SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
COMMISSION FILE NUMBER: 000-51160
ACE MARKETING & PROMOTIONS, INC.
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(Exact name of Registrant as specified in its charter)
NEW YORK 11-3427886
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(State of jurisdiction of I.R.S. Employee
incorporation or organization) Identification Number)
457 ROCKAWAY AVENUE, VALLEY STREAM, NY 11581
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 256-7766
Check whether the Registrant is not required to file reports pursuant to Section
13 of 15(d) of the Exchange Act. [ ]
Securities registered pursuant to Section 12 (b) of the Act: None
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Securities registered pursuant to Section 12 (g) of the Act:
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Common Stock, $.0001 Par Value
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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 if disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ].
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
State issuer's revenues for its most recent fiscal year: $5,665,413.
As of March 24, 2008, the number of shares held by non-affiliates was
approximately 3,790,000 shares. The approximate market value based on the last
sale (i.e. $.75 per share as of March 24, 2008) of the Company's Common Stock
was approximately $2,842,500.
The number of shares outstanding of the Registrant's Common Stock,
as of March 24, 2008 was 8,101,615.
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FORWARD-LOOKING STATEMENTS
We believe this annual report contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties and are based on the
beliefs and assumptions of our management, based on information currently
available to our management. When we use words such as "believes," "expects,"
"anticipates," "intends," "plans," "estimates," "should," "likely" or similar
expressions, we are making forward-looking statements. Forward-looking
statements include information concerning our possible or assumed future results
of operations set forth under "Business" and/or "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. Our future results and stockholder
values may differ materially from those expressed in the forward-looking
statements. Many of the factors that will determine these results and values are
beyond our ability to control or predict. Stockholders are cautioned not to put
undue reliance on any forward-looking statements. For those statements, we claim
the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995. For a discussion of some
of the factors that may cause actual results to differ materially from those
suggested by the forward-looking statements, please read carefully the
information under "Risk Factors." In addition to the Risk Factors and other
important factors discussed elsewhere in this annual report, you should
understand that other risks and uncertainties and our public announcements and
filings under the Securities Exchange Act of 1934, as amended could affect our
future results and could cause results to differ materially from those suggested
by the forward-looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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COMPANY OVERVIEW
Ace Marketing & Promotions, Inc. (the "Company" or "Ace") is a full
service promotional marketing company offering a wide array of business
solutions. These solutions include: fulfillment and warehousing, incentives and
rewards programs, importing, e-commerce and web design, printing and forms
management, database management and branded merchandise. Although we offer
several business solutions, our core business still remains to be distributing
advertising specialties and promotional items manufactured by others to our
customers typically with our customers' logos on them. Several of our customer
categories include large corporations, local schools, universities, financial
institutions, hospitals and not-for-profit organizations. Our promotional
products are a useful, practical, informative, entertaining, and/or decorative
item, most often imprinted with the sponsoring advertiser's name, logo, slogan
or message, and typically retained and appreciated by the end recipients who
receive them, in many cases free of charge in marketing and communication
programs.
Promotional products are also effective for the following:
o dealer/distribution programs;
o co-op programs;
o company stores;
o generating new customers or new accounts;
o nonprofit fundraising; public awareness campaigns;
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o promotion of brand awareness and brand loyalty;
o employee incentive programs;
o new product or service introduction; and
o marketing research for survey and focus group
participants.
We have the ability to distribute over 500,000 promotional
product items ranging from stickers that cost pennies all the way
through jewelry, sporting goods, awards, and electronics that cost
thousands of dollars per unit. Specific categories of promotional
products include:
o Advertising Specialties-build awareness, goodwill and
remembrance of the advertiser's name, product,
purpose, advantages or other timely message. These
products are generally lower priced goods and are
usually distributed for free.
o Business Gifts, Awards and Commemoratives - generally
lower priced goods and are given for goodwill, often
at trade shows to generate traffic.
o Incentives and Awards-focus on motivation, workplace
safety, goal setting and recognition. These are
typically higher priced items used in incentive
programs to promote employee retention and
recognition. They may also be used in recruitment
programs as well.
o Premiums-given after a specific behavior has been
performed.
The most popular products that we have distributed over the last
several 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.
ACE ADVANTAGES
Ace presently has over 2000 customer accounts ranging from Fortune 500
companies to local schools and small businesses. We have built our business
around the concept of high quality innovative branded merchandise, competitive
pricing, and consistently superior customer service. Our operational platform,
using top-line technology, is designed for economies of scale and ensures
superior relations with major industry suppliers. The platform also provides
superior support to an expanding team of experienced, well-connected salespeople
who are key to acquiring new business.
The major advantage we hold over most companies in the promotional
product industry is the ability to provide integrated business solutions to its
customers as trusted advisors. The majority of companies in the promotional
product industry offer only branded merchandise, whereas, we offer solutions in:
o Branded Merchandise;
o Importing;
o Incentive / Rewards programs;
o Printing / Forms Management;
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o Fulfillment / Warehousing;
o E-commerce / Website Design; and
o Database Management / Integrated Marketing Solutions.
The ability to offer multiple solutions and integrate them is what
separates us from the average promotional product distributor. Where nearly all
of the competition continues to be viewed as commodity based "order takers", our
solutions based services deepen the relationship with our clients as our sales
consultants become trusted advisors and Ace becomes a valued business partner.
POSITIONED FOR GROWTH
Ace has grown organically through referrals based on its high quality
service and external financings to support our growth. We are also expanding
through hiring leading independent salespersons who are well supported by the
Ace proprietary business structure. By offering more services and solutions to
our customers, new recruits will have the ability to expand their present
business by simply making the move to Ace. Upon integrating their client base
into our system they too become trusted advisors that provide integrated
business solutions instead of a commodity based promotional product salesperson.
These achievements position us to accelerate growth through potential
acquisition and consolidation of other companies as well as simply recruiting
experienced salespeople. In the event a company is acquired by us, of which no
assurances can be given in this regard, the new clients would all be introduced
to the additional services that are now available in our promotional marketing
model.
We have effectively carved out a niche for Ace. Marketing and branding
companies create an image and direction for clients. Ad agencies develop print,
TV, radio and other campaigns aimed at goals of recruiting and introducing new
products or services. Traditional promotional product companies offer imprinted
merchandise and apparel. Ace finds itself in a position of providing value added
services that compliment those of the ad agency, as well as branding and
marketing companies while at the same time far exceeding the capabilities of a
standard promotional products distributor.
BUSINESS STRATEGY
Ace's growth to date is based on a scalable corporate structure, using
top-of-the-line technology, to create advantages over most small distributors
by:
o Quickly targeting the best products and prices to meet a
client's needs;
o Providing in-house art capabilities for rapidly customizing
merchandise;
o Providing fulfillment and warehousing services for inventory
or custom programs,
o Providing research, consulting and design services to our
customers;
o Offering direct overseas importing for large quantities;
o Providing incentive and reward programs for both customers and
employees;
o Providing full service print and forms management solutions;
o Providing full e-commerce solutions, including company stores
and website design;
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o Managing purchase orders consistently from query to final
order;
o Tracking shipments effectively regardless of size or the
overseas location of the supplier; and
o Offering database management software, which integrates with
each service offered and allows the customer the ability to
quantify the results of any given marketing campaign or
promotion.
In addition, Ace offers a wide array of services not offered by most
distributors. These additional services allow our salespeople the opportunity to
open new doors and create more sales with both new and old customers. By
providing all the necessary back-office support, these efficiencies also free
salespersons to focus on selling. The in-house computer system allows access
from off-site, enabling sales staff to operate from any location.
ACE MOBILE MARKETING
In February 2008, we entered into an agreement with Blue Bite, LLC, a
distributor of Wilico Wireless Networking Solutions, SA (hereinafter referred to
as "Blue Bite"), to become an authorized provider and reseller in the United
States of mobile advertising solutions, in the Mobile Advertising & Proximity
Marketing Industry.
Management believes that proximity marketing has unlimited marketing
possibilities to thousands of different businesses. Proximity marketing is the
localized wireless distribution of advertising content associated with a
particular place. If we place a Blue Bite 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.
The ABI Research report published in January 2008 on mobile marketing
refers to the industry as still being in its "wild west" years but forecasts it
will settle down and become a $24 billion slice of the worldwide marketing and
advertising pie by 2013. It estimates there was about $1.8 billion spent in 2007
on all forms of mobile marketing.
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Ace intends to market its Blue Bite proximity boxes under the name "Ace
Mobile Marketing" 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 has formed a new
wholly-owned subsidiary under the name Ace Mobile Marketing, Inc. to market its
new services to clients.
Ace also plans to leverage the technology to develop niche vertical
sites. These services will be scalable for both large and small businesses to
monetize high traffic areas. Additionally, the platform shall be dynamically
scalable for worldwide partnerships, where a multi-location business will be
able to send a different marketing campaign for each demographic. Ace has loaned
Blue Bite $50,000 pursuant to a Note (due March 1, 2009) convertible at Ace's
option into a 10% ownership interest of Blue Bite. At the time of conversion,
Ace would also have to deliver to Blue Bite $75,000 in fair market value of its
restricted Common Stock as additional consideration.
THE MARKET
There are thousands of different types and styles of promotional
products. In many cases, it is even possible to obtain custom items that are not
found in any catalog. According to The Counselor - State of the Industry 2006
Survey, which is available online at no cost to the public at
www.thecounselor.net, the most popular promotion products sold in 2006 were the
following:
o Wearables (which also accounts for one- third of the
overall industry revenue);
o writing instruments;
o glassware and ceramics;
o desk/office/business accessories;
o calendars;
o Bags
o Caps and headwear
o recognition awards/trophies; and
o Sporting goods.
According to the Promotional Products Association International, which
is available online at no cost to the public at
www.ppai.com/MediaInformation/Industry/Statistics/SalesVolumeEstimates/,
promotional product distributor's sales were $5.13 billion in 1991, with steady
increases in sales until they reached $17.85 billion in 2000. Promotional
Product sales then declined to $16.55 billion in 2001, $15.63 billion in 2002,
increased to $16.34 billion in 2003, to $17.3 billion in 2004 and to $18.6 in
2006. A revitalized economy, increased competition in the marketplace, and a
trend toward integrated and targeted marketing strategies has contributed to
this growth. 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.
DISTRIBUTORS
According to the Promotional Products Association International, which
is available online at no cost to the public at www.ppai.com/MediaInformation/
Instustry/Statatistics/SalesVolumeEstimates/, with no single company dominating
the market, the promotional products industry is highly fragmented with 20,350
distributors in the industry with revenues of less than $2.5 million and 947
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distributors with revenues of $2.5 million or more. According to The Counselor -
State of the Industry 2007 Survey, the top ten distributors in our industry are
believed to have sales of between $131 million and $240 million for 2006.
Wearguard-Crest Co., Corporate Express Promotional Marketing, Proforma Inc.,
Group II Communications and Bensussen Deutsch & Associates, Inc. are the top
five distributors with 2006 sales of $240 million, $235 million, $228 million,
$222 million and 199 million, respectively. Nearly 80% of the distributors
surveyed are reported to be privately owned family businesses. Management
believes that control of sales lies predominantly with the independent sales
representatives, as there is little brand recognition at this time.
According to the Promotional Products Association International, which
is available online at no cost to the public at www.ppai.com/ProductsResources/
Research/TopBuyers/, the following ranks the top ten purchasers of promotional
products in descending order according to the findings of a 2003 study by
Louisiana State University and Glenrich Business Studies. Industries were named
by distributors according to the volume spent on promotional products by each
industry.
o education: schools, seminars;
o financial: banks, savings and loans, credit unions, stock
brokers;
o health care: hospitals, nursing homes, clinics;
o not-for-profit organizations;
o construction: building trades and building supplies;
o government: public offices, agencies, political candidates;
o trade, professional associations and civic clubs;
o real estate: agents, title companies and appraisers;
o automotive: manufacturers, dealers, parts suppliers; and
o professionals: doctors, lawyers, cpa's, architects.
SUPPLY CHAIN
Domestic and overseas manufacturers generally sell their promotional
product items directly to suppliers. Suppliers sell to distributors like Ace
Marketing and distributors sell promotional products to customer users such as
large corporations, financial institutions, universities and schools, hospitals,
not-for-profit organizations and small businesses. However, manufacturers have
the ability to sell their promotional products directly to distributors and
customers. Suppliers have the ability to sell promotional products directly to
customers who are not distributors.
Whereas the majority of the items are made overseas, often in China,
and the suppliers are simply importing from actual manufacturers, we generally
consider the supplier as the beginning of the industry supply chain. They choose
specified product lines and import blank goods to be warehoused until a
distributor orders one of their items with a customer logo on it. The suppliers
generally run the risk of inventory exposure and fluctuations in an item's
popularity. This is generally why most distributors stick to distributing and
not importing. There are situations where importing directly from the
manufacturer and thus cutting out the supplier does in fact make sense.
Generally, this happens when a distributor has a large quantity order and has
enough lead time from the customeR to import the item. Since ocean freight from
overseas generally takes 30-45 days and manufacturing may take several weeks,
this only makes sense when a customer orders far in advance and in large
quantity. The benefits of this are outstanding since the margins and cost
savings can be substantial. But, in general, the average order in the industry
is below $1,000 and thus the need for individual suppliers to carry specified
product lines and hold inventory to fill the need of the average distributor
with the average order.
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SUPPLIERS
Management believes that while there are an estimated 3,000 suppliers
in the industry, most of the promotional products distributors have access to
the same suppliers. Currently, we utilize approximately 500 suppliers in our
business with only one supplier accounting for about 10% of our purchasing
requirements over the last two years. We seek to distinguish ourselves from
other distributors by attractive pricing, by sourcing unique items, creating
custom products and/or offering superior in house service and customer support
through our employees. Most suppliers require us to pay within 30 days of
delivery of an order; however, we may not receive our customers' payments in the
same time frame. This requires us to have available cash resources to finance
most of our customers' orders. The possible lack of available cash resources
would limit our ability to take orders from customers, thus limiting our ability
to grow. An infusion of additional capital, a line of credit and better payment
terms based on volume can enable us to service a broader base of customers. We
have never sought to establish a line of credit, although we may seek to
establish one with an institutional lender in the future.
PURCHASING TRENDS - NEED FOR VALUE ADDED PRODUCTS AND RELATED SERVICES
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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
value-added 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.
OUR CUSTOMERS - CHOOSING US AS YOUR RIGHT DISTRIBUTOR
Most of our promotional products bear our customers' corporate name and
are a reflection of their corporate image. The events they use these items for
are of the utmost importance. If they go with another distributor who gives them
run of the mill ideas possibly at a lower cost, a poor quality product with
inferior quality decoration and/or the goods arrive late, then they quickly
realize there should be other factors that determine which distributor they
should be working with. We presently have over 500 customer accounts ranging
from fortune 500 companies to local schools and small businesses. A customer
account is a person or entity who has purchased promotional products from us in
the past on a non-exclusive basis and may or may not purchase from us additional
promotional products in the future. No customer has accounted for more than 10%
of sales during the past three years. Our customer base grows mainly through
business and personal referrals and the efforts of our sales representatives.
Generally our customers do not actively seek distributors to bid on their
projects. There are many reasons why our customers may work with us over another
distributor. The average buyer first believes that price is the sole issue with
the lowest bidding distributor on a project obtaining the business. Once they
gain more experience and understand the difficulties in processing and
fulfilling an order on time and correctly, they generally analyze the rationale
on how they choose a distributor differently. Although pricing is important to
our customers, they also count on our dependability, creativity and efficiency.
In this regard, we recently agreed to develop an online store for one of the
fastest growing privately held hospices in the United States to consolidate the
customer's purchasing from us for its multiple locations across the country.
