SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008
COMMISSION FILE NUMBER: 000-51160
ACE MARKETING & PROMOTIONS, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 11-3427886
(State of jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
457 ROCKAWAY AVE.
VALLEY STREAM, NY 11581
(Address of principal executive offices)
(516) 256-7766
(Registrant's telephone number)
NOT APPLICABLE
(Former name, address and fiscal year, if changed since last report)
_________________________
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the Registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Indicate by checkmark 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.
Large Accelerated Filer [ ] Accelerated Filer [ ]
Accelerated Filer [ ] Smaller Reporting Company [X}
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) YES [ ] NO [X]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 15, 2008, the registrant had a total of 8,121,615 shares of Common
Stock outstanding.
EXPLANATORY NOTE
This Form 10-Q is being filed in replacement of a Form 10-QSB for the quarter
ended March 31, 2008 filed with the Securities and Exchange Commission
on May 14, 2008, which Form 10-QSB was filed on an incorrect form.
ACE MARKETING & PROMOTIONS, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets as of March 31, 2008 and
December 31, 2007 3
Condensed Statements of Operations for the Three Months
Ended March 31, 2008 and 2007 4
Condensed Statements of Cash Flows for the Three Months
Ended March 31, 2008 and March 31, 2007 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submissions of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
ACE MARKETING &
PROMOTIONS, INC.
Condensed Balance Sheets
---------------------------------------------------------------------------------------------------------------
March 31, December 31,
2008 2007
---------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 931,624 $ 819,021
Accounts receivable, net of allowance for doubtful accounts of
$10,000 at March 31, 2008 and December 31, 2007, respectively 630,104 963,919
Note receivable 50,000 -
Prepaid expenses and other current assets 168,753 75,375
-----------------------------------
Total Current Assets 1,780,481 1,858,315
Property and Equipment, net 31,853 34,065
Other Assets 7,745 7,745
-----------------------------------
Total Assets $ 1,820,079 $ 1,900,125
===================================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 320,679 $ 475,452
Accrued expenses 137,123 206,015
Customer deposits 300,000 -
-----------------------------------
Total Current Liabilities 757,802 681,467
-----------------------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.0001 par value; 5,000,000 shares authorized;
none issued - -
Common stock, $.0001 par value; 25,000,000 shares authorized;
8,144,949 and 8,124,949 shares issued at March 31, 2008
and December 31, 2007, respectively 815 813
Additional paid-in capital 3,801,079 3,657,920
Accumulated deficit (2,708,116) (2,408,574)
-----------------------------------
1,093,778 1,250,159
Less: Treasury Stock, at cost, 23,334 shares (31,501) (31,501)
-----------------------------------
Total Stockholders' Equity 1,062,277 1,218,658
-----------------------------------
Total Liabilities and Stockholders' Equity $ 1,820,079 $ 1,900,125
===================================
---------------------------------------------------------------------------------------------------------------
See notes to condensed financial statements. 3
ACE MARKETING &
PROMOTIONS, INC.
Condensed Statements of Operations
---------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2008 2007
---------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Revenue, net $ 1,176,183 $ 1,282,880
Cost of Revenue 810,460 865,525
-----------------------------------
Gross Profit 365,723 417,355
-----------------------------------
Operating Expenses:
Selling, general and administrative expenses (including
stock-based payments expense of $143,161 and $25,583,
in 2008 and 2007, respectively) 667,718 554,523
-----------------------------------
Total Operating Expenses 667,718 554,523
-----------------------------------
Loss from Operations (301,995) (137,168)
-----------------------------------
Other Income:
Interest income 2,453 8,342
-----------------------------------
Total Other Income 2,453 8,342
-----------------------------------
Net Loss $ (299,542) $ (128,826)
===================================
Net Loss Per Common Share:
Basic $ (0.04) $ (0.02)
===================================
Diluted $ (0.04) $ (0.02)
===================================
Weighted Average Common Shares Outstanding:
Basic 8,118,099 8,028,363
===================================
Diluted 8,118,099 8,028,363
===================================
---------------------------------------------------------------------------------------------------------------
See notes to condensed financial statements. 4
ACE MARKETING &
PROMOTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2008 2007
---------------------------------------------------------------------------------------------------------------
(UNAUDITED) (Unaudited)
Cash Flows from Operating Activities:
Net loss $ (299,542) $ (128,826)
-----------------------------------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,212 1,012
Stock-based compensation 143,161 25,583
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Accounts receivable 333,815 (119,997)
Prepaid expenses and other assets (93,378) (216,344)
(Decrease) increase in operating liabilities:
Accounts payable and accrued expenses (223,665) (6,027)
Customer deposits 300,000 137,000
-----------------------------------
Total adjustments 462,145 (178,773)
-----------------------------------
Net Cash Provided by (Used in) Operating Activities 162,603 (307,599)
-----------------------------------
Cash Flows from Investing Activities:
Increase in note receivable (50,000) -
-----------------------------------
