- Quarterly Report (10-Q)

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

FORM 10-Q


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

For the quarterly period ended September 30, 2009

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		(I.R.S. Employer
incorporation or organization)		Identification Number)

75 Ninth Avenue New York, New York		10011

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (212) 660-3800

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

Yes x No 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 o No 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 Exchange Act).

Yes o No x

As of December 15, 2009, 8,596,951shares of the Registrant’s Common Stock, par value $.001 per share, were outstanding.

INDEX

‘mktg, inc.’


		Page

PART I - FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)

	Balance Sheets – September 30, 2009 and March 31, 2009	3
	Statements of Operations – Three and Six months ended September 30, 2009 and 2008	4
	Statements of Cash Flows – Six months ended September 30, 2009 and 2008	5

	Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 4T.	Controls and Procedures	23

PART II - OTHER INFORMATION

Items 1, 1A, 2, 3, 4 and 5. Not Applicable		23

Item 6.	Exhibits	23

SIGNATURES		24

PART I - FINANCIAL INFORMATION


Item 1.	Interim Condensed Consolidated Financial Statements

‘mktg, inc.’
Condensed Consolidated Balance Sheets
September 30, 2009 (Unaudited) and March 31, 2009


	September 30, 2009			March 31, 2009


Assets
Current assets:
Cash and cash equivalents	$	328,200		$	1,904,014
Accounts receivable, net of allowance for doubtful accounts of $334,000 at September 30, 2009 and $402,000 at March 31, 2009		10,170,211			7,895,107
Unbilled contracts in progress		1,309,621			1,574,301
Deferred contract costs		638,661			1,274,713
Prepaid expenses and other current assets		559,114			608,499
Restricted cash		—			675,000

Total current assets		13,005,807			13,931,634

Property and equipment, net		2,463,681			2,821,321

Restricted cash		—			1,318,750
Goodwill		10,052,232			10,052,232
Intangible assets - net		1,406,310			1,567,151
Other assets		517,155			513,880

Total assets	$	27,445,185		$	30,204,968


Liabilities and Stockholders’ Equity
Current liabilities:
Notes payable bank – current	$	—		$	675,000
Accounts payable		2,387,795			2,714,863
Accrued compensation		1,205,461			1,191,209
Accrued job costs		5,183,740			4,865,281
Other accrued liabilities		1,863,968			2,959,720
Deferred revenue		11,673,114			10,491,152

Total current liabilities		22,314,078			22,897,225

Deferred rent		1,699,701			1,748,158
Notes payable bank, net of current portion		—			1,318,750

Total liabilities		24,013,779			25,964,133


Commitments and contingencies

Stockholders’ equity:
Class A convertible preferred stock, par value $.001; authorized 650,000 shares; none issued and outstanding		—			—
Class B convertible preferred stock, par value $.001; authorized 700,000 shares; none issued and outstanding		—			—
Preferred stock, undesignated; authorized 3,650,000 shares; none issued and outstanding		—			—
Common stock, par value $.001; authorized 25,000,000 shares; 8,568,648 shares issued and outstanding at September 30, 2009 and 8,170,392 shares issued and outstanding at March 31, 2009		8,569			8,170
Additional paid-in capital		12,818,426			12,598,374
Accumulated deficit		(9,395,589	)		(8,365,709	)

Total stockholders’ equity		3,431,406			4,240,835

Total liabilities and stockholders’ equity	$	27,445,185		$	30,204,968

See notes to unaudited condensed consolidated financial statements.

‘mktg, inc.’
Condensed Consolidated Statements of Operations
Three and Six Months Ended September 30, 2009 and 2008
(Unaudited)


	Three Months Ended September 30						Six Months Ended September 30

	2009			2008			2009			2008



Sales	$	17,867,383		$	26,612,826		$	37,686,487		$	48,850,959


Operating expenses:
Reimbursable program costs and expenses		3,666,976			4,446,266			7,761,900			9,154,775
Outside production and other program expenses		6,718,994			12,402,535			14,264,397			22,165,897
Compensation expense		6,782,928			7,059,702			13,326,602			13,968,739
General and administrative expenses		1,775,093			2,140,360			3,340,632			3,842,379

Total operating expenses		18,943,991			26,048,863			38,693,531			49,131,790


Operating income (loss)		(1,076,608	)		563,963			(1,007,044	)		(280,831	)

Interest expense, net		(5,559	)		(34,181	)		(22,836	)		(24,655	)


Income (loss) before provision for income taxes		(1,082,167	)		529,782			(1,029,880	)		(305,486	)
Provision for income taxes		—			—			—			—


Net income (loss)	$	(1,082,167	)	$	529,782		$	(1,029,880	)	$	(305,486	)


Basic earnings (loss) per share	$	(.14	)	$	.08		$	(.15	)	$	(.04	)

Diluted earnings (loss) per share	$	(.14	)	$	.07		$	(.15	)	$	(.04	)


Weighted average number of common shares outstanding:
Basic		7,606,145			7,041,749			7,057,175			7,019,470
Diluted		7,606,145			7,302,607			7,057,175			7,019,470

See notes to unaudited condensed consolidated financial statements.

‘mktg, inc.’
Condensed Consolidated Statements of Cash Flows
Six Months Ended September 30, 2009 and 2008
(Unaudited)


	2009			2008


Cash flows from operating activities:
Net loss	$	(1,029,880	)	$	(305,486	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		607,143			422,146
Deferred rent amortization		(48,457	)		(105,838	)
Provision for bad debt expense		502			177,762
Compensation expense on non-vested stock and stock options		220,451			296,060
Changes in operating assets and liabilities:
Accounts receivable		(2,275,606	)		(2,282,682	)
Unbilled contracts in progress		264,680			943,475
Deferred contract costs		636,052			2,651,974
Prepaid expenses and other current assets		49,385			(80,156	)
Other assets		(3,275	)		(78,687	)
Accounts payable		(327,068	)		385,646
Accrued compensation		14,252			(1,387,311	)
Accrued job costs		318,459			(829,697	)
Other accrued liabilities		(1,095,752	)		(860,421	)
Deferred revenue		1,181,962			777,406


Net cash used in operating activities		(1,487,152	)		(275,809	)


Cash flows from investing activities:
Cash paid for acquisition of 3 For All Partners, LLC		—			(3,348,251	)
Restricted cash		1,993,750			—
Purchases of property and equipment		(88,662	)		(284,151	)

Net cash provided by (used in) investing activities		1,905,088			(3,632,402	)


Cash flows from financing activities:
Proceeds from note payable - bank		—			2,500,000
Payment of debt		(1,993,750	)		—

Net cash (used in) provided by financing activities		(1,993,750	)		2,500,000


Net decrease in cash and cash equivalents		(1,575,814	)		(1,408,211	)

Cash and cash equivalents at beginning of period		1,904,014			5,323,527

Cash and cash equivalents at end of period	$	328,200		$	3,915,316


Supplemental disclosures of cash flow information:
Interest paid during the period	$	39,780		$	34,140

Income taxes paid during the period	$	63,740		$	62,163

See notes to unaudited condensed consolidated financial statements.

