UNITED
STATES

SECURITIES
AND EXCHANGE COMMISSION

WASHINGTON,
D.C. 20549



FORM 10-Q



|x | QUARTERLY REPORT PURSUANT TO SECTION
    13 OR 15(d) OF THE | 
|- | ----------------------------------------------------------- | 
|  | SECURITIES EXCHANGE ACT OF 1934                             | 



For the
quarterly period ended September 30, 2012



| ̈ | TRANSITION REPORT PURSUANT TO SECTION
    13 OR 15(d) OF THE | 
|- | ------------------------------------------------------------ | 
|  | SECURITIES EXCHANGE ACT OF 1934                              | 



Commission
file number: 1-32543



FORTUNE
INDUSTRIES, INC.

(Exact name
of Registrant as specified in its charter)



|INDIANA                         | 20-2803889            
|------------------------------- | ----------------------
|(State or other jurisdiction of | (IRS Employer         
|incorporation or organization)  | Identification Number)



|6402 Corporate Drive                     | 46278     
|---------------------------------------- | ----------
|Indianapolis, IN                         | (Zip Code)
|(Address of principal executive offices) |           



(317) 532-1374

(Registrant’s
telephone number, including area code)



Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.



Yes xNo  ̈



Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as
defined in Rule 12b-2 of the Exchange Act).



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



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

Yes  ̈No x



As of November 14, 2012, 12,287,290
shares of the Company’s $0.10 per share par value common stock were outstanding.











FORTUNE
INDUSTRIES, INC.

FORM 10-Q

For The
Quarterly Period Ended September 30, 2012



INDEX



|                                 | Page                                                                                             
|-------------------------------- | -------------------------------------------------------------------------------------------------
|PART I.    Financial Information |                                                                                                  
|                                 | ITEM 1. Financial Statements                                                                     
|                                 |                                                                                                  
|                                 |                                                                                                  
|                                 |                                                                                                  
|                                 |                                                                                                  
|                                 |                                                                                                  
|                                 | ITEM 2.
    Management's Discussion and Analysis of Financial Condition and Results of Operations
|                                 | ITEM 3. Quantitative and Qualitative Disclosures
    About Market Risk                           
|                                 | ITEM 4. Controls and Procedures                                                                  
|PART II.    Other Information    |                                                                                                  
|                                 | ITEM 1. Legal Proceedings                                                                        
|                                 | ITEM 1A. Risk Factors                                                                            
|                                 | ITEM 2. Unregistered Sales of Equity Securities
    and Use of Proceeds                          
|                                 | ITEM 3 Defaults Upon Senior Securities                                                           
|                                 | ITEM 4.   Mine Safety Disclosures                                                                
|                                 | ITEM 5. Other Information                                                                        
|                                 | ITEM 6. Exhibits                                                                                 
|Signatures                       | 16                                                                                               











PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements.



FORTUNE
INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED
BALANCE SHEETS

(DOLLARS
IN THOUSANDS)



|                                                                                      |  | September 30, |        |  | June 30, |  
|------------------------------------------------------------------------------------- |  | ------------- | ------ |  | -------- | -
|                                                                                      |  | 2012          |        |  | 2012     |  
|                                                                                      |  |               |        |  |          |  
|ASSETS                                                                                |  |               |        |  |          |  
|CURRENT ASSETS                                                                        |  |               |        |  |          |  
|                                                                                      |  |               |        |  |          |  
|Cash and equivalents                                                                  |  | $             | 6,033  |  |          | $
|                                                                                      |  |               |        |  |          |  
|Restricted cash (Note 1)                                                              |  |               | 2,397  |  |          |  
|                                                                                      |  |               |        |  |          |  
|Accounts receivable, net of allowance for doubtful
    accounts of $77 and $15        |  |               | 2,322  |  |          |  
|                                                                                      |  |               |        |  |          |  
|Deferred tax asset                                                                    |  |               | 1,500  |  |          |  
|                                                                                      |  |               |        |  |          |  
|Prepaid expenses and other
    current assets                                         |  |               | 975    |  |          |  
|                                                                                      |  |               |        |  |          |  
|Total Current Assets                                                                  |  |               | 13,227 |  |          |  
|                                                                                      |  |               |        |  |          |  
|OTHER ASSETS                                                                          |  |               |        |  |          |  
|                                                                                      |  |               |        |  |          |  
|Property, plant & equipment, net of accumulated
    depreciation of $1,821 and $1,799 |  |               | 116    |  |          |  
|                                                                                      |  |               |        |  |          |  
|Deferred tax asset                                                                    |  |               | 1,250  |  |          |  
|                                                                                      |  |               |        |  |          |  
|Goodwill                                                                              |  |               | 12,379 |  |          |  
|                                                                                      |  |               |        |  |          |  
|Other intangible assets, net of accumulated amortization
    of $2,710 and $2,609     |  |               | 1,943  |  |          |  
|                                                                                      |  |               |        |  |          |  
|Other long-term assets                                                                |  |               | 69     |  |          |  
|                                                                                      |  |               |        |  |          |  
|Total Other Assets                                                                    |  |               | 15,757 |  |          |  
|                                                                                      |  |               |        |  |          |  
|TOTAL
    ASSETS                                                                      |  | $             | 28,984 |  |          | $



See Accompanying Notes to the
Unaudited Interim Consolidated Financial Statements



2







FORTUNE
INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED
BALANCE SHEETS (CONTINUED)