Net Cash Used in Investing Activities (50,000) -
-----------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 112,603 (307,599)
Cash and Cash Equivalents, beginning of period 819,021 1,353,131
-----------------------------------
Cash and Cash Equivalents, end of period $ 931,624 $ 1,045,532
===================================
---------------------------------------------------------------------------------------------------------------
See notes to condensed financial statements. 5
PART I. FINANCIAL INFORMATION
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
The Condensed Balance Sheets as of March 31, 2008, the Condensed Statements of
Operations for the three months ended March 31, 2008 and 2007 and the Condensed
Statements of Cash Flows for the three months ended March 31, 2008 and 2007 have
been prepared by us without audit, and in accordance with the requirements of
Form 10-Q and, therefore, they do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations,
and cash flows in conformity with accounting principles generally accepted in
the United States of America. In our opinion, the accompanying unaudited
condensed financial statements contain all adjustments necessary to present
fairly in all material respects our financial position as of March 31, 2008,
results of operations for the three months ended March 31, 2008 and 2007 and
cash flows for the three months ended March 31, 2008 and 2007. All such
adjustments are of a normal recurring nature.
This report should be read in conjunction with our Form 10-KSB for our fiscal
year ended December 31, 2007.
The results of operations and cash flows for the three months ended March 31,
2008 are not necessarily indicative of the results to be expected for the full
year.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition - Revenue is recognized when title and risk of loss
transfers to the customer and the earnings process is complete. In general,
title passes to our customers upon the customer's receipt of the merchandise.
Revenue is accounted for in accordance with Emerging Issue Task Force (EITF)
Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an
Agent." Revenue is recognized on a gross basis since the Company has the risks
and rewards of ownership, latitude in selection of vendors and pricing, and
bears all credit risk.
The Company records all shipping and handling fees billed to customers as
revenues, and related costs as cost of goods sold, when incurred, in accordance
with EITF 00-10, "Accounting for Shipping and Handling Fees and Costs."
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements - On September 15, 2006, the Financial
Accounting Standards Board ("FASB") issued Statement No. 157, FAIR VALUE
MEASUREMENTS ("SFAS 157"). SFAS 157 provides guidance for using fair value to
measure assets and liabilities. This statement references 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 in the market in which
the reporting entity transacts. The statement applies whenever other standards
require (or permit) assets or liabilities to be measured at fair value. The
statement does not expand the use of fair value in any new circumstances. The
Company adopted the provisions of SFAS No. 157 related to financial assets and
liabilities as of January 1, 2008. The application of this standard did not have
a material impact on the results of operations or financial condition. The
Company elected to defer adoption of SFAS No. 157 for non-financial assets and
liabilities and does not anticipate that adoption in fiscal 2009 will have a
material impact on the results of operations or financial condition.
In February 2007, the Financial Accounting Standards Board (FASB), issued
Statement of Financial Accounting Standards (SFAS) No. 159, THE FAIR VALUE
OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES -- INCLUDING AN AMENDMENT
OF FASB STATEMENT NO. 115. Under SFAS No. 159, a company may elect to measure
eligible financial assets and financial liabilities at fair value. Unrealized
gains and losses on items for which the fair value option has been elected are
reported in earnings at each subsequent reporting date. If elected, SFAS No. 159
is effective for fiscal years beginning after November 15, 2007. The Company did
not elect to begin reporting any financial assets or liabilities at fair value
upon adoption of SFAS No. 159 on January 1, 2008 and did not elect to report at
fair value any new financial assets or liabilities entered during the quarter
ended March
6
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141R, "Business Combinations" ("SFAS 141R"), which establishes principles
and requirements for the reporting entity in a business combination, including
recognition and measurement in the financial statements of the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. This statement also establishes disclosure requirements to enable
financial statement users to evaluate the nature and financial effects of the
business combination. SFAS 141R applies prospectively to business combinations
for which the acquisition date is on or after fiscal years beginning after
December 15, 2008. The Company is currently evaluating the effect that the
adoption of SFAS 141R will have on its financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an
Amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes accounting and
reporting standards pertaining to ownership interests in subsidiaries held by
parties other than the parent; the amount of net income attributable to the
parent and to the noncontrolling interest; changes in a parent's ownership
interest; and the valuation of any retained noncontrolling equity investment
when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS 160 is required to
be adopted prospectively for the first annual reporting period beginning after
December 15, 2008. The Company is currently reviewing the effect that the
adoption of this statement will have on its financial statements.