‘mktg, inc.’
Notes to the Unaudited Condensed Consolidated Financial Statements


(1)	Basis of Presentation

	The following unaudited interim condensed consolidated financial statements of ‘mktg, inc.’ (formerly CoActive Marketing Group, Inc.) (the “Company”) for the three and six months ended September 30, 2009 and 2008 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to GAAP for interim financial information and SEC rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2009. In the opinion of management, such consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s results for the interim periods presented. The results of operations for the six months ended September 30, 2009 are not necessarily indicative of the results for a full year. Events and transactions occurring subsequent to the balance sheet date of September 30, 2009 were considered through January 20, 2010, the date these financial statements were issued.

(2)	Summary of Significant Accounting Policies

	(a)	Principles of Consolidation

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

	(b)	Use of Estimates

		The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on certain assumptions, which it believes are reasonable in the circumstances. Actual results could differ from those estimates.

		The Company’s revenues are generated from projects subject to contracts requiring the Company to provide its services within specified time periods generally ranging up to twelve months. As a result, on any given date, the Company has projects in process at various stages of completion. Depending on the nature of the contract, revenue is recognized as follows: (i) on time and material service contracts, revenue is recognized as services are rendered and the costs are incurred; (ii) on fixed price retainer contracts, revenue is recognized on a straight-line basis over the term of the contract; (iii on certain fixed price contracts, revenue is recognized as certain key milestones 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.

		In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of such assets will be utilized in future periods. For financial reporting purposes, the Company has incurred losses for fiscal years 2004 through 2009 aggregating $12,832,000. The Company must generate approximately $13,850,000 of aggregate taxable income, exclusive of any reversals or timing differences, to fully utilize its net deferred tax asset. Based upon the available objective evidence, including the Company’s history of losses, management does not believe that it is more likely than not that the net deferred tax asset will be fully utilized. Accordingly, the Company has provided for a full valuation allowance against its net deferred tax asset.

		In October 2008, the Company exercised its option to terminate its sublease for office space. As such, management revised its estimate for the remaining life of its leasehold improvements. In November 2009, this previously terminated sublease was reinstated with the term of the lease extended to June 2015 resulting in a change in the estimated of life of the leasehold improvements to 78 months. This change was prospectively reflected effective January 1, 2009.


	(c)	Net Income (Loss) Per Share

		Basic earnings per share is based upon the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed on the same basis, including if dilutive, common share equivalents, which include outstanding options and restricted stock. For the three months ended September 30, 2009 and 2008, stock options and warrants to purchase approximately 352,016 and 87,641 shares of common stock were excluded from the calculation of diluted earnings per share as their inclusion would be anti-dilutive. For the six months ended September 30, 2009 and 2008, stock options and warrants to purchase approximately 352,016 and 358,891 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 consists of:


	Three Months Ended September 30,				Six Months Ended September 30,
	2009		2008		2009		2008

Basic		7,606,145		7,041,749		7,057,175		7,019,470
Dilutive effect of options and restricted stock		—		260,858		—		—

Diluted		7,606,145		7,302,607		7,057,175		7,019,470


		On December 15, 2009, The Company entered into a financing agreement which included the issuance of Series D Convertible Participating Stock, convertible into 5,319,149 shares of Common Stock and warrants to purchase 2,456,272 shares of the Company’s Common Stock (see Note 9).

	(d)	Recent Accounting Standards Affecting the Company

		Noncontrolling Interests in Consolidated Financial Statements

		In December 2007, the FASB issued authoritative guidance which changes the accounting and reporting for minority interests. Minority interests will be re-characterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. This guidance is effective for annual periods beginning after December 15, 2008. Management currently believes that the adoption of this guidance will not have a material impact on our financial statements.

		Business Combinations

		In December 2007, the FASB revised the authoritative guidance for business combinations. Transaction costs are now required to be expensed as incurred and adjustments to the acquired entity’s deferred tax assets and uncertain tax position balances occurring outside the measurement period are recorded as a component of income tax expense, rather than goodwill, among other changes. In April 2009, the FASB revised the authoritative guidance related to the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. Generally, assets acquired and liabilities assumed in a business combination that arise from contingencies must be recognized at fair value at the acquisition date. This guidance becomes effective for the Company as of April 1 2009. As this guidance is applied prospectively to business combinations with an acquisition date on or after the date the guidance becomes effective, the impact to the Company’s financial statements cannot be determined until the transactions occur.

		Derivative Instrument and Hedging Activity Disclosures

		In March 2008, the FASB amended and expanded the disclosure requirements related to derivative instruments and hedging activities by requiring enhanced disclosures about how and why an entity uses derivative instruments, how an entity accounts for derivative instruments and related hedged items and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The revised guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This guidance, which provides only disclosure requirements, is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Management currently believes that the adoption of this guidance will not have a material impact on our financial statements.


		Fair Value Measurements

		In February 2008, the FASB delayed the effective date of fair value measurement and disclosure guidance for all nonrecurring fair value measurements of nonfinancial assets and liabilities until fiscal years beginning after November 15, 2008.

		In April 2009, the FASB issued authoritative guidance clarifying that fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants under current market conditions.

		In August 2009, the FASB issued authoritative guidance clarifying the measurement of the fair value of a liability in circumstances when a quoted price in an active market for an identical liability is not available. The guidance emphasizes that entities should maximize the use of observable inputs in the absence of quoted prices when measuring the fair value of liabilities.

		In September 2009, the FASB issued authoritative guidance that provides further clarification for measuring the fair value of investments in entities that meet the FASB’s definition of an investment company. This guidance permits a company to estimate the fair value of an investment using the net asset value per share of the investment if the net asset value is determined in accordance with the FASB’s guidance for investment companies as of the company’s measurement date.

		Management currently believes that the adoption of this guidance will not have a material impact on the Company’s financial statements.

		Fair Value of Financial Instruments Disclosures

		In April 2009, the FASB issued revised authoritative guidance requiring disclosures about fair value of financial instruments, currently provided annually, to be included in interim financial statements. Since this guidance provides only disclosure requirements, the adoption of this standard is not expected to impact the Company’s results of operations, cash flows or financial positions.

		Subsequent Events

		In May 2009, the FASB issued authoritative guidance which incorporates the principles and accounting guidance for recognizing and disclosing subsequent events that originated as auditing standards into the body of authoritative literature issued by the FASB, and prescribes disclosures regarding the date through which subsequent events have been evaluated. The Company is required to evaluate subsequent events through the date the financial statements are issued. This guidance becomes effective for the Company for the period ending June 30, 2009. Since this guidance is not intended to significantly change the current practice of reporting subsequent events, it is not expected to have an impact on the Company’s results of operations, cash flows or financial position.

		Accounting Standards Codification

		In June 2009, the FASB issued authoritative guidance which replaced the previous hierarchy of GAAP and establishes the FASB Codification as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. SEC rules and interpretive releases are also sources of authoritative GAAP for SEC registrants. This guidance modifies the GAAP hierarchy to include only two levels of GAAP: authoritative and nonauthoritative. This guidance is effective for the Company as of September 30, 2009. The adoption of this guidance will not impact the Company’s results of operations, cash flows or financial positions since the FASB Codification is not intended to change or alter existing GAAP.


