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ACE MARKETING & PROMOTIONS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) FORWARD-LOOKING STATEMENTS
The information contained in this Form 10-Q and documents incorporated herein by
reference are intended to update the information contained in the Company's Form
10-K for its fiscal year ended December 31, 2011 which includes our audited
financial statements for the year ended December 31, 2011 and such information
presumes that readers have access to, and will have read, the "Management's
Discussion and Analysis of Financial Condition and Results of Operations," "Risk
Factors" and other information contained in such Form 10-K and other Company
filings with the Securities and Exchange Commission ("SEC").
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements involve risks and uncertainties, and
actual results could be significantly different than those discussed in this
Form 10-Q. Certain statements contained in Management's Discussion and Analysis,
particularly in "Liquidity and Capital Resources," and elsewhere in this Form
10-Q are forward-looking statements. These statements discuss, among other
things, expected growth, future revenues and future performance. Although we
believe the expectations expressed in such forward-looking statements are based
on reasonable assumptions within the bounds of our knowledge of our business, a
number of factors could cause actual results to differ materially from those
expressed in any forward-looking statements, whether oral or written, made by us
or on our behalf. The forward-looking statements are subject to risks and
uncertainties including, without limitation, the following: (a) changes in
levels of competition from current competitors and potential new competition,
(b) possible loss of customers, and (c) the company's ability to attract and
retain key personnel, (d) The Company's ability to manage other risks,
uncertainties and factors inherent in the business and otherwise discussed in
this 10-Q and in the Company's other filings with the SEC. The foregoing should
not be construed as an exhaustive list of all factors that could cause actual
results to differ materially from those expressed in forward-looking statements
made by us. All forward-looking statements included in this document are made as
of the date hereof, based on information available to the Company on the date
thereof, and the Company assumes no obligation to update any forward-looking
statements.
Overview
Ace Marketing & Promotions, Inc. is a publicly traded company on the OTCBB under
the ticker symbol: AMKT. The Company began as a promotional products company and
has since evolved into an integrated marketing solutions company. Ace currently
focuses on four business verticals; Branding, Interactive, Direct Relationship
Marketing and Mobile Marketing.
The Mobile Marketing advertising medium continues to gain momentum in marketing
spending. Technology allows advertisers to target and deliver rich media content
to specific locations and times where it is most relevant. It gives advertisers
the ability to reach consumers with their message as they are ready to make
their purchasing decision.
Ace Marketing & Promotions' subsidiary Mobiquity Networks provides
location-based mobile marketing services via Bluetooth and Wi-Fi that requires
no GPS tracking and no need to download an application. Mobiquity utilizes a
targeted, location-based approach to reach audiences on their mobile devices
when it matters most. Mobiquity employs a combination of leading-edge mobile
technologies to deliver virtually any digital media content including images,
videos, audio mp3s, maps, games, applications and coupons to mobile phones
within targeted geographic locations.
The Company has built an extensive location based mobile marketing mall network
which currently enables access to over 96 million mobile customer visits per
month while they are shopping. Our network allows brands to engage their
potential customers with the right offer at the right place at the right
time....when they are about to make a purchasing decision.
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--------------------------------------------------------------------------------Mobiquity currently has over 600 zones throughout 75 malls with over 96 million
monthly visits to those malls. These zones create a cloud of coverage so that
visitors do not need to go directly to one of these zone access points. Some of
our land mark malls include, but are not limited to:
· Roosevelt Field - NY
· The Galleria - Houston
· Lenox Square - Atlanta
· Northbridge - Chicago
· Santa Monica Place - LA
· Copley Place - Boston
Location-Based Mobile Marketing combined with Out-Of-Home Advertising results in
strong opt-in rates due to proximity of the Network. Through its subsidiary
Mobiquity Networks, Management believes that Ace is the first Location-Based
Mobile Marketing Company focused on US shopping malls and has built and controls
the only national proximity marketing mall network. An exclusive contract with
leading Out-Of-Home advertising company, Eye Corp. will enable Ace to remain a
leader in US malls. According to the agreement, Eye Corp. is exclusive to Ace
for five years. Eye Corp. is a subsidiary of Ten Network Holdings, a public
company with its headquarters in Australia. Eye Corp. has an exclusive agreement
with Simon Malls to manage their non-digital assets in all mall properties and
has a full-time sales force that maintains relationships with over 800 brands.