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SERVICING OUR CUSTOMERS
The major advantage we hold over most companies in the promotional
product industry is the ability to provide integrated business solutions to its
customers as trusted advisors. The majority of companies in the promotional
product industry offer only branded merchandise, whereas, we offer solutions in:
o Branded Merchandise
o Importing
o Incentive / Rewards programs
o Printing / Forms Management
o Fulfillment / Warehousing
o E-commerce / Website Design
o Database Management / Integrated Marketing Solutions
We have built our distribution business around the concept of
reliability, quality, innovative and custom promotional products at competitive
prices while maintaining a high level of customer service and good relationships
with industry suppliers. Our research licensed software technology, that we
purchased from an outside vendor and is available for licensing to other
distributors in the industry, affords us the ability to locate and purchase
industry product in an efficient manner rather than to have to manually research
products through hundreds of catalogs and/or reference books. Our in-house art
capabilities through our salaried employees make us a "one stop shop" for custom
merchandise and provide our customers with comfort in knowing logo modifications
will not delay valuable production days on tight turn-around projects. Our
in-house art department consists of two employees who work on Apple computers
using licensed software programs such as Illustrator, Photoshop and Quark to
create new logos or manipulate current ones. These logos are then sent to the
supplier who arranges to put them on the product whether internally or through
an outside source in one of the following manners:
o silkscreen printing
o embroidery
o hot stamp
o heat transfer
o embossing/debossing
o engraving
Our reliability stems from our own customized and detailed tracking
system that we structured and implemented to ensure an order is processed
correctly and on time. In general, customers contact us when they have a need
for items that have corporate logos. They provide us with general information
that helps us determine what products to suggest, including the following:
o The type of event and the targeted audience;
o The number of units that are required and the budget;
and
o The timing of the event and the theme of the event.
The aforementioned parameters will narrow the field of items suggested
from a broad list of 500,000 to possibly a dozen or less. Once a customer calls
in or e-mails us requesting ideas for an upcoming event, we begin to research
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ideas based on their parameters and we use our research software to look up
dozens of products, prepare a competitive analysis between similar products to
find just the right one, send a picture to the customer by email and prepare and
send a quotation to the customer also by email. This provides us an immediate
time saving advantage over other distributors who still do things manually. Many
of these distributors still scan a reference book which is called a register.
They search for a particular product, such as clocks, then find the sub-category
they are interested in, such as plastic, and there they find all the suppliers
who carry the specific item they are looking to purchase. They must then either
cross reference each supplier to find their phone number or web address, or they
can physically pull as many of the catalogs they have on hand and search for the
products that they are interested in and send catalogs with tabbed pages via
regular mail or overnight service. This is an inefficient way to research and
deliver images of products. We are not aware of any statistical information
which allows us to tell the percentages of distributors who use publicly
available licensed research software systems like ours versus the manual way
described above.
When the customer decides on the product that they would like to order,
the order is processed in our order entry department utilizing our order-entry
software which is available for licensing to anyone in the industry from third
party vendors. The salesperson submits the specifics of the order to our order
entry department where the order is keyed into the system by our employees.
Three parts to each order are printed:
o ACKNOWLEDGEMENT This outlines the product ordered along with a
description of the product and how the logo will be placed and
in what colors. It includes the quantity ordered, the price
per piece, total cost, ship to address, and the delivery date.
It is sent to our customer via fax along with a hard copy of
the artwork that will be used on the order. The order will not
move forward until our customer signs off on the
acknowledgment and the artwork. No order runs without the sign
offs thus protecting us in the long run of a customer claiming
they were not aware of some aspect of the order.
o PURCHASE ORDER The Purchase order is submitted to the supplier
only after the acknowledgment and art are signed by our
customer. It contains all the information that the
acknowledgment contains except the price of the product is now
shown as the price we will be paying. The art is sent via
e-mail to the factory and the purchase order requires that the
supplier send back a paper proof of the art to insure accuracy
before proceeding with the order. Now the supplier has the
exact same parameters to complete the order that the customer
signed off on. They must meet the delivery date for the
quantity specified, with the logo specified, at the price we
submitted. Orders are drop shipped from the supplier directly
to the customer, except on rare occasions where packaging is
done in our office.
o SALES ORDER COPY This is a print out that essentially shows
all of the components on the acknowledgment and the purchase
order combined side by side. It shows what we pay for the
product and what price our customer pays for the product. It
also shows the gross profit, the gross profit percentage, and
the commission due to the salesperson.
Once the above process takes place, the entire work folder goes to the
tracking department. We have developed a system to follow each order from the
time it is processed, through the time it is shipped. This is yet another
safeguard to protect us from a supplier not fulfilling their obligations, which
in turn may lead to us losing money, a customer, or both. The tracking process
consists of us contacting the factory at various points in the production
process to ensure that the order is on schedule. We verbally verify the item,
quantity, and ship date and document who at the supplier verified the
information. We then call again at a certain point in the process to verify it
is on schedule and lastly call on the day of shipping to receive tracking
numbers. The above processes have historically led to eliminating disputes with
both suppliers and customers.
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OUR DISTRIBUTION AND MARKETING STRATEGY
Key elements of our distribution and marketing strategy are:
o CREATING AWARENESS OF OUR PRODUCTS, SERVICES AND FACILITIES. We have
been in business since March 1998. Our revenues are derived from
existing customers and new customers through word of mouth
recommendations, attendance at trade shows, our sales representatives
and advertising and promotion in trade journals.
o MOTIVATING RETAILERS TO UTILIZE PROMOTIONAL AND SPECIALTY PRODUCTS IN
THEIR BUSINESS. It is our management's belief from conversations with
persons in our industry and trade show attendance, that a trend in our
industry is often for the use of promotional items to customers rather
than cash incentives for gaining customer loyalty and motivating sales
people. In this regard, customers who received a promotional item
tended to purchase more and repeat purchases more often than customers
who received a discount coupon of equivalent value. Additionally, sales
forces show a tendency for greater motivation when receiving a trip or
merchandise as opposed to the cash equivalent. We must show our
customers the benefits of utilizing promotional and specialty items in
their business and for their sales force and build customer loyalty
through the use of point systems that are exchanged for promotional
merchandise.
o OUR COMPANY WAS BUILT AS A PLATFORM THAT COULD GROW EASILY. Scalability
is the key and we have separate departments with defined roles which
will allow this to occur and for our salesperson to sell. Our sales
persons receive helpful support from us. In many other
distributorships, the salesperson is often responsible for everything
from answering phones, doing all their own research, processing orders,
billing, tracking and collections. At our company, we provide all the
backup to allow our sales persons to just sell. Since our technology is
currently up to date, including in house servers to allow access to our
systems from off-site, we have the ability to pick up salespeople from
any location in the United States.
o KEY ACQUISITIONS OF SMALL DISTRIBUTORS AND INTEGRATING THEIR WORKFORCE
INTO OURS. We will target one or more of the estimated 20,000 small
distributors for potential acquisition. However, we can provide no
assurances that we will be successful in acquiring any distributors on
terms satisfactory to us, if at all.
o PROVIDING GENEROUS INCENTIVES TO OUR SALES PEOPLE TO INCREASE
PERFORMANCE LEVELS. We offer competitive commissions in addition to
back office support and research assistance to allow our independent
sales representatives to optimize their sales time and to provide them
with adequate incentives to sell promotional products to our customers
rather than for our competitors. In the future, we may offer a stock
option program for additional incentives.
o MAINTAIN A COMPETITIVE GROSS PROFIT PERCENTAGE ON ALL SALES ORDERS. For
the years ended December 31, 2007, 2006, 2005 and 2004, our gross
profit percentage was 32.6%, 29.4%, 32.1% and 29% , respectively.
According to The Counselor - State of the Industry 2006 Survey, the
average reported gross profit margin for distributors during 2000
through 2005 ranged from 32.5% to 33.8%.
-11-
o PROVIDE RESEARCH, CONSULTING, DESIGN AND FULFILLMENT SERVICES TO OUR
CUSTOMERS TO INCREASE PROFITABILITY. We design promotional products for
our customers and provide consulting services in connection therewith.
We utilize licensed research software technology and order entry
systems that are available to anyone in the industry for license to
provide the best services to our customers in the most timely fashion
possible.
o UTILIZING THE INTERNET AND ITS CAPABILITIES AND OPPORTUNITIES FOR SALES
OF PROMOTIONAL PRODUCTS AND COST SAVINGS. Our website is
www.Acemarketing.net. Our website is utilized for multiple purposes,
including providing information to potential customers who want to
learn about us and research our available product line. We also develop
online company stores for CUSTOMERS to help facilitate re-orders at
cost savings to them based upon a pre-determined product line.
SALES AND MARKETING
Our revenues are derived from existing customers and new customers
through word of mouth recommendations, attendance at trade shows, our sales
representatives and advertising and promotion in trade journals. Except
primarily our two executive officers, our sales representatives receive
commissions and are not paid a salary. They work at their own location or at our
facility and may sell products on behalf of other companies. We encourage our
sales representatives to sell promotion products for us on the basis of sales
incentives which include competitive commissions and appropriate sales support
and research which is provided in-house by our employees. In the future, we
intend to offer stock and/or stock options as part of their incentive programs.
Our website is www.Acemarketing.net. Our website is utilized for
multiple purposes, including providing information to potential customers who
want to learn about us and research our available product line.
TECHNOLOGY
----------
Technology affects most industries, and specifically the internet,
which enables many capabilities and opportunities for cost savings. Sales of
promotional products are often catalog-based. The cost of producing and mailing
a catalog can be high. Placing a catalog on a website takes less manpower to
maintain and less money to update and distribute new versions. Additionally,
integrating the catalog with the order processing system can save time and money
in placing and filling orders, also eliminating manual errors.
The proliferation of open architecture software and hardware makes an
increasing number of systems available for automating processes and integrating
back office systems. By doing this, we reduce support requirements and further
enhance margins. Additionally, the ability to provide more direct support to our
sales force has led to increased retention of our sales team.
POSSIBLE GROWTH THROUGH ACQUISITIONS
------------------------------------
We believe the environment for growth and consolidation in the
promotional products industry is appealing, and that we would like to take
advantage of this if a satisfactory opportunity arises. There are some issues
that our company must address to be successful. The main issues are motivating
previous owners, retaining sales people, and integrating operations.
We have had conversions with the owners of several distributors of
promotional products and have observed that they are open to conversions taking
place for the possible sale of their business.
-12-
We believe that when a distributor is acquired, a decision must be made
about the existing management team, most typically the owner. An evaluation must
be made regarding the skills of the owner and desirability of having them
involved in our company. Acquisitions would be typically made for the customer
accounts; however, due to the size of the target companies, the owner would most
likely also be a key employee or sales person. The motivation of the previous
owner to work for others may be an issue. We must address this issue and ensure
the continued participation of the owners. In general, the best way to mitigate
this risk is to tie up much of the previous owners' payment in stock, thus
providing incentive for the overall company's success.
We believe that one of the most difficult tasks in our acquiring a
company is transitioning the new acquisition into us. It is important to have
flexible, open systems and technology to integrate the back office operations,
as well as strong controls and processes to put in place. Having the appropriate
technology and strong management team will help alleviate some of the issues
here.
As of the date hereof, there is no firm agreement to acquire any
company or distributor and there can be no assurances given that our plans will
be realized to grow through acquisitions of one or more distributors or, if
successful, that any acquisitions can be profitably integrated into our
company's operations.
JOINT MARKETING AND SALES AGREEMENT WITH ATRIUM ENTERPRISES
We have entered into a Joint Marketing and Sales Agreement with Atrium
Enterprises, a leader in the motivational, incentive and rewards industry,
whereby we have received the exclusive rights to market and sell a customized
version of Atriums technology platform called, WWW.EXPERIENCETHEREWARDS.COM. In
addition, Atrium provides its sales services to us on an exclusive basis in our
business which consists of selling promotional products, print sales and the
like to Atrium's clients.
Atrium has agreed to develop a fully functional customized "Points
Banking" platform for us called, "ACE REWARDS". "This platform will allow us to
differentiate ourselves from our competition by offering reward points and
incentives to all our customers who purchase promotional products through us and
to our employees. Atrium will also provide an enhanced Solata marketing and
communication module to the platform that would allow us to re-sell this "ACE
REWARDS" platform to other entities within the promotional products industry. In
addition Atrium agreed to create and introduce a sponsored Mobile Banking Debit
Card to Ace Marketing and its customers. Atrium has granted us exclusive sales
and marketing rights to both the "ACE REWARD" platform and the Mobile Banking
Debit Card within the promotional products industry, and related industry
organizations such as ASI and PPAI. For additional information, see "Note 10 to
our financial statements."
COMPETITION
While our competition is extensive with over 20,000 distributors, we
believe that there are no companies that dominate the market in which we
operate. Our company competes within the industry on the basis of service,
competitive prices, personnel relationships and competitive commissions to our
sales representatives to sell promotional products for us rather than our
competitors. Competitors' advantages over us may include better financing,
greater experience and better service, cheaper prices and personal relationships
than us.
-13-
According to The Counselor - State of the Industry 2006 Survey, the top
ten distributors in our industry are believed to have sales of between $113.8
million and $229 million for 2005. Corporate Express Promotional Marketing,
Wearguard-Crest Co., Proforma Inc., Group II Communications and American
Identity are the top five distributors with 2005 sales of $229 million, $224
million $202 million, $186 million and 180.0 million, respectively. Nearly 80%
of the distributors surveyed are reported to be privately owned family
businesses. Management believes that control of sales lies predominantly with
the independent sales representatives, as there is little brand recognition at
this time.
We believe that in the promotional products industry, sales people
typically have a large amount of autonomy and control the relationships with
their customers. This works both for and against us. To avoid losing customers,
we must provide the appropriate incentives to keep sales people. At the same
time, while there can be no assurances, management believes our company will be
able to obtain new customers by luring sales people away from competitors. The
offering of stock incentives and health care benefits are ways to retain sales
people, especially in an industry where these types of benefits are rare.
EMPLOYEES
As of March 24, 2008, we had 12 full time employees, including two
executive officers who provide in-house sales, our Chief Financial Officer, two
part-time support staff employees and eight sales representatives of which four
are employees who provide services on an exclusive basis and four additional
persons who provide services to us on a non-exclusive basis as independent
consultants.
We have an agreement with Aon Consulting, a division of Aon
Corporation, whereby Aon will recruit up to 50 additional salespeople for Ace.
Aon is seeking to implement a targeted national recruiting campaign to help us
attract top producing industry experienced sales talent generating at least
$400,000 in annual revenue. As of the filing date of this Form 10-KSB, this
recruiting plan has not been implemented as Ace will require additional
financing estimated at $2,000,000 to support the hiring of a substantial number
of additional personnel.
-14-
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO THE
OTHER INFORMATION PRESENTED IN THIS FORM 10-KSB, IN EVALUATING US AND OUR
BUSINESS. ANY OF THE FOLLOWING RISKS, AS WELL AS OTHER RISKS AND UNCERTAINTIES,
COULD HARM OUR BUSINESS AND FINANCIAL RESULTS AND CAUSE THE VALUE OF OUR
SECURITIES TO DECLINE, WHICH IN TURN COULD CAUSE YOU TO LOSE ALL OR PART OF YOUR
INVESTMENT.
RISKS RELATING TO OUR BUSINESS
THE PROMOTIONAL PRODUCTS DISTRIBUTION INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY
NOT BE ABLE TO COMPETE SUCCESSFULLY.
We compete with over 20,000 distributor companies. Some of our
competitors have greater financial and other resources than we do which could
allow them to compete more successfully. Most of our promotional products are
available from several sources and our customers tend to have relationships with
several distributors. Competitors could obtain exclusive rights to market
particular products which we would then be unable to market and may provide
business solutions related to promotional products competitive with those
provided by us. Industry consolidation among promotional products distributors,
the unavailability of products, whether due to our inability to gain access to
products or interruptions in supply from manufacturers, or the emergence of new
competitors could also increase competition. In the future, we may be unable to
compete successfully and competitive pressures may reduce our revenues.
WE EXPERIENCE FLUCTUATIONS IN QUARTERLY EARNINGS. AS A RESULT, WE MAY FAIL TO
MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, WHICH
COULD CAUSE OUR STOCK PRICE TO DECLINE.
