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 JUNE 30, 2009
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) 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 [ ]
Indicate by checkmark whether the registrant has submitted electronically and
posted on its corporate website, if any, every Interactive Data File required to
be submitted pursuant to Rule 405 of Regulation S-T during the 12 preceding
months (or such shorter period that the registrant was required to submit and
post such file). Yes [ ] 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]
As of August 12, 2009, the registrant had a total of 9,717,615 shares of Common
Stock outstanding,
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 June 30, 2009 (unaudited)
and December 31, 2008 3
Condensed Statements of Operations for the Three Months
and six months Ended June 30, 2009 and 2008 (unaudited) 4
Condensed Statements of Cash Flows for the Six Months
Ended June 30, 2009 and June 30, 2008 (unaudited) 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 21
Item 4. Submissions of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 23
2
ACE MARKETING &
PROMOTIONS, INC.
CONDENSED BALANCE SHEETS JUNE 30, December 31,
2009 2008
==============================================================================================
UNAUDITED Audited
ASSETS
Current Assets:
Cash and cash equivalents $ 368,081 $ 509,251
Accounts receivable, net of allowance for doubtful accounts of
$20,000 at June 30, 2009 and December 31, 2008 606,021 809,685
Note receivable -- 100,000
Prepaid expenses and other current assets 112,965 63,401
--------------------------
Total Current Assets 1,087,067 1,482,337
Property and Equipment, net 101,591 115,334
Other Assets 7,745 7,745
--------------------------
Total Assets $ 1,196,403 $ 1,605,416
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 181,561 $ 338,165
Accrued expenses 229,232 181,766
--------------------------
Total Current Liabilities 410,793 519,931
--------------------------
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;
9,740,949 and 9,234,949 shares issued and
9,717,615 and 9,211,615 shares outstanding at June 30, 2009
and December 31, 2008, respectively 975 924
Additional paid-in capital 5,172,365 4,851,529
Accumulated deficit (4,356,229) (3,735,467)
--------------------------
817,111 1,116,986
Less: Treasury Stock, at cost, 23,334 shares (31,501) (31,501)
--------------------------
Total Stockholders' Equity 785,610 1,085,485
--------------------------
Total Liabilities and Stockholders' Equity $ 1,196,403 $ 1,605,416
===========================
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SEE NOTES TO CONDENSED FINANCIAL STATEMENTS. 3
ACE MARKETING &
PROMOTIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS (unaudited)
=========================================================================================================
Three Months Ended Six Months Ended
June 30, June 30,
2009 2008 2009 2008
---- ---- ---- ----
Revenues, net $ 841,247 $ 2,049,867 $ 1,296,279 $ 3,226,050
Cost of Revenues 500,349 1,578,235 831,217 2,388,695
---------------------------------------------------------
Gross Profit 340,898 471,632 465,062 837,355
---------------------------------------------------------
Operating Expenses:
Selling, general and administrative expenses 499,189 666,312 1,090,135 1,334,030
---------------------------------------------------------
Total Operating Expenses 499,189 666,312 1,090,135 1,334,030
---------------------------------------------------------
Loss from Operations (158,291) (194,680) (625,073) (496,675)
---------------------------------------------------------
Other Income (Expense):
Interest expense (223) -- (249) --
Interest income 1,803 1,524 4,560 3,977
---------------------------------------------------------
Total Other Income (Expense) 1,580 1,524 4,311 3,977
---------------------------------------------------------
Net Loss $ (156,711) $ (193,156) $ (620,762) $ (492,698)
=========================================================
Net Loss Per Common Share:
Basic $ (0.02) $ (0.02) $ (0.06) $ (0.06)
=========================================================
Diluted $ (0.02) $ (0.02) $ (0.06) $ (0.06)
=========================================================
Weighted Average Common Shares Outstanding:
Basic 9,717,615 8,165,571 9,622,565 8,163,914
=========================================================
Diluted 9,717,615 8,165,571 9,622,565 8,163,914
=========================================================
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SEE NOTES TO CONDENSED FINANCIAL STATEMENTS. 4
ACE MARKETING &
PROMOTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2009 2008
===================================================================================
