10-K 1 mktg_10k.htm FORM 10-K
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

For the fiscal year ended March 31, 2013

 

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

 

  ‘mktg, 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 No.)
   
75 Ninth Avenue, New York, New York 10011
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (212) 366-3400

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o      No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o      No x

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x      No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

Yes o      No x

 

As of September 30, 2012, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $8,826,343.

 

As of June 14, 2013, 8,641,448 shares of Common Stock, $.001 par value, were outstanding.

 

Documents Incorporated by Reference: None

 
 

TABLE OF CONTENTS

      Page
PART I      
       
Item 1. Business   3  
         
Item 1A. Risk Factors   4  
         
Item 1B. Unresolved Staff Comments   5  
         
Item 2. Properties   5  
         
Item 3. Legal Proceedings   5  
         
Item 4. Mine Safety Disclosures   5  
         
PART II        
         
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   6  
         
Item 6. Selected Financial Data   7  
         
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations   7  
         
Item 7A. Quantitative and Qualitative Disclosures About Market Risk   13  
         
Item 8. Financial Statements and Supplementary Data   14  
         
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure   35  
         
Item 9A. Controls and Procedures   35  
         
Item 9B. Other Information   35  
         
PART III        
         
Item 10. Directors, Executive Officers and Corporate Governance   36  
         
Item 11. Executive Compensation   38  
         
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   42  
         
Item 13. Certain Relationships and Related Transactions, and Director Independence   44  
         
Item 14. Principal Accountant Fees and Services   45  
         
PART IV        
         
Item 15. Exhibits, Financial Statement Schedules   45  
         
SIGNATURES     48  
2
 

PART I

This report contains forward-looking statements which we believe to be 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 management as well as assumptions made by and information currently available to our 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 our current views 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 our expectations include, but are not limited to, those described below in “Risk Factors.” Other factors may be described from time to time in our public filings with the Securities and Exchange Commission, news releases and other communications. The forward-looking statements contained in this report speak only as of the date hereof. We do 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.

 

Item 1.Business.

Corporate Overview

‘mktg, inc.’, through its wholly-owned subsidiaries: Inmark Services LLC, Optimum Group LLC, U.S. Concepts LLC, Digital Intelligence Group LLC, mktg retail LLC and Mktg, inc. UK Ltd., is a full service marketing agency. 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.

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; Los Angeles, California; San Francisco, California; and London, England.

‘mktg, inc.’ 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. ‘mktg, inc.’ began to engage in the promotion business following a merger consummated on September 29, 1995 that resulted in Inmark becoming its wholly-owned subsidiary.

Our corporate headquarters are located at 75 Ninth Avenue, New York, New York 10011, and our telephone number is 212-366-3400. 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.

Premier Client Roster

Our principal clients are large manufacturers of packaged goods and other consumer products. Our client partners are actively engaged in promoting their products to both the consumer as well as trade partners, (i.e., retailers, distributors, etc.), and include, among others, Diageo North America, Inc. and its affiliates (“Diageo”), Nike, Inc., Nintendo of America, Inc., Google, Inc., Procter & Gamble, Beats Electronics LLC and Bayer HealthCare AG.

For our fiscal years ended March 31, 2013 and 2012, Diageo accounted for approximately 62% of our revenues (inclusive of reimbursable program costs and expenses) and 55% and 61%, respectively, of our accounts receivable.

To the extent that we continue to have a heavily weighted sales concentration with one or more clients, the loss of any such client would have a material adverse effect on our earnings. Unlike traditional general advertising firms which are engaged as agents of record on behalf of their clients, as a promotional company, we are typically engaged on a product-by-product, or project-by-project basis.

Competition

The market for promotional services is highly competitive, with hundreds of companies claiming to provide various services in the promotions industry. In general, our competition is derived from two basic groups: other full service promotion agencies, and companies which specialize in providing one specific aspect of a general promotional program. Some of our competitors are affiliated with larger general advertising agencies, and have greater financial and marketing resources available than we do. These competitors include Wunderman and OgilvyAction, which are subsidiaries of WPP Group; Arnold Brand Promotions, which is a subsidiary of Havas; Momentum Worldwide and Jack Morton Worldwide, which are subsidiaries of IPG; GMR Marketing and Pierce, which are subsidiaries of Omnicom Group; and Hyper Marketing, which is a subsidiary of Alliance Data Systems. Niche independent competitors include Marketing Werks and Amp Agency.

3
 

Employees

We currently have approximately 300 full-time and 6,500 part-time employees. Our part-time employees are primarily involved in marketing support, program management and in-store sampling and demonstration, and are employed on an as needed basis. None of our employees are represented by a labor organization and we consider our relationship with our employees to be good.

Item 1A.Risk Factors.

Concentration of Customers. A substantial portion of our sales has been dependent on one client or a limited concentration of clients. In particular, Diageo accounted for approximately 62% of our revenues for each of our fiscal years ended March 31, 2013 and 2012, and accounted for 55% of our accounts receivable at March 31, 2013. In addition, our second largest customer accounted for approximately 15% and 11% of our revenues for each of our fiscal years ended March 31, 2013 and 2012, respectively, and accounted for 17% of our accounts receivable at March 31, 2013. To the extent such dependency continues, significant fluctuations in revenues, results of operations and liquidity could arise if Diageo or any other significant client reduces its budget allocated to the services we provide.

Dependence on Key Personnel. Our business is managed by a limited number of key management and operating personnel. The loss of any one of those persons could have a material adverse impact on our business. We believe that our future success will depend in large part on our continued ability to attract and retain highly skilled and qualified personnel.

Series D Preferred Stock Liquidation Preference; Redemption. In the event of our dissolution, liquidation or change of control, the holders of our Series D Convertible Participating Preferred Stock (“Series D Preferred Stock”) will receive, in priority over the holders of Common Stock, a liquidation preference equal to the Stated Value of such shares plus the greater of (a) a 14% accreting liquidation preference, compounding annually, or (b) 3% of the volume weighted average price of the Company’s Common Stock outstanding on a fully-diluted basis (excluding the shares issued upon conversion of the Preferred Shares) for the 20 days preceding the event. A consolidation or merger, a sale of all or substantially all of our assets, and a sale of 50% or more of our Common Stock would be treated as a change of control for this purpose. Therefore, it is possible that holders of Common Stock will not obtain any proceeds upon any such event. After December 15, 2015, holders of the Series D Preferred Stock can require us to redeem the Series D Preferred Stock at its stated value plus any accretion thereon in the event such shares have not been converted to Common Stock at the same price per share payable upon a liquidation event.

Control by Union Capital Corporation and holders of Series D Preferred Stock. Union Capital currently beneficially owns approximately 35% of our outstanding shares of Common Stock (assuming conversion and exercise of all securities issued in the December 2009 financing), including approximately 85% of our Series D Preferred Stock. The holders of our Series D Preferred Stock have the right to appoint two members of our Board of Directors. In addition, the vote of a majority of the shares of the Series D Preferred Stock is required to approve, among other things, (i) any issuance by us of capital stock which is senior to or pari passu with the Series D Preferred Stock; (ii) any increase in the number of authorized shares of the Series D Preferred Stock; (iii) any dividends or payments on equity securities; (iv) any amendment to our Certificate of Incorporation, By-laws or other governing documents that would result in an adverse change to the rights, preferences, or privileges of the Series D Preferred Stock; (v) any material deviation from the annual budget approved by our Board of Directors; and (vi) entering into any material contract not contemplated by the annual budget approved by our Board of Directors. Accordingly, Union Capital has substantial control over our business and can decide the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and can also prevent or cause a change in control. The interests of Union Capital may differ from the interests of our other stockholders. Third parties may be discouraged from making a tender offer or bid to acquire us because of this concentration of ownership.

Anti-Dilution Provisions Of The Series D Preferred Stock Could Result In Dilution Of Stockholders. The conversion price of the Series D Preferred Stock is subject to weighted-average anti-dilution, so that upon future issuances of our Common Stock or equivalents thereof, subject to specified exceptions, at a price below the conversion price of the Series D Preferred Stock, the conversion price will be reduced, further diluting holders of our Common Stock.

Unpredictable Revenue Patterns. A significant portion of our revenues is derived from promotional programs which originate on a project-by-project basis. Since these projects are susceptible to change, delay or cancellation as a result of specific client financial or other marketing and manufacturing related circumstantial issues, as well as changes in the overall economy, our revenue is unpredictable and may vary significantly from period to period.

Competition. The market for promotional services is highly competitive, with hundreds of companies claiming to provide various services in the promotion industry. Some of these companies have greater financial and marketing resources than we do. We compete on the basis of the quality and the degree of comprehensive services which we provide to our clients. There can be no assurance that we will be able to continue to compete successfully with existing or future industry competitors.

4
 

Economic Conditions. The prolonged weakness in the general economy has had and is likely to continue to have a negative impact on our business. We provide services to companies and industries that have experienced and may continue to experience financial difficulty. If our customers experience financial difficulty, we could have difficulty recovering amounts owed to us from these customers and demand for our services could decline.

Recent Losses. We sustained net losses of approximately ($143,000), ($843,000), ($2,788,000) and ($4,893,000) for our fiscal years ended March 31, 2011, 2010, 2009 and 2008, respectively. Although we generated net income of $1,215,000 and $5,399,000 for our fiscal years ended March 31, 2013 and 2012, respectively, and expect to continue to be profitable in the future, there can be no assurance in that regard.

Lender’s Security Interest. At March 31, 2013, we had no loans outstanding under a $4,000,000 revolving credit facility. As security for our obligations under the credit facility, we granted the lender a first priority security interest in all of our assets. Under the credit facility, we are subject to customary affirmative, negative and financial covenants. The financial covenants require us to maintain a debt service coverage ratio (as defined in the loan agreement) of not less than 1.25 to 1.0 as of the end of any fiscal year, and that we have immediately available cash at all times, including borrowings under the credit facility, of at least $3 million. We were in compliance with these covenants at March 31, 2013. In the event of a default under the credit facility, our lender may demand the repayment of all outstanding principal and interest under the credit facility (if any), and may exercise all of its rights and remedies provided for under the loan agreements, and the rights and remedies of a secured party under applicable law. Although we expect to be able to comply with these covenants, there can be no assurance that we will do so.

Risks Associated with Acquisitions. Part of our growth strategy is evaluating and, from time to time, consummating acquisitions and strategic transactions. These transactions involve a number of risks and present financial, managerial and operational challenges, including: diversion of management’s attention from running our existing business; increased expenses, including legal, administrative and compensation expenses resulting from newly hired employees; increased costs to integrate personnel, customer base and business practices of the acquired company with our own; adverse effects on our reported operating results due to possible write-down of goodwill associated with acquisitions; and dilution to stockholders to the extent we issue securities in the transaction.

Item 1B.Unresolved Staff Comments.

Not applicable.

Item 2.Properties.

We have the following principal leased facilities:

Facility  Location  Square
Feet
   Fiscal
2013 Rent
 
Principal offices  New York, New York   33,400   $1,211,000 
              
Other sales offices and warehouses  Cincinnati, Ohio   8,300      
   Chicago, Illinois   13,600      
   San Francisco, California   6,000      
   Los Angeles, California   3,200      
   London, England   500      
   Total   31,600   $610,000 

In addition to the above, from time to time we enter into short-term warehouse leases for the storage of promotional materials that we use in connection with our programs.

The sublease for our principal offices in New York terminates in June 2015. For a summary of our minimum rental commitments under all non-cancelable operating leases with a maturity date in excess of one year as of March 31, 2013, see Note 12 to the Notes to the Consolidated Financial Statements.

We consider our facilities sufficient to maintain our current operations.

Item 3.Legal Proceedings.

 

We are not a party to any material pending legal proceedings.

 

Item 4.Mine Safety Disclosures.

 

Not Applicable.

5
 

PART II

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our Common Stock is traded on the over-the-counter-market under the symbol CMKG and is quoted on the OTC Bulletin Board. Prior to June 25, 2010 our common stock traded on the Nasdaq Capital Market. The following table sets forth for the periods indicated the high and low trade prices for our Common Stock as reported by the OTC Bulletin Board. The quotations listed below reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.

         
   Common Stock 
   High   Low 
Fiscal Year 2013          
Fourth Quarter  $1.41   $0.96 
Third Quarter   1.18    0.93 
Second Quarter   1.24    0.97 
First Quarter   1.10    0.67 
           
Fiscal Year 2012          
Fourth Quarter  $1.10   $0.60 
Third Quarter   0.85    0.56 
Second Quarter   1.25    0.72 
First Quarter   0.87    0.64 

On June 14, 2013 there were 8,641,448 shares of our Common Stock outstanding, approximately 70 shareholders of record and approximately 400 beneficial owners of shares held by a number of financial institutions.

No cash dividends have ever been declared or paid on our Common Stock. In addition, the terms of our credit facility and the Preferred Stock we issued in the December 2009 financing restrict our ability to pay cash dividends on our Common Stock. We intend to retain earnings, if any, to finance future operations and expansion and do not expect to pay any cash dividends in the foreseeable future.

 

Equity Compensation Plan Information

The following table sets forth information with respect to equity compensation plans (including individual compensation arrangements) of the Company as of March 31, 2013.

   (a)   (b)   (c) 
Plan category       Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
        Weighted average
exercise price of
outstanding options,
warrants and rights
        Number of securities
remaining available for
future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
 
             
Equity compensation plans approved by security holders(1)    2,525,428   $0.49    45,135 
Equity compensation plans not approved by security holders   0    n/a    0 
Total   2,525,428   $0.49    45,135 
(1)Includes options to purchase 2,455,428 shares of Common Stock granted under our 2010 Equity Incentive Plan, and options to purchase 70,000 shares of Common Stock granted under our 2002 Long-Term Incentive Plan.
6
 

Share Repurchase

Other than de minimis repurchases of Common Stock from employees to satisfy withholding obligations upon the vesting of restricted stock awards, during our fourth quarter ended March 31, 2013 we repurchased shares of Common Stock from one of our stockholders in a single, privately negotiated transaction, as set forth below.

 

Period   Total number
of shares
purchased
   Average
price
paid
per share
   Total number of shares
purchased as part of
publicly announced
plans or programs
   Maximum number of
shares that may yet be
purchased under the
plans or program
 
March 1, 2013 through   March 31, 2013    301,121   $1.25    n/a    n/a 
                       
Item 6.Selected Financial Data.
Not Applicable.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Critical Accounting Policies

Our significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 8 of this Form 10-K. We believe the following represent our critical accounting policies:

Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and of revenues and expenses during the reporting period. Estimates are made when accounting for revenue (as discussed below under “Revenue Recognition”), depreciation, amortization, allowance for doubtful accounts, fair value of derivative liabilities, valuation of stock options and equity transactions, income taxes and certain other contingencies. We are subject to risks and uncertainties that may cause actual results to vary from estimates. We review all significant estimates affecting the financial statements on a recurring basis and record the effects of any adjustments when necessary.

Revenue Recognition

Our revenues are generated from projects subject to contracts requiring us to provide services within specified time periods generally ranging up to twelve months. As a result, on any given date, we have 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; (ii) on fixed price retainer contracts, revenue is recognized on a straight-line basis over the term of the contract; and (iii) on certain fixed price contracts, revenue is recognized as certain key milestones are achieved. Reimbursable program costs and expenses and outside production and other program costs associated with the fulfillment of certain specific contracts are accrued or deferred and recognized proportionately to the related revenue. Our business is such that progress towards completing projects may vary considerably from quarter to quarter.

