Operating
Revenue.
For the three months ended June 30, 2008,
Operating Revenue increased by 9% to $7,766,000, compared to $7,094,000 for the
three months ended June 30, 2007. This is primarily a result of an increase in
Diageo event revenue. A reconciliation of Sales to Operating Revenues for the
three months ended June 30, 2008 and 2007 is set forth below.
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Three
Months Ended
June 30, (restated)
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Sales
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2008
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%
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2007
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%
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Sales – U.S. GAAP
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$
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22,238,000
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100
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$
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21,442,000
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100
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Reimbursable program costs and outside
production expenses
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14,472,000
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65
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14,348,000
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67
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Operating Revenue – Non-GAAP
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$
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7,766,000
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35
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$
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7,094,000
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33
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Compensation
Expense.
Compensation expense, exclusive of reimbursable
program costs and expenses and other program expenses, 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
three months ended June 30, 2008, compensation expense was $6,909,000, compared
to $5,801,000 for the three months ended June 30, 2007, an increase of
$1,108,000. The increase in compensation expense for the three months ended
June 30, 2008 reflects additional costs associated with recruiting senior
talent to support our technology, marketing and finance groups.
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 $1,702,000 for the
three months ended June 30, 2008, compared to $1,579,000 for the three months
ended June 30, 2007, an increase of $123,000.
Interest
Income, Net.
Net interest income for the three months
ended June 30, 2008 was $10,000 compared to $15,000 for the three months ended
in June 30, 2007. Interest income consists primarily of interest on our money
market and CD accounts that paid interest at average rates of approximately
2.85% and 3.25% for the three months ended June 30, 2008 and 2007,
respectively.
Loss
before Provision for Income Taxes.
The Company’s loss
before the benefit for income taxes for the three months ended June 30, 2008
and 2007 amounted to $835,000 and $271,000, respectively.
Provision
for Income Taxes.
We did not record a benefit for
federal, state and local income taxes for the three months ended June 30, 2008
because any such benefit would be fully offset by an increase in the valuation
allowance against the Company’s net deferred tax asset established as a result
of our historical operating losses. The provision for income taxes for the
three months ended June 30, 2007 was comprised of minimum state income taxes
and the impact of a change in estimate of the Company’s net operating loss
carryforward.
Net
Loss.
As a result of the items discussed above, net loss
for the three months ended June 30, 2008 was $835,000 compared to net loss of
$325,000 for the three months ended June 30, 2007. Fully diluted loss per share
amounted to $.12 for the three months ended June 30, 2008, compared to a loss
of $.05 per share in the three months ended June 30, 2007.
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 accounts payable and 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 bank financing made available to us, advance payments made to us on a
regular basis by our largest customers, 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. For the three months ended June 30, 2008 the working capital
deficit increased by $2,259,000 to $6,118,000.
On
June 26, 2008 the we entered into a Credit Agreement with Sovereign Bank under
which we were provided with a three-year revolving credit facility in the
principal amount of $2,500,000 for working capital purposes, and a three-year
term loan in the amount of $2,500,000 that was used to fund a portion of the
purchase price for the assets of 3 For All Partners, LLC.
17
Pursuant
to the Credit Agreement, among other things:
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·
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All outstanding loans under the Credit Agreement
will become due on June 30, 2011 (the “Maturity Date”).
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·
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The Term Loan will be repaid in 12 consecutive
quarterly installments commencing on September 30, 2008. The first 11
installments will be in the amount of $168,750, with a final payment in the
amount of $643,750 being due on the Maturity Date.
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·
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Interest accrues on outstanding loans under the Credit
Agreement at a per annum rate equal to, at our option, the prime rate (5.0%
at June 30, 2008) from time to time in effect (but in no event less than the
Federal Funds Rate plus one-half percent), or a LIBOR rate selected by us,
plus a margin of 2.25%.
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·
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We are required to comply with a number of
affirmative, negative and financial covenants. Among other things, these
covenants restrict our ability to pay dividends, limit annual capital
expenditures, provide that our “Consolidated Debt Service Coverage Ratio”
cannot be less than 1.5 to 1.0 as of the end of any fiscal quarter, that its
“Consolidated Leverage Ratio” can not exceed 2:25 to 1:00 at the end of any
fiscal quarter, and that we can not incur a “Consolidated Pre-Tax Net Loss”
in excess of $500,000 in the aggregate in any period of two consecutive
fiscal quarters.