The sales team of Eye Corp. will be paid a commission and will be required to
fulfill a sales quota on Mobiquity proximity products. Discussions have begun
between Eye Corp. and Ace about expanding their exclusive relationship to global
malls and airports.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with generally accepted accounting principles in the United States. The
preparation of financial statements requires management to make estimates and
disclosures on the date of the financial statements. On an on-going basis, we
evaluate our estimates including, but not limited to, those related to revenue
recognition. We use authoritative pronouncements, historical experience and
other assumptions as the basis for making judgments. Actual results could differ
from those estimates. We believe that the following critical accounting policies
affect our more significant judgments and estimates in the preparation of our
financial statements.
REVENUE RECOGNITION. Revenues are recognized when title and risk of loss
transfers to the customer and the earnings process is complete. In general,
title passes to our customers upon the customer's receipt of the merchandise.
Revenue is accounted by reporting revenue gross as a principal versus net as an
agent. Revenue is recognized on a gross basis since our company has the risks
and rewards of ownership, latitude in selection of vendors and pricing, and
bears all credit risk. Our company records all shipping and handling fees billed
to customers as revenues, and related costs as cost of goods sold, when
incurred.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We are required to make judgments based on
historical experience and future expectations, as to the realizability of our
accounts receivable. We make these assessments based on the following factors:
(a) historical experience, (b) customer concentrations, (c) customer credit
worthiness, (d) current economic conditions, and (e) changes in customer payment
terms.
STOCK BASED COMPENSATION. The Company records compensation expense associated
with stock options and other equity-based compensation. Share-based compensation
expense is determined based on the grant-date fair value estimated using the
Black Scholes method. The Company recognizes compensation expense on a
straight-line basis over the requisite service period of the award.
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--------------------------------------------------------------------------------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
March 31
2012 2011
Revenue $ 517,317 $ 647,770
Cost of Revenues $ 419,658 $ 464,782
Gross Profit $ 97,659 $ 182,988Selling, General and Administrative Expenses $ 1,001,845 $ 618,118
(Loss) from Operations
$ (904,186 ) $ (435,130 )
We generated revenues of $517,317 in the first quarter of 2012 compared to
$647,770 in the same three month period ending March 31, 2011. The decrease in
revenues of $130,453 in 2012 compared to 2011 was due to the downturn in the
overall economy.
Cost of revenues was $419,658 or 81.1% of revenues in the first quarter of 2012
compared to $464,782 or 71.7% of revenues in the same three months of 2011. Cost
of revenues includes purchases and freight costs associated with the shipping of
merchandise to our customers. Decrease in cost of revenues of $45,124 in 2012 is
related to a decrease in merchandise purchased due to the downturn in sales to
our customers during the current quarter ending March 31, 2012.
Gross profit was $97,659 in the first quarter of 2012 or 18.9% of net revenues
compared to $182,988 in the same three months of 2011 or 28.3% of revenues.
Gross profits will vary period-to-period depending upon a number of factors
including the mix of items sold, pricing of the items and the volume of product
sold. Also, it is our practice to pass freight costs on to our customers.
Reimbursement of freight costs which are included in revenues have lower profit
margins than sales of our promotional products and has the effect of reducing
our overall gross profit margin on sales of products, particularly on smaller
orders.
Selling, general, and administrative expenses were $1,001,845 in the first
quarter of 2012 compared to $618,118 in the same three months of 2011. Such
costs include payroll and related expenses, commissions, insurance, rents,
professional, consulting and public awareness fees.
Net loss was $(904,186) in the first quarter of 2012 compared to a net loss of
$(435,130) for the same three months in 2011. The first quarter net loss for
2012 includes stock based payments (non-cash) of $278,307 as compared to
$124,523 for the comparable period of 2011. Our 2012 net loss increased by
$469,056 due to our increased efforts in promoting our business verticles which
generated increased costs in salaries of $64,622 rents $150,000 and depreciation
on our new proximity equipment of $31,043. No benefit for income taxes is
provided for in 2012 and 2011 due to the full valuation allowance on the net
deferred tax assets.
Mobiquity Networks
In February 2012, we announced our plans to have the architecture for our
proprietary mobile marketing solutions; "Mall-Offers Wi-Fi" and "malloffers.com"
completed by the end of the first quarter of 2012 and that we would begin to
rollout the solutions on our nationwide Mobiquity Network by the end of second
quarter of 2012. Mobiquity Networks is currently operational in 75 malls across
the US and has access to approximately 96 million shopper visits per month.
