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, 2009
COMMISSION FILE NUMBER: 000-51160
ACE MARKETING & PROMOTIONS, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 11-3427886
(State of jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
457 ROCKAWAY AVE.
VALLEY STREAM, NY 11581
(Address of principal executive offices)
(516) 256-7766
(Registrant's telephone number)
NOT APPLICABLE
(Former name, address and fiscal year, if changed since last report)
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by checkmark whether the registrant has submitted electronically and
posted on its corporate website, if any, every Interactive Data File required to
be submitted pursuant to Rule 405 of Regulation S-T during the 12 preceding
months (or such shorter period that the registrant was required to submit and
post such file).
Yes [ ] No [ ]
Indicate by checkmark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ]
Accelerated Filer [ ] Smaller Reporting Company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of October 31, 2009, the registrant had a total of 10,846,593 shares of
Common Stock outstanding,
ACE MARKETING & PROMOTIONS, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets as of September 30, 2009 (unaudited)
and December 31, 2008 (audited) 3
Condensed Statements of Operations for the Three Months and
Nine months Ended September 30, 2009 and 2008 (unaudited) 4
Condensed Statements of Cash Flows for the Nine Months
Ended September 30, 2009 and September 30, 2008 (unaudited 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 23
Item 4. Submissions of Matters to a Vote of Security Holders 23
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
-2-
ACE MARKETING &
PROMOTIONS, INC.
CONDENSED BALANCE SHEETS SEPTEMBER 30, December 31,
2009 2008
------------------------------------------------------------------------------------------------------
UNAUDITED Audited
ASSETS
Current Assets:
Cash and cash equivalents $ 700,040 $ 509,251
Accounts receivable, net of allowance for doubtful accounts of
$20,000 at September 30, 2009 and December 31, 2008 359,785 809,685
Note receivable -- 100,000
Prepaid expenses and other current assets 109,313 63,401
------------------------------
Total Current Assets 1,169,138 1,482,337
Property and Equipment, net 140,044 115,334
Other Assets 7,745 7,745
------------------------------
Total Assets $ 1,316,927 $ 1,605,416
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 317,531 $ 338,165
Accrued expenses 171,486 181,766
------------------------------
Total Current Liabilities 489,017 519,931
------------------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.0001 par value; 5,000,000 shares authorized;
none issued -- --
Common stock, $.0001 par value; 25,000,000 shares authorized;
10,823,449 and 9,234,949 shares issued and
10,800,115 and 9,211,615 outstanding at September 30, 2009
and December 31, 2008, respectively 1,084 924
Additional paid-in capital 5,699,306 4,851,529
Accumulated deficit (4,840,979) (3,735,467)
------------------------------
859,411 1,116,986
Less: Treasury Stock, at cost, 23,334 shares (31,501) (31,501)
------------------------------
Total Stockholders' Equity 827,910 1,085,485
------------------------------
Total Liabilities and Stockholders' Equity $ 1,316,927 $ 1,605,416
==============================
------------------------------------------------------------------------------------------------------
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS. 3
ACE MARKETING &
PROMOTIONS, INC.
Condensed Statements of Operations
---------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Revenues, net $ 938,824 $ 1,480,577 $ 2,235,103 $ 4,706,627
Cost of Revenues 770,028 1,056,082 1,601,245 3,444,777
-------------------------------------------------------------
Gross Profit 168,796 424,495 633,858 1,261,850
-------------------------------------------------------------
Operating Expenses:
Selling, general and administrative expenses 653,625 763,795 1,743,758 2,097,674
-------------------------------------------------------------
Total Operating Expenses 653,625 763,795 1,743,758 2,097,674
-------------------------------------------------------------
Loss from Operations (484,829) (339,300) (1,109,900) (835,824)
-------------------------------------------------------------
Other Income (Expense):
Interest expense (129) (655) (379) (806)
Interest income 208 1,807 4,767 5,784
-------------------------------------------------------------
Total Other Income (Expense) 79 1,152 4,388 4,978
-------------------------------------------------------------
Net Loss $ (484,750) $ (338,148) $(1,105,512) $ (830,846)
Less Preferred Stock Dividend - 96,500 96,500
-------------------------------------------------------------
Net Loss Allocable to Common shareholders $ (484,750) $ (434,648) $(1,105,512) $ (927,346)
=============================================================
Net Loss Per Common Share:
Basic $ (0.05) $ 0.05 $ (0.11) $ (0.11)
=============================================================
Diluted $ (0.05) $ (0.05) $ (0.11) $ (0.11)
=============================================================
Weighted Average Common Shares Outstanding:
Basic 10,207,207 8,321,615 9,755,652 8,202,567
=============================================================
Diluted 10,207,207 8,321,615 9,755,652 8,202,567
=============================================================
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SEE NOTES TO CONDENSED FINANCIAL STATEMENTS. 4
ACE MARKETING &
PROMOTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2009 2008
----------------------------------------------------------------------------------------------
(UNAUDITED) (unaudited)
----------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $(1,105,512) $ (830,846)
------------------------------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 21,494 10,656
Stock-based compensation 205,210 455,141
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Accounts receivable 449,900 (77,802)
Prepaid expenses and other current assets (45,912) (14,486)
Decrease in operating liabilities:
Accounts payable and accrued expenses (30,914) (133,768)
------------------------------
Total adjustments 599,778 239,741
------------------------------
Net Cash Used in Operating Activities (505,734) (591,105)
------------------------------
Cash Flows from Investing Activities:
Increase (Decrease) in Note Receivable 100,000 (100,000)
Acquisition of Property and Equipment (46,204) (99,134)
------------------------------
Net Cash Provided by (Used in) Investing Activities 53,796 (199,134)
------------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of preferred stock 445,000
Proceeds from issuance of common stock 642,727 --
------------------------------
Net Cash Provided by Financing Activities 642,727 445,000
------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 190,789 (345,239)
Cash and Cash Equivalents, beginning of period 509,251 819,021
------------------------------
Cash and Cash Equivalents, end of period $ 700,040 $ 473,782
==============================
Supplenental Disclosure of noncash transaction:
Issuance Common Stock to FINRA Member $ 37 --
Beneficial conversion feature - preferred stock dividend -- $ 96,500
------------------------------
$ 37 $ 96,500
==============================
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SEE NOTES TO CONDENSED FINANCIAL STATEMENTS. 5
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION:
The accompanying condensed financial statements and footnotes thereto are
unaudited. In the opinion of the management of Ace Marketing & Promotions, Inc.
