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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number: 0-21419
CLICKNSETTLE.COM, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 23-2753988
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1010 Northern Boulevard
Great Neck, New York 11021
(Address of Principal Executive Offices)
(516) 829-4343
(Issuer's Telephone Number, Including Area Code)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of May 6, 2004, 8,449,056 shares
of common stock of the issuer were outstanding.
Transitional small business disclosure format (check one): Yes |_| No |X|
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CLICKNSETTLE.COM, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at
March 31, 2004 (unaudited)
and June 30, 2003 3
Consolidated Statements of Operations
for the three and nine month periods ended
March 31, 2004 and 2003 (unaudited) 4
Consolidated Statements of Changes in
Stockholders' Equity and Comprehensive
Loss for the nine month periods ended
March 31, 2004 and 2003 (unaudited) 5
Consolidated Statements of Cash Flows
for the nine month periods ended
March 31, 2004 and 2003 (unaudited) 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 10
ITEM 3. CONTROLS AND PROCEDURES 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 21
2
clickNsettle.com, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2004 2003
------------ ------------
(derived from
audited financial
ASSETS statements)
CURRENT ASSETS
Cash and cash equivalents $ 1,162,177 $ 1,798,786
Marketable securities 306,806 181,063
Accounts receivable (net of allowance for doubtful
accounts of $136,645 and $140,000, respectively) 257,513 435,667
Prepaid expenses and other current assets (net of allowance
for doubtful note receivable of $48,848 and $49,148, respectively) 60,064 39,825
------------ ------------
Total current assets 1,786,560 2,455,341
FURNITURE AND EQUIPMENT - AT COST, less accumulated depreciation 101,731 143,824
OTHER ASSETS 42,226 42,975
------------ ------------
$ 1,930,517 $ 2,642,140
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 195,026 $ 277,608
Accrued expenses and other liabilities 283,884 275,428
Accrued payroll and employee benefits 100,457 141,305
Deferred revenues 213,874 268,977
------------ ------------
Total current liabilities 793,241 963,318
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - $.001 par value; 25,000,000 shares authorized;
8,701,554 shares issued and outstanding 8,702 8,702
Additional paid-in capital 10,104,325 10,104,325
Accumulated deficit (8,956,705) (8,394,247)
Accumulated other comprehensive income 64,872 43,960
Less common stock in treasury at cost, 252,498 shares (83,918) (83,918)
------------ ------------
Total stockholders' equity 1,137,276 1,678,822
------------ ------------
$ 1,930,517 $ 2,642,140
============ ============
The accompanying notes are an integral part of these statements.
3
clickNsettle.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended March 31, Nine months ended March 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net revenues $ 809,868 $ 858,934 $ 2,724,722 $ 2,814,132
----------- ----------- ----------- -----------
Operating costs and expenses
Cost of services 179,311 194,869 623,594 653,398
Sales and marketing expenses 323,253 254,547 971,916 842,077
General and administrative expenses 511,570 626,889 1,745,749 1,866,694
----------- ----------- ----------- -----------
1,014,134 1,076,305 3,341,259 3,362,169
----------- ----------- ----------- -----------
Loss from operations (204,266) (217,371) (616,537) (548,037)
Other (expenses) income
Investment (loss) income (8,423) 579 52,056 4,058
Other income 587 3,767 2,023 7,250
----------- ----------- ----------- -----------
(7,836) 4,346 54,079 11,308
----------- ----------- ----------- -----------
Loss before income taxes (212,102) (213,025) (562,458) (536,729)
Income taxes -- -- -- --
----------- ----------- ----------- -----------
NET LOSS $ (212,102) $ (213,025) $ (562,458) $ (536,729)
=========== =========== =========== ===========
Net loss per common share - basic and diluted $ (0.03) $ (0.03) $ (0.07) $ (0.06)
=========== =========== =========== ===========
Weighted-average shares outstanding - basic and diluted 8,449,056 8,449,056 8,449,056 8,449,056
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
4
clickNsettle.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND COMPREHENSIVE LOSS
Nine months ended March 31, 2004 and 2003 (unaudited)
Accumulated
Common stock Additional other
----------------------------- paid-in Accumulated comprehensive
Shares Amount capital deficit income (loss)
-----------------------------------------------------------------------------------
Balances at June 30, 2002 1,450,259 $ 1,450 $ 10,111,324 ($7,914,736) ($21,114)
Compensation related to stock options 253
Net loss (536,729)
Change in unrealized gain (loss) on
marketable securities (5,813)
Comprehensive loss
-----------------------------------------------------------------------------------
Balances at March 31, 2003 1,450,259 $ 1,450 $ 10,111,577 ($8,451,465) ($26,927)
===================================================================================
Balances at June 30, 2003 1,450,259 1,450 10,111,577 (8,394,247) 43,960
Six-for-one forward stock split effectuated
on December 22, 2003 7,251,295 7,252 (7,252)
-----------------------------------------------------------------------------------
8,701,554 8,702 10,104,325 (8,394,247) 43,960
Net loss (562,458)
Change in unrealized gain (loss) on
marketable securities 20,912
Comprehensive loss
-----------------------------------------------------------------------------------
Balances at March 31, 2004 8,701,554 8,702 10,104,325 (8,956,705) 64,872
===================================================================================
Common Total Compre-
stock in stockholders' hensive
treasury equity loss
----------------------------------------------
Balances at June 30, 2002 ($ 83,918) $2,093,006
Compensation related to stock options 253
Net loss (536,729) $ (536,729)
Change in unrealized gain (loss) on
marketable securities (5,813) (5,813)
------------
Comprehensive loss $ (542,542)
============
-----------------------------
Balances at March 31, 2003 ($ 83,918) $1,550,717
=============================
Balances at June 30, 2003 (83,918) 1,678,822
Six-for-one forward stock split effectuated
on December 22, 2003
-----------------------------
(83,918) 1,678,822
Net loss (562,458) $ (562,458)
Change in unrealized gain (loss) on
marketable securities 20,912 20,912
------------
Comprehensive loss $ (541,546)
============
-----------------------------
Balances at March 31, 2004 (83,918) 1,137,276
=============================
The accompanying notes are an integral part of these statements.