		Revenue Arrangements with Multiple Deliverables

		In October 2009, the FASB issued authoritative guidance that amends existing guidance for identifying separate deliverables in a revenue-generating transaction where multiple deliverables exist, and provides guidance for allocating and recognizing revenue based on those separate deliverables. The guidance is expected to result in more multiple-deliverable arrangements being separable than under current guidance. This guidance is effective for the Company beginning on April 1, 2011 and is required to be applied prospectively to new or significantly modified revenue arrangements. Management currently believes that the adoption of this guidance will not have a material impact on the Company’s financial statements.

(4)	Acquisition of 3 For All Partners, LLC

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

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

	Pursuant to the Asset Purchase Agreement, $750,000 of the cash consideration and the entire Share Consideration were deposited into an escrow account to be held to satisfy indemnification claims, if any, that may be made by the Company under the Asset Purchase Agreement. In addition, as more fully set forth in the Asset Purchase Agreement, all or a portion of the escrowed consideration will be subject to release to the Company upon the occurrence of certain specified events under the Asset Purchase Agreement, including the termination of employment (other than due to death or by the Company without cause), of certain key employees of mktgpartners during the first year following the closing of the acquisition, and the failure to achieve “Gross Margin” targets during the 12 month period following the closing. 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 escrowed cash was released to mktgpartners. As of December 31, 2009 the entire share consideration was releasable to mktgpartners.

	The unaudited pro forma results of operations for the six months ended September 30, 2008 have been prepared as though the acquisition of mktgpartners had occurred as of the earliest period presented. This pro forma financial information is not indicative of the results of operations that the Company would have attained had the acquisition of mktgpartners occurred at the beginning of the periods presented, nor is the pro forma financial information indicative of the results of operations that may occur in the future:


	Six Months Ended September 30, 2008

Pro forma sales	$	52,084,867
Pro forma net loss	$	(409,971	)
Pro forma basic loss per share	$	(.06	)
Pro forma diluted loss per share	$	(.06	)


(4)	Bank Credit Facility

	On June 26, 2008, the Company entered into a Credit Agreement (the “Credit Agreement”) with Sovereign Bank (the “Lender”). Pursuant to the Credit Agreement, the Lender provided the Company with (i) a $2.5 million term loan (the “Term Loan”), which was funded in full on June 30, 2008 in connection with the acquisition of 3 For All Partners LLC, and (ii) a $2.5 million revolving credit facility (the “Revolving Credit Facility”). Borrowings under the Revolving Credit Facility are used for working capital purposes. The Term Loan and Revolving Credit Facility have been guaranteed by the Company’s subsidiaries and are secured by substantially all of their assets pursuant to a Security Agreement entered into by the Company and its subsidiaries in favor of the Lender.


	Pursuant to the Credit Agreement, among other things:

		·	All outstanding loans under the Credit Agreement will become due on June 30, 2011 (the “Maturity Date”).
		·	The Term Loan will be repaid in 12 consecutive quarterly installments commencing on September 30, 2008. The first 11 installments will be in the amount of $168,750, with a final payment in the amount of $643,750 being due on the Maturity Date.
		·	Interest accrues on outstanding loans under the Credit Agreement at a per annum rate equal to, at the Company’s option, the prime rate (5.0% at June 30, 2008) from time to time in effect (but in no event less than the Federal Funds Rate plus one-half percent), or a LIBOR rate selected by the Company, plus a margin of 2.25%.
		·	The Company is required to comply with a number of affirmative, negative and financial covenants. Among other things, these covenants restrict the Company’s ability to pay dividends, limit annual capital expenditures, provide that the Company’s “Consolidated Debt Service Coverage Ratio” cannot be less than 1.5 to 1.0 as of the end of any fiscal quarter, that its “Consolidated Leverage Ratio” cannot exceed 2:25 to 1:00 at the end of any fiscal quarter, and that the Company can not incur a “Consolidated Pre-Tax Net Loss” in excess of $500,000 in the aggregate in any period of two consecutive fiscal quarters.

	As of September 30, 2008 and March 31, 2009, the Company was not in compliance with these financial covenants. In addition, as a result of a restatement of the Company’s financial statements as of and for the year ended March 31, 2008 and the quarter ended June 30, 2008, the Company breached its financial reporting obligations under the Credit Agreement. In May 2009, the Company entered into an amendment and waiver to the Credit Agreement under which Sovereign Bank (i) waived existing defaults, (ii) indefinitely suspended the revolving credit facility including testing of financial covenants, and (iii) required the Company to maintain deposits with Sovereign Bank at all times in an amount not less than the outstanding balance of the term loan as cash-collateral therefor. As a result of the amendment and factors described above, the Company did not have the ability to borrow under the Credit Agreement and therefore terminated the Credit agreement in August 2009 and paid off the term loan by applying the cash collateral against the outstanding loan balance.

(5)	Accounting for Stock-Based Compensation

	Stock Options

	Under the Company’s 1992 Stock Option Plan (the “1992 Plan”), employees of the Company and its affiliates and members of the Board of Directors were granted options to purchase shares of Common Stock of the Company. The 1992 Plan was amended on May 11, 1999 to increase the maximum number of shares of Common Stock for which options may be granted to 1,500,000 shares. The 1992 Plan terminated in 2002, although options issued thereunder remain exercisable until the termination dates provided in such options. Options granted under the 1992 Plan were either intended to qualify as incentive stock options under the Internal Revenue Code of 1986, or non-qualified options. Grants under the 1992 Plan were awarded by a Committee of the Board of Directors, and are exercisable over periods not exceeding ten years from date of grant. The option price for incentive stock options granted under the 1992 Plan must be at least 100% of the fair market value of the shares on the date of grant, while the price for non-qualified options granted to employees and employee directors is determined by the Committee of the Board of Directors. At September 30, 2009, there were 13,750 options issued under the 1992 Plan, expiring from April 2010 through April 2011 that remain outstanding.

	On July 1, 2002, the Company established the 2002 Long-Term Incentive Plan (the “2002 Plan”) providing for the grant of options or other awards, including stock grants, to employees, officers or directors of, or consultants to, the Company or its subsidiaries to acquire up to an aggregate of 750,000 shares of Common Stock. In September 2005, the 2002 Plan was amended to increase the number of shares of Common Stock available under the plan to 1,250,000. 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 September 30, 2009, there were 297,500 options issued under the 2002 Plan, expiring from April 2011 through September 2017 that remain outstanding. Any option under the 2002 Plan that is not exercised by an option holder prior to its expiration may be available for re-issuance by the Company. As of September 30, 2009, the Company had 165,596 shares of Common Stock available for grant of awards under the 2002 Plan.

	Stock option compensation expense in the three and six month periods ended September 30, 2009 and 2008 represent the estimated fair value of options and warrants outstanding which are being amortized on a straight-line basis over the requisite vesting period of the entire award.


	No stock options were granted during the six month periods ended September 30, 2009 or 2008.

	A summary of option activity under all plans as of September 30, 2009, and changes during the six month period then ended is presented below:


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


Balance at March 31, 2009	$	2.19		318,125			4.95	$	0
Granted		—		—
Exercised		—		—
Canceled	$	3.38		(6,875	)

Balance at September 30, 2009 (vested and expected to vest)	$	2.16		311,250			4.55	$	0

Exercisable at September 30, 2009	$	2.16		311,250			4.55	$	0


	At September 30, 2009 there were no unvested stock option awards. Total compensation cost for the six months ended September 30, 2009, amounted to $3,261 for all outstanding option awards. There was no compensation cost for the six months ended September 30, 2008.

