SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 (I.R.S. Employer
of Incorporation) 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)
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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 November 6, 2006, the registrant had a total of 8,028,363 shares of Common
Stock outstanding, after giving effect to the issuance of an aggregate of
1,091,255 shares of Common Stock issued in connection with a recently completed
private placement offering as described herein under "Item 2 - 2006 Financing,."
ACE MARKETING & PROMOTIONS, INC.
FORM 10-QSB QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheet as of September 30, 2006 3
Condensed Statements of Operations for the Three and
Nine Months Ended September 30, 2006 and 2005 4
Condensed Statements of Cash Flows for the nine Months
Ended September 30, 2006 and September 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 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submissions of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
PART I. FINANCIAL INFORMATION
ACE MARKETING & PROMOTIONS, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
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SEPTEMBER 30, 2006
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ASSETS
Current Assets:
Cash and cash equivalents $ 1,299,928
Accounts receivable, net of allowance for doubtful accounts of $10,000 772,455
Prepaid expenses and other current assets 89,901
-----------
Total Current Assets 2,162,284
Property and Equipment, net 17,949
Other Assets 5,492
-----------
Total Assets $ 2,185,725
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 439,802
Accrued expenses 114,680
-----------
Total Current Liabilities 554,482
-----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.0001 par value; 25,000,000 shares
authorized 7,838,683 shares issued and outstanding 784
Preferred stock $.0001 par value: 500,000 shares
authorized no shares outstanding --
Additional paid-in capital 2,933,719
Accumulated deficit (1,303,260)
-----------
Total Stockholders' Equity 1,631,243
-----------
Total Liabilities and Stockholders' Equity $ 2,185,725
===========
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SEE NOTES TO CONDENSED FINANCIAL STATEMENTS. 3
ACE MARKETING & PROMOTIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2006 2005
------------------------------------------------------------------------------------------------------------------
Revenues, net $ 1,357,655 $ 750,957 $ 3,521,251 $ 2,300,150
Cost of Revenues 918,632 477,466 2,448,096 1,518,185
----------- ----------- ----------- -----------
Gross Profit 439,023 273,491 1,073,155 781,965
----------- ----------- ----------- -----------
Operating Expenses:
Selling, general and administrative expenses 459,791 313,066 1,330,275 1,310,147
----------- ----------- ----------- -----------
Total Operating Expenses 459,791 313,066 1,330,275 1,310,147
----------- ----------- ----------- -----------
Net (Loss) from Operations (20,768) (39,575) (257,120) (528,182)
----------- ----------- ----------- -----------
Other Income (Expense):
Interest expense -- -- -- (4,532)
Interest income 1,482 12 2,353 133
----------- ----------- ----------- -----------
Total Other Income (Expense) 1,482 12 2,353 (4,399)
----------- ----------- ----------- -----------
(Loss) Before Provision for Income Taxes (19,286) (39,563) (254,767) (532,581)
Provision for Income Taxes -- -- -- --
----------- ----------- ----------- -----------
Net Income (Loss) $ (19,286) $ (39,563) $ (254,767) $ (532,581)
=========== =========== =========== ===========
Net Loss Per Common Share:
Basic $ (0.00) $ (0.01) $ (0.04) $ (0.09)
=========== =========== =========== ===========
Diluted $ (0.00) $ (0.01) $ (0.04) $ (0.09)
=========== =========== =========== ===========
Weighted Average Common Shares Outstanding:
Basic 7,389,442 5,888,076 6,859,859 5,877,988
=========== =========== =========== ===========
Diluted 7,389,442 5,888,076 6,859,859 5,877,988
=========== =========== =========== ===========
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SEE NOTES TO CONDENSED FINANCIAL STATEMENTS. 4
ACE MARKETING & PROMOTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
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NINE MONTHS ENDED SEPTEMBER 30, 2006 2005
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Cash Flows from Operating Activities:
Net loss $ (254,767) $ (532,581)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,151 3,913
Stock-based payments 87,135 481,786
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Accounts receivable (61,399) (29,057)
Prepaid expenses and other assets (48,619) 31,144
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 73,522 (77,761)
Customer deposits (98,000) --
----------- -----------
Total adjustments (44,210) 410,025
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Net Cash Used in Operating Activities (298,977) (122,556)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from private placement, net 1,200,670 126,076
Payment on notes payable -- (25,000)
----------- -----------
Net Cash Provided by Financing Activities 1,200,670 101,076
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 901,693 (21,480)
Cash and Cash Equivalents, beginning of period 398,235 566,285
----------- -----------
Cash and Cash Equivalents, end of period $ 1,299,928 $ 544,805
=========== ===========
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SEE NOTES TO CONDENSED FINANCIAL STATEMENTS. 5
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
The Condensed Balance Sheet as of September 30, 2006, the Condensed Statements
of Operations for the three and nine months ended September 30, 2006 and 2005
and the Condensed Statements of Cash Flows for the nine months ended September
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 September 30, 2006, results of operations for the three and nine months ended
September 30, 2006 and 2005 and cash flows for the nine months ended September
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 nine months ended September 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.
