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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-20394
COACTIVE MARKETING GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1340408
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
75 Ninth Avenue
New York, New York 10011
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 660-3800
---------------
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 [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
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 August, 10, 2007, 7,457,365 shares of the Registrant's Common Stock, par
value $.001 per share, were outstanding.
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INDEX
-----
COACTIVE MARKETING GROUP, INC. AND SUBSIDIARIES
Page
----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Condensed Consolidated Financial Statements of CoActive
Marketing Group, Inc. and Subsidiaries (Unaudited)
Balance Sheets - June 30, 2007 and
March 31, 2007 (Audited) 3
Statements of Operations - Three months ended
June 30, 2007 and June 30, 2006 4
Statements of Cash Flows - Three months ended
June 30, 2007 and June 30, 2006 5
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
PART II - OTHER INFORMATION
- ---------------------------
Items 1, 1A, 2, 3, 4 and 5. Not Applicable
Item 6. Exhibits 17
SIGNATURES 18
- ----------
2
PART I - FINANCIAL INFORMATION
COACTIVE MARKETING GROUP, INC.
Condensed Consolidated Balance Sheets
June 30, 2007 and March 31, 2007
June 30, 2007 March 31, 2007
------------- --------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 755,740 $ 9,514,081
Accounts receivable, net of allowance for doubtful accounts of
$369,415 at June 30, 2007 and $365,000 at March 31, 2007 18,266,753 12,131,037
Unbilled contracts in progress 2,749,309 2,114,564
Deferred contract costs 1,291,040 1,552,910
Prepaid expenses and other current assets 983,180 913,538
------------ ------------
Total current assets 24,046,022 26,226,130
Property and equipment, net 3,363,564 3,382,968
Deferred tax asset 4,936,414 4,936,414
Goodwill and intangible asset 7,557,203 7,557,203
Other assets 38,667 38,667
------------ ------------
Total assets $ 39,941,870 $ 42,141,382
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,297,037 $ 3,568,910
Accrued compensation 2,547,970 2,166,244
Accrued job costs 1,372,940 999,588
Other accrued liabilities 1,851,796 2,148,423
Deferred revenue 18,185,772 18,364,020
Income taxes payable - 52,060
Deferred taxes payable 243,249 243,249
Notes payable bank - current - 2,000,000
------------ ------------
Total current liabilities 27,498,764 29,542,494
Deferred rent 2,550,755 2,542,452
------------ ------------
Total liabilities 30,049,519 32,084,946
------------ ------------
Stockholders' equity:
Class A convertible preferred stock, par value $.001; authorized 650,000
shares; none issued and outstanding - -
Class B convertible preferred stock, par value $.001; authorized 700,000
shares; none issued and outstanding - -
Preferred stock, undesignated; authorized 3,650,000 shares;
none issued and outstanding - -
Common stock, par value $.001; authorized 25,000,000 shares; issued and
outstanding 7,426,001 shares at June 30, 2007 and 7,626,001 at March 31, 2007 7,426 7,626
Additional paid-in capital 10,815,782 10,733,431
Retained earnings (accumulated deficit) (930,857) (684,621)
------------ ------------
Total stockholders' equity 9,892,351 10,056,436
------------ ------------
Total liabilities and stockholders' equity $ 39,941,870 $ 42,141,382
============ ============
See accompanying notes.
3
COACTIVE MARKETING GROUP, INC.
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 2007 and 2006
(Unaudited)
Three Months Ended June 30
2007 2006
------------ ------------
Sales $ 20,408,420 $ 27,021,465
------------ ------------
Operating expenses:
Reimbursable program costs and expenses 6,172,718 10,713,331
Outside production and other program expenses 6,421,798 7,293,709
Compensation expense 6,665,334 5,295,872
General and administrative expenses 1,507,792 2,182,330
------------ ------------
Total operating expenses 20,767,642 25,485,242
------------ ------------
Operating income (loss) (359,222) 1,536,223
Interest expense, net (22,176) (37,912)
Other income 15,162 57,000
------------ ------------
Income (loss) from continuing operations before provision
for income taxes (366,236) 1,555,311
Provision (credit) for income taxes (120,000) 622,125
------------ ------------
Income (loss) from continuing operations (246,236) 933,186
------------ ------------
Discontinued operations:
Loss from discontinued operations, net of tax (benefit) of ($32,591) - (49,650)
Loss on disposal of discontinued operations, net of tax provision
of $302,004 - (127,174)
------------ ------------
Loss from discontinued operations - (176,824)
------------ ------------
Net income (loss) $ (246,236) $ 756,362
============ ============
Basic earnings (loss) per share:
Income (loss) from continuing operations $ (.04) $ .14
Income (loss) from discontinued operations - (.03)
------------ ------------
Net income (loss) per share $ (.04) $ .11
------------ ------------
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ (.04) $ .13
Income (loss) from discontinued operations - (.02)
------------ ------------
Net income (loss) per share $ (.04) $ .11
------------ ------------
Weighted average number of common shares outstanding:
Basic 6,923,751 6,785,054
Dilutive effect of options, warrants and restricted shares - 227,730
------------ ------------
Diluted 6,923,751 7,012,784
============ ============
See accompanying notes.