	Warrants

	At each of September 30, 2009 and March 31, 2009, there was an outstanding warrant to purchase 40,766 shares of common stock at an exercise price per share of $3.68 held by one Director of the Company. The warrant expires on April 30, 2010.

	Non-Vested Stock

	As of September 30, 2009, pursuant to the authorization of the Company’s Board of Directors and certain Restricted Stock Agreements, the Company had awarded 1,166,904 shares of common stock under the Company’s 2002 Plan to certain employees. Grant date fair value is determined by the market price of the Company’s common stock on the date of grant. The aggregate value of these shares at their respective grant dates amounted to $1,962,277 and are recognized ratably as compensation expense over the vesting periods. The shares of common stock granted pursuant to such agreements vest in various tranches up to five years from the date of grant.

	The shares awarded under the restricted stock agreements vest on the applicable vesting dates only to the extent the recipient of the shares is then an employee of the Company or one of its subsidiaries, and each recipient will forfeit all of the shares that have not vested on the date his or her employment is terminated.

	As of September 30, 2009, pursuant to the authorization of the Company’s Board of Directors and certain Restricted Stock Agreements, the Company had awarded 209,767 shares of common stock that were not issued under the Company’s 2002 Plan. These shares include the award of 69,767 shares to the Company’s President.

	A summary of all non-vested stock activity as of September 30, 2009, and changes during the six month period then ended is presented below:


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


Unvested at March 31, 2009	$	2.34		627,806			4.08	$	583,860

Awarded	$	1.06		519,676
Vested	$	1.09		(151,009	)
Forfeited	$	2.06		(171,960	)


Unvested at September 30, 2009	$	1.92		824,513			4.69	$	964,680


	Total unrecognized compensation cost related to unvested stock awards at September 30, 2009 amounts to approximately $1,168,419 and is expected to be recognized over a weighted average period of 4.69 years. Total compensation cost for the six months ended September 30, 2009, amounted to approximately $217,190 for these stock awards.

(6)	Concentrations

	The Company had sales to one customer of 63% of total sales for the six months ended September 30, 2009. Sales to this customer approximated $23.8 million for the period. Accounts receivable as of September 30, 2009 from this customer approximated $5.1 million.

(7)	Income Taxes

	The Company did not record a benefit for federal, state and local income taxes for the three and six months ended September 30, 2009 and 2008 because any such benefit would be fully offset by an increase in the valuation allowance against the Company’s net deferred tax asset established as a result of our historical operating losses.

(8)	Contingencies

	(a)	Nasdaq Notice - Failure To Satisfy A Continued Listing Rule

		(i)	Failure to Timely File Annual and Quarterly Reports

			On November 19, 2009, the Company received a letter from The Nasdaq Stock Market stating that the Company was not in compliance with the requirements for continued listing set forth in Nasdaq Listing Rule 5250(c)(1) because of the Company’s failure to timely file its Quarterly Report on Form 10-Q for the period ended September 30, 2009.

			In addition, the Company received similar letters from Nasdaq in July 2009 and August 2009 indicating that the Company’s securities were subject to delisting due to its failure to timely file its Annual Report on Form 10-K for the year ended March 31, 2009, and Quarterly Report on Form 10-Q for the period ended June 30, 2009, respectively. The Company submitted to Nasdaq a plan of compliance with respect to such reports and was granted an exception until January 11, 2010 to file such reports.

		(ii)	Closing Bid Price of the Company’s Common Stock $1.00

			On December 17, 2009, the Company received a letter from The Nasdaq Stock Market stating that they were not in compliance with Nasdaq Listing Rule 5550(a)(2) because the closing bid price of the Company’s common stock was below $1.00 per share for 30 consecutive business days.

			Pursuant to Nasdaq’s Listing Rules, the Company has a 180 day grace period, until June 15, 2010, during which the Company may regain compliance if the bid price of its common stock closes at $1.00 per share or more for a minimum of ten consecutive business days. In the event the Company does not regain compliance prior to the end of this grace period, Nasdaq will provide them with written notification that their common stock is subject to delisting. Alternatively, the Company may be eligible for an additional 180-day grace period if they meet Nasdaq’s initial listing standards (other than with respect to minimum bid price) for The Nasdaq Capital Market.

			The Company intends to actively monitor the bid price for its common stock between now and June 15, 2010, and will consider available options to regain compliance with the Nasdaq minimum bid price requirements.

	(b)	Maritz Agreement

		On May 27, 2009, we entered into an Agreement with Maritz LLC providing for a three year strategic alliance in the field of direct to consumer promotions effective June 1, 2009. Under the terms of the Agreement, Maritz will engage us as a subcontractor, or otherwise cause us to be engaged directly by Maritz clients, for the production of direct-to-consumer events and the performance of related services on behalf of Maritz clients. Under the terms of the Agreement, Maritz initially received 50,000 shares of our Common Stock as consideration for subcontracting specific client projects to us, and will be issued up to an additional 550,000 shares of Common Stock as additional consideration if certain performance targets are achieved by us under the alliance.


(9)	Subsequent Events

	The Company has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2009, for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through January 20, 2010, the date these financial statements were issued.

	(a)	New York Sublease

		The Company signed an amendment in December 2009 which reinstates the previously terminated sublease for its principal New York City offices at an average annual rent of $1,203,000. Under the amendment, the sublease will terminate in June 2015.

	(b)	Union Capital Financing

		Transaction Details:

		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 Senior Secured Notes, $2.5 million in aggregate stated value of Series D Convertible Participating Preferred Stock initially convertible into 5,319,149 shares of Common Stock, and Warrants to purchase 2,456,272 shares of Common Stock. As a condition to their participation in the Financing Arrangement, UCC required that certain of the Company’s directors, officers and employees (“Management Buyers”) collectively purchase $735,000 of the Securities on the same terms and conditions as the lead investor. Aggregate amounts above are inclusive of Management Buyer amounts.

		The Secured Notes are secured by substantially all of the Company’s assets; bear interest at a rate of 12.5% per annum payable quarterly; and mature in one installment on December 15, 2012. The Company has the right to prepay the Secured Notes at any time. While the Secured Notes are outstanding, the Company will be subject to customary affirmative, negative and financial covenants. The financial covenants include (i) a fixed charge coverage ratio test requiring the Company to maintain a fixed charge coverage ratio of not less then 1.40 to 1.00 at the close of each fiscal quarter commencing December 31, 2010 , (ii) a minimum EBITDA test, to be tested at the end of each fiscal quarter commencing with the twelve months ending December 31, 2010, requiring the Company to generate “EBITDA” of at least $3,000,000 over the preceding four quarters, (iii) a minimum liquidity test requiring the Company to maintain cash and cash equivalents of $500,000 at all times, and (iv) limitations on capital expenditures.

		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 a conversion price of $0.47. The conversion price of the Preferred Stock is subject to full ratchet anti-dilution provisions for 18 months following issuance and weighted-average anti-dilution provisions thereafter. Generally, this means that if the Company sells its non-exempt securities below the conversion price, the holders’ conversion price will be adjusted. 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 Shares) 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. 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.

		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.

