SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-QSB
_________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
COMMISSION FILE NUMBER: 000-51160
ACE MARKETING & PROMOTIONS, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 11-3427896
(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 check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of June 30, 2006, the registrant had a total of 6,937,108 shares of Common
Stock outstanding.
ACE MARKETING & PROMOTIONS, INC.
FORM 10-QSB QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheet as of June 30, 2006 3
Condensed Statements of Operations for the Three and Six Months
Ended June 30 2006 and June 2005 4
Condensed Statements of Cash Flows for the six Months Ended
June 30, 2006 and June 30, 2005 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submissions of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
PART I. FINANCIAL INFORMATION
ACE MARKETING & PROMOTIONS, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
=========================================================================================
JUNE 30, 2006
-----------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 279,201
Accounts receivable, net of allowance for doubtful accounts of $10,000 652,651
Prepaid expenses and other current assets 38,257
-----------
Total Current Assets 970,109
Property and Equipment, net 18,999
Deferred Offering Costs 95,000
Other Assets 5,492
-----------
Total Assets $ 1,089,600
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 372,931
Accrued expenses 116,399
Customer deposits 78,400
-----------
Total Current Liabilities 567,730
-----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.0001 par value; 25,000,000 shares authorized
6,937,108 shares issued and outstanding 694
Preferred stock $.0001 par value: 500,000 shares authorized
no shares outstanding --
Additional paid-in capital 1,805,318
Accumulated deficit (1,284,142)
-----------
Total Stockholders' Equity 521,870
-----------
Total Liabilities and Stockholders' Equity $ 1,089,600
===========
-----------------------------------------------------------------------------------------
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,
2006 2005 2006 2005
-------------------------------------------------------------------------------------------------------------------
Revenues, net $ 1,088,589 $ 990,786 $ 2,163,596 $ 1,549,193
Cost of Revenues 754,291 682,810 1,529,464 1,040,719
------------------------------ -----------------------------
Gross Profit 334,298 307,976 634,132 508,474
------------------------------ -----------------------------
Operating Expenses:
Selling, general and administrative expenses 454,311 749,527 870,484 997,081
------------------------------ -----------------------------
Total Operating Expenses 454,311 749,527 870,484 997,081
------------------------------ -----------------------------
Loss from Operations (120,013) (441,551) (236,352) (488,607)
------------------------------ -----------------------------
Other Income (Expense):
Interest expense -- (21) -- (4,532)
Interest income 124 22 871 121
------------------------------ -----------------------------
Total Other Income (Expense) 124 1 871 (4,411)
------------------------------ -----------------------------
Loss Before Provision for Income Taxes (119,889) (441,550) (235,481) (493,018)
Provision for Income Taxes -- --
------------------------------ -----------------------------
Net Loss $ (119,889) $ (441,550) $ (235,481) $ (493,018)
============================== ==============================
Net Loss Per Common Share:
Basic $ (0.02) $ (0.07) $ (0.04) $ (0.08)
============================== ==============================
Diluted $ (0.02) $ (0.07) $ (0.04) $ (0.08)
============================== ==============================
Weighted Average Common Shares Outstanding:
Basic 6,923,701 5,888,076 6,590,678 5,872,861
============================== ==============================
Diluted 6,923,701 5,888,076 6,590,678 5,872,861
============================== ==============================
--------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS. 4
ACE MARKETING & PROMOTIONS, INC.
====================================================================================
Condensed Statements of Cash Flows (unaudited)
------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006 2005
------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $(235,649) $(493,018)
--------------------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,101 2,609
Stock-based payments 64,314 476,692
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Accounts receivable 58,405 (144,105)
Prepaid expenses and other assets 3,025 57,327
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 8,370 (72,593)
Customer deposits (19,600) --
--------------------------
Total adjustments 116,615 319,930
--------------------------
Net Cash Used in Operating Activities (119,034) (173,088)
--------------------------
Cash Flows from Financing Activities:
Proceeds from private placement -- 126,076
Payment on notes payable -- (25,000)
--------------------------
Net Cash Provided by Financing Activities -- 101,076
--------------------------
Net Decrease in Cash and Cash Equivalents (119,034) (72,012)
Cash and Cash Equivalents, beginning of period 398,235 566,285
--------------------------
Cash and Cash Equivalents, end of period $ 279,201 $ 494,273
==========================
------------------------------------------------------------------------------------
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS. 5
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)
The Condensed Balance Sheet as of June 30, 2006, the Condensed Statements of
Operations for the three and six months ended June 30, 2006 and 2005 and the
Condensed Statements of Cash Flows for the six months ended June 30, 2006 and
2005 have been prepared by us without audit. 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,
2006, results of operations for the three and six months ended June 30, 2006 and
2005 and cash flows for the six months ended June 30, 2006 and 2005.
