10-Q 1 coactive_q.htm FORM 10Q

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, 2008

OR

o	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 incorporation or organization)		(I.R.S. Employer 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 o


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


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
	Yes o	No x

As of August 4, 2008, 8,137,790 shares of the Registrant’s Common Stock, par value $.001 per share, were outstanding.

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, 2008 and March 31, 2008 (Audited)	3

		Statements of Operations – Three months ended June 30, 2008 and 2007	4

		Statements of Cash Flows – Three months ended June 30, 2008 and 2007	5

	Notes to Unaudited Condensed Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

Item 4.	Controls and Procedures		17

PART II - OTHER INFORMATION

Items 1, 1A, 2, 3, 4 and 5. Not Applicable

Item 6.	Exhibits		18

SIGNATURES			19

PART I - FINANCIAL INFORMATION
COACTIVE MARKETING GROUP, INC.
Condensed Consolidated Balance Sheets
June 30, 2008 and March 31, 2008


	June 30, 2008		March 31, 2008

	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,771,945	$	5,323,527
Accounts receivable, net of allowance for doubtful accounts of $209,000 at June 30, 2008 and $388,000 at March 31, 2008		4,808,663		6,586,673
Unbilled contracts in progress		5,331,804		6,338,361
Deferred contract costs		5,559,881		3,912,437
Prepaid expenses and other current assets		390,027		327,782

Total current assets		18,862,320		22,488,780

Property and equipment, net		3,382,280		3,429,752
Cash held in escrow		750,000		—
Deferred tax asset		3,370,829		3,704,829
Goodwill and other intangible assets		10,110,645		7,557,203
Other assets		559,088		489,511

Total assets	$	37,035,162	$	37,670,075


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,742,520	$	2,056,913
Deferred revenue and other client credits		7,464,712		11,983,638
Accrued job costs		4,317,514		3,254,729
Accrued compensation		3,126,909		2,774,033
Other accrued liabilities		2,529,990		2,801,352
Deferred taxes payable		401,035		401,035
Notes payable bank – current		675,000		—

Total current liabilities		20,257,680		23,271,700

Deferred rent		2,357,023		2,409,942
Notes payable bank		1,825,000		—

Total liabilities		24,439,703		25,681,642


Commitments and contingencies

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; 8,127,858 issued and 7,795,632 outstanding at June 30, 2008 and 7,624,103 shares issued and outstanding at March 31, 2008		7,796		7,624
Additional paid-in capital		11,308,526		11,178,594
Retained earnings		1,279,137		802,215

Total stockholders’ equity		12,595,459		11,988,433

Total liabilities and stockholders’ equity	$	37,035,162	$	37,670,075

See notes to condensed consolidated financial statements.

COACTIVE MARKETING GROUP, INC.
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 2008 and 2007
(Unaudited)


	Three Months Ended June 30,
	2008		2007


Sales	$	22,331,307	$	20,408,420


Operating expenses:
Reimbursable program costs and expenses		4,708,509		6,172,718
Outside production and other program expenses		8,346,346		6,421,798
Compensation expense		6,909,037		6,665,334
General and administrative expenses		1,566,019		1,529,968

Total operating expenses		21,529,911		20,789,818


Operating income (loss)		801,396		(381,398	)

Interest income, net		9,526		15,162


Income (loss) before provision (benefit) for income taxes		810,922		(366,236	)
Provision (benefit) for income taxes		334,000		(120,000	)


Net income (loss)	$	476,922	$	(246,236	)


Basic earnings (loss) per share	$	.07	$	(.04	)

Diluted earnings (loss) per share	$	.07	$	(.04	)


Weighted average number of common shares outstanding:
Basic		6,993,046		6,923,751
Diluted		7,284,797		6,923,751

See notes to condensed consolidated financial statements.