(DOLLARS
IN THOUSANDS)



|                                                                                                                                            |  | September 30, |         |   | June 30, |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | -------- | -
|                                                                                                                                            |  | 2012          |         |   | 2012     |  
|                                                                                                                                            |  |               |         |   |          |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                        |  |               |         |   |          |  
|                                                                                                                                            |  |               |         |   |          |  
|CURRENT LIABILITIES                                                                                                                         |  |               |         |   |          |  
|                                                                                                                                            |  |               |         |   |          |  
|Accounts payable                                                                                                                            |  | $             | 649     |   |          | $
|                                                                                                                                            |  |               |         |   |          |  
|Workers' compensation reserves                                                                                                              |  |               | 468     |   |          |  
|                                                                                                                                            |  |               |         |   |          |  
|Customer deposits                                                                                                                           |  |               | 96      |   |          |  
|                                                                                                                                            |  |               |         |   |          |  
|Accrued expenses                                                                                                                            |  |               | 7,398   |   |          |  
|                                                                                                                                            |  |               |         |   |          |  
|Total Current Liabilities                                                                                                                   |  |               | 8,611   |   |          |  
|                                                                                                                                            |  |               |         |   |          |  
|LONG-TERM LIABILITIES                                                                                                                       |  |               |         |   |          |  
|                                                                                                                                            |  |               |         |   |          |  
|Workers' compensation reserves                                                                                                              |  |               | 624     |   |          |  
|                                                                                                                                            |  |               |         |   |          |  
|Total Liabilities                                                                                                                           |  |               | 9,235   |   |          |  
|                                                                                                                                            |  |               |         |   |          |  
|SHAREHOLDERS' EQUITY (NOTE 3)                                                                                                               |  |               |         |   |          |  
|                                                                                                                                            |  |               |         |   |          |  
|Common stock, $0.10 par
    value; 150,000,000 authorized; 12,287,290 issued and outstanding at September 30, 2012 and June 30, 2012        |  |               | 1,226   |   |          |  
|                                                                                                                                            |  |               |         |   |          |  
|Series C preferred stock,
    $0.10 par value; 1,000,000 authorized; 296,180 issued and outstanding at September 30, 2012 and June 30, 2012 |  |               | 27,133  |   |          |  
|                                                                                                                                            |  |               |         |   |          |  
|Treasury stock, at cost, 214,444 shares
    at September 30, 2012 and June 30, 2012                                                         |  |               | (809    | ) |          |  
|                                                                                                                                            |  |               |         |   |          |  
|Additional paid-in capital
    and warrants outstanding                                                                                     |  |               | 20,383  |   |          |  
|                                                                                                                                            |  |               |         |   |          |  
|Accumulated
    deficit                                                                                                                     |  |               | (28,184 | ) |          |  
|                                                                                                                                            |  |               |         |   |          |  
|Total Shareholders' Equity                                                                                                                  |  |               | 19,749  |   |          |  
|                                                                                                                                            |  |               |         |   |          |  
|TOTAL
    LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                              |  | $             | 28,984  |   |          | $



See Accompanying Notes to the
Unaudited Interim Consolidated Financial Statements



3







FORTUNE
INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED
STATEMENTS OF OPERATIONS

(DOLLARS
IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)



|                                                |  | For
    the Three Months Ended |           
|----------------------------------------------- |  | ------------------------------ | ----------
|                                                |  | September 30,                  |           
|                                                |  | 2012                           |           
|                                                |  |                                |           
|REVENUES                                        |  | $                              | 13,760    
|                                                |  |                                |           
|COST OF REVENUES                                |  |                                | 10,514    
|                                                |  |                                |           
|GROSS PROFIT                                    |  |                                | 3,246     
|                                                |  |                                |           
|OPERATING EXPENSES                              |  |                                |           
|                                                |  |                                |           
|Selling, general and administrative expenses    |  |                                | 2,245     
|                                                |  |                                |           
|Depreciation and amortization                   |  |                                | 130       
|                                                |  |                                |           
|Total Operating Expenses                        |  |                                | 2,375     
|                                                |  |                                |           
|OPERATING INCOME                                |  |                                | 871       
|                                                |  |                                |           
|OTHER INCOME (EXPENSE)                          |  |                                |           
|                                                |  |                                |           
|Interest income                                 |  |                                | 6         
|                                                |  |                                |           
|Interest expense                                |  |                                | -         
|                                                |  |                                |           
|Other income                                    |  |                                | -         
|                                                |  |                                |           
|Total Other Income (Expense)                    |  |                                | 6         
|                                                |  |                                |           
|INCOME BEFORE PROVISION FOR INCOME TAXES        |  |                                | 877       
|                                                |  |                                |           
|Provision for income taxes                      |  |                                | 69        
|                                                |  |                                |           
|NET INCOME                                      |  |                                | 808       
|                                                |  |                                |           
|Preferred stock dividends                       |  |                                | 407       
|                                                |  |                                |           
|NET INCOME AVAILABLE TO
    COMMON SHAREHOLDERS |  | $                              | 401       
|                                                |  |                                |           
|BASIC INCOME PER COMMON SHARE                   |  | $                              | 0.03      
|                                                |  |                                |           
|Basic Weighted Average Shares Outstanding       |  |                                | 12,287,290
|                                                |  |                                |           
|DILUTED INCOME PER COMMON SHARE                 |  | $                              | 0.03      
|                                                |  |                                |           
|Diluted Weighted Average Shares Outstanding     |  |                                | 14,593,290



See Accompanying Notes to the
Unaudited Interim Consolidated Financial Statements