("the Company"), these statements include all adjustments, which are of a normal
recurring nature, necessary to present a fair statement of the Company's results
of operations, financial position and cash flows.
The preparation of financial statements in conformity with accounting principals
generally accepted in the United States of America ( GAAP) requires management
to make estimates and assumptions that effect the amounts of assets,
liabilities, revenue, costs and expenses. Actual results could differ from these
estimates.
Interim results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction with the
company's 2008 Annual Report.
In the opinion of management, these unaudited Condensed Financial Statements
include all adjustments of a normal and recurring nature necessary for a fair
statement of the information for each period contained therein. We have
evaluated subsequent events through the filing of this Form 10-Q with the SEC,
and determined there have not been any events that have occurred that would
require adjustments to our unaudited Condensed Financial Statements.
NATURE OF OPERATIONS - Ace Marketing & Promotions, Inc. (the "Company")
is a Promotional Marketing Company, that concentrate on three main business
verticals; Branding, Interactive Solutions, and Mobile Marketing. Each vertical
contains several solutions.
Within the Branding vertical we have the ability to create a brand, and
also provide all the branded merchandise or promotional products that go along
with the branding process. This has been the core of the Ace business model
since its inception. Our current focus within this vertical is to find new and
innovative ways to leverage new technology platforms and our growing list of
clients to drive growth beyond traditional channels.
Our Interactive vertical deals with any online marketing & branding
initiatives. Utilizing the Ace CMS (Content Management System) Platform, we
create custom websites that allow us to give total control of the site content
back to our clients after they are created. Through the Ace CMS platform, the
client has the ability to change all the content on the site without the need
for a programmer and the high hourly fees that go along with them. If they have
the ability to attach a file to an email, they have the ability to control
content (text, audio, video pictures and backgrounds) on our sites. With this
power, their websites become dynamic and powerful marketing vehicles instead of
just an online static ad. For relevant clients, we also add an E-Commerce
component to their websites. As an internal purchasing tool, this allows the
client to control the products that are purchased internally by requiring all
buyers to use the online company store. As an online sales tool, it provides a
professional and economical way to sell products online to their customers or
fans. As additional service offerings, we house these sites on Ace Marketing
servers, and offer clients email marketing services and solutions. We either
pass along the ability to generate email marketing campaigns to our client by
providing them with a certain amount of emails per month and a Newsletter
template, or we can create and manage the email marketing programs for them.
Under the Mobile vertical, we provide Proximity Marketing and SMS Text
platforms & services. Several years ago the term "Mobile Marketing" was really
just a buzz word, last year mobile marketing became more of a reality, and now
many companies are eagerly adding "mobile" to their advertising and marketing
mix. Our clients and potential clients are coming to the conclusion that if they
are not marketing to their customers or fans on their cell phones, then they are
behind the times. To address this exciting market opportunity, Ace has quickly
become involved in Proximity Marketing. Utilizing Proximity Marketing devices
purchased by us, we are setting up Bluetooth and Wi-Fi Proximity Marketing
networks that allow us to deliver content directly to consumers' cell phones for
free. There is no network charge by a cell phone carrier as we intend to set up
our own devices throughout sports and entertainment venues, retail locations,
and any other relevant locations, effectively creating our own local network.
The Proximity Marketing devices appear set to become the next component of
advertising and marketing expenditures as mobile marketing gains more and more
-6-
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
momentum. This allows us to target and deliver rich media content at targeted
locations at targeted times where it is most relevant. The technology allows us
to control all locations and campaigns remotely whether they are down the block
or across the country. With precise statistical reporting as to how many
consumers downloaded the campaign, advertisers now have an exciting new and
measurable medium to communicate with fans and consumers. It is our vision to
build this network at various locations across the United States and have plans
for our first permanent installations this calendar year. Our SMS Text platforms
provide another effective tool for our clients to interact with their customers
through their mobile devices. This technology can be used to complement
Proximity Marketing or as a stand-alone marketing channel.
Management believes that the services, products and technology
platforms that we have assembled provide our clients with an exceptional mix of
solutions for reaching Ace's customers in ways that were previously impossible.
We give clients the ability to choose a solution "A La Carte", where we will
simply create their branded merchandise, or just create their website, and there
are other times where a client will have us provide the entire suite of
solutions. We now have the ability to create the brand identity as well as the
merchandise to go along with it. Our platforms allow us to create the website
and the ecommerce platform to sell it on, communicate with the customer or fan
base via email marketing, and also create and manage a client's mobile marketing
initiatives using text messaging and proximity marketing. Additionally, we
provide warehousing, fulfillment, and shipping directly from Ace for online
programs. Providing the entire suite of solutions for a single client allows
that client to exclusively use Ace where in the past they may have had to look
to several different companies. Through the suite of solutions Ace can now
deliver, we have transformed from a supplier into a partner, and our sales
representatives are now seen as business solution consultants.
NOTE 2: ACCOUNTING PRONOUNCEMENTS:
On July 1, 2009, the FASB issued the FASB Accounting Standards Codification (the
Codification). The Codification became the single source of authoritative
nongovernmental U.S. GAAP, superseding existing FASB, American Institute of
Certified Public Accountants ( AICPA), Emerging Issues Task Force (EITF) and
related literature. The Codification eliminates the previous US GAAP hierarchy
and establishes one level of authoritative GAAP. All other literature is
considered non-authoritative. The Codification was effective for interim and
annual periods ending after September 15, 2009.
The company adopted the Codification for the quarter ending September 30, 2009.
There was no impact the condensed financial results as this change is
disclosure-only in nature.
In May 2009, the Financial Accounting Standards Board ("FASB") issued ASC 855-10
formerly Statement of Financial Accounting Standard ("SFAS") No. 165, Subsequent
Events ("Statement No. 165"), which requires an entity after the balance sheet
date to evaluate events or transactions that may occur for potential recognition
or disclosure in its financial statements. ASC 855-10 determines the
circumstances under which the entity shall recognize these events or
transactions in its financial statements and provides the disclosures that an
entity shall make about them including disclosing the date through which the
entity evaluated these events or transactions, as well as whether that date is
the date the entity's financial statements were issued or the date the financial
statements were available to be issued. ASC 855-10 became effective for the
Company as of June 30, 2009. The company established that there would be no
material effect with the adoption of this statement on its financial statements.
In April 2009, the FASB issued ASC 820-10-65-4 ( formally FSP SFAS 157-4)
"Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly" which provides additional guidance for estimating fair value in
accordance with ASC 820 (formerly SFAS No. 157) "Fair Value Measurements", when
the volume and level of activity for the asset or liability have significantly
decreased. This pronouncement also includes guidance on identifying
circumstances that indicate a transaction is not orderly. The Company adopted
this pronouncement on April 1, 2009. The adoption did not have a material effect
on the Company's financial position or results of operations.