4
COACTIVE MARKETING GROUP, INC.
Condensed Consolidated Statements of Cash Flows
Three Months Ended June 30, 2007 and 2006
(Unaudited)
2007 2006
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (246,236) $ 756,362
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 191,068 226,089
Deferred rent amortization 8,303 (17,772)
Provision for bad debt expense 4,500 46,980
Interest income on note receivable from officer - (11,725)
Compensation expense on vested stock and stock options 82,123 93,745
Deferred income taxes - 614,349
Loss from discontinued operations, net of tax - 49,650
Loss on disposal of discontinued operations, net of tax - 127,174
Changes in operating assets and liabilities:
Accounts receivable (6,140,216) (3,740,481)
Unbilled contracts in progress (634,745) 109,929
Deferred contract costs 261,870 585,112
Prepaid expenses and other assets (69,642) (24,610)
Accounts payable (271,875) 189,764
Deferred revenue (178,248) (1,318,439)
Accrued job costs 373,352 (257,356)
Accrued compensation 381,726 416,553
Other accrued liabilities (348,687) (367,941)
----------- -----------
Net cash (used) by operating activities of continuing operations (6,586,707) (2,522,617)
Operating activities of discontinued operations - (35,004)
----------- -----------
Net cash (used) by operating activities (6,586,707) (2,557,621)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of discontinued operations - 1,100,000
Purchases of fixed assets (171,634) (76,680)
----------- -----------
Net cash (used in)/provided by investing activities (171,634) 1,023,320
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options - 433,656
Payments of debt (2,000,000) (250,000)
Financing costs - (5,000)
----------- -----------
Net cash (used in)/provided by financing activities (2,000,000) 178,656
----------- -----------
Net (decrease) in cash and cash equivalents (8,758,341) (1,355,645)
Cash and cash equivalents at beginning of period 9,514,081 3,929,438
----------- -----------
Cash and cash equivalents at end of period $ 755,740 $ 2,573,793
=========== ===========
5
COACTIVE MARKETING GROUP, INC.
Condensed Consolidated Statements of Cash Flows
Three Months Ended June 30, 2007 and 2006
(Unaudited)
Supplemental disclosures of cash flow information:
Interest paid during the period $ 69,897 $ 61,323
========= ========
Income tax paid during the period $ 28,895 $ 7,776
========= ========
Noncash activities relating to investing and financing activities:
Retirement of common stock in connection with payment of
interest on note receivable $ - $283,147
========= ========
Forfeiture of non-vested stock $ 200 $ -
========= ========
See accompanying notes.
6
CoActive Marketing Group, Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 2007
(1) Basis of Presentation
---------------------
The interim financial statements of CoActive Marketing Group, Inc. (the
"Company") for the three months ended June 30, 2007 and 2006 have been
prepared without audit. In the opinion of management, such consolidated
financial statements reflect all adjustments, consisting of normal
recurring accruals, necessary to present fairly the Company's results
for the interim periods presented. Certain amounts in prior periods
have been reclassified to conform to our current presentation The
results of operations for the three months June 30, 2007 are not
necessarily indicative of the results for a full year.
The consolidated financial statements of the Company include the
financial statements of the Company and its wholly owned subsidiaries.
Through May 22, 2006, the consolidated financial statements included
the accounts of a variable interest entity, Garcia Baldwin, Inc. d/b/a
MarketVision ("MarketVision"), an affiliate that provided ethnically
oriented marketing and promotional services. The Company owned 49% of
the common stock of MarketVision. A third party owned the remaining
51%, which was accounted for as minority interest in the Company's
consolidated financial statements. The Company sold its 49% interest in
MarketVision in May 2006 for $1,100,000, and all related amounts were
reclassified as discontinued operations in the Company's financial
statements on a net of tax basis for the period ended June 30, 2006.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended March 31, 2007.
(2) Summary of Significant Accounting Policies
------------------------------------------
Reimbursable Program Costs and Expenses
---------------------------------------
Pursuant to contractual arrangements with some of its clients, the
Company is reimbursed for certain program costs and expenses. These
reimbursed costs are recorded both as revenues, and as operating
expenses. Such costs may include variable employee program compensation
costs. Not included in reimbursable program costs and expenses are
certain compensation and general and administrative expenses that are
recurring in nature and for which a certain client fee arrangement
provides for payment to us for such costs. These costs are included in
compensation and general and administrative expenses on our income
statement.