4







FORTUNE
INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(DOLLARS
IN THOUSANDS)



|                                          |  |        |       |  |           |   |        |          |  |   | Additional          |   |  |             |        |  |               |  
|----------------------------------------- |  | ------ | ----- |  | --------- | - | ------ | -------- |  | - | ------------------- | - |  | ----------- | ------ |  | ------------- | -
|                                          |  |        |       |  |           |   |        |          |  |   | Paid-in
    Capital |   |  |             |        |  | Total         |  
|                                          |  | Common |       |  | Preferred |   |        | Treasury |  |   | and Warrants        |   |  | Accumulated |        |  | Shareholders' |  
|                                          |  | Stock  |       |  | Stock     |   |        | Stock    |  |   | Outstanding         |   |  | Deficit     |        |  | Equity        |  
|                                          |  |        |       |  |           |   |        |          |  |   |                     |   |  |             |        |  |               |  
|BALANCE AT JUNE 30, 2012 (Audited)        |  | $      | 1,226 |  |           | $ | 27,133 |          |  | $ | (809                | ) |  | $           | 20,383 |  |               | $
|                                          |  |        |       |  |           |   |        |          |  |   |                     |   |  |             |        |  |               |  
|Net income                                |  |        | -     |  |           |   | -      |          |  |   | -                   |   |  |             | -      |  |               |  
|Preferred stock dividends                 |  |        | -     |  |           |   | -      |          |  |   | -                   |   |  |             | -      |  |               |  
|                                          |  |        |       |  |           |   |        |          |  |   |                     |   |  |             |        |  |               |  
|BALANCE AT SEPTEMBER 30, 2012 (Unaudited) |  | $      | 1,226 |  |           | $ | 27,133 |          |  | $ | (809                | ) |  | $           | 20,383 |  |               | $



See Accompanying Notes to the
Unaudited Interim Consolidated Financial Statements



5







FORTUNE
INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED
STATEMENTS OF CASH FLOWS

(DOLLARS
IN THOUSANDS)

(UNAUDITED)



|                                                                                                |  | For the Three Months Ended |      
|----------------------------------------------------------------------------------------------- |  | -------------------------- | -----
|                                                                                                |  | September 30,              |      
|                                                                                                |  | 2012                       |      
|CASH FLOWS FROM OPERATING ACTIVITIES                                                            |  |                            |      
|Net Income                                                                                      |  | $                          | 808  
|Adjustments to reconcile net income to net cash
    provided by (used in) operating activities: |  |                            |      
|Depreciation and amortization                                                                   |  |                            | 130  
|Provision for losses on accounts receivable                                                     |  |                            | 62   
|Changes in certain operating assets and liabilities:                                            |  |                            |      
|Accounts receivable                                                                             |  |                            | 708  
|Prepaid assets and other current assets                                                         |  |                            | (492 
|Other long-term assets                                                                          |  |                            | (3   
|Accounts payable                                                                                |  |                            | (232 
|Workers' compensation reserves                                                                  |  |                            | (164 
|Customer deposits                                                                               |  |                            | 4    
|Accrued expenses                                                                                |  |                            | 313  
|Net Cash Provided by (Used In) Operating Activities                                             |  |                            | 1,134
|                                                                                                |  |                            |      
|CASH FLOWS FROM INVESTING ACTIVITIES                                                            |  |                            |      
|Capital expenditures                                                                            |  |                            | (6   
|Net Cash Used in Investing Activities                                                           |  |                            | (6   
|                                                                                                |  |                            |      
|CASH FLOWS FROM FINANCING ACTIVITIES                                                            |  |                            |      
|Payments on term debt                                                                           |  |                            | -    
|Dividends paid on preferred
    stock                                                           |  |                            | (407 
|Net Cash Used in Financing
    Activities                                                       |  |                            | (407 
|                                                                                                |  |                            |      
|NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS                                                 |  |                            | 721  
|                                                                                                |  |                            |      
|CASH AND EQUIVALENTS                                                                            |  |                            |      
|Beginning of Period                                                                             |  |                            | 5,312
|                                                                                                |  |                            |      
|End of Period                                                                                   |  | $                          | 6,033



See Accompanying Notes to the
Unaudited Interim Consolidated Financial Statements



6







FORTUNE
INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)

(DOLLARS
IN THOUSANDS)

(UNAUDITED)



|                         |  | For the Three Months Ended |   
|------------------------ |  | -------------------------- | --
|                         |  | September 30,              |   
|                         |  | 2012                       |   
|SUPPLEMENTAL DISCLOSURES |  |                            |   
|Interest paid            |  | $                          | - 
|                         |  |                            |   
|Income taxes paid        |  | $                          | 69



See Accompanying Notes to the
Unaudited Interim Consolidated Financial Statements



7









FORTUNE
INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS
IN THOUSANDS UNLESS OTHERWISE INDICATED,

EXCEPT
PER SHARE DATA)

(UNAUDITED)



NOTE 1 - NATURE OF BUSINESS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



General



Basis of Presentation:The
financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and
accompanying notes included in the 2012 Annual Report on Form 10-K filed by Fortune Industries, Inc. (which, together with its
subsidiaries unless the context requires otherwise, shall be referred to herein as the “Company”). The consolidated
balance sheet at June 30, 2012 has been derived from the audited financial statements at that date, but does not include all of
the information or footnotes required by accounting principles generally accepted in the United States for complete financial
statements. The Company’s consolidated balance sheet at September 30, 2012 and the consolidated statements of operations,
cash flows and shareholders’ equity for the period ended September 30, 2012 have been prepared by the Company without audit.
These unaudited financial statements contain, in the opinion of management, all adjustments (consisting of normal accruals and
other recurring adjustments) necessary for a fair presentation of the consolidated financial position, results of operations,
and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States. The
Company has evaluated subsequent events through the time these financial statements in the Form 10-Q report were filed with the
Securities and Exchange Commission. The operating results for the three month period ended September 30, 2012 are not necessarily
indicative of the operating results to be expected for the full fiscal year.



