10-Q/A 1 ace_10qa-063008.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-Q/A QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008 COMMISSION FILE NUMBER: 000-51160 ACE MARKETING & PROMOTIONS, INC. -------------------------------- (Exact name of registrant as specified in its charter) NEW YORK 11-3427886 -------- ---------- (State of jurisdiction of Incorporation) (I.R.S. Employer Identification No.) 457 ROCKAWAY AVE. VALLEY STREAM, NY 11581 ----------------------- (Address of principal executive offices) (516) 256-7766 -------------- (Registrant's telephone number) NOT APPLICABLE -------------- (Former name, address and fiscal year, if changed since last report) ------------------------- Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large Accelerated Filer [ ] Accelerated Filer [ ] Accelerated Filer [ ] Smaller Reporting Company [X} Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES [ ] NO [X] APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: As of August 1, 2008, the registrant had a total of 8,321,615 shares of Common Stock outstanding, exclusive of 250,000 outstanding shares of Series A Preferred Stock automatically convertible on December 15, 2008 into a minimum of 500,000 shares of Common Stock and a maximum of 1,000,000 shares of Common Stock. ACE MARKETING & PROMOTIONS, INC. FORM 10-Q/A QUARTERLY REPORT TABLE OF CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Balance Sheet as of June 30, 2008 and December 31, 2007 3 Condensed Statements of Operations for the Three and Six Months Ended June 30, 2008 and 2007 4 Condensed Statements of Cash Flows for the Six Months Ended June 30, 2008 and June 30, 2007 5 Notes to Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures and Market Risk 17 Item 4. Controls and Procedures 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities 19 Item 3. Defaults Upon Senior Securities 20 Item 4. Submissions of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 21 2 ACE MARKETING & PROMOTIONS, INC. CONDENSED BALANCE SHEETS --------------------------------------------------------------------------------------------------- JUNE 30, December 31, 2008 2007 --------------------------------------------------------------------------------------------------- (UNAUDITED) (audited) ASSETS Current Assets: Cash and cash equivalents $ 579,305 $ 819,021 Accounts receivable, net of allowance for doubtful accounts of $10,000 at June 30, 2008 and December 31, 2007, respectively 859,319 963,919 Note receivable 50,000 -- Prepaid expenses and other current assets 84,531 75,375 ----------- ----------- Total Current Assets 1,573,155 1,858,125 Property and Equipment, net 29,641 34,065 Other Assets 7,745 7,745 ----------- ----------- Total Assets $ 1,610,541 $ 1,900,125 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 460,816 $ 475,452 Accrued expenses 151,921 206,015 ----------- ----------- Total Current Liabilities 612,737 681,467 ----------- ----------- 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; 8,344,949 and 8,124,949 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively 835 813 Less: Treasury Stock, at cost, 23,334 shares (31,501) (31,501) Additional paid-in capital 3,929,742 3,657,920 Accumulated deficit (2,901,272) (2,408,574) ----------- ----------- Total Stockholders' Equity 997,804 1,218,658 ----------- ----------- Total Liabilities and Stockholders' Equity $ 1,610,541 $ 1,900,125 =========== =========== --------------------------------------------------------------------------------------------------- SEE NOTES TO CONDENSED FINANCIAL STATEMENTS. 3 ACE MARKETING & PROMOTIONS, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) ------------------------------------------------------------------------------------------------------------------ Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 ------------------------------------------------------------------------------------------------------------------ Revenue, net $ 2,049,867 $ 1,400,786 $ 3,226,050 $ 2,683,666 Cost of Revenue 1,578,235 960,074 2,388,695 1,825,598 ----------- ----------- ----------- ----------- Gross Profit 471,632 440,712 837,355 858,068 ----------- ----------- ----------- ----------- Operating Expenses: Selling, general and administrative expenses 666,312 580,384 1,334,030 1,134,908 ----------- ----------- ----------- ----------- Total Operating Expenses 666,312 580,384 1,334,030 1,134,908 ----------- ----------- ----------- ----------- Loss from Operations (194,680) (139,672) (496,675) (276,840) ----------- ----------- ----------- ----------- Other Income (Expense): Interest expense -- (43) -- (43) Interest income 1,524 7,995 3,977 16,337 ----------- ----------- ----------- ----------- Total Other Income (Expense) 1,524 7,952 3,977 16,294 ----------- ----------- ----------- ----------- Net Loss $ (193,156) $ (131,720) $ (492,698) $ (260,546) =========== =========== =========== =========== Net Loss Per Common Share: Basic $ (0.02) $ (0.02) $ (0.06) $ (0.03) =========== =========== =========== =========== Diluted $ (0.02) $ (0.02) $ (0.06) $ (0.03) =========== =========== =========== =========== Weighted Average Common Shares Outstanding: Basic 8,165,571 8,012,722 8,163,914 8,020,499 =========== =========== =========== =========== Diluted 8,165,571 8,012,722 8,163,914 8,020,499 =========== =========== =========== =========== ------------------------------------------------------------------------------------------------------------------ SEE NOTES TO CONDENSED FINANCIAL STATEMENTS. 