5
clickNsettle.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine months ended March 31,
2004 2003
----------- -----------
Cash flows from operating activities
Net loss $ (562,458) $ (536,729)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 53,695 66,125
(Gains) on sales of marketable securities (43,756) (42,258)
Write-down of marketable securities 58,732
Advertising in exchange for common stock 18,285
Compensation related to stock options 253
Provision for write-down of note receivable 24,250
Recovery from write-down of note receivable (300)
Changes in operating assets and liabilities
Decrease in accounts receivable 178,154 101,113
(Increase) in prepaid expenses and other current assets (19,190) (41,617)
(Decrease) in accounts payable, accrued expenses and other liabilities (74,126) (120,093)
(Decrease) increase in accrued payroll and employee benefits (40,848) 113,107
(Decrease) in deferred revenues (55,103) (18,648)
----------- -----------
Net cash used in operating activities (563,932) (377,480)
----------- -----------
Cash flows from investing activities
Purchases of marketable securities (1,128,314) (481,975)
Proceeds from sales of marketable securities 1,067,239 171,182
Purchases of furniture and equipment (11,602) (11,818)
----------- -----------
Net cash used in investing activities (72,677) (322,611)
----------- -----------
Cash flows from financing activities
----------- -----------
Net cash used in financing activities
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (636,609) (700,091)
Cash and cash equivalents at beginning of period 1,798,786 1,917,066
----------- -----------
Cash and cash equivalents at end of period $ 1,162,177 $ 1,216,975
=========== ===========
The accompanying notes are an integral part of these statements.
6
CLICKNSETTLE.COM, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine months ended March 31, 2004
(Unaudited)
1. The consolidated balance sheet as of March 31, 2004 and the related
consolidated statements of operations for the three and nine month periods ended
March 31, 2004 and 2003 have been prepared by clickNsettle.com, Inc., including
the accounts of its wholly-owned subsidiaries. In the opinion of management, all
adjustments necessary to present fairly the financial position as of March 31,
2004 and for all periods presented, consisting of normal recurring adjustments,
have been made. Results of operations for the three and nine month periods ended
March 31, 2004 are not necessarily indicative of the operating results expected
for the full year.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended June 30,
2003 included in the Company's Annual Report on Form 10-KSB. The accounting
policies used in preparing these consolidated financial statements are the same
as those described in the June 30, 2003 consolidated financial statements.
2. On December 22, 2003, the Company effected a 6-for-1 forward stock split. All
references to number of shares and per share data in the consolidated financial
statements and accompanying notes have been restated. The par value of the
common stock remained unchanged at $.001 per share.
3. Basic earnings per share are based on the weighted average number of common
shares outstanding without consideration of potential common stock. Diluted
earnings per share are based on the weighted-average number of common and
potential common shares outstanding. The calculation takes into account the
shares that may be issued upon exercise of stock options and warrants, reduced
by the shares that may be repurchased with the funds received from the exercise,
based on the average price during the period. Diluted earnings per share is the
same as basic earnings per share as potential common shares of 5,750,288 and
5,924,622 at March 31, 2004 and 2003, respectively, would be antidilutive as the
Company incurred net losses for the three and nine month periods ended March 31,
2004 and 2003.
4. The cost of advertising is expensed when the advertising takes place. For
advertising and external public relations costs, the Company incurred $43,850
and $8,258 for the quarters ended March 31, 2004 and 2003, respectively, and
$147,458 and $42,225 for the nine month periods ended March 31, 2004 and 2003,
respectively. Of such totals, non-cash advertising charges comprised $18,285 for
the nine-month period ended March 31, 2003. In accordance with the terms of the
August 2000 advertising agreement, as amended, with American Lawyer Media, Inc.,
the Company will purchase $250,000 of advertising subsequent to the initial
two-year term. Such advertising is to be expended from May 2003 through
September 2004. During the quarter and nine months ended March 31, 2004, the
Company incurred $39,514 and $131,794 respectively, of advertising expense
related to this commitment. The remaining commitment outstanding as of March 31,
2004 is $95,371.