Nature of Business: Fortune Industries,
Inc. is an Indiana corporation comprised of Professional Employer Organizations (PEOs) which provide full-service human resources
outsourcing services through co-employment relationships with its clients.  Wholly owned subsidiaries operating in this
industry include Professional Staff Management, Inc. and related entities (“PSM”); CSM, Inc. and related subsidiaries
(“CSM”); and Employer Solutions Group, Inc. and related subsidiaries (“ESG”).



The Company bills its clients
under Professional Services Agreements as licensed PEOs.  The billing includes amounts for the client’s gross
wages, payroll taxes, employee benefits, workers’ compensation insurance and an administration fee.  The administration
fee charged by the Company is typically a percentage of the gross payroll and is sufficient to allow the Company to provide payroll
administration services, human resources consulting services, worksite safety training, and employment regulatory compliance.



The component of the administration
fee related to administration varies, in part, according to the size of the client, the amount and frequency of payroll payments
and the delivery method of such payments.  The component of the administration fee related to health, workers’
compensation and unemployment insurance is based, in part, on the client’s historical claims experience.  Charges
by the Company are invoiced along with each periodic payroll delivered to the client.



Through the co-employment contractual
relationship, the Company becomes the employer of record for all payroll related taxes and, as such, all payroll-related taxes
are filed on the Company’s federal, state, and local tax identification numbers with the exception of states that require
client identification for state unemployment taxes.  The clients are not required to file any payroll related taxes
on their own behalf.  The calculations of amounts the Company owes and pays the various government and employment insurance
vendors are based on the experience levels and activity of the Company and its clients.



Restricted Cash: Restricted
cash includes certificates of deposits for letters of credit issued to collateralize the Company’s obligations under its
various workers’ compensation programs and certain general insurance coverage. At September 30, 2012, the Company had $2,395
in total restricted cash. Of this amount, $2,125 is restricted for its various workers’ compensation programs in accordance
with terms of insurance carrier agreements, and the remainder is restricted for certain standby letters of credit in accordance
with various state regulations.



Goodwill and Other Indefinite-Lived
Intangible Assets:Goodwill and other intangible assets with indeterminate lives are assessed for impairment at least annually
and more often as triggering events occur. In making this assessment, management relies on a number of factors including operating
results, business plans, economic projections, anticipated future cash flows, and transactions and market place data. There are
inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of both goodwill
and other intangible assets impairment. Since management’s judgment is involved in performing goodwill and other intangible
assets valuation analyses, there is risk that the carrying value of the goodwill and other intangible assets may be overstated
or understated.



The Company has elected to perform
the annual impairment assessment of recorded goodwill and other indefinite-lived intangible assets as of the end of its fiscal
year. Management has assessed qualitative factors, to determine whether it is necessary to perform the two-step quantitative impairment
test, and determined it is more likely than not that its fair value exceeds the carrying amount.



8







Workers’ Compensation:The Company's PSM, CSM and ESG subsidiaries maintain fully funded, high deductible workers' compensation insurance programs.
Under the insurance policies established at each company, PSM and CSM’s deductible liability is limited to $250 per incident,
with an aggregate liability limit of approximately $2,000. Under the insurance policy established at ESG, the deductible liability
is limited to $350 per incident, with no aggregate liability limit.



NOTE 2– EQUITY INCENTIVE
PLANS AND OTHER STOCK COMPENSATION



Restricted Share Units



Effective April 13, 2006, the
Company’s shareholders approved the 2006 Equity Incentive Plan. Under terms of the 2006 Equity Incentive Plan, the Company
may grant options, restricted share units and other stock-based awards to its management personnel as well as other individuals
for up to 1.0 million shares of common stock. During the three month period ended September 30, 2012, no restricted share units
were issued under this plan.



NOTE 3- SHAREHOLDERS’
EQUITY



Common Stock



The Company did not issue any
shares of common stock during the three month period ended September 30, 2012.



Preferred Stock



On September 25, 2009, the Company
reached an agreement with the Chairman to amend the dividend rates on the Series C Preferred Stock with an effective date of July
1, 2009. From the effective date forward the Series C Preferred Stock will bear an annual dividend of $2 per share in the years
ending June 30, 2010 and 2011, $5 per share in the year ending June 30, 2012, $6 per share in the year ending June 30, 2013 and
$7 per share thereafter. All other items of the Series C Preferred Shares remained unchanged. Dividends of $407 and $339 were
declared for the three months ended September 30, 2012 and September 30, 2011 respectively.



Effective December 31, 2010, the
Company revised its estimate regarding the collectability of its $2,500 term note receivable with a related party. Based on this
change in estimate, the Company reclassified the note receivable as a reduction to its outstanding preferred stock as prescribed
by a Security Agreement between the Company and the related party. Under terms of this Security Agreement and in the event of
default of the term note receivable, the Company obtains the right to equal value of the preferred stock as defined including
but not limited to title, interest and dividends. As of September 30, 2012 and the date of this filing, the Company has no intention
to convert the note receivable in the foreseeable future.



NOTE 4- INCOME TAXES



ASC 740 requires a valuation allowance
to reduce the deferred tax assets reported, if at September 30, 2012, the Company had federal tax operating losses based on the
weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.



This evidence includes consideration
of various uncertainties that management has identified as risk factors to the Company. Recent events, including significant turmoil
within the domestic and foreign financial markets, healthcare legislation and increasing unemployment tax rates and taxable wage
thresholds, more than likely are expected to contribute to atypical customer attrition and decreased gross profits. Additionally,
since the divesture of certain segments in fiscal 2009 unrelated to the Company’s current focus of full service human resources,
the Company has had positive results for the last five fiscal periods for financial reporting purposes including the current period.
However, the Company has not evidenced a similar trend for income tax reporting purposes, experiencing net operating losses in
four of prior seven fiscal periods, with the current, 2012 and 2011 fiscal years as the exception. These taxable losses are primarily
the result of permanent timing differences related to the amortization of certain intangible assets for income tax purposes through
2022. The Company’s deferred tax assets and liabilities are susceptible to erratic changes due to the inherent unpredictable
nature of the Company’s insurance claim liabilities and sensitivity to unemployment and wage volatility. Changes in the
economy and federal and state legislature, both favorable and unfavorable, will impact management’s assumptions and estimates
in future periods.