2. LOSS PER SHARE
Basic loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Dilutive
loss per share gives effect to stock options and warrants, which are considered
to be dilutive common stock equivalents. Basic loss per common share was
computed by dividing net loss by the weighted average number of shares of common
stock outstanding. The number of common shares potentially issuable upon the
exercise of certain options and warrants that were excluded from the diluted
loss per common share calculation was approximately 4,739,170 and 3,519,000
because they are antidilutive as a result of a net loss for the three months
ended March 31, 2008 and 2007.
3. STOCK COMPENSATION
Effective January 1, 2006, the Company's Plan is accounted for in accordance
with the recognition and measurement provisions of Statement of Financial
Accounting Standards ("FAS") No. 123 (revised 2004), Share-Based Payment ("FAS
123(R)"). FAS 123 (R) requires compensation costs related to share-based payment
transactions, including employee stock options, to be recognized in the
financial statements. In addition, the Company adheres to the guidance set forth
within Securities and Exchange Commission ("SEC") Staff Accounting Bulletin
("SAB") No. 107, which provides the Staff's views regarding the interaction
between SFAS No. 123(R) and certain SEC rules and regulations and provides
interpretations with respect to the valuation of share-based payments for public
companies.
Stock options and warrants issued in exchange for non-employee services pursuant
to the provisions of FAS 123(R), Emerging Issues Task Force ("EITF") 96-3 and
EITF 96-18 are accounted for at the fair value of the consideration or services
received or the fair value of the equity instruments issued, whichever is more
reliably measurable
The Company's results for the three month periods ended March 31, 2008 and 2007
include employee share-based compensation expense totaling approximately
$143,000 and $26,000, respectively. Such amounts have been included in the
Condensed Consolidated Statements of Operations within selling, general and
administrative expenses. No income tax benefit has been recognized in the
statement of operations for share-based compensation arrangements due to a
history of operating losses.
The following table summarizes stock-based compensation expense for the three
months ended March 31, 2008 and 2007:
------------------------------------------------------ -------------------------
Three Months Ended
March 31,
2008 2007
------------------------------------------------------ ------------ ------------
Employee stock-based compensation - option grants $107,055 $12,862
Employee stock-based compensation - stock grants - -
Non-Employee stock-based compensation - option grants 19,156 12,721
Non-Employee stock-based compensation - stock grants 17,000 -
------------------------------------------------------ ------------ ------------
Total $143,161 $25,583
------------------------------------------------------ ============ ============
7
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
STOCK OPTION PLAN
During Fiscal 2005, the Company established, and the stockholders approved, an
Employee Benefit and Consulting Services Compensation Plan (the "Plan") for the
granting of up to 2,000,000 non-statutory and incentive stock options and stock
awards to directors, officers, consultants and key employees of the Company. On
June 9, 2005, the Board of Directors amended the Plan to increase the number of
stock options and awards to be granted under the Plan to 4,000,000.
All stock options under the Plan are granted at or above the fair market value
of the common stock at the grant date. Employee and non-employee stock options
vest over varying periods and generally expire either 5 or 10 years from the
grant date.
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model. For option grants, the Company will take
into consideration guidance under SFAS 123R and SEC Staff Accounting Bulletin
No. 107 (SAB 107) when reviewing and updating assumptions. The expected
volatility is based upon historical volatility of our stock and other
contributing factors. The expected term is based upon observation of actual time
elapsed between date of grant and exercise of options for all employees.
Previously such assumptions were determined based on historical data.
The weighted average assumptions made in calculating the fair values of options
granted during the three months ended March 31, 2008 and 2007 are as follows:
------------------------------------------------------ -------------------------
Three Months Ended
March 31,
2008 2007
------------------------------------------------------ ------------ ------------
Expected volatility 114.92% -
Expected dividend yield - -
Risk-free interest rate 3.125% -
Expected term (in years) 5.00 -
------------------------------------------------------ ------------ ------------
The following table represents the activity under our stock option plan:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Share Price Term Value
------------------------------------- ------------- --------- ------------- -----------
Outstanding, January 1, 2008 2,221,222 $ 1.13
Granted 1,110,000 $ .80
Exercised - -
Forfeited (100,000) $ 2.00
-------------
Outstanding, March 31, 2008 3,231,222 $ 1.11 6.77 $ -
=============
Options exercisable, March 31, 2008 1,762,247 $ 1.10 5.99 $ -
=============
8
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
The weighted-average grant-date fair value of options granted during the three
months ended March 31, 2008 was $0.52. There were no option grants for the three
months ended March 31, 2007.