This report should be read in conjunction with our Form 10-KSB for our fiscal
year ended December 31, 2005.
The results of operations and cash flows for the six months ended June 30, 2006
are not necessarily indicative of the results to be expected for the full year.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION - Revenue is recognized when title and risk of loss
transfers to the customer and the earnings process is complete. In general,
title passes to our customers upon the customer's receipt of the merchandise.
Revenue is accounted for in accordance with Emerging Issue.
Task Force (EITF) Issue No. 99-19, "Reporting Revenue Gross as a Principal
versus Net as an Agent." Revenue is recognized on a gross basis since the
Company has the risks and rewards of ownership, latitude in selection of vendors
and pricing, and bears all credit risk.
The Company records all shipping and handling fees billed to customers as
revenues, and related costs as cost of goods sold, when incurred, in accordance
with EITF 00-10, "Accounting for Shipping and Handling Fees and Costs."
ESTIMATES - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
6
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)
2. EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Dilutive earnings 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. Diluted loss per common share does not give effect
to the impact of options because their effect would have been anti-dilutive.
3. STOCK COMPENSATION
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.
Effective January 1, 2006, the Company's Plan is accounted for in accordance
with the recognition and measurement provisions of Statement of Financial
Accounting Standards ("FAS") No. 123 (revised 2004), Share-Based Payment ("FAS
123(R)"), which replaces FAS No. 123, Accounting for Stock-Based Compensation,
and supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting
for Stock Issued to Employees, and related interpretations. 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.
Prior to January 1, 2006, the Company accounted for similar transactions in
accordance with APB No. 25 which employed the intrinsic value method of
measuring compensation cost. Accordingly, compensation expense was not
recognized for fixed stock options if the exercise price of the option equaled
or exceeded the fair value of the underlying stock at the grant date.
While FAS No. 123 encouraged recognition of the fair value of all stock-based
awards on the date of grant as expense over the vesting period, companies were
permitted to continue to apply the intrinsic value-based method of accounting
prescribed by APB No. 25 and disclose certain pro-forma amounts as if the fair
value approach of SFAS No. 123 had been applied. In December 2002, FAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
of SFAS No. 123, was issued, which, in addition to providing alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation, required more prominent pro-forma disclosures
in both the annual and interim financial statements. The Company complied with
these disclosure requirements for all applicable periods prior to January 1,
2006.
In adopting FAS 123(R), the Company applied the modified prospective approach to
transition. Under the modified prospective approach, the provisions of FAS 123
(R) are to be applied to new awards and to awards modified, repurchased, or
cancelled after the required effective date. Additionally, compensation cost for
the portion of awards for which the requisite service has not been rendered that
are outstanding as of the required effective date shall be recognized as the
requisite service is rendered on or after the required effective date. The
compensation cost for that portion of awards shall be based on the grant-date
fair value of those awards as calculated for either recognition or pro-forma
disclosures under FAS 123.
As a result of the adoption of FAS 123 (R), the Company's results for the three
and six month period ended June 30, 2006 include employee share-based
compensation expense totaling approximately $13,000 and $24,500, 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
7
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)
compensation arrangements due to a history of operating losses. Stock
compensation expense recorded under APB No. 25 in the Consolidated Statements of
Operations for the three and six months ended June 30, 2005 totaled $0 and $0,
respectively.
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model. For option grants in Fiscal 2006, 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, 2006 and 2005 are as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
------------ ------------ ----------- ------------
Pro forma Pro Forma
Expected volatility 25.0% 0.00% 25.0% 0.00%
Expected dividend yield -- -- -- --
Risk-free interest rate 5.02% 2.84% 5.02% 2.38%
Expected term (in years) 5.00 5.00 5.00 9.84
Fair Values $0.34 $ 0.13 $0.34 $0.21
The following table addresses the additional disclosure requirements of 123(R)
in the period of adoption. The table illustrates the effect on net income and
earnings per share as if the fair value recognition provisions of FAS No. 123
had been applied to all outstanding and unvested awards in the prior year
comparable period.