		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 will be paid in six monthly installments beginning January 1, 2010. 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 UCC under which UCC provides the Company with management advisory services and the Company pays UCC a fee of $125,000 per year for such services. Such fee will be reduced to $62,500 per year if the holders of the Series D Preferred Stock no longer have the right to nominate two directors and UCC no longer owns at least 40% of the Common Stock purchased by it at closing (assuming conversion of Series D Preferred Stock and exercise of Warrants held by it). 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 UCC no longer owns at least 20% of the Common Stock purchased by it at closing (assuming conversion of Series D Preferred Stock and exercise of Warrants held by it).

		Planned and Pro Forma Accounting:

		The Company’s accounting for the financing will initially be reflected in its quarterly report for the period ended December 31, 2009. However, the Company has preliminarily evaluated the financial instruments issued under current accounting standards and has reached the following preliminary conclusions regarding classification and measurement of the financial instruments:

		The Preferred Stock is a hybrid financial instrument that embodies the risks and rewards typically associated with both equity and debt instruments. Accordingly, the Company is required to evaluate the features of this contract to determine its nature as either an equity-type contract or a debt-type contract. The Company’s preliminary conclusions are that the Preferred Stock is generally more akin to a debt-type contract, principally due to its redemption features. As a result, the embedded conversion feature and those other features that have risks associated with debt require bifurcation and classification in liabilities as a compound embedded derivative financial instrument. The principal accounting concept requires bifurcation in these instances when the embedded feature and the host contracts have risks that are not clearly and closely related. Certain exemptions to this rule, such as the traditional conventional convertible exemption and the common-indexed exemption were not available to the Company because the Preferred Stock is not indexed, as that term is defined, to the Company’s common stock. Accordingly, the conversion feature, along with certain other features that have risks of equity, will require bifurcation and classification in liabilities as a compound embedded derivative financial instrument. Derivative financial instruments are required to be measured at fair value both at inception and an ongoing basis. While the Company has not yet completed the valuation of the compound embedded derivative, the Company intends to utilize the Monte Carlo Simulation technique, 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 will be required to carry the host Preferred Stock outside of stockholders’ equity; generally referred to as the mezzanine and any discount resulting from the initial allocation will require accretion through charges to retained earnings, using the effective method, over the period from issuance to the redemption date.


		The Company has preliminarily concluded that the Warrants require classification in 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. The Company’s preliminary conclusion is that the Warrants meet the conditions for equity classification. Notwithstanding, the Company will be required to measure 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 financing. The Company currently intends to utilize the Black-Scholes-Merton valuation technique, because that method embodies, in the Company’s view, all of the assumptions that market participants would consider in determining the fair value of the contract for purposes of a sale or exchange.

		The Company’s accounting will require an allocation of the proceeds to the individual financial instruments comprising the financing. As it relates to the Management Buyers, the Company will be required to recognize as compensation expense the amount that the fair value of the share-linked financial instruments (i.e. Preferred Stock and Warrants) exceeds the proceeds that the Company received. Those financial instruments subject to allocation are preliminarily identified as the Secured Notes, Preferred Stock, Compound Embedded Derivative 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 Compound Embedded Derivative, and the remainder based upon relative fair values. Discounts to the face value of the Secured Notes and redemption amounts of the Preferred Stock require amortization to interest expense and accretion to retained earnings, respectfully, using the effective method over the related term.


	UCC			Management Buyers			Total


Proceeds:
Gross proceeds	$	4,265,000		$	735,000		$	5,000,000
Closing costs (iii)		(325,000	)		—			(325,000	)
Reimbursement of investor costs (iii)		(250,000	)					(250,000	)

Net proceeds	$	3,690,000		$	735,000		$	4,425,000


Allocation (i):
Accrued financing costs	$	162,500		$	—		$	162,500
Series D Preferred Stock (iv)		1,060,138			233,098			1,293,236
Secured Notes Payable		1,006,493			363,293			1,369,786
Compound Embedded Derivatives (CED) (ii):
Series D Preferred Stock		949,106			167,489			1,116,595
Secured Notes Payable		23,842			4,207			28,049
Warrants		487,921			183,852			671,773
Compensation Expense		—			(216,939	)		(216,939	)

	$	3,690,000		$	735,000		$	4,425,000


		Notes to allocation table:

		(i) The allocation of net proceeds from UCC is first to the derivative financial instruments, because current accounting standards require their initial, and ongoing recognition at fair value. The residual is allocated among the Series D Preferred Stock, Secured Notes Payable and warrants based upon their relative fair values. The allocation of net proceeds of management buyers are to the share-linked contracts at their fair values, the Secured Notes Payable at the residual and the difference to compensation expense. The fair value of the Series D Preferred and the Secured Notes Payable were further allocated to the derivative, at fair value, at the host contract at residual.

		(ii) Fair values are determined as follows: The Series D Preferred Stock was valued as a common stock equivalent, using the trading market price on the financing date, plus enhancements associated with certain beneficial features (e.g. anti-dilution adjustments). The Secured Notes Payable were valued as a forward contract using credit-risk adjusted market rates associated with expectations of credit worthiness of the Company. The CED associated with the Series D Preferred Stock was valued using the Monte Carlo Simulation Model. The CED associated with the Secured Notes Payable was valued as a forward contract, using probability trees and credit-risk adjusted market rates. Warrants were valued using the Black-Scholes-Merton Valuation Technique.


		(iii) Closing costs of $325,000 are paid directly to the investor with $162,500 paid at closing and the remaining portion to be paid in six monthly installments of $27,083.33 beginning January 1, 2010. The Company agreed to reimburse UCC up to $250,000 of out-of-pocket expenses of which $150,000 was paid upon signing of the agreement and the remainder paid at closing. Financing costs paid directly to an investor or creditors are reflected in the allocation as original issue discount to the financial instruments.

		(iv) The Series D Preferred and Secured Notes Payable will be accreted and amortized, respectively, to their redemption values over the term of the contracts using the effective interest method.

		Unaudited Condensed Pro Forma Balance Sheet

		The following unaudited condensed pro forma balance sheet as of June 30, 2009 gives effect to the UCC Financing Transaction as though the financing had been consummated on June 30, 2009. Unaudited pro forma financial information is provided for informational purposes and is not necessarily indicative of the financial condition that would have been reported had the Company completed the financing on June 30, 2009.


	As Reported			Pro Forma Adjustments			Pro Forma


Current assets:

Cash and cash equivalents (i)	$	328,200		$	2,839,118		$	3,167,318

All other current assets		12,677,607			—			12,677,607

Total current assets		13,005,807			2,839,118			15,844,925

Other assets		14,439,378			—			14,439,378

Total assets	$	27,445,185		$	2,839,118		$	30,284,303


Current liabilities

Current liabilities (ii)	$	22,314,078		$	162,500		$	22,476,578

Derivative financial instruments (iii)		—			1,144,644			1,144,644

Indebtedness subject to settlement (i)		—			(1,585,882	)		(1,585,882	)

Total current liabilities		22,314,078			(278,738	)		22,035,340

Deferred rent		1,699,701			—			1,699,701

Notes payable (iv)		—			1,369,786			1,369,786

Total liabilities	$	24,013,779		$	1,091,048		$	25,104,827



Redeemable preferred stock (v)	$	—		$	1,293,236		$	1,293,236


Stockholders’ equity:

Common stock	$	8,569		$	—		$	8,569

Additional paid-in capital (vi)		12,818,426			671,773			13,490,199

Accumulated deficit (vii)		(9,395,589	)		(216,939	)		(9,612,528	)

Total stockholders’ equity	$	3,431,406		$	454,834		$	3,886,240



Total liabilities and stockholders’ equity	$	27,445,185		$	2,839,118		$	30,284,303


		Index to unaudited pro forma adjustments:

		(i) This amount represents the net cash proceeds from the financing. Net proceeds subject to allocation amounted to $4,425,000 ($3,690,000 related to the UCC investor and $735,000 related to the Management Buyers). The difference of $1,585,882 was withheld at closing to settle other indebtedness, and is net of $575,000 paid to UCC for closing costs and other expenses.