After consideration of the evidence,
both positive and negative, management has determined that a $5.0 million and $5.3 million valuation allowance at September 30,
2012 and June 30, 2012, respectively, is necessary to reduce the deferred tax assets to the amount that will more likely than
not be realized. The change in the valuation allowance is $0.3 million for the three months ended September 30, 2012. The Company
has federal net operating loss carry forwards of approximately $10.2 million and $10.8 million at September 30, 2012 and June
30, 2012, respectively, which expire between 2021 and 2030. The Company has state net operating loss carry forwards of approximately
$10.3 million and $11.0 million at September 30, 2012 and June 30, 2012, respectively.



9







Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations.



Statements contained in this
document, as well as some statements by the Company in periodic press releases and oral statements of Company officials during
presentations about the Company constitute “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 (the “Act”).  Forward-looking statements include statements that are predictive
in nature, depend on or refer to future events or conditions, which include words such as “expect,” “estimate,”
“anticipate,” “predict,” “believe” and similar expressions. These statements are based on
the current intent, belief or expectation of the Company with respect to, among other things, trends affecting the Company’s
financial condition or results of operations.  These statements are not guaranties of future performance and the Company
undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise.



Actual events and results involve
risks and uncertainties and may differ materially from those expressed or forecasted in forward-looking statements due to a number
of factors.  Factors that might cause or contribute to such differences, include, but are not limited to, the risks
and uncertainties that are discussed under the heading “Risk Factors” disclosed within Form 10-K for the year ended
June 30, 2012. Readers should carefully review the risk factors referred to above and the other documents filed by the Company
with the Securities and Exchange Commission.



OVERVIEW



Fortune Industries, Inc. is a
holding company of providers of full service human resources outsourcing services through co-employment relationships with the
company’s clients. The terms “we”, “our”, “us”, “the Company”, and “management”
as used herein refers to Fortune Industries, Inc. and its subsidiaries unless the context otherwise requires.



Our operations are largely decentralized
from the corporate office. Autonomy is given to subsidiary entities, and there are few integrated business functions (i.e. sales,
marketing, purchasing and accounting). Day-to-day operating decisions are made by subsidiary management teams. Our Corporate management
team assists in operational decisions when deemed necessary, selects subsidiary management teams and handles capital allocation
among our operations.



We were incorporated in the state
of Delaware in 1988, restructured in 2000 and re-domesticated to the state of Indiana in May 2005.



On September 20, 2012, the Company
announced that it has reached an agreement in principal to restructure its current merger agreement by planning to enter into
an amended merger agreement with Ide Management Group, LLC (“Ide”), a skilled nursing facility management group headquartered
in Greenfield, Indiana (the “Amended Agreement”). The Amended Agreement is subject to final documentation, completion
of due diligence, regulatory compliance and other normal contingencies. Once completed, a revised Proxy Statement and the Amended
Agreement will be filed with the SEC for review. Further, the Amended Agreement will result in the Company remaining registered
with the Securities and Exchange Commission, and it is anticipated that it will continue to be publicly traded. Current shareholders
of the Company will continue to own their Company shares.



In connection with the Amended
Agreement, the Company will exchange all of its professional employer organization (“PEO”) subsidiaries for all of
the common and preferred shares owned by the late Carter M. Fortune and by CEP, Inc., a Tennessee corporation which had previously
entered into a merger agreement with the Company to acquire all the Company’s PEO operations. As a result of the revised
transaction structure, the Company will cease being in the PEO business and through its newly acquired Ide subsidiaries, will
operate a chain of approximately 30 skilled nursing facilities located in Indiana, Illinois, Iowa and Wisconsin.



The Amended Agreement provides
that Ide will merge with a to-be formed subsidiary of the Company, and become a wholly-owned subsidiary of the Company. Mark Ide,
the sole member of Ide, will receive sufficient shares of the Company in exchange for full ownership of Ide. As a result, Mr.
Ide will own a substantial majority of the Company shares. In addition, Ide will pay the Company three hundred thousand dollars
($300,000) as part of the transaction, which has been deposited into an escrow account with an independent third-party bank. The
terms and conditions of the escrow agreement and the revised merger transaction are more fully described in the Company’s
Form 8-K filed on September 20, 2012.



Mr. Fortune has pledged his ownership
holdings in the Company as collateral on certain personal debt obligations. Mr. Fortune passed away on August 25, 2012. If his
estate were to default on these debt obligations and the collateral is called upon by the lending institution, it could result
in a potential change in control of the Company if the default may not be cured by the majority shareholder through some other
means.



CRITICAL ACCOUNTING POLICIES



The Company’s accounting
policies, which are in compliance with accounting principles generally accepted in the United States, require application of methodologies,
estimates and judgments that have a significant impact on the results reported in the Company’s financial statements. Those
policies that, in the belief of management, are critical and require the use of complex judgment in their application, are disclosed
on the Company’s Form 10-K for the year ended June 30, 2012. Since June 30, 2012, there have been no material changes to
the Company’s critical accounting policies, except for the following:



10







New Accounting Pronouncements



In September 2011, the FASB issued
ASU 2011-08, “Testing Goodwill for Impairment”. The objective of this ASU is to simplify how an entity tests
goodwill for impairment. The new guidance will allow an entity to first assess qualitative factors to determine whether it is
necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the
fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not
that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill
impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual
and interim goodwill impairment tests performed as of a date before September 15, 2011, if a public entity’s financial statements
for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available
for issuance.