4 ACE MARKETING & PROMOTIONS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) ---------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, 2008 2007 ---------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net loss $ (492,698) $ (260,546) ----------- ----------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 4,424 2,243 Stock-based compensation 271,844 51,166 Changes in operating assets and liabilities: (Increase) decrease in operating assets: Accounts receivable 104,600 (11,078) Prepaid expenses and other assets (9,156) (19,948) Decrease in operating liabilities: Accounts payable and accrued expenses (68,730) (73,300) ----------- ----------- Total adjustments 302,982 (50,917) ----------- ----------- Net Cash Used in Operating Activities (189,716) (311,463) ----------- ----------- Cash Flows from Investing Activities: Increase in Note receivable 50,000 -- Acquisition of property and equipment -- (4,406) ----------- ----------- Net Cash Used in Financing Activities 50,000 (4,406) ----------- ----------- Net Decrease in Cash and Cash Equivalents (239,716) (315,869) Cash and Cash Equivalents, beginning of period 819,021 1,353,131 ----------- ----------- Cash and Cash Equivalents, end of period $ 579,305 $ 1,037,262 =========== =========== --------------------------------------------------------------------------------------------------------------- SEE NOTES TO CONDENSED FINANCIAL STATEMENTS. 5 PART I. FINANCIAL INFORMATION ACE MARKETING & PROMOTIONS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED) The Condensed Balance Sheet as of June 30, 2008, the Condensed Statements of Operations for the three months and six months ended June 30, 2008 and 2007 and the Condensed Statements of Cash Flows for six months ended June 30, 2008 and 2007 have been prepared by us without audit, and in accordance with the requirements of Form 10-Q/A and, therefore, they do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. In our opinion, the accompanying unaudited condensed financial statements contain all adjustments necessary to present fairly in all material respects our financial position as of June 30, 2008, results of operations for the three months and six months ended June 30, 2008 and 2007 and cash flows for the six months ended June 30, 2008 and 2007. All such adjustments are of a normal recurring nature. This report should be read in conjunction with our Form 10-KSB for our fiscal year ended December 31, 2007. The results reported for the three months and six months ended June 30, 2008 are not necessarily indicative of the results which may be expected for the full year. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition - Revenue is recognized when title and risk of loss transfers to the customer and the earnings process is complete. In general, title passes to our customers upon the customer's receipt of the merchandise. Revenue is accounted for in accordance with Emerging Issue Task Force (EITF) Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." Revenue is recognized on a gross basis since the Company has the risks and rewards of ownership, latitude in selection of vendors and pricing, and bears all credit risk. The Company records all shipping and handling fees billed to customers as revenues, and related costs as cost of goods sold, when incurred, in accordance with EITF 00-10, "Accounting for Shipping and Handling Fees and Costs." Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recently Issued Accounting Pronouncements - On September 15, 2006, the Financial Accounting Standards Board ("FASB") issued Statement No. 157, FAIR VALUE MEASUREMENTS ("SFAS 157"). SFAS 157 provides guidance for using fair value to measure assets and liabilities. This statement references fair value as the price that would be received to sell an asset or paid to transfer a liability, in an orderly transaction, between market participants in the market in which the reporting entity transacts. The statement applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The statement does not expand the use of fair value in any new circumstances. The Company adopted the provisions of SFAS No. 157 related to financial assets and liabilities as of January 1, 2008. The application of this standard did not have a material impact on the results of operations or financial condition. The Company elected to defer adoption of SFAS No. 157 for non-financial assets and liabilities and does not anticipate that adoption in fiscal 2009 will have a material impact on the results of operations or financial condition. 6 PART I. FINANCIAL INFORMATION ACE MARKETING & PROMOTIONS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED) In February 2007, the Financial Accounting Standards Board (FASB), issued Statement of Financial Accounting Standards (SFAS) No. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES -- INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115. Under SFAS No. 159, a company may elect to measure eligible financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. If elected, SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company did not elect to begin reporting any financial assets or liabilities at fair value upon adoption of SFAS No. 159 on January 1, 2008 and did not elect to report at fair value any new financial assets or liabilities entered during the quarter ended June 30, 2008 In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, "Business Combinations" ("SFAS 141R"), which establishes principles and requirements for the reporting entity in a business combination, including recognition and measurement in the financial statements of the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. This statement also establishes disclosure requirements to enable financial statement users to evaluate the nature and financial effects of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after fiscal years beginning after December 15, 2008. The Company is currently evaluating the effect that the adoption of SFAS 141R will have on its financial statements. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent; the amount of net income attributable to the parent and to the noncontrolling interest; changes in a parent's ownership interest; and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is required to be adopted prospectively for the first annual reporting period beginning after December 15, 2008. The Company is currently reviewing the effect that the adoption of this statement will have on its financial statements. 