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.
6
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
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 nine month period ended September 30, 2006 include employee share-based
compensation expense totaling approximately $12,000 and $37,000, 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. Stock
compensation expense recorded under APB No. 25 in the Consolidated Statements of
Operations for the three and nine months ended September 30, 2005 totaled $0 and
$0 respectively.
7
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
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 nine months ended September 30, 2006 and 2005 are
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
------------ ------------ ----------- ------------
Pro forma Pro Forma
Expected volatility -- 25.00% 25.0% 1.00%
Expected dividend yield -- -- -- --
Risk-free interest rate -- 3.49% 5.02% 2.41%
Expected term (in years) -- 5.00 5.00 9.79
Fair Values -- $ 0.20 $0.34 $0.16
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 Nine Months
Ended Ended
September 30, September 30,
2005 2005
------------ ------------
Net loss, as reported $ (39,563) $ (532,581)
Deduct: Total stock based compensation expense
determined under the fair value based method
for all awards (no tax effect) 0 (181,939)
------------ ------------
Pro forma net loss $ (39,563) $ (714,520)
============ ============
Net income per share:
Basic - as reported $ (0.01) $ (0.09)
Basic - pro forma $ (0.01) $ (0.12)
Diluted - as reported $ (0.01) $ (0.09)
Diluted - pro forma $ (0.01) $ (0.12)
8
ACE MARKETING & PROMOTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
The following table represents our stock options granted, exercised, and
forfeited during the quarter ended September 30, 2006:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Share Price 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 1,130,464 $ 1.07 7.14 $ 1,338,000
=====================
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. PRIVATE PLACEMENT
During the nine months ended September 30, 2006 the Company raised proceeds of
$1,200,670 (net of expenses of $202,080) from the sale of 13.36 Units. Each Unit
consisted of 60,000 shares of the Company's Common Stock and Class C Warrants to
purchase 30,000 shares of Common Stock at an offering price of $105,000 per
Unit. The Class C Warrants are exercisable at $1.75 per share at anytime from
the date of issuance through the earlier of June 30, 2009 or the redemption date
of the Class C Warrants, whichever is earlier. In addition, through September
30, 2006, the Company issued 100,000 shares to the placement agent in connection
with the offering.
In connection with the offering, the Company granted 50,000 ten year non
statutory stock options to a law firm for legal services The options have an
exercise price of $0.10 per share and have been valued at $95,000 and were
netted against the proceeds of the offering at September 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 period ended September 30, 2006.
7. MAJOR CUSTOMER
For the nine months ended September 30, 2006, sales from one customer
approximated 26.7% of total sales.
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 (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-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 Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Revenue $ 1,357,655 $ 750,957 $ 3,521,251 $ 2,300,150
Cost of Revenues 918,632 477,466 2,448,096 1,518,185
----------- ----------- ----------- -----------
Gross Profit 439,023 273,491 1,073,527 781,965
Selling, general & Administrative expenses 459,791 313,066 1,330,275 1,310,147
----------- ----------- ----------- -----------
(Loss) from operations (20,768) (39,575) (257,120) (528,182)
=========== =========== =========== ===========
Three Months Ended September 30, 2006 versus Three Months Ended September 30,
-----------------------------------------------------------------------------
2005
----
We generated revenues of $1,357,655 in the third quarter of 2006 compared to
$750,957 in the same three month period ending September 30, 2005. The increase
in revenues of $606,698 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 $918,632 or 68% of revenues in the third quarter of 2006
compared to $477,466 or 64% 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 $441,166 in 2006
is related to an increase in revenues.
Gross profit was $439,023 in the third quarter of 2006 or 32% of net revenues
compared to $273,491 in the same three months of 2005 or 36% of revenues. Gross
profits will vary period-to-period depending upon a number of factors including
the mix of items sold, pricing of the items and the volume of product sold.
Also, it is our practice to pass freight costs on to our customers.
Reimbursement of freight costs which are included in revenues have lower profit
margins than sales of our promotional products and has the effect of reducing
our overall gross profit margin on sales of products, particularly on smaller
orders.
Selling, general, and administrative expenses were $459,791 in the third quarter
of 2006 compared to $313,066 in the same three months of 2005. Such costs
include payroll and related expenses, insurance and rents. The overall increase
of $146,725 is primarily due to the increase in stock based compensation and an
increase in salaries.