The aggregate intrinsic value of options outstanding and options exercisable at
March 31, 2008 is calculated as the difference between the exercise price of the
underlying options and the market price of the Company's common stock for the
shares that had exercise prices, that were lower than the $.75 closing price of
the Company's common stock on March 31, 2008. At March 31, 2008 there were no
outstanding options with exercise prices less than $.75.
As of March 31, 2008, the fair value of unamortized compensation cost related to
unvested stock option awards was approximately $532,473. Unamortized
compensation cost as of March 31, 2008 is expected to be recognized over a
remaining weighted-average vesting period of 4.75 years.
4. NOTE RECEIVABLE
In February 2008, the Company entered into an agreement with Blue Bite, LLC
("Blue Bite"), a distributor of wireless networking solutions, to become an
authorized provider and reseller in the United States of mobile advertising
solutions.
In connection with the agreement, the Company loaned Blue Bite $50,000., The
Note bears interest at 10% per annum and is due March 1, 2009. The Note is
convertible, at the Company's option, into a 10% ownership interest of Blue
Bite. Upon conversion, the Company would also have to deliver to Blue Bite,
$75,000 in restricted Common Stock of the Company as additional consideration.
5. TRANSACTIONS WITH MAJOR CUSTOMER
The Company sells its products to a geographically diverse group of customers,
performs ongoing credit evaluations of its customers and generally does not
require collateral.
For the three months ended March 31, 2008 and 2007, sales from ten percent or
greater customers approximated 20.4% and 47.5%, respectively of total sales.
During these reporting periods, we had one principal customer, of whom is a
retailer, accounting for these results.
6. CONSULTING AGREEMENT
During the three months ended March 31, 2008, the Company issued 20,000 shares
of common stock to a consultant in exchange for marketing and training services.
The services were recorded equal to the value of the shares and an expense of
$17,000 is included in selling, general and administrative for the three months
ended March 31, 2008.
7. SUBSEQUENT EVENTS - WARRANTS
On April 1, 2008, the Company's Board of Directors approved the extension of the
expiration date of the Company's Class A and Class B Warrants to July 1, 2008.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The information contained in this Form 10-Q and documents incorporated
herein by reference are intended to update the information contained in the
Company's Form 10-KSB for its fiscal year ended December 31, 2007 which includes
our audited financial statements for the year ended December 31, 2007 and such
information presumes that readers have access to, and will have read, the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Risk Factors" and other information contained in such Form 10-KSB
and other Company filings with the Securities and Exchange Commission ("SEC").
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements involve risks and uncertainties, and
actual results could be significantly different than those discussed in this
Form 10-Q. Certain statements contained in Management's Discussion and
Analysis, particularly in "Liquidity and Capital Resources," and elsewhere in
this Form 10-Qare forward-looking statements. These statements discuss, among
other things, expected growth, future revenues and future performance. Although
we believe the expectations expressed in such forward-looking statements are
based on reasonable assumptions within the bounds of our knowledge of our
business, a number of factors could cause actual results to differ materially
from those expressed in any forward-looking statements, whether oral or written,
made by us or on our behalf. The forward-looking statements are subject to risks
and uncertainties including, without limitation, the following: (a) changes in
levels of competition from current competitors and potential new competition,
(b) possible loss of customers, and (c) the company's ability to attract and
retain key personnel, (d) The Company's ability to manage other risks,
uncertainties and factors inherent in the business and otherwise discussed in
this 10-Q and in the Company's other filings with the SEC. The foregoing
should not be construed as an exhaustive list of all factors that could cause
actual results to differ materially from those expressed in forward-looking
statements made by us. All forward-looking statements included in this document
are made as of the date hereof, based on information available to the Company on
the date thereof, and the Company assumes no obligation to update any
forward-looking statements.
OVERVIEW
We are a full service promotional marketing and distribution company
offering a wide array of business solutions. Ace has grown organically through
referrals based on its high quality service and external financings to support
our growth. We are also expanding through hiring leading independent
salespersons who are well supported by the Ace proprietary business structure.
By offering more services and solutions to our customers, new recruits will have
the ability to expand their present business by simply making the move to Ace.