2. LOSS PER SHARE Basic loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Dilutive loss per share gives effect to stock options and warrants, which are considered to be dilutive common stock equivalents. 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 5,124,000 and 3,519,000 because they are antidilutive as a result of a net loss for the three and six months ended June 30, 2008 and 2007. 7 ACE MARKETING & PROMOTIONS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED) 3. STOCK COMPENSATION Effective January 1, 2006, the Company's Plan is accounted for in accordance with the recognition and measurement provisions of Statement of Financial Accounting Standards ("FAS") No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)"). FAS 123 (R) requires compensation costs related to share-based payment transactions, including employee stock options, to be recognized in the financial statements. In addition, the Company adheres to the guidance set forth within Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 107, which provides the Staff's views regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides interpretations with respect to the valuation of share-based payments for public companies. Stock options and warrants issued in exchange for non-employee services pursuant to the provisions of FAS 123(R), Emerging Issues Task Force ("EITF") 96-3 and EITF 96-18 are accounted for at the fair value of the consideration or services received or the fair value of the equity instruments issued, whichever is more reliably measurable The Company's results for the three and six month periods ended June 30, 2008 and 2007 includes share-based compensation expense totaling approximately $129,000 and $25,000 and $272,000 and $51,000, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations within selling, general and administrative expenses. No income tax benefit has been recognized in the statement of operations for share-based compensation arrangements due to a history of operating losses. The following table summarizes stock-based compensation expense for the three and six months ended June 30, 2008 and 2007. ------------------------------------------------------ ----------------------------------------------- Six Months Ended Three Months Ended June 30, June 30, 2008 2007 2008 2007 ------------------------------------------------------ ------------ -------------- ---------- -------- Employee stock-based compensation - option grants $133,198 $25,724 - $12,862 Employee stock-based compensation - stock grants 17,000 - - - Non-Employee stock-based compensation - option grants 31,158 25,442 38,195 12,721 Non-Employee stock-based compensation - stock grants 60,000 - 60,000 - Non-Employee-Warrants 30,488 - 30,488 - ------------------------------------------------------ ------------ -------------- ----------- ------- Total $271,844 $51,166 $128,683 $25,583 ------------------------------------------------------ ============ ============== =========== ======= 8 ACE MARKETING & PROMOTIONS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED) STOCK OPTION PLAN During Fiscal 2005, the Company established, and the stockholders approved, an Employee Benefit and Consulting Services Compensation Plan (the "Plan") for the granting of up to 2,000,000 non-statutory and incentive stock options and stock awards to directors, officers, consultants and key employees of the Company. On June 9, 2005, the Board of Directors amended the Plan to increase the number of stock options and awards to be granted under the Plan to 4,000,000. All stock options under the Plan are granted at or above the fair market value of the common stock at the grant date. Employee and non-employee stock options vest over varying periods and generally expire either 5 or 10 years from the grant date. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. For option grants, the Company will take into consideration guidance under SFAS 123R and SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and updating assumptions. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based upon observation of actual time elapsed between date of grant and exercise of options for all employees. Previously such assumptions were determined based on historical data. The weighted average assumptions made in calculating the fair values of options granted during the six months ended June 30, 2008 and 2007 are as follows: --------------------------------- ----------------------- -------------------- Six Months Ended Three Months Ended June 30, June 30, 2008 2007 2008 2007 --------------------------------- ----------------------- -------------------- Expected volatility 115.00% - - - Expected dividend yield - - - - Risk-free interest rate 3.125% - - - Expected term (in years) 5.00 - - - --------------------------------- ---------- ------------ -------------------- The following table represents the activity under our stock option plan: Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Share Price Term Value ------------------------------------- ------------- --------- ------------- ----------- Outstanding, January 1, 2008 2,221,222 $ 1.18 Granted 1,110,000 $ .98 ------------- Outstanding, June 30, 2008 3,331,222 $ 1.11 6.52 $ - ============= Options exercisable, June 30, 2008 2,097,038 $ 1.13 5.45 $ - ============= ACE MARKETING & PROMOTIONS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED) The weighted-average grant-date fair value of options granted during the six months ended June 30, 2008 was $0.53. There were no option grants for the six months ended June 30, 2007. The aggregate intrinsic value of options outstanding and options exercisable at June 30, 2008 is calculated as the difference between the exercise price of the underlying options and the market price of the Company's common stock for the shares that had exercise prices, that were lower than the $.50 closing price of the Company's common stock on June 30, 2008. At June 30, 2008 there were no outstanding options with exercise prices less than $.50. As of June 30, 2008, the fair value of unamortized compensation cost related to unvested stock option awards was approximately $612,765. Unamortized compensation cost as of June 30, 2008 is expected to be recognized over a remaining weighted-average vesting period of 2.89 years. 