Item 1. Financial Statements.
AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
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Dec. 31, 2007
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Mar. 31, 2007
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(Unaudited)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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6,436,132
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$
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6,647,267
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Accounts receivable, net
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73,783
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64,851
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Prepaid expenses
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10,850
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41,154
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Total current assets
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6,520,765
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6,753,272
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Property and equipment, net
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105,761
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83,627
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Total assets
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$
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6,626,526
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$
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6,836,899
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Liabilities and Stockholders’ Equity
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Current liabilities:
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Accounts payable
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$
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51,236
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$
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22,394
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Accrued expenses
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91,858
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101,887
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Total current liabilities
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143,094
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124,281
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Commitments
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Stockholders’ equity:
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Common stock, $.01 par value. Authorized 20,000,000 shares and 10,000,000 shares at December 31, 2007 and March 31, 2007, respectively; issued 5,050,000 shares; outstanding 4,761,800 shares
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50,500
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50,500
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Additional paid-in capital
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4,931,099
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4,646,099
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Retained earnings
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1,963,674
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2,477,860
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6,945,273
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7,174,459
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Treasury stock, at cost
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(461,841
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)
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(461,841
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)
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Total stockholders’ equity
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6,483,432
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6,712,618
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Total liabilities and stockholders’ equity
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$
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6,626,526
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$
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6,836,899
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See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(Unaudited)
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Three months ended
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Nine months ended
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Dec. 31,
2007
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Dec. 31,
2006
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Dec. 31,
2007
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Dec. 31,
2006
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Revenues
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$
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209,780
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$
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199,610
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$
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581,662
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$
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641,731
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Cost of services
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94,639
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93,164
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278,527
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311,590
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Gross margin
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115,141
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106,446
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303,135
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330,141
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Selling, general and administrative expenses
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262,131
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299,162
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1,084,973
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818,740
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Operating loss
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(146,990
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)
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(192,716
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)
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(781,838
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)
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(488,599
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)
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Interest income
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87,252
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96,927
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267,652
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278,756
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Loss before income tax expense
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(59,738
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)
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(95,789
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)
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(514,186
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)
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(209,843
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Income tax expense
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—
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—
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—
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—
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Net loss
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$
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(59,738
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)
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$
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(95,789
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)
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$
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(514,186
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)
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$
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(209,843
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Net loss per share – basic and diluted
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$
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(0.01
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)
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$
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(0.02
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)
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$
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(0.11
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)
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$
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(0.04
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)
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Weighted average shares – basic and diluted
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4,761,800
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4,761,800
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4,761,800
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4,761,800
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See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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Nine months ended
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Dec. 31,
2007
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Dec. 31,
2006
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Cash flows from operating activities:
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Net loss
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$
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(514,186
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)
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$
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(209,843
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation
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18,019
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8,362
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Stock-based compensation
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285,000
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38,000
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Changes in assets and liabilities:
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Accounts receivable
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(8,932
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)
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9,502
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Prepaid expenses
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30,304
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23,750
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Accounts payable
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28,842
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(554
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)
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Accrued expenses
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(10,029
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)
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(17,324
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)
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343,204
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61,736
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Net cash used in operating activities
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(170,982
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)
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(148,107
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Cash flows from investing activities:
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Capital expenditures
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(40,153
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)
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(79,982
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Net cash used in investing activities
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(40,153
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)
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(79,982
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Net decrease in cash and cash equivalents
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(211,135
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)
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(228,089
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)
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Cash and cash equivalents at beginning of period
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6,647,267
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6,939,798
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Cash and cash equivalents at end of period
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$
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6,436,132
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$
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6,711,709
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See accompanying notes to condensed consolidated financial statements.
5
Table of Contents
AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
General
The accompanying unaudited consolidated financial statements and footnotes have been condensed and therefore do not contain all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the information furnished reflects all adjustments, consisting of normal recurring adjustments, necessary to make the consolidated financial position, results of operations and cash flows for the interim periods not misleading. Interim periods are not necessarily indicative of results for a full year.