If we do not accurately estimate the resources required or the scope of work to be performed, or do not manage our projects properly within the planned periods of time to satisfy our obligations under the contracts, then future profit margins may be significantly and negatively affected or losses on existing contracts may need to be recognized. Our outside production costs consist primarily of costs to purchase media and program merchandise; costs of production; merchandise warehousing and distribution; third party contract fulfillment costs; and other costs directly related to marketing programs.

In many instances, revenue recognition will not result in related billings throughout the duration of a contract due to timing differences between the contracted billing schedule and the time such revenue is recognized. In such instances, when revenue is recognized in an amount in excess of the contracted billing amount, we record such excess on our balance sheet as unbilled contracts in progress. Alternatively, on a scheduled billing date, should the billing amount exceed the amount of revenue recognized, we record such excess on our balance sheet as deferred revenue. In addition, on contracts where reimbursable costs are incurred prior to the time revenue is recognized on such contracts, we record such costs as deferred contract costs on our balance sheet. Notwithstanding this, labor costs for permanent employees are expensed as incurred.

7
 

Goodwill and Other Intangible Assets

Our goodwill consists of the cost in excess of the fair market value of the acquired net assets of our subsidiary companies, Inmark, Optimum, U.S. Concepts, and Digital Intelligence as well as U.S. Concepts acquisition of 3 For All Partners, LLC, d/b/a mktgpartners. These companies and businesses have been integrated into a structure which does not provide the basis for separate reporting units. Consequently, the Company is a single reporting unit for goodwill impairment testing purposes. We also have intangible assets consisting of a customer relationship acquired from mktgpartners, and an Internet domain name and related intellectual property rights. At March 31, 2013 and 2012, our balance sheet reflected goodwill and intangible assets as set forth below:

   2013   2012 
Amortizable:          
Customer relationship  $80,422   $402,103 
           
Non-Amortizable:          
Goodwill  $10,052,232   $10,052,232 
Internet domain name   200,000    200,000 
   $10,252,232   $10,252,232 
           
Total  $10,332,654   $10,654,335 

Goodwill and the internet domain name are deemed to have indefinite lives and are subject to annual impairment tests. Goodwill impairment tests require that we first assess qualitative factors to determine whether it is necessary to perform a two-step quantitative goodwill impairment test. We are not required to calculate the fair value of a reporting unit unless we determine, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. We assess 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 review, if impairment is found to have occurred, a corresponding charge will be recorded. The value assigned to the customer relationship is being amortized over a five year period.

Based on our assessment of qualitative factors which included an analysis of macroeconomic conditions, financial performance, and industry and market considerations, we concluded that it was not necessary to perform a two-step quantitative goodwill impairment test and that our goodwill was not impaired as of March 31, 2013. 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. Impairment testing is required more often than annually if an event or circumstance indicates that an impairment or decline in value may have occurred. Management has also determined that there was no impairment of the amortizable intangible asset.

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.

Accounting for Income Taxes

Our ability to recover the reported amounts of the deferred income tax asset resulting from net operating losses is dependent upon our ability to generate sufficient taxable income during the periods over which such losses are deductible to reduce our tax expense in future periods. In assessing the realizability of deferred tax assets, management considers, in light of available objective evidence, whether it is more likely than not that some or all of such assets will be utilized in future periods. As of March 31, 2011, based upon the available objective evidence, specifically our history of losses for fiscal years 2004 through 2010, we provided for a full valuation allowance against our net deferred tax asset at March 31, 2011. In fiscal years 2011 and 2012, we earned in the aggregate, $7,492,000 of operating income for financial reporting purposes which will lead to the utilization of approximately $7,507,000 of our net operating loss carry forward for tax reporting purposes. Based on this return to profitability and other available objective evidence, we believed it was more likely than not that the results of future operations would generate sufficient taxable income to realize the net deferred tax asset during the periods in which we are able to utilize this asset under applicable tax regulations. Accordingly, we reversed the full valuation allowance against our deferred tax asset at March 31, 2012. As of March 31, 2013, we would have to generate approximately $7,967,000 of aggregate taxable income to fully utilize our deferred tax assets. 

8
 

Results of Operations

Fiscal Year Ended March 31, 2013 Compared to March 31, 2012:

Overview

For the fiscal year ended March 31, 2013 we generated $4,695,000 in operating income, a $473,000 increase over the $4,222,000 earned during the fiscal year ended March 31, 2012. This improvement was the result of an increase of $4,433,000 in Operating Revenue, partially offset by increases of $3,366,000 in compensation expense and $594,000 in general and administrative expenses.

Our net income for the fiscal year ended March 31, 2013 was $1,215,000, which includes a $1,660,000 non-cash charge for the fair value adjustment to the derivative financial instruments reflected on our balance sheet in connection with our December 2009 financing. The fair value adjustment is primarily attributable to the rise in the price of our Common Stock during Fiscal 2013, which under generally accepted accounting principles required us to increase the carrying value of the Warrant derivative on our balance sheet and record the amount of such increase under “Fair value adjustments to compound embedded derivatives” on our statement of operations. Our net income for the fiscal year ended March 31, 2012 was $5,399,000, which includes a $1,573,000 income tax benefit primarily attributable to the reinstatement of a net deferred tax asset and a $163,000 non-cash charge for the fair value adjustment to the derivative financial instruments reflected on our balance sheet in connection with our December 2009 financing. A more detailed explanation of the accounting treatment for these non-cash charges is provided in Notes 4 and 7 to our Consolidated Financial Statements included in Item 8 of this Report.

 

The following table presents the reported operating results for the fiscal years ended March 31, 2013 and 2012:

 

   2013   2012 
Operations Data:          
Sales  $130,810,000   $125,485,000 
Reimbursable program costs and expenses   (23,004,000)   (23,398,000)
Outside production and other program expenses   (64,920,000)   (63,634,000)
Operating revenue   42,886,000    38,453,000 
Compensation expense   30,867,000    27,501,000 
General and administrative expenses   7,324,000    6,730,000 
Operating income   4,695,000    4,222,000 
Interest income (expense), net   1,000    (233,000)
Fair value adjustments to compound embedded derivatives   (1,660,000)   (163,000)
Income before provision (benefit) for income taxes   3,036,000    3,826,000 
Provision (benefit) for income taxes   1,821,000    (1,573,000)
Net income  $1,215,000   $5,399,000 
           
Per Share Data:          
Basic earnings per share  $.15   $.66 
Diluted earnings per share  $.07   $.34 
           
Weighted Average Shares Outstanding:          
Basic   8,289,132    8,140,944 
Diluted   16,427,501    15,963,308 

Operating Revenue and Modified EBITDA

We believe Operating Revenue and Modified EBITDA are key performance indicators. We define Operating Revenue as our sales less 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, general and administrative expenses, and capital expenditures. We define Modified EBITDA as income before interest, income taxes, depreciation and amortization plus other non-cash expenses. Modified EBITDA is a supplemental measure to evaluate operational performance. Operating Revenue and Modified EBITDA are Non-GAAP financial measures disclosed by management to provide additional information to investors in order to provide them with an alternative method for assessing our financial condition and operating results. These measures are not in accordance with, or a substitute for, GAAP, and may be different from or inconsistent with Non-GAAP financial measures used by other companies.

9
 

The following table presents operating data expressed as a percentage of Operating Revenue for each of the fiscal years ended March 31, 2013 and 2012, respectively:

   2013   2012 
Statement of Operations Data:          
Operating revenue   100.0%   100.0%
Compensation expense   72.0%   71.5%
General and administrative expenses   17.1%   17.5%
Operating income   10.9%   11.0%
Interest income (expense), net   0.0%   (0.6%)
Fair value adjustments to compound embedded derivatives   (3.9%)   (0.4%)
Income before provision (benefit) for income taxes   7.0%   10.0%
Provision (benefit) for income taxes   4.2%   (4.0%)
Net income   2.8%   14.0%

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.

Sales for the fiscal year ended March 31, 2013 were $130,810,000, compared to $125,485,000 for the fiscal year ended March 31, 2012, an increase of $5,325,000, or 4%. This increase in sales was attributable to a $3,265,000 increase in sales from our largest customer, Diageo, a $2,348,000 increase in interactive marketing revenues, and a $2,297,000 increase in experiential marketing revenues, offset by a reduction in our trade marketing revenues of $2,585,000.

Reimbursable Program Costs and Expenses. Reimbursable program costs and expenses consist primarily of direct labor, travel and product costs generally associated with events we execute for Diageo. For the fiscal year ended March 31, 2013, these expenses totaled $23,004,000, compared to $23,398,000 for the fiscal year ended March 31, 2012. This $394,000 decrease is primarily reflects a decrease in the reimbursable program costs and expenses we incurred in executing events for Diageo during the fiscal year ended March 31, 2013 versus the fiscal year ended March 31, 2012.

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 costs for the fiscal year ended March 31, 2013 were $64,920,000 compared to $63,634,000 for the fiscal year ended March 31, 2012, an increase of $1,286,000, or 2%. This increase in outside production and other program expenses is primarily due to an increase in the number of Diageo events we executed, along with an increase in the cost of interactive marketing programs, partially offset by reductions in the cost of experiential marketing programs and trade marketing programs.

Operating Revenue. For the fiscal year ended March 31, 2013, Operating Revenue increased $4,433,000, or 12%, to $42,886,000, compared to $38,453,000 for the fiscal year ended March 31, 2012. This increase is primarily due to increases in our business with Diageo, interactive marketing revenue and experiential marketing revenue, partially offset by a decrease in trade marketing revenue. Operating Revenue as a percentage of Sales for the fiscal year ended March 31, 2013 was 33%, compared to 31% for the fiscal year ended March 31, 2012. This increase in the Operating Revenue percentage is a result of a higher mix of fee revenues for the fiscal year ended March 31, 2013 versus the fiscal year ended March 31, 2012. A reconciliation of Sales to Operating Revenues for the fiscal years ended March 31, 2013 and 2012 is set forth below.

   Fiscal Year Ended March 31, 
Sales  2013   %   2012   % 
Sales – U.S. GAAP  $130,810,000    100   $125,485,000    100 
Reimbursable program costs and expenses, and outside production and other program expenses   87,924,000    67    87,032,000    69 
Operating Revenue – Non-GAAP  $42,886,000    33   $38,453,000    31 

Compensation Expense. Compensation expense consists of the salaries, bonuses, payroll taxes and benefit costs related to indirect labor, overhead personnel and direct labor not otherwise charged to programs. For the fiscal year ended March 31, 2013, compensation expense was $30,867,000, compared to $27,501,000 for the fiscal year ended March 31, 2012, an increase of $3,366,000, or 12%. This increase is primarily the result of a $3,051,000 increase in salaries and a $275,000 increase in payroll taxes and employee benefits primarily due to direct labor staff increases.

10
 

General and Administrative Expenses. General and administrative expenses consist of office and equipment rent, depreciation and amortization, professional fees, insurance and other overhead expenses. For the fiscal year ended March 31, 2013, general and administrative costs were $7,324,000, compared to $6,730,000 for the fiscal year ended March 31, 2012, an increase of $594,000 or 9%. This increase is primarily the result of a $266,000 increase in new business and promotion expenses, a $181,000 increase in rent and occupancy expenses, a $75,000 increase in insurance expense, and a $48,000 increase in telecommunication expense.

Modified EBITDA. As described above, we believe that Modified EBITDA is a key performance indicator. We use it to measure and evaluate operational performance. Modified EBITDA for the fiscal year ended March 31, 2013 was $6,117,000, compared to $5,605,000 for the fiscal year ended March 31, 2012. A reconciliation of operating income to Modified EBITDA for the fiscal years ended March 31, 2013 and 2012 is set forth below.

 

   Fiscal Year Ended March 31, 
   2013   2012 
Operating income - US GAAP  $4,695,000   $4,222,000 
Depreciation and amortization   980,000    939,000 
Share based compensation expense   442,000    444,000 
Modified EBITDA – Non-GAAP  $6,117,000   $5,605,000 

Interest Income (Expense), Net. Net interest income for the fiscal year ended March 31, 2013 amounted to $1,000, compared to ($233,000) of net interest expense for the fiscal year ended March 31, 2012. Interest expense for the fiscal year ended March 31, 2012 consisted primarily of interest incurred on the Senior Secured Notes, which were issued in December 2009 and repaid in full in November 2011.

Fair Value Adjustments to Compound Embedded Derivatives. Fair value adjustments to compound embedded derivatives for the fiscal years ended March 31, 2013 and 2012 were ($1,660,000) and ($163,000), respectively. These amounts consist entirely of a non-cash fair value adjustment to the derivative financial instruments generated from the December 2009 financing. This adjustment is primarily attributable to the fluctuation in the price of our Common Stock during the relevant periods, which under generally accepted accounting principles required us to adjust the carrying values of the Warrant derivative liability and other derivative liabilities on our balance sheets and record the amount of such adjustments under “Fair value adjustments to compound embedded derivatives” on our statements of operations. In general, an increase in the price of our Common Stock in a particular period will result in an increase in the carrying values of these derivative liabilities on our balance sheets at the end of such period and require us to record the amount of such increase as a charge under “Fair value adjustments to compound embedded derivatives” on our statements of operations for such period, and a decrease in the price of our Common Stock in a particular period will have the opposite effect. A more detailed explanation of the accounting treatment for these derivative financial instruments is provided in Note 4 to our Consolidated Financial Statements in Item 8 of this Report.

Income Before Provision (Benefit) for Income Taxes. The Company’s income before provision (benefit) for income taxes for the fiscal year ended March 31, 2013 decreased $790,000 to $3,036,000, compared to $3,826,000 for the fiscal year ended March 31, 2012.

Provision (Benefit) for Income Taxes. For the fiscal year ended March 31, 2013 the provision for income taxes was $1,821,000. For the fiscal year ended March 31, 2012 the benefit for income taxes was ($1,573,000), consisting primarily of the reversal of a $3,414,000 valuation allowance against the net deferred tax asset at March 31, 2012, partially offset by a $1,841,000 provision for income taxes. We reversed this allowance because, in the light of operating income generated in the fiscal years 2012 and 2011 and other factors, we believed it was more likely than not that we would be able to utilize the net deferred tax asset to reduce our tax expense in future periods.

Net Income. As a result of the items discussed above, we generated net income of $1,215,000 for the fiscal year ended March 31, 2013, a decrease of $4,184,000, compared to $5,399,000 of net income for the fiscal year ended March 31, 2012. Diluted earnings per share amounted to $.07 in the fiscal year ended March 31, 2013 versus $.34 per share for the fiscal year ended March 31, 2012.

Liquidity and Capital Resources

For the fiscal year ended March 31, 2013, working capital increased by $5,124,000 from $2,083,000 to $7,207,000, primarily as a result of the operating income we generated during the period.

At March 31, 2013, we had cash and cash equivalents of $11,240,000, borrowing availability under our credit facility of $3,198,000, working capital of $7,207,000, and stockholders’ equity of $10,177,000. In comparison, at March 31, 2012, we had cash and cash equivalents of $6,661,000, borrowing availability under the our credit facility of $3,726,000, working capital of $2,083,000, and stockholders’ equity of $9,554,000. The $4,579,000 increase in cash and cash equivalents during Fiscal 2013 was primarily due $4,985,000 of cash provided by operating activities and the release of $500,000 of restricted cash, partially offset by $461,000 used to repurchase shares of our Common Stock and $435,000 in property and equipment purchases.