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--------------------------------------------------------------------------------The Mall-Offers Platform will list specials from retailers in each mall
throughout the Mobiquity Network. The specials will be accessible on the secured
Wi-Fi network that Mobiquity has already installed in each of its 75 malls
across the US. Shoppers with smart phones will simply connect to "Mall-Offers
Wi-Fi" and browse by either retailer or category on their mobile device. The
solution will not require the shopper to download an app and access to Mall
Offers will be completely free for the user. Malloffers.com is a website that
aggregates all of the special offers, coupons and discounts offered by all of
the participating retailers in all of the malls within the Mobiquity Network.
Consumers will have the ability to search for specials by mall, store name or
category prior to going to the mall or on their mobile devices. This will help
the consumer to choose which mall to visit as well as which store within the
mall to purchase their item of interest. The website will also offer consumers
the ability to register for special alerts from their favorite stores. The
consumer can choose to receive an email or text whenever their favorite store
has a special offer.
Our Mall-Offers Platform should help address the mobile marketing industry's
single largest issue, which is delivering relevant offers to consumers at the
point of purchase. Management believes that most mall retailers desire to have a
mobile marketing strategy but haven't figured out how to get in front of
consumers at the point of sale. The Mall-Offers Platform gives us the ability to
offer the hundreds of retailers in each mall within the Mobiquity Network a true
mobile marketing solution. In 2012 both companies and their sales agencies now
realize the implementation of a mobile strategy is now a necessity. The
activation needs to go beyond simple banner and pop-up ads on a mobile website
or the development of an app. Consumers are seeking relevant content and
valuable offers, not ambush advertising. The new Mall Offers Wi-Fi Network will
give retailers and company brands access to consumers and consumers' access to
the offers they want to see.
As a result of the foregoing, Management is excited to have several million
dollars of proposals that we have provided to fortune 500 and other companies
(and their advertising agencies) and Management believes that with a three to
six month sales cycle that we are operating under with most of these large
companies, that a significant ramp up of sales across our network will be
realized during the 3rd and 4th quarters of 2012.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $493,908 at March 31, 2012. Cash
used in operating activities for the three months ended March 31, 2012 was
$543,657. This resulted primarily from a net loss of $904,070, offset by stock
based compensation of $278,307 a decrease in accounts receivable of $249,914 and
an increase in prepaid expenses and other assets of $53,979 and an increase of
accounts payable and accrued expenses of $160,178. The Company had an increase
in investing activities of $25,610 with the purchase of equipment.
The Company had cash and cash equivalents of $992,535 at March 31, 2011. Cash
used in operating activities for the three months ended March 31, 2011 was
$182,471. This resulted primarily from a net loss of $435,006, offset by stock
based compensation of $124,523 an increase in accounts receivable of $47,507 and
an increase in prepaid expenses and other assets of $18,301 and a decrease of
accounts payable and accrued expenses of $176,514. The Company had an increase
in investing activities of $36,575 with the purchase of equipment.
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 twelve 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.
23
--------------------------------------------------------------------------------Recent Financings
In the past two fiscal years ended December 31, 2011 and the period January 1,
2012 through January 31, 2017, the Company completed the following private
placement offerings with non-affiliated persons except as otherwise noted:
On December 8, 2009, Ace Marketing & Promotions, Inc. entered into an
Introducing Agent Agreement with Legend Securities, Inc., a FINRA registered
broker-dealer ("Legend"), to attempt to raise additional financing through the
sale of its Common Stock and Warrants. Between December 8, 2009 and March 15,
2010, the Company closed on gross proceeds of $1,025,000 before commissions of
$117,000. The planned use of proceeds is to primarily expand the Company's
mobile and interactive divisions. The Company issued pursuant to the terms of
the offering an aggregate of 2,050,000 shares of Common Stock at a per share
price of $.50 per share and 1,025,000 Warrants exercisable at $1.00 per share to
investors in the offering and placement agent warrants to purchase an amount
equal to 10% of the number of shares and the number of warrants sold in the
offering. All securities were issued pursuant to Rule 506 of Regulation D
promulgated under Section 4(2) of the Securities Act of 1933, as amended.
