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 SEPTEMBER 30, 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
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(Registrant's telephone number)
NOT APPLICABLE
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(Former name, address and fiscal year, if changed since last report)
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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 November 1, 2008, the registrant had a total of 8,321,615 shares of Common
Stock outstanding, exclusive of 445,000 outstanding shares of Series A Preferred
Stock automatically convertible on December 15, 2008 into a minimum of 890,000
shares of Common Stock and a maximum of 1,780,000 shares of Common Stock.
ACE MARKETING & PROMOTIONS, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheet as of September 30, 2008
and December 31, 2007 3
Condensed Statements of Operations for the Three
and Nine Months Ended September 30, 2008 and 2007 4
Condensed Statements of Cash Flows for the Nine Months
Ended September 30, 2008 and September 30, 2007 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures and Market Risk 19
Item 4. Controls and Procedures 19
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 22
2
ACE MARKETING & PROMOTIONS, INC.
CONDENSED BALANCE SHEETS
---------------------------------------------------------------------------------------------------
September 30, December 31,
2008 2007
---------------------------------------------------------------------------------------------------
(UNAUDITED) (audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 473,782 $ 819,021
Accounts receivable, net of allowance for doubtful accounts of
$10,000 at September 30, 2008 and December 31, 2007, respectively 1,041,721 963,919
Note receivable 100,000 --
Prepaid expenses and other current assets 89,861 75,375
----------- -----------
Total Current Assets 1,705,364 1,858,315
Property and Equipment, net 122,543 34,065
Other Assets 7,745 7,745
----------- -----------
Total Assets $ 1,835,652 $ 1,900,125
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 412,946 $ 475,452
Accrued expenses 134,753 206,015
----------- -----------
Total Current Liabilities 547,699 681,467
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.0001 par value; 5,000,000 shares authorized;
445,000 and 0 shares issued and outstanding at
September 30, 2008 and December 31, 2007, respectively 45 --
Common stock, $.0001 par value; 25,000,000 shares authorized;
8,344,949 and 8,124,949 shares issued and outstanding
at September 30, 2008 and December 31, 2007, respectively 835 813
Less: Treasury Stock, at cost, 23,334 shares (31,501) (31,501)
Additional paid-in capital 4,654,494 3,657,920
Accumulated deficit (3,335,920) (2,408,574)
----------- -----------
Total Stockholders' Equity 1,287,953 1,218,658
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,835,652 $ 1,900,125
=========== ===========
---------------------------------------------------------------------------------------------------
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
3
ACE MARKETING & PROMOTIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
------------------------------------------------------------------------------------------------------------------
Revenue, net $ 1,480,577 $ 1,639,182 $ 4,706,627 $ 4,322,848
Cost of Revenue 1,056,082 1,050,799 3,444,777 2,876,397
----------- ----------- ----------- -----------
Gross Profit 424,495 588,383 1,261,850 1,446,451
----------- ----------- ----------- -----------
Operating Expenses:
Selling, general and administrative expenses 763,795 869,277 2,097,674 2,004,185
----------- ----------- ----------- -----------
Total Operating Expenses 763,795 869,277 2,097,674 2,004,185
----------- ----------- ----------- -----------
Loss from Operations (339,300) (280,894) (835,824) (557,734)
----------- ----------- ----------- -----------
Other Income (Expense):
Interest expense (655) (1) (806) (44)
Interest income 1,807 5,731 5,784 22,068
----------- ----------- ----------- -----------
Total Other Income (Expense) 1,152 5,730 4,978 22,024
----------- ----------- ----------- -----------
Net Loss (338,148) (275,164) (830,846) (535,710)
Less Preferred Stock Dividend 96,500 - 96,500 -
----------- ----------- ----------- -----------
Net Loss Allocable to Common Shareholders $ (434,648) $ (275,164) $ (927,346) $ (535,710)
=========== =========== =========== ===========
Net Loss Per Common Share:
Basic $ (0.05) $ (0.03) $ (0.11) $ (0.07)
=========== =========== =========== ===========
Diluted $ (0.05) $ (0.03) $ (0.11) $ (0.07)
=========== =========== =========== ===========
Weighted Average Common Shares Outstanding:
Basic 8,321,615 8,015,708 8,202,567 8,018,885
=========== =========== =========== ===========
Diluted 8,321,615 8,015,708 8,202,567 8,018,885
=========== =========== =========== ===========
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SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
4
ACE MARKETING & PROMOTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
2008 2007
----------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $ (830,846) $ (535,710)
----------- -----------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 10,656 3,940
Stock-based compensation 455,141 354,853
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Accounts receivable (77,802) (283,271)
Prepaid expenses and other assets (14,486) (55,795)
Decrease in operating liabilities:
Accounts payable and accrued expenses (133,768) 127,439
----------- -----------
Total adjustments 239,741 147,166