Upon integrating their client base into our system they too become trusted
advisors that provide integrated business solutions instead of a commodity based
promotional product salesperson.
These achievements position us to accelerate growth through potential
acquisition and consolidation of other companies as well as simply recruiting
experienced salespeople. In the event a company is acquired by us, of which no
assurances can be given in this regard, the new clients would all be introduced
to the additional services that are now available in our promotional marketing
model.
10
We have effectively carved out a niche for Ace. Marketing and branding
companies create an image and direction for clients. Ad agencies develop print,
TV, radio and other campaigns aimed at goals of recruiting and introducing new
products or services. Traditional promotional product companies offer imprinted
merchandise and apparel. Ace finds itself in a position of providing value added
services that compliment those of the ad agency, as well as branding and
marketing companies while at the same time far exceeding the capabilities of a
standard promotional products distributor.
We expect our revenues to grow as economic conditions in the United States
continue to improve, by adding additional in-house and independent sales
representatives to our sales network. While one or more acquisitions of other
distributors will also be considered by Management, we can provide no assurances
that one or more acquisitions of other distributors will be completed on terms
satisfactory to us, if at all.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of financial statements require management to make estimates and
disclosures on the date of the financial statements. On an on-going basis, we
evaluate our estimates including, but not limited to, those related to revenue
recognition. We use authoritative pronouncements, historical experience and
other assumptions as the basis for making judgments. Actual results could differ
from those estimates. We believe that the following critical accounting policies
affect our more significant judgments and estimates in the preparation of our
financial statements.
REVENUE RECOGNITION. Revenues are recognized when title and risk of loss
transfers to the customer and the earnings process is complete. In general,
title passes to our customers upon the customer's receipt of the merchandise.
Revenue is accounted for in accordance with Emerging Issue Task Force Issue No.
99-19, reporting revenue gross as a principal versus net as an agent. Revenue is
recognized on a gross basis since our company has the risks and rewards of
ownership, latitude in selection of vendors and pricing, and bears all credit
risk. Our company records all shipping and handling fees billed to customers as
revenues, and related costs as cost of goods sold, when incurred, in accordance
with Emerging Issue Task Force Issue No. 00-10, accounting for shipping and
handling fees and costs.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We are required to make judgments based
on historical experience and future expectations, as to the realizability of our
accounts receivable. We make these assessments based on the following factors:
(a) historical experience, (b) customer concentrations, customer credit
worthiness, (d) current economic conditions, and (e) changes in customer payment
terms.
STOCK BASED COMPENSATION. Effective January 1, 2006, the Company began
recording compensation expense associated with stock options and other
equity-based compensation in accordance with SFAS 123(R), using the modified
prospective transition method and therefore has not restated results for prior
periods. Under the modified prospective transition method, share-based
compensation expense for 2006 includes 1) compensation expense for all
share-based awards granted on or after January 1, 2006 as determined based on
the grant-date fair value estimated in accordance with the provisions of SFAS
123(R) and 2) compensation expense for share-based compensation awards granted
prior to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123. The
Company recognizes compensation expense on a straight-line basis over the
requisite service period of the award.
11
Recently Issued Accounting Pronouncements
-----------------------------------------
On September 15, 2006, the Financial Accounting Standards Board ("FASB") issued
Statement No. 157, FAIR VALUE MEASUREMENTS ("SFAS 157"). SFAS 157 provides
guidance for using fair value to measure assets and liabilities. This statement
references 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 in the market in which the reporting entity transacts. The
statement applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value. The statement does not expand the use
of fair value in any new circumstances. The Company adopted the provisions of
SFAS No. 157 related to financial assets and liabilities as of January 1, 2008.
The application of this standard did not have a material impact on the results
of operations or financial condition. The Company elected to defer adoption of
SFAS No. 157 for non-financial assets and liabilities and does not anticipate
that adoption in fiscal 2009 will have a material impact on the results of
operations or financial condition.