In August 2010, the Company raised $175,000 in gross proceeds from the sale of
437,500 shares and a like number of Warrants expiring in August 2013. The
investor paid $0.40 per Share and received Warrants exercisable at $0.60 per
Share. In November 2010, the Company commenced a plan of financing and raised an
additional $800,500 in financing from the sale of 2,934,999 Shares of its
restricted Common Stock at $0.30 per Share and Common Stock Purchase Warrants to
purchase a like number of Shares, exercisable at $0.30 per Share through August
31, 2013. Subsequent to the completion of the second financing, the Company
agreed to adjust the terms of the August 2010 transaction and issue to the
August 2010 investor Shares and Warrants on the same terms as those sold in
November - December 2010. Accordingly, an additional 145,833 Shares and a like
number of Warrants were issued to the August 2010 investor, with the exercise
price of the Warrants being lowered from $0.60 per Share to $0.30 per Share. All
securities will be issued pursuant to Section 4(2) and/or Rule 506 of Regulation
D promulgated under Section 4(2) of the Securities Act of 1933, as amended.
In March 2011, the Company commenced a private placement offering. Pursuant to
said offering between March 29, 2011 and April 19, 2011, the Company raised
$755,000 in gross proceeds from the sale of 2,516,666 shares of common stock and
a like number of warrants, exercisable at $.30 per share through August 31,
2013. Exemption is claimed for the sale of securities pursuant to Rule 506
and/or Section 4(2) of the Securities Act of 1933, as amended.
Between May 25, 2011 and June 3, 2011, the Company received gross proceeds of
$461,250 from the sale of 1,025,000 shares of Common Stock at a purchase price
of $.45 per share. The sale of stock was also accompanied by Warrants expiring
on May 31, 2014. Exemption is claimed for the sale of securities pursuant to
Rule 506 and/or Section 4(2) of the Securities Act of 1933, as amended.
In July 2011, the Company commenced a private placement offering. Pursuant to
said offering between July14, 2011 and August 1, 2011, the Company raised
$975,000 in gross proceeds from the sale of 1,950,000 shares of common stock and
a like number of warrants, exercisable at $.60 per share through July 31,
2014. Of the $975,000, $250,000 was invested by Thomas Arnost who later became a
director of the Company in December 2011. Mr. Arnost received 500,000 shares of
Common Stock and Warrants to purchase 500,000 shares in the offering. Exemption
is claimed for the sale of securities pursuant to Rule 506 and/or Section 4(2)
of the Securities Act of 1933, as amended.
On January 30, 2012, the Company's private placement offering was terminated.
Rockwell Global Capital LLC acted as Placement Agent. The Company received gross
proceeds of $575,000 from the sale of 958,338 shares of Common Stock at a
purchase price of $.60 per share. The private placement offering also included
the sale of Warrants to purchase 191,671 shares of Common Stock, exercisable at
$.60 per share and expiring on January 18, 2016. The Placement Agent received a
$25,000 advisory fee, $51,750 in commissions and warrants to purchase 95,833
shares identical to the warrants sold to investors in the offering. Exemption is
claimed for the sale of securities pursuant to Rule 506 and/or Section 4(2) of
the Securities Act of 1933, as amended.
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--------------------------------------------------------------------------------The Company is required to file a Registration Statement with the Securities and
Exchange Commission ("SEC") to register the resale of the shares of Common Stock
sold in the private placement offering and the resale of the shares of Common
Stock issuable upon exercise of the Class AA Warrants (collectively the
"Registrable Shares"). If a Registration Statement covering the Registrable
Shares is not filed with the SEC on or before March 15, 2012 or is not declared
effective within 120 days of January 30, 2012 (subject to a 60 day extension in
the event the SEC is performing a full review of the Registration Statement),
the Company shall pay to each investor as liquidated damages, a payment equal to
1.5% of the aggregate amount invested by such investor in the offering,
cumulative for every 30 day period until such Registration Statement has been
filed or declared effective or a portion thereof. Such liquidated damages shall
not exceed 15% per annum. The Company, at its sole discretion, shall pay the
liquidated damage payment in cash and/or Common Stock of the Company based upon
the closing sale price of the Company's Common Stock on the trading day
preceding the date triggering the payment of the liquidated damages.
In April 2012, the Company received $270,000 from the exercise of Warrants and
issued 900,000 shares of its Common Stock. Between April 1, 2012 and May 10,
2012, the Company sold 450,000 shares of Series 1 Convertible Preferred Stock at
$1.00 per share pursuant to an ongoing plan of financing. The Company is seeking
to raise additional funds through such financing, although no assurances can be
given that it will be successful.
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