Three Months
Ended Six Months Ended
June 30, 2005 June 30,2005
----------- -----------
Net loss, as reported $ (441,550) $ (493,018)
Deduct: Total stock based compensation expense determined
under the fair value based method for all awards (no tax
effect) (439) (181,939)
----------- -----------
Pro forma net loss $ (441,989) $ (674,957)
=========== ===========
Net income per share:
Basic - as reported $ (0.07) $ (0.08)
Basic - pro forma $ (0.08) $ (0.11)
Diluted - as reported $ (0.07) $ (0.08)
Diluted - pro forma $ (0.08) $ (0.11)
8
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)
The following table represents our stock options granted, exercised, and
forfeited during the quarter ended June 30, 2006:
Weighted Weighted
Average Average Aggregate
Exercise Remaining Intrinsic
Share Price Contractual Term Value
---------------------------------------------- --------------------- ------------------ ----------------- -------------------
Outstanding, beginning of year 2,777,000 $ 1.05
Granted 182,000 2.09
Exercised (37,778) 1.00
Forfeited (1,000,000) 1.00
---------------------
Outstanding, end of quarter 1,921,222 $ 1.17 6.13 $ 2,077,000
=====================
Options exercisable, end of quarter 1,057,006 $ 1.06 7.30 $ 1,262,000
=====================
On May 31, 2006, an option holder exercised 37,778 options utilizing the
cashless exercise provisions and received 20,000 shares of common stock. The
options were exercisable at $1.00 per share with a fair market value of $2.125
per share on the date of exercise.
4. CONSULTING AGREEMENT
On June 10, 2005 the Company entered into a consulting agreement with a
financial advisory firm. In connection with this agreement, the Company granted
a warrant for the purchase of 1,100,000 shares of the Company's common stock
containing cashless exercise provisions. The warrant was exercisable at $.10 per
share and would have expired on June 10, 2010. On February 27, 2006, the holder
exercised the warrants utilizing the cashless exercise provision and received
1,029,032 shares of common stock in exchange for the exercise of the 1,100,000
warrants based on the closing price of $1.55 of the Company's stock on that
date.
5. LEGAL SERVICES
On April 25, 2006, the Company granted 50,000 ten year non statutory stock
options to a law firm in connections with services related to a private
placement offering. The options have an exercise price of $0.10 per share and
have been valued at $95,000 and are included in deferred offering costs at June
30, 2006.
6. RELATED PARTY TRANSACTION
On April 10, 2006, the Company granted 40,000 five year non statutory stock
options to an entity controlled by two of the officers of the Company, for the
purchase of an email list of promotional products professionals and an industry
specific search engine. The officers of the Company have waived their right to
receive any benefit from the option grant, and the options were granted in the
name of the minority shareholders of the related entity. The options have an
exercise price of $2.50 per share and the email list and search engine were
expensed and have been valued at approximately $18,000 which is included in
general and administrative expenses for the periods ended June 30, 2006.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The information contained in this Form 10-QSB 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, 2005 which includes our
audited financial statements for the year ended December 31, 2005 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-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties, and actual results
could be significantly different than those discussed in this Form 10-QSB.
Certain statements contained in Management's Discussion and Analysis,
particularly in "Liquidity and Capital Resources," and elsewhere in this Form
10-QSB 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-QSB 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 advertising specialties and promotional products company.
Specific categories of the use of promotional products include advertising
specialties, business gifts, incentives and awards, and premiums. Through the
services of our two in-house sales persons, who also serve as executive officers
of our company, and the use of independent sales representatives, we distribute
items to our customers typically with their logos on them. Several of our
customer categories include large corporations, local schools, universities,
financial institutions, hospitals and not-for-profit organizations.
The most popular products that we have distributed over the last two years and
account for over 50% of our business are as follows:
o Wearables, such as t-shirts, golf shirts and hats.
o Glassware, such as mugs and drinking glasses.
o Writing instruments, such as pens, markers and highlighters.
o Bags, such as tote bags, gift bags and brief cases.
There are a number of trends in the advertising/marketing industry, the most
significant of which is the trend toward integrated marketing strategies.
Integrated marketing campaigns involve not only advertising, but also sales
promotions, internal communications, public relations, and other disciplines.
The objectives of integrated marketing are to promote products and services,
raise employee awareness, motivate personnel, and increase productivity through
a wide array of methods including extensive use of promotional products.