5. On March 12, 2004, the Company extended its March 1998 purchase plan (the
"Plan"), pursuant to which the number of shares of common stock of the Company
eligible for purchase under the Plan remained at an aggregate of 1,600,002
shares. The Plan shall expire on the earlier of all of the shares being
purchased or March 12, 2005, provided, however, that the Plan may be
discontinued at any time by the Company. The Plan may also be extended on a
year-to-year basis. There were no
7
purchases in the nine-month period ended March 31, 2004, and, through March 31,
2004, the Company had purchased 252,498 shares under the Plan for an aggregate
cost of $83,918.
6. The components of comprehensive loss are as follows:
Three months ended March 31,
2004 2003
---- ----
Net loss $(212,102) $(213,025)
Change in unrealized gain (loss)
on marketable securities 9,873 (2,266)
--------- ---------
Comprehensive loss $(202,229) $(215,291)
--------- ---------
Nine months ended March 31,
2004 2003
---- ----
Net loss $(562,458) $(536,729)
Change in unrealized gain (loss)
on marketable securities 20,912 (5,813)
--------- ---------
Comprehensive loss $(541,546) $(542,542)
--------- ---------
7. In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123" ("SFAS No. 148"). SFAS No. 148 encourages, but does not require, companies
to record compensation cost for stock-based compensation plans at fair value. In
addition, SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation and amends the disclosure requirements of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS No. 123"). SFAS No. 148 requires disclosures in the summary of
significant accounting policies in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.
The Company adopted, effective December 31, 2002, the disclosure provisions of
SFAS No. 148 and continues to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, compensation expense is not recognized for options granted to
employees and to members of the board of directors when such options are granted
to board members in their capacity as directors. During the nine-month periods
ended March 31, 2004 and 2003, the Company granted 240,000 and 2,100,000
options, respectively. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the nine-month period ended March 31, 2004: a
dividend yield of zero; a risk-free interest rate of 1.96%; an expected term of
3 years; an expected stock price volatility of 124.7%; and a forfeiture rate of
15%. The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation.
8
Three months ended March 31,
2004 2003
---- ----
Net loss, as reported $(212,102) $(213,025)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (35,182) (101,087)
--------- ---------
Proforma net loss $(247,284) $(314,112)
--------- ---------
Net loss per common share:
Basic and diluted - as reported $ (0.03) $ (0.03)
Basic and diluted - pro forma $ (0.03) $ (0.04)
Nine months ended March 31,
2004 2003
---- ----
Net loss, as reported $(562,458) $(536,729)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (116,829) (353,502)
--------- ---------
Proforma net loss $(679,287) $(890,231)
--------- ---------
Net loss per common share:
Basic and diluted - as reported $ (0.07) $ (0.06)
Basic and diluted - pro forma $ (0.08) $ (0.11)
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
From time to time, including in this quarterly report on Form
10-QSB, clickNsettle.com, Inc. (formerly NAM Corporation) (the "Company" or
"we") may publish forward-looking statements relating to such matters as
anticipated financial performance, business prospects, future operations, new
products, research and development activities and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, we note that a variety of factors could cause our actual results to
differ materially from the anticipated results or other expectations expressed
in our forward-looking statements. The risks and uncertainties that may affect
the operations, performance, development and results of our business include,
without limitation, the following: changes in the insurance and legal
industries; our inability to retain current or new hearing officers; changes in
the public court systems; and the degree and timing of the market's acceptance
of our arbitration and mediation programs and electronic oversight applications
and other risks that are set forth herein.
RISK FACTORS
Our business faces risks. These risks include those described
below and may include additional risks of which we are not currently aware or
which we currently do not believe are material. If any of the events or
circumstances described in the following risks actually occurs, our business,
financial condition or results of operations could be adversely affected. These
risks should be read in conjunction with the other information set forth in this
report.
We have Recent, and Anticipate Continuing, Losses
We have incurred operating losses during the last seven years
and through March 31, 2004. Going forward, we may continue to incur operating
losses and make capital expenditures and, as a result, we will need to generate
higher revenues to achieve and maintain profitability and provide working
capital needed to fund losses. We cannot assure you that we can achieve or
sustain profitability in the future. If revenues grow slower than we anticipate,
or if operating expenses exceed our current expectations and cannot be adjusted
accordingly, our business, the results of our operations and our financial
condition may be materially and adversely affected.
We Depend On Insurance-Related Disputes
The majority of our alternative dispute resolution ("ADR")
services involve claims that are usually covered by insurance. We resolve many
of these disputes in a matter of hours. Since our revenues are derived primarily
from certain administrative and hourly fees, a high volume of these cases is
required in order for us to generate revenues sufficient to maintain our
operations. Although catastrophic injury, self-insured commercial and employment
initiatives represent a growing percentage of our revenues, there can be no
assurance that we will be able to continue to expand our insurance and
non-insurance-related dispute business, or maintain or increase our current
level of cases. In addition, we cannot assure you that changes in the insurance
industry will not affect our business.