In July 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") released Issue 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent" ("EITF 99-19").
Additionally, in January 2002, the EITF released Issue 01-14, "Income
Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred" ("EITF 01-14"). EITF 99-19 and EITF
01-14 provides guidance on when client reimbursements, including out of
pocket expenses, should be characterized as revenue. Pursuant to such
literature, the Company records such client reimbursements as revenue
on a gross basis.
Revenue Recognition
-------------------
The Company's revenues are generated from projects subject to contracts
requiring the Company to provide its services within specified time
periods generally ranging up to twelve months. As a result, on any
given date, the Company has projects in process at various stages of
completion. Depending on the nature of the contract, revenue is
recognized as follows: (i) on time and material service contracts,
revenue is recognized as services are rendered and the costs are
incurred; (ii) on fixed price retainer contracts, revenue is recognized
on a straight-line basis over the term of the contract; (iii) on fixed
price multiple services contracts, revenue is recognized over the term
of the contract for the fair value of segments of the services rendered
which qualify as separate activities or delivered units of service; to
7
the extent multi-service arrangements are deemed inseparable, revenue
on these contracts is recognized as the contracts are completed; (iv)
on certain fixed price contracts, revenue is recognized on a percentage
of completion basis, whereby the percentage of completion is determined
by relating the actual costs incurred to date to the estimated total
costs for each contract; (v) on other fixed price contracts, revenue is
recognized on the basis of proportional performance as certain key
milestones are delivered. Costs associated with the fulfillment of
projects are accrued and recognized proportionately to the related
revenue in order to ensure a matching of revenue and expenses in the
proper period. Provisions for anticipated losses on uncompleted
projects are made in the period in which such losses are determined.
(3) Goodwill and Intangible Asset
-----------------------------
Goodwill consists of the cost in excess of the fair value of the
acquired net assets of the Company's subsidiary companies. The
Company's other intangible asset consists of an Internet domain name
and related intellectual property rights which has been determined to
have an indefinite life.
Goodwill and intangible assets deemed to have indefinite lives are
subject to annual impairment tests. Goodwill impairment tests require
the comparison of the fair value and carrying value of reporting units.
Measuring fair value of a reporting unit is generally based on
valuation techniques using multiples of earnings. The Company assesses
the potential impairment of goodwill annually and on an interim basis
whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Upon completion of such annual review, if
impairment is found to have occurred, a corresponding charge will be
recorded. The Company has determined that it has four reporting units
representing each of its subsidiaries.
Goodwill and the intangible asset will continue to be tested annually
at the end of each fiscal year to determine whether they have been
impaired. Upon completion of each annual review, there can be no
assurance that a material charge will not be recorded. As a result of
the Company's annual test to determine whether goodwill has been
impaired as of March 31, 2007, the Company had not identified any
indication of goodwill impairment of its reporting units or intangible
assets.
(4) Net Income (Loss) Per Share
---------------------------
Basic earnings per share is based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share
is computed on the same basis, including if dilutive, common share
equivalents, which include outstanding options and restricted shares.
For purpose of computing diluted earnings per share, 575,766 and
227,730 common share equivalents were assumed to be outstanding for the
three months period ended June 30, 2007 and 2006 respectively. For the
three months ended June 30, 2007, all common share equivalents were
excluded from the calculation of diluted earnings per share because
their inclusion would have been anti-dilutive as a result of the net
loss applicable to this period.
(5) Unbilled Contracts in Progress
------------------------------
Unbilled contracts in progress represent revenue recognized in advance
of billings rendered based on work performed to date on certain
contracts. Accrued job costs are also recorded for such contracts to
properly match costs and revenue.
(6) Deferred Contract Costs
-----------------------
Deferred contract costs represent direct contract expenses incurred
prior to the Company's related revenue recognition on such contracts.
Notwithstanding the Company's accounting policy with regards to
deferred contract costs, labor costs for permanent employees are
expensed as incurred.
(7) Deferred Revenue
----------------
Deferred revenue represents contract amounts billed in excess of
revenues earned.
8
(8) Deferred Rent
-------------
Deferred rent consists of (i) the excess of the allocable straight line
rent expense to date as compared to the total amount of rent due and
payable through such period and (ii) funds received from landlords to
reimburse the Company for the cost, or a portion of the cost, of
leasehold improvements. Deferred rent is amortized to rent expense over
the term of the lease. Effective January 1, 2006, in accordance with
FASB Staff Position No. 13-1, "Accounting for Rental Costs Incurred
during a Construction Period" ("FSP 13-1"), rental costs associated
with any new ground or building operating leases that are incurred
during a construction period are recognized as rental expense.