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As
of June 30, 2008, we were not in compliance with these financial covenants. In
addition, as a result of the restatement of our financial statements, we
breached our financial reporting obligations under the Credit Agreement. On
April 28, 2009, we entered into a letter agreement with Sovereign Bank pursuant
to which Sovereign Bank agreed to enter into an amendment and waiver to the
Credit Agreement under which (i) Sovereign Bank waives our past non-compliance
with the financial covenants and reporting obligations, (ii) indefinitely
suspends our revolving credit facility, (iii) requires us to maintain deposits
with Sovereign Bank at all times in an amount not less then the outstanding
balance of the term loan as cash-collateral therefor, and (iv) suspends our
obligation to comply with the financial covenants in the future during the
period in which the revolving credit facility is suspended and the term loan is
fully cash-collateralized.
At
June 30, 2008, we had cash and cash equivalents of $2,772,000, a working
capital deficit of $6,118,000, borrowing availability of $2,500,000 under the
revolving credit facility, and stockholders’ equity of $4,903,000. In
comparison, at March 31, 2008, we had cash and cash equivalents of $5,324,000,
a working capital deficit of $3,859,000, and stockholders’ equity of
$5,608,000, with no line of credit. The decrease of $2,552,000 in cash and cash
equivalents from March 31, 2008 to June 30, 2008 was primarily due to the
acquisition of fixed assets and cash used in operating activities. Although we
currently do not have a revolving credit facility available to us and are
required to fully cash collateralize amounts outstanding under our term loan,
management believes that cash on hand, together with cash anticipated to be
generated from operations, should provide us with adequate financing to fund
operations through the end of Fiscal 2010, although there can no assurance in
that regard. We may be unable to secure additional financing in the future, if
required, on favorable terms or at all. 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.
Operating
Activities.
Net cash used in operating activities
was $1,593,000 and $6,587,000 for the three months ended June 30, 2008 and
2007, respectively. For the quarter ended June 30, 2008, cash used in operating
activities primarily reflected our net loss in that period and a decrease in
deferred revenue, partially offset by an increase in accrued job costs and
collections of accounts receivable. For the prior year, cash used in operating
activities primarily resulted from our net loss, and an increase in accounts
receivable, during the three months ended June 30, 2007.
Investing
Activities.
For the three months ended June 30,
2008, net cash used by investing activities amounted to $3,458,000, primarily
relating to the cash portion of the purchase price for the assets of 3 For All
Partners, LLC. For the three months ended June 30, 2007, net cash used by
investing activities was $172,000, primarily due to the purchase of computer
equipment and software.
Financing
Activities.
For the three months ended June 30,
2008, net cash provided by financing activities amounted to $2,500,000 of bank
borrowings utilized to fund a portion of the purchase price for the acquisition
of the assets of 3 For All Partners, LLC. For the three months ended June 30,
2007, net cash used in financing activities amounted to $2,000,000 resulting
from repayments of bank borrowings.
18
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 2008 Annual Report on Form 10-K/A 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, 2008, there were no material changes to these
policies.
Item 4.
Controls and Procedures
Disclosure Controls and Procedures
Our
management, including our Principal Executive Officer and Principal Financial
Officer, evaluated the effectiveness of our “disclosure controls and
procedures” as defined in Exchange Act Rule 13a-15(e) as of June 30, in
connection with our filing of this Quarterly Report Form 10-Q/A. Based on that
evaluation, and in light of the material weakness described in Amendment No. 2
to our Annual Report on Form 10-K/A for the year ended March 31, 2008 (the “Amended
10-K”), our Principal Executive Officer and Principal Financial Officer
concluded that as of June 30, 2008, our disclosure controls and procedures were
not effective to ensure that information we are required to disclose in reports
that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in rules and forms of
the SEC and is accumulated and communicated to our management as appropriate to
allow timely decisions regarding required disclosure. For a description of the
actions we are taking to remediate our internal controls, please see
“Management’s Report on Internal Control Over Financial Reporting” in Item
9A(T) of the Amended 10-K.
Changes
in Internal Controls
There
has not been any change in our internal control over financial reporting that
occurred during our quarter ended June 30, 2008 that has materially affected,
or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
19
PART II
- OTHER INFORMATION
Items 1, 1A, 2, 3, 4, 5. Not
Applicable
Item 6.
Exhibits
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31.1
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Certification of principal executive officer
pursuant to Rule 13a-14(a) of the Exchange Act.
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31.2
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Certification of principal financial officer
pursuant to Rule 13a-14(a) of the Exchange Act.
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32.1
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Certification of principal executive officer pursuant to Rule
13a-14(b) of the Exchange Act
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32.2
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Certification of principal financial officer
pursuant to Rule 13a-14(b) of the Exchange Act
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20
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.
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‘mktg, inc.’
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Dated: May 8, 2009
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By:
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/s/ Charles W. Horsey
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Charles W. Horsey, President
(principal executive officer)
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Dated: May 8, 2009
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By:
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/s/ James R. Haughton
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James R. Haughton, Senior Vice President-Controller
(principal accounting officer)
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21
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