(UNAUDITED) (unaudited)
-----------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $(620,762) $(492,698)
--------------------------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 13,743 4,424
Stock-based compensation 70,887 271,844
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Accounts receivable 203,664 104,600
Prepaid expenses and other current assets (49,564) (9,156)
Decrease in operating liabilities:
Accounts payable and accrued expenses (109,138) (68,730)
--------------------------
Total adjustments 129,592 302,982
--------------------------
Net Cash Used in Operating Activities (491,170) (189,716)
--------------------------
Cash Flows from Investing Activities:
Collection (Disbursement) in Note receivable 100,000 (50,000)
--------------------------
Net Cash (Used in) Provided by Financing Activities 100,000 (50,000)
--------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 250,000 --
--------------------------
Net Cash Provided by Financing Activities 250,000 --
--------------------------
Net Decrease in Cash and Cash Equivalents (141,170) (239,716)
Cash and Cash Equivalents, beginning of period 509,251 819,021
--------------------------
Cash and Cash Equivalents, end of period $ 368,081 $ 579,305
==========================
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SEE NOTES TO CONDENSED FINANCIAL STATEMENTS. 5
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)
The Condensed Balance Sheets as of June 30, 2009 and December 31, 2008 the
Condensed Statements of Operations for the three months and six months ended
June 30, 2009 and 2008 and the Condensed Statements of Cash Flows for the six
months ended June 30, 2009 and 2008 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 June 30, 2009, results of operations for the three months and six
months ended June 30, 2009 and 2008 and cash flows for the six months ended June
30, 2009 and 2008. All such adjustments are of a normal recurring nature.
This report should be read in conjunction with our Form 10-K for our fiscal year
ended December 31, 2008.
The results of operations for the three months and six months ended June 30,
2009 and the cash flows for the six months ended June 30, 2009 are not
necessarily indicative of the results to be expected for the full year.
NATURE OF OPERATIONS - Ace Marketing & Promotions, Inc. (the "Company") is a
full service advertising specialties and promotional products company that
distributes items typically with logos to large corporations, schools and
universities, financial institutions and not-for-profit organizations. Specific
categories of promotional products include advertising specialties, business
gifts, incentives and awards, and premiums.
In Fiscal 2008, the Company became an authorized distributor, provider and
reseller of mobile advertising solutions. To date, the Company has not generated
any significant revenue from this segment.
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.
6
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)
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. SFAS
157 was effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
adoption of this Statement did not have a material effect on our financial
position or results of operation.
In May 2009, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 165, Subsequent Events ("Statement
No. 165"), which requires an entity after the balance sheet date to evaluate
events or transactions that may occur for potential recognition or disclosure in
its financial statements . Statement No. 165 determines the circumstances under
which the entity shall recognize these events or transactions in its financial
statements and provides the disclosures that an entity shall make about them
including disclosing the date through which the entity evaluated these events or
transactions, as well as whether that date is the date the entity's financial
statements were issued or the date the financial statements were available to be
issued. Statement No. 165 became effective for the Company as of June 30, 2009.
The company established that there would be no material effect with the adoption
of this statement on its financial statements.
7
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)
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 6,484,000 and 5,124,000
because they are antidilutive as a result of a net loss for the three and six
months ended June 30, 2009 and 2008, respectively.
3. STOCK COMPENSATION
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 and six month periods ended June 30, 2009
and 2008 include employee share-based compensation expense totaling
approximately $(54,000) and $71,000 and $129,000 and 272,000, 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.