(9) Notes Payable Bank
------------------
On June 20, 2007, the Company repaid all obligations due to Signature
Bank, which totaled $2,000,000. Additionally, the Company substituted a
$450,000 Stand by letter of credit issued by Signature Bank with a cash
security deposit to landlord, which amount is included in other current
assets in the accompanying balance sheet.
(10) Accounting for Stock-Based Compensation
---------------------------------------
On April 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (Revised 2004) - "Share-Based Payment" ("SFAS No.
123R"), which requires the Company to measure all employee stock-based
compensation awards using a fair value method and record the related
expense in the financial statements over the period during which an
employee is required to provide service in exchange for the award. SFAS
No. 123R also amends FASB Statement No. 95, "Statement of Cash Flows,"
to require that excess tax benefits, as defined, realized from the
exercise of stock options be reported as a financing cash inflow rather
than as a reduction of taxes paid in cash flow from operations. The
Company elected to use the modified prospective transition method,
which requires that compensation cost be recognized in the financial
statements for all awards granted after the date of adoption as well as
for existing rewards for which the requisite service has not been
rendered as of the date of adoption.
Pre-tax stock based employee compensation expense for the three months
ended June 30, 2007 and June 30, 2006 was $81,910 and $19,800
respectively.
Stock Options
-------------
Under the Company's 1992 Stock Option Plan (the "1992 Plan"), employees
of the Company and its affiliates and members of the Board of Directors
were granted options to purchase shares of common stock of the Company.
The 1992 Plan was amended on May 11, 1999 to increase the maximum
number of shares of common stock for which options may be granted to
1,500,000 shares. The 1992 Plan terminated in 2002, although options
issued thereunder remain exercisable until the termination dates
provided in such options. Options granted under the 1992 Plan were
either intended to qualify as incentive stock options under the
Internal Revenue Code of 1986, or non-qualified options. Grants under
the 1992 Plan were awarded by a committee of the Board of Directors,
and are exercisable over periods not exceeding ten years from date of
grant. The option price for incentive stock options granted under the
1992 Plan must be at least 100% of the fair market value of the shares
on the date of grant, while the price for non-qualified options granted
to employees and employee directors is determined by the committee of
the Board of Directors. At June 30, 2007, there were 27,500 options
issued, expiring from April 2008 through April 2011, under the 1992
Plan that remain outstanding.
On July 1, 2002, the Company established the 2002 Long-Term Incentive
Plan (the "2002 Plan") providing for the grant of options or other
awards, including stock grants, to employees, officers or directors of,
consultants to, the Company or its subsidiaries to acquire up to an
aggregate of 750,000 shares of Common Stock. In September 2005, the
2002 Plan was amended so as to increase the number of shares of common
stock available under the plan to 1,250,000. Options granted under the
2002 Plan may either be intended to qualify as incentive stock options
under the Internal Revenue Code of 1986, or may be non-qualified
options. Grants under the 2002 Plan are awarded by a committee of the
Board of Directors, and are exercisable over periods not exceeding ten
years from date of grant. The option price for incentive stock options
granted under the 2002 Plan must be at least 100% of the fair market
value of the shares on the date of grant, while the price for
non-qualified options granted is determined by the Committee of the
9
Board of Directors. At June 30, 2007, there were 507,500 options,
expiring from September 2007 through April 2017, issued under the 2002
Plan that remains outstanding. Any option under the 2002 Plan that is
not exercised by an option holder prior to its expiration may be
available for re-issuance by the Company. As of June 30, 2007, the
Company had 456,250 options available for grant under the 2002 Plan.
A summary of option activity under all plans as of June 30, 2007, and
changes during the period then ended is presented below:
Weighted
Weighted average
average Number remaining Aggregate
exercise of contractual intrinsic
price options term value
------------ ------------ ------------ ------------
Balance at March 31, 2007 $ 3.07 751,875 2.84 $ 45,325
Granted (A) $ 2.26 40,000
Exercised -- --
Canceled $ 4.00 (256,875)
Balance at June 30, 2007 (vested and
expected to vest) $ 2.56 535,000 4.07 $ 42,800
============================================================
Exercisable at June 30, 2007 $ 2.57 510,000 3.79 $ 35,700
============================================================
(A) Represents options granted to each of our Directors of 10,000
shares at an exercise price of $2.26. 20,000 shares became
exercisable on the date of grant and the remaining on the
first anniversary of the date of grant. These options are
"Formula Awards" under the 2002 Plan and granted to them as
Independent Directors as defined in the Plan.
Total unrecognized compensation cost related to unvested stock option
awards at June 30, 2007 amounts to approximately $28,119 and is
expected to be recognized over a weighted average period of 1.23 years.