4. NOTE RECEIVABLE In February 2008, the Company entered into an agreement with Blue Bite, LLC ("Blue Bite"), a distributor of wireless networking solutions, to become an authorized provider and reseller in the United States of mobile advertising solutions. In connection with the agreement, the Company loaned Blue Bite $50,000. The Note bears interest at 10% per annum and is due March 1, 2009. The Note is convertible, at the Company's option, into a 10% ownership interest of Blue Bite. Upon conversion, the Company would also have to deliver to Blue Bite, $75,000 in restricted Common Stock of the Company as additional consideration. 5. TRANSACTIONS WITH MAJOR CUSTOMER The Company sells its products to a geographically diverse group of customers, performs ongoing credit evaluations of its customers and generally does not require collateral. For the six months ended June 30, 2008 and 2007, sales from ten percent or greater customers approximated 21.7% and 27.0%, respectively of total sales. During these reporting periods, we had one principal customer, of whom is a retailer, accounting for these results. 6. CONSULTING AGREEMENT During the three months ended June 30, 2008, the company issued to an investment advisor 133,500 warrants for the purpose of providing investor awareness and business advisory services. The services were recorded equal to the value of the warrants and an expense of $30,488 is included in selling, general and administrative for the three and six months ended June 30, 2008. During the three months ended June 30, 2008, the company issued 200,000 shares of common stock for two independent contractors to seek and obtain new business for the firm. The services were recorded equal to the value of the stock at the date of grant and an expense of $60,000 is included in selling, general and administrative for the three and six months ended June 30, 2008. During the six months ended June 30, 2008, the Company issued 20,000 shares of common stock to a consultant in exchange for marketing and training services. The services were recorded equal to the value of the shares and an expense of $17,000 is included in selling, general and administrative for the six months ended June 30, 2008. 9 ACE MARKETING & PROMOTIONS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED) 7. SUBSEQUENT EVENTS - WARRANTS On July 1, 2008, the Company's Board of Directors approved the extension of the expiration date of the Company's Class A and Class B Warrants to October 1, 2008. In July 2008, the Company sold 250,000 shares of Convertible Preferred Stock for $250,000. The shares of Preferred Stock automatically converts into a minimum 500,000 and a maximum of 1,000,000 shares on December 15, 2008 based upon a conversion price equal to the lower of $.50 per share or the average closing sales price over the ten trading dates preceding December 15, 2008, with a floor of $.25. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS The information contained in this Form 10-Q/A and documents incorporated herein by reference are intended to update the information contained in the Company's Form 10-KSB for its fiscal year ended December 31, 2007 which includes our audited financial statements for the year ended December 31, 2007 and such information presumes that readers have access to, and will have read, the "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Risk Factors" and other information contained in such Form 10-KSB and other Company filings with the Securities and Exchange Commission ("SEC"). This Quarterly Report on Form 10-Q/A contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, and actual results could be significantly different than those discussed in this Form 10-Q. Certain statements contained in Management's Discussion and Analysis, particularly in "Liquidity and Capital Resources," and elsewhere in this Form 10-Q are forward-looking statements. These statements discuss, among other things, expected growth, future revenues and future performance. Although we believe the expectations expressed in such forward-looking statements are based on reasonable assumptions within the bounds of our knowledge of our business, a number of factors could cause actual results to differ materially from those expressed in any forward-looking statements, whether oral or written, made by us or on our behalf. The forward-looking statements are subject to risks and uncertainties including, without limitation, the following: (a) changes in levels of competition from current competitors and potential new competition, (b) possible loss of customers, and (c) the company's ability to attract and retain key personnel, (d) The Company's ability to manage other risks, uncertainties and factors inherent in the business and otherwise discussed in this Form 10-Q/A and in the Company's other filings with the SEC. The foregoing should not be construed as an exhaustive list of all factors that could cause actual results to differ materially from those expressed in forward-looking statements made by us. All forward-looking statements included in this document are made as of the date hereof, based on information available to the Company on the date thereof, and the Company assumes no obligation to update any forward-looking statements. OVERVIEW We are a full service promotional marketing and distribution company offering a wide array of business