COACTIVE MARKETING GROUP, INC.
Condensed Consolidated Statements of Cash Flows
Three Months Ended June 30, 2008 and 2007
(Unaudited)


	2008			2007

Cash flows from operating activities:
Net income (loss)	$	476,922		$	(246,236	)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		202,309			191,068
Deferred rent amortization		(52,919	)		8,303
Provision for bad debt expense		90,911			4,500
Compensation expense on non-vested stock and stock options		130,103			82,123
Deferred income taxes		334,000			—
Changes in operating assets and liabilities:					—
Accounts receivable		1,687,099			(6,140,216	)
Unbilled contracts in progress		1,006,557			(634,745	)
Deferred contract costs		(1,647,444	)		261,870
Prepaid expenses and other current assets		(62,245	)		(69,642	)
Other assets		(69,577	)		—
Accounts payable		(314,392	)		(271,875	)
Deferred revenue		(4,518,926	)		(178,248	)
Accrued job costs		1,062,785			373,352
Accrued compensation		352,876			381,726
Accrued liabilities		(271,362	)		(348,687	)


Net cash used in operating activities		(1,593,303	)		(6,586,707	)


Cash flows from investing activities:
Cash paid for acquisition of 3 For All Partners, LLC		(2,598,251	)		—
Cash held in escrow		(750,000	)		—
Purchases of fixed assets		(110,028	)		(171,634	)

Net cash used in investing activities		(3,458,279	)		(171,634	)


Cash flows from financing activities:
Proceeds from credit facility		2,500,000			—
Payments of debt		—			(2,000,000	)

Net cash provided by (used in) financing activities		2,500,000			(2,000,000	)


Net decrease in cash and cash equivalents		(2,551,582	)		(8,758,341	)

Cash and cash equivalents at beginning of period		5,323,527			9,514,081

Cash and cash equivalents at end of period	$	2,771,945		$	755,740


Supplemental disclosures of cash flow information:
Interest paid during the period	$	2,552		$	69,897

Income tax paid during the period	$	16,889		$	28,895

See notes to condensed consolidated financial statements.

CoActive Marketing Group, Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2008


(1)	Basis of Presentation

	The interim financial statements of CoActive Marketing Group, Inc. (the “Company”) for the three months ended June 30, 2008 and 2007 have been prepared without audit. In the opinion of management, such consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s results for the interim periods presented. Certain amounts in prior periods have been reclassified to conform to the current period’s presentation. The results of operations for the three months ended June 30, 2008 are not necessarily indicative of the results for a full year.

	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, 2008.

(2)	Summary of Significant Accounting Policies

	(a)	Principles of Consolidation

		The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

	(b)	Use of Estimates

		The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on certain assumptions, which it believes are reasonable in the circumstances, and does not believe that any change in those assumptions would have a significant effect on the financial position or results of operations of the Company. Actual results could differ from those estimates

	(c)	Fair Value of Financial Instruments

		The carrying value of all financial instruments classified as a current asset or liability is deemed to approximate fair value due to the short maturity of these instruments and interest rates that approximate current market rates.

	(d)	Cash and Cash Equivalents

		Investments with original maturities of three months or less at the time of purchase are considered cash equivalents. Due to the short-term nature of the cash equivalents, the carrying value approximates fair value.

	(e)	Accounts Receivable and Credit Policies

		The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. In addition to reviewing delinquent accounts receivable, management considers many factors in estimating its general allowance, including historical data, experience, customer types, credit worthiness, and economic trends. From time to time, management may adjust its assumptions for anticipated changes in any of those or other factors expected to affect collectability.

	(f)	Unbilled Contracts in Progress/Accrued Job Costs

		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.


	(g)	Deferred Contract Costs

		Deferred contract costs represent direct contract costs and expenses incurred prior to the Company’s related revenue recognition on such contracts. Notwithstanding the Company’s accounting policy with regard to deferred contract costs, labor costs for permanent employees are expensed as incurred.

