10QSB 1 d59603_10q.txt QUARTERLY REPORT] ================================================================================ U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- 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| ---------- 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. 18 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