solutions. Ace has grown organically through referrals based on its high quality service and external financings to support our growth. We are also expanding through hiring leading independent salespersons who are well supported by the Ace proprietary business structure. By offering more services and solutions to our customers, new recruits will have the ability to expand their present business by simply making the move to Ace. Upon integrating their client base into our system they too become trusted advisors that provide integrated business solutions instead of a commodity based promotional product salesperson. These achievements position us to accelerate growth through potential acquisition and consolidation of other companies as well as simply recruiting experienced salespeople. In the event a company is acquired by us, of which no assurances can be given in this regard, the new clients would all be introduced to the additional services that are now available in our promotional marketing model. 11 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. 12 Recently Issued Accounting Pronouncements ----------------------------------------- On September 15, 2006, the Financial Accounting Standards Board ("FASB") issued Statement No. 157, FAIR VALUE MEASUREMENTS ("SFAS 157"). SFAS 157 provides guidance for using fair value to measure assets and liabilities. This statement references fair value as the price that would be received to sell an asset or paid to transfer a liability, in an orderly transaction, between market participants in the market in which the reporting entity transacts. The statement applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The statement does not expand the use of fair value in any new circumstances. The Company adopted the provisions of SFAS No. 157 related to financial assets and liabilities as of January 1, 2008. The application of this standard did not have a material impact on the results of operations or financial condition. The Company elected to defer adoption of SFAS No. 157 for non-financial assets and liabilities and does not anticipate that adoption in fiscal 2009 will have a material impact on the results of operations or financial condition. In February 2007, the Financial Accounting Standards Board (FASB), issued Statement of Financial Accounting Standards (SFAS) No. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES -- INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115. Under SFAS No. 159, a company may elect to measure eligible financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. If elected, SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company did not elect to begin reporting any financial assets or liabilities at fair value upon adoption of SFAS No. 159 on January 1, 2008 and did not elect to report at fair value any new financial assets or liabilities entered during the quarter ended June 30, 2008 In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, "Business Combinations" ("SFAS 141R"), which establishes principles and requirements for the reporting entity in a business combination, including recognition and measurement in the financial statements of the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. This statement also establishes disclosure requirements to enable financial statement users to evaluate the nature and financial effects of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after fiscal years beginning after December 15, 2008. The Company is currently evaluating the effect that the adoption of SFAS 141R will have on its financial statements. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent; the amount of net income attributable to the parent and to the noncontrolling interest; changes in a parent's ownership interest; and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is required to be adopted prospectively for the first annual reporting period beginning after December 15, 2008. The Company is currently reviewing the effect that the adoption of this statement will have on its financial statements. 13 RESULTS OF OPERATIONS The following table sets forth certain selected unaudited condensed statement of operations data for the periods indicated in dollars and as a percentage of total net revenues. The following discussion relates to our results of operations for the periods noted and is not necessarily indicative of the results expected for any other interim period or any future fiscal year. In addition, we note that the period-to-period comparison may not be indicative of future performance. Three Months Ended June 30, 2008 2007 ------------ ------------ Revenue $2,049,867 $1,400,786 Cost of Revenue 1,578,235 960,074 ------------ ------------ Gross Profit 471,632 440,712 Selling, general & Administrative expenses 663,312 580,384 ------------ ------------ Loss from operations (194,680) (139,672) ============ ============ We generated revenues of $2,049,867 in the second quarter of 2008 compared to $1,400,786 in the same three month period ending June 30, 2007. The increase in revenues of $649,081 in 2008 compared to 2007 was for the following reason. Through a collaborated effort with a major customer, Ace Marketing was able to create, administer and fulfill in house a large order which benefited over 3,500 members of a police organization. The order was responsible for approximately 34.1% of the quarterly revenue. We can provide no assurances that this large order will be recurring in future operating periods. Cost of revenues was $1,578,235 or 77% of revenues in the second quarter of 2008 compared to $960,074 or 69% of revenues in the same three months of 2007. Cost of revenues includes purchases and freight costs associated with the shipping of merchandise to our customers. Increase in cost of revenues of $618,161 in 2008 is related to a increase in sales to a major customer which placed a large order during the current quarter ending June 