	(h)	Property and Equipment

		Property and equipment are stated at cost. Depreciation is computed on the straight-line method over the estimated useful lives of the assets, which range from three to ten years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the asset. Funds received from a landlord to reimburse the Company for the cost, or a portion of the cost, of leasehold improvements are recorded as deferred rent and amortized as reductions to rent expense over the lease term.

	(i)	Goodwill and Other Intangible Assets

		Goodwill consists of the cost in excess of the fair value of the acquired net assets of the Company’s subsidiaries. The Company’s other intangible assets consist of an Internet domain name and related intellectual property rights. At June 30, 2008 the Company had approximately $9,911,000 of goodwill and a $200,000 carrying value related to the internet domain name. At March 31, 2008 the Company had approximately $7,357,000 of goodwill and a $200,000 carrying value related to the internet domain name.

		Goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests. 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 and other intangible assets 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.

	(j)	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 as a reduction to rent expense over the term of the lease.

	(k)	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 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 cost of labor performed to date to the estimated total cost of labor for each contract; (v) on certain 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 or deferred 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.


	(l)	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 which are recurring in nature and for which a certain client fee arrangement provides for payment of such costs. These costs are included in compensation and general and administrative expenses on the statements of operations.

		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 provide 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.

	(m)	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 awards for which the requisite service has not been rendered as of the date of adoption. For each award that has a graded vesting schedule, the Company recognizes compensation cost on a straight-line basis over the requisite service period for the entire award. Stock based employee compensation expense for the three months ended June 30, 2008 and 2007 was $130,103 and $82,123 respectively.

	(n)	Income Taxes

		The provision for income taxes includes federal, state and local income taxes that are currently payable. Deferred income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

		On April 1, 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48). There was no impact on the Company’s consolidated financial position, results of operations or cash flows at March 31, 2008 and for the year then ended as a result of implementing FIN 48. At the adoption date of April 1, 2007 and at March 31, 2008, the Company did not have any unrecognized tax benefits. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of June 30, 2008, the Company had no accrued interest or penalties related to income taxes. The Company currently has no federal or state tax examinations in progress

	(o)	Net Income 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 stock. For purpose of computing diluted earnings per share, 291,751 common share equivalents were assumed to be outstanding for the three months ended June 30, 2008. For the three months ended June 30, 2008 and 2007, stock options and warrants to purchase approximately 235,767 and 575,766 shares of common stock were excluded from the calculation of diluted earnings per share as their inclusion would be anti-dilutive. The weighted average number of shares outstanding consist of:


	Three Months Ended		Three Months Ended
	June 30, 2008		June 30, 2007

Basic		6,993,046		6,923,751
Dilutive effect of options and restricted stock		291,751		—

Diluted		7,284,797		6,923,751


	(p)	Recent Accounting Standards Affecting the Company

		In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), Business Combinations, which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Management currently believes that the adoption of this statement will not have a material impact on the Company’s financial statements.

		In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for annual periods beginning after December 15, 2008. Management currently believes that the adoption of this statement will not have a material impact on the Company’s financial statements.

		In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Management currently believes that the adoption of this statement will not have a material impact on the Company’s financial statements.

		In May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. Prior to the issuance of SFAS 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.

		SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. Management currently believes that the adoption of this statement will not have a material impact on the Company’s financial statements.

	(q)	Reclassifications

		Certain amounts as previously reported have been reclassified to conform to current year presentation.


(3)	Acquisition of 3 For All Partners, LLC

	On June 30, 2008, the Company, through its wholly-owned subsidiary U.S. Concepts LLC, acquired substantially all of the assets of 3 For All Partners, LLC, d/b/a mktgpartners (“mktgpartners”) pursuant to an Asset Purchase Agreement between the Company, U.S. Concepts LLC, mktgpartners and mktgpartners’ members. Founded in 2003, mktgpartners focuses on entertainment and sports marketing, experiential marketing and promotional media, and is headquartered in New York, with additional offices in Chicago, San Francisco and Toronto.