In February 2007, the Financial Accounting Standards Board (FASB), issued
Statement of Financial Accounting Standards (SFAS) No. 159, THE FAIR VALUE
OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES -- INCLUDING AN AMENDMENT
OF FASB STATEMENT NO. 115. Under SFAS No. 159, a company may elect to measure
eligible financial assets and financial liabilities at fair value. Unrealized
gains and losses on items for which the fair value option has been elected are
reported in earnings at each subsequent reporting date. If elected, SFAS No. 159
is effective for fiscal years beginning after November 15, 2007. The Company did
not elect to begin reporting any financial assets or liabilities at fair value
upon adoption of SFAS No. 159 on January 1, 2008 and did not elect to report at
fair value any new financial assets or liabilities entered during the quarter
ended March
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141R, "Business Combinations" ("SFAS 141R"), which establishes principles
and requirements for the reporting entity in a business combination, including
recognition and measurement in the financial statements of the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. This statement also establishes disclosure requirements to enable
financial statement users to evaluate the nature and financial effects of the
business combination. SFAS 141R applies prospectively to business combinations
for which the acquisition date is on or after fiscal years beginning after
December 15, 2008. The Company is currently evaluating the effect that the
adoption of SFAS 141R will have on its financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an
Amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes accounting and
reporting standards pertaining to ownership interests in subsidiaries held by
parties other than the parent; the amount of net income attributable to the
parent and to the noncontrolling interest; changes in a parent's ownership
interest; and the valuation of any retained noncontrolling equity investment
when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS 160 is required to
be adopted prospectively for the first annual reporting period beginning after
December 15, 2008. The Company is currently reviewing the effect that the
adoption of this statement will have on its financial statements.
12
RESULTS OF OPERATIONS
The following table sets forth certain selected unaudited condensed
statement of operations data for the periods indicated in dollars and as a
percentage of total net revenues. The following discussion relates to our
results of operations for the periods noted and is not necessarily indicative of
the results expected for any other interim period or any future fiscal year. In
addition, we note that the period-to-period comparison may not be indicative of
future performance.
Three Months Ended March 31, 2008 2007
------------ ------------
Revenue $1,176,183 $1,282,880
Cost of Revenues 810,460 865,525
------------ ------------
Gross Profit 365,723 417,355
Selling, general & Administrative expenses 667,718 554,523
------------ ------------
(Loss) from operations (301,995) (137,168)
============ ============
We generated revenues of $1,176,183 in the first quarter of 2008 compared to
$1,282,280 in the same three month period ending March 31, 2007. The decrease in
revenues of $106,697 in 2008 compared to 2007 was for the following reason. One
of our major customers was responsible for revenues in 2006 and 2007 totaling
approximately $930,000 and $1,120,000, respectively. This same customer is
anticipated by management to maintain a constant level of sales orders for 2008
versus 2007. Sales of merchandise for this principal customer in the first
quarter of 2007 included over $300,000 of merchandise that were ordered in the
fourth quarter of fiscal 2006, but due to delays in shipping, were not invoiced
until the first quarter of 2007. Accordingly, the first quarter of fiscal 2007
has a bunching effect of orders which did not occur in the first quarter of
2008.
Cost of revenues was $810,460 or 68.9% of revenues in the first quarter of 2008
compared to $865,425 or 67.5% of revenues in the same three months of 2007. Cost
of revenues includes purchases and freight costs associated with the shipping of
merchandise to our customers. Decrease in cost of revenues of $55,065 in 2008 is
related to a decrease in sales to a major customer who placed two fewer orders
during the current quarter ending March 31, 2008.
Gross profit was $365,723 in the first quarter of 2008 or 31.1% of net revenues
compared to $417,355 in the same three months of 2007 or 32.5% of revenues.
Gross profits will vary period-to-period depending upon a number of factors
including the mix of items sold, pricing of the items and the volume of product
sold. Also, it is our practice to pass freight costs on to our customers.
Reimbursement of freight costs which are included in revenues have lower profit
margins than sales of our promotional products and has the effect of reducing
our overall gross profit margin on sales of products, particularly on smaller
orders.
Selling, general, and administrative expenses were $667,718 in the first quarter
of 2008 compared to $554,523 in the same three months of 2007. Such costs
include payroll and related expenses, commissions, insurance, rents,
professional, consulting and public awareness fees. The overall increase of
$113,195 was primarily due to a $117,578 increase in stock based compensation.
Net loss was $299,542 in the first quarter of 2008 compared to a net loss of
$128,826 for the same three months in 2007. The first quarter net loss for 2008
includes stock based payments (non-cash) of $143,161 as compared to $25,583 for
the comparable period of 2007. No benefit for income taxes is provided for in
2008 and 2007 due to the full valuation allowance on the net deferred tax
assets.
Liquidity and Capital Resources
-------------------------------
The company had cash and cash equivalents of $931,624 at March 31, 2008. Cash
provided by operating activities for the three months ended March 31, 2008 was
$162,603. This resulted primarily from a net loss of $299,542, offset by stock
based compensation of $143,161 a decrease in accounts receivable of $333,815 and
an increase in customer deposits of $300,000, as well as an increase prepaid
expenses and other assets of $93,378 and a decrease of accounts payable and
accrued expenses of $223,665.