----------- -----------
Net Cash Used in Operating Activities (591,105) (388,544)
----------- -----------
Cash Flows from Investing Activities:
Increase in Note receivable (100,000) --
Acquisition of property and equipment (99,134) (26,081)
----------- -----------
Net Cash Used in Investing Activities (199,134) (26,081)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of Preferred Stock 445,000 --
---------- ----------
Net Cash Provided by Financing Activities 445,000 --
---------- ----------
Net Decrease in Cash and Cash Equivalents (345,239) (414,625)
Cash and Cash Equivalents, beginning of period 819,021 1,353,131
----------- -----------
Cash and Cash Equivalents, end of period $ 473,782 $ 938,506
=========== ===========
Supplemental Disclosure of noncash transaction:
Beneficial conversion feature - preferred stock dividend $ 96,500 $ --
=========== ===========
---------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
5
PART I. FINANCIAL INFORMATION
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
The Condensed Balance Sheet as of September 30, 2008, the Condensed Statements
of Operations for the three months and nine months ended September 30, 2008 and
2007 and the Condensed Statements of Cash Flows for nine months ended September
30, 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 September 30, 2008, results of operations for the three months
and nine months ended September 30, 2008 and 2007 and cash flows for the nine
months ended September 30, 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 reported for the three months and nine months ended September 30,
2008 are not necessarily indicative of the results which may 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.
6
PART I. FINANCIAL INFORMATION
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
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 September 30, 2008.
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.
In March 2008, the FASB issued Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). This statement will require enhanced disclosures about derivative
instruments and hedging activities to enable investors to better understand
their effects on an entity's financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The Company is assessing the impact of the adoption of SFAS 161, but
anticipates that SFAS 161 will not have a material effect on its financial
position, results of operations and cash flows once it is adopted on January 1,
2009.
2. LOSS PER SHARE
Basic loss per common share is computed by dividing net loss allocable to common
shareholders 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. The number of common shares potentially issuable upon the exercise
of certain options, convertible preferred stock and warrants that were excluded
from the diluted loss per common share calculation was approximately 6,264,000
and 3,679,000 because they are antidilutive as a result of a net loss for the
three and nine months ended September 30, 2008 and 2007.
7
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
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 nine month periods ended September 30,
2008 and 2007 includes share-based compensation expense totaling approximately
$183,000 and $455,000 and $304,000 and $355,000, 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
and nine months ended September 30, 2008 and 2007.
------------------------------------------------------ -----------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
2008 2007 2008 2007
------------------------------------------------------ ------------ -------------- ---------- --------
Employee stock-based compensation - option grants $167,034 $296,593 33,836 $270,865
Employee stock-based compensation - stock grants 17,000 12,000 - 12,000
Non-Employee stock-based compensation - option grants 41,442 38,160 10,284 12,721
Non-Employee stock-based compensation - stock grants 60,000 8,100 - 8,100
Non-Employee stock-based compensation - warrants 169,665 - 139,177 -
------------------------------------------------------ ------------ -------------- ----------- -------
Total $455,141 $354,853 $183,297 $303,686
------------------------------------------------------ ============ ============== =========== =======
8
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 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 nine months ended September 30, 2008 and 2007 are as follows:
--------------------------------- ----------------------- --------------------
Nine Months Ended Three Months Ended
September 30, September 30,
2008 2007 2008 2007
--------------------------------- ----------------------- --------------------
Expected volatility 115.00% 58.23% - 58.23%
Expected dividend yield - - - -
Risk-free interest rate 3.125% 4.15% - 4.15%
Expected term (in years) 5.00 10.00 - 10.00
--------------------------------- ---------- ------------ --------------------
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 $ 1.18
Granted 1,110,000 $ .98
-------------
Outstanding, September 30, 2008 3,331,222 $ 1.11 6.27 $ -
=============
Options exercisable, September 30, 2008 2,215,038 $ 1.13 5.21 $ -
=============
9
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
The weighted-average grant-date fair value of options granted during the nine
months ended September 30, 2008 was $0.53, and $.86 for the nine months ended
September 30, 2007.
The aggregate intrinsic value of options outstanding and options exercisable at
September 30, 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 $1.00 closing
price of the Company's common stock on September 30, 2008.