11
 

Operating Activities. Net cash provided by operating activities for the fiscal year ended March 31, 2013 was $4,985,000, primarily attributable to net income of $1,215,000 plus $4,354,000 in net non-cash charges that include a reduction in our deferred income tax asset, fair value adjustments to compound derivatives, depreciation and amortization expense, and share based compensation expense, partially offset by $584,000 of cash used by the changes in operating assets and liabilities.

Investing Activities. Net cash provided by investing activities for the fiscal year ended March 31, 2013 was $65,000, resulting from the release of $500,000 of restricted cash, offset by $435,000 in property and equipment purchases.

Financing Activities. Net cash used in investing activities for the fiscal year ended March 31, 2013 was $399,000, the result of $461,000 in repurchases of our Common Stock, offset by $62,000 in proceeds from the exercise of employee stock options. Our stock repurchases consisted of the repurchase of 301,121 shares of Common Stock from one of our stockholders in a single, privately negotiated transaction for an aggregate purchase price of $376,000, and $85,000 of stock repurchase from employees to satisfy employee tax withholding obligations in connection with the vesting of restricted stock and other de minimis repurchases.

On November 23, 2011, we entered into a Loan and Security Agreement with TD Bank, N.A. (the “Bank”), pursuant to which we were provided with a $4.0 million revolving credit facility (the “Credit Facility”). Borrowings under the Credit Facility are secured by substantially all of our assets, and have been guaranteed by our subsidiaries.

 

Pursuant to the Loan Agreement, among other things:

 

·All outstanding loans will become due on November 23, 2013, provided that following our request, the Bank may in its sole discretion agree to one year extensions of the maturity date;
   
·Interest accrues on outstanding loans at a per annum rate equal to the greater of (i) 4.0%, and (ii) the Bank’s prime rate as from time to time in effect plus one percent;
   
·Aggregate loans outstanding at any time are limited to a borrowing base equal to 80% of our eligible accounts receivable, as determined by the Bank, provided that the advance rate is limited to 50% with respect to accounts receivable from our customers whose receivables constitute more than 50% of our receivables in the aggregate; and
   
·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, provide that our debt service coverage ratio (as determined pursuant to the Loan Agreement) cannot be less than 1.25 to 1.0 as of the end of any fiscal year, and require that we have immediately available cash at all times, including borrowings under the Credit Facility, of at least $3 million. We were in compliance with these covenants at March 31, 2013.

 

If we do not comply with the financial and other covenants and requirements of the Loan Agreement, the Bank may, subject to various cure rights, require the immediate payment of all amounts outstanding under the Loan Agreement.

In connection with the Loan Agreement, the holders of our Series D Preferred Stock entered into a Standstill Agreement with the Bank under which such stockholders have agreed not to exercise any rights they may have to cause us to redeem their shares of Series D Preferred Stock prior to December 15, 2015 (or such earlier date as the Credit Facility is terminated), other than upon a change of control or liquidation event of the Company.

On December 11, 2012, we entered into an amendment to the Loan Agreement, effective as of November 23, 2012, pursuant to which (i) the maturity date under the Loan Agreement was extended for one year to November 23, 2013, and (ii) our obligation to maintain $500,000 in a blocked account with the Bank to secure our obligations under the loan agreement was terminated. Accordingly, in connection with the amendment, such blocked account was released back to us.

We believe that cash currently on hand together with cash expected to be generated from operations and borrowing availability under the Credit Facility, will be sufficient to fund our cash and near-cash requirements both through March 31, 2014 and on a long term basis. We had no loans outstanding under the Credit Facility at March 31, 2013.

Off-Balance Sheet Transactions

We are not a party to any “off-balance sheet transactions” as defined in Item 301 of Regulation S-K.

12
 

Impact of Recently Issued Accounting Standards

Offsetting Assets and Liabilities

In December 2011, the FASB has issued FASB Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.  Upon adoption an entity is required to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position.  The amendments in this ASU are effective for the Company for the first annual reporting period beginning on or after January 1, 2013, and interim periods within those annual periods.  Management currently believes that the adoption of this ASU will not have a material impact on the Company’s operating results, financial position, or cash flows.

Testing Indefinite-Lived Intangible Assets for Impairment

In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.” Similar to ASU 2011-08, “Intangibles - Goodwill and Other (Topic 250) - Testing Goodwill for Impairment”, ASU 2012-02 addresses the growing cost and complexity of performing an analysis to evaluate indefinite-lived intangible assets (other than goodwill) for impairment. This ASU introduces qualitative factors which would simplify the analysis if facts and circumstances make it more-likely-than-not that impairment would not exist. Rather than requiring a purely quantitative impairment test, the ASU provides entities with the option to first examine qualitative factors to make this determination. Factors to be considered would include, but are not limited to:

·Increases in interest rates, salaries, or other operating expenses, which would have a negative impact on future earnings or cash flows;
·Recent financial performance and cash flow trends;
·Aspects of the legal and regulatory environment which are expected to impact future cash flows, such as the Dodd-Frank Act;
·Management turnover;
·Economic and industry conditions.

Entities are required by the guidance to consider both positive and negative impacts of such factors before determining whether it is more-likely-than-not (i.e. greater than 50% probability) that the indefinite-lived intangible asset is impaired. It should be noted that the qualitative portion of the analysis is optional for all issuers.

This ASU is effective for impairment tests performed during fiscal years beginning after September 15, 2012, and may be early adopted if the entity’s financial statements for the most recent fiscal or interim period have not yet been issued. The adoption of this ASU did not have a material impact on the Company’s operating results, financial position or cash flows.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

13
 
Item 8.Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

    Page
     
Report of Independent Registered Public Accounting Firm 15
     
Consolidated Financial Statements:  
  Balance Sheets as of March 31, 2013 and 2012 16
  Statements of Operations for the years ended March 31, 2013 and 2012 17
  Statements of Comprehensive Income for the years ended March 31, 2013 and 2012 18
  Statements of Stockholders’ Equity for the years ended March 31, 2013 and 2012 19
  Statements of Cash Flows for the years ended March 31, 2013 and 2012 20
     
Notes to Consolidated Financial Statements 21
14
 

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
‘mktg, inc.’
New York, New York

We have audited the accompanying consolidated balance sheets of ‘mktg, inc.’ and subsidiaries (collectively “the Company”) as of March 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ‘mktg, inc.’ and subsidiaries as of March 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

  /s/ ParenteBeard LLC  

New York, New York
June 24, 2013

15
 

‘mktg, inc.’
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2013 AND 2012

         
   2013   2012 
Assets          
Current assets:          
Cash and cash equivalents  $11,239,835   $6,660,695 
Accounts receivable, net of allowance for doubtful accounts of $297,000 in 2013 and $317,000 in 2012   10,228,377    11,286,403 
Unbilled contracts in progress   2,397,873    1,991,951 
Deferred contract costs   1,023,460    533,200 
Prepaid expenses and other current assets   253,999    296,443 
Deferred tax asset   774,138    805,696 
Total current assets   25,917,682    21,574,388 
           
Property and equipment, net   1,486,686    1,709,109 
           
Restricted cash       500,000 
Deferred tax asset   2,412,500    3,345,874 
Goodwill   10,052,232    10,052,232 
Intangible assets, net   280,422    602,103 
Other assets   457,448    449,511 
Total assets  $40,606,970   $38,233,217 
           
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable  $1,591,807   $1,637,619 
Accrued compensation   1,676,675    1,739,734 
Accrued job costs   736,669    533,523 
Other accrued liabilities   2,773,637    3,108,798 
Income taxes payable   31,686    891 
Deferred revenue   11,900,222    12,470,463 
Total current liabilities   18,710,696    19,491,028 
           
Deferred rent   925,788    1,245,371 
Warrant derivative liability   4,664,894    3,005,319 
Deferred tax liability   2,995,866    2,368,544 
Total liabilities   27,297,244    26,110,262 
           
Commitments and contingencies          
           
Redeemable Series D Convertible Participating Preferred Stock, $3,732,681 redemption and liquidation value, par value $1.00:  2,500,000  shares designated, issued and outstanding at March 31, 2013 and 2012   3,132,882    2,569,347 
           
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; 9,066,752 shares issued and 8,641,448 outstanding at March 31, 2013 and 8,820,815 shares issued and 8,765,827 outstanding at March 31, 2012   9,067    8,821 
Additional paid-in capital   15,250,715    14,746,738 
Accumulated deficit   (4,509,462)   (5,160,841)
Cumulative translation adjustment   (71,770)    
Treasury stock at cost, 425,304 shares at March 31, 2013 and 54,988 at March 31, 2012   (501,706)   (41,110)
Total stockholders’ equity   10,176,844    9,553,608 
Total liabilities and stockholders’ equity  $40,606,970   $38,233,217 

 

See accompanying notes to consolidated financial statements

16
 

‘mktg, inc.’
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2013 AND 2012

         
   2013   2012 
         
Sales  $130,809,778   $125,485,075 
           
Operating expenses:          
Reimbursable program costs and expenses   23,004,366    23,398,344 
Outside production and other program expenses   64,919,726    63,633,577 
Compensation expense   30,867,075    27,500,633 
General and administrative expenses   7,324,114    6,729,931 
Total operating expenses   126,115,281    121,262,485 
           
Operating income   4,694,497    4,222,590 
           
Interest income   1,023    9,028 
Interest expense   (444)   (242,330)
Fair value adjustments to compound embedded derivatives   (1,659,575)   (162,904)
           
Income before provision (benefit) for income taxes   3,035,501    3,826,384 
           
Provision (benefit) for income taxes   1,820,587    (1,573,026)
           
Net income  $1,214,914   $5,399,410 
           
Basic earnings per share  $.15   $.66 
           
Diluted earnings per share  $.07   $.34 
           
Weighted average number of shares outstanding:          
Basic   8,289,132    8,140,944 
Diluted   16,427,501    15,963,308 

   

See accompanying notes to consolidated financial statements

17
 

‘mktg, inc.’
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED MARCH 31, 2013 AND 2012

     
   2013   2012 
         
Net income  $1,214,914   $5,399,410 
           
Other comprehensive loss, net of tax:          
Foreign currency translation loss   (43,062)    
           
Comprehensive income  $1,171,852   $5,399,410 
18
 

‘mktg, inc.’
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED MARCH 31, 2013 AND 2012

                             
   Common Stock   Additional       Cumulative       Total 
   par value $.001   Paid-in   Accumulated   Translation   Treasury   Stockholders’ 
   Shares   Amount   Deficit   Deficit   Adjustment   Stock   Equity 
                             
Balance, March 31, 2011   8,590,315   $8,590   $14,302,693   $(9,993,989)  $   $(27,511)  $4,289,783 
                                    
Issuance of restricted stock   250,500    251    (251)                
                                    
Forfeiture of restricted stock   (20,000)   (20)   20                 
                                    
Compensation cost recognized in connection with vested restricted stock           266,580                266,580 
                                    
Compensation cost recognized in connection with stock options           177,696                177,696 
                                    
Purchase of treasury stock                       (13,599)   (13,599)
                                    
Accretion on redeemable preferred stock               (566,262)           (566,262)
                                    
Net income               5,399,410            5,399,410 
                                    
Balance, March 31, 2012   8,820,815    8,821    14,746,738    (5,160,841)       (41,110)   9,553,608 
                                    
Exercise of stock options   144,437    144    61,964                62,108 
                                    
Issuance of restricted stock   160,000    160    (160)                
                                    
Forfeiture of restricted stock   (58,500)   (58)   58                 
                                    
Compensation cost recognized in connection with vested restricted stock           280,009                280,009 
                                    
Compensation cost recognized in connection with stock options           162,106                162,106 
                                    
Purchase of treasury stock                       (460,596)   (460,596)
                                    
Accretion on redeemable preferred stock               (563,535)           (563,535)
                                    
Exchange rate change                   (71,770)       (71,770)
                                    
Net income               1,214,914            1,214,914 
                                    
Balance, March 31, 2013   9,066,752   $9,067   $15,250,715   $(4,509,462)  $(71,770)  $(501,706)  $10,176,844 

  

See accompanying notes to consolidated financial statements

19
 

‘mktg, inc.’
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2013 AND 2012

         
   2013   2012 
Cash flows from operating activities:          
Net income  $1,214,914   $5,399,410 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   979,411    939,218 
Deferred rent amortization   (319,583)   (211,617)
Fair value adjustments to compound embedded derivatives   1,659,575    162,904 
Share based compensation expense   442,115    444,276 
Deferred income taxes   1,592,254    (1,783,026)
Changes in operating assets and liabilities:          
Accounts receivable   1,058,026    (3,600,020)
Unbilled contracts in progress   (405,922)   (456,184)
Deferred contract costs   (490,260)   644,284 
Prepaid expenses and other assets   34,507    (147,791)
Accounts payable   (45,812)   692,855 
Accrued compensation   (63,059)   (122,044)
Accrued job costs   203,146    (1,149,954)
Other accrued liabilities   (335,161)   911,959 
Income taxes payable   30,795    (173,109)
Deferred revenue   (570,241)   182,839 
Net cash provided by operating activities   4,984,705    1,734,000 
           
Cash flows from investing activities:          
Release of restricted cash   500,000    500,000 
Restricted cash deposit       (500,000)
Purchases of property and equipment   (435,307)   (536,774)
Net cash provided by (used in) investing activities   64,693    (536,774)
           
Cash flows from financing activities:          
Payments of debt       (2,500,000)
Proceeds from exercise of stock options   62,108     
Purchase of treasury stock   (460,596)   (13,599)
Net cash (used in) financing activities   (398,488)   (2,513,599)
           
Effect of exchange rate changes on cash and cash equivalents   (71,770)    
           
Net increase (decrease) in cash and cash equivalents   4,579,140    (1,316,373)
Cash and cash equivalents at beginning of year   6,660,695    7,977,068 
Cash and cash equivalents at end of year  $11,239,835   $6,660,695 
           
Supplemental disclosures of cash flow information:          
Interest paid during the year  $444   $242,340 
Income taxes paid during the year  $245,263   $378,825 
Capitalized cost of fully depreciated property and equipment disposed during the year  $4,044,080   $ 

 

See accompanying notes to consolidated financial statements

20
 
(1)Organization and Nature of Business

‘mktg, inc.’ (the “Company”), through its wholly-owned subsidiaries Inmark Services LLC, Optimum Group LLC, U. S. Concepts LLC, Digital Intelligence Group LLC, mktg retail LLC and Mktg, inc. UK Ltd, is a full service marketing agency. The Company develops, manages and executes sales promotional programs at both national and local levels, utilizing both online and offline media channels. These programs help the Company’s 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. The Company’s activities reinforce brand awareness, provide incentives to retailers to order and display its clients’ products, and motivate consumers to purchase those products, and are designed to meet the needs of its clients by focusing on communities of consumers who want to engage brands as part of their lifestyles.

The Company’s 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 clients through sales forces operating out of offices located in New York, New York; Cincinnati, Ohio; Chicago, Illinois: Los Angeles, California: San Francisco, California; and London, England.

(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 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. Significant estimates include allowance for doubtful accounts, fair value of derivative liabilities, valuation of stock options and equity transactions, and revenue recognition. Management bases its estimates on certain assumptions, which it believes are reasonable in the circumstances. Actual results could differ from those estimates.