Net loss was $(20,768) in the third quarter of 2006 compared to a net loss of
$(39,575) for the same three months in 2005.
The third quarter net loss for 2006 includes stock based payments (non-cash) of
$22,821 as compared to $5,094 for the comparable period of 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.
Nine months ended September 30, 2006 versus September 30, 2005
--------------------------------------------------------------
We generated revenues of $3,521,251 in the first nine months of 2006 compared to
$2,300,150 in the same nine month period ending September 30, 2005. The increase
in revenues of $1,221,101 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 $2,448,096 or 70% of revenues in the first nine months of
2006 compared to $1,518,185 or 66% of revenues in the same nine 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
$929,911 in 2006 is related to an increase in revenues.
11
Gross profit was $1,073,155 in the first nine months of 2006 or 30% of net
revenues compared to $781,965 in the same nine months of 2005 or 34% 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 nine
months of 2006 relates to the mix of product sold and size of orders.
Selling, general, and administrative expenses were $1,330,275 in the first nine
months of 2006 compared to $1,310,147 in the same nine months of 2005. Such
costs include payroll and related expenses, insurance and rents. The overall
increase of $20,127 is primarily due to the increase in salaries.
Net loss was $(257,120) in the first nine months of 2006 compared to a net loss
of $(528,182) for the same nine months in 2005. The first nine months of 2006
include stock based payments (non-cash) of $87,135 as compared to $481,786 for
the comparable period of the prior year. No benefit for income taxes is provided
for in 2006 and 2005 due to the full valuation allowance on the net deferred tax
assets.
12
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $1,299,928 at September 30, 2006.
Cash used by operating activities for the nine months ended September 30, 2006
was $(298,977). This resulted primarily from a net loss of $(254,767), an
increase in accounts receivable of $(61,399) and a increase in accounts payable
and accrued expenses of $73,522 partially offset by customer deposits of
$(98,000) and stock based compensation of $87,135.
The Company had cash and cash equivalents of $544,805 at September 30, 2005.
Cash used by operating activities for the nine months ended September 30, 2005
was $(122,556). This resulted primarily from a net loss of $(532,581), an
increase in accounts receivable of $(29,057) and a decrease in accounts payable
and accrued expenses of $(77,761) partially offset by prepaid expenses of
$31,144 and stock based compensation of $481,786. Cash provided from financing
activities was $101,076 resulting from a private 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.
We anticipate that our future liquidity requirements will arise from the need to
finance our accounts receivable and inventories, hire additional sales persons,
capital expenditures and possible acquisitions. The primary sources of funding
for such requirements will be cash generated from operations, raising additional
capital from the sale of equity or other securities and borrowings under debt
facilities which currently do not exist. We believe that we can generate
sufficient cash flow from these sources to fund our operations for at least the
next fifteen months. In the event we should need additional financing, we can
provide no assurances that we will be able to obtain financing on terms
satisfactory to us, if at all.
2006 Financing
--------------
We recently engaged Brookshire Securities Corporation, a licensed broker-dealer
and member of the NASD, to act as Placement Agent to raise financing for our
company through the sale of our unregistered securities solely to "accredited
investors" as defined in Rule 501 of Regulation D of the Securities Act of 1933,
as amended.
Pursuant to the offering, we raised gross proceeds of $1,665,250 from the sale
of Units. Each Unit consisted of 60,000 shares of our Common Stock and Class C
Warrants to purchase 30,000 shares of Common Stock at an offering price of
$105,000 per Unit. We had the right to sell fractional Units, but not fractional
shares or fractional Class C Warrants. The Class C Warrants are exercisable at
$1.75 per share at anytime from the date of issuance through the earlier of June
30, 2009 or the redemption date of the Class C Warrants, whichever is earlier.
Each Class C Warrant may be redeemed by us at a redemption price of $.001 per
Warrant, on at least 30 days prior written notice (the "Redemption Date'), at
anytime after the average closing sales price of our Common Stock as reported in
the Over-the-Counter Market OTC Electronic Bulletin Board, NASDAQ or if listed
on a national securities exchange, equals or exceeds $3.00 per share for a
period of 20 consecutive trading days ending within 10 days prior to the date of
the notice of redemption is mailed or otherwise delivered by us to each holder
of Class C Warrants.