As of September 30, 2008, the fair value of unamortized compensation cost
related to unvested stock option awards was approximately $482,645. Unamortized
compensation cost as of September 30, 2008 is expected to be recognized over a
remaining weighted-average vesting period of 2.72 years.
On January 16, 2008, the Company issued 20,000 shares of common stock to an
employee in exchange for marketing and training services. The services were
recorded equal to the value of the shares and an expense of $17,000 which is
included in selling, general and administrative for the nine months ended
September 30, 2008.
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.
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 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.
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 nine months ended September 30, 2008 and 2007, sales from ten percent or
greater customers approximated 26.4% and 25.9%, respectively of total sales.
6. CONSULTING AGREEMENTS
On June 26, 2008 the Company issued to an investment advisor 133,500 common
stock purchase warrants for the purpose of providing investor awareness and
business advisory services. The services were recorded equal to the value of the
warrants and an expense of $30,488 is included in selling, general and
administrative for the nine months ended September 30, 2008.
On June 10, 2008, the Company issued 200,000 shares
of common stock for two independent contractors to seek and obtain new business
for the firm. The services were recorded equal to the value of the stock at the
date of grant and an expense of $60,000 is included in selling, general and
administrative for the nine months ended September 30, 2008.
On July 1, 2008, the Company issued to an investor relations and public
relations company 250,000 common stock purchase warrants (the "Warrants") for
the purpose of providing investor awareness and public relations advisory
services. The Warrants are immediately exercisable and expire on June 30, 2011.
150,000 of the Warrants are exercisable at $.50 per share and contain a cashless
exercise provision, and 100,000 of the Warrants are exercisable at $.80 per
share. The services were recorded equal to the value of the Warrants and an
expense of $139,177 is included in selling, general and administrative for the
three and nine months ended September 30, 2008.
10
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
7. PRIVATE PLACEMENT - SERIES A CONVERTIBLE PREFERRED STOCK
Between July 2008 and September 30, 2008, through a private placement, the
Company sold 445,000 shares of Series A Convertible Preferred Stock, par value
$.01 per share, for an issue price of $1.00 per share (the "Preferred
Stock").The shares of Preferred Stock are convertible at the holders option, at
any time, based upon a conversion price equal to the lower of $.50 per share or
the average closing sales price over the ten trading dates preceding December
15, 2008, with a floor of $.25. On December 15, 2008 the Preferred Stock
automatically converts into common stock based upon the same conversion rate. As
a result of the conversion option and that the Company's stock was trading above
$.50 upon the issuance of certain of the Preferred Stock, this resulted in a
non-cash beneficial conversion feature of $96,500 which was recognized as a
non-cash dividend as of September 30, 2008.
An individual related to one of the Company's officers purchased 250,000 shares
of the Preferred Stock.
8. SUBSEQUENT EVENTS
WARRANT EXTENSION
On October 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 January 2,
2009.
CONSULTING AGREEMENT
On October 15, 2008, the Company entered into a one year agreement with a
consulting firm to provide public relations services, which agreement may be
terminated by the company after three months in the event the company does not
raise additional financing from the sale of common stock of at least $1,250,000.
The contract provides for monthly cash payments of $5,000 for a minimum period
of three months plus the grant of 125,000 stock purchase warrants. The Warrants
are immediately exercisable, have an exercise price of $.90, contain a cashless
exercise provision and expire on October 14, 2011. In the last nine months of
the agreement, the company shall pay $165,000 to the consulting firm. Further,
on or before December 31, 2008, the consultant will receive warrants to purchase
375,000 Restricted shares of common stock exercisable at the sale price of the
private placement, but at an exercise price not to exceed $1.10 per share. These
warrants, if issued, would have an expiration date of October 14, 2011 and will
not contain any cashless exercise provisions. In the event the contract is
cancelled within the first three-month period, the consultant would not be
entitled to receive the additional 375,000 warrants.
11
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-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 Form 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.
12
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
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.
ACE MOBILE MARKETING
We are an authorized 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 PDAs 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. To date, we have not generated any significant revenue from our
mobile advertising services.
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.
The ABI Research report published in January 2008 on mobile marketing
refers to the industry as still being in its "wild west" years but forecasts it
will settle down and become a $24 billion slice of the worldwide marketing and
advertising pie by 2013. It estimates there was about $1.8 billion spent in 2007
on all forms of mobile marketing.
Ace intends to market the 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.
13
Ace also 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 loaned Blue Bite
(another authorized provider and reseller of mobile advertising Solutions)
$100,000 pursuant to two Notes (due March 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.
See "Note 4."
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.
14
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 September 30, 2008.
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.
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.