8
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)
The following table summarizes stock-based compensation expense for the three
and six months ended June 30, 2009 and 2008:
Six Months Ended Three Months Ended
June 30, June 30,
2009 2008 2009 2008
--------- --------- --------- ---------
Employee stock-based compensation - option grants $(129,540) $ 133,198 $(159,395) --
Employee stock-based compensation - stock grants -- 17,000 -- --
Non-Employee stock-based compensation - option grants 104,220 31,158 69,504 38,195
Non-Employee stock-based compensation - stock grants 4,200 60,000 -- 60,000
Non-Employee stock-based compensation-stock warrant 92,007 30,488 36,001 30,488
--------- --------- --------- ---------
Total $ 70,887 $ 271,844 $ (53,890) $ 128,683
========= ========= ========= =========
9
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(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 and six months ended June 30, 2009 and 2008 are as
follows:
Six Months Ended Three Months Ended
June 30, June 30,
2009 2008 2009 2008
---- ---- ---- ----
Expected volatility 135.23% 115.00% 135.57% --
Expected dividend yield -- -- -- --
Risk-free interest rate 1.27 3.125% 1.28% --
Expected term (in years) 4.87 5.00 5.00 --
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Share Price Term Value
----- ----- ---- -----
Outstanding, January 1, 2009 3,331,222 $ 1.11
Granted 750,000 $ 1.00
Exercised - -
Cancelled (560,000) 1.03
------------
Outstanding, June 30, 2009 3,521,222 $ .90 4.36 -
============
Options exercisable, June 30, 2009 2,806,500 $ 1.14 4.30 -
============
10
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30 , 2009 AND 2008
(UNAUDITED)
The weighted-average grant-date fair value of options granted during the six
months ended June 30, 2009 was $0.62and $0.53 for the six months ended June 30,
2008.
The aggregate intrinsic value of options outstanding and options exercisable at
June 30, 2009 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 June 30, 2009.
As of June 30, 2009, the fair value of unamortized compensation cost related to
unvested stock option awards was approximately $561,000. Unamortized
compensation cost as of June 30, 2009 is expected to be recognized over a
remaining weighted-average vesting period of 5 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"). The Note bears interest at 10% per annum and is due June 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.
On September 17, 2008, the Company loaned Blue Bite an additional $50,000
pursuant to the terms of a one year convertible promissory note the "Second
Note". The Second Note provides for interest at 10% per annum, payable with any
outstanding principal on September 17, 2009. The Company has the option to
convert the Second Note plus $75,000 worth of shares of restricted Common Stock
of the Company into an additional 10% interest in Blue Bite.
On May 26, 2009, Ace Marketing received repayment of $100,000 loan from Blue
Bite together with interest.
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 six months ended June 30, 2009 and 2008, sales from ten percent or
greater customers approximated 25.9 % and 21.7%, respectively of total sales.
During the June 30, 2009 reporting period, we had one principal customer
accounted for these results. During the June 30, 2008 reporting period we had a
different customer, a retailer who accounted for these results.
11
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)
6. CONSULTING AGREEMENT
In February 2009, the Company entered into an agreement with a consulting firm
to provide investor relations services. The agreement provides for the issuance
of 350,000 common stock purchase warrants, with an exercise price of $.80 and
expires in February 2014. The warrants have a vesting period of 25% immediately
and the remaining ratably on a monthly basis through January 2010.
In addition, the consultant would be entitled to an additional advisory fee,
subject to the Company completing a successful capital raise through the sale of
its common stock of at least $1,250,000.
In April of 2009, the Company entered into an agreement with a consultant
(former employee) to assist Ace in forming a proximity marketing business to
offer to Ace Marketing customers. The original agreement with this person was
executed in January 2008 and it provided for the grant of non-statutory stock
options to purchase 1,000,000 shares under our 2005 Employee Benefit and
Consulting Services Compensation Plan. The amended agreement provides for a
reduction in the number of options pursuant to the agreement from 1,000,000
options to 500,000 options with the exercise price of $1.00 per share and
expiring on March 31,2012. The options currently have a vesting period of 25%
each on May 1, 2009, May 1, 2010, May 1, 2011 and March 1, 2012.
In April of 2009, the Company entered into an agreement with a consultant to
assist in developing a proximity marketing business. The consultant is to market
and promote Ace's proximity marketing units as a premier mobile technology to
all industries, as needed. The agreement provides for the issuance of 600,000
options with an exercise price of $0.90 per share and expires on April 9, 2014.