30, 2008. Gross profit was $471,632 in the second quarter of 2008 or 23% of net revenues compared to $440,712 in the same three months of 2007 or 31% of revenues. Gross profits will vary period-to-period depending upon a number of factors including the mix of items sold, pricing of the items and the volume of product sold. Also, it is our practice to pass freight costs on to our customers. Reimbursement of freight costs which are included in revenues have lower profit margins than sales of our promotional products and has the effect of reducing our overall gross profit margin on sales of products, particularly on smaller orders. The second quarter gross profit was negatively impacted by reduced gross profit achieved in connection with the large order placed by members of a police organization Selling, general, and administrative expenses were $666,312 in the second quarter of 2008 compared to $580,384 in the same three months of 2007. Such costs include payroll and related expenses, commissions, insurance, rents, professional, consulting and public awareness fees. The overall increase of $85,928 was primarily due to a $103,100 increase in stock based compensation. Net loss was $194,680 in the second quarter of 2008 compared to a net loss of $139,672 for the same three months in 2007. The second quarter net loss for 2008 includes stock based payments (non-cash) of $128,683 as compared to $25,583 for the comparable period of 2007. No benefit for income taxes is provided for in 2008 and 2007 due to the full valuation allowance on the net deferred tax assets. 14 The following table sets forth certain selected unaudited condensed statement of operations data for the periods indicated in dollars and as a percentage of total net revenues. The following discussion relates to our results of operations for the periods noted and is not necessarily indicative of the results expected for any other interim period or any future fiscal year. In addition, we note that the period-to-period comparison may not be indicative of future performance. Six months Ended June 30, 2008 2007 ------------ ------------ Revenue $3,226,050 $2,683,666 Cost of Revenues 2,388,694 1,825,598 ------------ ------------ Gross Profit 837,356 858,068 Selling, general & Administrative expenses 1,334,030 1,134,908 ------------ ------------ (Loss) from operations (496,674) (276,840) ============ ============ We generated revenues of $3,226,050 in the first six months of 2008 compared to $2,683,666 in the same six month period ending June 30, 2007. The increase in revenues of $542,384 in 2008 compared to 2007 is due to the collaborated effort with a major customer, Ace Marketing was able to create, administer and fulfill an in house order which benefited over 3,500 members of the organization. This order was responsible for 21.7% of revenues for the six months ended June 30, 2008. We can provide no assurance that this large order will be recurring in future operating periods. Cost of revenues was $2,388,694 or 74% of revenues in the first six months of 2008 compared to $1,825,598 or 68% of revenues in the same six months of 2007. Cost of revenues includes purchases and freight costs associated with the shipping of merchandise to our customers. Increase in cost of revenues of $563,096 in 2008 is related to a increase in sales to a major customer which placed a large order during the current quarter ending June 30, 2008. Gross profit was $837,356 in the first six months of 2008 or 26% of net revenues compared to $858,068 in the same six months of 2007 or 32% of revenues. Gross profits will vary period-to-period depending upon a number of factors including the mix of items sold, pricing of the items and the volume of product sold. Also, it is our practice to pass freight costs on to our customers. Reimbursement of freight costs which are included in revenues have lower profit margins than sales of our promotional products and has the effect of reducing our overall gross profit margin on sales of products, particularly on smaller orders. The six month gross profit was negatively impacted by reduced gross profit achieved in connection with the large order placed by members of a police organization. Selling, general, and administrative expenses were $1,334,030 in the first six months of 2008 compared to $1,134,908 in the same six months of 2007. Such costs include payroll and related expenses, commissions, insurance, rents, professional, consulting and public awareness fees. The overall increase of $199,122 was primarily due to a $220,678 increase in stock based compensation. Net loss from operations was $(496,674) in the first six months of 2008 compared to a net loss of $(276,840) for the same six months in 2007. The first six months net loss for 2008 includes stock based payments (non-cash) of $271,844 as compared to $51,166 for the comparable period of 2007. No benefit for income taxes is provided for in 2008 and 2007 due to the full valuation allowance on the net deferred tax assets. 15 Liquidity and Capital Resources ------------------------------- The company had cash and cash equivalents of $579,305 at June 30, 2008. Cash used by operating activities for the six months ended June 30, 2008 was $(239,716). This resulted primarily from a net loss of $(492,697), offset by stock based compensation of $271,844 a decrease in accounts receivable of $104,600 and an increase in prepaid expenses and other assets of $59,157 and a decrease of accounts payable and accrued expenses of $68,730. The company had cash and cash equivalents of $819,021 at December 31, 2007. Cash used by operating activities during the six months period ended June 30, 2007 was $(311,463). This resulted primarily from a net loss of $(260,546) and an increase in accounts receivable of $11,078, partially offset by stock based compensation of $51,166 and an decrease in accounts payable and accrued expenses of $73,300. Our company commenced