		(ii) This amount represents the accrued portion of the $575,000 paid to UCC for closing costs and other expenses. This balance is payable in six equal monthly installments.

		(iii) This amount represents the derivative financial instruments recorded at fair value. The CED associated with the Series D Preferred amounted to $1,116,595; the CED associated with the Secured Notes amounted to $28,049. Derivative financial instruments are recorded initially and subsequently at fair value with changes reflected in income.


		(iv) This amount represents the proceeds that were allocated to the face value $2,500,000 Secured Notes. The discounted balance is subject to amortization to its face value with charges to interest expense using the effective method.

		(v) This amount represents the proceeds that were allocated to the stated value $2,500,000 Series D Preferred Stock. The discounted balance is subject to accretion to its redemption value, including the preference payment, with charges to equity, similar to dividends. Accretions of preferred stock are reflected in the Company’s operations as a reduction of income to arrive at income (loss) applicable to common stockholders.

		(vi) This amount represents the proceeds that were allocated to the Warrants. Warrants will require ongoing evaluation to determine if continued classification remains appropriate.

		(vii) This amount represents the compensation expense related to the Management Buyers. Compensation expense is calculated as the fair value of the share-linked contracts less the proceeds received.

		Amounts in the unaudited pro forma balance sheet are preliminary and may change as a result of material changes in the assumptions underlying the Company’s valuation techniques, if any.


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

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management. When used in this report, the words “estimate,” “project,” “believe,” “anticipate,” “intend,” “expect,” “plan,” “predict,” “may,” “should,” “will,” the negative thereof or other variations thereon or comparable terminology are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events based on currently available information and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in those forward-looking statements. Factors that could cause actual results to differ materially from the Company’s expectations are set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2009 under “Risk Factors,” including but not limited to “Need for Additional Funding; Working Capital Deficit,” “Recent Losses,” “Internal Controls,” “Concentration of Customers,” “Recent Economic Changes,” “Dependence on Key Personnel,” “Unpredictable Revenue Patterns,” “Competition,” and “Risks Associated with Acquisitions,” in addition to other information set forth herein and elsewhere in our other public filings with the Securities and Exchange Commission. The forward-looking statements contained in this report speak only as of the date hereof. The Company does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

‘mktg, inc.’, through its wholly-owned subsidiaries Inmark Services LLC, Optimum Group LLC, U.S. Concepts LLC and Digital Intelligence Group LLC, is an integrated sales promotional and marketing services company. We develop, manage and execute sales promotion programs at both national and local levels, utilizing both online and offline media channels. Our programs help our clients effectively promote their goods and services directly to retailers and consumers and are intended to assist them in achieving maximum impact and return on their marketing investment. Our activities reinforce brand awareness, provide incentives to retailers to order and display our clients’ products, and motivate consumers to purchase those products, and are designed to meet the needs of our clients by focusing on communities of consumers who want to engage brands as part of their lifestyles.

Our services include experiential and face to face marketing, event marketing, interactive marketing, ethnic marketing, and all elements of consumer and trade promotion, and are marketed directly to our clients by our sales force operating out of offices located in New York, New York; Cincinnati, Ohio; Chicago, Illinois; San Francisco, California and Los Angeles, California.

‘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. On September 18, 2008, we changed our name from CoActive Marketing Group, Inc. to ‘mktg, inc.’

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

Results of Operations

Overview

We have been unprofitable in both Fiscal 2008 and Fiscal 2009, as well as the first six months of Fiscal 2010, primarily as a result of increasing expenses and hiring of additional personnel and overhead in advance of revenue that did not materialize, and more recently, due to a decrease in revenues resulting from weakening market conditions. Our operating loss for the three months ended September 30, 2009 was ($1,077,000), compared to $564,000 in operating income for the three months ended September 30, 2008. This $1,641,000 reduction in operating income is the result of a $2,283,000 reduction in Operating Revenue offset by a $642,000 decrease in compensation and general and administrative expenses. Our operating loss for the six months ended September 30, 2009 was ($1,007,000) compared to an operating loss ($281,000) for the six months ended September 30, 2008. This $726,000 increase in operating loss is the result of a $1,870,000 reduction in Operating Revenue offset by a $1,144,000 decrease in compensation and general and administrative expenses. In light of our recent performance, management has taken substantial steps subsequent to the end of Fiscal 2009 to reduce expenses, including reducing our workforce by approximately 60 full-time persons in the aggregate. These efforts are expected to reduce compensation, general and administrative expenses by approximately $8.6 million in the aggregate on an annual basis, and by $6.2 million in Fiscal 2010.

Operating Revenue

We believe Operating Revenue is a key performance indicator. 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. Operating Revenue is a Non-GAAP financial measure 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.

The following table presents operating data expressed as a percentage of Operating Revenue for the three and six months ended September 30, 2009 and 2008, respectively:


	Three Months Ended September 30,						Six Months Ended September 30,

	2009			2008			2009			2008


Statement of Operations Data:
Operating revenue		100.0	%		100.0	%		100.0	%		100.0	%
Compensation expense		90.7	%		72.3	%		85.1	%		79.7	%
General and administrative expense		23.7	%		21.9	%		21.3	%		21.9	%
Operating income (loss)		(14.4	%)		5.8	%		(6.4	%)		(1.6	%)
Interest (expense) income, net		(0.0	%)		(0.4	%)		(0.2	%)		(0.1	%)
Income (loss) before provision for income taxes		(14.4	%)		5.4	%		(6.6	%)		(1.7	%)
Provision for income taxes		0.0	%		0.0	%		0.0	%		0.0	%
Net income (loss)		(14.4	%)		5.4	%		(6.6	%)		(1.7	%)

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 three months ended September 30, 2009 decreased 33% to $17,867,000, compared to $26,613,000 for the quarter ended September 30, 2008. Sales for the six months ended September 30, 2009 decreased 23% to $37,686,000, compared to $48,851,000 for the six months ended September 30, 2008 These decreases in sales are primarily due to a decrease in Diageo events we executed and a general decrease in experiential, trade and digital marketing programs we executed for other clients.

Reimbursable Program Costs and Expenses . Reimbursable program costs and expenses are primarily direct labor, travel and product costs generally associated with events we execute for Diageo. Reimbursable program costs and expenses for the three months ended September 30, 2009 and 2008 were $3,667,000 and $4,446,000, respectively. Reimbursable program costs and expenses for the six months ended September 30, 2009 and 2008 were $7,762,000 and $9,155,000, respectively. These decreases are primarily due to a decrease in the number of events we executed during the three and six month period ended September 30, 2009 versus the same periods in Fiscal 2008.