(c)Fair Value of Financial Instruments

 

The Company’s financial instruments consist of cash and cash equivalents, accounts receivables, accounts payable and accrued liabilities, derivative financial instruments, the Company’s Senior Secured Notes (“Secured Notes”) which were retired in 2012 and Series D Convertible Participating Stock (“Series D Preferred Stock”) issued December 15, 2009. The fair values of cash and cash equivalents, accounts receivables, accounts payable and accrued liabilities generally approximate their respective carrying values due to their current nature. Derivative liabilities, as discussed below, are required to be carried at fair value. The following table reflects the comparison of the carrying value and the fair value of the Company’s Series D Preferred Stock as of March 31, 2013:

 

   Carrying Values   Fair Values 
Series D Preferred Stock (See Notes 4 and 6)  $3,132,882   $8,413,532 

 

The fair value of the Company’s Series D Preferred Stock has been determined based upon the forward cash flow of the contracts, discounted at credit-risk adjusted market rates.

 

Derivative financial instruments – Derivative financial instruments, as defined in Financial Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815 Derivatives and Hedging, consist of financial instruments or other contracts that contain a notional amount and one or more underlying features (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.

 

The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company issued other financial instruments with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815, these instruments are required to be carried as derivative liabilities at fair value in the Company’s financial statements. See Notes 4, 6 and 7 for additional information.

21
 

Redeemable preferred stock – Redeemable preferred stock (such as the Series D Preferred Stock, and any other redeemable financial instrument the Company may issue) is initially evaluated for possible classification as a liability under ASC 480 Financial Instruments with Characteristics of Both Liabilities and Equity. Redeemable preferred stock classified as a liability is recorded and carried at fair value. Redeemable preferred stock that does not, in its entirety, require liability classification, is evaluated for embedded features that may require bifurcation and separate classification as derivative liabilities under ASC 815. In all instances, the classification of the redeemable preferred stock host contract that does not require liability classification is evaluated for equity classification or mezzanine classification based upon the nature of the redemption features. Generally, any feature that could require cash redemption for matters not within the Company’s control, irrespective of probability of the event occurring, requires classification outside of stockholders’ equity. See Note 6 for further disclosures about the Company’s Series D Preferred Stock, which constitutes redeemable preferred stock.

 

Fair value measurements - Fair value measurement requirements are embodied in certain accounting standards applied in the preparation of the Company’s financial statements. Significant fair value measurements resulted from the application of ASC 815 Fair Value Measurements to the Company’s Series D Preferred Stock, and Warrants issued in December 2009 as described in Note 7, and ASC 718 Stock Compensation to the Company’s share based payment arrangements.

 

ASC 815 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Standard applies under other accounting pronouncements that require or permit fair value measurements. ASC 815 further permits entities to choose to measure many financial instruments and certain other items at fair value. At this time, the Company does not intend to reflect any of its current financial instruments at fair value (except that the Company is required to carry derivative financial instruments at fair value). However, the Company will consider the appropriateness of recognizing financial instruments at fair value on a case by case basis as they arise in future periods.

(d)Cash and Cash Equivalents

Investments with maturities of three months or less at the time of purchase are considered cash equivalents. At March 31, 2013 the Company had approximately $10,650,000 of cash on hand in excess of FDIC insurance limits.

(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 collectibility. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote.

(f)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.

(g)Deferred/Accrued Contract Costs

Reimbursable program costs and expenses and outside production and other program expenses associated with the fulfillment of certain specific contracts are accrued or deferred and recognized proportionately to the related revenue. 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 on furniture, fixtures and computer equipment is computed using 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. Minor repairs and maintenance are expensed as incurred while costs that enhance the life of an asset are capitalized.

22
 
(i)Goodwill

Goodwill consists of the cost in excess of the fair value of the acquired net assets of the Company’s subsidiaries. Goodwill is subject to annual impairment tests which require the Company to first assess qualitative factors to determine whether it is necessary to perform a two-step quantitative goodwill impairment test. The Company is not required to calculate the fair value of a reporting unit unless it determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. 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 one reporting unit, and that a two-step quantitative goodwill impairment test was not necessary. Based on such analysis, the Company did not identify any indication of impairment of its goodwill as of March 31, 2013. At March 31, 2013 and 2012, our balance sheet reflected $10,052,232 of goodwill.

(j)Intangible Assets

Intangible assets include the value of a customer relationship and an internet domain name. The customer relationship intangible asset is being amortized over its estimated economic life of five years. Amortization expense for the years ended March 31, 2013 and 2012 for this asset amounted to $321,681 and $321,683, respectively.

At March 31, 2013 and 2012, our balance sheet reflected:

 

   March 31, 2013 
   Gross
carrying
amount
   Accumulated
amortization
   Net value 
             
Customer relationship  $1,608,413   $1,527,991   $80,422 
                
Unamortizable intangible asset:    200,000        200,000 
Internet domain name  $1,808,413   $1,527,991   $280,422 

 

   March 31, 2012 
   Gross
carrying
amount
   Accumulated
amortization
   Net value 
             
Customer relationship  $1,608,413   $1,206,310   $402,103 
                
Unamortizable intangible asset:    200,000   $    200,000 
Internet domain name  $1,808,413   $1,206,310   $602,103 

Amortization expense is expected to be $80,422 for the year ending March 31, 2014.

(k)Long-Lived Assets

In accordance with FASB guidance, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined based on the estimated discounted future cash flows expected to be generated by the asset. The Company did not identify any indication of impairment of its long-lived assets as of March 31, 2013.

23
 
(l)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; (ii) on fixed price retainer contracts, revenue is recognized on a straight-line basis over the term of the contract; and (iii) on certain fixed price contracts, revenue is recognized as certain key performance criteria are achieved. Incremental direct costs associated with the fulfillment of certain specific contracts are accrued or deferred and recognized proportionately to the related revenue. Provisions for anticipated losses on uncompleted projects are made in the period in which such losses are determined.

(m)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.

The FASB released guidance on “Reporting Revenue Gross as a Principal versus Net as an Agent” and “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred.” Indicators identified by the Company for gross revenue reporting included: the Company is the primary obligor in customer arrangements, the Company has discretion in supplier selection, and the Company has credit risk. Accordingly, the Company records its client reimbursements, including out-of-pocket expenses, as revenue on a gross basis.

(n)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.

(o)Accounting for Share Based Compensation

In accordance with FASB guidance, the Company measures all employee share based compensation awards using a fair value method and records the related expense in the financial statements over the period during which an employee is required to provide service in exchange for the award. Excess tax benefits, as defined by FASB guidance, are realized from the exercise of stock options and are reported as a financing cash inflow rather than as a reduction of taxes paid in cash flow from operations. 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. Share based employee compensation expense for the years ended March 31, 2013 and 2012 was $442,115 and $444,276 respectively.

(p)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. At March 31, 2012 the Company reversed its full allowance against its net deferred tax asset because, in the light of operating income generated in the fiscal years 2012 and 2011 and other factors, the Company believed it was more likely than not that it would be able to utilize its net deferred tax asset to reduce its tax expense in future periods.

24
 
(q)Net Earnings Per Share

Basic earnings per share is based upon the weighted average number of common shares outstanding during the period, excluding restricted shares. Diluted earnings per share is computed on the same basis, including if dilutive, common share equivalents, which include outstanding options, warrants, preferred stock and restricted stock. For the years ended March 31, 2013 and 2012, stock options to purchase approximately 70,000 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:

         
   2013   2012 
Basic   8,289,132    8,140,944 
Dilutive effect of:          
Options   212,424     
Restricted stock   152,842    50,108 
Warrants   2,453,954    2,453,107 
Series D preferred stock   5,319,149    5,319,149 
Diluted   16,427,501    15,963,308 
(r)Recent Accounting Standards Affecting the Company

 

Offsetting Assets and Liabilities

 

In December 2011, the FASB has issued FASB Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.  Upon adoption an entity is required to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position.  The amendments in this ASU are effective for the Company for the first annual reporting period beginning on or after January 1, 2013, and interim periods within those annual periods.  Management currently believes that the adoption of this ASU will not have a material impact on the Company’s operating results, financial position, or cash flows.

 

Testing Indefinite-Lived Intangible Assets for Impairment

In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.” Similar to ASU 2011-08, “Intangibles - Goodwill and Other (Topic 250) - Testing Goodwill for Impairment”, ASU 2012-02 addresses the growing cost and complexity of performing an analysis to evaluate indefinite-lived intangible assets (other than goodwill) for impairment. This ASU introduces qualitative factors which would simplify the analysis if facts and circumstances make it more-likely-than-not that impairment would not exist. Rather than requiring a purely quantitative impairment test, the ASU provides entities with the option to first examine qualitative factors to make this determination. Factors to be considered would include, but are not limited to:

·Increases in interest rates, salaries, or other operating expenses, which would have a negative impact on future earnings or cash flows;
·Recent financial performance and cash flow trends;
·Aspects of the legal and regulatory environment which are expected to impact future cash flows, such as the Dodd-Frank Act;
·Management turnover;
·Economic and industry conditions.

 

Entities are required by the guidance to consider both positive and negative impacts of such factors before determining whether it is more-likely-than-not (i.e. greater than 50% probability) that the indefinite-lived intangible asset is impaired. It should be noted that the qualitative portion of the analysis is optional for all issuers.

 

This ASU is effective for impairment tests performed during fiscal years beginning after September 15, 2012, and may be early adopted if the entity’s financial statements for the most recent fiscal or interim period have not yet been issued. The adoption of this ASU did not have a material impact on the Company’s operating results, financial position or cash flows.

25
 
(3)Property and Equipment

Property and equipment consist of the following:

         
   March 31, 2013        March 31, 2012 
Furniture, fixtures and equipment  $844,435   $1,227,587 
Computer equipment   1,004,564    4,240,128 
Leasehold improvements   3,852,910    3,842,967 
    5,701,909    9,310,682 
Less: accumulated depreciation and
amortization
   4,215,223    7,601,573 
Property and equipment, net  $1,486,686   $1,709,109 

Depreciation and amortization expense on property and equipment for the years ended March 31, 2013 and 2012 amounted to $657,730 and $617,535 respectively. The Company disposed of $4,044,080 worth of fully depreciated property and equipment during the year ended March 31, 2013.

(4)Union Capital Financing

Overview:

On December 15, 2009, the Company consummated a $5.0 million financing led by an investment vehicle organized by Union Capital Corporation (“UCC”). In the financing, the Company issued $2.5 million in aggregate principal amount of Secured Notes which were repaid in full in November 2011, $2.5 million in aggregate stated value of Series D Preferred Stock initially convertible into 5,319,149 shares of Common Stock, and Warrants to purchase 2,456,272 shares of Common Stock (“Warrants”). As a condition to its participation in the financing, UCC required that certain of our directors, officers and employees (“Management Buyers”) collectively purchase $735,000 of the financial instruments on the same terms and conditions as the lead investor. Aggregate amounts above are inclusive of Management Buyers amounts.

The shares of Series D Preferred Stock issued in the financing have a stated value of $1.00 per share, and are convertible into Common Stock at an initial conversion price of $0.47. The conversion price of the Series D Preferred Stock is subject to weighted-average anti-dilution provisions. Generally, this means that if the Company sells non-exempt securities below the conversion price, the holders’ conversion price will be adjusted downwards. Holders of the Series D Preferred Stock are not entitled to special dividends but will be entitled to be paid upon a liquidation, redemption or change of control, the stated value of such shares plus the greater of (a) a 14% accreting liquidation preference, compounding annually, and (b) 3% of the volume weighted average price of the Common Stock outstanding on a fully-diluted basis (excluding the shares issued upon conversion of the Series D Preferred Stock) for the 20 days preceding the event. A consolidation or merger, a sale of all or substantially all of the Company’s assets, and a sale of 50% or more of Common Stock would be treated as a change of control for this purpose.

After December 15, 2015, holders of the Series D Preferred Stock can require the Company to redeem the Series D Preferred Stock for cash at its stated value plus any accretion thereon (“Put Derivative”). In addition, the Company may be required to redeem the Series D Preferred Stock for cash earlier upon the occurrence of a “Triggering Event.” Triggering Events include (i) a failure to timely deliver shares of Common Stock upon conversion of Series D Preferred Stock, (ii) failure to pay amounts due to the holders (after notice and a cure period), (iii) a bankruptcy event with respect to the Company or any of its subsidiaries, (iv) default under other indebtedness in excess of certain amounts, and (v) a breach of representations, warranties or covenants in the documents entered into in connection with the financing. Upon a Triggering Event or failure to redeem the Series D Preferred Stock, the accretion rate on the Series D Preferred Stock will increase to 16.5% per annum. The Company may also be required to pay penalties upon a failure to timely deliver shares of Common Stock upon conversion of Series D Preferred Stock.

The Series D Preferred Stock votes together with the Common Stock on an as-converted basis, and the vote of a majority of the shares of the Series D Preferred Stock is required to approve, among other things, (i) any issuance of capital stock senior to or pari passu with the Series D Preferred Stock; (ii) any increase in the number of authorized shares of Series D Preferred Stock; (iii) any dividends or payments on equity securities; (iv) any amendment to the Company’s Certificate of Incorporation, By-laws or other governing documents that would result in an adverse change to the rights, preferences, or privileges of the Series D Preferred Stock; (v) any material deviation from the annual budget approved by the Board of Directors; and (vi) entering into any material contract not contemplated by the annual budget approved by the Board of Directors.

26
 

So long as at least 25% of the shares of Series D Preferred Stock issued at closing are outstanding, the holders of the Series D Preferred Stock as a class will have the right to designate two members of the Company’s Board of Directors, and so long as at least 15% but less than 25% of the shares of Series D Preferred Stock issued at the closing are outstanding, the holders of the Series D Preferred Stock will have the right to designate one member of the Board of Directors. Additionally, the holders of Series D Preferred Stock have the right to designate two non-voting observers to the Company’s Board of Directors.

The Warrants to purchase 2,456,272 shares of Common Stock issued in the financing have an exercise price of $0.001 per share, subject to adjustment solely for recapitalizations. The Warrants may also be exercised on a cashless basis under a formula that explicitly limits the number of issuable common shares. The exercise period for the Warrants ends December 15, 2015.

At the request of the holders of a majority of the shares of Common Stock issuable upon conversion of the Series D Preferred Stock and exercise of the Warrants, if ever, the Company will be required to file a registration statement with the SEC to register the resale of such shares of Common Stock under the Securities Act of 1933, as amended.

Upon closing of the financing, UCC became entitled to a closing fee of $325,000, half of which was paid upon the closing and the balance of which was paid in six monthly installments following the closing. The Company also reimbursed UCC for its fees and expenses in the amount of $250,000. Additionally, the Company entered into a management consulting agreement with Union Capital under which Union Capital provides the Company with management advisory services and the Company currently pays Union Capital a fee of $62,500 per year. The management consulting agreement will terminate when the holders of the Series D Preferred Stock no longer have the right to nominate any directors and Union Capital no longer owns at least 20% of the Common Stock purchased by it at closing (assuming conversion of Series Preferred D Stock and exercise of Warrants held by it).

Accounting for the December 2009 Financing:

Current accounting standards require analysis of each of the financial instruments issued in the December 2009 financing for purposes of classification and measurement in our financial statements.

The Series D Preferred Stock is a hybrid financial instrument. Due to the redemption feature and the associated participation feature that behaves similarly to a coupon on indebtedness, the Company determined that the embedded conversion feature and other features that have risks associated with debt require bifurcation and classification in liabilities as a compound embedded derivative financial instrument. The conversion feature, along with certain other features that have risks of equity, required bifurcation and classification in their compound form in liabilities as a derivative financial instrument. Derivative financial instruments are required to be measured at fair value both at inception and an ongoing basis. The Company has used the Monte Carlo simulation technique to value the compound embedded derivative, because that model affords the flexibility to incorporate all of the assumptions that market participants would likely consider in determining the value for purposes of trading the hybrid contract. Further, due to the redemption feature, the Company is required to carry the host Series D Preferred Stock outside of stockholders’ equity and the discount resulting from the initial allocation requires accretion through charges to retained earnings, using the effective method, over the period from issuance to the redemption date.