13
Cash used in investing activities for the three months ended March 31, 2008 was
$50,000 as a result of an issuance of a note receivable.
The company had cash and cash equivalents of $1,045,532 at March 31, 2007. Cash
used by operating activities for the three months ended March 31, 2007 was
$(307,599). This resulted primarily from a net loss of $128,826, an increase in
accounts receivable of $119,997 and an increase in prepaid expenses and other
assets of $216,344 primarily offset by customer deposits of $137,000 and stock
based compensation of $25,583.
Our company commenced operations in 1998 and was initially funded by our three
founders, each of whom has made demand loans to our Company that have been
repaid. Since 1999, we have relied primarily on equity financing from outside
investors to supplement our cash flow from operations.
We anticipate that our future liquidity requirements will arise from the need to
finance our accounts receivable and inventories, hire additional sales persons,
capital expenditures and possible acquisitions. The primary sources of funding
for such requirements will be cash generated from operations, raising additional
capital from the sale of equity or other securities and borrowings under debt
facilities which currently do not exist. We believe that we can generate
sufficient cash flow from these sources to fund our operations for at least the
next fifteen months. In the event we should need additional financing, we can
provide no assurances that we will be able to obtain financing on terms
satisfactory to us, if at all.
2006 Financing
--------------
In 2006, we engaged Brookshire Securities Corporation, a licensed broker-dealer
and member of the NASD, to act as Placement Agent to raise financing for our
company through the sale of our unregistered securities solely to "accredited
investors" as defined in Rule 501 of Regulation D of the Securities Act of 1933,
as amended.
Pursuant to the offering, we raised gross proceeds of $1,665,250 from the sale
of Units. Each Unit consisted of 60,000 shares of our Common Stock and Class C
Warrants to purchase 30,000 shares of Common Stock at an offering price of
$105,000 per Unit. We had the right to sell fractional Units, but not fractional
shares or fractional Class C Warrants. The Class C Warrants are exercisable at
$1.75 per share at anytime from the date of issuance through the earlier of June
30, 2009 or the redemption date of the Class C Warrants, whichever is earlier.
Each Class C Warrant may be redeemed by us at a redemption price of $.001 per
Warrant, on at least 30 days prior written notice (the "Redemption Date'), at
anytime after the average closing sales price of our Common Stock as reported in
the Over-the-Counter Market OTC Electronic Bulletin Board, NASDAQ or if listed
on a national securities exchange, equals or exceeds $3.00 per share for a
period of 20 consecutive trading days ending within 10 days prior to the date of
the notice of redemption is mailed or otherwise delivered by us to each holder
of Class C Warrants.
We sold 951,575 shares of our Common Stock and Class C Warrants to purchase
475,788 shares of our Common Stock in the offering. On December 21, 2006 and
December 17, 2007, we obtained an effective registration statement with the
Securities and Exchange Commission to register the resale of 951,575 shares of
Common Stock and 475,588 shares underlying the Class C Warrants. We also issued
to the Placement Agent 139,680 shares of Common Stock and five-year Warrants to
purchase 95,160 shares of Common Stock exercisable at $1.00 per share. Exemption
from registration is claimed under Rule 506 of Regulation d promulgated under
Section 4(2) of the Securities Act.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates and commodity
prices. Our primary exposure to market risk is interest rate risk associated
with our short term money market investments. The Company does not have any
financial instruments held for trading or other speculative purposes and does
not invest in derivative financial instruments, interest rate swaps or other
investments that alter interest rate exposure. The Company does not have any
credit facilities with variable interest rates.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures, which are designed to ensure
that information required to be disclosed in the reports we file or submit under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commissions rules and forms, and that such information is accumulated
and communicated to our management, including our CEO and CFO, as appropriate,
to allow timely decisions regarding required disclosure.
14
Under the supervision and with the participation of our management, including
our CEO and CFO, an evaluation was performed on the effectiveness of the design
and operation of our disclosure controls and procedures as of the end of the
period covered by this quarterly report. Based on that evaluation, our
management, including our CEO and CFO, concluded that our disclosure controls
and procedures were effective as of the end of the period covered by this
report.
There were no changes in the Company's internal controls over financial
reporting during the most recently completed fiscal quarter that have materially
affected or are reasonably likely to materially affect the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
As of the filing date of this Form 10-Q, we are not a party to any pending
legal proceedings.
ITEM 2. CHANGES IN SECURITIES.