-7-
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
NOTE 3: SUMMARY OF SELECTED 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.
The Company applies the revenue recognition principles which provides for
revenue to be recognized when (i) persuasive evidence of an arrangement exists,
(ii) delivery has been completed, (iii) the customer accepts and verifies
receipt, (iv) collectability is reasonably assured. The Company records all
shipping and handling fees billed to customers as revenues, and related costs as
cost of goods sold, when incurred.
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.
NOTE 4: LOSS PER SHARE
ASC 260 "Earnings (Loss) Per Share", previously SFAS No. 128, requires dual
presentation of basic and diluted earnings per share ("EPS") with a
reconciliation of the numerator and denominator of the basis EPS computation to
the numerator and denominator of the diluted EPS computation. Basic EPS excludes
dilution. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
Basic loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Dilutive
loss per share gives effect to stock options and warrants, which are considered
to be dilutive common stock equivalents. Basic loss per common share was
computed by dividing net loss by the weighted average number of shares of common
stock outstanding. The number of common shares potentially issuable upon the
exercise of certain options and warrants that were excluded from the diluted
loss per common share calculation was approximately 6,855,000 and 6,264,000
because they are antidilutive as a result of a net loss for the three and nine
months ended September 30, 2009 and 2008, respectively.
-8-
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
NOTE 5: STOCK COMPENSATION
The Company's Plan is accounted for in accordance with the recognition and
measurement provisions of ASC 718 Stock Compensation, previously revised
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.
The Company's results for the three and nine month periods ended September 30,
2009 and 2008 include employee share-based compensation expense totaling
approximately $134,000 and $205,000 and $183,000 and $455,000, 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, 2009 and 2008:
------------------------------------------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
2009 2008 2009 2008
------------------------------------------------------------------------------------------------------------------
Employee stock-based compensation - option grants $(129,540) $ 167,034 -- 33,836
Employee stock-based compensation - stock grants -- 17,000 -- --
Non-Employee stock-based compensation - option grants 172,542 41,442 68,322 10,284
Non-Employee stock-based compensation - stock grants 34,200 60,000 30,000 --
Non-Employee stock-based compensation-stock warrant 128,008 169,665 36,001 139,177
--------- --------- --------- ---------
Total $ 205,210 $ 455,141 $ 134,323 $ 183,297
========= ========= ========= =========
-9-
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
NOTE 6: 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 payments subject to the provisions of ASC 718 "Stock
Compensation", previously Revised SFAS No. 123 "Share-Based Payment" ( "SFAS 123
(R)"). The fair values of these restricted stock awards are equal to the market
value of the Company's stock on the date of grant, after taking into certain
discounts. 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 nine months ended September 30, 2009 and 2008 are
as follows:
-----------------------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
2009 2008 2009 2008
-----------------------------------------------------------------------------------------------
Expected volatility 135.23% 115.00% - -
Expected dividend yield - - - -
Risk-free interest rate 1.27% 3.125% - -
Expected term (in years) 4.87 5.00 - -
-------------------------------------------------------------------------------------------------------
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Share Price Term Value
-------------------------------------------------------------------------------------------------------
Outstanding, January 1, 2009 3,331,222 $ 1.11
Granted 1,250,000 $ 1.00
Exercised - -
Cancelled (1,060,000) $ 1.01
----------
Outstanding, September 30, 2009 3,521,222 $ 1.10 4.71 -
==========
Options exercisable, September 30, 2009 2,556,222 $ 1.14 4.23 -
The weighted-average grant-date fair value of options granted during the nine
months ended September 30, 2009 was $0.62 and $0.53 for the nine months ended
September 30, 2008.
The aggregate intrinsic value of options outstanding and options exercisable at
September 30, 2009 is calculated as the difference between the exercise price of
the underlying options and the market price of the Company's common stock for
the shares that had exercise prices, that were lower than the $.80 closing price
of the Company's common stock on September 30, 2009.
As of September 30, 2009, the fair value of unamortized compensation cost
related to unvested stock option awards was approximately $628,000. Unamortized
compensation cost as of September 30, 2009 is expected to be recognized over a
remaining weighted-average vesting period of 2.75 years.
-10-
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
The weighted average assumptions made in calculating the fair value of warrants
granted during the nine months ended September 30, 2009 are as follows:
---------------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
2009 2008 2009 2008
---------------------------------------------------------------------------------------
Expected volatility 130.52% 142.00% -- 142.00%
Expected dividend yield -- -- -- --
Risk-free interest rate 1.15% 2.96% -- 2.87%
Expected term (in years) 3.00 3.00 -- 3.00
---------------------------------------------------------------------------------------
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Share Price Term Value
------------------------------------------------------------------------------------------------
Outstanding, January 1, 2009 508,000 $ .67
Granted 721,250 $ .90
Exercised -- --
Cancelled -- --
---------
Outstanding, September 30, 2009 1,229,750 $ .81 2.88 --
=========
Warrants exercisable, September 30, 2009 991,114 $ .81 2.51 --
=========
-11-
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
NOTE 7: NOTE RECEIVABLE
In February 2008, the Company entered into an agreement with Blue Bite, LLC
("Blue Bite"), a distributor of wireless networking solutions, to become an
authorized provider and reseller in the United States of mobile Advertising
solutions.
In connection with the agreement, the Company loaned Blue Bite $50,000 (the
"Note"). The Note bears interest at 10% per annum and is due June 1, 2009. The
Note is convertible, at the Company's option, into a 10% ownership interest of
Blue Bite. Upon conversion, the Company would also have to deliver to Blue Bite,
$75,000 in restricted Common Stock of the Company as additional consideration.
On September 17, 2008, the Company loaned Blue Bite an additional $50,000
pursuant to the terms of a one year convertible promissory note the "Second
Note". The Second Note provides for interest at 10% per annum, payable with any
outstanding principal on September 17, 2009. The Company has the option to
convert the Second Note plus $75,000 worth of shares of restricted Common Stock
of the Company into an additional 10% interest in Blue Bite.
On May 26, 2009, Ace Marketing received repayment of $100,000 loan from Blue
Bite together with interest.
NOTE 8: 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, 2009 and 2008, sales from ten percent or
greater customers approximated 18.8 % and 26.4%, respectively of total sales.
During the September 30, 2009 reporting period, we had one principal customer
accounted for these results. During the September 30, 2008 reporting period we
had two different customers who accounted for these results.