The Company evaluated the terms and conditions of the Secured Notes under the guidance of ASC 815, Derivatives and Hedging. The terms of the Secured Notes that qualified as a derivative instrument were (i) a written put option which allows the holders of the Secured Notes to accelerate interest and principal (effectively forcing an early redemption of the Secured Notes) in the event of certain events of default, including a change of control of the Company, and (ii) the holders’ right to increase the interest rate on the Secured Notes by 4% per year in the event of a suspension from trading of the Company’s Common Stock or an event of default. Pursuant to ASC 815-15-25-40, put options that can accelerate repayment of principal meet the requisite criteria of a derivative financial instrument. In addition, as addressed in ASC 815-15-25-41, for a contingently exercisable put to be considered clearly and closely related to the relevant instrument and not constitute a separate derivative financial instrument, it can be indexed only to interest or credit risk. In this instance, the put instruments embedded in the Secured Notes were indexed to events that were not related to interest or credit risk, namely, a change of control of the Company, and suspension of trading of the Company’s Common Stock. Accordingly, these features were not considered clearly and closely related to the Note, and bifurcation was necessary.

The Company determined that the Warrants should be classified as stockholders’ equity. The principal concepts underlying accounting for warrants provide a series of conditions, related to the potential for net cash settlement, which must be met in order to achieve equity classification. Our conclusion is that the Warrants are indexed to the Company’s common stock and meet all of the conditions for equity classification. The Company measured the fair value of the Warrants on the inception date to provide a basis for allocating the net proceeds to the various financial instruments issued in the December 2009 financing. The Company used the Black-Scholes-Merton valuation technique, because that method embodies, in its view, all of the assumptions that market participants would consider in determining the fair value of the Warrants for purposes of a sale or exchange. The allocated value of the Warrants was recorded to Additional Paid-in Capital.

27
 

The financial instruments sold to the Management Buyers, were recognized as compensation expense in the amount by which the fair value of the share-linked financial instruments (i.e. Series D Preferred Stock and Warrants) exceeded the proceeds that the Company received. The financial instruments subject to allocation were the Secured Notes, Series D Preferred Stock, Compound Embedded Derivatives (“CED”) and the Warrants. Other than the compensatory amounts, current accounting concepts generally provide that the allocation is, first, to those instruments that are required to be recorded at fair value; that is, the CED; and the remainder based upon relative fair values.

The following table provides the components of the allocation and the related fair values of the subject financial instruments:

 

       Allocation 
   Fair
Values
   UCC   Management
Buyers
   Total 
                     
Proceeds:                    
  Gross proceeds       $4,265,000   $735,000   $5,000,000 
  Closing costs        (325,000)       (325,000)
  Reimbursement of investor costs        (250,000)        (250,000)
       Net proceeds       $3,690,000   $735,000   $4,425,000 
                     
Allocation:                    
  Series D Preferred Stock  $2,670,578   $1,127,574   $233,098   $1,360,672 
  Secured Notes  $2,536,015    1,070,519    363,293    1,433,812 
  Compound Embedded Derivatives (CED):        

 

         
       Series D Preferred Stock  $1,116,595    949,106    167,489    1,116,595 
       Secured Notes  $28,049    23,842    4,207    28,049 
  Warrants  $1,225,680    518,959    183,852    702,811 
  Compensation Expense            (216,939)   (216,939)
        $3,690,000   $735,000   $4,425,000 

 

Closing costs of $325,000 were paid directly to the lead investor. As required by current accounting standards, financing costs paid directly to an investor or creditor are reflected in the allocation as original issue discount to the financial instruments.

Fair Value Considerations:

The Company has adopted the authoritative guidance on “Fair Value Measurements.” The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs. The guidance also establishes a fair value hierarchy that prioritizes the inputs to the valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices in active markets for identical asset or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3) as described below:

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company.

Level 2 Inputs – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.

Level 3 Inputs – Unobservable inputs for the asset or liability including significant assumptions of the Company and other market participants.

The Company’s Secured Notes, Warrant derivative liability, Put option derivative and Series D Preferred Stock are classified within Level 3 of the fair value hierarchy as they are valued using unobservable inputs including significant assumptions of the Company and other market participants. In November, 2011, in conjunction with the Company obtaining a bank credit facility (see Note 5), the Company repaid in full the remaining $2 million of principal then outstanding under the Secured Notes.

There were no transfers between Level 1 and Level 2, or transfers in and out of Level 3 during the twelve months ended March 31, 2013 and 2012.

Except for those assets and liabilities which are required by authoritative guidance to be recorded at fair value in the Company’s balance sheet, the Company has elected not to record any other assets and liabilities at fair value.

28
 

The following tables present the Company’s instruments that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.

 

   Fair Value Measurements as of March 31, 2012 
   Total   Level 1   Level 2   Level 3 
Instruments:                    
Warrants  $3,005,319   $   $   $3,005,319 
Series D Preferred Stock   2,569,347            2,569,347 
Total Instruments  $5,574,666   $   $   $5,574,666 

 

   Fair Value Measurements as of March 31, 2013 
   Total   Level 1   Level 2   Level 3 
Instruments:                    
Warrants  $4,664,894   $   $   $4,664,894 
Series D Preferred Stock   3,132,882            3,132,882 
Total Instruments  $7,797,776   $   $   $7,797,776 

The following table presents the changes in Level 3 Instruments measured at fair value on a recurring basis for the twelve months ended March 31, 2013 and 2012:

 

   Total   Secured
Notes
   Warrants   Put
Derivative
   Series D
Preferred
Stock
 
                          
Balances at, March 31, 2011  $7,345,500   $2,500,000   $2,837,143   $5,272   $2,003,085 
Fair value adjustments   162,904        168,176    (5.272)    
Payments of debt   (2,500,000)   (2,500,000)            
Accretion   566,262                566,262 
Balances at, March 31, 2012  5,574,666      3,005,319      2,569,347 
Fair value adjustments   1,659,575        1,659,575         
Accretion   563,535                563,535 
Balances at, March 31, 2013  $7,797,776   $   $4,664,894   $   $3,132,882 

The fair value adjustments recorded for Warrants and Put Derivative are reported separately in the Statement of Operations, the discount amortization on Secured Notes is reported in interest expense, and accretion on Series D Preferred Stock is recorded to the accumulated deficit.

(5)Bank Credit Facility

On November 23, 2011, the Company entered into a Loan and Security Agreement with TD Bank, N.A. (the “Bank”), pursuant to which it was provided with a $4.0 million revolving credit facility (the “Credit Facility”). Borrowings under the Credit Facility are secured by substantially all of Company’s assets and have been guaranteed by the Company’s subsidiaries.

Pursuant to the Loan Agreement, among other things:

·All outstanding loans will become due on November 23, 2013, provided that following the Company’s request, the Bank may in its sole discretion agree to one year extensions of the maturity date;

·Interest accrues on outstanding loans at a per annum rate equal to the greater of (i) 4.0%, and (ii) the Bank’s prime rate as from time to time in effect plus one percent;

·Aggregate loans outstanding at any time are limited to a borrowing base equal to 80% of the Company’s eligible accounts receivable, as determined by the Bank, provided that the advance rate is limited to 50% with respect to accounts receivable from customers of the Company whose receivables constitute more than 50% of the Company’s receivables in the aggregate; and

·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, provide that the Company’s debt service coverage ratio (as determined pursuant to the Loan Agreement) cannot be less than 1.25 to 1.0 as of the end of any fiscal year, and require that the Company have immediately available cash at all times, including borrowings under the Credit Facility, of at least $3 million.
29
 

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

Upon the closing of the Credit Facility, the Company paid a $30,000 commitment fee to the Bank plus its legal costs and expenses.

On December 11, 2012, the Company entered into an amendment to the Loan Agreement, effective as of November 23, 2012, pursuant to which (i) the maturity date under the loan agreement was extended for one year to November 23, 2013, and (ii) the Company’s obligation to maintain $500,000 in a blocked account with the Bank to secure the Company’s obligations under the loan agreement was terminated. Accordingly, in connection with the amendment, such blocked account was released to the Company.

At March 31, 2013, the Company had no borrowings outstanding under the Credit Facility and availability of $3,198,000.

In connection with the Loan Agreement, the holders of the Company’s Series D Preferred Stock entered into a Standstill Agreement with the Bank under which such stockholders have agreed not to exercise any rights they may have to cause the Company to redeem their shares of Series D Preferred Stock prior to December 15, 2015 (or such earlier date as the Credit Facility is terminated), other than upon a change of control or liquidation event of the Company.

(6)Redeemable Preferred Stock

Redeemable preferred stock consists of the following as of March 31, 2013 and 2012:

 

   March 31,
2013
   March 31,
2012
 
Series D Convertible Participating Preferred Stock, par value
$0.001, stated value $1.00, 2,500,000 shares designated,
2,500,000 shares issued and outstanding at March 31,
2013; redemption and liquidation value $3,732,681 at
March 31, 2013
  $3,132,882   $2,569,347 

 

The Series D Preferred Stock is subject to accretion to its redemption value, through charges to equity, over the period from issuance to the contractual redemption date, discussed in Note 4, above, using the effective interest method. The redemption value is determined based upon the stated redemption amount of $1.00 per share, plus an accretion amount, more fully discussed below. For the years ended March 31, 2013 and 2012, accretion amounted to $563,535 and $566,262, respectively.

(7)Derivative Financial Instruments

The Company’s derivative financial instruments consist of compound embedded derivatives (“CED”) that were bifurcated from our Series D Preferred Stock and Secured Notes. The Preferred CED comprises the embedded conversion option and certain other equity-indexed features that were not clearly and closely related to the Series D Preferred Stock in terms of risks. The Senior Note CED comprises certain put features that were not clearly and closely related to the Secured Notes in terms of risks. Derivative financial instruments are carried at fair value. The following table reflects the components of the CEDs and changes in fair value, using the techniques and assumptions described in Note 4:

 

   Total   Warrant
Derivative
   Put
Derivative
 
Balances at April 1, 2011  $2,842,415   $2,837,143   $5,272 
Fair value adjustments   162,904    168,176    (5,272)
Balances at March 31, 2012   3,005,319    3,005,319     
Fair value adjustments   1,659,575    1,659,575     
Balances at March 31, 2013  $4,664,894   $4,664,894   $ 

Fair value adjustments are recorded in fair value adjustments to compound embedded derivatives in the accompanying financial statements. As a result, the Company’s earnings are and will be affected by changes in the assumptions underlying the valuation of the derivative financial instruments. The principal assumptions that have, in the Company’s view, the most significant effects are the Company’s trading market prices, volatilities and risk-adjusted market credit rates.

30
 
(8)Stockholders’ Equity
(i) Stock Options

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. In September 2008, the 2002 Plan was amended to increase the number of shares of Common Stock available under the plan to 1,650,000. 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 March 31, 2013, there were 70,000 options, expiring from April 2015 through September 2017, issued under the 2002 Plan that remained outstanding. The 2002 Plan terminated on June 30, 2012.

On March 25, 2010, the stockholders of the Company approved the ‘mktg, inc.’ 2010 Equity Incentive Plan (the “2010 Plan”), under which 3,000,000 shares of Common Stock have been set aside and reserved for issuance. The 2010 Plan provides for the granting to our employees, officers, directors, consultants and advisors of stock options (non-statutory and incentive), restricted stock awards, stock appreciation rights, restricted stock units and other performance stock awards. The 2010 Plan is administered by the Compensation Committee of the Board of Directors.  The exercise price per share of a stock option, which is determined by the Compensation Committee, may not be less than 100% of the fair market value of the common stock on the date of grant. For non-qualified options the term of the option is determined by the Compensation Committee. For incentive stock options the term of the option is not more than ten years. However, if the optionee owns more than 10% of the total combined voting power of the Company, the term of the incentive stock option will be no longer than five years. The 2010 Plan automatically terminates on February 22, 2020, unless it is terminated earlier by a vote of the Company’s stockholders or the Board of Directors; provided, however, that any such action does not affect the rights of any participants of the 2010 Plan. In addition, the 2010 Plan may be amended by the stockholders of the Company or the Board of Directors, subject to stockholder approval if required by applicable law or listing requirements. At March 31, 2013, there were options to purchase 2,455,428 shares of Common Stock, expiring May 2020, issued under the 2010 Plan that remained outstanding. Any option under the 2010 Plan that is not exercised by an option holder prior to its expiration may be available for re-issuance by the Company. As of March 31, 2013, the Company had options or other awards for 45,135 shares of Common Stock available for grant under the 2010 Plan.

The maximum contractual life for any of the options is ten years. The Company uses the Black-Scholes model to estimate the value of stock options granted under FASB guidance. Because option-pricing models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of options.

A summary of option activity under all plans as of March 31, 2013, and changes during the two-year 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, 2011  $0.60    3,048,677    8.55   $701,196 
Granted                  
Exercised                  
Canceled  $2.08    (234,375)          
                     
Balance at March 31, 2012  $0.56    2,814,302    8.06   $1,328,393 
Granted                  
Exercised  $0.43    (144,437)          
Canceled  $0.43    (144,437)          
Balance at March 31, 2013 (vested and expected to vest)  $0.49    2,525,428    7.05   $2,171,868 
Exercisable at March 31, 2013  $0.54    1,297,716    7.16   $1,051,150 
31
 

Total unrecognized compensation cost related to vested and expected to vest options at March 31, 2013 amounted to $185,486 and is expected to be recognized over a weighted average period of 1.17 years. Total compensation cost for all outstanding option awards for the years ended March 31, 2013 and 2012 amounted to $162,106 and $177,696, respectively.

(ii) Warrants

At March 31, 2013 and March 31, 2012 there were warrants outstanding to purchase 2,456,272 shares of common stock at a price of $.001 per share, which were issued in the December 2009 financing and expire December 15, 2015. The aggregate intrinsic value of the warrants outstanding at March 31, 2013 and March 31, 2012 was $3,313,511 and $2,257,314, respectively.

(iii) Restricted Stock

During the years ended March 31, 2013 and 2012, the Company awarded 160,000 and 250,500 shares of Common Stock initially subject to forfeiture (“restricted stock”) pursuant to the authorization of the Company’s Board of Directors and certain Restricted Stock Agreements under the Company’s 2010 Plan.

As of March 31, 2013 the Company had awarded 1,185,571 shares (net of forfeited shares) of restricted stock under the Company’s 2002 Plan, 355,000 shares (net of forfeited shares) of restricted stock under the Company’s 2010 Plan, and 189,767 shares (net of forfeited shares) of restricted stock that were not issued under the Company’s 2002 or 2010 Plans. 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 amount to approximately $2,612,944 and is recognized ratably as compensation expense over the vesting periods. The shares of restricted stock granted pursuant to such agreements vest in various tranches over one to five years from the date of grant.

The shares awarded to employees 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 March 31, 2013, and changes during the two years then ended is presented below:

                 
   Weighted
average
grant date
fair value
   Number
of
shares
   Aggregate
Intrinsic
Value
   Weighted
average
remaining
contractual
term
 
                 
Unvested at March 31, 2011  $1.96    500,845   $415,701    2.62 
                     
Awarded  $0.71    250,500           
Vested  $2.05    (149,490)          
Forfeited  $1.21    (20,000)          
                     
Unvested at March 31, 2012  $1.62    581,855   $535,307    2.06 
                     
Awarded  $0.90    160,000           
Vested  $1.87    (197,739)          
Forfeited  $0.88    (58,500)          
                     
Unvested at March 31, 2013  $1.36    485,616   $655,582    1.70 

Total unrecognized compensation cost related to unvested stock awards at March 31, 2013 amounted to $321,355 and is expected to be recognized over a weighted average period of 1.70 years. Total compensation cost for the stock awards amounted to $280,009 and $266,580 for the years ended March 31, 2013 and 2012, respectively.