operations in 1998 and was initially funded by our three founders, each of whom has made demand loans to our Company that have been repaid. Since 1999, we have relied primarily on equity financing from outside investors to supplement our cash flow from operations. We anticipate that our future liquidity requirements will arise from the need to finance our accounts receivable and inventories, hire additional sales persons, capital expenditures and possible acquisitions. The primary sources of funding for such requirements will be cash generated from operations, raising additional capital from the sale of equity or other securities and borrowings under debt facilities which currently do not exist. We believe that we can generate sufficient cash flow from these sources to fund our operations for at least the next fifteen months. In the event we should need additional financing, we can provide no assurances that we will be able to obtain financing on terms satisfactory to us, if at all. 2008 Financing --------------- During July of 2008, the Company sold 250,000 shares of its Series A Preferred Stock at a purchase price of $1.00 per share. The following describes the rights, preferences and privileges of the Series A Preferred Stock: o CONVERTIBILITY INTO COMMON STOCK. Each share of Preferred Stock shall automatically convert on December 15, 2008 into shares of Common Stock (the "Common Shares") based on a conversion price of the lower of $.50 per share or the average closing sale price for the Company's Common Stock on the OTC Bulletin Board for the 10 trading days immediately preceding December 15, 2008, with a floor of $.25 per share. Each share of Preferred Stock may at the option of the holder be converted into Common Shares prior to December 15, 2008 based upon a price of $.50 per share. o VOTING. The Preferred Shares shall have no voting rights until converted into Common Shares, except as otherwise required by applicable state law. o DIVIDENDS. The Preferred Shares shall have no dividend rights until converted into Common Shares, except as otherwise required by applicable state law. o LIQUIDATION PREFERENCE. The Preferred Shares shall have no liquidation preference and shall be treated the same as a holder of Common Shares. Exemption is claimed for the sale of the aforementioned 250,000 shares of Series A Preferred Stock pursuant to Rule 506 and/or Section 4(2) of the Securities Act of 1933, as amended. 16 2006 Financing -------------- In 2006, we engaged Brookshire Securities Corporation, a licensed broker-dealer and member of the NASD, to act as Placement Agent to raise financing for our company through the sale of our unregistered securities solely to "accredited investors" as defined in Rule 501 of Regulation D of the Securities Act of 1933, as amended. Pursuant to the offering, we raised gross proceeds of $1,665,250 from the sale of Units. Each Unit consisted of 60,000 shares of our Common Stock and Class C Warrants to purchase 30,000 shares of Common Stock at an offering price of $105,000 per Unit. We had the right to sell fractional Units, but not fractional shares or fractional Class C Warrants. The Class C Warrants are exercisable at $1.75 per share at anytime from the date of issuance through the earlier of June 30, 2009 or the redemption date of the Class C Warrants, whichever is earlier. Each Class C Warrant may be redeemed by us at a redemption price of $.001 per Warrant, on at least 30 days prior written notice (the "Redemption Date'), at anytime after the average closing sales price of our Common Stock as reported in the Over-the-Counter Market OTC Electronic Bulletin Board, NASDAQ or if listed on a national securities exchange, equals or exceeds $3.00 per share for a period of 20 consecutive trading days ending within 10 days prior to the date of the notice of redemption is mailed or otherwise delivered by us to each holder of Class C Warrants. We sold 951,575 shares of our Common Stock and Class C Warrants to purchase 475,788 shares of our Common Stock in the offering. On December 21, 2006 and December 17, 2007, we obtained an effective registration statement with the Securities and Exchange Commission to register the resale of 951,575 shares of Common Stock and 475,588 shares underlying the Class C Warrants. We also issued to the Placement Agent 139,680 shares of Common Stock and five-year Warrants to purchase 95,160 shares of Common Stock exercisable at $1.00 per share. Exemption from registration is claimed under Rule 506 of Regulation d promulgated under Section 4(2) of the Securities Act. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our short term money market investments. The Company does not have any financial instruments held for trading or other speculative purposes and does not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure. The Company does not have any credit facilities with variable interest rates. 17 ITEM 4. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our management, including our CEO and CFO, an evaluation was performed on the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. There were no changes in the Company's internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting. At December 31, 2007, management identified the following significant deficiencies that when aggregated give rise to a material weakness in the area of financial reporting. These deficiencies include a) lack of review or evidence of review in the financial Reporting process; b) the inability to account for complex equity transaction; c) various manual processes and dual databases creating need for extensive number of journal entries; and d) inability to apply complex accounting principles. Management is presently assessing these deficiencies and as of June 30, 2008 It had not remediated the identified deficiencies. 