	The consideration for the acquisition consisted of $3.25 million in cash and 332,226 common shares (the “Share Consideration”) of the Company’s common stock, valued at approximately $1,000,000. In addition the Company incurred $98,251 in direct acquisition costs.

	In connection with the acquisition, the Company hired all of mktgpartners’ employees and issued 166,113 shares of restricted common stock of the Company, valued at approximately $500,000, to certain of those employees. The restricted shares vest annually in equal installments over five years.

	Pursuant to the Asset Purchase Agreement, $750,000 of the cash consideration and the entire Share Consideration were deposited into an escrow account to be held for a period of 18 months to satisfy indemnification claims, if any, that may be made by the Company under the Asset Purchase Agreement. In addition, as more fully set forth in the Asset Purchase Agreement, all or a portion of the escrowed consideration will be subject to release to the Company upon the occurrence of certain specified events under the Asset Purchase Agreement, including the termination of employment (other than due to death or by the Company without cause), of certain key employees of mktgpartners during the first year following the closing of the acquisition, and the failure to achieve “Gross Margin” targets during the 12 month period following the closing.

	The following table summarizes the preliminary allocation of the $2,598,251 purchase price utilizing the estimated fair values of the assets acquired at June 30, 2008. The Company is currently in the process of obtaining third-party valuations of certain intangible assets, therefore the allocation of the purchase price is subject to refinement.


Property and equipment	$	44,809
Goodwill and other intangible assets		2,553,442

Total asset acquired	$	2,598,251


	The $2,553,442 of Goodwill was assigned to US Concepts, LLC reporting unit all of which is expected to be deductible for income tax reporting purposes.

	Pro Forma Results of Operations (unaudited)

	The following pro forma results of operations for the three months ended June 30, 2008 and 2007 have been prepared as though the acquisition of 3 For All Partners, LLC, d/b/a mktgpartners had occurred as of the earliest period presented. This pro forma financial information is not indicative of the results of operations that the Company would have attained had the acquisition of 3 For All Partners, LLC occurred at the beginning of the periods presented, nor is the pro forma financial information indicative of the results of operations that may occur in the future:



	Three Months Ended June 30, 2008		Three Months Ended June 30, 2007

Pro forma sales	$	25,548,951	$	23,581,243
Pro forma net income (loss)	$	364,940	$	(241,805	)
Pro forma basic earnings (loss) per share	$	.05	$	(.03	)
Pro forma diluted earnings (loss) per share	$	.05	$	(.03	)


(4)	Bank Credit Facility

	On June 26, 2008, the Company entered into a Credit Agreement (the “Credit Agreement”) with Sovereign Bank (the “Lender”).

	Pursuant to the Credit Agreement, the Lender provided the Company with (i) a $2.5 million term loan (the “Term Loan”), which was funded in full on June 30, 2008 in connection with the acquisition of 3 For All Partners LLC, and (ii) a $2.5 million revolving credit facility (the “Revolving Credit Facility”). Borrowings under the Revolving Credit Facility will be used for working capital purposes.

	The Term Loan and Revolving Credit Facility have been guaranteed by the Company’s subsidiaries and are secured by substantially all of their assets pursuant to a Security Agreement entered into by the Company and its subsidiaries in favor of the Lender.


Pursuant to the Credit Agreement, among other things:

	•	All outstanding loans under the Credit Agreement will become due on June 30, 2011 (the “Maturity Date”).

	•	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.

	•	Interest accrues on outstanding loans under the Credit Agreement at a per annum rate equal to, at the Company’s 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 the Company, plus a margin of 2.25%.

	•	The Company is required to comply with a number of affirmative, negative and financial covenants. Among other things, these covenants restrict the Company’s ability to pay dividends, limit annual capital expenditures, provide that the Company’s “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 the Company 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. As of June 30, 2008, the Company was in compliance with these covenants.