32
 
(9)Income Taxes

The components of the provision (benefit) for income taxes from continuing operations for the years ended March 31, 2013 and 2012 are as follows:

         
   2013   2012 
Current:          
State and local  $158,000   $138,000 
Federal   70,333    72,000 
    228,333    210,000 
Deferred:          
State and local   171,501    257,017 
Federal   1,420,753    1,373,893 
Change in valuation allowance       (3,413,936)
    1,592,254    (1,783,026)
           
   $1,820,587   $(1,573,026)

The differences between the provision (benefit) for income taxes from continuing operations computed at the federal statutory rate and the reported amount of tax expense attributable to income from continuing operations before provision (benefit) for income taxes for the years ended March 31, 2013 and 2012 are as follows:

   2013   2012 
Statutory federal income tax   34.0%   34.0%
State and local taxes, net of federal benefit   9.1    6.3 
Permanent differences   21.4    4.2 
Alternative minimum tax   (6.3)   3.6 
Valuation allowance       (89.2)
Other   1.8     
Effective tax rate   60.0%   (41.1%)

The tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities that are included in the deferred tax assets and liability are as follows:

         
   2013   2012 
Deferred tax assets  (liability):          
Current:          
Allowance for doubtful accounts  $126,839   $126,839 
Accrued compensation   647,299    678,857 
   $774,138   $805,696 
Non-current:          
Assets:          
Depreciation on fixed assets  $124,838   $48,584 
Amortization on intangible asset   407,464    321,682 
Net operating loss carryforwards   1,169,280    2,455,533 
Share-based payment arrangements   206,843    237,994 
Other   504,075    282,081 
   $2,412,500   $3,345,874 
Liability:          
Goodwill, principally due to differences in amortization  $(2,995,866)  $(2,368,544)
   $(2,995,866)  $(2,368,544)
           
Net deferred tax asset  $190,772   $1,783,026 
33
 

At March 31, 2013, the Company had federal net operating loss carry-forwards of approximately $2,578,000 that begin to expire on March 31, 2029, as follows:

     
Fiscal Year End  Amount 
2029  $1,163,000 
2030   1,415,000 
   $2,578,000 

As of March 31, 2013 and 2012, the Company did not have any unrecognized tax benefit or open tax positions. It is the Company’s practice to include interest and penalties in tax expense. As of March 31, 2013 and 2012, the Company had no accrued interest or penalties related to income tax matters included in its provision for income taxes.

The Company currently has no federal or state tax examinations in progress and is no longer subject to federal and state income tax audits by taxing authorities for years prior to March 2010.

(10)Significant Customers

For each of the years ended March 31, 2013 and 2012, Diageo North America, Inc. (“Diageo”) accounted for approximately 62% of the Company’s revenues. At March 31, 2013 and 2012, Diageo accounted for 55% and 61%, respectively, of the Company’s accounts receivable. For the years ended March 31, 2013 and 2012, our second largest customer accounted for approximately 15% and 11% of the Company’s revenue, respectively. At March 31, 2013 and 2012, this customer accounted for 17% and 13% respectively, of the Company’s accounts receivable.

(11)Employee Benefit Plan

The Company has a savings plan available to substantially all salaried employees which is intended to qualify as a deferred compensation plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). Pursuant to the 401(k) Plan, employees may contribute up to 15% of their eligible compensation, up to the maximum amount allowed by law. The Company at its sole discretion may from time to time make discretionary matching contributions as it deems advisable. The Company’s current policy is to match its employee’s contributions to the 401(k) Plan at the rate of 50%, with the maximum matching contribution per employee being the lower of 2.5% of salary or $6,250 in any calendar year. For the years ended March 31, 2013 and 2012, the Company made discretionary contributions of approximately $208,000 and $183,000, respectively.

(12)Leases

The Company has several non-cancelable operating leases, primarily for property, that expire through November 2016. Rent expense for the years ended March 31, 2013 and 2012 amounted to approximately $1,751,000 and $1,570,000, respectively. Future non-cancelable minimum lease payments under all of the leases as of March 31, 2013 are as follows:

 

Year ending March 31,     
      
2014  $1,905,000 
2015   1,948,000 
2016   692,000 
2017   107,000 
2018    
Thereafter    
   $4,652,000 
(13)Employment Agreements

In June 2008, upon the acquisition of mktgpartners the Company employed Charles Horsey, the principal member of mktgpartners, as its Chief Operating Officer. The Company subsequently entered into a three-year employment agreement with Mr. Horsey upon his appointment as the Company’s President. In May 2010, the Company further amended the agreement so that Mr. Horsey serves as the Company’s Chief Executive Officer in addition to its President. The employment agreement, as amended, expires April 1, 2014, currently provides for an annual base salary of $390,000, and an annual bonus targeted at 60% of the base salary. Pursuant to the employment agreement, in the event that Mr. Horsey’s employment is terminated by the Company without “Cause” or by Mr. Horsey for “Good Reason,” Mr. Horsey will be entitled to severance pay equal to twelve months of his then base salary plus $100,000.

34
 
(14)Related Party Transactions

Charles Horsey, who was not then employed by the Company, but who is currently its Chairman of the Board, President and Chief Executive Officer, was mktgpartners’ principal member. In July 2009, following the approval of the Company’s Audit Committee, which was based on mktgpartners’ performance following the acquisition and other relevant factors, the cash of $750,000 that was placed into escrow at the time of the acquisition was released to mktgpartners. In addition, the entire share consideration consisting of 332,226 shares of common stock was released to mktgpartners in January 2010. As a condition to their participation in the December 2009 Stock financing, Union Capital required that directors, officers and employees collectively purchase $735,000 of the securities issued in the financing on the same terms and conditions as Union Capital. Directors, officers and employees participating in the financing included Marc Particelli, the Chairman of the Board of the Company at that time, who invested $500,000 in the financing, and Charles Horsey, who invested $200,000 in the financing. As a result of their respective investments, Mr. Particelli was issued a Senior Note in the principal amount of $250,000, 250,000 shares of Series D Preferred Stock and a Warrant to purchase 245,627 shares of Common Stock; and Mr. Horsey was issued a Senior Note in the principal amount of $100,000, 100,000 shares of Series D Preferred Stock and a Warrant to purchase 98,251 shares of Common Stock.

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, with the participation of our Chief Executive Officer and Principal Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of March 31, 2013. Based on that evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2013.

Management’s Report On Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records, that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Our management, with the participation of our Chief Executive Officer and Principal Financial Officer, evaluates the effectiveness of our internal control over financial reporting based on the framework established in “Internal Control – Integrated Framework”, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In accordance with these standards, management assessed and tested, on a sample basis, the Company’s internal control over financial reporting. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of March 31, 2013.

Notwithstanding the foregoing, we do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met and cannot detect all deviations.  Because of the inherent limitations in all control systems, no evaluation of control can provide absolute assurance that all control issues and instances of fraud or deviations, if any, within the Company have been detected. While we believe that our disclosure controls and procedures and our internal control over financial reporting are effective, in light of the foregoing, we intend to continue to examine and refine our disclosure controls and procedures and our internal control over financial reporting to monitor ongoing developments in this area.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B.Other Information.

 

Not Applicable

35
 

PART III

Item 10.Directors, Executive Officers and Corporate Governance.

The following table sets forth information with respect to each Director and executive officer of the Company.

DIRECTORS
     
Charles Horsey
Age: 45
Director since March 2009;
Chairman of the Board, Chief Executive
Officer and President
  Mr. Horsey was appointed as Chairman of the Board of the Company on August 1, 2012.  Mr. Horsey has served as the Company’s Chief Executive Officer since May 12, 2010 and as its President since March 1, 2009, and previously served as the Company’s Chief Operating Officer from December 22, 2008 until his appointment as President.  Mr. Horsey originally joined the Company as an Executive Vice President on June 30, 2008 upon the Company’s acquisition of 3 For All Partners, LLC d/b/a mktgpartners (“mktgpartners”). Mr. Horsey helped found mktgpartners in 2003 and served as its Chief Executive Officer from January 2007 until it was acquired by the Company. Previously, from 1992 until co-founding mktgpartners, Mr. Horsey held various positions in the Contemporary Marketing division of Clear Channel Communications, Inc., culminating with his appointment as Chief Executive Officer of that division.  We believe that Mr. Horsey’s industry experience and service as our Chief Executive Officer qualify him to serve on our Board.
     
Reis L. Alfond(1)
Age: 32
Director since January 2012
  Mr. Alfond has been the Vice President of Union Capital Corporation since 2010, having joined Union Capital in 2007 as an analyst. Mr. Alfond began his career as a consultant at the Strategic Decision Group. During his tenure at Union Capital, he has completed leveraged buyout transactions and managed portfolio investments in the, marketing services, commercial and digital printing, direct mail and food industries.  We believe that Mr. Alfond’s extensive business and management experience qualifies him to serve on our Board.
     
Richard L. Feinstein
Age: 70
Director since January 2010
  Retired partner of KPMG LLP, and currently a private consultant providing management and financial advice to clients in a variety of industries. From April 2004 to December 2004, Mr. Feinstein, as a consultant, served as Chief Financial Officer for Image Technology Laboratories, Inc., a developer and provider of radiological imaging, archiving and communications systems. From December 1997 to October 2002, Mr. Feinstein was a Senior Vice President and Chief Financial Officer for The Major Automotive Companies, Inc., formerly a diversified holding company, but now engaged solely in retail automotive dealership operations. Since September 2010, Mr. Feinstein, as a consultant, serves as Chief Financial Officer for Amertrans Capital Corporation, a closed-end investment company. From April 2003 to May 2011, Mr. Feinstein served as a director of EDGAR Online, Inc. He also serves as a director and chief financial officer of USA Fitness Corps, a not-for-profit using the services of returning veterans to provide fitness training to children who are at risk for obesity. Mr. Feinstein, a Certified Public Accountant, received a B.B.A. degree from Pace University. We believe that Mr. Feinstein’s extensive financial accounting and auditing experience qualifies him to serve on our Board.
     
Jay F. Landauer(1)
Age: 35
Director since August 2012
  Mr. Landauer was appointed to the Board on August 1, 2012. Mr. Landauer is currently a Partner at Union Capital Corporation, having joined Union Capital in 2004 as an associate. Prior to joining Union Capital, Mr. Landauer worked in corporate development at a publicly held medical device company reporting to the CEO and CFO as well as managing and facilitating the sale of a small company. During his tenure at Union Capital, he has completed leveraged buyout transactions, public company investments, distressed investments as well as managing portfolio investments in the marketing services, commercial and digital printing, direct mail and food industries. He received his MBA from MIT’s Sloan School of Management and a BBA from Baruch College where he received the top award in finance. He has also served as a past president of the MIT Sloan Club of New York. We believe that Mr. Landauer’s extensive business and management experience qualifies him to serve on our Board.

36
 

     
Marc C. Particelli
Age: 68
Director since February 2005
  Chairman of the Board of the Company from July 12, 2006 until August 12, 2010, and its interim President and Chief Executive Officer from July 12, 2006 until October 9, 2006. Mr. Particelli was the Chief Executive Officer of Modem Media, an interactive marketing services firm, from January 1991 until its acquisition by Digitas Inc. in October 2004, and more recently, from August 2005 until March 2006, he was the Chief Executive Officer of TSM Corporation, a telecommunications company serving the Hispanic market. Earlier, Mr. Particelli was a partner at Oak Hill Capital Management, a private equity investment firm, and managing director at Odyssey Partners L.P., a hedge fund. Prior to entering the private equity business, Mr. Particelli spent 20 years with Booz Allen where he helped create the Marketing Industries Practice and led its expansion across Europe, Asia and South America. Mr. Particelli also currently serves as a director of and investor in several private companies, and as an advisor to several private equity firms. Mr. Particelli presently serves as a director of CIN Legal Data Services. We believe that Mr. Particelli’s business and industry experience, as well as his prior experience with the Company, qualify him to serve on our Board.
     

EXECUTIVE OFFICERS

     

Paul Trager
Age: 53
Chief Financial Officer

 

  Mr. Trager, a Certified Public Accountant, has served as the Company’s Chief Financial Officer since April 1, 2011.   Mr. Trager originally joined the Company as a Senior Vice President – Financial Planning and Analysis on June 30, 2008 upon the Company’s acquisition of mktgpartners, and had served as mktgpartners’ Chief Financial Officer from March 2007 until it was acquired by the Company.  Previously, from May 2005 until joining mktgpartners, Mr. Trager was an Aarons Rents franchise owner.  Prior to May 2005, Mr. Trager was a partner in the accounting firm Weinick Sanders Leventhal &Co.
     
James R. Haughton
Age: 54
Senior Vice President – Controller
  Mr. Haughton, a Certified Public Accountant, has been employed by the Company in its finance and accounting department since November 2007, and has been its Senior Vice President – Controller since March 1, 2009. Previously, from October 2005 to June, 2007 Mr. Haughton was the Chief Financial Officer of National Retail Services, Inc., a full service provider of merchandising and retail marketing services. Prior to that, from January 2002 to October 2005, Mr. Haughton was a regional Chief Financial Officer at Euro-RSCG Worldwide, a global advertising and communications company.

 

(1) Messrs. Alfond and Landauer were appointed to the Board as the nominees of the holders of the Series D Preferred Stock. Pursuant to the certificate of designations designating the Series D Preferred Stock, so long as at least 25% of the shares of Series D Preferred Stock issued at the closing of the December 2009 financing are outstanding, the holders of the Series D Preferred Stock as a class have the right to designate two members of the Board of Directors, and so long as at least 15% but less than 25% of the shares of Series D Preferred Stock issued at the closing are outstanding, the holders of the Series D Preferred Stock will have the right to designate one member of our Board of Directors.

 

Audit Committee

 

The Company has an Audit Committee currently composed of Richard L. Feinstein (Chairman) and Marc C. Particelli. The Board of Directors has determined that Richard L. Feinstein is an “audit committee financial expert,” as such term is defined in Item 401(h) of Regulation S-K and is independent as defined in Nasdaq Listing Rule 5605(a)(2).

Compliance With Section 16(a) Of The Exchange Act

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires the Company’s officers and Directors and persons who own more than 10% of a registered class of the Company’s equity securities (collectively, the “Reporting Persons”) to file reports of ownership and changes in ownership with the Securities and Exchange Commission and to furnish the Company with copies of these reports. To the Company’s knowledge, based solely on a review of the Forms 3, 4, and 5 submitted to the Company during and with respect to Fiscal 2013, there were no known failures to file a required Form 3, 4 or 5, and no known late filings of a required Form 3, 4 or 5 by any person required to file such forms with respect to the Company pursuant to Section 16 of the Exchange Act.

37
 

Code of Conduct

The Company maintains a Code of Conduct that is applicable to all of the Company’s and its subsidiaries’ employees, including the Company’s Chief Executive Officer, Chief Financial Officer and Controller. The Code of Conduct, which satisfies the requirements of a “code of ethics” under applicable Securities and Exchange Commission rules, contains written standards that are designed to deter wrongdoing and to promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest; full, fair, accurate, timely and understandable public disclosures and communications, including financial reporting; compliance with applicable laws, rules and regulations; prompt internal reporting of violations of the code; and accountability for adherence to the code.