Our business has been subject to seasonal and other quarterly
fluctuations. Net sales and operating profits generally have been higher in the
third and fourth quarters, particularly in the months of September through
November, due to the timing of sales of promotional products and year-end
promotions. Net sales and operating profits have been lower in the first
quarter, primarily due to increased sales in the prior two quarters. Quarterly
results may also be adversely affected by a variety of other factors, including:
o costs of developing new promotions and services;
o costs related to acquisitions of businesses;
o The timing and amount of sales and marketing expenditures;
o general economic conditions, as well as those specific to the
promotional product industry; and
o our success in establishing additional business relationships.
Any change in one or more of these or other factors could cause our
annual or quarterly operating results to fluctuate. If our operating results do
not meet market expectations, our stock price may decline in the event a market
should develop.
-15-
BECAUSE WE DO NOT MANUFACTURE THE PRODUCTS WE DISTRIBUTE, WE ARE DEPENDENT UPON
THIRD PARTIES FOR THE MANUFACTURE AND SUPPLY OF OUR PRODUCTS.
We obtain all of our products from third-party suppliers, both
domestically and overseas primarily in China. We submit purchase orders to our
suppliers who are not committed to supply products to us. Therefore, suppliers
may be unable to provide the products we need in the quantities we request.
Because we lack control of the actual production of the products we sell, we may
be subject to delays caused by interruption in production based on conditions
outside of our control. In the event that any of our third-party suppliers were
to become unable or unwilling to continue to provide the products in required
volumes, we would need to identify and obtain acceptable replacement sources on
a timely cost effective basis. There is no guarantee that we will be able to
obtain such alternative sources of supply on a timely basis, if at all. An
extended interruption in the supply of our products would have an adverse effect
on our results of operations, which most likely would adversely affect the value
of our common stock.
WE MAY NOT BE ABLE TO EXPAND THROUGH INTERNAL GROWTH AND MEET CHANGES IN THE
INDUSTRY.
Our plans for internal growth include hiring in-house sales
representatives from our competitors and offering stock incentives and generous
commissions to keep them. Additionally, we have room for growth by building
direct relationships with advertising agencies and major corporations. Because
of potential industry changes, our products and promotions must continue to
evolve to meet changes in the industry. Our future expansion plans may not be
successful due to competition, competitive pressures and changes in the
industry.
OUR LIMITED CASH RESOURCES AND LACK OF A LINE OF CREDIT MAY RESTRICT OUR
EXPANSION OPPORTUNITIES.
An economic issue that can limit our growth is lack of extensive cash
resources, due to the typical payment terms of a transaction. Most suppliers
require us to pay within 30 days of delivery of an order; however, we may not
receive our customer's payment in the same time frame. This requires us to have
available cash resources to finance most of our customers' orders. Any lack of
cash resources would limit our ability to take orders from customers, thus
limiting our ability to grow. An infusion of capital and a good line of credit
can enable us to service a broader base of customers. We can provide no
assurances that we will obtain an adequate line of credit in the future, if at
all.
OUR PROPOSED EXPANSION THROUGH ACQUISITIONS INVOLVES SEVERAL RISKS.
We may expand our domestic markets in part through acquisitions in the
future. Such transactions would involve numerous risks, including possible
adverse effects on our operating results or the market price of our common
stock. Some of our future acquisitions could give rise to an obligation by us to
make contingent payments or to satisfy certain repurchase obligations, which
payments could have an adverse effect on our results of operations. In addition,
integrating acquired businesses:
o may result in a loss of customers of the acquired businesses;
o requires significant management attention; and
o may place significant demands on our operations, information systems and
financial resources.
There can be no assurance that our future acquisitions will be
successful. Our ability to successfully effect acquisitions will depend upon the
following:
-16-
o The availability of suitable acquisition candidates at acceptable
prices;
o The development of an established market for our common stock; and
o The availability of financing on acceptable terms, in the case of
non-stock transactions.
OUR REVENUES DEPEND ON OUR RELATIONSHIPS WITH CAPABLE INDEPENDENT SALES
PERSONNEL OVER WHOM WE HAVE NO CONTROL AS WELL AS KEY CUSTOMERS, VENDORS AND
MANUFACTURERS OF THE PRODUCTS WE DISTRIBUTE.
Our future operating results depend on our ability to maintain
satisfactory relationships with qualified independent Sales personnel as well as
key customers, vendors and manufacturers. We are dependent upon our independent
sales representatives to sell our products and do not have any direct control
over these third parties. If we fail to maintain our existing relationships with
our independent sales representatives, key customers, vendors and manufacturers
or fail to acquire new relationships with such key persons in the future, our
business may suffer.
OUR FUTURE PERFORMANCE IS MATERIALLY DEPENDENT UPON OUR MANAGEMENT AND THEIR
ABILITY TO MANAGE OUR GROWTH.
Our future success is substantially dependent upon the efforts and
abilities of members of our existing management, particularly Dean L. Julia,
Chief Executive Officer and Michael Trepeta, President. The loss of the services
of Mr. Julia or Mr. Trepeta could have a material adverse effect on our
business. We have an employment agreement with each of Messrs. Julia and Mr.
Trepeta expiring February 28, 2011. However, we lack "key man" life insurance
policies on any of our officers or employees. Competition for additional
qualified management is intense, and we may be unable to attract and retain
additional key personnel. Our management personnel is currently limited and they
may be unable to manage our expansion successfully and the failure to do so
could have a material adverse effect on our business, results of operations and
financial condition.
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING.
We may need to raise additional funds in the future to fund more
aggressive expansion of our business or make strategic acquisitions or
investments. We may require additional equity or debt financings or funds from
other sources for these purposes. No assurance can be given that these funds
will be available for us to finance our development on acceptable terms, if at
all. Such additional financings may involve substantial dilution of our
stockholders or may require that we relinquish rights to certain of our
technologies or products. In addition, we may experience operational
difficulties and delays due to working capital restrictions. If adequate funds
are lacking from operations or additional sources of financing, we may have to
delay or scale back our growth plans.
RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK
WE LACK AN ESTABLISHED TRADING MARKET FOR OUR COMMON STOCK, AND YOU MAY BE
UNABLE TO SELL YOUR COMMON STOCK AT ATTRACTIVE PRICES OR AT ALL.
-17-
There is currently a limited and sporadic trading market for our common
stock in the OTC electronic bulletin board under the symbol "AMKT." There can be
no assurances given that an established public market will be obtained for our
common stock or that any public market will last. The trading price of the
common stock depends on many factors, including:
o The markets for similar securities;
o our financial condition, results of operations and prospects;
o The publication of earnings estimates or other research reports and
speculation in the press or investment community;
o Changes in our industry and competition; and
o general market and economic conditions.
As a result, we cannot assure you that you will be able to sell your
common stock at attractive prices or at all.
THE MARKET PRICE FOR OUR COMMON STOCK MAY BE HIGHLY VOLATILE.
The market price for our common stock may be highly volatile. A variety
of factors may have a significant impact on the market price of our common
stock, including:
o The publication of earnings estimates or other research reports and
speculation in the press or investmentcommunity;
o Changes in our industry and competitors;
o our financial condition, results of operations and prospects;
o any future issuances of our common stock, which may include primary
offerings for cash, issuances in connection with business acquisitions,
and the grant or exercise of stock options from time to time;
o general market and economic conditions; and
o any outbreak or escalation of hostilities, which could cause a recession
or downturn in our economy.
In addition, the markets in general can experience extreme price and
volume fluctuations that can be unrelated or disproportionate to the operating
performance of the companies listed or quoted. Broad market and industry factors
may negatively affect the market price of our common stock, regardless of actual
operating performance. In the past, following periods of volatility in the
market price of a company's securities, securities class action litigation has
often been instituted against companies. This type of litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources, which would harm our business.
-18-
WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS IN THE FUTURE.
No cash dividends have been paid by our company on our common stock.
The future payment by us of cash dividends on our common stock, if any, rests
within the discretion of our board of directors and will depend, among other
things, upon our earnings, our capital requirements and our financial condition
as well as other relevant factors. We do not intend to pay cash dividends upon
our common stock for the foreseeable future.
PROVISIONS OF OUR ARTICLES OF INCORPORATION AND AGREEMENTS COULD DELAY OR
PREVENT A CHANGE IN CONTROL OF OUR COMPANY.
Certain provisions of our articles of incorporation may discourage,
delay, or prevent a merger or acquisition that a shareholder may consider
favorable. These provisions include:
o Authority of the board of directors to issue preferred stock.
o Prohibition on cumulative voting in the election of directors.
WE LACK INDEPENDENT DIRECTORS AND COMMITTEES THEREOF.
The Sarbanes-Oxley Act of 2002 requires us as a public corporation to
have an audit committee composed solely of independent directors. Currently, we
have no independent directors or committees of directors. Without independent
directors, our board may have no way to resolve conflicts of interest,
including, without limitation, executive compensation, employment contracts and
the like.
OUR FUTURE SALES OF COMMON STOCK BY MANAGEMENT AND OTHER STOCKHOLDERS MAY HAVE
AN ADVERSE EFFECT ON THE THEN PREVAILING MARKET PRICE OF OUR COMMON STOCK.
In the event a public market for our common stock is sustained in the
future, sales of our common stock may be made by holders of our public float
(believed to be 4,890,995 shares) or by holders of restricted securities in
compliance with the provisions of Rule 144 of the Securities Act of 1933. In
general, under Rule 144, a non-affiliated person who has satisfied a six-month
holding period in a fully reporting company under the Securities Exchange Act of
1934, as amended, may, sell their restricted Common Stock without volume
limitation, so long as the issuer is current with all reports under the Exchange
Act in order for there to be adequate common public information. Affiliated
persons may also sell their common shares held for at least six months, but
affiliated persons will be required to meet certain other requirements,
including manner of sale, notice requirements and volume limitations.
Non-affiliated persons who hold their common shares for at least one year will
be able to sell their common stock without the need for there to be current
public information in the hands of the public. Future sales of shares of our
public float or by restricted common stock made in compliance with Rule 144 may
have an adverse effect on the then prevailing market price, if any, of our
common stock.
ITEM 2. DESCRIPTION OF PROPERTY
--------------------------------
Our principal executive offices are located at 457 Rockaway Avenue,
Valley Stream, NY 11581. We currently lease approximately 4,000 square feet of
office space at this facility at an annual cost of approximately $57,000
pursuant to a month-to-month lease. We are currently exploring our options of
obtaining a new location and/or entering into a long-term lease at our current
facility. We also lease approximately 2,000 square feet of space at an annual
cost of approximately $31,000 (inclusive of taxes) at 1105 Portion Road,
Farmingville, NY 11738.
-19-
ITEM 3. LEGAL PROCEEDINGS
--------------------------
We are currently not subject to any threatened or pending legal
proceedings. Nevertheless, we may from time to time become a party to various
legal proceedings arising in the ordinary course of our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2007.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
------------------------------------------------------------------
Since June 9, 2005, our common stock has been traded on the OTC
Bulletin Board under the symbol "AMKT." Our common stock trades on a limited
basis on the OTC Electronic Bulletin Board in the Over-the-Counter Market. The
following table sets forth the range of high and low closing sales prices of our
Common Stock for the periods indicated (it being understood that prices for the
quarter ended June 30, 2005 are for the period June 9 through June 30, 2005).
QUARTERS ENDED HIGH LOW
-------------------------------------------------------------------
June 30, 2005......................................$3.50 $ .50
September 30, 2005................................. 2.00 .50
December 31, 2005.................................. 2.00 .57
March 31, 2006..................................... 1.80 1.70
June 30, 2006...................................... 2.25 2.25
September 30, 2006................................. 2.25 2.15
December 31, 2006.................................. 2.25 1.46
March 31, 2007..................................... 2.05 1.32
June 30, 2007...................................... 1.95 1.25
September 30, 2007................................. 2.00 .86
December 31, 2007.................................. 1.45 .65
The closing sales price on March 24, 2008 was $.75 per share. All
quotations provided herein reflect inter-dealer prices, without retail mark-up,
markdown or commissions.
In the event a public market for our common stock is sustained in the
future, sales of our common stock may be made by holders of our public float
(believed to be 4,890,995 shares) or by holders of restricted securities in
compliance with the provisions of Rule 144 of the Securities Act of 1933. In
general, under Rule 144, a non-affiliated person who has satisfied a six-month
holding period in a fully reporting company under the Securities Exchange Act of
1934, as amended, may, sell their restricted Common Stock without volume
limitation, so long as the issuer is current with all reports under the Exchange
Act in order for there to be adequate common public information. Affiliated
persons may also sell their common shares held for at least six months, but
affiliated persons will be required to meet certain other requirements,
including manner of sale, notice requirements and volume limitations.
-20-
Non-affiliated persons who hold their common shares for at least one year will
be able to sell their common stock without the need for there to be current
public information in the hands of the public. Future sales of shares of our
public float or by restricted common stock made in compliance with Rule 144 may
have an adverse effect on the then prevailing market price, if any, of our
common stock.
Currently, we have outstanding Class A and Class B warrants to purchase
837,000 restricted shares of our common stock exercisable at a price of $2.00
per share through April 1, 2008. In the event that all of the warrants are
exercised, of which there can be no assurances given, an additional 837,000
shares of restricted common stock will be issued and may be resold pursuant to
Rule 144 after a holding period of at least six months, unless we elect to
voluntarily register the resale of the shares issuable upon exercise of the
warrants for earlier sale. No registration rights were granted in connection
with the issuance of said warrants.
Between July 20, 2006 and November 30, 2006, we sold 951,575 shares of
common stock at a purchase price of $1.75 per share and Class C warrants to
purchase 475,788 shares at an exercise price of $1.75 per share. We also issued
to the placement agent and its designees 139,680 shares of common stock and
placement agent warrants to purchase 95,160 shares exercisable at a price of
$1.00 per share. We registered the resale of the 951,575 shares of common stock
sold to these investors, including the 475,788 shares issuable upon exercise of
the Class C warrants.
As of March 24, 2008, there were 83 holders of record of our common
stock, although we believe that there are other persons who are beneficial
owners of our common stock held in street name. Our transfer agent is
Continental Stock Transfer & Trust Company, 17 Battery Place, 8th Floor, New
York, NY 10004.
DIVIDEND POLICY
---------------
We have never paid any cash dividends and intend, for the foreseeable
future, to retain any future earnings for the development of our business. Our
Board of Directors will determine our future dividend policy on the basis of
various factors, including our results of operations, financial condition,
capital requirements and investment opportunities.
RECENT SALES OF UNREGISTERED SECURITIES
---------------------------------------
Since January 2007, we had no sales or issuances of unregistered common
stock, except we made sales or issuances of unregistered securities listed in
the table below:
CONSIDERATION RECEIVED
AND DESCRIPTION OF
UNDERWRITING OR OTHER
DISCOUNTS TO MARKET IF OPTION, WARRANT OR
PRICE OR CONVERTIBLE EXEMPTION FROM CONVERTIBLE SECURITY,
TITLE OF SECURITY, AFFORDED TO REGISTRATION TERMS OF EXERCISE OR
DATE OF SALE SECURITY NUMBER SOLD PURCHASERS CLAIMED CONVERSION
---------------- -------------- ---------------- ------------------------- ------------------- -----------------------
February 2007 Common 70,000 shares Services rendered; no Section 4(2) Not applicable.