The options have a vesting period of five years. These options shall vest in six
equal parts, each part representing 100,000 options semi-annually over three
years.
7. PRIVATE PLACEMENT
On February 3, 2009, the Company sold 500,000 shares of its common stock at $.50
per share to investors in a private transaction.
8. OPTIONS OUTSIDE COMPENSATION PLAN
On April 9, 2009, the Company hired a firm as an independent sales organization
to promote its proximity marketing units in the sports and entertainment
industry. The firm was granted options to purchase 100,000 shares at $.90 per
share outside of Ace's compensation plan.
9. SUBSEQUENT EVENT
The Company has a Plan of Financing to raise up to $2,100,000 from the sale of
its Common Stock and Warrants, which commenced on July 14, 2009 and it is in the
process of attempting to complete same. As of August 12, 2009, the Company has
not received any proceeds and it is not yet obligated to issue any shares of
Common Stock with three year Class D Warrants to purchase shares of Common
Stock, exercisable at a $1.00 per share.
The Company has evaluated all subsequent events through the filing date of this
Form 10-Q for appropriate accounting and disclosures.
12
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-K for its fiscal year ended December 31, 2008 which includes
our audited financial statements for the year ended December 31, 2008 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-K
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-Q are 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.
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 at such time as economic conditions in
the United States 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.
13
ACE MOBILE MARKETING
--------------------
In 2008, we entered into agreements with certain non-affiliated parties
to become an authorized distributor, provider and reseller in the United States
of mobile advertising solutions, in the Mobile Advertising & Proximity Marketing
Industry.
Management believes that proximity marketing has unlimited marketing
possibilities to thousands of different businesses. Proximity marketing is the
localized wireless distribution of advertising content associated with a
particular place. If we place a proximity transmitting box in a location of an
advertiser/business, transmissions (messages) will be sent to and received by
cell phones and PDA's equipped with Bluetooth technology within approximately
100 meters of a marketing broadcast. A person receiving the transmission can
elect to download the transmission, read the message and potentially act upon
the message sent by the advertiser. The message will remain on the cell phone or
PDA until proactively removed by the user. The user also has the ability to
forward the message to other users, which generates multiple views over an
extended period of time.
Management believes that advertisers are constantly seeking new
measurable media channels that can accurately target and engage key consumer
segments, and deliver compelling, relevant content that can be enjoyed for what
it is, shared with friends, interactively engaged with or commercially acted
upon instantaneously. All messages received by the public are free of charge
meaning there is no charge on any content a consumer downloads. We will enable
our advertising customers to promote their business by sending still images,
animated images, audio files, video clips, text files, promotional or discount
contents, bar codes, mobile games and java applications and business card files.
We can also send live data such as news and sports updates to targeted mobile
phones.
Management believes that proximity marketing is completely spam-free
and compliant with all applicable governmental regulations. It asks the users if
they would like to receive the content. It tracks how many people accept and
reject the content, providing the sender with a detailed time and date for every
transmission. The system maintains a unique Bluetooth ID assigned to each
device, and therefore will not send users the same advertisement more than once,
and if rejected will not contact the user again.
Ace intends to market its proximity boxes as a premiere mobile
technology. This will allow Ace to create a new channel in the mobile
marketplace for existing brands and marketers to leverage the inherent strengths
of mobile advertising. Ace plans to leverage the technology to develop niche
vertical sites. These services will be scalable for both large and small
businesses to monetize high traffic areas. Additionally, the platform shall be
dynamically scalable for worldwide partnerships, where a multi-location business
will be able to send a different marketing campaign for each demographic. Ace
has demonstrated the use of proximity marketing boxes and delivered branded
content for:
o Def Leppard to support their band tour;
o International Speeding Corporation, owner and operator of 13
major motorsports facilities, including the Daytona
International Speedway;
o Macy's Thanksgiving Day Parade ;
o SantaLand at Macy's;
o Madison Square Garden;
o IMAX theater
o Lonestar to support their band
Blue Bite, LLC is also an authorized distributor, provider and reseller
of the proximity transmitting boxes. We have an agreement pursuant to which Ace
loaned Blue Bite $100,000 pursuant to two Notes (due June 1, 2009 and September
17, 2009) convertible at Ace's option into a 20% ownership interest of Blue
Bite. At the time of conversion, Ace would also have to deliver to Blue Bite up
to $150,000 in fair market value of its restricted Common Stock as additional
consideration. In May 2009, Blue Bite repaid Ace its loans, together with
accrued interest thereon.