Item 11.Executive Compensation.

Compensation Discussion and Analysis

General

The Compensation Committee of the Board of Directors (the “Committee”), under its charter, is charged with, among other things, determining the cash and non-cash compensation of our executive officers, and exercising the authority of the Board of Directors with respect to the administration of our stock-based and other incentive compensation plans.

Our compensation arrangements with those persons who served as our executive officers for all or part of Fiscal 2013 primarily reflect the individual circumstances surrounding the applicable executive officer’s hiring or appointment, as reflected in the employment agreements we entered into with those persons. The foregoing information is intended to provide context for the discussion that follows regarding our compensation arrangements with those persons who served as our executive officers for all or part of Fiscal 2013.

Compensation Philosophy

Our compensation programs are designed to align compensation with business objectives and performance metrics, enabling us to reward executives and other key employees who contribute to and maximize shareholder value. Our compensation strategy will utilize multiple compensation vehicles to balance institutional affordability and the ability to hire and retain top talent. Consistent with the foregoing, the Compensation Committee subscribes to the following principles:

·We believe that the most effective compensation strategies are simple in design, straightforward in application and easy to communicate to management, investors and participants.
·We will reward key talent who directly contribute to the achievement of our core business objectives, based upon evaluation of specific, measurable performance goals.
·We believe that an incentive compensation award should be first dependent upon the profitability and performance of the company and second upon an individual’s achievement of measurable personal goals that are directly aligned with the company’s strategic and operational goals.
·We believe that base salary should be the fixed portion of executive compensation and should be used to compensate individuals for expected, day-to-day performance.
·We believe that the variable portion of executive compensation should consist of cash and equity (or equity-like) incentives, to be determined annually and tied directly to performance measures and executive retention.

Role of Management Officers in Compensation Decisions

The Committee makes all compensation decisions for executive officers. The Chief Executive Officer, together with other members of management, evaluate the performance of executive officers (other than the Chief Executive Officer), and the Chief Executive Officer then makes recommendations to the Committee with respect to annual salary adjustments, annual cash bonus awards and restricted stock grants. The Committee can exercise its discretion in modifying any recommended salary adjustments or discretionary cash or equity-based awards to executives.

Principal Components of Compensation of Our Executive Officers

The principal components of the compensation paid to our executive officers consist of:

·base salary;
38
 
·cash bonuses; and
·equity compensation, generally in the form of stock options and awards of restricted stock.

Management Bonus Plan

On May 12, 2010, upon the recommendation of the Company’s Compensation Committee, the Company’s Board of Directors approved a Management Bonus Plan. Pursuant to the Management Bonus Plan, the Company’s Chief Executive Officer and other employees of the Company selected by him are eligible to be paid annual cash bonuses from a bonus pool. The bonus pool is only funded to the extent specified EBITDA thresholds approved of by the Company’s Board of Directors are achieved, and the actual amount of the bonus pool in each year (if any) is determined by the amount by which such thresholds are exceeded. For Fiscal 2013, 86% of the bonus pool was funded as a result of the Company’s performance for the fiscal year.

Allocation and Objectives of Compensation

The Committee has established the following policies and guidelines with respect to the mix of base salary, cash bonus and equity awards to be paid or awarded to our executive officers.

·Target cash bonus for our senior executives of up to 50% of base salary for the achievement of objectives established by the Committee and the Board of Directors;
·Target cash bonus for other officers and senior management equal to 30% of the base salary of each such person for the achievement of objectives established by the Committee and the Board of Directors; and
·Stock option grants vesting over four years and subject to the achievement of EBITDA targets set by the Board of Directors, awarded at the discretion of the Committee.

Base Salary

Base salary levels for the Company’s executive officers recognize the experience, skills, knowledge and responsibilities required of each executive officer and are determined, as applicable, based on prevailing market conditions, terms of existing employment agreements, and arms’ length negotiation.

Equity Compensation

Chief Executive Officer

Upon his initial employment with the Company in connection with the acquisition of mktgpartners in June 2008, the Committee approved the award to Mr. Horsey of 69,767 shares of Common Stock under a Restricted Stock Agreement vesting over a five-year period. In addition, the Committee approved an award to Mr. Horsey of an additional 30,233 shares of restricted Common Stock upon Mr. Horsey’s appointment as Chief Operating Officer in December 2008, and an additional 100,000 shares of restricted Common Stock upon his appointment as President in March 2009. Subsequently, in May 2010, following the approval of the Committee, Mr. Horsey was granted an option to purchase 953,284 shares of Common Stock at an exercise price of $0.43 per share, with such option vesting over four years and subject to the achievement of EBITDA targets set by the Board of Directors. Finally, in May 2012, the Committee approved the award to Mr. Horsey of 67,500 shares of Common Stock under a Restricted Stock Agreement vesting over a four-year period.

Chief Financial Officer

In May 2012, the Committee approved the award to Mr. Trager of 35,000 shares of Common Stock under a Restricted Stock Agreement vesting over a four-year period.

 

Senior Vice President - Controller

In connection with his appointment as Senior Vice President – Controller, Chief Accounting Officer in March 2009, the Committee approved the award to Mr. Haughton of 25,000 shares of restricted Common Stock vesting over a five-year period. In addition, in May 2010, following the approval of the Committee, Mr. Haughton was granted an option to purchase 144,437 shares of Common Stock at an exercise price of $0.43 per share, with such option vesting over four years and subject to the achievement of EBITDA targets set by the Board of Directors. Subsequently, in May 2012, the Committee approved the award to Mr. Haughton of 35,000 shares of Common Stock under a Restricted Stock Agreement vesting over a four-year period.

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Other Benefits

The Company believes that establishing competitive benefit packages for its employees is an important factor in attracting and retaining highly qualified personnel. Executive officers are eligible to participate in all of our employee benefit plans, such as medical, dental, and the Company’s 401(k) plan, in each case on the same basis as other employees. During Fiscal 2012, consistent with the Company’s practice with respect to all of its employees, the Company provided matching contributions under its 401(k) plan. Other than the 401(k) plan offered to all of its eligible employees, the Company does not offer retirement benefits.

 

SUMMARY COMPENSATION TABLE

The following table shows compensation awarded to or earned by Charles Horsey, the Company’s Chairman of the Board, Chief Executive Officer and President; Paul Trager, the Company’s Chief Financial Officer and James R. Haughton, the Company’s Senior Vice President – Controller and Principal Financial Officer during Fiscal 2013 (together, the “Named Executive Officers”).

Name and
Principal Position
  Fiscal
Year
   Salary
($)
   Stock
Awards(1)
($)
   Option
Awards (2)
($)
   NonEquity
Incentive
Plan
Compensation (3)
($)
   All Other
Compensation
($)
   Total
($)
 
Charles Horsey,
Chairman of the Board, Chief Executive Officer, President
   2013   $376,507   $60,750   $   $200,315   $9,542(5)  $647,114 
    2012   $365,541   $   $   $208,843   $7,267(5)  $581,651 
                                    
Paul Trager,
Chief Financial Officer (4)
   2013   $271,127   $31,500   $   $85,315   $7,214(6)  $395,156 
    2012   $260,699   $   $   $90,316   $5,795(6)  $356,810 
                                    
James R. Haughton,
Senior Vice President – Controller
   2013   $213,704   $31,500   $   $40,272   $5,334(6)  $290,810 
    2012   $205,485   $   $   $50,338   $5,898(6)  $261,721 
(1)The value of stock awards granted to the Named Executive Officers has been estimated pursuant to FASB ASC Topic 718. The Named Executive Officers will not realize the estimated value of these awards in cash until these awards are vested and sold. For information regarding our valuation of awards of restricted stock, see “Restricted Stock” in Note 8 of our financial statements.

(2)The value of options granted to the Named Executive Officers has been estimated pursuant to FASB ASC Topic 718. The Named Executive Officers will not realize the estimated value of these awards in cash unless and until the options are exercised and the shares issuable thereunder are sold for a price in excess of the exercise price. For information regarding our valuation of awards of options, see “Stock Options” in Note 8 of our financial statements.

(3)Amounts are payable under our Management Bonus Plan based on the achievement of EBITDA targets set for the applicable fiscal year, and for Mr. Horsey includes a special bonus of $40,000 for fiscal 2013 and $55,000 for fiscal 2012.

(4)
Was appointed Chief Financial Officer on April 1, 2011 and was not previously a Named Executive Officer.

(5)Consists of 401(k) matching contributions and a term life insurance premium.

(6)Consists of 401(k) matching contributions.
40
 
Outstanding Equity Awards at March 31, 2013
   Option Awards   Stock Awards 
Name  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
   Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable (1)
   Option Exercise
Price
($)
   Option
Expiration Date
   Number of shares
or Units
of Stock That Have
Not
Vested (2)
(#)
   Market Value
of shares or
Units
of Stock That
Have Not
Vested
($)
 
                         
Charles Horsey   0    953,284   $0.43    4/1/2020    87,500   $118,100 
Paul Trager   0    202,212   $0.43    4/1/2020    56,338   $76,100 
James R. Haughton   0    144,437   $0.43    4/1/2020    45,000   $60,800 
(1)These options vest in quarterly installments of 25% on each of April 1, 2011, April 1, 2012, April 1, 2013, and April 1, 2014, provided that other than the first 25% that vested on April 1, 2011, all vesting is subject to the achievement of EBITDA targets set forth in the grant notices for these options.
(2)The 87,500 shares of restricted Common Stock held by Mr. Horsey that had not vested as of March 31, 2013 vest as follows: (i) 13,954 shares vest on June 30, 2013, (ii) 6,046 shares vest on March 1, 2014, (iii) 16,875 shares vest on May 7, 2013, (iv) 16,875 shares vest on May 7, 2014, (v) 16,875 shares vest on May 7, 2015, and (vi) 16,875 shares vest on May 7, 2016. The 56,338 shares of restricted Common Stock held by Mr. Trager that had not vested as of March 31, 2013 vest as follows: (i) 5,000 shares vest on March 1, 2014, (ii) 1,661 shares vest on June 30, 2013, (iii) 6,339 shares vest on July 1, 2013, (iv) 6,338 shares vest on July 1, 2014, (v) 2,000 shares vest on November 11, 2013, (vi) 8,750 shares vest on May 7, 2013, (vii) 8,750 shares vest on May 7, 2014, (viii) 8,750 shares vest on May 7, 2015, and (ix) 8,750 shares vest on May 7, 2016. The 45,000 shares of restricted Common Stock held by Mr. Haughton that had not vested as of March 31, 2013 vest as follows: (i) 5,000 shares vest on March 1, 2014, (ii) 3,000 shares vest on November 11, 2013, (iii) 2,000 shares vest on August 6, 2013, (iv) 8,750 shares vest on May 7, 2013, (v) 8,750 shares vest on May 7, 2014, (vi) 8,750 shares vest on May 7, 2015, and (vii) 8,750 shares vest on May 7, 2016.

 

Executive Employment Contracts, Termination of Employment and Change-in-Control Arrangements

 

Charles Horsey. On June 30, 2008, the Company entered into an Employment Agreement with Mr. Horsey in connection with the acquisition of mktgpartners. The Employment Agreement was subsequently amended upon Mr. Horsey’s promotion to Chief Operating Officer and again in May 2010. Pursuant to the Employment Agreement, as amended:

·Mr. Horsey is currently entitled to a base salary of $390,000 per annum.
·Mr. Horsey’s target bonus is 60% of his base salary. Such bonus is contingent on achieving EBITDA targets approved of by the Company’s Board of Directors.
·The term of Mr. Horsey’s employment is until April 1, 2014.
·In the event of the termination of his employment by the Company other than for “Cause” or by Mr. Horsey for “Good Reason” (as such terms are defined in the employment agreement), Mr. Horsey will be entitled to severance payments equal to 12 months of his then base salary, plus $100,000.

Paul Trager. Mr. Trager is currently employed with the Company pursuant to a letter agreement under which he is compensated by the Company at the rate of $298,200 per annum and eligible to receive an annual bonus targeted at 30% of base salary. Pursuant to an agreement we entered into with Mr. Trager, Mr. Trager is entitled to severance payments equal to six months of his then base salary if he is terminated other than for “Cause.”

James R. Haughton. Mr. Haughton is currently employed with the Company pursuant to a letter agreement under which he is compensated by the Company at the rate of $220,100 per annum and eligible to receive an annual bonus targeted at 40% of base salary. In addition, Mr. Haughton is entitled to six months notice prior to termination if he is terminated other than for “Cause.”

41
 

Compensation of Directors

The following table shows for the Fiscal 2013 certain information with respect to the compensation of all non-employee directors of the Company.

Name  Fees Earned or
Paid in Cash
($)
   All other
compensation
($)
   Total
($)
 
Marc C. Particelli (1)  $39,000       $39,000 
Richard L. Feinstein  $39,000       $39,000 
Reis L. Alfond (2)  $       $ 
Jay F. Landauer(2)  $       $ 

 

(1)At March 31, 2013, Mr. Particelli held options to purchase an aggregate of 70,000 shares of Common Stock.

 

(2)Messrs. Alfond and Landauer are affiliates of Union Capital Corporation and serve on our Board as the designees of the holders of the Series D Preferred Stock. As such, they do not receive cash compensation for their service on our Board. However, pursuant to a management consulting agreement we entered into with Union Capital, Union Capital provides us with management advisory services. We currently pay Union Capital a fee of $62,500 per year for such services. We also pay Union Capital $62,500 per year for the service of their employees on our Board of Directors.

Current Director Compensation

Pursuant to the terms of the agreements we entered into in connection with our December 2009 financing, the compensation we currently pay our directors is limited to cash compensation of (i) $4,000 per attendance at a meeting of the Board of Directors, (ii) $2,000 for participation by telephone in regular meetings of the Board of Directors, and (iii) $2,000 per attendance at or participation in a meeting of a committee of the Board of Directors. Directors also receive $500 for their participation in each special telephonic meeting of the Board of Directors. All Directors are reimbursed for reasonable travel expenses incurred in connection with attending Board meetings. Directors no longer receive the stock grants described below.

Compensation Committee Interlocks and Insider Participation

None of the current members of the Compensation Committee have been, or are, an officer or employee of the Company. During Fiscal 2013, none of our executive officers served as a member of the Board of Directors or compensation committee (or other committee performing equivalent functions) of any entity that had one or more executive officers serving as a member of our Board of Directors.

Narrative Disclosure of our Compensation Policies and Practices as They Relate to Risk Management

Based on our executive compensation program, policies and practices, and the nature of our business, we believe that any risks arising from these policies and programs are not reasonable likely to have a material adverse effect on the Company.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth certain information as of May 31, 2013 with respect to stock ownership of (i) those persons or groups known to the Company to beneficially own more than 5% of the Company’s outstanding Common Stock, (ii) each of the Company’s Directors and executive officers named in the summary compensation table, and (iii) the Company’s Directors and executive officers as a group. Unless otherwise indicated, the named beneficial owner has sole voting and investment power with respect to the shares.