In July 2012, the FASB issued
ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment”. The objective of this ASU is to simplify
how an entity tests indefinite-lived intangibles for impairment. The new guidance will allow an entity to first assess qualitative
factors to determine whether it is necessary to perform the quantitative indefinite-lived intangible assets impairment test. An
entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative
assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are
effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption
is permitted, including for annual and interim goodwill impairment tests performed as of a date before July 27, 2012, if a public
entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities,
have not yet been made available for issuance.



Other new pronouncements issued
but not effective until after September 30, 2012, are not expected to have a significant effect on the Company’s consolidated
financial statements.



Income Taxes



Deferred tax assets are recognized
for taxable temporary differences, tax credit and net operating loss carry forwards. These assets are reduced by a valuation allowance,
which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
For this purpose, management considered evidence, both positive and negative, regarding various uncertainties identified as risk
factors to the Company. Recent events, including significant turmoil within the domestic and foreign financial markets, healthcare
legislation and increasing unemployment tax rates and taxable wage thresholds, more than likely are expected to contribute to
atypical customer attrition and decreased gross profits. Additionally, since the divesture of certain segments in fiscal 2009
unrelated to the Company’s current focus of full service human resources, the Company has had positive results for the last
five fiscal periods for financial reporting purposes, including the current period. However, the Company has not evidenced a similar
trend for income tax reporting purposes, experiencing net operating losses in four of prior seven fiscal periods, with the current,
2012 and 2011 fiscal years as the exception. These taxable losses are primarily the result of permanent timing differences related
to the amortization of certain intangible assets for income tax purposes through 2022. The Company’s deferred tax assets
and liabilities are susceptible to erratic changes due to the inherent unpredictable nature of the Company’s insurance claim
liabilities and sensitivity to unemployment and wage volatility. Changes in the economy and federal and state legislature, both
favorable and unfavorable, will impact management’s assumptions and estimates in future periods.



As of September 30, 2012, management
has determined that a 86% valuation allowance against the Company’s $4.0 million component of deferred tax assets generated
by the net operating loss carry forward of $10.2 million is necessary to reduce the deferred tax assets to the amount that will
more likely than not be realized. This represents a decrease from the prior fiscal year’s 87% allowance as the Company experienced
positive taxable earnings in the current fiscal year for the third time in seven years. As a result, management elected to limit
the valuation allowance release to 14% as the Company has not established a significant historical trend of taxable earnings.
As of September 30, 2012, management has also determined that a $1.5 million valuation allowance against the Company’s $3.8
million of deferred tax assets generated by book versus tax differences of certain assets and liabilities is necessary to reduce
the deferred tax assets to the amount that will more likely than not be realized. This 40% valuation allowance represents a decrease
from the prior fiscal year’s 42% due to the aforementioned earnings trend. The Company released $0.3 million of the valuation
allowance in fiscal 2013 due to the positive earnings in the Company’s operations and projected earnings for the remainder
of fiscal 2013 and 2014.



As of June 30, 2012, management
had determined that a 87% valuation allowance against the Company’s $4.3 million component of deferred tax assets generated
by the net operating loss carry forward of $10.8 million was necessary to reduce the deferred tax assets to the amount that will
more likely than not be realized. This represented a decrease from the prior fiscal year’s 90% allowance as the Company
experienced positive taxable earnings in the 2012 fiscal year for the second time in six years. As a result, management elected
to limit the valuation allowance release to 13% as the Company had not established a significant historical trend of taxable earnings.
As of June 30, 2012, management had also determined that a $1.6 million valuation allowance against the Company’s $3.8 million
of deferred tax assets generated by book versus tax differences of certain assets and liabilities was necessary to reduce the
deferred tax assets to the amount that will more likely than not be realized. This 42% valuation allowance represented a decrease
from the prior fiscal year’s 43% due to the aforementioned earnings trend. The Company released $0.9 million of the valuation
allowance in fiscal 2012 due to the positive earnings in the Company’s operations and projected earnings for 2013 and 2014.



11







RESULTS OF OPERATIONS: COMPARISON
OF THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2012 AND SEPTEMBER 30, 2011



Executive Overview of Financial
Results



Gross billings for the three month
periods ended September 30, 2012 and September 30, 2011 were $116.0 million and $134.9 million, respectively.



Results of operations for the
three month periods ended September 30, 2012 and September 30, 2011 are as follows:





|                                            |  | Revenue for the        |        |  | Operating income for the |  
|------------------------------------------- |  | ---------------------- | ------ |  | ------------------------ | -
|                                            |  | Three Months Ended     |        |  | Three Months Ended       |  
|                                            |  | September 
30,         |        |  | September 
30,           |  
|                                            |  | 2012                   |        |  | 2011                     |  
|                                            |  | (Dollars in thousands) |       
|Business Solutions                          |  | $                      | 13,760 |  |                          | $
|Holding Company                             |  |                        | 0      |  |                          |  
|Company Totals                              |  | $                      | 13,760 |  |                          | $
|                                            |  |                        |        |  |                          |  
|Net Income Available to Common Shareholders |  |                        |        |  |                          |  



Net income available to common
stock shareholders was $0.40 million or $0.03 per diluted share on revenue of $13.8 million for the three month period ended September
30, 2012 compared with net income available to common stock shareholders of $0.39 million or $0.03 per diluted share on revenue
of $15.8 million for the three month period ended September 30, 2011. This represents a $2.0 million or 12.9% decrease in revenue
and a $0.01 million or 2.6% increase in net income.