All investors who purchased Units in the Offering have the following additional
rights:
o LIQUIDATED DAMAGES RELATING TO REGISTRATION STATEMENT - We
have agreed to file a Registration Statement with the SEC
within 60 days (automatically extended to 120 days if we have
executed an agreement to acquire the stock or assets of
another promotional product distributor) after the final
closing date of the Offering (i.e. October 30, 2006), to
provide for the resale by purchasers of Units of the shares of
Common Stock and the Warrant Shares issuable upon exercise of
the Class C Warrants under the Securities Act. We have agreed
to use our best efforts to have the Registration Statement
declared effective as soon as possible after filing and we
have agreed to obtain an effective Registration Statement
within 210 days after the final closing date of the Offering
(i.e. October 30, 2006), subject to a 30-day extension if the
Registration Statement receives a "full review" from the
Commission. These intervals would be extended by 30 days if
fiscal year end audited financial statements would be
required, and which were not issued prior to the closing. If
the Registration Statement is not effective within the
aforementioned time parameters, we will pay liquidated damages
in cash or, at our discretion, in Common stock (based upon the
fair market value of our Common Stock) equal to 1% of the
13
amount invested to each investor for each subsequent 30-day
period that we fail to have an effective Registration
Statement, up to a maximum of 9%. In the event the SEC
establishes policy preventing the use of or prohibiting the
effectiveness of a registration statement, and the
Registration Statement is still pending with liquidated
damages accruing, we shall be responsible for said damages up
to the date of the policy change. We have agreed to use our
best efforts to maintain the effectiveness of the registration
statement until the earlier of five years from the final
closing date of the Offering or until the Shares and Warrant
Shares may be sold pursuant to provisions of Rule 144(k)
without volume limitations. Any registration costs (other than
costs of counsel to subscribers or commissions related to the
sales of the Shares and Warrant Shares) will be paid by us.
o ANTI-DILUTION PROTECTION - In the event we seek to raise money
on a capital raise transaction during the period commencing on
October 30, 2006 and terminating on the earlier of 24 months
from that date or 12 months from the initial effective date of
the Registration Statement (the "Covered Period") and we sell
shares of our Common Stock or issue options or warrants at a
price below $1.75 per share during the Covered Period, the
investors in the Offering will have the following
anti-dilution protection during the Covered Period:
"MOST FAVORED NATION PROVISION" - Purchasers of Units
sold by the Company during the Covered Period may
elect at the time of each capital raise transaction
by us to exchange their unsold Units multiplied by
$105,000 per Unit in exchange for an equivalent
amount of our securities offered in any new capital
raise transaction based upon the new terms offered by
us. A capital raise transaction shall not include the
issuance of securities to officers, directors,
employees, advisors or consultants or securities
issued in connection with acquisitions,
consolidations or mergers."
Pursuant to the Offering, we sold 951,575 shares of our Common Stock and Class C
Warrants to purchase 475,788 shares of our Common Stock. We also issued to the
Placement Agent 139,680 shares of Common Stock and five-year Warrants to
purchase 95,160 shares of Common Stock exercisable at $1.00 per share. Exemption
from registration is claimed under Rule 506 of Regulation d promulgated under
Section 4(2) of the Securities Act.
ITEM 3. 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.
14
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) Between July 1, 2006 and October 31, 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
---------------------- -------------------- -------------------- -------------------- -------------------- --------------------
July - October Common Stock and 951,575 shares $1,665,250 gross Rule 506 For a description
2006 Class C 475,788 warrants proceeds received; of Class C
Warrants 12% of gross Warrants and
proceeds paid to Placement Agent
Brookshire Warrants, see 2006
Securities plus Financing.
$30,000 legal
expenses, 100,000
shares of Common
Stock and
Placement Agent
Warrants to
purchase 139,680
shares.
(b) Rule 463 of the Securities Act is not applicable to the Company.
(c) In the three months ended September 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:
The Company has outstanding Class A Common Stock Purchase Warrants to purchase
an aggregate of 737,000 shares of Common Stock, exercisable at $2.00 per share.
The expiration date of the Class A Warrants has been extended to the close of
business on January 3, 2007.
15
ITEM 6. EXHIBITS:
Except for the exhibits listed below as filed herewith or unless
Otherwise noted, all other required exhibits have been previously
filed with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended, on Form 10-SB, as amended (file no.
000-51160).
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation filed March 26, 1998 (1)
3.2 Amendment to Articles of Incorporation filed June 10, 1999 (1)
3.3 Amendment to Articles of Incorporation approved by stockholders on
February 9, 2005(1)
3.4 Amended By-Laws (1)
10.1 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 Third Quarter Results of Operations (5)
99.6 Form of Class C Warrant (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 September 30,
2005.
(5) Filed herewith.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ACE MARKETING & PROMOTIONS, INC.
Date: November 13, 2006 By: /s/ Dean L. Julia
--------------------------------
Dean L. Julia,
Chief Executive Officer
Date: November 13, 2006 By: /s/ Sean McDonnell
--------------------------------
Sean McDonnell,
Chief Financial Officer
17