-12-
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
NOTE 9: CONSULTING AGREEMENTS
In February 2009, the Company entered into an agreement with a consulting firm
to provide investor relations services. The agreement provides for the issuance
of 350,000 common stock purchase warrants, with an exercise price of $.80 that
expires in February 2014. The warrants have a vesting period of 25% immediately
and the remaining ratably on a monthly basis through January 2010 which
generates approximately a non-cash $12,000 expense per month.
In addition, the consultant would be entitled to an additional advisory fee,
subject to the Company completing a successful capital raise through the sale of
its common stock of at least $1,250,000.
In April of 2009, the Company entered into an agreement with a consultant
(former employee) to assist Ace in forming a proximity marketing business to
offer to Ace Marketing customers. The original agreement was executed in January
2008 and it provided for the grant of non-statutory stock options to purchase
1,000,000 shares under our 2005 Employee Benefit and Consulting Services
Compensation Plan. The amended agreement provides for a reduction in the number
of options pursuant to the agreement from 1,000,000 options to 500,000 options
with the exercise price of $1.00 per share and expiring on March 31, 2012. The
options currently have a vesting period of 25% each on May 1, 2009, May 1, 2010,
May 1, 2011 and March 1, 2012.
In April of 2009, the Company entered into an agreement with a consultant to
assist in developing a proximity marketing business. The consultant is to market
and promote Ace's proximity marketing units as a premier mobile technology to
all industries, as needed. The agreement provides for the issuance of 600,000
options with an exercise price of $0.90 per share and expires on April 9, 2014.
The options have a vesting period of five years. These options shall vest in six
equal parts, each part representing 100,000 options semi-annually over three
years which generates approximately a non-cash $10,000 expense on a monthly
basis.
On July 30, 2009, the Company entered into an agreement with Ten West Holding,
Inc., a consultant to assist in obtaining new business and create general
awareness of our company and new services. The agreement provides for the
issuance of 40,000 share of restricted common stock in August and October of
2009, and a monthly payment of $5,000 per month over four months.
NOTE 10: PRIVATE PLACEMENT
On February 3, 2009, the Company sold 500,000 shares of its common stock at $.50
per share to investors in a private transaction.
On July 14, 2009, the Company commenced a private placement offering of its
Common Stock and Warrants. On August 21, 2009 and September 25, 2009, the
Company received gross proceeds of $345,000 and $124,250, respectively, and the
Company sold 500,000 shares of Common stock at $.69 per share and 175,000 shares
of Common Stock at $.71 per share at each respective date. For every two shares
sold in the Offering, Class D Warrants were issued to purchase one share of
Common Stock exercisable through August 21, 2012 at an exercise price of $1.00
per share. Pursuant to the Placement Agency Agreement and a Financial Advisory
Agreement, the Placement Agent received cash compensation of 10% of the gross
proceeds and an amount equal to 300,000 shares of Common Stock plus 10% of the
shares and warrants sold in the Offering. As of September 30, 2009, the
Placement Agent was entitled to receive 367,500 shares and warrants to purchase
33,750 shares. Warrant exercise price is subject to a change in the event the
Company pays a stock dividend.
-13-
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
NOTE 11: OPTIONS OUTSIDE COMPENSATION PLAN
On April 9, 2009, the Company hired a firm as an independent sales organization
to promote its proximity marketing units in the sports and entertainment
industry. The firm was granted options to purchase 100,000 shares at $.90 per
share outside of Ace's compensation plan which generates approximately a
non-cash $3,000 expense on a monthly basis.
NOTE 12: SUBSEQUENT EVENTS
On October 8, 2009, the Company's stockholders ratified, adopted and approved
the following proposals:
(A) Each of management's four nominees as director;
(B) Holtz Rubenstein & Reminick LLP to serve as auditors for Ace's fiscal
year ended December 31, 2009;
(C) An increase in the number of authorized common shares from 25,000,000
to 100,000,000, $.0001 par value; and
(D) The establishment of a 2009 Employee Benefit and Consulting
Compensation Plan covering 4,000,000 shares.
On October 15, 2009, the Company received gross proceeds of $30,000 from the
sale of 42,254 shares of Common Stock at a price of $.71 per share and Class D
Warrants to purchase 21,127 shares of Common Stock at an exercise price of $1.00
per share, exercisable through August 21, 2012. Pursuant to the Placement Agency
Agreement and a Financial Advisory Agreement, the Placement Agent received cash
compensation of 10% of the gross proceeds and an amount equal to 10% of the
shares and warrants sold in the Offering. As of October 15, 2009, the Placement
Agent received 4,225 shares and 2,113 warrants. Warrant expense is subject to a
charge in the event the corporation pays a stock dividend.
The Company has evaluated all subsequent events through the filing date of this
Form 10-Q for appropriate accounting and disclosures.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The information contained in this Form 10-Q and documents incorporated
herein by reference are intended to update the information contained in the
Company's Form 10-K for its fiscal year ended December 31, 2008 which includes
our audited financial statements for the year ended December 31, 2008 and such
information presumes that readers have access to, and will have read, the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Risk Factors" and other information contained in such Form 10-K
and other Company filings with the Securities and Exchange Commission ("SEC").
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements involve risks and uncertainties, and
actual results could be significantly different than those discussed in this
Form 10-Q. Certain statements contained in Management's Discussion and Analysis,
particularly in "Liquidity and Capital Resources," and elsewhere in this Form
10-Q are forward-looking statements. These statements discuss, among other
things, expected growth, future revenues and future performance. Although we
believe the expectations expressed in such forward-looking statements are based
on reasonable assumptions within the bounds of our knowledge of our business, a
number of factors could cause actual results to differ materially from those
expressed in any forward-looking statements, whether oral or written, made by us
or on our behalf. The forward-looking statements are subject to risks and
uncertainties including, without limitation, the following: (a) changes in
levels of competition from current competitors and potential new competition,
(b) possible loss of customers, and (c) the company's ability to attract and
retain key personnel, (d) The Company's ability to manage other risks,
uncertainties and factors inherent in the business and otherwise discussed in
this 10-Q and in the Company's other filings with the SEC. The foregoing should
not be construed as an exhaustive list of all factors that could cause actual
results to differ materially from those expressed in forward-looking statements
made by us. All forward-looking statements included in this document are made as
of the date hereof, based on information available to the Company on the date
thereof, and the Company assumes no obligation to update any forward-looking
statements.
OVERVIEW
--------
We are a Promotional Marketing Company that concentrates on three main
business verticals; Branding, Interactive Solutions, and Mobile Marketing. Each
vertical contains several solutions.