	•	If the Company does not comply with the various financial and other covenants and requirements of the Credit Agreement, the Lender may, subject to various customary cure rights, require the immediate payment of all amounts outstanding under the Credit Agreement.


(5)	Accounting for Stock-Based Compensation

	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, 2008, there were 20,625 options issued under the 1992 Plan, expiring from April 2009 through April 2011 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, or 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 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 Board of Directors. At June 30, 2008, there were 297,500 options issued under the 2002 Plan, expiring from April 2011 through September 2017 that remain 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, 2008, the Company had 366,386 shares of common stock available for grant of awards under the 2002 Plan.

	Stock option compensation expense in the three month periods ended June 30, 2008 and 2007 represent the estimated fair value of options and warrants outstanding which are being amortized on a straight-line basis over the requisite vesting period of the entire award.


	No stock options were granted during the three month period ending June 30, 2008. The weighted average estimated fair value of stock options granted in the three month period ended June 30, 2007 was $2.26 per share. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is determined using the simplified method as permitted by SAB 107.

	The assumptions made in calculating the fair values of options are as follows:


	Three Months Ended June 30, 2008	Three Months Ended June 30, 2007

Expected volatility	n/a	63.5%
Expected dividend yield	n/a	0%
Risk-free interest rate	n/a	4.51%
Expected term (in years)	n/a	5.25


	A summary of option activity under all plans as of June 30, 2008, and changes during the period then ended is presented below:


	Weighted average exercise price		Number of options			Weighted average remaining contractual term		Aggregate intrinsic value

Balance at March 31, 2008	$	2.55		466,250			4.12	$	153,863
Granted		—		—
Exercised		—		—
Canceled	$	3.33		(148,125	)

Balance at June 30, 2008 (vested and expected to vest)	$	2.19		318,125			5.70	$	264,044

Exercisable at June 30, 2008	$	2.19		318,125			5.70	$	264,044


	At June 30, 2008 there were no unvested stock option awards. Total compensation cost for the three months ended June 30, 2008, amounted to $2,195 for all outstanding option awards.

	Warrants

	At each of June 30, 2008 and March 31, 2008, there were outstanding warrants to purchase an aggregate of 40,766 shares of common stock at an exercise price per share of $3.68 held by one individual. These warrants expire on April 30, 2010.

	Non-Vested Stock

	As of June 30, 2008, pursuant to the authorization of the Company’s Board of Directors and certain Restricted Stock Agreements, the Company had awarded 566,114 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 $1,432,364 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 tranches 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.


	A summary of all non-vested stock activity as of June 30, 2008, and changes during the three month period then ended is presented below:


	Weighted average grant date fair value		Number of shares			Weighted average remaining contractual term		Aggregate intrinsic value


Unvested at March 31, 2008	$	2.22		653,172			3.82	$	431,094

Granted	$	2.86		176,529
Vested	$	2.11		(36,416	)
Forfeited	$	2.50		(5,000	)


Unvested at June 30, 2008	$	2.40		788,285			3.90	$	491,871


	Total unrecognized compensation cost related to unvested stock awards at June 30, 2008 amounts to approximately $1,560,520 and is expected to be recognized over a weighted average period of 3.90 years. Total compensation cost for the three months ended June 30, 2008, amounted to approximately $99,575 for these stock awards.

(6)	Commitments and Contingencies

	The Company had sales to one customer in excess of 10% of total sales for the three months ended June 30, 2008. Sales to this customer approximated $16.2 million for the period. Accounts receivable as of June 30, 2008 from this customer approximated $4.5 million.

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, 2008 under “Risk Factors,” including but not limited to “Recent Losses,” “Customers,” “Dependence on Key Personnel,” “Unpredictable Revenue Patterns,” “Competition,” and “Risks Associated with Acquisitions,” 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 company. We develop, manage and execute sales promotion programs at both national and local levels, utilizing both online and offline media channels. Our programs help our clients effectively promote their goods and services directly to retailers and consumers and are intended to assist them in achieving 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, and are designed to meet the needs of our clients by focusing on communities of consumers who want to engage brands as part of their lifestyles.