Stock commissions paid
Options
---------------- -------------- ---------------- ------------------------- ------------------- -----------------------
-21-
---------------- -------------- ---------------- ------------------------- ------------------- -----------------------
July 2007 Common Stock 12,500 shares Services rendered; no Section 4(2). A Not applicable.
commissions paid restrictive
legend appears on
each certificate
---------------- -------------- ---------------- ------------------------- ------------------- -----------------------
July 2007 Common Stock 4,086 shares Cancellation of 8,671 Section 3(a)9 of Not applicable
warrants on a cashless the Securities Act
---------------- -------------- ---------------- ------------------------- ------------------- -----------------------
October 2007 Common Stock 5,000 shares Services rendered; Section 4(2). A Not applicable
No commissions paid restrictive
legend appears on
each certificate
---------------- -------------- ---------------- ------------------------- ------------------- -----------------------
December 2007 Common Stock 75,000 shares Services rendered; Section 4(2). A Not applicable
No commissions paid restrictive
legend appears on
each certificate
---------------- -------------- ---------------- ------------------------- ------------------- -----------------------
RECENT PURCHASES OF SECURITIES
------------------------------
In 2007, we have had no repurchases of our common stock. However,
23,334 shares were cancelled by agreement with a former consultant in settlement
of a dispute involving the number of shares consultant was entitled to retain
for services previously rendered.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-------------------------------------------------------------------------------
OF OPERATIONS
-------------
The following discussion should be read in conjunction with our
financial statements and the notes thereto appearing elsewhere in this Form
10-KSB. All statements contained herein that are not historical facts,
including, but not limited to, statements regarding anticipated future capital
requirements, our future plan of operations, our ability to obtain debt, equity
or other financing, and our ability to generate cash from operations, are based
on current expectations. These statements are forward-looking in nature and
involve a number of risks and uncertainties that may cause the Company's actual
results in future periods to differ materially from forecasted results.
OVERVIEW
--------
We are a full service promotional marketing and distribution company
offering a wide array of business solutions. Ace has grown organically through
referrals based on its high quality service and external financings to support
our growth. We are also expanding through hiring leading independent
salespersons who are well supported by the Ace proprietary business structure.
By offering more services and solutions to our customers, new recruits will have
the ability to expand their present business by simply making the move to Ace.
Upon integrating their client base into our system they too become trusted
advisors that provide integrated business solutions instead of a commodity based
promotional product salesperson.
These achievements position us to accelerate growth through potential
acquisition and consolidation of other companies as well as simply recruiting
experienced salespeople. In the event a company is acquired by us, of which no
assurances can be given in this regard, the new clients would all be introduced
to the additional services that are now available in our promotional marketing
model.
-22-
We have effectively carved out a niche for Ace. Marketing and branding
companies create an image and direction for clients. Ad agencies develop print,
TV, radio and other campaigns aimed at goals of recruiting and introducing new
products or services. Traditional promotional product companies offer imprinted
merchandise and apparel. Ace finds itself in a position of providing value added
services that compliment those of the ad agency, as well as branding and
marketing companies while at the same time far exceeding the capabilities of a
standard promotional products distributor.
We expect our revenues to grow as economic conditions in the United
States continue to improve, by adding additional in-house and independent sales
representatives to our sales network. While one or more acquisitions of other
distributors will also be considered by Management, we can provide no assurances
that one or more acquisitions of other distributors will be completed on terms
satisfactory to us, if at all.
CRITICAL ACCOUNTING POLICIES
----------------------------
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of financial statements require management to make estimates and
disclosures on the date of the financial statements. On an on-going basis, we
evaluate our estimates including, but not limited to, those related to revenue
recognition. We use authoritative pronouncements, historical experience and
other assumptions as the basis for making judgments. Actual results could differ
from those estimates. We believe that the following critical accounting policies
affect our more significant judgments and estimates in the preparation of our
financial statements.
REVENUE RECOGNITION. Revenues are recognized when title and risk of loss
transfers to the customer and the earnings process is complete. In general,
title passes to our customers upon the customer's receipt of the merchandise.
Revenue is accounted for in accordance with Emerging Issue Task Force Issue No.
99-19, reporting revenue gross as a principal versus net as an agent. Revenue is
recognized on a gross basis since our company has the risks and rewards of
ownership, latitude in selection of vendors and pricing, and bears all credit
risk. Our company records all shipping and handling fees billed to customers as
revenues, and related costs as cost of goods sold, when incurred, in accordance
with Emerging Issue Task Force Issue No. 00-10, accounting for shipping and
handling fees and costs.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We are required to make judgments based
on historical experience and future expectations, as to the realizability of our
accounts receivable. We make these assessments based on the following factors:
(a) historical experience, (b) customer concentrations, customer credit
worthiness, (d) current economic conditions, and (e) changes in customer payment
terms.
STOCK BASED COMPENSATION. Effective January 1, 2006, the Company began
recording compensation expense associated with stock options and other
equity-based compensation in accordance with SFAS 123(R), using the modified
prospective transition method and therefore has not restated results for prior
periods. Under the modified prospective transition method, share-based
compensation expense for 2006 includes 1) compensation expense for all
share-based awards granted on or after January 1, 2006 as determined based on
the grant-date fair value estimated in accordance with the provisions of SFAS
123(R) and 2) compensation expense for share-based compensation awards granted
prior to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123. The
Company recognizes compensation expense on a straight-line basis over the
requisite service period of the award.
-23-
RESULTS OF OPERATIONS
---------------------
2007 VERSUS 2006
----------------
The following table sets forth certain selected condensed statement of
operations data for the periods indicated in dollars. In addition, we note that
the period-to-period comparison may not be indicative of future performance.
----------------------------------------------
Year Ended December 31
----------------------------------------------
2007 2006
----------------------- ----------------------
Revenue $ 5,660,102 $ 4,506,807
Cost of Revenues 3,844,047 3,183,825
Gross Profit 1,816,055 1,322,982
Operating Expenses 2,721,058 1,806,684
(Loss) from operations (905,003) (483,702)
Net (Loss) (879,055) $ (481,026)
Net (Loss) per common Share (.11) $ (.07)
Weighted average common Shares
Outstanding 8,021,521 7,142,594
We generated revenues of $5,660,102 for 2007 as compared to $4,506,807
for 2006. The 25.6% increase in revenues of $1,158,606 in 2007 compared to 2006
is primarily due to our utilizing additional in-house and independent sales
representatives to obtain additional customers.
Gross profit was $1,816,055 for 2007 as compared to $1,322,982 for
2006. Our gross profit percentage was 32.1% as compared to 29.4% for 2006. 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 associated with shipping of
merchandise to our customers which are included in costs of revenues and net
revenue. Reimbursement of freight costs 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 change in gross
profit percentage for fiscal 2007 relates to the mix of product sold and size of
orders.
Operating expenses consisting of selling, general, and administrative
expenses were $2,721,058 for 2007 as compared to $1,806,684 for fiscal 2006.
Operating costs as a percentage of net revenue was 48.1 % for 2007 compared to
40.1% for 2006. Operating expenses in 2007 increased over 2006 by approximately
$914,374 or 50.6 % primarily due to increased salaries of executive officers,
stock based compensation and commissions paid.
Our net loss was $(879,055) for 2007 as compared to $(481,026) for
2006.
Our results of operations for fiscal 2007 were significantly impacted
as a result of (x) additional costs incurred (primarily consisting of a new
website ($20,000), new computer systems ($30,000), hiring additional personnel
($26,000) and collateral materials ($10,000)) estimated at approximately
$100,000 to switch from a branded merchandise company to an integrated business
solutions company and (y) stock based compensation of $449,638. Our stock-based
payments to employees and consultants can vary period to period based upon the
terms of the underlying grants. Fiscal 2007 included stock based (option)
compensation to two executive officers in connection with an extension of their
employment contracts of approximately $290,000. For comparison purposes, fiscal
2007 and 2006 net loss, excluding stock-based payments of $449,638 and $109,959,
was $(429,417) and $(371,067), respectively.
-24-
No benefit for income taxes is provided for in 2007 and 2006 due to the
full valuation allowance on the net deferred tax assets as a result of the
uncertainty of the future realization of deferred tax assets. As a result our
pre-tax loss and net loss are the same.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company had cash and cash equivalents of $819,021 at December 31,
2007. Cash used by operating activities for the year ended December 31, 2007 was
$(511,739). This resulted primarily from a net loss of $(879,055) and an
increase of accounts receivable of $241,933 partially offset by stock based
compensation of $449,638 and an increase in accounts payable and accrued
expenses of $184,351.
For 2006, net cash was used in operating activities of $(466,041)
substantially due to our net loss of $(481,026), increased by a reduction in
customer deposits of $98,000 and partially offset by non-cash stock based
compensation of $109,959. For 2006, net cash of $1,420,937 was provided by
financing activities due to proceeds from a private placement of our Common
Stock and Class C Common Stock Purchase Warrants.
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.
2006 Financing
--------------
In 2006, we engaged Brookshire Securities Corporation, a licensed
broker-dealer and member of the NASD, to act as Placement Agent to raise
financing for our company through the sale of our unregistered securities solely
to "accredited investors" as defined in Rule 501 of Regulation D of the
Securities Act of 1933, as amended.
Pursuant to the offering, we raised gross proceeds of $1,665,250 from
the sale of Units. Each Unit consisted of 60,000 shares of our Common Stock and
Class C Warrants to purchase 30,000 shares of Common Stock at an offering price
of $105,000 per Unit. We had the right to sell fractional Units, but not
fractional shares or fractional Class C Warrants. The Class C Warrants are
exercisable at $1.75 per share at anytime from the date of issuance through the
earlier of June 30, 2009 or the redemption date of the Class C Warrants,
whichever is earlier.
Each Class C Warrant may be redeemed by us at a redemption price of
$.001 per Warrant, on at least 30 days prior written notice (the "Redemption
Date'), at anytime after the average closing sales price of our Common Stock as
reported in the Over-the-Counter Market OTC Electronic Bulletin Board, NASDAQ or
if listed on a national securities exchange, equals or exceeds $3.00 per share
for a period of 20 consecutive trading days ending within 10 days prior to the
date of the notice of redemption is mailed or otherwise delivered by us to each
holder of Class C Warrants.
-25-
All investors who purchased Units in the Offering have the following
additional rights:
o REGISTRATION RIGHTS -We currently have an effective Registration
Statement registering the resale of the unsold 951,575 shares of our
Common Stock and 475,788 shares of our Common Stock underlying a like
number of Class C Warrants
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 (i.e. December 21, 2006) 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
In July 2006, the FASB issued Financial Interpretation No. 48,
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES ("FIN 48"), as an interpretation of
SFAS No. 109, ACCOUNTING FOR INCOME TAXES. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS No. 109 and prescribes a recognition threshold of
more-likely-than-not to be sustained upon examination. Measurement of the tax
uncertainty occurs if the recognition threshold has been met. FIN 48 also
provides guidance on derecognition, classification, interest, penalties,
accounting in interim periods, disclosure, and transition. FIN 48 was effective
in the first quarter of Fiscal 2007. Differences between the amounts recognized
in the statements of financial position prior to the adoption of FIN 48 and the
amounts reported after adoption are accounted for as a cumulative-effect
adjustment recorded to the beginning balance of retained earnings. The adoption
of this Statement did not have a material effect on the Company's financial
position or results of operation.
In September 2006, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 108, CONSIDERING THE EFFECTS OF PRIOR YEAR
MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL
STATEMENTS ("SAB 108"). SAB 108 provides interpretive guidance on how the
effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. The SEC staff believes
that registrants should quantify errors using both a balance sheet and an income
statement approach and evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. SAB 108 was effective for the Company's fiscal fourth
quarter ending December 31, 2006. The adoption of this Statement did not have a
material effect on the Company's financial position or results of operation.
-26-
On September 15, 2006, the Financial Accounting Standards Board
("FASB") issued Statement No. 157, FAIR VALUE MEASUREMENTS ("SFAS 157"). SFAS
157 provides guidance for using fair value to measure assets and liabilities.
This Statement references fair value as the price that would be received to sell
an asset or paid to transfer a liability, in an orderly transaction, between
market participants in the market in which the reporting entity transacts. The
Statement applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value. The Statement does not expand the use
of fair value in any new circumstances. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company does not anticipate that
the adoption of this Statement will have a material effect on our financial
position or results of operation.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans ("SFAS 158"). SFAS 158 requires an employer to recognize
the over-funded or under-funded status of a defined benefit postretirement plan
as an asset or liability in its balance sheet and to recognize changes in funded
status in the year in which the changes occur through comprehensive income. SFAS
158 had no impact on the Company's financial position or results of operation.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141R, "Business Combinations" ("SFAS 141R"), which establishes
principles and requirements for the reporting entity in a business combination,
including recognition and measurement in the financial statements of the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. This statement also establishes disclosure
requirements to enable financial statement users to evaluate the nature and
financial effects of the business combination. SFAS 141R applies prospectively
to business combinations for which the acquisition date is on or after fiscal
years beginning after December 15, 2008. The Company is currently evaluating the
effect that the adoption of SFAS 141R will have on its financial statements.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 160, "Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes
accounting and reporting standards pertaining to ownership interests in
subsidiaries held by parties other than the parent; the amount of net income
attributable to the parent and to the noncontrolling interest; changes in a
parent's ownership interest; and the valuation of any retained noncontrolling
equity investment when a subsidiary is deconsolidated. SFAS 160 also establishes
disclosure requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS 160
is required to be adopted prospectively for the first annual reporting period
beginning after December 15, 2008. The Company is currently reviewing the effect
that the adoption of this statement will have on its financial statements.
ITEM 7. FINANCIAL STATEMENTS
-----------------------------
FINANCIAL STATEMENTS
--------------------
The report of the Independent Registered Public Accounting Firm,
Financial Statements and Schedules are set forth beginning on page F-1 of this
Annual Report on Form 10-KSB, following this page.
-27-
ACE MARKETING &
PROMOTIONS, INC.
---------------------------------------------
REPORT ON AUDITS OF FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007 AND 2006
ACE MARKETING &
PROMOTIONS, INC.
CONTENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006 PAGES
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-1
Balance Sheets F-2
Statements of Operations F-3
Statement of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 - F-15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Ace Marketing & Promotions, Inc.
Valley Stream, New York
We have audited the accompanying balance sheets of Ace Marketing & Promotions,
Inc. for the years ended December 31, 2007 and 2006, and the related statements
of operations, stockholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ace Marketing & Promotions,
Inc. as of December 31, 2007 and 2006 and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Holtz Rubenstein Reminick LLP
Melville, New York
March 26, 2008
F-1
ACE MARKETING &
PROMOTIONS, INC.
BALANCE SHEETS
====================================================================================================
DECEMBER 31, 2007 2006
----------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 819,021 $ 1,353,131
Accounts receivable, net of allowance for doubtful accounts of
$10,000 at December 31, 2007 and 2006, respectively 963,919 721,986
Prepaid expenses and other current assets 75,375 47,683
-----------------------------
Total Current Assets 1,858,315 2,122,800
Property and Equipment, net 34,065 16,899
Other Assets 7,745 5,492
-----------------------------
Total Assets $ 1,900,125 $ 2,145,191
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 475,452 $ 359,518
Accrued expenses 206,015 137,598
-----------------------------
Total Current Liabilities 681,467 497,116
-----------------------------
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;
8,124,949 and 8,028,363 shares issued and outstanding
at December 31, 2006 and 2005, respectively 813 803
Additional paid-in capital 3,657,920 3,176,791
Accumulated deficit (2,408,574) (1,529,519)
-----------------------------
1,250,159 1,648,075
Less: Treasury Stock, at cost, 23,334 shares (31,501) --
-----------------------------
Total Stockholders' Equity 1,218,658 1,648,075
-----------------------------
Total Liabilities and Stockholders' Equity $ 1,900,125 $ 2,145,191
=============================
----------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. F-2
ACE MARKETING &
PROMOTIONS, INC.
STATEMENTS OF OPERATIONS
============================================================================================
YEARS ENDED DECEMBER 31, 2007 2006
--------------------------------------------------------------------------------------------
Revenue, net $ 5,660,102 $ 4,506,807
Cost of Revenue 3,844,047 3,183,825
-----------------------------
Gross Profit 1,816,055 1,322,982
-----------------------------
Operating Expenses:
Selling (including stock based payments of
$212,638 and $63,280 for the years ended
December 31, 2007 and 2006, respectively) 795,115 444,192
General and administrative (including stock based
payments of $237,000 and $46,679 for the
years ended December 31, 2007 and 2006, respectively) 1,925,943 1,362,492
-----------------------------
Total Operating Expenses 2,721,058 1,806,684
-----------------------------
Loss from Operations (905,003) (483,702)
-----------------------------
Other Income:
Interest income 25,948 2,676
-----------------------------
Total Other Income 25,948 2,676
-----------------------------
Net Loss $ (879,055) $ (481,026)
=============================
Net Loss Per Common Share:
Basic $ (0.11) $ (0.07)
=============================
Diluted $ (0.11) $ (0.07)
=============================
Weighted Average Common Shares Outstanding:
Basic 8,021,521 7,142,594
=============================
Diluted 8,021,521 7,142,594
=============================
--------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. F-3
ACE MARKETING &
PROMOTIONS, INC.