Within the Branding vertical we have the ability to create a brand, and
also provide all the branded merchandise or promotional products that go along
with the branding process. This has been the core of the Ace business model
since its inception. Our current focus within this vertical is to find new and
innovative ways to leverage new technology platforms and our growing list of
clients to drive growth beyond traditional channels.
Our Interactive vertical deals with any online marketing & branding
initiatives. Utilizing the Ace CMS (Content Management System) Platform, we
create custom websites that allow us to give total control of the site content
back to our clients after they are created. Through the Ace CMS platform, the
client has the ability to change all the content on the site without the need
for a programmer and the high hourly fees that go along with them. If they have
the ability to attach a file to an email, they have the ability to control
content (text, audio, video pictures and backgrounds) on our sites. With this
power, their websites become dynamic and powerful marketing vehicles instead of
just an online static ad. For relevant clients, we also add an E-Commerce
component to their websites. As an internal purchasing tool, this allows the
client to control the products that are purchased internally by requiring all
buyers to use the online company store. As an online sales tool, it provides a
professional and economical way to sell products online to their customers or
fans. As additional service offerings, we house these sites on Ace Marketing
servers, and offer clients email marketing services and solutions. We either
pass along the ability to generate email marketing campaigns to our client by
providing them with a certain amount of emails per month and a Newsletter
template, or we can create and manage the email marketing programs for them.
-15-
Under the Mobile vertical, we provide Proximity Marketing and SMS Text
platforms & services. Several years ago the term "Mobile Marketing" was really
just a buzz word, last year mobile marketing became more of a reality, and now
many companies are eagerly adding "mobile" to their advertising and marketing
mix. Our clients and potential clients are coming to the conclusion that if they
are not marketing to their customers or fans on their cell phones, then they are
behind the times. To address this exciting market opportunity, Ace has quickly
become involved in Proximity Marketing. Utilizing Proximity Marketing devices
purchased by us, we are setting up Bluetooth and Wi-Fi Proximity Marketing
networks that allow us to deliver content directly to consumers' cell phones for
free. There is no network charge by a cell phone carrier as we intend to set up
our own devices throughout sports and entertainment venues, retail locations,
and any other relevant locations, effectively creating our own local network.
The Proximity Marketing devices appear set to become the next component of
advertising and marketing expenditures as mobile marketing gains more and more
momentum. This allows us to target and deliver rich media content at targeted
locations at targeted times where it is most relevant. The technology allows us
to control all locations and campaigns remotely whether they are down the block
or across the country. With precise statistical reporting as to how many
consumers downloaded the campaign, advertisers now have an exciting new and
measurable medium to communicate with fans and consumers. It is our vision to
build this network at various locations across the United States and have plans
for our first permanent installations this calendar year. Our SMS Text platforms
provide another effective tool for our clients to interact with their customers
through their mobile devices. This technology can be used to complement
Proximity Marketing or as a stand-alone marketing channel.
Management believes that the services, products and technology
platforms that we have assembled provide our clients with an exceptional mix of
solutions for reaching Ace's customers in ways that were previously impossible.
We give clients the ability to choose a solution "A La Carte", where we will
simply create their branded merchandise, or just create their website, and there
are other times where a client will have us provide the entire suite of
solutions. We now have the ability to create the brand identity as well as the
merchandise to go along with it. Our platforms allow us to create the website
and the ecommerce platform to sell it on, communicate with the customer or fan
base via email marketing, and also create and manage a client's mobile marketing
initiatives using text messaging and proximity marketing. Additionally, we
provide warehousing, fulfillment, and shipping directly from Ace for online
programs. Providing the entire suite of solutions for a single client allows
that client to exclusively use Ace where in the past they may have had to look
to several different companies. Through the suite of solutions Ace can now
deliver, we have transformed from a supplier into a partner, and our sales
representatives are now seen as business solution consultants.
ACE MOBILE MARKETING
--------------------
In 2008, we entered into agreements with certain non-affiliated parties
to become an authorized distributor, provider and reseller in the United States
of mobile advertising solutions, in the Mobile Advertising & Proximity Marketing
Industry.
Management believes that proximity marketing has unlimited marketing
possibilities to thousands of different businesses. Proximity marketing is the
localized wireless distribution of advertising content associated with a
particular place. If we place a proximity transmitting box in a location of an
advertiser/business, transmissions (messages) will be sent to and received by
cell phones and PDA's equipped with Bluetooth technology within approximately
100 meters of a marketing broadcast. A person receiving the transmission can
elect to download the transmission, read the message and potentially act upon
the message sent by the advertiser. The message will remain on the cell phone or
PDA until proactively removed by the user. The user also has the ability to
forward the message to other users, which generates multiple views over an
extended period of time.
Management believes that advertisers are constantly seeking new
measurable media channels that can accurately target and engage key consumer
segments, and deliver compelling, relevant content that can be enjoyed for what
it is, shared with friends, interactively engaged with or commercially acted
upon instantaneously. All messages received by the public are free of charge
meaning there is no charge on any content a consumer downloads. We will enable
our advertising customers to promote their business by sending still images,
animated images, audio files, video clips, text files, promotional or discount
contents, bar codes, mobile games and java applications and business card files.
We can also send live data such as news and sports updates to targeted mobile
phones.
Management believes that proximity marketing is completely spam-free
and compliant with all applicable governmental regulations. It asks the users if
they would like to receive the content. It tracks how many people accept and
reject the content, providing the sender with a detailed time and date for every
transmission. The system maintains a unique Bluetooth ID assigned to each
device, and therefore will not send users the same advertisement more than once,
and if rejected will not contact the user again.
-16-
Ace intends to market its proximity boxes as a premiere mobile
technology. This will allow Ace to create a new channel in the mobile
marketplace for existing brands and marketers to leverage the inherent strengths
of mobile advertising. Ace plans to leverage the technology to develop niche
vertical sites. These services will be scalable for both large and small
businesses to monetize high traffic areas. Additionally, the platform shall be
dynamically scalable for worldwide partnerships, where a multi-location business
will be able to send a different marketing campaign for each demographic. Ace
has demonstrated the use of proximity marketing boxes and delivered branded
content for:
o Def Leppard to support their band tour;
o International Speeding Corporation, owner and operator of 13 major
motorsports facilities, including the Daytona International Speedway;
o Macy's Thanksgiving Day Parade ;
o SantaLand at Macy's;
o Madison Square Garden;
o IMAX theater
o Lonestar to support their band
Blue Bite, LLC is also an authorized distributor, provider and reseller
of the proximity transmitting boxes. We had an agreement pursuant to which Ace
loaned Blue Bite $100,000 pursuant to two Notes (due June 1, 2009 and September
17, 2009) convertible at Ace's option into a 20% ownership interest of Blue
Bite. At the time of conversion, Ace would also have to deliver to Blue Bite up
to $150,000 in fair market value of its restricted Common Stock as additional
consideration. In May 2009, Blue Bite repaid Ace its loans, together with
accrued interest thereon.