(a) Since January 2008, we had no sales or issuances of unregistered
common stock, except we made sales or issuances of unregistered securities
listed in the table below:
---------------- ----------- ------------ ----------------------- ------------------- ----------------------
CONSIDERATION RECEIVED
AND DESCRIPTION
OF UNDERWRITING
OR OTHER DISCOUNTS IF OPTION, WARRANT OR
TO MARKET PRICE OR EXEMPTION FROM CONVERTIBLE SECURITY,
TITLE OF NUMBER CONVERTIBLE SECURITY, REGISTRATION TERMS OF EXERCISE
DATE OF SALE SECURITY SOLD AFFORDED TO PURCHASERS CLAIMED OR CONVERSION
---------------- ----------- ------------ ----------------------- ------------------- ----------------------
---------------- ----------- ------------ ----------------------- ------------------- ----------------------
January 2008 Common 1,000,000 Services rendered; no Section 4(2) Not applicable.
Stock shares commissions paid
Options
---------------- ----------- ------------ ----------------------- ------------------- ----------------------
January 2008 Common 20,000 Services rendered; no Section 4(2). A Not applicable.
Stock shares commissions paid restrictive
legend appears on
each certificate
---------------- ----------- ------------ ----------------------- ------------------- ----------------------
(b) Between January 1, 2008 and March 31, 2008, there were no sales of
unregistered securities.
(c) Rule 463 of the Securities Act is not applicable to the Company.
(d) In the three months ended March 31, 2008, there were no repurchases by
the Company of its Common Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Not applicable.
ITEM 5. OTHER INFORMATION:
The Company has outstanding Class A and Class B Common Stock Purchase Warrants
to purchase an aggregate of 737,000 shares of Common Stock, exercisable at $2.00
per share. The expiration date of the Class A and Class B Warrants has been
extended to the close of business on July 1, 2008.
15
ITEM 6. EXHIBITS:
Except for the exhibits listed below as filed herewith or unless Otherwise
noted, all other required exhibits have been previously filed with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended, on Form 10-SB, as amended (file no. 000-51160).
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation filed March 26, 1998 (1)
3.2 Amendment to Articles of Incorporation filed June 10, 1999 (1)
3.3 Amendment to Articles of Incorporation approved by stockholders on
February 9, 2005(1)
3.4 Amended By-Laws (1)
10.1 Employment Agreement - Michael Trepeta (2)
10.2 Employment Agreement - Dean Julia (2)
10.3 Amendments to Employment Agreement - Michael Trepeta (5)(7)
10.4 Amendments to Employment Agreement - Dean L. Julia (5)(7)
10.5 Joint Venture Agreement with Atrium Enterprises Ltd. (6)
10.6 Agreement with Aon Consulting (6)
11.1 Statement re: Computation of per share earnings. See
Statement of Operations and Notes to Financial Statements
14.1 Code of Ethics/Code of Conduct (5)
21.1 Subsidiaries of the Issuer - None in 2007
31.1 Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification (3)
31.2 Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certification (3)
32.1 Chief Executive Officer Section 1350 Certification (3)
32.2 Chief Financial Officer Section 1350 Certification (3)
99.1 2005 Employee Benefit and Consulting Services Compensation Plan(2)
99.2 Form of Class A Warrant (2)
99.3 Form of Class B Warrant (2)
99.4 Amendment to 2005 Plan (4)
99.5 Form of Class C Warrant (8)
99.6 Release - 2008 First quarter Results of Operations (3)
___________
(1) Incorporated by reference to Registrant's Registration Statement on Form
10-SB as filed with the Commission on February 10, 2005.
(2) Incorporated by reference to Registrant's Registration Statement on Form
10-SB/A as filed with the Commission March 18, 2005.
(3) Filed herewith.
(4) Incorporated by reference to the Registrant's Form 10-QSB/A filed with the
Commission on August 18, 2005.
(5) Incorporated by reference to the Registrant's Form 10-KSB for its fiscal
year ended December 31, 2005.
(6) Incorporated by reference to the Registrant's Form 10-KSB for its fiscal
year ended December 31, 2006.
(7) Incorporated by reference to the Registrant's Form 8-K dated September 21,
2007.
(8) Incorporated by reference to the Registrant's Form 10-QSB for its quarter
ended September 30, 2006.
16
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.
ACE MARKETING & PROMOTIONS, INC.
Date: May 13, 2008 By: /s/ Dean L. Julia
------------------------------------
Dean L. Julia,
Chief Executive Officer
Date: May 13, 2008 By: /s/ Sean McDonnell
------------------------------------
Sean McDonnell,
Chief Financial Officer
17