On June 30, 2008, the Company, through U.S. Concepts LLC, acquired substantially all of the assets of 3 For All Partners, LLC d/b/a mktgpartners (“mktgpartners”), a marketing services company. The consideration for the acquisition consisted of $3.25 million in cash and 332,226 common shares (the “Share Consideration”) of the Company’s common stock, valued at approximately $1,000,000 pursuant to an Asset Purchase Agreement between the Company, U.S. Concepts LLC, mktgpartners and mktgpartners’ members. The foregoing summary does not purport to be complete and is subject to and qualified in its entirety by reference to the actual text of the Asset Purchase Agreement, which has been filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K. filed July 2, 2008

Our services include experiential and face to face 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; San Francisco, California and Toronto, Ontario..

CoActive was formed under the laws of the State of Delaware in March 1992 and is the successor to a sales promotion business originally founded in 1972. CoActive began to engage in the promotion business following a merger consummated on September 29, 1995 that resulted in Inmark becoming its wholly-owned subsidiary.

On July 31, 2008, the Company began conducting business under the name ‘mktg.’ The Company will seek the approval of its stockholders to formally change its legal name to ‘mktg inc.’ at its Annual Meeting of Stockholders in September 2008.

Our corporate headquarters are located at 75 Ninth Avenue, New York, New York 10011, and our telephone number is 212-660-3800. Our Web site is www.mktg.com. Copies of all reports we file with the Securities and Exchange Commission are available on our Web site.

Results of Operations

The following table presents operating data of the Company expressed as a percentage of operating revenue, which is defined as sales, net of reimbursable program costs and expenses and outside production and other program expenses.


	Three Months Ended June 30,

	2008			2007


Statement of Operations Data:
Operating revenue		100.0	%		100.0	%
Compensation expense		74.5	%		85.3	%
General and administrative expense		16.9	%		19.6	%
Operating income (loss)		8.6	%		(4.9	%)
Interest income, net		0.1	%		0.2	%
Income (loss) before provision for income taxes		8.7	%		(4.7	%)
Provision (benefit) for income taxes		3.6	%		(1.5	%)
Net income (loss)		5.1	%		(3.2	%)

Sales. Sales consist of fees for services, commissions, reimbursable program costs and expenses and other production and program 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, and outside production and other program expenses which are included in revenues will vary from period to period, based on the type and scope of the service being provided. The general trend for the three months ended June 30, 2008 has been toward lower reimbursable program costs and other expenses as a percentage of total revenues versus the comparable period in the prior year. This trend is due in large part to our previously reported efforts to eliminate single-project work in favor of more profitable recurring work.


	Three Months Ended June 30,

Sales	2008		%		2007		%

Sales	$	22,331,000		100	$	20,408,000		100
Reimbursable program
costs and outside
production expenses		13,055,000		58		12,594,000		62

Operating Revenue	$	9,276,000		42	$	7,814,000		38

Sales for the three months ended June 30, 2008 increased 9% to $22,331,000, compared to $20,408,000 for the quarter ended June 30, 2007. This $1,923,000 increase in sales and proportionately higher increase in Operating Revenue reflects growth in wine and spirits events and a shift in certain client contracts, under which the Company’s compensation is based primarily on labor, with lower associated reimbursable program and production costs.

Reimbursable Program Costs and Expenses. Reimbursable program costs and expenses for the three months ended June 30, 2008 and 2007 were $4,709,000 and $6,173,000, respectively. The changes realized in any period with regard to reimbursable program costs and expenses reflects the mix of such costs in experiential and sales promotion programs that have been executed during that period, and for the three months ended June 30, 2008, also reflect the shift in client contracts referred to above.