Statement of Stockholders' Equity
================================================================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------------------------------------------------------
Total Common Stock Additional Treasury Stock
Stockholders' ------------------------ Paid-in ------------------------
Equity Shares Amount Capital (Deficit) Shares Amount
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, January 1, 2006 $ 598,205 5,888,076 $ 589 $ 1,646,109 $(1,048,493) -- $ --
Securities Issued to Private
Placement Investors, net 1,420,937 1,091,255 109 1,420,828 -- -- --
Cashless Exercise of Stock
Purchase Warrants -- 1,029,032 103 (103) -- -- --
Cashless Exercise of Stock Options -- 20,000 2 (2) -- -- --
Stock Based Payments 109,959 -- -- 109,959 -- -- --
Net Loss (481,026) -- -- -- (481,026) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, at December 31, 2006 1,648,075 8,028,363 803 3,176,791 (1,529,519) -- --
Cancellation of Restricted Stock -- -- -- 31,501 -- 23,334 (31,501)
Cashless Exercise of Stock
Purchase Warrants -- 4,086 1 (1) -- -- --
Stock Based Payments 449,638 92,500 9 449,629 -- -- --
Net Loss (879,055) -- -- -- (879,055) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, at December 31, 2007 $ 1,218,658 8,124,949 $ 813 $ 3,657,920 $(2,408,574) 23,334 $ (31,501)
=========== =========== =========== =========== =========== =========== ===========
--------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. F-4
ACE MARKETING &
PROMOTIONS, INC.
STATEMENTS OF CASH FLOWS
=========================================================================================
YEARS ENDED DECEMBER 31, 2007 2006
-----------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $ (879,055) $ (481,026)
------------------------------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 5,705 4,201
Stock-based compensation 449,638 109,959
Changes in operating assets and liabilities:
Increase in operating assets:
Accounts receivable (241,933) (10,930)
Prepaid expenses and other assets (29,945) (6,401)
(Decrease) increase in operating liabilities:
Accounts payable and accrued expenses 184,351 16,156
Customer deposits -- (98,000)
------------------------------
Total adjustments 367,816 14,985
------------------------------
Net Cash Used in Operating Activities (511,239) (466,041)
------------------------------
Cash Flows from Investing Activities:
Acquisition of property and equipment (22,871) --
------------------------------
Net Cash Used in Investing Activities (22,871) --
------------------------------
Cash Flows from Financing Activities:
Proceeds from private placement, net -- 1,420,937
------------------------------
Net Cash Provided by Financing Activities -- 1,420,937
------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (534,110) 954,896
Cash and Cash Equivalents, beginning of year 1,353,131 398,235
------------------------------
Cash and Cash Equivalents, end of year $ 819,021 $ 1,353,131
==============================
-----------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. F-5
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Ace Marketing & Promotions, Inc. (the "Company")
is a full service advertising specialties and promotional products
company that distributes items typically with logos to large
corporations, schools and universities, financial institutions and
not-for-profit organizations. Specific categories of promotional
products include advertising specialties, business gifts, incentives
and awards, and premiums.
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. Advance payments made by customers are included in customer
deposits.
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".
ALLOWANCE FOR DOUBTFUL ACCOUNTS - Management must make estimates of the
uncollectability of accounts receivable. Management specifically
analyzes accounts receivable and analyzes historical bad debts,
customer concentrations, customer credit-worthiness, current economic
trends and changes in customer payment terms when evaluating the
adequacy of the allowance for doubtful accounts.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is provided using the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements
are being amortized using the straight-line method over the estimated
useful lives of the related assets or the remaining term of the lease.
The costs of additions and improvements, which substantially extend the
useful life of a particular asset, are capitalized. Repair and
maintenance costs are charged to expense. When assets are sold or
otherwise disposed of, the cost and related accumulated depreciation
are removed from the account and the gain or loss on disposition is
reflected in operating income.
COMPREHENSIVE INCOME (LOSS) - Comprehensive income (loss) refers to
revenue, expenses, gains and losses that under generally accepted
accounting principles are included in comprehensive income but are
excluded from net income as these amounts are recorded directly as an
adjustment to stockholders' equity. At December 31, 2007 and 2006,
there were no such adjustments required.
CONCENTRATION OF CREDIT RISK - Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist
principally of trade receivables and cash and cash equivalents.
Concentration of credit risk with respect to trade receivables is
generally diversified due to the large number of entities comprising
the Company's customer base and their dispersion across geographic
areas principally within the United States. The Company routinely
addresses the financial strength of its customers and, as a
consequence, believes that its receivable credit risk exposure is
limited.
The Company places its temporary cash investments with high credit
quality financial institutions. At times the Company maintains bank
account balances, which exceed FDIC limits. The Company has not
experienced any losses in such accounts and believes that it is not
exposed to any significant credit risk on cash. Management does not
believe significant credit risk exists at December 31, 2007 and 2006.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
debt instruments with a maturity of three months or less, as well as
bank money market accounts, to be cash equivalents.
F-6
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
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.
NET INCOME PER SHARE - Basic net income per share is computed by
dividing income available to common shareholders by the
weighted-average number of common shares outstanding. Diluted earnings
per share reflect, in periods in which they have a dilutive effect, the
impact of common shares issuable upon exercise of stock options.
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 3,880,000 and 3,519,000
because they are anti-dilutive as a result of a net loss for the years
ended December 31, 2007 and 2006.
ADVERTISING COSTS - Advertising costs are expensed as incurred.
Advertising expense for the years ended December 31, 2007 and 2006
approximated $20,900 and $500, respectively.
SHARE-BASED COMPENSATION - The Company records compensation expense
associated with stock options and other equity-based compensation in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 123 (revised 2004), SHARE-BASED PAYMENT, using the modified
prospective transition method and therefore has not restated results
for prior periods. Under the modified prospective transition method,
share-based compensation expense includes, (1) compensation expense for
all share-based awards granted on or after January 1, 2006 as
determined based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123R and, (2) compensation expense for
share-based compensation awards granted prior to, but not yet vested as
of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS 123. The Company
recognizes compensation expense on a straight-line basis over the
requisite service period of the award.
INCOME TAXES - Deferred income taxes are recognized for temporary
differences between financial statement and income tax basis of assets
and liabilities for which income tax or tax benefits are expected to be
realized in future years. A valuation allowance is established to
reduce deferred tax assets, if it is more likely, than not that all, or
some portion, of such deferred tax assets will not be realized. The
effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
FAIR VALUE OF FINANCIAL INSTRUMENTS - In the opinion of management, the
carrying value of all financial instruments, consisting primarily of
cash and cash equivalents, accounts receivables and accounts payable,
reflected in the accompanying balance sheet, approximates fair value as
of December 31, 2007 and 2006, due to their short term nature.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In July 2006, the FASB
issued Financial Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN
INCOME TAXES ("FIN 48"), as an interpretation of SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with SFAS No. 109 and prescribes a recognition
threshold of more-likely-than-not to be sustained upon examination.
Measurement of the tax uncertainty occurs if the recognition threshold
has been met. FIN 48 also provides guidance on derecognition,
classification, interest, penalties, accounting in interim periods,
disclosure, and transition. FIN 48 was effective in the first quarter
of Fiscal 2007. Differences between the amounts recognized in the
statements of financial position prior to the adoption of FIN 48 and
the amounts reported after adoption are accounted for as a
cumulative-effect adjustment recorded to the beginning balance of
retained earnings. The adoption of this Statement did not have a
material effect on the Company's financial position or results of
operation.
F-7
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
In September 2006, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 108, CONSIDERING THE EFFECTS OF
PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN CURRENT YEAR
FINANCIAL STATEMENTS ("SAB 108"). SAB 108 provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year
misstatement. The SEC staff believes that registrants should quantify
errors using both a balance sheet and an income statement approach and
evaluate whether either approach results in quantifying a misstatement
that, when all relevant quantitative and qualitative factors are
considered, is material. SAB 108 was effective for the Company's fiscal
fourth quarter ending December 31, 2006. The adoption of this Statement
did not have a material effect on the Company's financial position or
results of operation.
On September 15, 2006, the Financial Accounting Standards Board
("FASB") issued Statement No. 157, FAIR VALUE MEASUREMENTS ("SFAS
157"). SFAS 157 provides guidance for using fair value to measure
assets and liabilities. This Statement references fair value as the
price that would be received to sell an asset or paid to transfer a
liability, in an orderly transaction, between market participants in
the market in which the reporting entity transacts. The Statement
applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value. The Statement does not expand
the use of fair value in any new circumstances. SFAS 157 is effective
for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The
Company does not anticipate that the adoption of this Statement will
have a material effect on our financial position or results of
operation.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 158, Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans ("SFAS 158"). SFAS 158 requires an
employer to recognize the over-funded or under-funded status of a
defined benefit postretirement plan as an asset or liability in its
balance sheet and to recognize changes in funded status in the year in
which the changes occur through comprehensive income. SFAS 158 did not
have an impact on the Company's financial position or results of
operation.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141R, "Business Combinations" ("SFAS 141R"), which
establishes principles and requirements for the reporting entity in a
business combination, including recognition and measurement in the
financial statements of the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree.
This statement also establishes disclosure requirements to enable
financial statement users to evaluate the nature and financial effects
of the business combination. SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after
fiscal years beginning after December 15, 2008. The Company is
currently evaluating the effect that the adoption of SFAS 141R will
have on its financial statements.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 160, "Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51" ("SFAS 160"). SFAS 160
establishes accounting and reporting standards pertaining to ownership
interests in subsidiaries held by parties other than the parent; the
amount of net income attributable to the parent and to the
noncontrolling interest; changes in a parent's ownership interest; and
the valuation of any retained noncontrolling equity investment when a
subsidiary is deconsolidated. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners.
SFAS 160 is required to be adopted prospectively for the first annual
reporting period beginning after December 15, 2008. The Company is
currently reviewing the effect that the adoption of this statement will
have on its financial statements.
F-8
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
2. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consist of the following at December 31:
USEFUL LIVES 2007 2006
-------------------------------- ------------------ ------------------- ------------------
Furniture and Fixtures 5 years $ 70,715 $ 47,844
Leasehold Improvements 5 years 8,919 8,919
------------------- ------------------
79,634 56,763
Less Accumulated Depreciation 45,569 39,864
------------------- ------------------
$ 34,065 $ 16,899
=================== ==================
Depreciation expense for the years ended December 31, 2007 and 2006 was
$5,705 and $4,201, respectively.
3. INCOME TAXES
The provision for income taxes for the years ended December 31, 2007
and 2006 is summarized as follows:
2007 2006
------------------------------- ------------------ -------------------
Current:
Federal $ - $ -
State - -
------------------ -------------------
- -
------------------ -------------------
Deferred:
Federal - -
State - -
------------------ -------------------
$ - $ -
================== ===================
The Company has federal and state net operating loss carryforwards of
approximately $1,268,000, which can be used to reduce future taxable
income through 2027.
The tax effects of temporary differences which give rise to deferred
tax assets (liabilities) at December 31, are summarized as follows:
DECEMBER 31, 2007 2006
-------------------------------------- ------------------ -------------------
Deferred Tax Assets:
Net operating loss carryforwards $ 507,000 $ 342,000
Stock based compensation 420,000 240,000
Allowance for doubtful accounts 4,000 4,000
------------------ -------------------
Deferred Tax Assets 931,000 586,000
Less Valuation Allowance 931,000 586,000
------------------ -------------------
Net Deferred Tax Asset $ - $ -
================== ===================
F-9
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
A reconciliation of the federal statutory rate to the Company's
effective tax rate is as follows:
YEARS ENDED DECEMBER 31, 2007 2006
-------------------------------------- --------------- --------------
Federal Statutory Tax Rate 34.00% 34.00%
State Taxes, net of federal benefit 6.00% 6.00%
Change in Valuation Allowance (40.00%) (40.00%)
--------------- --------------
Total Tax Expense 0.00% 0.00%
=============== ==============
4. STOCKHOLDERS' EQUITY
CAPITALIZATION - On February 9, 2005, the stockholders approved an
amendment to the Company's Certificate of Incorporation to (i) increase
the authorized shares of Common Stock from 22,000,000 shares to
25,000,000; par value $.0001; and (ii) create 5,000,000 shares of
Preferred Stock, $.0001 par value. The Board of Directors has the
authority to issue shares of Preferred Stock from time to time and to
fix such rights, preferences and privileges of such issuances.
PRIVATE PLACEMENT OF SECURITIES - During Fiscal 2004, the Company sold
through a private placement, 14.74 units (each consisting of 50,000
common shares and 50,000 Class A Warrants). Each Class A Warrant has an
exercise price of $2.00 and was to expire on January 3, 2007. The
Company extended the expiration date of the Class A Warrants to April
1, 2008.
During Fiscal 2005, the Company completed a private placement through
the sale of 10 units (each consisting of 10,000 common shares and
10,000 Class B Warrants) at a purchase price of $10,000 per unit for
net proceeds of $95,000, net of transaction cost of approximately
$5,000. Each Class B Warrant has an exercise price of $2.00 and expires
on January 2, 2008. Subsequent to December 31, 2007, the Company
extended the expiration date of the Class B Warrants to April 1, 2008.
During Fiscal 2006, the Company completed a private placement (the
"Offering") through the sale of 15.859 units (each consisting of 60,000
common shares and 30,000 Class C Warrants) at a purchase price of
$105,000 per unit for net proceeds of $1,420,937, net of transaction
costs of approximately $244,000. Each Class C Warrant has an exercise
price of $1.75 per share and expires on June 30, 2009.
Pursuant to the Offering, the Placement Agent was issued 139,680 shares
of the Company's common stock and a warrant to purchase 95,160 shares
of common stock at an exercise price of $1.00 per share. The placement
agent warrants expire on June 29, 2011. During the year ended December
31, 2007, the Placement Agent exercised 8,671 warrants using the
cashless exercise provision, and received 4,086 shares of the Company's
common stock.
In addition, pursuant to the Offering, the Company issued options to
purchase 50,000 shares of the Company's common stock at an exercise
price of $.10 per share to a law firm in connection with legal services
for the Offering. The options were valued at $95,000 and have been
recorded as a cost of the Offering.
5. SHARE-BASED COMPENSATION
WARRANTS - 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. The warrant had an exercise price
of $.10 per share and expired on June 10, 2010. On February 27, 2006,
F-10
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 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.
On September 26, 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 100,000 shares of the
Company's common stock. The warrant has an exercise price of $2.50 per
share and expires on August 14, 2010.
PURCHASE OF LISTS AND SEARCH ENGINE - On April 10, 2006, the Company
granted 40,000 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 expire on April 10, 2011.
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 year ended December 31, 2006.
SHARE BASED COMPENSATION 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 4,000,000 non-statutory and incentive stock options and stock
awards to directors, officers, consultants and key employees of the
Company.
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 generally vest over periods ranging from 1
to 3 years 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 ("SFAS 123(R)"), which replaces SFAS 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. SFAS 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.
In adopting SFAS 123(R), the Company applied the modified prospective
approach to transition. Under the modified prospective approach, the
provisions of SFAS 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 SFAS 123.
The Company's results for the years ended December 31, 2007 and 2006
include employee share-based compensation expense totaling
approximately $317,000 and $49,000. Such amounts have been included in
the Statement 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.