On May 26, 2009, Ace opted not to convert the loans and accepted full payment of
principal and interest to close out the agreement and loan with Blue Bite.
CRITICAL ACCOUNTING POLICIES
----------------------------
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of financial statements requires management to make estimates
and disclosures on the date of the financial statements. On an on-going basis,
we evaluate our estimates including, but not limited to, those related to
revenue recognition. We use authoritative pronouncements, historical experience
and other assumptions as the basis for making judgments. Actual results could
differ from those estimates. We believe that the following critical accounting
policies affect our more significant judgments and estimates in the preparation
of our financial statements.
REVENUE RECOGNITION. Revenues are recognized when title and risk of
loss transfers to the customer and the earnings process is complete. In general,
title passes to our customers upon the customer's receipt of the merchandise.
Revenue is accounted by 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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We are required to make judgments
based on historical experience and future expectations, as to the realizability
of our accounts receivable. We make these assessments based on the following
factors: (a) historical experience, (b) customer concentrations, (c) customer
credit worthiness, (d) current economic conditions, and (e) changes in customer
payment terms.
-17-
STOCK BASED COMPENSATION. The Company records compensation expense
associated with stock options and other equity-based compensation. Share-based
compensation expense is determined based on the grant-date fair value estimated
using the black scholes method. The Company recognizes compensation expense on a
straight-line basis over the requisite service period of the award.
RESULTS OF OPERATIONS
The following table sets forth certain selected unaudited condensed
statement of operations data for the periods indicated in dollars and as a
percentage of total net revenues. The following discussion relates to our
results of operations for the periods noted and is not necessarily indicative of
the results expected for any other interim period or any future fiscal year. In
addition, we note that the period-to-period comparison may not be indicative of
future performance.
---------------------------------------------------------- ---------------------------------------------------------------
Three Months Ended September 30
---------------------------------------------------------- ------------------------------ --------------------------------
2009 2008
---------------------------------------------------------- ------------------------------ --------------------------------
Revenue $ 938,824 $ 1,480,577
---------------------------------------------------------- ------------------------------ --------------------------------
Cost of Revenues 770,028 82% 1,056,082 71%
---------------------------------------------------------- ------------------------------ --------------------------------
Gross Profit 168,796 18% 424,495 29%
---------------------------------------------------------- ------------------------------ --------------------------------
Selling, General and Administrative Expenses 653,625 70% 763,795 52%
---------------------------------------------------------- ------------------------------ --------------------------------
(Loss) from Operations (484,829) 52% (339,300) 23%
---------------------------------------------------------- ------------------------------ --------------------------------
We generated revenues of $938,824 in the third quarter of 2009 compared to
$1,480,577 in the same three month period ending September 30, 2008. The
decrease in revenues of $541,753 in 2009 compared to 2008 was due to the general
state of economy and customers choosing to cancel or delay purchases of
promotional products.
Cost of revenues was $770,028 or 82% of revenues in the third quarter of 2009
compared to $1,056,082 or 71% of revenues in the same three months of 2008. Cost
of revenues includes purchases and freight costs associated with the shipping of
merchandise to our customers. Decrease in cost of revenues of $286,054 in 2009
is related to a decrease in sales during the current quarter ending September
30, 2009.
Gross profit was $168,796 in the third quarter of 2009 or 18% of net revenues
compared to $424,495 in the same three months of 2008 or 29% 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 $653,625 in the third quarter
of 2009 compared to $763,795 in the same three months of 2008. Such costs
include payroll and related expenses, commissions, insurance, rents,
professional, consulting and public awareness fees. The overall decrease of
$110,170 was primarily due to a $48,974 decrease in stock based payments.
Net loss from operations was $(484,829) in the third quarter of 2009 compared to
a net loss of $(339,300) for the same three months in 2008. The third quarter
net loss for 2009 includes stock based payments (non-cash) of $134,323 as
compared to $183,297 for the comparable period of 2008. Our 2009 net loss
increased by $145,529 due to decreases in sales caused by customers choosing to
cancel or delay purchases of promotional products primarily as a result of the
general state of the economy. No benefit for income taxes is provided for in
2009 and 2008 due to the full valuation allowance on the net deferred tax
assets.
The following table sets forth certain selected unaudited condensed statement of
operations data for the periods indicated in dollars and as a percentage of
total net revenues. The following discussion relates to our results of
operations for the periods noted and is not necessarily indicative of the
results expected for any other interim period or any future fiscal year. In
addition, we note that the period-to-period comparison may not be indicative of
future performance.
-18-
------------------------------------------------------------------------------------------------
Nine months Ended September 30
------------------------------------------------------------------------------------------------
2009 2008
------------------------------------------------------------------------------------------------
Revenue $ 2,235,103 $ 4,706,627
Cost of Revenues 1,601,245 72% 3,444,777 73%
----------- -----------
Gross Profit 633,858 28% 1,261,850 27%
Selling, general & Administrative expenses 1,743,758 78% 2,097,674 45%
----------- -----------
(Loss) from operations (1,109,900) 50% (835,824) 18%
=========== ============
We generated revenues of $2,235,103 in the first nine months of 2009 compared to
$4,706,627 in the same nine month period ending September 30, 2008. The decrease
in revenues of $2,471,524 in 2009 as compared to 2008 is due to the general
state of the economy and customers choosing to cancel or delay purchases of
promotional products and the non-occurrence of a major order with a New York
State Troopers which was responsible for 16% of revenues for the nine months
ended September 30, 2008.
Cost of revenues was $1,601,245 or 72% of revenues in the first nine months of
2009 compared to $3,444,777 or 73% of revenues in the same nine months of 2008.
Cost of revenues includes purchases and freight costs associated with the
shipping of merchandise to our customers. Decreases in cost of revenues of
$1,843,532 in 2009 are due to reduced revenues for the reasons set forth the in
preceding paragraph.
Gross profit was $633,858 in the first nine months of 2009 or 28% of net
revenues compared to $1,261,850 in the same nine months of 2008 or 27% 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 for 2008 was negatively impacted
by reduced gross profit achieved in connection with the large order placed by
members of a police organization.