15
Three Months Ended September 30, 2008 2007
------------ ------------
Revenue $1,480,577 $1,639,182
Cost of Revenue 1,056,082 1,050,799
------------ ------------
Gross Profit 424,495 588,383
Selling, general & Administrative expenses 763,795 869,277
------------ ------------
Loss from operations (339,300) (280,894)
============ ============
We generated revenues of $1,480,577 in the third quarter of 2008 compared to
$1,639,182 in the same three month period ending September 30, 2007. The
decrease in revenues of $158,605 in 2008 compared to 2007 was due to a slowing
of the economy as a whole which effects the sale of advertising and promotional
items.
Cost of revenues was $1,056,082 or 71% of revenues in the third quarter of 2008
compared to $1,050,799 or 64% 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. Increase in cost of revenues of $5,283 in 2008
is due to the cost of merchandise which varies depending on the items
purchased by the customer.
Gross profit was $424,495 in the third quarter of 2008 or 29% of net revenues
compared to $588,383 in the same three months of 2007 or 36% 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 $763,795 in the third
quarter of 2008 compared to $869,277 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 decrease of
$105,482 was primarily due to a $120,389 decrease in stock based compensation.
Net loss was $(339,300) in the third quarter of 2008 compared to a net loss of
$(280,894) for the same three months in 2007. The 2008 third quarter increase in
net loss of $58,406 as compared to the comparable period of the prior year, was
due to a decrease in gross profit of $163,888, partially offset by a $120,389
decrease in stock based compensation. No benefit for income taxes is provided
for in 2008 and 2007 due to the full valuation allowance on the net deferred tax
assets. Our ability to be profitable in the future is dependent upon both a
turnaround in the United States economy and the successful introduction and
usage of our proximity marketing services by our clients, which commenced in
August 2008.
During the quarter ended September 30, 2008, we recognized a non-cash dividend
of $96,500 which related to the terms of our private placement of Series A
Convertible Preferred Stock. See "Note 7".
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.
16
Nine months Ended September 30, 2008 2007
------------ ------------
Revenue $4,706,627 $4,322,848
Cost of Revenues 3,444,777 2,876,397
------------ ------------
Gross Profit 1,261,850 1,446,451
Selling, general & Administrative expenses 2,097,674 2,004,185
------------ ------------
(Loss) from operations (835,824) (557,734)
============ ============
We generated revenues of $4,706,627 for the nine months ended September 30, 2008
compared to $4,322,848 in the same nine month period ending September 30, 2007.
The increase in revenues of $383,779 in 2008 compared to 2007 is due to the
collaborated effort with a major customer, Ace Marketing was able to create,
administer and fulfill an in house order which benefited over 3,500 members of
the organization. This order was responsible for 15.6% of revenues for the nine
months ended September 30, 2008. We can provide no assurance that this large
order will be recurring in future operating periods.
Cost of revenues was $3,444,777 or 73% of revenues for the nine months ended
September 30, 2008 compared to $2,876,397 or 67% of revenues in the same nine
months of 2007. Cost of revenues includes purchases and freight costs associated
with the shipping of merchandise to our customers. Increase in cost of revenues
of $568,380 in 2008 is related to a increase in sales to a major customer which
placed a large order during the second quarter of fiscal 2008.
Gross profit was $1,261,950 for the nine months ended September 30, 2008 or 27%
of net revenues compared to $1,446,451 in the same nine months of 2007 or 33% 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. The nine month gross profit 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 $2,097,674 for the nine
months ended September 30, 2008 compared to $2,004,185 in the same nine months
of 2007. Such costs include payroll and related expenses, commissions,
insurance, rents, professional, consulting and public awareness fees. The
overall increase of $93,489 was primarily due to a $108,388 increase in stock
based compensation.
Net loss from operations was $(835,824) in the first nine months of 2008
compared to a net loss of $(557,734) for the same nine months in 2007. Our net
loss for the nine months ended 2008 increased $278,090 as compared to the
comparable period of the prior year due to an increase in stock based payments
of $100,288 and a decrease in gross profit of $184,601. No benefit for income
taxes is provided for in 2008 and 2007 due to the full valuation allowance on
the net deferred tax assets. Our ability to be profitable in the future is
dependent upon both a turnaround in the United States economy and the successful
introduction and usage of our proximity marketing services by our clients, which
commenced in August 2008.
During nine months ended September 30, 2008, we recognized a non-cash dividend
of $96,500 which related to the terms of our private placement of Series A
Convertible Preferred Stock. See "Note 7".
17
Liquidity and Capital Resources
-------------------------------
The Company had cash and cash equivalents of $473,782 at September 30, 2008.