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS: As of the filing date of this Form 10-Q/A, we are not a party to any pending legal proceedings. ITEM 2. CHANGES IN SECURITIES. (a) From January 2008 to the filing date of this Form 10-Q/A, we had no sales or issuances of unregistered common stock, except we made sales or issuances of unregistered securities listed in the table below: ---------------- ----------- ------------ ----------------------- ------------------- ---------------------- CONSIDERATION RECEIVED AND DESCRIPTION OF UNDERWRITING OR OTHER DISCOUNTS IF OPTION, WARRANT OR TO MARKET PRICE OR EXEMPTION FROM CONVERTIBLE SECURITY, TITLE OF NUMBER CONVERTIBLE SECURITY, REGISTRATION TERMS OF EXERCISE DATE OF SALE SECURITY SOLD AFFORDED TO PURCHASERS CLAIMED OR CONVERSION ---------------- ----------- ------------ ----------------------- ------------------- ---------------------- January 2008 Common 1,000,000 Services rendered; no Section 4(2) Not applicable. Stock shares commissions paid Options ---------------- ----------- ------------ ----------------------- ------------------- ---------------------- January 2008 Common 20,000 Services rendered; no Section 4(2). A Not applicable. Stock shares commissions paid restrictive legend appears on each certificate ---------------- ----------- ------------ ----------------------- ------------------- ---------------------- June 2008 Common 200,000 Services rendered; no Section 4(2) Not applicable. Stock shares commissions paid ---------------- ----------- ------------ ----------------------- ------------------- ---------------------- June 2008 Common 133,500 Services rendered; no Section 4(2) Exercisable at prices Stock warrants commissions paid ranging from $.50 per Warrants share to $.80 per share Through June 30, 2011 ---------------- ----------- ------------ ----------------------- ------------------- ---------------------- July 2008 Shares of 250,000 $250,000 paid in cash; Section 4(2) Automatically converted Series A shares No commissions paid into common stock on Preferred December 15, 2008 based Stock upon a conversion price Equal to the lower of $.50 per share or the average closing price over the 10 preceding trading days with a floor of $.25 per share ---------------- ----------- ------------ ----------------------- ------------------- ---------------------- July 2008 Common 250,000 Services rendered; no Section 4(2) Exercisable at prices Stock warrants commissions paid ranging from $.50 to Warrants $.80 per share through June 30, 2011 ---------------- ----------- ------------ ----------------------- ------------------- ---------------------- (b) Rule 463 of the Securities Act is not applicable to the Company. (c) In the six months ended June 30, 2008, there were no repurchases by the Company of its Common Stock. 19 ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS: Not applicable. ITEM 5. OTHER INFORMATION: The Company has outstanding Class A and Class B Common Stock Purchase Warrants to purchase an aggregate of 737,000 shares of Common Stock, exercisable at $2.00 per share. The expiration date of the Class A and Class B Warrants has been extended to the close of business on October 1, 2008. ITEM 6. EXHIBITS: Except for the exhibits listed below as filed herewith or unless Otherwise noted, all other required exhibits have been previously filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, on Form 10-SB, as amended (file no. 000-51160). Exhibit Number Description ------ ----------- 3.1 Articles of Incorporation filed March 26, 1998 (1) 3.2 Amendment to Articles of Incorporation filed June 10, 1999 (1) 3.3 Amendment to Articles of Incorporation approved by stockholders on February 9, 2005(1) 3.4 Amended By-Laws (1) 10.1 Employment Agreement - Michael Trepeta (2) 10.2 Employment Agreement - Dean Julia (2) 10.3 Amendments to Employment Agreement - Michael Trepeta (5)(7) 10.4 Amendments to Employment Agreement - Dean L. Julia (5)(7) 10.5 Joint Venture Agreement with Atrium Enterprises Ltd. (6) 10.6 Agreement with Aon Consulting (6) 11.1 Statement re: Computation of per share earnings. See Statement of Operations and Notes to Financial Statements 14.1 Code of Ethics/Code of Conduct (5) 21.1 Subsidiaries of the Issuer - None in 2007 31.1 Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification (3) 31.2 Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certification (3) 32.1 Chief Executive Officer Section 1350 Certification (3) 32.2 Chief Financial Officer Section 1350 Certification (3) 99.1 2005 Employee Benefit and Consulting Services Compensation Plan (2) 99.2 Form of Class A Warrant (2) 99.3 Form of Class B Warrant (2) 99.4 Amendment to 2005 Plan (4) 99.5 Form of Class C Warrant (8) 99.6 Press Release - 2nd Quarter Results of Operations (3) 99.7 Press Release - August 13, 2008 (3) 99.8 Press Release - August 14, 2008 (3) 99.9 Press Release - August 18, 2008 (3) ----------- (1) Incorporated by reference to Registrant's Registration Statement on Form 10-SB as filed with the Commission on February 10, 2005. (2) Incorporated by reference to Registrant's Registration Statement on Form 10-SB/A as filed with the Commission March 18, 2005. (3) Filed herewith. (4) Incorporated by reference to the Registrant's Form 10-QSB/A filed with the Commission on August 18, 2005. (5) Incorporated by reference to the Registrant's Form 10-KSB for its fiscal year ended December 31, 2005. (6) Incorporated by reference to the Registrant's Form 10-KSB for its fiscal year ended December 31, 2006. (7) Incorporated by reference to the Registrant's Form 8-K dated September 21, 2007. (8) Incorporated by reference to the Registrant's Form 10-QSB for its quarter ended September 30, 2006. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ACE MARKETING & PROMOTIONS, INC. Date: August 18, 2008 By: /s/ Dean L. Julia ------------------------------------ Dean L. Julia, Chief Executive Officer Date: August 18, 2008 By: /s/ Sean McDonnell ------------------------------------ Sean McDonnell, Chief Financial Officer 21