Outside Production and other Program Expenses . Outside production and other program expenses consist of the costs of purchased materials, media, services, certain direct labor charged to programs and other expenditures incurred in connection with and directly related to sales but which are not classified as reimbursable program costs and expenses. Outside production and other program expenses for the three months ended September 30, 2009 were $6,719,000 compared to $12,403,000 for the three months ended September 30, 2008. Outside production and other program expenses for the six months ended September 30, 2009 were $14,264,000 compared to $22,166,000 for the six months ended September 30, 2008. The decreases in outside production and other program expenses are primarily due to a decrease in Diageo events we executed and reductions in experiential, trade and digital marketing programs partially offset by an increase in expenses attributable to the acquisition of mktgpartners. Outside production and other program expenses can fluctuate greatly from quarter to quarter based on the nature of the projects.

Operating Revenue. For the three months ended September 30, 2009, Operating Revenue decreased by 23% to $7,481,000, compared to $9,764,000 for the three months ended September 30, 2008. For the six months ended September 30, 2009, Operating Revenue decreased by 11% to $15,660,000, compared to $17,530,000 for the six months ended September 30, 2008. The decreases in Operating Revenue are due to reductions in experiential, trade and digital marketing programs partially offset by an increase in revenue attributable to the acquisition of mktgpartners. A reconciliation of Sales to Operating Revenues for the three months ended September 30, 2009 and 2008 is set forth below.


	Three Months Ended September 30,								Six Months Ended September 30,

Sales	2008		%		2008		%		2008		%		2008		%

Sales – U.S. GAAP	$	17,867,000		100	$	26,613,000		100	$	37,686,000		100	$	48,851,000		100
Reimbursable program costs and outside production expenses		10,386,000		58		16,849,000		63		22,026,000		58		31,321,000		64

Operating Revenue – Non-GAAP	$	7,481,000		42	$	9,764,000		37	$	15,660,000		42	$	17,530,000		36

Compensation Expense. Compensation expense, exclusive of reimbursable program costs and expenses and other program expenses, consists of the salaries, payroll taxes and benefit costs related to indirect labor, overhead personnel and certain direct labor otherwise not charged to programs. For the three months ended September 30, 2009, compensation expense decreased $277,000 to $6,783,000, compared to $7,060,000 for the three months ended September 30, 2008. This decrease in compensation expense for the three months ended September 30, 2009 is primarily the result of staff reductions in the trade and digital marketing departments partially offset by severance expense. For the six months ended September 30, 2009, compensation expense decreased $642,000 to $13,327,000, compared to $13,969,000 for the six months ended September 30, 2008. This decrease in compensation expense for the six months ended September 30, 2009 is primarily the result of a decrease in bonus expense and staff reductions in the trade and digital marketing departments partially offset by an increase in severance expense.

General and Administrative Expenses. General and administrative expenses, consisting of office and equipment rent, depreciation and amortization, professional fees, other overhead expenses and charges for doubtful accounts. For the three months ended September 30, 2009, general and administrative expenses decreased $365,000 to $1,775,000, compared to $2,140,000 for the three months ended September 30, 2008. For the six months ended September 30, 2009, general and administrative expenses decreased $501,000 to $3,341,000, compared to $3,842,000 for the six months ended September 30, 2008. These decreases in general and administrative expenses for the three and six months ended September 30, 2009 are primarily the result of the reductions in travel, entertainment and office expenses, and nonrecurring costs related to the Company’s rebranding with its new name in September, 2008.

Interest (Expense), Net. Net interest expense for the three months ended September 30, 2009 was ($6,000) compared to ($34,000) for the three months ended in September 30, 2008. Net interest expense for the six months ended September 30, 2009 was ($23,000) compared to ($25,000) for the six months ended in September 30, 2008.

Income (Loss) before Provision for Income Taxes. The Company’s loss before provision for income taxes for the three months ended September 30, 2009 was ($1,082,000) compared to income before provision for income taxes of $530,000 for the three months end September 30, 2008. For the six months ended September 30, 2009 the Company’s loss before provision for income taxes was ($1,030,000) compared to ($305,000) for the six months end September 30, 2008.

Provision for Income Taxes. We did not record a benefit for federal, state and local income taxes for the three months ended September 30, 2009 and 2008 because any such benefit would be fully offset by an increase in the valuation allowance against the Company’s net deferred tax asset established as a result of our historical operating losses.

Net Income (Loss). As a result of the items discussed above, net loss for the three months ended September 30, 2009 was ($1,082,000) compared to net income of $530,000 for the three months end September 30, 2008. For the six months ended September 30, 2009 the Company’s net loss was ($1,030,000) compared to ($305,000) for the six months end September 30, 2008. Fully diluted earnings (loss) per share amounted to ($.14) and ($.15) for the three and six months ended September 30, 2009, compared to $.07 and ($.04) for the three and six months ended September 30, 2008.

Liquidity and Capital Resources

Beginning with our fiscal year ended March 31, 2000, we have continuously experienced negative working capital. This deficit has generally resulted from our inability to generate sufficient cash and receivables from our programs to offset our current liabilities, which consist primarily of obligations to vendors and other accounts payable, deferred revenues and bank borrowings required to be paid within 12 months from the date of determination. We are continuing our efforts to increase revenues from our programs and reduce our expenses, but to date these efforts have not been sufficiently successful. We have been able to operate during this extended period with negative working capital due primarily to advance payments made to us on a regular basis by our largest customers, and to a lesser degree, equity infusions from private placements of our securities ($1 million in January 2000, and $1.63 million in January and February 2003), and stock option and warrant exercises.

On June 26, 2008 we entered into a Credit Agreement with Sovereign Bank under which we were provided with a three-year revolving credit facility in the principal amount of $2,500,000 for working capital purposes, and a three-year term loan in the amount of $2,500,000 that was used to fund a portion of the purchase price for the assets of 3 For All Partners, LLC. As a result of our failure to comply with various financial and other covenants under the Credit Agreement, we entered into an amendment and waiver to the Credit Agreement in May 2009 under which Sovereign Bank (i) waived existing defaults, (ii) indefinitely suspended our revolving credit facility, and (iii) required us to maintain deposits with Sovereign Bank at all times in an amount not less then the outstanding balance of the term loan as cash-collateral therefore, and (iv) suspends the Company’s obligation to comply with the financial covenants in the future during the period in which the revolving credit facility is suspended and the term loan is fully cash-collateralized. As a result of the amendment and factors described above, we did not have the ability to borrow under the Credit Agreement and therefore terminated the Credit agreement in August 2009 and paid off the debt by applying the cash collateral against the outstanding loan balance.

Subsequent to the end of Fiscal 2009, we experienced a reduction in deferred revenues (i.e., advance payments by clients). We were also required to repay approximately $1.6 million in advance billings to Diageo as a result of a reduction in our Diageo business, which payment was made using a portion of the proceeds from the $5 million financing described below. Furthermore, in November 2009 the method by which Diageo prepays expenses we incur in connection with the execution of their programs was changed so that we are now reimbursed on a semi-monthly basis (twice each month) instead of on a monthly basis, thereby reducing the amount of each such prepayment. Specifically, we are now generally reimbursed in advance on the first and 15th day of each month for the reimbursable expenses we expect to incur during the half-month period following the date of reimbursement. Previously, Diageo generally reimbursed us in advance on the first day of each month for the reimbursable expenses we expected to incur during the entire month.