10
Possible Improvements in the Public Court System, Including Use of ADR Services,
May Affect Our Business
The ADR industry, in general, furnishes an alternative to
public dispute mechanisms, principally the local, state and federal court
systems. Our marketing efforts have been based on our belief that there exists a
high degree of dissatisfaction among litigants and their counsel with the public
court system. If the public courts, in the markets we are currently serving or
seek to serve, reduce case backlogs and provide effective settlement mechanisms
at no, or at a substantially reduced cost to litigants, our business
opportunities in such markets may be significantly reduced. Several public court
systems, both on the federal and state level, including certain federal and
state courts located in New York State, have instituted court coordinated ADR
programs. Similar programs are under consideration in a number of states and may
be adopted at any time. The success of such ADR programs could have a material
adverse effect on our business by diminishing the demand for private ADR
services.
The Private ADR Services Business is Highly Competitive
The private ADR business is highly competitive, both on a
national and regional level. Barriers to entry into the ADR business are
relatively low, and new competitors can begin doing business relatively quickly.
There are two types of competitors, not-for-profit and for-profit entities:
o We believe that our largest not-for-profit
competitor is the American Arbitration
Association, as it has significant market share in
complex commercial cases.
o We believe that our largest for-profit competitor
is JAMS.
At this time, we believe that numerous other private ADR
firms are competing with us in the regions we currently serve. Increased
competition could decrease the fees we are able to charge for our services and
limit our ability to obtain qualified hearing officers. This could have a
material adverse effect on our ability to be profitable in the future. Certain
competitors may have greater financial or other capabilities than us.
Accordingly, there is no assurance that we can successfully compete in the
present or future marketplace for ADR services.
We Depend Upon Our Key Personnel
Our success will be largely dependent on the personal efforts
of Roy Israel, our Chief Executive Officer, President and Chairman of the Board
of Directors. Although we have entered into an employment agreement with Mr.
Israel, which expires in 2007, the loss of his services could have a material
adverse effect on our business and prospects. We have obtained "key-man" life
insurance on the life of Mr. Israel. The Company is the sole beneficiary in the
amount of $1 million. Our success is also dependent upon our ability to hire and
retain qualified marketing and other personnel in our offices. We may not be
able to hire or retain such necessary personnel.
11
We Do Not Have Written Contracts with the Majority of Our Clients
We currently rely on our marketing efforts and relationships
with insurance companies, law firms, corporations and municipalities to obtain
cases. We do not have written agreements with the majority of our clients, but
we have instituted the process of obtaining written agreements with our existing
clients and with new clients. We also rely on case referrals from our current
clients. We may not continue to receive our current level of, or an adequate
level of, referrals of cases. If we do not maintain such levels, there could be
a material adverse effect on our business.
We Depend Upon Qualified Hearing Officers
The market for our services depends on a perception by our
clients that our hearing officers are impartial, qualified, and experienced. Our
ability to retain qualified hearing officers in the event that competition
increases would be uncertain. We have mitigated this risk by retaining exclusive
hearing officers. Of the total number of cases heard during the fiscal year
ended June 30, 2003, approximately 66% were heard by exclusive hearing officers.
Accordingly, at any time, the remaining hearing officers who are not under
contract with us can refuse to continue to provide their services to us and are
free to render services independently or through competing ADR services. If
qualified hearing officers are unwilling or unable to continue to provide their
services through us for any reason, including possible agreements to provide
their services to our competitors on an exclusive basis, our business and
operations could be materially and adversely affected.
Our Current Stockholders Have the Ability to Exert Significant Control
Our executive officers, directors, and their affiliates
beneficially own 3,755,136 shares or approximately 44.4% of the common stock
outstanding based on 8,449,056 shares of common stock outstanding as of May 6,
2004. Of that number, Mr. Israel beneficially owns 2,410,278 shares or
approximately 28.5% of the common stock. As a result, these stockholders acting
in concert may have significant influence on votes to elect or remove any or all
of our directors and to control substantially all corporate activities in which
we are involved, including tender offers, mergers, proxy contests or other
purchases of common stock that could give our stockholders the opportunity to
realize a premium over the then prevailing market price for their shares of
common stock.
We May Be Unable to Protect Our Proprietary Technology and We May Be Sued for
Infringing on the Rights of Others
Our success depends, in part, upon our ability to protect our
proprietary software technology and operate without infringing upon the rights
of others. We rely on a combination of methods to protect our proprietary
intellectual property, technology and know-how, such as:
trade secret laws copyright law
trademark law patent law
contractual provisions confidentiality agreements
certain technology and security measures
12
The steps we have taken regarding our proprietary technology,
however, may be insufficient to deter misappropriation.
In the systems and software industries, it is common that
companies receive notices from time to time alleging infringement of patents,
copyrights or other intellectual property rights of others. We may from time to
time be notified of claims that we may be infringing upon patents, copyrights or
other intellectual property rights owned by third parties. Companies may pursue
claims against us with respect to the alleged infringement of patents,
copyrights or other intellectual property rights owned by third parties.
Although we believe we have not violated or infringed upon any intellectual
property patents and have taken measures to protect our own rights, there is no
assurance that we will avoid litigation. Litigation may be necessary to protect
our intellectual property rights and trade secrets, to determine the validity of
and scope of the proprietary rights of others or to defend against third party
claims of invalidity. Any litigation could result in substantial costs and the
diversion of resources away from the day-to-day operation of our business.