Selling, general, and administrative expenses were $1,743,758 in the first nine
months of 2009 compared to $2,097,674 in the same nine months of 2008. Such
costs include payroll and related expenses, commissions, insurance, rents,
professional, consulting and public awareness fees. The overall decrease of
$353,916 was primarily due to a $110,506 decrease in salaries and $249,931
decrease in stock based compensation.
Net loss from operations was $(1,109,900) in the first nine months of 2009
compared to a net loss of $(835,824) for the same nine months in 2008. The net
loss from operations increased by $274,076 due to a decrease in gross profit of
$627,992, offset by a decrease in operating expenses of $353,916. No benefit for
income taxes is provided for in 2009 and 2008 due to the full valuation
allowance on the net deferred tax assets.
Liquidity and Capital Resources
-------------------------------
The Company had cash and cash equivalents of $700,040 at September 30, 2009.
Cash used by operating activities for the nine months ended September 30, 2009
was $(505,734). This resulted primarily from a net loss of ($1,105,512)
partially offset by a decrease in accounts receivable of $449,900 and $205,210
in stock based payments. Net cash was provided by investing activities in the
amount of $53,796. The Company collected $100,000 on a note receivable, but used
cash of $46,204 to acquire property and equipment. Net cash was provided by
financing activities totaling $642,727 resulting from the issuance 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 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,
-19-
capital expenditures and possible acquisitions. The primary sources of funding
for such requirements will be cash generated from operations, raising additional
capital from the sale of equity or other securities and borrowings under debt
facilities which currently do not exist. We believe that we can generate
sufficient cash flow from these sources to fund our operations for at least the
next fifteen months. In the event we should need additional financing, we can
provide no assurances that we will be able to obtain financing on terms
satisfactory to us, if at all.
Recent Financings
-----------------
In February 2009, we sold 500,000 shares of our Common Stock at an exercise
price of $.50 per share, payable one-half immediately and the balance in March
2009 through the retirement of a $125,000 Note. Exemption is claimed under
Section 4(2) of the Securities Act of 1933, as amended.
On July 14, 2009, Ace Marketing & Promotions, Inc. entered into a Placement
Agent Agreement with Sierra Equity Group LLC, a FINRA registered broker-dealer
("Sierra"), to attempt to raise additional financing through the sale of its
Common Stock and Warrants. Between August 21, 2009 and October 15, 2009, the
Company closed on gross proceeds of $499,250 and received net cash proceeds of
approximately $403,000, after commissions of approximately $50,000, legal
expenses of $40,000 and blue sky, escrow and printing expenses of approximately
$7,000. The planned use of proceeds is to primarily expand the Company's mobile
and interactive divisions. In connection with the offering, the Company entered
into a Financial Advisory Agreement with Sierra pursuant to which Sierra would
receive 300,000 shares of Common Stock and an additional 10% of the number of
shares sold in the offering. As of October 15, 2009, the Company is obligated to
issue pursuant to the terms of the offering and the Financial Advisory Agreement
an aggregate of 717,253 shares of Common Stock at an average per share price of
$.696 per share and 358,627 Warrants exercisable at $1.00 per share to investors
in the offering and an aggregate of 371,725 shares and 35,863 Warrants to
Sierra. All securities are being issued pursuant to Rule 506 of Regulation D
promulgated under Section 4(2) of the Securities Act of 1933, as amended. All
certificates will bear an appropriate restrictive legend.
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 not effective as of the end of the period covered by this
report.
There was a change in the Company's internal control over the financial
reporting during the most recently completed fiscal quarter that has eased the
restraints on acquiring the necessary financial data. The internal controls over
financial reporting have been streamlined during the most recently completed
fiscal quarter. This change will likely affect the Company's internal control
over financial reporting.
-20-
At December 31, 2008, management identified the following
significant deficiencies that when aggregated give rise to a material weakness
in the area of financial reporting.
These deficiencies include, without limitation, a) lack of review or
evidence of review in the financial reporting process; b) information technology
limitations; and inability to apply complex accounting principles. Management is
presently assessing these deficiencies and as of September 30, 2009, had not
completed remediation of the identified deficiencies.
Management's Plan of Remediation
--------------------------------
Independent Board of Directors or Audit Committee
-------------------------------------------------
Due to the current size of the Company it does not intend to add
independent board members at this time. This deficiency will be addressed if the
Company shows substantial growth moving forward.
Information Technology
----------------------
Management is in the process of implementing a weekly and monthly
checklist of IT required function to assure all necessary activities are
completed and documented. As of this time the checklist has not yet been
completed.
Management has limited the access to all financial applications only to
include the Companies CEO, President and CFO. All passwords have been changed
and will be changed on a quarterly basis to allow only access to the proper
employee's.
Management has its IT personnel updating the software at least annually
and ensuring the updates, patches and licenses are current.
Revenue Recognition and Cost of Revenue
---------------------------------------
As of January 2009, management has implemented a change to ensure the
company has a centralized system to track orders processed shipped and recorded.
Orders can no longer move forward without verification from the billing or
tracking department. No testing has yet been completed on the system.
Financial Reporting
-------------------
Management has completed the complex equity transactions that are
required and is in the process of having an outside consultant report on the
system.
Management is also addressing the two accounting systems currently in
use and has a plan which will be implemented in the third quarter to move to a
single system. The single system will meet the company's needs and any current
future growth.
Accounts Payable and Cash Disbursements
---------------------------------------
As of February 2009, management has implemented a change to address its
deficiencies. The Company has granted access rights for the user of the accounts
payable module which now results in the payment of open invoices to relieve any
double counting. No testing has been completed on the new system.
-21-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As of the filing date of this Form 10-Q, we are not a party to any pending legal
proceedings.
ITEM 1A. RISK FACTORS
As a Smaller Reporting Company as defined Rule 12b-2 of the Exchange
Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure
reporting obligations and therefore are not required to provide the information
requested by this Item 1A.
ITEM 2. CHANGES IN SECURITIES.
(a) From January 2009 through October 15, 2009, we had no sales or
issuances of unregistered common stock, except we made sales or issuances of
unregistered securities listed in the table below:
------------- ------------- ----------------- ---------------------------- ------------------- -----------------------
CONSIDERATION RECEIVED AND
DESCRIPTION OF
UNDERWRITING OR OTHER IF OPTION, WARRANT OR
DISCOUNTS TO MARKET PRICE EXEMPTION FROM CONVERTIBLE SECURITY,
DATE OF TITLE OF OR CONVERTIBLE SECURITY, REGISTRATION TERMS OF EXERCISE OR
SALE SECURITY NUMBER SOLD AFFORDED TO PURCHASERS CLAIMED CONVERSION
------------- ------------- ----------------- ---------------------------- ------------------- -----------------------
February Common 500,000 Shares $250,000; no commissions Section 4(2). A Not applicable.