Total compensation cost for the three months ended June 30, 2007,
amounted to approximately $31,067, for these option awards.
Warrants
At each of June 30, 2007 and March 31, 2007, there were outstanding
warrants to purchase an aggregate of 40,766 shares of common stock at a
weighted average exercise price per share of $3.68 held by one
individual. These warrants were to expire on April 30, 2007. In April
2007, in consideration of services provided, the expiration date of
these warrants was extended to April 30, 2010.
Non-Vested Stock
As of June 30, 2007, pursuant to the authorization of the Company's
Board of Directors and certain Restricted Stock Agreements, the Company
awarded 566,250 shares of common stock under the Company's 2002 Plan to
certain employees. Grant date fair value is determined by the market
price of the Company's common stock on the date of grant. The aggregate
value of these shares at their respective grant dates amounted to
approximately $1,047,675 and will be recognized ratably as compensation
expense over the vesting periods. The shares of common stock granted
pursuant to such agreements vest in various traunches over five years
from the date of grant.
The shares awarded under the restricted stock agreements vest on the
applicable vesting dates only to the extent the recipient of the shares
is then an employee of the Company or one of its subsidiaries, and each
recipient will forfeit all of the shares that have not vested on the
date his or her employment is terminated.
10
A summary of all non-vested stock activity as of June 30, 2007, and
changes during the three month period then ended is presented below:
Weighted Weighted
average average
grant Number remaining Aggregate
date fair of contractual intrinsic
value shares term value
------------ ------------ ------------ ------------
Unvested at March 31, 2007 $ 1.40 702,250 2.96 $ 94,703
------------ ------------ ------------ ------------
Granted
Vested
Forfeited $ 1.96 (200,000)
============================
Unvested at June 30, 2007 $ 2.87 502,250 3.04 $ 398,765
============================================================
Total unrecognized compensation cost related to unvested stock awards
at June 30, 2007 amounts to approximately $824,949 and is expected to
be recognized over a weighted average period of 3.04 years. Total
compensation cost for the three months ended June 30, 2007, amounted to
approximately $50,843, respectively, for these stock awards.
(11) Recent Accounting Standards Affecting the Company
-------------------------------------------------
In June 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes
- an Interpretation of FASB No. 109" ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in the financial
statements in accordance with FASB Statement No. 109, "Accounting for
Income Taxes." FIN 48 prescribes a recognition threshold and
measurement attribute for a tax position taken or expected to be taken
in a tax return. FIN 48 also provides guidance on future changes,
classification, interest and penalties, accounting in interim periods,
disclosures and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006 and the Company adopted this standard
beginning April 1, 2007. Management believes that the adoption of FIN
48 had no material impact on the financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities ("SFAS No. 159"). SFAS
No. 159 permits entities to choose to measure, on an item-by-item
basis, specified financial instruments and certain other items at fair
value that are currently required to be measured at historical costs.
SFAS No. 159 is effective for fiscal years beginning after November 15,
2007, the provisions for which are required to be applied
prospectively. Adoption of SFAS 159 is optional. Currently, the company
does not expect to adopt SFAS No. 159.
(12) Commitments and Contingencies
-----------------------------
The Company had sales to one customer in excess of 10% of total sales
in the three months ended June 30, 2007. Sales to this customer
approximated $8 million. Accounts receivable as of June 30, 2007 from
this customer approximated $9 million.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that are based on beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. When used in this report, the words
"estimate," "project," "believe," "anticipate," "intend," "expect," "plan,"
"predict," "may," "should," "will," the negative thereof or other variations
thereon or comparable terminology are intended to identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to future events based on currently available information and are
subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated in those forward-looking statements. Factors
that could cause actual results to differ materially from the Company's
expectations are set forth in the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 2007 under "Risk Factors," including but not limited
to "Recent Losses," "Dependence on Key Personnel," "Customers," "Unpredictable
Revenue Patterns," "Competition," "Risks Associated with Acquisitions," "Need
for Additional Funding,", "Internal Controls" and "Control by Executive Officers
and Directors," in addition to other information set forth herein and elsewhere
in our other public filings with the Securities and Exchange Commission. The
forward-looking statements contained in this report speak only as of the date
hereof. The Company does not undertake any obligation to release publicly any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Overview
CoActive Marketing Group, Inc., through its wholly-owned subsidiaries
Inmark Services LLC, Optimum Group LLC, U. S. Concepts LLC and Digital
Intelligence Group LLC, is an integrated sales promotional and marketing
services agency. We develop, manage and execute promotional programs at both
national and local levels. Our programs help our clients effectively promote
their goods and services directly to retailers and consumers and are intended to
assist them in achieving a maximum impact and return on their marketing
investment. Our activities reinforce brand awareness, provide incentives to
retailers to order and display our clients' products, and motivate consumers to
purchase those products.