Existing copyright, trademark, patent and trade secret laws
afford only limited protection. Existing laws, in combination with the steps we
have taken to protect our proprietary rights may be inadequate to prevent
misappropriation of our technology or other proprietary rights. Also, such
protections do not preclude competitors from independently developing products
with functionality or features similar or superior to our products and
technologies.
Our Common Stock is No Longer Listed on The Nasdaq SmallCap Market
On March 5, 2003, The Nasdaq Listing Qualifications Panel
delisted our common stock from The Nasdaq SmallCap Market. Since that date,
trading in our securities has been conducted in the over-the-counter market in
the NASD's OTC Electronic Bulletin Board. As a result, an investor may find it
more difficult to purchase, dispose of and to obtain accurate quotations as to
the value of our securities.
In addition, as the trading price of our common stock has been
less than $5.00 per share, trading in our common stock is also subject to the
requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under that
rule, broker/dealers who recommend such low-priced securities to persons other
than established customers and accredited investors must satisfy special sales
practice requirements, including (a) a requirement that they make an
individualized written suitability determination for the purchaser and (b)
receive the purchaser's written consent prior to the transaction.
The Securities Enforcement Remedies and Penny Stock Reform Act
of 1990 also requires additional disclosure in connection with any trades
involving a stock defined as a penny stock (generally, any equity security not
traded on an exchange or quoted on The Nasdaq SmallCap Market that has a market
price of less than $5.00 per share), including the delivery, prior to any penny
stock transaction, of a disclosure schedule explaining the penny stock market
and the risks associated therewith. Such requirements could severely limit the
market liquidity of our securities and the ability of stockholders to sell their
securities in the secondary market.
13
GENERAL
We provide ADR services to insurance companies, law firms,
corporations and municipalities. We focus the majority of our marketing efforts
on developing and expanding relationships with these entities, which we believe
are some of the largest consumers of ADR services. Furthermore, we believe that
there is greater market acceptance and a positive trend relating to the
utilization of ADR services as opposed to the traditional litigation process.
The variety, complexity and volume of cases being submitted for ADR are
illustrative and, we believe, accurate barometers of the integration of ADR into
the legal landscape. Further, we see this trend continuing. We believe that with
our roster of qualified hearing officers, administrative capabilities,
electronic oversight applications, knowledge of dispute resolution and
reputation within the corporate and legal communities, we are uniquely
positioned to provide a comprehensive total solution to disputing parties over
broad geographic areas.
We currently operate from locations in New York and
Massachusetts.
Our objective is to become the leading provider of dispute
resolution services by providing services and technology designed to enhance and
streamline the traditional and often time-consuming and expensive legal process.
We believe we are uniquely positioned within the ADR industry as we offer highly
qualified hearing officers, premium services and innovative solutions designed
to appeal to a client base which has become more sophisticated with the
continuing acceptance and utilization of ADR. We have a patent pending on our
inventions relating to dispute resolution processing and oversight.
Additionally, depending upon market acceptance, we will review the needs of our
current and prospective customers and offer those solutions that we believe will
be of most value to our clients and to our shareholders. We believe that our
marketing efforts going forward will best be directed towards large-scale
applications that benefit from our proprietary electronic infrastructure. As
such, our marketing emphasis will be driven by our unique capabilities as an
administrator. Additionally, the staff presently dedicated to our existing
client base will be charged with growing our business and exploiting our
inherent market advantages. Therefore, our plan is as follows: (1) exploit
potential revenue streams driven by our technological innovations in software,
systems and intellectual property such as (i) the administration of high-volume,
customized dispute resolution programs for large corporations, governmental
bodies, law firms and agencies and (ii) targeting revenue opportunities related
to our various technology-based solutions; (2) build brand recognition of
National Arbitration and Mediation (NAM) as the premier provider of dispute
resolution solutions through our advertising campaign; (3) continue to attract
and retain the services of highly talented, former top-tier judges and attorneys
to act as independent and impartial hearing officers; and (4) broaden the type
and complexity of the dispute resolution cases we administer.
In our current environment, corporate governance, integrity of
process and transparency have taken center stage in how corporations,
municipalities and other entities are to conduct operations. Our suite of
services, particularly those related to oversight applications, can enhance
business practices by enabling our clients to better manage their operations
through data driven features and, at the same time, produce cost savings given
the tremendous expense related to traditional litigation versus our quicker,
more efficient dispute resolution solutions.
We have and may continue to incur net losses in the future as
a result of (a) marketing and other costs associated with our investment in
technology and (b) our advertising expenses. Our advertising campaign commenced
in August 2000 when we signed an agreement with American Lawyer Media, Inc., the
nation's leading legal journalism and information company, to
14
provide $1,000,000 of advertising and promotional opportunities in their
national and regional publications over a two-year period in exchange for
368,844 shares of our common stock (as adjusted for the 1-for-3 reverse stock
split effectuated on August 20, 2001 and as adjusted for the 6-for-1 forward
stock split effectuated on December 22, 2003). At the time this advertising was
contracted for, we were promoting our new corporate name, clickNsettle.com, as
well as continuing to promote our established brand name, National Arbitration
and Mediation (NAM). We believe that National Arbitration and Mediation (NAM) is
a proven and well-respected brand in the ADR industry. As part of our agreement,
as amended, with American Lawyer Media, Inc., we agreed to purchase an
additional $250,000 of advertising. Such advertising is to be expended from May
2003 through September 2004. However, we currently anticipate that, at the
conclusion of our present campaign, we will reduce our advertising expenses and
we believe our revenues will not be adversely impacted.
