Effective income tax rate
|
|
|
0
|
%
|
|
|
0
|
%
|
Deferred income taxes result from temporary
differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes.
NOTE 15 - PROVISION FOR INCOME TAXES
(CONTINUED)
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:
|
|
Revenue
|
|
|
Accounts Receivable
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Customer A
|
|
|
76.4
|
%
|
|
|
36.6
|
%
|
|
|
12.88
|
%
|
|
|
69.24
|
%
|
Customer B
|
|
|
12.8
|
%
|
|
|
32.7
|
%
|
|
|
16.07
|
%
|
|
|
13.03
|
%
|
Customer C
|
|
|
5.1
|
%
|
|
|
20.4
|
%
|
|
|
3.15
|
%
|
|
|
8.49
|
%
|
Customer D
|
|
|
2.5
|
%
|
|
|
5.5
|
%
|
|
|
11.07
|
%
|
|
|
5.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
96.8
|
%
|
|
|
95.2
|
%
|
|
|
43.17
|
%
|
|
|
96.51
|
%
|
During the years ended September 30, 2012 and 2011, purchases
were made from the following suppliers:
|
|
Purchases
|
|
|
Accounts Payable
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Supplier 1
|
|
|
51.19
|
%
|
|
|
21.75
|
%
|
|
|
4.02
|
%
|
|
|
1.24
|
%
|
Supplier 2
|
|
|
15.81
|
%
|
|
|
15.99
|
%
|
|
|
0.17
|
%
|
|
|
5.37
|
%
|
Supplier 3
|
|
|
14.41
|
%
|
|
|
13.27
|
%
|
|
|
0.42
|
%
|
|
|
0.32
|
%
|
Supplier 4
|
|
|
10.40
|
%
|
|
|
10.28
|
%
|
|
|
0.44
|
%
|
|
|
0.18
|
%
|
Supplier 5
|
|
|
94.7
|
%
|
|
|
10.26
|
%
|
|
|
0.43
|
%
|
|
|
0.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
90.6
|
%
|
|
|
71.54
|
%
|
|
|
5.48
|
%
|
|
|
7.60
|
%
|
NOTE 17 – COMMITMENTS AND CONTINGENCIES
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.
The company currently has the following:
James Marvin/Michigan Department of Wage
and Hour
Marvin, a former director and shareholder
of MWW brought a wage and hour claim against MWW alleging failure to pay wages and benefits. On March 2, 2011, an ALJ found in
favor of Marvin in the amount of $81,730. An appeal by MWW was dismissed.
On September 24, 2012, the State of Michigan
brought an action against MWW to collect the amount due to Marvin. MWW has filed a third party complaint against Marvin alleging
breach of employment agreement, breach of fiduciary duty and tortious interference with business relations.
NOTE 17 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
MWW and the State of Michigan have entered
into a consent judgment for the wage and hour amount. The State has agreed to hold the judgment in abeyance until the completion
of the third party complaint and any amounts found due to MWW from Marvin will be deducted from the consent judgment. The matter
against Marvin will be vigorously contested, as Marvin abused his position with MWW and financially devastated the company. MWW
counsel feels MWW will either be awarded or settle for an amount equal to or greater than the amount due to Marvin.
MWW’s subsidiary Colortek owns property and a building
in Baroda, Michigan. Edgewater Bank holds the mortgage. Colortek fell behind on payments. Edgewater foreclosed on the property
by Sheriff’s sale on October 25, 2012. Edgewater purchased the property at the Sheriff’s sale. The purchase price left
a deficiency of $167,000, which was accrued as of September 30, 2012. The mortgage was secured not only by the property, but by a UCC security interest filing on Colortek
equipment and a personal guaranty from MWW. Edgewater initiated a lawsuit against MWW and Colortek for the deficiency. The original
owners of Colortek had also signed a personal guaranty for the mortgage. Their guaranty was not discharged when MWW became a guarantor.
MWW brought a third party complaint against them on the guaranty.
Edgewater and MWW principals and their
attorneys have a settlement meeting scheduled for January 14, 2013 to pursue a settlement on both the deficiency and redeeming
the property prior to the redemption period running. Because Edgewater agreed to the settlement meeting and did not simply file
a Motion for Summary Disposition to get a judgment, the Company believes settlement is probable. Both parties would suffer greatly
otherwise as Edgewater would have property and equipment it cannot use or sell and Colortek, and thus MWW would be out of business,
making the deficiency uncollectable as well. A well thought out settlement will get Edgewater paid and keep Colortek and MWW solvent .
MWW's subsidiary, Colortek, owed money for services and product to Merlyn Engineering. Merlyn initiated a lawsuit to collect
$12,000. Settlement was entered into in October, 2012. Payment is due and was to be paid before 12-31-2012.
MWW's subsidiary
Colortek filed with the Michigan Tax Tribunal to have the 2011 property tax assessment lowered by Baroda Township. The matter
was lost in both the Tribunal and at MWW. After working with the Township and Tribunal, on December 4, 2012 the Tribunal agreed
to enter a Stipulated Order reducing the property assessment for 2011 and 2012 by approximately $150,000 for each year.
In
March, 2012, Colortek received a letter from the attorney for Reliable Analysis demanding payment of an overdue account in
the amount of $21,711. The attorney was instructed direct all future correspondence to MWW's legal counsel. No further request
has been received.
WLC brought a lawsuit against MWW to collect past due amounts for services. A consent judgment with installment
payment terms. The amount should be paid off in January 2014.
NOTE 18 – SUBSEQUENT EVENTS
There were 200,264,188 common shares
issued for note conversions and 163,096,802 common shares for Series E conversions and for services rendered 54,509,616 common shares after
September 30, 2012.
The Company issued $179,500 of Notes
Payable.
The Company is in default with note holder
due as of November 22, 2012. Default interest rate of 22% now applies.