These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended March 31, 2007 and the notes thereto contained in the Company’s Annual Report on Form 10-KSB, as filed with the Securities and Exchange Commission (the ‘‘SEC’’).
Net Loss Per Share
Basic earnings/(loss) per share are computed on the weighted average common shares outstanding. Diluted earnings/(loss) per share reflects the maximum dilution from potential common shares issuable pursuant to the exercise of stock options, if dilutive, outstanding during each period. Potentially dilutive securities consisting of employee and director stock options to purchase 1,236,000 shares as of December 31, 2007 and 2006 were not included in the diluted net loss per share calculations because their effect would have been anti-dilutive.
Stock Option Plans
Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment
(‘‘SFAS 123R’’). Under these provisions, stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the recipient’s requisite service period (generally the vesting period of the grant).
The Company recognized stock-based compensation totaling $285,000 during the nine months ended December 31, 2007 based on the fair value of stock options granted. This expense is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. At December 31, 2007, all outstanding options to purchase shares are fully vested. However, certain option grants contain disposition restrictions which prohibit the sale of 50% of the shares obtained through the exercise of such awarded options until the first anniversary of the grant date and the remaining 50% of the shares obtained through the exercise of the awarded options until the second anniversary of the grant date.
The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. Under this method, the weighted average fair value of stock options granted during the nine months ended December 31, 2007 was $0.95. In addition to the exercise price of the awards, certain weighted average assumptions were used to estimate the fair value of stock option grants as follows: expected volatility of 47.6%, expected dividend yield of 0%, risk-free interest rate of 5.05% and an expected option term of 5 years.
6
Table of Contents
The following table summarizes information about stock option activity for the nine months ended December 31, 2007:
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Shares
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Weighted
Average
Exercise
Price
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Weighted
Average
Remaining
Contractual
Term
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Aggregate
Intrinsic
Value
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Outstanding at March 31, 2007
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1,236,000
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$
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1.95
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4.6 years
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Granted
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300,000
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$
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1.97
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10 years
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Expired
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(300,000
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)
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$
|
1.25
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—
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Outstanding at Dec. 31, 2007
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1,236,000
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$
|
2.12
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6.3 years
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—
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Exercisable at Dec. 31, 2007
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1,236,000
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$
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2.12
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6.3 years
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—
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There were no options outstanding with an exercise price less than the closing price of the Company’s shares of $0.87 as of December 31, 2007. Accordingly, there was no aggregate intrinsic value associated with outstanding options at December 31, 2007.
At December 31, 2007, there was no unrecognized compensation cost related to non-vested stock option awards.
Item 2. Management’s Discussion and Analysis or Plan of Operation.
Critical Accounting Policies
The Company makes estimates and assumptions in the preparation of its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. Our significant accounting policies are described in Note 1 to the audited consolidated financial statements included in our Annual Report on Form 10-KSB for the fiscal year ended March 31, 2007. The accounting policies used in preparing our interim condensed consolidated financial statements are the same as those described in such Annual Report.
Results of Operations — Three and Nine Months ended December 31, 2007 and 2006
Revenues for the quarterly period ended December 31, 2007 were $209,780, an increase of 5.1% from the $199,610 reported for the three month period ended December 31, 2006. This increase was the result of an increase in vocational rehabilitation services performed for the Washington State Department of Labor & Industries during the three months ended December 31, 2007 compared to the comparable period last year. Revenues for the nine months ended December 31, 2007 were $581,662, a decrease of 9.4% from the $641,731 reported for the nine months ended December 31, 2006. This decrease is attributable to two factors. In the prior fiscal year, the Company lost the services of its highest producing consultant due to medical reasons during the second fiscal quarter. Accordingly, the revenue reported for the first quarter of the prior fiscal year had not yet been affected by this event. In addition, the Company ceased providing services under a community access program contract in the current fiscal year during the quarter ended June 30, 2007.