F-11
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model. The Company took into consideration
guidance under SFAS 123(R) and SEC Staff Accounting Bulletin No. 107
(SAB 107) when reviewing and updating assumptions. The expected
volatility is based upon historical volatility of the Company's 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 estimated fair value of each option award granted was determined on
the date of grant using the following weighted-average assumptions for
option grants during the years ended December 31, 2007 and 2006:
2007 2006
--------------------------------------------------------------------------- --------------------- --------------------
Dividend Yield 0.00% 0.00%
Volatility 58.23% 25.00%
Risk-Free Interest Rate 4.15% 5.02%
Expected Life 10.00 YEARS 5.00 years
A summary of option activity under the Plan as of December 31, 2007,
and changes during the year then ended is as follows:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Shares Price Term (years) Value
----------------------------------------- ------------------ ------------------ ------------------- ------------------
Outstanding, beginning of year 1,921,222 $ 1.17 6.13
Granted 300,000 1.20 10.00
------------------
Outstanding, end of year 2,221,222 $ 1.18 5.74 $ -
================== ================== =================== ==================
Exercisable, end of year 1,652,247 $ 1.13 6.31 $ -
================== ================== =================== ==================
For the years ended December 31, 2007 and 2006, share-based
compensation expense related to stock options was approximately
$360,000 and $92,000, respectively. The weighted-average grant-date
fair value of options granted during the years ended December 31, 2007
and 2006 was $.86 and $.57, respectively.
The aggregate intrinsic value of options outstanding and options
exercisable at December 31, 2007 is $0, and was 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 $0.66 closing price of the
Company's common stock on December 31, 2007. The total intrinsic value
of options exercised in the years ended December 31, 2007 and 2006 was
approximately $0 and $42,500, respectively, determined as of the date
of exercise. The Company received no cash proceeds from options
exercised in the years ended December 31, 2007 and 2006. Options
exercised during the year ended December 31, 2007 and 2006 were
completed through cashless exercise provisions of the Plan.
A summary of the status of the Company's non-vested shares as of
December 31, 2007 and the changes during the year ended December 31,
2007, is as follows:
F-12
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
Weighted
Average
Grant-Date
Non-vested Shares Shares Fair Value
------------------------------------ --------------- ------------------
Non-vested at January 1, 2007 873,767 $ .32
Granted 300,000 .86
Vested (575,833) .57
--------------- ------------------
Non-vested at December 31, 2007 597,934 $ .36
=============== ==================
As of December 31, 2007 and 2006, the fair value of unamortized
compensation cost related to unvested stock option awards was
approximately $108,000 and $216,000, respectively. Unamortized
compensation cost as of December 31, 2007 is expected to be recognized
over a remaining weighted-average vesting period of 1.14 years. For the
year ended December 31, 2006, the weighted average fair value of
options exercised was $.13. There were no options exercised during the
year ended December 31, 2007.
COMMON SHARES RESERVED
Class A Warrants 737,000
Class B Warrants 100,000
Class C Warrants 475,788
Placement Agent Warrants 86,489
2005 Stock Option Plan 3,962,222
6. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company leases office space under
non-cancelable operating leases, which expire in November 2009. The
Company is obligated for the payment of real estate taxes under these
leases. The Company is also currently leasing additional office space
on a month-to-month basis. Minimum future rentals under non-cancelable
lease commitments are as follows:
YEARS ENDING DECEMBER 31,
-----------------------------------------------------------------------
2008 $ 28,000
2009 27,000
Rent and real estate tax expense was approximately $85,000 and $72,000
for the years December 31, 2007 and 2006, respectively.
EMPLOYMENT CONTRACTS - On March 1, 2005, the Company entered into
employment contracts with two of its officers. The employment
agreements provide for minimum annual salaries plus bonuses equal to 5%
of pre-tax earnings (as defined) and other perquisites commonly found
in such agreements. In addition, pursuant to the employment contracts,
the Company granted the officers options to purchase up to an aggregate
of 400,000 shares of common stock.
On August 22, 2007, the Company approved a three year extension of the
employment contracts with two of its officers expiring on February 28,
2011. The employment agreements provide for minimum annual salaries
with scheduled increases per annum to occur on every anniversary date
of the contract and extension commencing on March, 1, 2008. A signing
bonus of options to purchase 150,000 shares granted to each executive
were fully vested at the date of the grant and exercisable at $1.20 per
share through August 22, 2017. Ten-year options to purchase 50,000
F-13
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
shares of Common Stock are to be granted at fair market value on each
anniversary date of the contract and extension commencing March 1,
2008. Termination pay of one-year base salary based upon the scheduled
annual salary of each executive officer for the next contract year,
plus the amount of bonuses paid (or entitle to be paid) to the
executive for the current fiscal year of the preceding fiscal year,
whichever is higher.
Minimum aggregate future commitments under the employment contracts is
as follows:
YEARS ENDING DECEMBER 31,
----------------------------------------------------------------------
2008 424,000
2009 472,000
2010 520,000
2011 88,000
7. CONCENTRATIONS
TRANSACTIONS WITH MAJOR CUSTOMERS - 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.
During the years ended December 31, 2007 and 2006, a customer accounted
for approximately 20% and 21% of net revenues, respectively.
TRANSACTIONS WITH MAJOR SUPPLIER - During the year ended December 31,
2007, a supplier accounted for approximately 12% of net purchases.
8. RELATED PARTY TRANSACTIONS
The Company purchased merchandise with a cost of approximately $4,934
and $8,700 for the years ended December 31, 2007 and 2006,
respectively, from an entity that is owned by an individual related to
one of the officers of the Company.
9. SUPPLEMENTARY INFORMATION - STATEMENT OF CASH FLOWS
Cash paid during the years for:
YEARS ENDED DECEMBER 31, 2007 2006
-------------------------------- ------------------- ------------------
Interest $ - $ -
=================== ==================
Income Taxes $ - $ -
=================== ==================
10. JOINT MARKETING AND SALES AGREEMENT
In February 2007, the Company entered into a joint marketing and sales
agreement with Atrium Enterprises Ltd. ("Atrium"). Atrium provides
solutions to corporate customers through the design and application of
performance improvement programs.
The agreement provides for the Company to receive the exclusive rights
to market and sell Atrium's products and services to its customers and
provides Atrium the exclusive right to sell and market the Company's
promotional services to its customers. The Company will receive a 50%
commission on gross profit (as defined) from all sales of Atrium's
F-14
ACE MARKETING &
PROMOTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
products and services generated by the Company. Atrium will receive a
50% commission on gross profit (as defined) from all sales of the
Company's promotional services generated by Atrium. In addition, Atrium
was granted an option to purchase 70,000 shares of the Company's common
stock at an exercise price of $2.50 per share. The options vest in
three equal installments commencing on February 15, 2008, and expire
four years after the date of grant. Included in stock based payments,
for the year ended December 31, 2007, is approximately $14,000 related
to this grant.
11. SUBSEQUENT EVENT
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,
pursuant to a Note which is due March 1, 2009, and 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.
F-15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
Not Applicable.
Item 8.A.( T) Controls and Procedures.
--------------------------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
-------------------------------------------------
As of the end of the period covered by this annual report, we carried
out an evaluation, under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and
15d-15(e)). Based upon the foregoing evaluation, our principal executive officer
and principal financial officer have concluded that our disclosure controls and
procedures are not effective, for the reasons discussed below, to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and Exchange
Commission("SEC").
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting and for the assessment of the
effectiveness of internal control over financial reporting, as defined in Rule
13a-15(f) under the Exchange Act. Internal control over financial reporting is a
process designed by, or under the supervision of our principal executive officer
and principal financial officer and effected by our Board of Directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the financial
statements in accordance with U.S. generally accepted accounting principles.
Our internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect our transactions and
dispositions of our assets; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of the financial statements in
accordance with U.S. generally accepted accounting principles, and that our
receipts and expenditures are being made only in accordance with authorizations
of our management and directors; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial statements.
-28-
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of our annual financial statements,
management has undertaken an assessment of the effectiveness of our internal
control over financial reporting as of December 31, 2007, based on criteria
established in INTERNAL CONTROL - INTEGRATED FRAMEWORK issued by the Committee
of Sponsoring Organizations of the Treadway Commission, or the COSO Framework.
Management's assessment included an evaluation of the design of our internal
control over financial reporting and testing of the operational effectiveness of
those controls. Due to the inherent issue of segregation of duties in a small
company, we have relied heavily on entity or management review controls to
lessen the issue of segregation of duties.
Based on this evaluation, management has concluded that our internal
control over financial reporting was not effective as of December 31, 2007. Our
principal executive officer and principal financial officer have concluded that
we have material weaknesses in our internal control over financial reporting.
A material weakness is a deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company's annual or interim
financial statements will not be prevented or detected on a timely basis.
Management identified the following material weaknesses as of December 31, 2007.
INDEPENDENT BOARD OF DIRECTORS OR AUDIT COMMITTEE
We do not have an independent board of directors or audit committee to
oversee our internal control over financial reporting.
REVENUE RECOGNITION AND COST OF REVENUE
Revenue is recognized upon shipment of merchandise to customers and
when title and risk of loss transfers to the customer. The verification of drop
shipments to customers is not a centralized function, and we lack a process of
timely identifying shipping dates and accurately matching revenue and related
expenses. As such there is a potential of a misstatement as a result of a period
cutoff error. We have purchased new accounting software that will integrate and
automate the shipping information with our accounting records and which we
believe will remediate this deficiency. This software is expected to be
implemented by the end of our second quarter in Fiscal 2008.
INFORMATION TECHNOLOGY
Management has identified certain control procedures that were not
sufficiently documented relating to a) entity level management of our
information technology functions; b) logical access to financial applications
and company wide networks; and c) the managing of operations for application and
technology platforms. We have engaged a consultant to assist us in remediating
these deficiencies.
-29-
FINANCIAL REPORTING
Management identified the following significant deficiencies that when
aggregated give rise to a material weakness in the area of financial reporting.
These deficiencies include a) lack of review or evidence of review in the
financial reporting process; b) the inability to account for complex equity
transactions; c) various manual processes and dual databases creating need for
extensive number of journal entries; and d) inability to apply complex
accounting principles. Management is presently assessing these deficiencies.
This annual report does not include an attestation report of the
Company's independent registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject to
attestation by the Company's independent registered public accounting firm
pursuant to temporary rules of the SEC that permit the Company to provide only
management's report on internal control in this annual report.
CHANGES IN INTERNAL CONTROLS
----------------------------
There have been no changes in our internal control over financial
reporting during our most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
Item 8.B. Other Information.
-----------------------------
Not Applicable.
-30-
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
--------------------------------------------------------------------------------
WITH SECTION 16(a) OF THE EXCHANGE ACT.
---------------------------------------
The names, ages and principal occupations of the Company's present
officers and directors are listed below.
FIRST BECAME DIRECTOR
---------------------
NAME (1) AGE AND/OR OFFICER POSITION
-------- --- -------------- --------
1998 Chief Executive Officer/ Secretary/
Dean Julia 40 Treasurer/Director/Co-Founder
Michael Trepeta 36 1998 President/Director/Co-Founder
Scott Novack 40 1998 Director/Co-Founder
Sean McDonnell 47 2005 Chief Financial Officer
______
(1) Directors are elected at the annual meeting of stockholders and hold
office until the following annual meeting.
The terms of all officers expire at the annual meeting of directors
following the annual stockholders meeting. Officers serve at the pleasure of the
Board and may be removed, either with or without cause, by the Board of
Directors, and a successor elected by a majority vote of the Board of Directors,
at any time.
MANAGEMENT TEAM
Our officers, directors and founders each have experience in the
development of early stage companies including business strategies, products and
services and financing.
DEAN L. JULIA
Mr. Julia holds a Bachelor of Business Administration from Hofstra
University received in 1990. Since that time, Mr. Julia has been associated with
various broker/dealers as a stockbroker where he was involved in the funding of
numerous development stage and growth companies. From 1991 to 1996, Mr. Julia
served as a Vice President for Reich & Co. From 1993 to 1994, he was Vice
President for D. Blech & Co. From 1994 to 1995, he served as a Vice President
for GKN Securities; and from 1995 to 1996 he served as Vice President for Rickel
& Associates. From September 1996 through February 1998, Mr. Julia served as
President and Chief Executive Officer of DLJ Consulting, a financial
intermediary consultant for public and private companies. In 1998, Mr. Julia
co-founded us and became an officer, director and principal stockholder of our
company and a full time employee.
MICHAEL D. TREPETA
Mr. Trepeta received a Bachelor of Science Degree in Applied Economics
and Business Management with a minor in Communications from Cornell University
in 1993. Since that time, Mr. Trepeta has been associated with various
broker/dealers as a stockbroker where he was involved in the funding of numerous
development stage and growth companies. Mr. Trepeta was a Vice President of
Investments at Joseph Roberts & Co. in 1994 and a Vice President of Investments
at Rickel & Associates from 1995-1996. From September of 1996 through February
1998, he has served as President of MDT Consulting Group, Inc., a corporation
contracted by publicly traded companies to serve as a financial intermediary to
investment bankers and to assist in developing products, services, and business
strategies. In 1998, Mr. Trepeta co-founded us and he became an officer,
director and principal owner of our company and a full time employee.
SCOTT J. NOVACK
Mr. Novack holds a Bachelor of Business Administration from Hofstra
University received in 1990. From 1993-1994, Mr. Novack was a Vice President at
D. Blech & Co., a New York investment bank specializing in raising venture
capital money for early stage companies. From 1994-1995, Mr. Novack was a Vice
President at GKN Securities, a New York based investment bank. From 1995-1996,
Mr. Novack was a Vice President at Rickel Associates, a New York based
investment bank. Mr. Novack was the President of SJN Consulting Group, Inc., a
privately held company, from 1996 to 2003. SJN was a corporation contracted by
publicly traded companies to serve as a financial intermediary to investment
bankers and to assist in developing products, services, and business strategies.
Since 2003, Mr. Novack is a private investor who invests for his own account. In
1998, Mr. Novack co-founded us and became a director of our company.
-31-
SEAN MCDONNELL
Sean J. McDonnell, Certified Public Accountant, has been self employed
and in private accounting practice since January 1990 handling many different
types of business entities and associations. Mr. McDonnell has spent much of his
time helping his customers grow their companies and acquire financing for the
purchase of buildings and equipment. Prior to starting his own practice, he was
employed from 1985 - 1990 as a senior staff member in the accounting firm of
Breiner & Bodian CPA's. After graduating from Dowling College in 1984, he was
employed by Kenneth Silver C.P.A. from 1984 - 1985. He is currently serving on
the boards of the Police Athletic League, North East Youth Sports Association
and Sound Beach Soccer Club, Inc. Mr. McDonnell has served as our Chief
Financial Officer since January 3, 2005 and currently as an employee, he devotes
such time to our affairs as is necessary for the performance of his duties.
LACK OF COMMITTEES
------------------
Our Company has no audit, compensation or nominating committees of our
board of directors or committees performing similar functions. We are currently
seeking to nominate and appoint to the board two independent directors and to
form an audit committee consisting of the two independent directors. It is our
goal that at least, one of the two independent directors would be deemed a
"Financial Expert" within the meaning of Sarbanes-Oxley Act of 2002, as amended.
Under the National Association of Securities Dealers Automated
Quotations definition, an "independent director means a person other than an
officer or employee of the Company or its subsidiaries or any other individuals
having a relationship that, in the opinion of the Company's board of directors,
would interfere with the exercise of independent judgment in carrying out the
responsibilities of the director. The board's discretion in determining director
independence is not completely unfettered. Further, under the NASDAQ definition,
an independent director is a person who (1) is not currently (or whose immediate
family members are not currently), and has not been over the past three years
(or whose immediate family members have not been over the past three years),
employed by the company; (2) has not (or whose immediate family members have
not) been paid more than $60,000 during the current or past three fiscal years;
(3) has not (or whose immediately family has not) been a partner in or
controlling shareholder or executive officer of an organization which the
company made, or from which the company received, payments in excess of the
greater of $200,000 or 5% of that organizations consolidated gross revenues, in
any of the most recent three fiscal years; (4) has not (or whose immediate
family members have not), over the past three years been employed as an
executive officer of a company in which an executive officer of Ace has served
on that company's compensation committee; or (5) is not currently (or whose
immediate family members are not currently), and has not been over the past
three years (or whose immediate family members have not been over the past three
years) a partner of Ace's outside auditor.