Third Quarter Ended March 31, 2004 Compared to Third Quarter Ended March 31,
2003
Revenues. Revenues decreased 5.7% or by $49,066 from $858,934
for the quarter ended March 31, 2003 to $809,868 for the quarter ended March 31,
2004. The decline is primarily due to a decrease in the number of cases heard
between the periods. We believe that lawsuits continue to be commenced and that
ADR services should prove to be vital to insurers in their ability to address a
growing caseload with reduced costs and increased efficiency. We believe ADR
services will benefit clients as they seek to optimize efficiencies in the
litigation process in order to improve their own financial outlook as, due to
low interest rates, insurers cannot rely on investment income to offset
operational and indemnity expenses. Additionally, plaintiffs benefit from a
speedier resolution of their claims which is of greater importance in difficult
economic times.
Cost of Services. Cost of services decreased 8.0% to $179,311
for the third quarter ended March 31, 2004 from $194,869 for the third quarter
ended March 31, 2003. Additionally, the cost of services as a percentage of
revenues declined slightly from 22.7% for the prior quarterly period to 22.1%
for the current quarterly period. The ratio of cost of services to revenues will
fluctuate based on the type of cases administered, the number of hours per case
and our ability (or inability) to take advantage of volume arrangements with
hearing officers which usually lower the cost per case.
Sales and Marketing. Sales and marketing costs increased
27.0% to $323,253 for the third quarter ended March 31, 2004 from $254,547 for
the third quarter ended March 31, 2003. Sales and marketing costs as a
percentage of revenues increased to 39.9% in the third quarter of fiscal year
2004 from 29.6% in the third quarter of fiscal year 2003. Most of the increase
(approximately $35,600) relates to advertising costs. Our initial agreement with
American Lawyer Media, Inc., which provided us with $1,000,000 worth of
advertising and promotional opportunities in their national and regional
publications over a two-year period, ended in August 2002. As part of our
agreement, as amended, with American Lawyer Media, Inc., we agreed to purchase
an additional $250,000 worth of advertising. Such advertising is to be expended
from May 2003 through September 2004. During the three months ended March 31,
2004, we incurred $39,514 of advertising expense related to this commitment.
Additionally, employee costs and related items (including benefits, payroll
taxes and outside services) increased in total by $23,000. Further, travel,
entertainment and promotions increased by approximately $10,100 as our marketing
efforts have been concentrated on demonstrating our complete line of services to
new and existing clients as we believe there exists great potential to expand
these relationships.
15
General and Administrative. General and administrative costs
decreased 18.4% to $511,570 for the third quarter ended March 31, 2004 from
$626,889 for the third quarter ended March 31, 2003. Most of the decrease
(approximately $150,200) relates to employee costs and related items (including
benefits, payroll taxes and outside services), rental expenses, bad debts
expense, insurance and depreciation. Offsetting the above decreases were
increases in legal, auditing and automobile expenses totaling approximately
$37,400. General and administrative costs as a percentage of revenues decreased
to 63.2% for the third quarter ended March 31, 2004 from 73.0% for the third
quarter ended March 31, 2003.
Other Income (Expenses). Other income (expenses) changed to an
expense of $7,836 for the third quarter ended March 31, 2004 from income of
$4,346 for the third quarter ended March 31, 2003. Other income (expenses) is
composed primarily of investment income and realized gains (losses) generated
from investments. Realized gains (losses) (which may include write-downs for
other than temporary declines in the value of marketable securities) was
($10,927) in the third quarter of fiscal year 2004 versus ($5,840) in the third
quarter of fiscal year 2003, resulting in a decline of $5,087. Additionally, net
interest income generated primarily from investments in money market funds
declined by $3,915 from $6,419 in the prior year period due to lower invested
balances and interest rates as compared to the prior period.
Income Taxes. Tax benefits resulting from net losses incurred
for the three months ended March 31, 2004 and 2003 were not recognized as we
recorded a full valuation allowance against the net operating loss carryforwards
during the periods.
Net Loss. For the three months ended March 31, 2004, we had a
net loss of $212,102 as compared to a net loss of $213,025 for the three months
ended March 31, 2003.
Nine Months Ended March 31, 2004 Compared to Nine Months Ended March 31, 2003
Revenues. Revenues decreased by 3.2% or by $89,410 from
$2,814,132 for the nine months ended March 31, 2003 to $2,724,722 for the nine
months ended March 31, 2004. The decline is primarily due to a decrease in the
number of cases heard between the periods. We believe that lawsuits continue to
be commenced and that ADR services should prove to be vital to insurers in their
ability to address a growing caseload with reduced costs and increased
efficiency. We believe ADR services will benefit clients as they seek to
optimize efficiencies in the litigation process in order to improve their own
financial outlook as, due to low interest rates, insurers cannot rely on
investment income to offset operational and indemnity expenses. Additionally,
plaintiffs benefit from a speedier resolution of their claims which is of
greater importance in difficult economic times.