Cost of services as a percentage of revenues for the three month periods ended December 31, 2007 and 2006 were 45.1% and 46.7%, respectively. During the nine months ended December 31, 2007 and 2006, cost of services as a percentage of revenues were 47.9% and 48.6%, respectively. The variations in cost of services resulted from changes in the mix of vocational rehabilitation services rendered during the current fiscal year as compared to the corresponding periods in the prior fiscal year.
Selling, general and administrative expenses for the quarter ended December 31, 2007 decreased to $262,131 from $299,162 for the three months ended December 31, 2006. During the three months ended December 31, 2006, stock based compensation expense of $38,000 was recorded in accordance
7
Table of Contents
with the provisions of SFAS 123R for stock options granted which caused last year’s quarterly results to be higher. Selling, general and administrative expenses for the nine months ended December 31, 2007 increased to $1,084,973 from $818,740 for the nine months ended December 31, 2006 as a result of $285,000 of stock based compensation expense recorded in accordance with the provisions of SFAS 123R for stock options granted during the current fiscal year.
Interest income for the three and nine month periods ended December 31, 2007 was $87,252 and $267,652, respectively. Interest income for the three and nine months ended December 31, 2006 was $96,927 and $278,756, respectively. These decreases were related to a decrease in the cash and cash equivalents available for investment and a slight decline in interest rates.
Liquidity and Capital Resources
At December 31, 2007, the Company had working capital of $6,377,671 as compared to working capital of $6,628,991 at March 31, 2007. The Company believes that it has sufficient cash resources and working capital to meet its present cash requirements.
During the nine months ended December 31, 2007, net cash used in operations of $170,982 consisted principally of a net loss of $514,186 offset by stock based compensation expense of $285,000. Included in the $40,153 of investing activities during the nine months ended December 31, 2007 is $39,005 related to the purchase of an automobile for use by the Chief Financial Officer.
Minimum lease payments under non-cancelable leases and subleases, exclusive of future escalation charges, for the remainder of fiscal 2008 and fiscal years ending thereafter are as follows:
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|
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2008
|
|
|
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$
|
21,000
|
|
|
2009
|
|
|
|
|
51,000
|
|
|
2010
|
|
|
|
|
41,000
|
|
|
2011
|
|
|
|
|
42,000
|
|
|
2012
|
|
|
|
|
29,000
|
|
|
Total minimum lease payments
|
|
|
|
$
|
184,000
|
|
The Company continues its review of strategic alternatives for maximizing shareholder value. Potential acquisitions will be evaluated based on their merits within the Company’s current line of business, as well as other fields.
On December 28, 2007, the Company was notified by The Nasdaq Stock Market (‘‘Nasdaq’’) that, because the price of the Company’s common stock traded below $1.00 per share for thirty consecutive days, and continues to do so, we are not in compliance with one of Nasdaq’s continued listing requirements. If our common stock does not trade at or above $1.00 per share for at least 10 consecutive trading days by June 25, 2008, and if we are not eligible for any further compliance periods, we will be notified that our common stock will be delisted. If the Company’s common stock is delisted, it would be eligible to be traded on the OTC Bulletin Board. As a result, it may become more difficult for the Company to raise funds through the sale of its securities and delisting could also adversely affect the ability to use the Company’s common stock in acquisitions.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to the Company.
Market Risk
The Company is exposed to market risk related to changes in interest rates. Most of the Company’s cash and cash equivalents are invested at variable rates of interest and decreases in market interest rates would cause a related reduction in interest income.
8
Table of Contents
Forward Looking Statements
Except for the historical information contained herein, the matters discussed in this Report on Form 10-QSB may contain forward-looking statements that involve risks and uncertainties. The Company’s actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, general economic and market conditions, the potential loss or termination of existing clients and contracts, potential investment losses due to liquidity conditions and the ability of the Company to successfully identify and thereafter consummate one or more acquisitions.