The term "Financial Expert" is defined as a person who has the
following attributes: an understanding of generally accepted accounting
principles and financial statements; has the ability to assess the general
application of such principles in connection with the accounting for estimates,
accruals and reserves; experience preparing, auditing, analyzing or evaluating
financial statements that present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and complexity of
issues that can reasonably be expected to be raised by the company's financial
statements, or experience actively supervising one or more persons engaged in
such activities; an understanding of internal controls and procedures for
financial reporting; and an understanding of audit committee functions.
We can provide no assurances that our board's efforts to select two
persons to serve as independent directors on the Board of Directors (at least
one of which is a "Financial Expert") and on the proposed audit committee will
be successful. In the event an audit committee is established, its first
responsibility would be to adopt a written charter. Such charter would be
expected to include, among other things:
o being directly responsible for the appointment, compensation
and oversight of our independent auditor, which shall report
directly to the audit committee, including resolution of
disagreements between management and the auditors regarding
financial reporting for the purpose of preparing or issuing an
audit report or related work;
o annually reviewing and reassessing the adequacy of the
committee's formal charter;
o reviewing the annual audited financial statements with our
management and the independent auditors and the adequacy of
our internal accounting controls;
o reviewing analyses prepared by our management and independent
auditors concerning significant financial reporting issues and
judgments made in connection with the preparation of our
financial statements;
-32-
o reviewing the independence of the independent auditors;
o reviewing our auditing and accounting principles and practices
with the independent auditors and reviewing major changes to
our auditing and accounting principles and practices as
suggested by the independent auditor or its management;
o reviewing all related party transactions on an ongoing basis
for potential conflict of interest situations; and
o all responsibilities given to the audit committee by virtue of
the Sarbanes-Oxley Act of 2002, which was signed into law by
President George W. Bush on July 30, 2002.
CODE OF ETHICS
Effective March 3, 2003, the Securities & Exchange Commission requires
registrants like the Company to either adopt a code of ethics that applies to
the Company's Chief Executive Officer and Chief Financial Officer or explain why
the Company has not adopted such a code of ethics. For purposes of item 406
of Regulation S-K, the term "code of ethics" means written standards that
are reasonably designed to deter wrongdoing and to promote:
o Honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships;
o Full, fair, accurate, timely and understandable disclosure in
reports and documents that the Company files with, or submits
to, the Securities & Exchange Commission and in other public
communications made by the Company;
o Compliance with applicable governmental law, rules and
regulations;
o The prompt internal reporting of violations of the code to an
appropriate person or persons identified in the code; and
o Accountability for adherence to the code.
In March 2006, the Company adopted a Code of Ethics and Code of Conduct
which have been filed as Exhibit 14.1 to our Form 10-KSB. Changes to the Code of
Ethics and Code of Conduct will be filed under a Form 8-K or quarterly or annual
report under the Exchange Act.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers and directors, and persons who own more than ten percent
of a registered class of our equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission (the
"Commission"). Officers, directors and greater than ten percent stockholders are
required by the Commission's regulations to furnish us with copies of all
Section 16(a) forms they file. During fiscal 2006, none of our officers,
directors or 10% or greater stockholders failed to file or filed any forms late
to the best of our knowledge, except for certain Form 4 filings of Glenwood
Capital and Peter Chung.
ITEM 10. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.
-----------------------------------------------------------
SUMMARY COMPENSATION TABLE
The following table sets forth the overall compensation earned over the
fiscal year ended December 31, 2007 and 2006 by (1) each person who served as
the principal executive officer of the Company during fiscal year 2007; (2) the
Company's most highly compensated (up to a maximum of two) executive officers as
of December 31, 2007 with compensation during fiscal year 2007 of $100,000 or
more; and (3) those two individuals, if any, who would have otherwise been in
included in section (2) above but for the fact that they were not serving as an
executive of the Company as of December 31, 2007.
SALARY COMPENSATION
--------------------------
NON-EQUITY NONQUALIFIED
NAME AND OPTIONS INCENTIVE PLAN DEFERRED ALL OTHER
PRINCIPAL FISCAL BONUS STOCK AWARDS COMPENSATION COMPENSATION COMPENSATION
POSITION YEAR SALARY ($) ($) AWARDS ($)(1) ($) EARNINGS ($) ($) (2)(3) TOTAL ($)
--------------------- ------ --------- -------- ------- ---------------------------------------------------------------
Dean L. Julia 2007 $188,000 -- -- $145,667 -- -- $ 15,112 $ 348,779
Chief Executive 2006 $164,000 -- -- $ 16,667 -- -- $ 15,600 $ 196,267
Officer
Michael D. Trepeta 2007 $188,000 -- -- $145,667 -- -- $ 15,112 $ 348,779
President 2006 $164,000 -- -- $ 16,667 -- -- $ 15,387 $ 196,054
____________________
-33-
(1) Reflects dollar amount expensed by the company during applicable fiscal
year for financial statement reporting purposes pursuant to FAS 123R.
FAS 123R requires the company to determine the overall value of the
options as of the date of grant based upon the Black-Scholes method of
valuation, and to then expense that value over the service period over
which the options become exercisable (vest). As a general rule, for
time-in-service-based options, the company will immediately expense any
option or portion thereof which is vested upon grant, while expensing
the balance on a pro rata basis over the remaining vesting term of the
option. For a description FAS 123 R and the assumptions used in
determining the value of the options under the Black-Scholes model of
valuation, see the notes to the financial statements included with this
Form 10-KSB.
(2) Includes all other compensation not reported in the preceding columns,
including (i) perquisites and other personal benefits, or property,
unless the aggregate amount of such compensation is less than $10,000;
(ii) any "gross-ups" or other amounts reimbursed during the fiscal year
for the payment of taxes; (iii) discounts from market price with
respect to securities purchased from the company except to the extent
available generally to all security holders or to all salaried
employees; (iv) any amounts paid or accrued in connection with any
termination (including without limitation through retirement,
resignation, severance or constructive termination, including change of
responsibilities) or change in control; (v) contributions to vested and
unvested defined contribution plans; (vi) any insurance premiums paid
by, or on behalf of, the company relating to life insurance for the
benefit of the named executive officer; and (vii) any dividends or
other earnings paid on stock or option awards that are not factored
into the grant date fair value required to be reported in a preceding
column.
(3) Includes compensation for service as a director described under
Director Compensation, below.
For a description of the material terms of each named executive
officers' employment agreement, including the terms of the terms of any common
share purchase option grants, see that section of this Form 10-KSB captioned
"Employment Agreements."
No outstanding common share purchase option or other equity-based award
granted to or held by any named executive officer in 2007 were repriced or
otherwise materially modified, including extension of exercise periods, the
change of vesting or forfeiture conditions, the change or elimination of
applicable performance criteria, or the change of the bases upon which returns
are determined, nor was there any waiver or modification of any specified
performance target, goal or condition to payout.
-34-
For a description of the material terms of any contract, agreement,
plan or other arrangement that provides for any payment to a named executive
officer in connection with his or her resignation, retirement or other
termination, or a change in control of the company see "Employment Agreements".
EXECUTIVE OFFICER OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table provides certain information concerning any common
share purchase options, stock awards or equity incentive plan awards held by
each of our named executive officers that were outstanding as of December 31,
2007.
OPTION AWARDS STOCK AWARDS
-------------------------------------------------------------------------------- ---------------------------------------------------
EQUITY
INCENTIVE
PLAN
AWARDS:
NUMBER EQUITY
EQUITY OF INCENTIVE PLAN
INCENTIVE PLAN UNEARNED AWARDS:
AWARDS: MARKET SHARES, MARKET OR
NUMBER OF NUMBER OF NUMBER OF NUMBER OF VALUE OF UNITS OR PAYOUT VALUE
SECURITIES SECURITIES SECURITIES SHARES OR SHARES OR OTHER UNEARNED
UNDERLYING UNDERLYING UNDERLYING UNITS OF UNITS OF RIGHTS SHARES, UNITS OR
UNEXERCISE UNEXERCISED UNEXERCISED OPTION OPTION STOCK THAT STOCK THAT THAT HAVE OTHER RIGHTS
OPTIONS(#) OPTIONS(#) UNEARNED EXERCISE EXPIRATION HAVE NOT HAVE NOT NOT THAT HAVE NOT
NAME EXERCISABLE UNEXERCISABLE OPTIONS (#) PRICE ($) DATE VESTED (#) VESTED VESTED VESTED
------------- ------------------------- ------------------- --------- ---------- ------------ ----------- --------- ----------------
Dean L. Julia 250,000 -- -- $ 1.00 01/03/15 -- -- -- --
(1) 100,000 100,000 $ 1.20 12/28/15
150,000 -- -- $ 1.20 08/22/17
Michael D. 250,000 -- -- $ 1.00 01/03/15 -- -- -- --
Trepeta 100,000 100,000 $ 1.20 12/28/15
(1) 150,000 -- -- $ 1.20 08/22/17 -- -- -- --
______________
(1) Common Stock purchase options to acquire 250,000 shares of
common stock at $1.00 per share were granted on January 3,
2005. These options were fully exercisable (vested) upon
grant. Options granted on December 28, 2005 vest and are
exercisable immediately as to one-half of the options and the
balance shall vest and become exercisable on December 28,
2008. Common Stock purchase options to acquire 150,000 shares
of Common Stock were granted on August 23, 2007, exercisable
at $1.20 per share and fully vested at the date of grant. All
options contain cashless exercise provisions.
-35-
EMPLOYMENT AGREEMENTS
Each of the following executive officers is a party to an employment
agreement with the Company.
NAME POSITION ANNUAL SALARY(1) BONUS (2)
Dean L. Julia Chief Financial Officer $ 212,000 Annual bonuses of at least
5% of pre-tax earnings
Michael Trepeta President $ 212,000 Annual bonuses of at least
5% of pre-tax earnings
__________
(1) Annual salary is for 2008. Compensation of each executive officer named in
the table above has his monthly base salary increased by $2,000 each
subsequent March 1st during the term of the agreement and any extensions
thereof. The current monthly base salary of $16,000 increased to $18,000 on
March 1, 2008.
(2) Annual bonuses are paid by us by the last business day of March for the
preceding calendar (fiscal) year, except in the event of termination prior
to the end of any fiscal year (other than termination for cause), a pro
rata portion of the annual bonus shall be paid within 30 days of
termination.
A summary of each Executive's employment agreement, as amended, is as
follows:
Each employment agreement, as amended, expires on February 29, 2011.
The Agreement shall be automatically renewed for a period of two years
thereafter unless the Executive gives 60 days prior written notice of his
intention not to renew this Agreement prior to the end of the initial Term. Each
employment agreement may not be terminated without cause. However, it may be
terminated at any time by the Executive upon written three-month notice. In such
event, the Company shall be relieved of all of its obligations under the
Agreement, except for payment of the Executive's Base Salary and Annual Bonus
earned and unpaid through the effective date of termination, those obligations
with respect to indemnification and director and officer insurance and severance
pay as described below.
We may terminate the Executive's employment for cause ("Cause") as
defined in the Agreement. In the event this Agreement is terminated for cause,
the Executive's Base Salary and any unearned Annual Bonus, severance pay and all
benefits shall terminate immediately upon such discharge, and we shall have no
further obligations to the Executive except for payment and reimbursement for
any monies due which right to payment or reimbursement accrued prior to such
termination.
We may terminate this Agreement upon the disability as defined in the
Agreement or death of the Executive by giving written notice to the Executive.
In the case of disability, such termination will become effective immediately
upon the giving of such notice unless otherwise specified by us. Upon any such
termination, we shall be relieved of all our obligations under the Executive's
employment, except for payment of the Executive's Base Salary and Annual Bonus
earned and unpaid through the effective date of termination and severance pay.
We have agreed to defend and indemnify each Executive in his capacity
as an officer against all claims, judgments, damages, liabilities, costs and
expenses (including reasonable attorney's fees) arising out of, based upon, or
related to his performance of services to us, to the maximum extent permitted
under law. We will also use our reasonable best efforts to include each
Executive as an insured under all applicable directors' and officers' liability
insurance policies maintained by us.
-36-
Each Executive is also entitled to the following additional benefits:
o $2,000 per month pay raise on each March 1 during the
term of the Agreement and any extension thereof;
o The annual grant on March 1 of each year of ten-year
stock options to purchase 50,000 shares at an
exercise price equal to the then fair market value of
our common stock as determined by the Board. On
December 28, 2005, Messrs. Trepeta and Julia each
agreed to amend their employment contracts to
eliminate the automatic annual grant of options in
consideration of the grant of ten year options to
purchase 200,000 shares exercisable at $1.20 per
share, with one-half immediately vested and the other
half to vest on December 28, 2008 irrespective of
employment or termination thereof; Pursuant to a
three-year extension of their employment agreements,
the automatic grant of 50,000 options at fair market
value on each anniversary date of the contract
recommenced on March 1, 2008. A signing bonus was
paid to each executive consisting of options to
purchase 150,000 shares, fully vested at the date of
grant and exercisable at $1.20 per share at any time
through August 22, 1017;
o Election to the Board of Directors and during the
term of employment, the Board's nomination for
re-election to the Board;
o Paid disability insurance and term life insurance for
the benefit of each Executive's family in an amount
fixed by the Board at a cost not to exceed $10,000
per annum;
o Use of company automobile with all related costs paid
for by us;
o Health insurance;
o Right to participate in any pensions of our company;
o Termination pay of one-year base salary based upon
the scheduled annual salary of each executive officer
for the next contract year, plus the amount of
bonuses paid or entitled to be paid to the executive
for the current fiscal year or the preceding fiscal
year, whichever is higher;
o Health insurance; and
o Right to participate in any pensions of our company.
CORPORATE GOVERNANCE
BOARD OF DIRECTORS
BOARD MEMBERS WHO ARE DEEMED INDEPENDENT
Our board of directors has determined that none of our directors are
"independent" as that term is defined by the National Association of Securities
Dealers Automated Quotations ("NASDAQ"). See "Lack of Committees" for the NASDAQ
definition of "Independent Director."
-37-
DIRECTOR COMPENSATION
STOCK OPTIONS
Stock options and equity compensation awards to our non-employee /
non-executive director are at the discretion of the Board. To date, no options
or equity awards have been made to our non-employee / non-executive director.
CASH COMPENSATION
Our non-employee / non-executive director is eligible to receive a fee
of $500 to be paid for attending each Board meeting; however, no fees were paid
in 2007.
TRAVEL EXPENSES
All directors shall be reimbursed for their reasonable out of pocket
expenses associated with attending the meeting.
DIRECTOR COMPENSATION
The following table shows the overall compensation earned for the 2007
fiscal year with respect to each non-employee and non-executive director as of
December 31, 2007.
DIRECTOR COMPENSATION
-------------------------------------------------------------------------------------------
FEES
EARNED NON-EQUITY NONQUALIFIED
NAME AND OR PAID OPTION INCENTIVE PLAN DEFERRED
PRINCIPAL IN CASH STOCK AWARDS ($) COMPENSATION COMPENSATION ALL OTHER
POSITION ($) AWARDS ($) (1) ($)(2) EARNINGS ($) COMPENSATION ($) TOTAL ($)
----------------------- ------------ ---------- ---------- ------------- ------------- ---------------- ---------
Scott Novack, Director -- -- -- -- -- -- --
______________
(1) Reflects dollar amount expensed by the company during applicable fiscal
year for financial statement reporting purposes pursuant to FAS 123R. FAS
123R requires the company to determine the overall value of the options as
of the date of grant based upon the Black-Scholes method of valuation, and
to then expense that value over the service period over which the options
become exercisable (vest). As a general rule, for time-in-service-based
options, the company will immediately expense any option or portion thereof
which is vested upon grant, while expensing the balance on a pro rata basis
over the remaining vesting term of the option. For a description FAS 123 R
and the assumptions used in determining the value of the options under the
Black-Scholes model of valuation, see the notes to the financial statements
included with this Form 10-KSB.