Cash used by operating activities for the nine months ended September 30, 2008
was $(591,105). This resulted primarily from a net loss of $(830,846), offset by
stock based compensation of $455,141 an increase in accounts receivable of
$77,802 and an increase in prepaid expenses and other assets of $14,486 an a
decrease of accounts payable and accrued expenses of $133,768.
The Company had cash and cash equivalents of $938,506 at September 30, 2007.
Cash used by operating activities for the nine months ended September 30, 2007
was $(388,544). This resulted primarily from a net loss of $(535,710), an
increase in accounts receivable of $(283,271) and an increase in accounts
payable and accrued expenses of $127,439 partially offset by stock based
payments of $354,853.
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.
2008 Financing
---------------
Between July and October 2008, the Company sold 445,000 shares of its Series A
Preferred Stock at a purchase price of $1.00 per share. The following describes
the rights, preferences and privileges of the Series A Preferred Stock:
o CONVERTIBILITY INTO COMMON STOCK. Each share of Preferred Stock shall
automatically convert on December 15, 2008 into shares of Common Stock
(the "Common Shares") based on a conversion price of the lower of $.50 per
share or the average closing sale price for the Company's Common Stock
on the OTC Bulletin Board for the 10 trading days immediately preceding
December 15, 2008, with a floor of $.25 per share. Each share of Preferred
Stock may at the option of the holder be converted into Common Shares prior
to December 15, 2008 based upon a price of $.50 per share.
o VOTING. The Preferred Shares shall have no voting rights until converted
into Common Shares, except as otherwise required by applicable state law.
o DIVIDENDS. The Preferred Shares shall have no dividend rights until
converted into Common Shares, except as otherwise required by applicable
state law.
o LIQUIDATION PREFERENCE. The Preferred Shares shall have no liquidation
preference and shall be treated the same as a holder of Common Shares.
Exemption is claimed for the sale of the aforementioned 445,000 shares of Series
A Preferred Stock pursuant to Rule 506 and/or Section 4(2) of the Securities Act
of 1933, as amended.
18
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. Such
registration Statement is currently stale. 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.
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.
19
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, 2007, management identified the following significant
deficiencies that when aggregated give rise to a material weakness in the area
of financial reporting.
These deficiencies include a) lack of review or evidence of review in the
financial Reporting process; b) the inability to account for complex equity
transaction; c) various manual processes and dual databases creating need for
extensive number of journal entries; and d) inability to apply complex
accounting principles. Management is presently assessing these deficiencies and
as of September 30, 2008, had not remediated the identified deficiencies.
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) From January 2008 to the filing date of this Form 10-Q, 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
---------------- ----------- ------------ ----------------------- ------------------- ----------------------
June 2008 Common 200,000 Services rendered; no Section 4(2) Not applicable.
Stock shares commissions paid
---------------- ----------- ------------ ----------------------- ------------------- ----------------------
June 2008 Common 133,500 Services rendered; no Section 4(2) Exercisable at prices
Stock warrants commissions paid ranging from $.50 per
Warrants share to $.80 per share
Through June 30, 2011
---------------- ----------- ------------ ----------------------- ------------------- ----------------------
July 2008 Shares of 445,000 $445,000 paid in cash; Section 4(2) Automatically converted
Series A shares No commissions paid into common stock on
Preferred December 15, 2008 based
Stock upon a conversion price
Equal to the lower of
$.50 per share or the
average closing price
over the 10 preceding
trading days with a
floor of $.25 per share
---------------- ----------- ------------ ----------------------- ------------------- ----------------------
July 2008 Common 250,000 Services rendered; no Section 4(2) Exercisable at prices
Stock warrants commissions paid ranging from $.50 to
Warrants $.80 per share through
June 30, 2011
---------------- ----------- ------------ ----------------------- ------------------- ----------------------
October 2008 Common 125,000 Services rendered; no Section 4(2) Exercisable at prices
Stock Warrants commissions paid ranging from $.50 to
Warrants $.80 per share through
June 30, 2011.
Exercisable at a price
Of $.90 per share through
October 14, 2011.
---------------- ----------- ------------ ----------------------- ------------------- ----------------------
20
(b) Rule 463 of the Securities Act is not applicable to the Company.
(c) In the nine months ended September 30, 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 January 2, 2009.
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 Press Release - Third 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.
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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: November 14, 2008 By: /s/ Dean L. Julia
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Dean L. Julia,
Chief Executive Officer
Date: November 14, 2008 By: /s/ Sean McDonnell
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Sean McDonnell,
Chief Financial Officer
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