Our services include experiential marketing, event marketing,
interactive marketing, ethnic marketing, and all elements of consumer and trade
promotion and are marketed directly to our clients by our sales force operating
out of offices located in New York, New York; Cincinnati, Ohio; Chicago,
Illinois and San Francisco, California.
Results of Operations
The following table presents operating data of the Company expressed as
a percentage of sales, net of reimbursable program costs and expenses, for the
three months ended June 30, 2007 and June 30 2006:
Three Months Ended
June 30,
------------------
2007 2006
---- ----
Statement of Operations Data:
Sales, net of reimbursable program costs and expenses 100% 100%
Operating Revenue 55% 55%
Compensation expense 47% 32%
General and administrative expense 11% 13%
Operating income (loss) (3%) 9%
Income (loss) from continuing operations before provision
(benefit) for income taxes (3%) 10%
Net income (loss) (2%) 5%
12
Sales. Sales consist of fees for services, classified below as
Operating Revenue, as well as sales from reimbursable costs and production
expenses. We purchase a variety of items and services on behalf of our clients
for which we are reimbursed pursuant to our client contracts. The amount of
reimbursable program costs and expenses which are included in revenues will vary
from period to period, based on the type and scope of the service being
provided.
Three Months Ended
June 30,
------------------------------------------------------------
Sales 2007 % 2006 %
----- ------------ ------------ ------------ ------------
Gross Sales $ 20,408,420 100 $ 27,021,465 100
Reimbursable program
costs and production
expenses 12,594,516 62 18,007,040 67
------------ ------------ ------------ ------------
Operating Revenue $ 7,813,904 38 $ 9,014,425 33
============ ============ ============ ============
Total sales for the quarter ended June 30, 2007 were $20,408,000,
compared to $27,021,000 for the quarter ended June 30, 2006, a decrease of
$6,613,000. The decrease in gross sales reflects the growing shift in certain
client remuneration contracts, where the foundation for Company compensation is
based on labor with nominal associated reimbursable program and production
costs. Additionally, 2006 sales were positively affected by one significant
non-recurring project, which resulted in gross sales of $5 million during the
quarter ended June 30, 2006.
Operating Revenue. We believe "Operating Revenue" is a key performance
indicator. Operating Revenue is defined as our Gross Sales less outside
reimbursable production and other program expenses. Operating Revenue is the net
amount derived from sales to customers that we believe is available to fund our
compensation and general and administrative expenses, and capital expenditures.
For the three months ended June 30, 2007, Operating Revenue amounted to
$7,814,000. Operating Revenue decreased by 13% or $1,200,000 over the same
period ended June 30, 2006.
Operating Expenses. Total operating expenses of $20,768,000 for the
three months ended June 30, 2007, were approximately $4,717,000 or 18% less than
the comparable period in the prior year. The decreases in operating expenses
resulted from the aggregate of the following:
Reimbursable Program Costs and Expenses. Reimbursable costs and
expenses for the three months ended June 30, 2007 and 2006 were $6,173,000 and
$10,713,000, respectively. The decrease in reimbursable costs and expenses of
$4,540,000 is due to a decrease of such costs derived from experiential
programs.
Outside Production and Other Program Expenses. Outside production and
other program expenses consist of the costs of purchased materials, media,
services, certain direct labor charged to programs and other expenditures
incurred in connection with and directly related to sales but which are not
classified as reimbursable program costs and expenses. Outside production and
other program expenses for the three months ended June 30, 2007 were $6,422,000
compared to $7,294,000 for the three months ended June 30, 2006, a decrease of
$872,000. The weighted mix of outside production and other program expenses
related to these components may vary significantly from project to project based
on the type and scope of the service being provided.
Compensation Expense. Compensation expense, exclusive of program
reimbursable costs, consists of the salaries, payroll taxes and benefit costs
related to indirect labor, overhead personnel and certain direct labor otherwise
not charged to programs. For the quarter ended June 30, 2007, compensation
expense was $6,665,000, compared to $5,296,000 for the quarter ended June 30,
2006, an increase of $1,369,000. The increase in compensation expense for June
30, 2007 reflects the additional costs associated with recruiting senior talent
to support growth in our technology group. The remaining increase is due to
performance based salary increases.
General and Administrative Expenses. General and administrative
expenses consisting of office and equipment rent, depreciation and amortization,
professional fees, other overhead expenses and charges for doubtful accounts,
were $1,508,000 for the three months ended June 30, 2007, compared to $2,182,000
for the three months ended June 30, 2006, a decrease of $674,000, or 30%. The
decreases realized in general and administrative costs reflect our continued
efforts to reduce overhead costs.