Cost of Services. Cost of services decreased 4.6% to $623,594
for the nine months ended March 31, 2004 from $653,398 for the nine months ended
March 31, 2003. Additionally, the cost of services as a percentage of revenues
declined slightly from 23.2% for the prior nine-month period to 22.9% for the
current nine-month period. The ratio of cost of services to revenues will
fluctuate based on the type of cases administered, the number of hours per case
and our ability (or inability) to take advantage of volume arrangements with
hearing officers which usually lower the cost per case.
Sales and Marketing. Sales and marketing costs increased
15.4% to $971,916 for the nine months ended March 31, 2004 from $842,077 for the
nine months ended March 31, 2003. Sales and marketing costs as a percentage of
revenues increased to 35.7% in the first
16
nine months of fiscal year 2004 from 29.9% in the first nine months of fiscal
year 2003. Most of the increase (approximately $105,200) relates to advertising
costs. Our initial agreement with American Lawyer Media, Inc., which provided us
with $1,000,000 worth of advertising and promotional opportunities in their
national and regional publications over a two-year period, ended in August 2002.
The related non-cash amount expensed for the nine months ended March 31, 2004
and 2003 was $0 and $18,285, respectively. As part of our agreement, as amended,
with American Lawyer Media, Inc., we agreed to purchase an additional $250,000
worth of advertising. Such advertising is to be expended from May 2003 through
September 2004. During the nine months ended March 31, 2004, we incurred
$131,794 of advertising expense related to this commitment. Additionally,
travel, entertainment and promotions increased by approximately $23,200 as our
marketing efforts have been concentrated on demonstrating our complete line of
services to new and existing clients as we believe there exists great potential
to expand these relationships. Further, salaries and related costs increased by
approximately $1,400.
General and Administrative. General and administrative costs
decreased 6.5% to $1,745,749 for the nine months ended March 31, 2004 from
$1,866,694 for the nine months ended March 31, 2003. Most of the decrease
(approximately $201,800) relates to lower employee costs and related items
(including benefits, payroll taxes, travel and outside services), rental
expense, depreciation, bad debts expense and costs associated with being a
NASDAQ listed company. Offsetting the above decreases were increases in
automobile expenses, contributions, taxes and legal and auditing expenses,
totaling approximately $83,600. General and administrative costs as a percentage
of revenues decreased to 64.1% for the nine months ended March 31, 2004 from
66.3% for the nine months ended March 31, 2003.
Other Income. Other income increased from $11,308 for the nine
months ended March 31, 2003 to $54,079 for the nine months ended March 31, 2004.
Other income is composed primarily of investment income and realized gains
(losses) generated from investments. Realized losses (which may include
write-downs for other than temporary declines in the value of marketable
securities) was ($16,474) in the first nine months of fiscal year 2003 versus
realized gains of $43,756 in the first nine months of fiscal year 2004,
resulting in an improvement of $60,230. As an offset, net interest income
generated primarily from investments in money market funds declined by $12,232
from $20,532 in the prior year period due to lower invested balances and
interest rates as compared to the prior period.
Income Taxes. Tax benefits resulting from net losses incurred
for the nine month periods ended March 31, 2004 and 2003 were not recognized as
we recorded a full valuation allowance against the net operating loss
carryforwards during the periods.
Net Loss. For the nine months ended March 31, 2004, we had a
net loss of $562,458 as compared to a net loss of $536,729 for the nine months
ended March 31, 2003. The loss increased principally due to higher advertising
expenses, offset by improved investment results.
Liquidity and Capital Resources
At March 31, 2004, the Company had a working capital surplus
of $993,319 compared to $1,492,023 at June 30, 2003. The decrease in working
capital occurred primarily as a result of the loss from operations.
17
Net cash used in operating activities was $563,932 for the
nine months ended March 31, 2004 versus $377,480 in the prior comparable period.
Cash used in operating activities principally increased due to a slightly higher
net loss as well as changes in operating liabilities.
Net cash used in investing activities was $72,677 for the nine
months ended March 31, 2004 versus $322,611 in the comparable prior period. The
change in cash from investing activities was primarily due to a higher level of
net purchases of marketable securities in the prior period.
There were no financing activities during the nine months
ended March 31, 2004 and 2003.
In accordance with the terms of our August 2000 advertising
agreement, as amended, with American Lawyer Media, Inc., we agreed to purchase
an additional $250,000 worth of advertising. Such advertising is to be expended
from May 2003 through September 2004. During the nine months ended March 31,
2004, we incurred $131,794 of advertising expenses related to this commitment.
The remaining commitment outstanding as of March 31, 2004 is $95,371.
We have incurred net losses and had negative cash flow from
operations during the last seven years and through March 31, 2004. Cash and cash
equivalents arising principally from equity transactions have provided
sufficient working capital to fund losses incurred and capital expenditures, as
well as to provide cash to redeem preferred stock outstanding and to purchase
treasury stock. As of March 31, 2004, we had $1,468,983 in aggregate cash, cash
equivalents and marketable securities. We believe that, through the proper use
of these existing funds, from revenue generated from existing and new web-based
services and from efficiencies achieved by utilizing an enhanced processing
system, we will have sufficient cash to meet our needs over the next twelve
months.