2009 Stock paid restrictive
legend appears on
each certificate.
------------- ------------- ----------------- ---------------------------- ------------------- -----------------------
February Common 350,000 Services rendered; no Section 4(2). A Five year Warrants,
2009 Stock commissions paid restrictive exercisable at $.80
Warrants legend appears on per share
each certificate.
------------- ------------- ----------------- ---------------------------- ------------------- -----------------------
April 2009 Common 100,000 Services rendered; Section 4(2). A Five year Options,
Stock no commissions paid restrictive exercisable at $.90
Options legend appears on per share
each certificate.
------------- ------------- ----------------- ---------------------------- ------------------- -----------------------
April 2009 Common 500,000 (1) Services rendered; Section 4(2). A Three year Options
Stock no commissions paid restrictive exercisable at $1.00
Options legend appears on per share
each certificate.
------------- ------------- ----------------- ---------------------------- ------------------- -----------------------
August 2009 Common 40,000 Services rendered; Section 4(2). A Not applicable.
Stock No commissions paid restrictive
legend appears on
each certificate.
------------- ------------- ----------------- ---------------------------- ------------------- -----------------------
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------------- ------------- ----------------- ---------------------------- ------------------- -----------------------
August - Common 1,075,880 $499,250; $49,925 paid in Rule 506 Warrants exercisable
October Stock and shares commissions plus $25,000 at $1.00 per share
2009 Class D (includes legal, plus 371,725 shares through August 21,
Warrants 371,725 and 35,863 warrants 2012.
placement agent
shares) and
394,490
warrants
(includes
35,863
placement agent
warrants)
------------- ------------- ----------------- ---------------------------- ------------------- -----------------------
(1) See item 2(c) below as these options may be deemed the grant of new
securities under the Securities Act.
(b) Rule 463 of the Securities Act is not applicable to the Company.
(c) In the nine months ended September 30, 2009, there were no
repurchases by the Company of its Common Stock. However, in April
2009, a consultant of the Company agreed to reduce his options to
purchase 1,000,000 shares to options to purchase 500,000 shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS:
On October 8, 2009, the Company's stockholders ratified, adopted and
approved the following proposals:
(A) Each of management's four nominees as director;
(B) Holtz Rubenstein & Reminick LLP to serve as auditors for Ace's fiscal
year ended December 31, 2009;
(C) An increase in the number of authorized common shares from 25,000,000
to 100,000,000, $.0001 par value; and
(D) The establishment of a 2009 Employee Benefit and Consulting
Compensation Plan covering 4,000,000 shares.
The voting tallies for the four proposals were as follows:
---------------------------------------------------------------------
DIRECTORS INFORMATION
----------------------- --------------------- -----------------------
DIR NAME VOTES FOR VOTES WITHHELD
----------------------- --------------------- -----------------------
Dean L. Julia 7,111,568 27,000
----------------------- --------------------- -----------------------
Michael D. Trepeta 7,111,568 27,000
----------------------- --------------------- -----------------------
Scott J. Novack 7,111,568 27,000
----------------------- --------------------- -----------------------
Domenico Iannucci. 7,111,568 27,000
----------------------- --------------------- -----------------------
--------------------------------------------------------------------------------------------------
PROPOSALS INFORMATION
-------------- ----------------------- ------------------ ------------------- --------------------
VOTES AGAINST VOTES ABSTAIN BROKER
PROP # VOTES FOR NON-VOTE
-------------- ----------------------- ------------------ ------------------- --------------------
2 7,138,568 -0- -0- -0-
-------------- ----------------------- ------------------ ------------------- --------------------
3 7,137,068 1,500 -0- -0-
-------------- ----------------------- ------------------ ------------------- --------------------
4 5,328,369 155,986 -0- 1,654,213
-------------- ----------------------- ------------------ ------------------- --------------------
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ITEM 5. OTHER INFORMATION:
The Company had outstanding Class A and Class B Common Stock Purchase
Warrants to purchase an aggregate of 837,000 shares of Common Stock, exercisable
at $2.00 per share. The Company also had outstanding Class C Common Stock
Purchase Warrants to purchase an aggregate of 475,788 shares at an exercise
price of $1.75 per share. The Class A, Class B and Class C Warrants expired on
September 30, 2009. None of the Class A, Class B or class C Warrants were
exercised prior to their expiration.
ITEM 6. EXHIBITS:
Except for the exhibits listed below as filed herewith or unless
otherwise noted, all other required exhibits have been previously filed with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended, on Form 10-SB, as amended (file no. 000-51160).
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation filed March 26, 1998 (1)
3.2 Amendment to Certificate of Incorporation filed June 10, 1999 (1)
3.3 Amendment to Articles of Incorporation approved by stockholders on February 9, 2005(1)
3.4 Amendment to Certificate of Incorporation filed September 11, 2008 to designate
rights and preferences of a series of Preferred Stock.
3.5 Amended By-Laws (1)
10.1 Employment Agreement - Michael Trepeta (2)
10.2 Employment Agreement - Dean Julia (2)
10.3 Amendments to Employment Agreement - Michael Trepeta (5)(7)
10.4 Amendments to Employment Agreement - Dean L. Julia (5)(7)
10.5 Joint Venture Agreement with Atrium Enterprises Ltd. (6)
10.6 Agreement with Aon Consulting (6)
11.1 Statement re: Computation of per share earnings. See Statement of Operations and Notes
to Financial Statements
14.1 Code of Ethics/Code of Conduct (5)
21.1 Subsidiaries of the Issuer - None in 2008
31.1 Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification (3)
31.2 Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certification (3)
32.1 Chief Executive Officer Section 1350 Certification (3)
32.2 Chief Financial Officer Section 1350 Certification (3)
99.1 2005 Employee Benefit and Consulting Services Compensation Plan (2)
99.2 Form of Class A Warrant (2)
99.3 Form of Class B Warrant (2)
99.4 Amendment to 2005 Plan (4)
99.5 Form of Class C Warrant (8)
99.6 Release - 2009 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 16, 2009 By: /s/ Dean L. Julia
--------------------------------------
Dean L. Julia,
Chief Executive Officer
Date: November 16, 2009 By: /s/ Sean McDonnell
--------------------------------------
Sean McDonnell,
Chief Financial Officer
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