13
Interest and Other Income (Expense), Net. Net interest and other
expense for the quarter ended June 30, 2007, totaled ($7,000) as compared to a
$19,000 net income for the comparable period in 2006. Interest and other income
expense consists primarily of interest paid on bank debt and was tied to the
bank's prime rate in effect. Interest income consists primarily of interest on
our money market and CD accounts.
Income (Loss) from Continuing Operations before Provision (Benefit) for
Income Taxes. Income (loss) from continuing operations before the provision
(benefit) for income taxes for the quarters ended June 30, 2007 and 2006
amounted to ($366,000) and $1,555,000, respectively.
Provision (Benefit) for Income Taxes. The provision (benefit) for
federal, state and local income taxes for the three months ended June 30, 2007
and 2006 were based upon the Company's estimated effective tax rate for the
respective fiscal years.
Income (Loss) from Continuing Operations. As a result of the items
discussed above, income (loss) from continuing operations for the quarters ended
June 30, 2007 and 2006 was ($246,000) and $933,000, respectively. Diluted
earnings (loss) per share from continuing operations amounted to ($.04) for the
three months ended June 30, 2007, compared to $.13 in the three months ended
June 30, 2006.
Net Income (Loss). As a result of the items discussed above, net income
for the three months ended June 30, 2007 was ($246,000), compared to net income
of $756,000, for the three months ended June 30, 2006. Diluted earnings (loss)
per share amounted to ($.04) for the three months ended June 30, 2007,
respectively, compared to $.11 in the three months ended June 30, 2006.
Liquidity and Capital Resources
Beginning with our fiscal year ended March 31, 2000, we have
continuously experienced negative working capital. This deficit has generally
resulted from our inability to generate sufficient cash and receivables from our
programs to offset our current liabilities, which consist primarily of
obligations to vendors and other payables, as well as deferred revenues. We are
continuing our efforts to increase revenues from our programs and reduce our
expenses, but to date these efforts have not been sufficiently successful. We
have been able to operate during this extended period with negative working
capital due primarily to advance payments made to us on a regular basis by our
customers, bank financing made available to us, and to a lesser degree, equity
infusions from private placements of our securities ($1 million in January 2000,
and $1.63 million in January and February 2003), and stock option and warrant
exercises.
On June 20, 2007, we repaid all outstanding remaining obligations owed
to our senior lender in the amount of $1,762,000. We currently do not have a
revolving credit facility in place. Although we believe cash currently on hand
together with cash expected to be generated from operations will be sufficient
to fund our operations through the end of Fiscal 2008, we are currently in
discussions with several lending institutions to obtain revolving credit
financing for working capital purposes to fund our operations if we do not
produce the level of revenues required for our cash flow needs. There can be no
assurance that funding will be available to us at the time it is needed or in
the amount necessary to satisfy our needs, or, that if funds are made available,
that they will be available on terms that are favorable to us. If we are unable
to secure financing when needed, our businesses may be materially and adversely
affected, and we may be required to cease all or a substantial portion of our
operations. If we issue additional shares of common stock or securities
convertible into common stock in order to secure additional funding, current
stockholders may experience dilution of their ownership. In the event we issue
securities or instruments other than common stock, we may be required to issue
such instruments with greater rights than those currently possessed by holders
of common stock.
Cash and cash equivalents decreased by approximately $8,700,000 during the first
quarter of fiscal 2008 primarily due to the repayment of our outstanding bank
obligations and the halting of payments owed to us by a large client . Payments
were halted as a result of internal processing delays experienced by that client
during June 2007 . Subsequent to the end of the quarter, normal processing
resumed and the Company's cash balances have averaged approximately $5 million.
At June 30, 2007, we had cash and cash equivalents of $756,000, a
working capital deficit of $3,452,000, no outstanding bank loans or outstanding
letters of credit, and stockholders' equity of $9,892,000. In comparison, at
March 31, 2007, we had cash and cash equivalents of $9,514,000, a working
capital deficit of $3,316,000, an outstanding bank term loan of $2,000,000, an
outstanding bank letter of credit of $450,000, and stockholders' equity of
$10,056,000.
14
Operating Activities. Net cash used by operating activities was
$6,587,000 for the three months ended June 30, 2007.
Investing Activities. For the three months ended June 30, 2007, net
cash used by investing activities amounted to $171,600.
Financing Activities. For the three months ended June 30, 2007, net
cash used by financing activities amounted to $2,000,000 resulting from payments
made to pay-off bank borrowings of $2,000,000.
Critical Accounting Policies
The preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to use judgment in making estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. Certain of the
estimates and assumptions required to be made relate to matters that are
inherently uncertain as they pertain to future events. While management believes
that the estimates and assumptions used were the most appropriate, actual
results may vary from these estimates under different assumptions and
conditions.