14
On May 26, 2009, Ace opted not to convert the loans and accepted full
payment of principal and interest to close out the agreement and loan with Blue
Bite.
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 requires 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, (c) customer credit
worthiness, (d) current economic conditions, and (e) changes in customer payment
terms.
STOCK BASED COMPENSATION. The Company records compensation expense
associated with stock options and other equity-based compensation in accordance
with SFAS 123(R). Share-based compensation expense is determined based on the
grant-date fair value estimated in accordance with the provisions of SFAS
123(R). The Company recognizes compensation expense on a straight-line basis
over the requisite service period of the award.
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 June 30
------------------------------
2009 2008
---- ----
Revenue $ 841,247 $ 2,049,867
Cost of Revenues 500,349 1,578,235
Gross Profit 340,898 471,632
Selling, General and Administrative Expenses 499,189 663,312
(Loss) from Operations (158,291) (194,680)
We generated revenues of $841,247 in the second quarter of 2009 compared to
$2,049,867 in the same three month period ending June 30, 2008. The decrease in
revenues of $1,208,620 in 2009 compared to 2008 was due to the general state of
economy and customers choosing to cancel or delay purchases of promotional
products and the non-occurrence of a major one-time order of $685,000, which
accounted for 33.5% of sales in 2008.
15
Cost of revenues was $500,349 or 59% of revenues in the second quarter of 2009
compared to 1,578,235 or 77% of revenues in the same three months of 2008. Cost
of revenues includes purchases and freight costs associated with the shipping of
merchandise to our customers. Decrease in cost of revenues of $1,077,886 in 2009
is related to a decrease in sales during the current quarter ending June 30,
2009.
Gross profit was $340,898 in the second quarter of 2009 or 41% of net revenues
compared to $471,632 in the same three months of 2008 or 23% 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 $499,189 in the second
quarter of 2009 compared to $663,312 in the same three months of 2008. Such
costs include payroll and related expenses, commissions, insurance, rents,
professional, consulting and public awareness fees. The overall decrease of
$164,123 was primarily due to an $182,573 decrease in stock based compensation.
Net loss from operations was $(158,291) in the second quarter of 2009 compared
to a net loss of $(194,680) for the same three months in 2008. The second
quarter net loss for 2009 includes stock based payments (non-cash) of $(53,890)
as compared to $128,683 for the comparable period of 2008. Net loss for the
three months ended June 30, 2009 decreased by approximately
$36,000 over the comparable period of the prior year despite a substantial
decrease in revenue and gross profit primarily due to a $182,573 decrease in
stock based payments (non-cash. No benefit for income taxes is
provided for in 2009 and 2008 due to the full valuation allowance on the net
deferred tax assets.
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.
Six months Ended June 30
2009 2008
----------- ------------
Revenue $1,296,279 $ 3,226,050
Cost of Revenues 831,217 64.1% 2,388,695 74%
---------- ------------
Gross Profit 465,062 35.9% 837,355 26%
Selling, general & Administrative expenses 1,090,135 84.1% 1,334,030 41.4%
---------- ------------
(Loss) from operations (625,073) 48.2% (496,675) 15.4%
========== ============
We generated revenues of $1,296,279 in the first six months of 2009 compared to
$3,226,050 in the same six month period ending June 30, 2008. The decrease in
revenues of $1,929,771 in 2009 as compared to 2008 is due to the general state
of the economy and customers choosing to cancel or delay purchases of
promotional products and the non-occurrence of a major order with a New York
State Troopers which was responsible for 21.7% of revenues for the six months
ended June 30, 2008.