Due to our recent performance, management has taken substantial steps at the end of Fiscal 2009 and thereafter to reduce expenses and to reset the direction of the business into areas and markets consistent with our core capabilities. These steps include the reduction of our workforce by approximately 60 full-time persons in the aggregate and other cost cutting measures which are expected to reduce compensation, and general and administrative expenses by approximately $8.6 million ($7.8 million of compensation and $800,000 of general and administrative expenses) in the aggregate on an annual basis, and by $6.2 million ($5.3 million of compensation and $900,000 of general and administrative expenses) in Fiscal 2010.

In light of our pressing cash needs caused by the events described above, on December 15, 2009, we consummated a $5 million financing led by an investment vehicle organized by Union Capital Corporation. In the financing, we issued $2.5 million in aggregate principal amount of Senior Secured Notes, $2.5 million in aggregate stated value of Series D Convertible Participating Preferred Stock initially convertible into 5,319,149 shares of Common Stock, and Warrants to purchase 2,456,272 shares of Common Stock.

The Secured Notes are secured by substantially all of our assets; bear interest at a rate of 12.5% per annum payable quarterly; and mature in one installment on December 15, 2012. We have the right to prepay the Secured Notes at any time. While the Secured Notes are outstanding, we will be subject to customary affirmative, negative and financial covenants. The financial covenants include (i) a fixed charge coverage ratio test requiring us to maintain a fixed charge coverage ratio of not less then 1.40 to 1.00 at the close of each fiscal quarter commencing December 31, 2010, (ii) a minimum EBITDA test, to be tested at the end of each fiscal quarter commencing December 31, 2010, requiring us to generate “EBITDA” of at least $3,000,000 over the preceding four quarters, (iii) a minimum liquidity test requiring us to maintain cash and cash equivalents of $500,000 at all times, and (iv) limitations on our capital expenditures. The Secured Notes are not convertible into equity.

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 a conversion price of $0.47. The conversion price of the Preferred Stock is subject to full ratchet anti-dilution provisions for 18 months following issuance, and weighted-average anti-dilution provisions thereafter. 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 our Common Stock outstanding on a fully-diluted basis (excluding the shares issued upon conversion of the Series D 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.

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 addition, we may be required to redeem the Series D Preferred Stock earlier upon the occurrence of a “Triggering Event.” Triggering Events include (i) 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 us or any of our subsidiaries; (iv) our default under other indebtedness in excess of certain amounts, and (v) our breach of representations, warranties or covenants in the documents entered into in connection with the Financing. Upon a Triggering Event or our failure to redeem the Series D Preferred Stock, the accretion rate on the Series D Preferred Stock will increase to 16.5% per annum. We may also be required to pay penalties upon our failure to timely deliver shares of Common Stock upon conversion of Series D Preferred Stock.

Upon closing of the financing, Union Capital became entitled to a closing fee of $325,000, half of which was paid upon closing and the balance of which will be paid in six monthly installments beginning January 1, 2010. The Company also reimbursed Union Capital for its fees and expenses in the amount of $250,000. Additionally, we entered into a management consulting agreement with Union Capital under which Union Capital provides us with management advisory services and we pay Union Capital a fee of $125,000 per year for such services. Such fee will be reduced to $62,500 per year if the holders of the Series D Preferred Stock no longer have the right to nominate two directors and Union Capital no longer owns at least 40% of the Common Stock purchased by it at closing (assuming conversion of Series D Preferred Stock and exercise of Warrants held by it). 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 D Preferred Stock and exercise of Warrants held by it).

We believe that cash currently on hand together with cash expected to be generated from operations and the proceeds from the December 2009 financing described above will be sufficient to fund our operations through September 30, 2010.

At September 30, 2009, we had cash and cash equivalents of $328,000, a working capital deficit of $9,308,000, and stockholders’ equity of $3,431,000. In comparison, at March 31, 2009, we had cash and cash equivalents of $1,904,000, a working capital deficit of $8,966,000, and stockholders’ equity of $4,241,000. The decrease of $1,576,000 in cash and cash equivalents during the six months ended September 30, 2009 was primarily due to the net loss during the period, and to a lesser degree, a change in operating assets and liabilities during the period.

Operating Activities. Net cash used in operating activities for the six months ended September 30, 2009 was $1,487,000 compared to $276,000 for the six months ended September 30, 2008. For the six months ended September 30, 2009, cash used in operating activities primarily reflected an increase in accounts receivable and a reduction in other accrued liabilities, partially offset by a decrease in unbilled contracts in progress and deferred contract costs and an increase in accrued job costs and deferred revenue. For the six months ended September 30, 2008, cash used in operating activities was primarily due to the net loss for the period.

Investing Activities. For the six months ended September 30, 2009, net cash provided by investing activities was $1,905,000, primarily due to a $1,994,000 refund of a deposit in a restricted account previoulsy used as cash collateral against outstanding bank borrowings, partially offset by the purchase of $89,000 of computer equipment and software. For the six months ended September 30, 2008, net cash used in investing activities amounted to $3,632,000, primarily relating to the cash portion of the purchase price for the assets of 3 For All Partners, LLC.

Financing Activities. For the six months ended September 30, 2009, net cash used in investing activities was 1,994,000 resulting from the repayment of all outstanding bank borrowings. For the six months ended September 30, 2008, net cash provided by financing activities amounted to $2,500,000 of bank borrowings utilized to fund a portion of the purchase price for the acquisition of the assets of 3 For All Partners, LLC.

Critical Accounting Policies

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Certain of the estimates and assumptions required to be made relate to matters that are inherently uncertain as they pertain to future events. While management believes that the estimates and assumptions used were the most appropriate, actual results may vary from these estimates under different assumptions and conditions.

Please refer to the Company’s 2009 Annual Report on Form 10-K for a discussion of the Company’s critical accounting policies relating to revenue recognition, goodwill and other intangible assets and accounting for income taxes. During the three months ended September 30, 2009, there were no material changes to these policies.


Item 4T.	Controls and Procedures

Disclosure Controls and Procedures

Our management, including our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures” as defined in Exchange Act Rule 13a-15(e) as of September 30, 2009 in connection with our filing of this Quarterly Report Form 10-Q. Based on that evaluation, and due to our inability to timely file this Quarterly Report on Form 10-Q, a material weakness,our Principal Executive Officer and Principal Financial Officer concluded that as of September 30, 2009, our disclosure controls and procedures were not effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

In addition, due to our inability to timely file our Annual Report on Form 10-K for the year ended March 31, 2009, the quartely report on Form 10-Q for the three months ended June 30, 2009 and this quartely report on Form 10-Q, our Principal Executive Officer and Principal Financial Officer concluded that as of September 30, 2009 our internal controls over financial reporting were not effective to ensure that reports required to be filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC.

Changes in Internal Controls

There has not been any change in our internal control over financial reporting that occurred during our quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

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


Item 6.	Exhibits


	31.1	Certification of 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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

‘mktg, inc.’


Dated: January 20, 2010	By:	/s/ Charles W. Horsey

		Charles W. Horsey, President
		(principal executive officer)

Dated: January 20, 2010	By:	/s/ James R. Haughton

		James R. Haughton, Senior Vice President-Controller
		(principal accounting officer)

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