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, 2008 were $8,346,000 compared to $6,422,000 for the three months ended June 30, 2007. 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 services being provided.

Operating Revenue. We believe operating revenue is a key performance indicator. Operating Revenue is defined as our sales less outside reimbursable program costs and expenses and outside 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, 2008, Operating Revenue increased by 19% to $9,276,000, compared to $7,814,000 for the three months ended June 30, 2007. The increase is a result of the Company’s shift toward client contracts under which the Company’s compensation is based primarily on labor, with lower associated reimbursable program and production costs. In addition, Operating Revenue as a percentage of total sales increased to 42% for the three months ended June 30, 2008 from 38% for the three months ended June 30, 2007.

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 $6,665,000 for the three months ended June 30, 2007, an increase of $244,000 The increase in compensation expense for the three months ended June 30, 2008 reflect 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 $1,566,000 for the three months ended June 30, 2008, compared to $1,530,000 for the three months ended June 30, 2007, an increase of $36,000.

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 rate of approximately 2.85% and 3.25% for the three months ended June 30, 2008 and 2007, respectively.

Income (loss) before Provision for Income Taxes. The Company’s income (loss) before the provision for income taxes for the three months ended June 30, 2008 and 2007 amounted to $811,000 and ($366,000), respectively.

Provision (benefit) for Income Taxes. The provision for federal, state and local income taxes for the three months ended June 30, 2008 and 2007 were based upon the Company’s estimated effective tax rate for the respective fiscal years.

Net Income. As a result of the items discussed above, net income for the three months ended June 30, 2008 was $477,000 compared to net loss of $246,000 for the three months ended June 30, 2007. Fully diluted earnings per share amounted to $.07 for the three months ended June 30, 2008, compared to a loss of ($.04) per share in the three months ended June 30, 2007.

Liquidity and Capital Resources

On June 26, 2008 the Company entered into a Credit Agreement with Sovereign Bank under which the Company obtained 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.

Pursuant to the Credit Agreement, among other things:


	•	All outstanding loans under the Credit Agreement will become due on June 30, 2011 (the “Maturity Date”).

	•	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.

	•	Interest accrues on outstanding loans under the Credit Agreement at a per annum rate equal to, at the Company’s 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 the Company, plus a margin of 2.25%.

	•	The Company is required to comply with a number of affirmative, negative and financial covenants. Among other things, these covenants restrict the Company’s ability to pay dividends, limit annual capital expenditures, provide that the Company’s “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 the Company 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. As of June 30, 2008, the Company was in compliance with these covenants.

At June 30, 2008, we had cash and cash equivalents of $2,772,000, a working capital deficit of $1,395,000, borrowing availability of $2,500,000 under the revolving credit facility, and stockholders’ equity of $12,595,000. In comparison, at March 31, 2008, we had cash and cash equivalents of $5,323,000, a working capital deficit of $783,000, and stockholders’ equity of $11,988,000, 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. Management believe that cash on hand, together with borrowings available under the Credit Agreement and cash anticipated to be generated from operations, will provide the Company with adequate financing to fund operations through the end of Fiscal 2009.

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 consisted of a decrease in deferred revenue, partially offset by net income and collections of accounts receivable. For the prior year, cash used in operating activities was primarily due to 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 due to the purchase of 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.

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 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

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure under Rules 13a-15(e) and 15d-15(e). Disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, rather than absolute, assurance of achieving the desired control objectives.

As of June 30, 2008, we carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

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.

PART II - OTHER INFORMATION

Items 1, 1A, 2, 3, 4, 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 Chief Financial 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 Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act

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 13, 2008	By:	/s/ Charles F. Tarzian

		Charles F. Tarzian, President and Chief Executive Officer
		(Principal Executive Officer)

Dated: August 13, 2008	By:	/s/ Fred Kaseff

		Fred Kaseff, Chief Financial Officer
		(Principal Financial Officer)