Cost of revenues was $831,217 or 64% of revenues in the first six months of 2009
compared to $2,388,695 or 74% of revenues in the same six months of 2008. Cost
of revenues includes purchases and freight costs associated with the shipping of
merchandise to our customers. Decreases in cost of revenues of $1,557,478 in
2009 are due to reduced revenues for the reasons set forth the in preceding
paragraph.
Gross profit was $465,062 in the first six months of 2009 or 36% of net revenues
compared to $837,355 in the same six months of 2008 or 26% 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.
16
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. The six month gross profit for 2008 was negatively impacted by reduced
gross profit achieved in connection with the large order placed by members of a
police organization.
Selling, general, and administrative expenses were $1,090,135 in the first six
months of 2009 compared to $1,334,030 in the same six months of 2008. Such costs
include payroll and related expenses, commissions, insurance, rents,
professional, consulting and public awareness fees. The overall decrease of
$243,895 was primarily due to a $200,957 decrease in stock based compensation.
Net loss from operations was $(625,073) in the first six months of 2009 compared
to a net loss of $(496,675) for the same six months in 2008. The net loss
increased by approximately $128,000 due to a decrease in gross profit of
approximately $372,000 partially offset by a decrease in operating expenses of
$343,900. The first six months net loss for 2009 includes stock based payments
(non-cash) of $70,887 as compared to $271,844 for the comparable period of 2008.
No benefit for income taxes is provided for in 2009 and 2008 due to the full
valuation allowance on the net deferred tax assets.
Liquidity and Capital Resources
-------------------------------
2009 Cash Flow Discussion
The company had cash and cash equivalents of $368,081 at June 30, 2009. Cash
used in operating activities for the six months ended June 30, 2009 was
$(491,170). This resulted primarily from a net loss of $(620,762), offset by
stock based compensation of $70,887 a decrease in accounts receivable of
$203,664 and an increase in prepaid expenses and other assets of $49,564 and a
decrease of accounts payable and accrued expenses of $109,138.
The company had cash and cash equivalents of $579,305 at June 30, 2008. Cash
used by operating activities for the six months ended June 30, 2008 was
$(189,716). This resulted primarily from a net loss of $(492,698), offset by
stock based compensation of $271,844 a decrease in accounts receivable of
$104,600, an increase in prepaid expenses and other assets of $9,156 and a
decrease of accounts payable and accrued expenses of $68,730.
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.
Recent Financings
-----------------
In February 2009, we sold 500,000 shares of our Common Stock at an exercise
price of $.50 per share, payable one-half immediately and the balance in March
2009 through the retirement of a $125,000 Note. Exemption is claimed under
Section 4(2) of the Securities Act of 1933, as amended.
17
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.
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.
At December 31, 2008, management identified the following significant
deficiencies that when aggregated give rise to a material weakness in the area
of financial reporting.
These deficiencies include, without limitation, a) lack of review or
evidence of review in the financial Reporting process; b) information technology
limitations; and inability to apply complex accounting principles. Management is
presently assessing these deficiencies and as of June 30, 2009, had not
completed remediated the identified deficiencies.
Management's Plan of Remediation
Independent Board of Directors or Audit Committee
Due to the current size of the Company it does not intend to add
independent board members at this time. This deficiency will be addressed if the
Company shows substantial growth moving forward.
Information Technology
Management is in the process of implementing a weekly and monthly
checklist of IT required function to assure all necessary activities are
completed and documented. As of this time the checklist has not yet been
completed.
Management has limited the access to all financial applications only to
include the Companies CEO, President and CFO. All passwords have been changed
and will be changed on a quarterly basis to allow only access to the proper
employee's.
Management has its IT personnel updating the software at least annually
and ensuring the updates, patches and licenses are current.
18
Revenue Recognition and Cost of Revenue
As of January 2009, management has implemented a change to ensure the
company has a centralized system to track orders processed shipped and recorded.