CONTROLS AND PROCEDURES
Our disclosure controls and procedures are designed to ensure
that material information relating to the Company are made known to our Chief
Executive Officer ("CEO"), Chief Financial Officer ("CFO") and others in the
Company involved in the preparation of this quarterly report, by others within
the Company. Our CEO and CFO have reviewed our disclosure controls and
procedures within 90 days prior to the filing of this quarterly report and have
concluded that they are effective. There were no significant changes in our
internal controls or other factors that could significantly affect our internal
controls subsequent to the last date they were reviewed by our CEO and CFO.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are a party to legal matters arising in the general conduct
of business. The ultimate outcome of such matters is not
expected to have a material adverse effect on the results of
operations or financial position.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
Number Description of Document
------ -----------------------
3.1 Certificate of Incorporation, as amended (1)
3.1 (b) Certificate of Designation of Series A Exchangeable Preferred Stock (5)
3.1 (c) Certificate of Correction of Certificate of Designation of Series A Exchangeable Preferred Stock (6)
3.1 (d) Certificate of Amendment of Certificate of Incorporation (8)
3.1 (e) Certificate of Amendment of Certificate of Incorporation, as amended (11)
3.1 (f) Certificate of Amendment of Certificate of Incorporation, second amendment(14)
3.2 By-Laws of the Company, as amended (3)
4.1 Stock Purchase Agreement dated May 10, 2000 (7)
4.2 Stock Purchase Warrant dated May 10, 2000 (7)
4.3 Exchangeable Preferred Stock and Warrants Purchase Agreement (5)
10.1 1996 Stock Option Plan, amended and restated (3)
10.2 Employment Agreement between Company and Roy Israel effective July 1, 2002 (12)
10.5 Employment Agreement between Company and Patricia Giuliani-Rheaume(2)
10.7 Lease Agreement for Great Neck, New York facility (1)
10.7.1 Amendment to Lease Agreement for Great Neck, New York facility (4)
10.7.2 Third Amendment to Lease Agreement for Great Neck, New York facility (10)
10.14 Advertising Agreement dated August 11, 2000 (9)
10.14.1 Amendment to Advertising Agreement dated August 11, 2000 (13)
10.14.2 Second amendment to Advertising Agreement dated August 11, 2000(14)
10.15 Employment Agreement between Company and Alan Littman (13)
31.1 Rule 13a-14(a)/15d-14(a) Certification (CEO)**
31.2 Rule 13a-14(a)/15d-14(a) Certification (CFO)**
32.1 Section 1350 Certification (CEO)**
32.2 Section 1350 Certification (CFO)**
----------
(1) Incorporated herein in its entirety by reference to the
Company's Registration Statement on Form SB-2, Registration
No. 333-9493, as filed with the Securities and Exchange
Commission on August 2, 1996.
(2) Incorporated herein in its entirety by reference to the
Company's 1997 Annual Report on Form 10-KSB.
19
(3) Incorporated herein in its entirety by reference to the
Company's 1998 Annual Report on Form 10-KSB.
(4) Incorporated herein in its entirety by reference to the
Company's 1999 Annual Report on Form 10-KSB.
(5) Incorporated herein in its entirety by reference to the
Company's SB-2 filed on March 28, 2000.
(6) Incorporated herein in its entirety by reference to the
Company's SB-2A filed on April 21, 2000.
(7) Incorporated herein in its entirety by reference to the
Company's Form 8-K filed on May 17, 2000.
(8) Incorporated herein in its entirety by reference to the
Company's Form 8-K filed on June 21, 2000.
(9) Incorporated herein in its entirety by reference to the
Company's Form 8-K filed on August 24, 2000.
(10) Incorporated herein in its entirety by reference to the
Company's 2000 Annual Report on Form 10-KSB.
(11) Incorporated herein in its entirety by reference to the
Company's 2001 Annual Report on Form 10-KSB.
(12) Incorporated herein in its entirety by reference to the
Company's 2002 Annual Report on Form 10-KSB.
(13) Incorporated herein in its entirety by reference to the
Company's 2003 Annual Report on Form 10-KSB.
(14) Incorporated herein in its entirety by reference to the
Company's Quarterly Report for the quarter ended December 31,
2003 on Form 10-QSB.
** Filed herewith.
(b) Reports on Form 8-K.
Form 8-K was filed on February 17, 2004 by the Company to
announce its revenues and results for the second fiscal
quarter ended December 31, 2003. Form 8-K was filed on March
12, 2004 by the Company to announce the extension of its March
1998 purchase plan (the "Plan"), pursuant to which the number
of shares of common stock of the Company eligible for purchase
under the Plan remained at an aggregate of 1,600,002 shares.
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CLICKNSETTLE.COM, INC.
Date: May 11, 2004 By: /s/ Roy Israel
-------------------------------
Roy Israel, President and CEO
Date: May 11, 2004 By: /s/ Patricia A. Giuliani-Rheaume
--------------------------------
Patricia A. Giuliani-Rheaume, Vice
President, Treasurer and CFO
21