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  Name and Address of Beneficial Owner   Amount and
Nature
of Beneficial
Ownership(1)
  Percent
of Class(1)
               
(i) Beneficial Owners of More Than 5% of the Common Stock (Other            
  Than Directors, Nominees and Executive Officers)            
               
  UCC-mktg Investment, LLC   6,632,434 (2)   43.4 %
  UCC-mktg Partners, LLC            
  c/o Union Capital Corporation            
  445 Park Avenue, 14th Floor            
  New York, NY 10022            
               
  James C. Marlas   6,819,593 (3)   44.6 %
  c/o Union Capital Corporation            
  445 Park Avenue, 14th Floor            
  New York, NY 10022            
               
  Rutabaga Capital Management   843,873 (4)   9.8 %
  64 Broad Street, 3rd Floor            
  Boston, MA 02109            
               
(ii) Directors, Nominees and Executive Officers            
               
  Charles Horsey   1,477,570 (5)   15.3 %
  c/o mktg, inc.            
  75 Ninth Avenue            
  New York, NY 10011            
               
  Reis L. Alfond   0 (6)   *  
  c/o Union Capital Corporation            
  445 Park Avenue, 14th Floor            
  New York, NY 10022            
               
  Richard L. Feinstein   10,000     *  
  c/o mktg, inc.            
  75 Ninth Avenue            
  New York, NY 10011            
               
  Jay Landauer   0 (7)   *  
  c/o Union Capital Corporation            
  445 Park Avenue, 14th Floor            
  New York, NY 10022            
               
  Marc C. Particelli   1,248,787 (8)   13.3 %
  c/o mktg, inc.            
  75 Ninth Avenue            
  New York, NY 10011            
               
  Paul Trager   261,046 (9)   3.0 %
  c/o mktg, inc.            
  75 Ninth Avenue            
  New York, NY 10011            
               
  James R. Haughton   198,312 (10)   2.3 %
  c/o mktg, inc.            
  75 Ninth Avenue            
  New York, NY 10011            
               
(iii) All Directors and Executive Officers as a Group (8 persons)   18,469,597 (11)   53.2 %
*Less than 1%.
(1)All information was determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, based upon information furnished by the persons listed or contained in filings made by them with the Securities and Exchange Commission or otherwise available to the Company, and based on 8,552,345 shares of Common Stock on May 31, 2011.
(2)Based solely on a Schedule 13D/A filed with the SEC on April 15, 2010. Consists of 4,537,234 shares of Common Stock issuable upon conversion of 2,132,500 shares of Series D Preferred Stock and 2,095,000 shares of Common Stock issuable upon exercise of warrants held directly by UCC-mktg Investment, LLC, which is managed by UCC-mktg Partners, LLC (“UCC Partners”). James C. Marlas, as Managing Director and member of UCC Partners, has voting and investment control over these shares.
43
 
(3)Based solely on a 13D/A filed with the SEC on April 15, 2010. Consists of shares of Common Stock held directly by UCC-mktg Investment, LLC as disclosed in note (2) above, as well as (i) 152,159 shares of Common Stock owned by the James C. Marlas 2007 Charitable Remainder UniTrust, of which Mr. Marlas and his wife are the lifetime beneficiaries and Mr. Marlas is the sole trustee; (ii) 15,000 shares of Common Stock owned by the James C. Marlas Revocable Trust dated 11/09/07, of which Mr. Marlas is the sole owner and beneficiary; and (iii) 20,000 shares of Common Stock owned by an individual retirement account for the benefit of Mr. Marlas.
(4)Based solely on a Schedule 13G/A filed with the SEC on February 15, 2013.
(5)Includes 70,625 shares of restricted stock that are subject to forfeiture, 212,766 shares of Common Stock issuable upon conversion of 100,000 shares of Series D Preferred Stock, and warrants to purchase 98,251 shares of Common Stock. Does not include 238,321 shares of Common Stock issuable upon exercise of options that are not currently exercisable.
(6)Mr. Alfond is a director and member of UCC Partners and disclaims beneficial ownership of the shares held by it.
(7)Mr. Landauer is a director and member of UCC Partners and disclaims beneficial ownership of the shares held by it.
(8)Includes 70,000 shares of Common Stock issuable upon exercise of immediately exercisable options, 478,723 shares of Common Stock issuable upon conversion of 225,000 shares of Series D Preferred Stock, warrants to purchase 221,064 shares of Common Stock, and 16,800 shares of Common Stock owned by Mr. Particelli’s IRA. Does not include Common Stock issuable upon conversion of 225,000 shares of Series D Preferred Stock and exercise of warrants to purchase 24,563 shares of Common Stock owned by the Marc C. Particelli 2006 Family Trust (the “Trust”) or 26,500 shares of Common Stock owned by the Trust. The beneficiaries of the Trust are Mr. Particelli’s children, and Mr. Particelli’s wife is a trustee of the Trust. Mr. Particelli disclaims beneficial ownership of the shares held by the Trust.
(9)Includes 47,588 shares of restricted stock subject to forfeiture. Does not include 50,553 shares of Common Stock issuable upon exercise of options that are not currently exercisable.
(10)Includes 36,250 shares of restricted stock subject to forfeiture. Does not include 36,109 shares of Common Stock issuable upon exercise of options that are not currently exercisable.
(11)Includes 5,228,723 shares of Common Stock issuable upon conversion of Series D Preferred Stock, 1,044,950 shares of Common Stock issuable upon exercise of immediately exercisable options, 2,414,515 shares of Common Stock issuable upon exercise of immediately exercisable warrants and 154,463 shares of restricted stock subject to forfeiture.
Item 13.Certain Relationships and Related Transactions, and Director Independence.

TRANSACTIONS WITH RELATED PERSONS

RELATED-PERSON TRANSACTIONS POLICY AND PROCEDURES

We have a written Related-Person Transactions Policy that sets forth the Company’s policies and procedures regarding the identification, review, consideration and approval or ratification of “related-persons transactions.” For purposes of our policy only, a “related-person transaction” is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which the Company and any “related person” are participants involving an amount that exceeds $50,000. Transactions involving compensation for services provided to the Company as an employee, director, consultant or similar capacity by a related person are not covered by this policy. A related person is any executive officer, director, or more than 5% stockholder of the Company, including any of their immediate family members, and any entity owned or controlled by such persons.

Under the policy, where a transaction has been identified as a related-person transaction, management must present information regarding the proposed related-person transaction to the Audit Committee (or, where Audit Committee approval would be inappropriate, to another independent body of the Board) for consideration and approval or ratification. The presentation must include a description of, among other things, the material facts, the interests, direct and indirect, of the related persons, the benefits to the Company of the transaction and whether any alternative transactions were available. To identify related-person transactions in advance, the Company relies on information supplied by its executive officers and directors. In considering related-person transactions, the Committee takes into account the relevant available facts and circumstances including, but not limited to (a) the risks, costs and benefits to the Company, (b) the impact on a director’s independence in the event the related person is a director, immediate family member of a director or an entity with which a director is affiliated, (c) the terms of the transaction, (d) the availability of other sources for comparable services or products, and (e) the terms available to or from, as the case may be, unrelated third parties or to or from employees generally. In the event a director has an interest in the proposed transaction, the director must recuse himself or herself form the deliberations and approval. The policy requires that, in determining whether to approve, ratify or reject a related-person transaction, the Committee look at, in light of known circumstances, whether the transaction is in, or is not inconsistent with, the best interests of the Company and its stockholders, as the Committee determines in the good faith exercise of its discretion.

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In March 2013, following the approval of our full Board, including our Audit Committee, we repurchased 301,121 shares of Common Stock at a price of $1.25 per share from John Benfield, who at that time was the holder of approximately 5.2% of our outstanding shares of Common Stock.

Director Independence

The Board of Directors has determined that each of Richard L. Feinstein and Marc C. Particelli is an “independent director” as defined in Nasdaq Listing Rule 5605(a)(2). The Board of Directors has also determined that each of the members of its Audit, Compensation and Nominating Committees meets the independence requirements applicable to those committees prescribed by the Nasdaq Listing Rules and the Securities and Exchange Commission, as currently in effect.

Item 14.Principal Accounting Fees and Services.

Principal Accounting Firm Fees

The following table sets forth the aggregate fees billed to and accrued by the Company for Fiscal 2013 and Fiscal 2012 by ParenteBeard LLC.

   Fiscal 2013   Fiscal 2012 
Audit Fees (for audit of annual financial statements and review of quarterly financial statements)  $268,000   $254,000 
Tax Fees (for federal, State and local tax compliance and planning)   60.000    48,000 
All Other Fees (1)   34,000    24,000 
Total  $362,000   $326,000 
(1)For Fiscal 2013 and 2012, these fees relate to the audit of the Company’s 401(k) plan and nonrecurring non-attest special projects.

Pre-Approval Policies and Procedures

The Audit Committee has adopted a policy requiring pre-approval by the Audit Committee of all services (audit and non-audit) to be provided to the Company by its independent auditor. In accordance with that policy, the Audit Committee approved all audit and non-audit services rendered to the Company by ParenteBeard LLC in Fiscal 2013 and Fiscal 2012 and has determined that the provision of non-audit services by such auditors was compatible with maintaining their independence.

 

PART IV

Item 15.Exhibits and Financial Statement Schedules.
(a)The following documents are filed as part of this Report.
1.  Financial Statements:

 

    Page
Index to Financial Statements   14
Report of Independent Registered Public Accounting Firm   15
Consolidated Financial Statements:    
Balance Sheets as of March 31, 2013 and 2012   16
Statements of Operations for the years ended March 31, 2013 and 2012   17
Statements of Comprehensive Income for the years ended March 31, 2013 and 2012   18
Statements of Stockholders’ Equity for the years ended March 31, 2013 and 2012   19
Statements of Cash Flows for the years ended March 31, 2013 and 2012   20
Notes to Consolidated Financial Statements   21
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3. Exhibits:

       
  Exhibit
Number
  Description of Exhibits. 
       
  3.1   Certificate of Incorporation, as amended, of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the three month period ended September 30, 2009, filed with the Securities and Exchange Commission on May 11, 2009).
       
  3.2   Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on December 16, 2009).
       
  3.3   Certificate of Designations, Designations, Preferences and Rights of Series D Convertible Participating Preferred Stock of ‘mktg, inc.’ (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on December 16, 2009).
       
  4.1   Form of Warrant to Purchase Common Stock of ‘mktg, inc.’ (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on November 30, 2009).
       
  4.2   Registration Rights Agreement entered into by ‘mktg, inc.’ and purchasers of the Series D Convertible Participating Preferred Stock (incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on November 30, 2009).
       
  10.1*   ‘mktg, inc.’ 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit A to Registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on July 29, 2002).
       
  10.2*  

Employment Agreement, dated June 30, 2008, between the Registrant and Charles Horsey, and Amendment to Employment Agreement, dated December 22, 2008, between the Registrant and Charles Horsey (incorporated by reference to Exhibits 10.1 and 10.2 to the Registrant’s Current Report on Form 8-K dated December 22, 2008, filed with the Securities and Exchange Commission on December 30, 2008).

 

  10.3*   Second Amendment to Employment Agreement, dated May 12, 2010, between the Registrant and Charles Horsey (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated May 12, 2010, filed with the Securities and Exchange Commission on May 18, 2010).
       
  10.4*   Restricted Stock Agreement, dated December 22, 2008, between the Registrant and Charles Horsey (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated December 22, 2008, filed with the Securities and Exchange Commission on December 30, 2008).
       
  10.5*   Letter Agreement, dated as of July 1, 2008, between the Registrant and Paul Trager (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated April 1, 2011, filed with the Securities and Exchange Commission on April 5, 2011).
       
  10.6   Agreement, dated as of May 27, 2009, between the Registrant and Maritz LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on May 27, 2009).

 

  10.7*   Form of Indemnification Agreement for Directors and Officers, dated as of November 8, 2006 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated November 8, 2006, filed with the Securities and Exchange Commission on November 14, 2006).
       
  10.8   Securities Purchase Agreement, dated as of November 25, 2009, by and among ‘mktg, inc.’, UCC-mktg Investment, LLC, and the “Management Investors” identified therein (incorporated by reference to Exhibit 10.1 to the Registrant’s Current report on Form 8-K, as filed with the Securities and Exchange Commission on November 30, 2009).
       
  10.9  

Management Consulting Agreement, dated as of December 15, 2009, between ‘mktg, inc.’ and Union Capital Corporation (incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on November 30, 2009). 

46
 

  10.10*  

‘mktg, inc.’ 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated March 25, 2010, filed with the Securities and Exchange Commission on March 29, 2010).

 

  10.11*  

‘mktg, inc.’ Management Bonus Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated May 12, 2010, filed with the Securities and Exchange Commission on May 18, 2010).

 

  10.12  

Settlement Agreement, dated as of September 16, 2011, by and among Brian Murphy, on behalf of himself and derivatively on behalf of ‘mktg, inc.’, and Defendants Charles F. Tarzian, Fred Kaseff, Marc C. Particelli, James H. Feeney, Herbert M. Gardner, John A. Ward III, UCC-mktg Investment, LLC, UCC-mktg Partners, LLC, Charles Horsey, Patty Hubbard, James Ferguson, Dave Arnold, and Nominal Defendant ‘mktg, inc.’ and Union Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated September 16, 2011, filed with the Securities and Exchange Commission on September 21, 2011).

 

  10.13  

Loan and Security Agreement, dated as of November 23, 2011, by and among ‘mktg, inc.’ and TD Bank, N.A. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated November 3, 2011, filed with the Securities and Exchange Commission on November 29, 2011).

 

  10.14  

Amendment No. 1 to Loan and Security Agreement, dated as of November 23, 2012, by and among ‘mktg, inc.’ and TD Bank, N.A. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 11, 2012, filed with the Securities and Exchange Commission on December 14, 2012).

 

  10.15  

Standstill Agreement, dated as of November 23, 2011, by and among ‘mktg, inc.,’ TD Bank, N.A. and the holders of the Company’s Series D Preferred Stock (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated November 3, 2011, filed with the Securities and Exchange Commission on November 29, 2011).

 

  14   Registrant’s Code of Ethics (incorporated by reference to Exhibit 14 to Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 2004, initially filed with the Securities and Exchange Commission on July 22, 2004).
       
  21   Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the Registrant’s Annual Report on Form 10-K for the year ended March 31, 2012, filed with the Securities and Exchange Commission on June 28, 2012).
       
  23.1   Consent of ParenteBeard, LLC
       
  31.1   Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.
       
  31.2   Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.
       
  32.1   Certification of Principal Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act.
       
  32.2   Certification of Principal Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act.
       
  101   The following financial statements from Registrant’s Annual Report on Form 10-K for the year ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, (v) Notes to the Consolidated Financial Statements, tagged as blocks of text.
       
  *   Indicates a management contract or compensatory plan or arrangement
47
 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

  ‘mktg, inc.’  
       
  By: /s/ Charles W. Horsey  
    Charles W. Horsey  
    Chairman, Chief Executive Officer and President  
       
  Dated: June 24, 2013  

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

  Signature and Title     Signature and Title
         
By: /s/ Charles W. Horsey   By: /s/ James R. Haughton
  Charles W. Horsey     James R. Haughton
  Chairman, Chief Executive Officer, President and Director     Senior Vice President - Controller
  (Principal Executive Officer)     (Principal Accounting Officer)
         
Dated: June 24, 2013   Dated: June 24, 2013
         
         
By: /s/Richard L.Feinstein   By: /s/ Paul Trager
  Richard L.Feinstein     Paul Trager
  Director     Chief Financial Officer
        (Principal Financial Officer)
Dated: June 24, 2013   Dated: June 24, 2013
         
         
By: /s/ Jay F. Landauer   By: /s/ Marc C. Particelli
  Jay F. Landauer     Marc C. Particelli
  Director     Director
         
Dated: June 24, 2013   Dated: June 24, 2013
       
       
    By:  /s/ Reis L. Alfond
  Reis L Alfond
  Director
     
  Dated: June 24, 2013
48