Orders can no longer move forward without verification from the billing or
tracking department. No testing has yet been completed on the system.
Financial Reporting
Management has completed the complex equity transactions that are
required and is in the process of having an outside consultant report on the
system.
Management is also addressing the two accounting systems currently in
use and has a plan which will be implemented in the second quarter to move to a
single system. The single system will meet the company's needs and any current
future growth.
Accounts Payable and Cash Disbursements
As of February 2009, management has implemented a change to address its
deficiencies. The Company has granted access rights for the user of the accounts
payable module which now results in the payment of open invoices to relieve any
double counting. No testing has been completed on the new system.
19
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 1A. RISK FACTORS
As a Smaller Reporting Company as defined Rule 12b-2 of the Exchange
Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure
reporting obligations and therefore are not required to provide the information
requested by this Item 1A.
ITEM 2. CHANGES IN SECURITIES.
(a) From January 2009 through June 30, 2009, 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 TO MARKET IF OPTION, WARRANT OR
PRICE OR CONVERTIBLE EXEMPTION FROM CONVERTIBLE SECURITY,
TITLE OF SECURITY, AFFORDED TO REGISTRATION TERMS OF EXERCISE OR
DATE OF SALE SECURITY NUMBER SOLD PURCHASERS CLAIMED CONVERSION
---------------- -------------- ---------------- ------------------------- ------------------- -----------------------
---------------- -------------- ---------------- ------------------------- ------------------- -----------------------
February 2009 Common 500,000 Shares $250,000; no Section 4(2). A Not applicable.
Stock commissions paid restrictive
legend appears on
each certificate.
---------------- -------------- ---------------- ------------------------- ------------------- -----------------------
February Common Stock 350,000 Services rendered; no Section 4(2). A Five year Warrants,
2009 Warrants commissions paid restrictive exercisable at $.80
legend appears on per share
each certificate.
---------------- -------------- ---------------- ------------------------- ------------------- -----------------------
April 2009 Common 100,000 Services rendered; Section 4(2). A Five year Options,
Stock no commissions paid restrictive exercisable at $.90
Options legend appears on per share
each certificate.
---------------- -------------- ---------------- ------------------------- ------------------- -----------------------
April 2009 Common 500,000 (1) Services rendered; Section 4(2). A Three year Options
Stock no commissions paid restrictive exercisable at $1.00
Options legend appears on per share
each certificate.
---------------- -------------- ---------------- ------------------------- ------------------- -----------------------
(1) See item 2(c) below as these options may be deemed the grant of new
securities under the Securities Act.
(b) Rule 463 of the Securities Act is not applicable to the Company.
(c) In the six months ended June 30, 2009, there were no repurchases by
the Company of its Common Stock. However, in April 2009, a consultant
of the Company agreed to reduce his options to purchase 1,000,000
shares to options to purchase 500,000 shares.
20
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 837,000 shares of Common Stock, exercisable
at $2.00 per share. The Company also has outstanding Class C Common Stock
Purchase Warrants to purchase an aggregate of 475,788 shares at an exercise
price of $1.75 per share. The expiration date of the Class A, Class B and Class
C Warrants has been extended to the close of business on September 30, 2009 (the
"Expiration Date"). No further extensions will be granted as the Warrants will
expire on the Expiration Date.
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 Certificate of Incorporation filed June 10, 1999 (1)
3.3 Amendment to Articles of Incorporation approved by stockholders on
February 9, 2005(1)
3.4 Amendment to Certificate of Incorporation filed September 11, 2008 to
designate rights and preferences of a series of Preferred Stock.
3.5 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 2008
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 - 2009 Second Quarter Results of Operations (3)
21
-----------
(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.
22
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: August 13, 2009 By: /s/ Dean L. Julia
-----------------------------
Dean L. Julia,
Chief Executive Officer
Date: August 13, 2009 By: /s/ Sean McDonnell
-----------------------------
Sean McDonnell,
Chief Financial Officer
23