The decrease in revenue for the
three month period ended September 30, 2012 is primarily due to the loss of a major client at both CSM and ESG effective December
31, 2011. Both clients had been with CSM or ESG over ten years and had grown to the size that they could realize some material
economies of scale by bringing the service in-house.



The increase in net income available
to common shareholders for the three month period ended September 30, 2012 is due to a decrease in selling, general and administrative
expenses which more than offset the increase in preferred stock dividends.



Results are described in further
detail as follows:



Operating results for three month
periods ended September 30, 2012 and September 30, 2011 are as follows:



|                              |  | Three Month Period Ended |       
|----------------------------- |  | ------------------------ | ------
|                              |  | September 30, 2012       |       
|                              |  | (Dollars in thousands)   |       
|Revenues                      |  | $                        | 13,760
|Cost of revenues              |  |                          | 10,514
|Gross profit                  |  |                          | 3,246 
|                              |  |                          |       
|Operating expenses            |  |                          |       
|Selling, general and admin    |  |                          | 2,245 
|Depreciation and amortization |  |                          | 130   
|Total operating expenses      |  |                          | 2,375 
|                              |  |                          |       
|Segment operating income      |  | $                        | 871   



Revenue



Revenue for the three month period
ended September 30, 2012 was $13.8 million, compared to $15.8 million for the three month period ended September 30, 2011, a decrease
of $2.0 million or 12.9%. Revenue decreased primarily due to the loss of a major client at both CSM and ESG effective December
31, 2011. Total worksite employee count is down 1,725 employees or 11.4% from September 30, 2011. We continue to focus on growing
in our target client size of 5-100 employees.



12







Gross Profit



Gross profit for the three month
period ended September 30, 2012 was $3.2 million, representing 23.6% of revenue, compared to $3.3 million, representing 20.6%
of revenue for the three month period ended September 30, 2011. Despite a 12.9% decrease in revenue, gross profit dollars remained
constant due to $0.37 million increase in profitability in our workers comp program.



Operating Income



Operating income for the three
month period ended September 30, 2012 was $0.87 million, compared to operating income of $0.76 million for the three month period
ended September 30, 2011, an increase of $0.12 million or 15.5% due to a decrease in our selling, general and administrative expense
of $0.12 million.



Interest Expense



Interest expense was $0.0 million
for the three month period ended September 30, 2012, compared to $0.005 million for the three month period ended September 30,
2011, a decrease of $0.005 million due to the payoff of the term note in April, 2012.



Income Taxes



Income tax expense was $0.07 and
$0.03 million for the three months ended September 30, 2012 and 2011, respectively.



LIQUIDITY AND CAPITAL RESOURCES



Our principal sources of liquidity
include cash and equivalents and proceeds from debt borrowings. We had cash and equivalents of $6.0 million at September 30, 2012
and $5.3 million at June 30, 2012. The increase is primarily due to net income for the first three months of $0.81 million.



We had working capital of $4.6
million at September 30, 2012 compared with $4.1 million at June 30, 2012. The increase in working capital was a direct result
of our first quarter net income available to shareholders of $0.4 million. Current assets are primarily comprised of cash and
equivalents and net accounts receivable. Current liabilities are primarily comprised of accounts payable, workers compensation
reserves and accrued expenses.



The Company is required to collateralize
its obligations under its workers’ compensation and certain general insurance coverage. The Company uses its cash and cash
equivalents to collateralize these obligations. Restricted cash was approximately $2.4 million and $2.4 million at September 30,
2012 and June 30, 2012, respectively.



Cash Flows



Cash flows provided by (used in)
operations for the three month periods ended September 30, 2012 and September 30, 2011 were $1.1 million and ($0.25) million,
respectively. The increase is primarily due to a small increase in customer deposits of $0.04 million in Q1 2013 compared to a
$2.44 million decrease in Q1 2012.



Cash flows used in investing activities
for the three month period ended September 30, 2012 and September 30, 2011 were $0.006 million and $0.0 million, respectively.
The change was due to capital expenditures at CSM.



Cash flows used in financing activities
was $0.41 million for the three month period ended September 30, 2012 compared to $0.46 million for the three month period ended
September 30, 2011. The decrease is due to the payoff of the term debt in April, 2012 which saved $0.125 million which offset
the increase in dividend expense of $0.07 million.



CONTRACTUAL OBLIGATIONS AND
COMMERCIAL COMMITMENTS



There have been no material changes
to the Company’s contractual obligations from those disclosed in the Form 10-K for the year ended June 30, 2012 under “Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.



OFF BALANCE SHEET ARRANGEMENTS



As is common in the industry we
operate in, we have entered into certain off-balance sheet arrangements in the ordinary course of business that result in risks
not directly reflected in our balance sheets. Our significant off-balance sheet transactions include liabilities associated with
guarantees and letter of credit obligations.



Guarantees



Significant portions of our letters
of credit are personally guaranteed by the estate of the Company’s former Chairman. Future changes to these guarantees would
affect financing capacity of the Company.



13







Restricted Cash



Certain states and vendors require
us to post letters of credit to ensure payment of taxes or payments to our vendors under workers’ compensation contracts
and to guarantee performance under our contracts. Such letters of credit are generally issued by a bank or similar financial institution.
The letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit if the holder demonstrates
that we have failed to perform specified actions. If this situation were to occur, we would be required to reimburse the issuer
of the letter of credit. Depending on the circumstances of such a reimbursement, we may also have to record a charge to earnings
for the reimbursement. We do not believe that it is likely that any claims will be made under a letter of credit in the foreseeable
future. As of September 30, 2012, we had approximately $2.4 million in restricted cash primarily to secure obligations under our
PEO contracts.