(2) Excludes awards or earnings reported in preceding columns.
(3) Includes all other compensation not reported in the preceding columns,
including (i) perquisites and other personal benefits, or property, unless
the aggregate amount of such compensation is less than $10,000; (ii) any
"gross-ups" or other amounts reimbursed during the fiscal year for the
payment of taxes; (iii) discounts from market price with respect to
securities purchased from the company except to the extent available
generally to all security holders or to all salaried employees; (iv) any
amounts paid or accrued in connection with any termination (including
without limitation through retirement, resignation, severance or
constructive termination, including change of responsibilities) or change
in control; (v) contributions to vested and unvested defined contribution
plans; (vi) any insurance premiums paid by, or on behalf of, the company
relating to life insurance for the benefit of the director; (vii) any
consulting fees earned, or paid or payable; (viii) any annual costs of
payments and promises of payments pursuant to a director legacy program and
similar charitable awards program; and (ix) any dividends or other earnings
paid on stock or option awards that are not factored into the grant date
fair value required to be reported in a preceding column.
2005 EMPLOYEE BENEFIT AND CONSULTING SERVICES COMPENSATION PLAN
---------------------------------------------------------------
On January 3, 2005, our company established an Employee Benefit and
Consulting Services Compensation Plan (the "2005 Plan") covering 2,000,000
shares, which 2005 Plan was ratified by our stockholders on February 9, 2005. On
August 12, 2005, the company's stockholders approved a 2,000,000 share increase
in the 2005 Plan to 4,000,000 shares.
-38-
ADMINISTRATION
--------------
Our board of directors administers the 2005 Plan, has the authority to
determine and designate officers, employees, directors and consultants to whom
awards shall be made and the terms, conditions and restrictions applicable to
each award (including, but not limited to, the option price, any restriction or
limitation, any vesting schedule or acceleration thereof, and any forfeiture
restrictions). The board may, in its sole discretion, accelerate the vesting of
awards.
TYPES OF AWARDS
---------------
The 2005 Plan is designed to enable us to offer certain officers,
employees, directors and consultants of us and our subsidiaries equity interests
in us and other incentive awards in order to attract, retain and reward such
individuals and to strengthen the mutuality of interests between such
individuals and our stockholders. In furtherance of this purpose, the 2005 Plan
contains provisions for granting non-statutory stock options and incentive stock
options and common stock awards.
STOCK OPTIONS. A "stock option" is a contractual right to purchase a
number of shares of common stock at a price determined on the date the option is
granted. An incentive stock option is an option granted under the Internal
Revenue Code of 1986 to our employees with certain tax advantages to the grantee
over non-statutory stock options. The option price per share of common stock
purchasable upon exercise of a stock option and the time or times at which such
options shall be exercisable shall be determined by the Board at the time of
grant. Such option price in the case of incentive stock options shall not be
less than 100% of the fair market value of the common stock on the date of grant
and may be granted below fair market value in the case of non-statutory stock
options. Incentive stock options granted to owners of 10% or more of our common
stock must be granted at an exercise price of at least 110% of the fair market
value of our common stock and may not have a term greater than five years. Also,
the value of incentive options vesting to any employee cannot exceed $100,000 in
any calendar year. The option price of our options must be paid in cash, money
order, check or common stock of the company. The non-statutory stock options may
also contain at the time of grant, at the discretion of the board, certain other
cashless exercise provisions. These cashless exercise provisions are included in
the currently outstanding non-statutory stock options granted by the board.
-39-
Options shall be exercisable at the times and subject to the conditions
determined by the Board at the date of grant, but no option may be exercisable
more than ten years after the date it is granted. If the optionee ceases to be
an employee of our company for any reason other than death, any incentive stock
option exercisable on the date of the termination of employment may be exercised
for a period of thirty days or until the expiration of the stated term of the
option, whichever period is shorter. In the event of the optionee's death, any
incentive stock option exercisable at the date of death may be exercised by the
legal heirs of the optionee from the date of death until the expiration of the
stated term of the option or six months from the date of death, whichever event
first occurs. In the event of disability of the optionee, any incentive stock
options shall expire on the stated date that the Option would otherwise have
expired or 12 months from the date of disability, whichever event first occurs.
The termination and other provisions of a non-statutory stock option shall be
fixed by the board of directors at the date of grant of each respective option.
COMMON STOCK AWARD. Common stock awards are shares of common stock that
will be issued to a recipient at the end of a restriction period, if any,
specified by the board if he or she continues to be an employee, director or
consultant of us. If the recipient remains an employee, director or consultant
at the end of the restriction period, the applicable restrictions will lapse and
we will issue a stock certificate representing such shares of common stock to
the participant. If the recipient ceases to be an employee, director or
consultant of us for any reason (including death, disability or retirement)
before the end of the restriction period unless otherwise determined by the
board, the restricted stock award will be terminated.
AWARDS
------
As of December 31, 2007, the Company has granted non-statutory stock
options to purchase 2,221,222 shares of the Company's Common Stock which are
currently outstanding at exercise prices ranging from $1.00 per share to $ 2.50
per share, exclusive of options which have been cancelled since the date of
grant. The board has granted options with varying terms.
It is not possible to predict the individuals who will receive future
awards under the Plan or the number of shares of Common Stock covered by any
future award because such awards are wholly within the discretion of the Board.
The table below contains information as of December 31, 2007 on the known
benefits provided to certain persons and group of persons under the Plan.
----------------------------------------------------- ---------------- ---------------- ------------------------
NUMBER OF RANGE OF VALUE OF UNEXERCISED
SHARES SUBJECT EXERCISE PRICE OPTIONS AT
TO OPTIONS ($) PER SHARE DECEMBER 31, 2007 (1)
----------------------------------------------------- ---------------- ---------------- ------------------------
Dean L. Julia, Chief Executive Officer 600,000 $1.00 - $1.20 $-0-
----------------------------------------------------- ---------------- ---------------- ------------------------
Michael D. Trepeta, President 600,000 $1.00 - $1.20 $-0-
----------------------------------------------------- ---------------- ---------------- ------------------------
Sean McDonnell, Chief Financial officer 50,000 $1.00 $-0-
----------------------------------------------------- ---------------- ---------------- ------------------------
Three Executive Officers As a group 1,250,000 $1.00 - $1.20 $-0-
----------------------------------------------------- ---------------- ---------------- ------------------------
Non-Executive Officer, Employees and Consultants 971,222 $1.00-$ 2.50 $-0-
----------------------------------------------------- ---------------- ---------------- ------------------------
__________
(1) Value is normally calculated by multiplying (a) the difference between
the market value per share at period end (i.e. $.66 based upon a last
sale on December 31, 2007) and the option exercise price by (b) the
number of shares of Common Stock underlying the option.
-40-
ELIGIBILITY
-----------
Our officers, employees, directors and consultants of Ace and our
subsidiaries are eligible to be granted stock options, and common stock awards.
TERMINATION OR AMENDMENT OF THE 2005 PLAN
-----------------------------------------
The board may at any time amend, discontinue, or terminate all or any
part of the 2005 Plan, provided, however, that unless otherwise required by law,
the rights of a participant may not be impaired without his or her consent, and
provided that we will seek the approval of our stockholders for any amendment if
such approval is necessary to comply with any applicable federal or state
securities laws or rules or regulations.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
---------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS.
----------------------------
As of March 24, 2008, the Company had outstanding 8,101,615 shares of
Common Stock. The only persons of record who presently hold or are known to own
(or believed by the Company to own) beneficially more than 5% of the outstanding
shares of such class of stock is listed below. The following table also sets
forth certain information as to holdings of the Company's Common Stock of all
officers and directors individually, and all officers and directors as a group.
------------------------------------------------------------- ------------------------------- ------------------------
NUMBER OF COMMON APPROXIMATE
NAME AND ADDRESS OF BENEFICIAL OWNER (1) SHARES PERCENTAGE
----------------------------------------------------------------------------------------------------------------------
OFFICERS AND DIRECTORS:
------------------------------------------------------------- ------------------------------- ------------------------
Scott Novack
457 Rockaway Avenue
Valley Stream, NY 11583 1,052,402 13.0
------------------------------------------------------------- ------------------------------- ------------------------
Michael D. Trepeta
457 Rockaway Avenue
Valley Stream, NY 11583(2) 1,566,402 18.1
------------------------------------------------------------- ------------------------------- ------------------------
Dean L. Julia
457 Rockaway Avenue
Valley Stream, NY 11583 (2) 1,536,901 17.8
------------------------------------------------------------- ------------------------------- ------------------------
Sean McDonnell
457 Rockaway Avenue
Valley Stream, NY 11583 (3) 50,000 .6
------------------------------------------------------------- ------------------------------- ------------------------
All Directors and Officers as a
Group (four persons) (4) 4,205,705 45.5
------------------------------------------------------------- ------------------------------- ------------------------
Glenwood Capital Corporation
2070 South Hibiscus Drive
North Miami Beach, FL 33181 (5) 979,122 11.9
------------------------------------------------------------- ------------------------------- ------------------------
Domenico Iannucci
One Windsor Drive
Muttontown, NY 11753 (6) 789,660 9.7
------------------------------------------------------------- ------------------------------- ------------------------
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_______________
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended, and is generally determined
by voting powers and/or investment powers with respect to securities.
Unless otherwise noted, all of such shares of common stock listed above
are owned of record by each individual named as beneficial owner and such
individual has sole voting and dispositive power with respect to the
shares of common stock owned by each of them. Such person or entity's
percentage of ownership is determined by assuming that any options or
convertible securities held by such person or entity, which are
exercisable within sixty (60) days from the date hereof, have been
exercised or converted as the case may be, but not for the purposes of
determining the number of outstanding shares held by any other named
beneficial owner.
(2) Includes options to purchase 550,000 shares. Excludes options to purchase
100,000 shares which will vest in December 2008.
(3) Includes options to purchase 50,000 shares. (4) Includes options to
purchase 1,150,000 shares.
(5) Includes 600,000 shares and 50,000 Class B Warrants owned by Glenwood
Capital, 218,000 shares and 30,000 warrants owned by Peter S. Chung and 47,212 shares
and 7,910 warrants owned by Brookshire and 26,000 warrants owned by Tim Ruggiero,
a principal of Brookshire. The foregoing information was based on information
supplied to Ace by the security holders.
(6) Includes 339,660 shares of Common Stock, Class A Warrants to purchase
300,000 shares and Class B Warrants to purchase 50,000 shares and includes
options to purchase 100,000 shares.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
-------------------------------------------------------------------
The following summary information is as of December 31, 2007 and
relates to our 2005 Plan described elsewhere herein pursuant to which we have
granted options to purchase our common stock:
------------------------------- ------------------------------ ---------------------- --------------------------------
(a) (b) (c)
------------------------------- ------------------------------ ---------------------- --------------------------------
Number of securities
remaining available for
Number of shares of common Weighted average future issuance under
stock to be issued upon exercise price of equity compensation plans
exercise outstanding (excluding shares
Plan category of outstanding options options reflected in column (a)
------------------------------- ------------------------------ ---------------------- --------------------------------
Equity compensation
Plans (1) 2,221,222 1.18 1,778,778
------------------------------- ------------------------------ ---------------------- --------------------------------
(1) Options exercisable at December 31, 2007 include 2,221,222 shares with a
weighted average exercise price of $1.00 to $2.50 per share and aggregate
intrinsic value of $0.00.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
---------------------------------------------------------
RELATED PARTY TRANSACTIONS
--------------------------
Michael Trepeta's wife has a company which is a candle supplier. From
time-to-time, we have in the past and may in the future purchase candle supplies
from her company. During 2004, 2005, 2006 and 2007, we purchased a total of
$20,471, $10,313, $8,657 and $4,934, respectively, from her company.
The transactions above were approved by the Board of Directors based
upon obtaining at least three competitive quotes and Mr. Trepeta's wife being
the best price. Accordingly, the transactions described above were believed by
Management to be on terms that are at least as favorable to us as the terms we
could have obtained from an unaffiliated third party.
In the future, we expect to have one or more members of our Board be
independent directors of our company. It is anticipated that future transactions
between us and our executive officers and directors and other affiliated parties
will be approved by the then disinterested members of the Board and, if not a
majority of the Board, then by our independent director(s) through a committee
appointed by the Board.
OTHER TRANSACTIONS
------------------
In 2006, we engaged Brookshire Securities Corporation, a licensed
broker-dealer and member of the NASD, to act as Placement Agent to raise
financing for our company through the sale of our unregistered securities solely
to "accredited investors" as defined in Rule 501 of Regulation D of the
Securities Act of 1933, as amended. Pursuant to the offering, we raised gross
proceeds of $1,665,250 from the sale of Units. Each Unit consisted of 60,000
shares of our Common Stock and Class C Warrants to purchase 30,000 shares of
Common Stock at an offering price of $105,000 per Unit.
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. We have agreed to file a Registration Statement with the Securities and
Exchange Commission within 60 days of October 30, 2006 (automatically extended
to 120 days if we have executed an agreement to acquire the stock or assets of
another promotional product distributor), 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 of 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 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 October 30, 2006, 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.
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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 Ace
Marketing 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."
Item 13. EXHIBITS
-----------------
Exhibit DESCRIPTION
------- -----------
NO.
---
3.1 Articles of Incorporation filed March 26, 1998 (1)
3.2 Amendment to Articles of Incorporation filed June 10, 1999 (1)
3.3 Amendment to Articles of Incorporation approved by stockholders on
February 9, 2005(1)
3.4 Amended By-Laws (1)
10.1 Employment Agreement - Michael Trepeta (2)
10.2 Employment Agreement - Dean Julia (2)
10.3 Amendments to Employment Agreement - Michael Trepeta (5)(7)
10.4 Amendments to Employment Agreement - Dean L. Julia (5)(7)
10.5 Joint Venture Agreement with Atrium Enterprises Ltd. (6)
10.6 Agreement with Aon Consulting (6)
11.1 Statement Statement re: Computation of per share earnings. See
Statement of Operations and Notes to Financial Statements
14.1 Code of Ethics/Code of Conduct (5)
21.1 Subsidiaries of the Issuer - None in 2007
23.1 Consent of by Holtz Rubenstein Reminick LLP (3)
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 of Earnings - 2007 (3)
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___________
(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.
-45-
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
-------------------------------------------------
AUDIT FEES
For the fiscal year ended December 31, 2007 and 2006, the aggregate
fees billed for professional services rendered by Holtz Rubenstein Reminick LLP
("independent auditors") for the audit of the Company's annual financial
statements and the reviews of its financial statements included in the Company's
quarterly reports and filings under the Securities Act of 1933 totaled
approximately $54,000 and $49,000, respectively.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
For the fiscal years ended December 31, 2007 and 2006, there were $-0-
in fees billed for professional services by the Company's independent auditors
rendered in connection with, directly or indirectly, operating or supervising
the operation of its information system or managing its local area network.
ALL OTHER FEES
For the fiscal years ended December 31, 2007 and 2006, there were no
fees paid or billed for preparation of corporate tax returns, tax research and
other professional services rendered by the Company's independent auditors.
-46-
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ACE MARKETING & PROMOTIONS, INC.
By: /S/ Dean L. Julia
---------------------------------
Dean L. Julia, Chairman of the
Board and Chief Executive Officer
Dated: Valley Stream, New York
March 28, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURES TITLE DATE
---------- ----- ----
/S/ DEAN L. JULIA Chairman of the Board March 28, 2008
--------------------------- Chief Executive Officer
Dean L. Julia
/S/ SEAN MCDONNELL Principal Financial and
-------------------------- Accounting Officer March 28, 2008
Sean McDonnell
/S/ MICHAEL D. TREPETA
--------------------------- President, Director March 28, 2008
Michael D. Trepeta
/S/ SCOTT NOVACK
--------------------------- Director March 28, 2008
Scott Novack
Dean L. Julia, Michael D. Trepeta and Scott Novack represent all the current
members of the Board of Directors.
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