Price is no longer the sole motivator of purchasing behavior for our customers.
With the availability of similar products from multiple sources, customers are
increasingly looking for distributors who provide a tangible added-value to
their products. As a result, we provide a broad range of products and related
services. Specifically, we provide research and consultancy services, artwork
and design services, and fulfillment services to our customers. These services
are provided in-house by our current employees. Management believes that by
offering these services, we can attempt to attract new customers.
10
Our revenues are expected by us to grow as economic conditions in the United
States continue to improve, by adding additional independent sales
representatives to our sales network and through one or more acquisitions of
other distributors. We can provide no assurances that our expectations described
above will be realized.
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, Six Months Ended June 30,
2005 2006 2005 2006
---- ---- ---- ----
Revenue $ 1,088,588 $ 990,786 $ 2,163,596 $ 1,549,193
Cost of Revenues 754,291 682,810 1,529,464 1,040,719
----------- ----------- ----------- -----------
Gross Profit 334,298 307,976 634,131 508,474
Selling, general & Administrative expenses 454,311 749,527 870,484 997,081
----------- ----------- ----------- -----------
(Loss) from operations $ (120,013) $ (441,551) $ (236,352) $ (488,607)
=========== =========== =========== ===========
Three Months Ended June 30, 2006 versus Three Months Ended June 30, 2005
------------------------------------------------------------------------
We generated revenues of $1,088,588 in the second quarter of 2006 compared to
$990,786 in the same three month period ending June 30, 2005. The increase in
revenues of $97,802 in 2006 compared to 2005 is primarily due to our utilizing
additional sales representations to obtain additional customers and our new and
existing customers buying products with higher average prices.
Cost of revenues was $754,291 or 69% of revenues in the second quarter of 2006
compared to $682,810 or 69% of revenues in the same three months of 2005. Cost
of revenues includes purchases and freight costs associated with the shipping of
merchandise to our customers. Increase in cost of revenues of $71,481 in 2006 is
related to an increase in revenues.
Gross profit was $334,298 in the second quarter of 2006 or 31% of net revenues
compared to $307,976 in the same three months of 2005 or 31% 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 $454,311 in the second
quarter of 2006 compared to $749,527 in the same three months of 2005. Such
costs include payroll and related expenses, insurance and rents. The overall
decrease of $295,216 is primarily due to the decrease in stock based
compensation.
Net loss was $(119,889) in the second quarter of 2006 compared to a net loss of
$(451,551) for the same three months in 2005. No benefit for income taxes is
provided for in 2006 and 2005 due to the full valuation allowance on the net
deferred tax assets.
Six months ended June 30, 2006 versus June 30, 2005
---------------------------------------------------
We generated revenues of $2,163,596 in the first half of 2006 compared to
$1,549,193 in the same six month period ending June 30, 2005. The increase in
revenues of $614,403 in 2006 compared to 2005 is primarily due to our utilizing
additional sales representations to obtain additional customers and our new and
existing customers buying products with higher average prices.
Cost of revenues was $1,529,464 or 71% of revenues in the first half of 2006
compared to $1,040,719 or 67% of revenues in the same six months of 2005. Cost
of revenues includes purchases and freight costs associated with the shipping of
merchandise to our customers. Increase in cost of revenues of $488,745 in 2006
is related to an increase in revenues.
11
Gross profit was $634,132 in the first half of 2006 or 29% of net revenues
compared to $508,474 in the same six months of 2005 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 decrease in gross profit percentage during the first half of 2006
relates to the mix of product sold and size of orders.
Selling, general, and administrative expenses were $870,4849 in the first half
of 2006 compared to $997,081 in the same six months of 2005. Such costs include
payroll and related expenses, insurance and rents. The overall decrease of
$126,597 is primarily due to the decrease in stock based compensation.
Net loss was $(235,481) in the first half of 2006 compared to a net loss of
$(493,018) for the same six months in 2005. No benefit for income taxes is
provided for in 2006 and 2005 due to the full valuation allowance on the net
deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $279,201 at June 30, 2006. Cash
used by operating activities for the six months ended June 30, 2006 was
$(119,034). This resulted primarily from a net loss of $(235,649), an increase
in accounts receivable of $(58,405) and a increase in accounts payable and
accrued expenses of $8,370 partially offset by prepaid expenses of $3,025 and
stock based compensation of $64,314.