Item 3. Quantitative and Qualitative
Disclosures about Market Risk



There have been no material changes
from the information previously reported under “Item 7A. Quantitative and Qualitative Disclosures About Market Risk”
in the Form 10-K for the year ended June 30, 2012.



Item 4. Controls and Procedures



Evaluation of Disclosure Controls
and Procedures



Under the supervision and with
the participation of our management, including our President/Chief Executive Officer and our Chief Financial Officer, we conducted
an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based
on the foregoing, our President/Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of September 30, 2012.



Management Report on Internal
Control over Financial Reporting



Our management is responsible
for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange
Act). Under the supervision and with the participation of our management, including the President/Chief Executive Officer and
Chief Financial Officer, we evaluated the effectiveness of our internal control over financial reporting as of September 30, 2012.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO") in Internal Control-Integrated Framework.



Based upon this assessment, we
determined that our internal control over financial reporting as of September 30, 2012 was effective.



This Quarterly Report does not
include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's
report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange
Commission that permit the company to provide only management's report.



Changes in Internal Controls



There were no changes to our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the
last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.



Inherent Limitations on Effectiveness
of Controls



Our management, including our
President/Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or
our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to
their costs. Our disclosure controls and procedures and our internal controls over financial reporting have been designed to provide
reasonable assurance of achieving their objectives. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.



14







PART II--OTHER INFORMATION.



Item 1. Legal Proceedings.



The Company is a party to certain
pending claims that have arisen in the ordinary course of business, none of which, in the opinion of management, is expected to
have a material adverse effect on the consolidated financial position, results of operations, or cash flows if adversely resolved.



On April
9, 2012, a putative class action complaint captioned Mark Haagen, individually v. Tena Mayberry, Carter M. Fortune, Paul J. Hayes,
David A. Berry, Richard F. Suja, Fortune Industries, Inc., CEP, Inc., and CEP Merger Sub, Inc. was filed in the Superior Court
of Indiana, Marion County Circuit, on behalf of an alleged class of the Company’s shareholders. In each case, the plaintiffs
allege that members of the Board breached their fiduciary duties to the Company's stockholders in connection with the proposed
Merger (see Item 5, Other Information below) and that the Company aided and abetted the directors' breaches of fiduciary duties.
The complaint claims that the proposed Merger between the Company and Merger Sub involves an unfair price, an inadequate sales
process, self-dealing and unreasonable deal protection devices. The complaints sought injunctive relief, including to enjoin or
rescind the Merger, and an award of other unspecified attorneys’ and other fees and costs, in addition to other relief.
On August 16, 2012 a Stipulation of Dismissal with Prejudice was filed in the Superior Court of Indiana, Marion County Circuit
whereby both the plaintiff and defendant stipulated to the dismissal of this complaint.



Item 1A. Risk Factors



There have been no material changes
with regard to the risk factors previously disclosed in our most recent Annual Report on Form 10-K for the year ended June 30,
2012.



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



None



Item 3. Defaults upon Senior
Securities.



None



Item 4. Mine Safety Disclosures.



Not Applicable



Item 5. Other Information.



On September 20, 2012, the Company
announced that it has reached an agreement in principal to restructure its current merger agreement by planning to enter into
an amended merger agreement with Ide Management Group, LLC (“Ide”), a skilled nursing facility management group headquartered
in Greenfield, Indiana (the “Amended Agreement”). The Amended Agreement is subject to final documentation, completion
of due diligence, regulatory compliance and other normal contingencies. Once completed, a revised Proxy Statement and the Amended
Agreement will be filed with the SEC for review. Further, the Amended Agreement will result in the Company remaining registered
with the Securities and Exchange Commission, and it is anticipated that it will continue to be publicly traded. Current shareholders
of the Company will continue to own their Company shares.



In connection with the Amended
Agreement, the Company will exchange all of its professional employer organization (“PEO”) subsidiaries for all of
the common and preferred shares owned by the late Carter M. Fortune and by CEP, Inc., a Tennessee corporation which had previously
entered into a merger agreement with the Company to acquire all the Company’s PEO operations. As a result of the revised
transaction structure, the Company will cease being in the PEO business and through its newly acquired Ide subsidiaries, will
operate a chain of approximately 30 skilled nursing facilities located in Indiana, Illinois, Iowa and Wisconsin.



The Amended Agreement provides
that Ide will merge with a to-be formed subsidiary of the Company, and become a wholly-owned subsidiary of the Company. Mark Ide,
the sole member of Ide, will receive sufficient shares of the Company in exchange for full ownership of Ide. As a result, Mr.
Ide will own a substantial majority of the Company shares. In addition, Ide will pay the Company three hundred thousand dollars
($300,000) as part of the transaction, which has been deposited into an escrow account with an independent third-party bank. The
terms and conditions of the escrow agreement and the revised merger transaction are more fully described in the Company’s
Form 8-K filed on September 20, 2012.



Item 6. Exhibits



The following exhibits are included
herein:



|31.1 | Rule 15d-14(a) Certification of CEO
|---- | -----------------------------------
|31.2 | Rule 15d-14(a) Certification of CFO
|32.1 | Section 1350 Certification of CEO  
|32.2 | Section 1350 Certification of CFO  



15







SIGNATURES



In accordance with the requirements
of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                        | Fortune Industries, Inc.
|----------------------- | ------------------------
|                        | (Registrant)            
|                        |                         
|Date: November 14, 2012 | By: /s/ Tena Mayberry   
|                        | Tena Mayberry,          
|                        | Chief Executive Officer 
|                        |                         
|Date: November 14, 2012 | By: /s/ Randy E. Butler 
|                        | Randy E. Butler,        
|                        | Chief Financial Officer 





16