Please refer to the Company's 2007 Annual Report on Form 10-K for a
discussion of the Company's critical accounting policies relating to revenue
recognition, goodwill and other intangible assets and accounting for income
taxes. During the three months ended June 30, 2007, there were no material
changes to these policies.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
There has been no significant change in our exposure to market risk
during the three months ended June 30, 2007. For a discussion of our exposure to
market risk, refer to our 2007 Annual Report on Form 10-K.
Item 4. Controls and Procedures
-----------------------
Evaluation of Disclosure Controls and Procedures
In connection with their review of our financial statements for the
quarter ended September 30, 2006, Grant Thornton LLP, our independent auditor at
the time of such review, communicated to management and our Audit Committee the
existence of internal control deficiencies that constituted material weaknesses
under standards established by the Public Company Accounting Oversight Board. A
material weakness is a significant deficiency or combination of significant
deficiencies, that results in more than a remote likelihood that that a material
misstatement of financial statements will not be prevented or detected.
As a result of our communications with Grant Thornton and further
review conducted by management and our Audit Committee, we believe that these
following material weaknesses were remedied during the period covered by this
Quarterly Report:
o Failure to properly monitor and account for state sales and
use tax liabilities in various jurisdictions.
o Misapplication of revenue recognition policies. .
Grant Thornton also advised our Audit Committee that it believed there
existed several other significant deficiencies that in the aggregate constituted
material weaknesses. We believe the following significant deficiencies
identified by Grant Thornton adversely impacted our internal controls during the
period covered by this Quarterly Report:
o Resource constraints faced by the Company's accounting
department.
o Excessive reliance on Excel spreadsheets by the Company in key
areas, including as support for revenue recognition on certain
customer contracts.
o Insufficient controls in monitoring and controlling the
posting of journal entries.
15
o Ineffective controls over access by information technology
personnel to information technology programs and systems.
Our management and our current independent auditors, Lazar Levine &
Felix LLP, have discussed the material weaknesses described above with our Audit
Committee. By implementing the following remedial measures, management intends
to improve its internal control over financial reporting and to avoid future
material misstatements of our financial statements. Prior to the end of the
period covered by this Quarterly Report, we have implemented or are implementing
the following measures:
o The restructuring of the accounting and finance department;
o The engagement of a consultant specializing in accounting and
financial reporting to augment our accounting staff;
o The upgrading of our accounting and financial reporting
software systems;
o Additional monitoring and review of selected journal entries;
and
o The initiation of a comprehensive review of financial controls
and procedures to address the issues identified above and to
bring us into compliance with the requirements of the
Sarbanes-Oxley Act with respect to internal controls and
procedures;
We are monitoring the effectiveness of these measures, and may take
further action as we deem appropriate to strengthen our internal control over
financial reporting. However, we do not expect that our disclosure controls and
procedures or our internal control over financial reporting will prevent all
error and all fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. 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, within the Company have been or
will be detected.
An evaluation was performed, under the supervision of, and with the
participation of, our management, including our Chief Executive Officer and
Principal Accounting Officer, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-(e) to the Securities and Exchange Act of 1934). Based on that
evaluation, due to the material weaknesses described above, the Company's
management, including our Chief Executive Officer and Principal Accounting
Officer, concluded that the Company's disclosure controls and procedures were
effective, as of June 30, 2007, to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934, is recorded, processed, summarized, and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to management, including
our Chief Executive Officer and Principal Accounting Officer, as appropriate, to
allow timely decisions regarding required disclosure. Notwithstanding the
material weaknesses referred to above, management believes that the consolidated
financial statements included in this Quarterly Report on Form 10-Q fairly
present, in all material respects, our financial position, results of operations
and cash flows for the periods presented.
16
Changes in Internal Controls
There has not been any changes in our internal controls over financial
reporting that occurred during our quarter ended June 30, 2007 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II - OTHER INFORMATION
---------------------------
Items 1, 1A, 2, 3, 4, and 5. Not Applicable
Item 6. Exhibits
--------
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) of the Exchange Act.
31.2 Certification of Principal Accounting Officer Pursuant to Rule
13a-14(a) of the Exchange Act.
32.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b) of the Exchange Act
32.2 Certification of Principal Accounting Officer pursuant to Rule
13a-14(b) of the Exchange Act
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COACTIVE MARKETING GROUP, INC.
Dated: August 14, 2007 By: /s/ CHARLES F. TARZIAN
------------------------------------
Charles F. Tarzian, President and
Chief Executive Officer
(Principal Executive Officer)
Dated: August 14, 2007 By: /s/ DENISE FELITTI
-------------------------------------
Denise Felitti,
Vice President - Controller
(Principal Accounting Officer)
18