The Company had cash and cash equivalents of $494,273 at June 30, 2005. Cash
used by operating activities for the six months ended June 30, 2005 was
$(173,088). This resulted primarily from a net loss of $(493,018), an increase
in accounts receivable of $(144,105) and a decrease in accounts payable and
accrued expenses of $(72,593) partially offset by prepaid expenses of $57,327
and stock based compensation of $476,692. Cash provided from financing
activities was $126,076 resulting from private a placement of common stock and
warrants which netted $95,000 and the conversion of a note payable with accrued
interest into common stock of the company at a reduced conversion rate of $1.00
per share, which resulted in the issuance of 31,076 shares of common stock.
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 on equity financing and borrowings from
outside investors to supplement our cash flow from operations. As of June 30,
2006, all borrowings from outside investors have been repaid or converted into
our company's common stock. We raised net proceeds of $95,000 from the sale of
our common stock and warrants to purchase additional common stock in the first
quarter of 2005.
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 twelve months. We are currently seeking to raise private financing of up to
$4,830,000 from the sale of our common stock and warrants as described below. We
can provide no assurance that our attempt to raise additional financing will be
successful on terms satisfactory to us, if at all.
The Registrant has a plan of financing to sell shares of its unregistered Common
Stock at $1.75 per share and to issue Warrants also exercisable at $1.75 per
share. This financing is ongoing through a licensed broker/dealer who is a
member of the National Association of Securities Dealers, Inc. As of August 16,
2006, the Company has raised gross proceeds of $761,250 and is obligated to
issue 435,000 shares of Common Stock and Warrants to purchase 217,500 shares of
its Common Stock, exclusive of shares of Common Stock and Warrants to be issued
to the Placement Agent. Exemption from registration is claimed under Rule 506 of
Regulation D promulgated under Section 4(2) of the Securities Act of 1933, as
amended. The aforementioned securities have not been registered under the
Securities Act and may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements. The
securities being sold pursuant to the plan of financing contain certain
registration rights.
12
ITEM 3. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-15(e). In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. The Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective at the reasonable
assurance level at the end of our most recent quarter. There have been no
changes in the Company's disclosure controls and procedures or in other factors
that could affect the disclosure controls subsequent to the date the Company
completed its evaluation. Therefore, no corrective actions were taken.
13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
As of the filing date of this Form 10-QSB, we are not a party to any pending
legal proceedings.
ITEM 2. CHANGES IN SECURITIES.
(a) In the three months ended June 30, 2006 there were no sales of unregistered
securities, except as follows:
CONSIDERATION
RECEIVED AND
DESCRIPTION OF IF OPTION, WARRANT
UNDERWRITING OR OR CONVERTIBLE
OTHER DISCOUNTS TO EXEMPTION FROM SECURITY TERMS OF
MARKET PRICE OR REGISTRATION EXERCISE OR
DATE OF SALE TITLE OF SECURITY NUMBER SOLD CONVERTIBLE CLAIMED CONVERSION
-----------------------------------------------------------------------------------------------------------------------------
April 2006 Common stock 50,000 shares Services rendered; Section 4(2). A Options
underlying options no commissions paid restrictive legend exercisable at
appears on each $.10 per share;
certificate immediately
exercisable;
expire April 25,
2016; contain
cashless exercise
provisions.
(b) Rule 463 of the Securities Act is not applicable to the Company.
(c) In the three months ended June 30, 2006 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:
None.
14
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 Letter Employment Agreement - Michael Trepeta (2)
10.2 Letter Employment Agreement - Dean Julia (2)
10.3 Amendment to Employment Agreement - Michael Trepeta (3)
10.4 Amendment to Employment Agreement - Dean L. Julia (3)
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 (3)
31.1 Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification
(5)
31.2 Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certification
(5)
32.1 Chief Executive Officer Section 1350 Certification (5)
32.2 Chief Financial Officer Section 1350 Certification (5)
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 Release - 2006 Second Quarter Results of Operations (5)
_____________
(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) Incorporated by reference to Form 10-KSB for fiscal year ended December
31, 2005.
(4) Incorporated by reference to the Registrant's Form 10-QSB/A filed with
the Commission on August 18, 2005 for the quarter ended June 30, 2005.
(5) Filed herewith.
15
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 21, 2006 By: /s/ Dean L. Julia
------------------------------
Dean L. Julia,
Chief Executive Officer
Date: August 21, 2006 By: /s/ Sean McDonnell
------------------------------
Sean McDonnell,
Chief Financial Officer
16