UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended October 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-23903
EAUTOCLAIMS, INC.
(Exact name of registrant as specified in charter)
Nevada 95-4583945
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
110 East Douglas Road, Oldsmar, Florida 34677
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(Address of principal executive offices) (Zip Code)
Registrant's telephone Number, including area code: (813) 749-1020
Securities registered pursuant to Section 12(b)of the Exchange Act: None
Indicate by check whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] Yes [ ] No
Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [ X ] No
Indicate the number of shares outstanding of each of the Issuer's classes
of common stock, $.001 Par Value, as of November 30, 2004 was 36,283,851.
EAUTOCLAIMS, INC.
INDEX TO FORM 10-Q
--------------------------------------------------
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements 2
Balance Sheets 3
Statements of Operations 4
Statement of Stockholders' Deficiency 5
Statements of Cash Flows 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
Certifications 21
1
EAUTOCLAIMS, INC.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The financial statements of eAutoclaims, Inc. (collectively the
"Company") included herein were prepared, without audit, pursuant to
rules and regulations of the Securities and Exchange Commission.
Because certain information and notes normally included in financial
statements prepared in accordance with generally accepted accounting
principles were condensed or omitted pursuant to such rules and
regulations, these financial statements should be read in conjunction
with the financial statements and notes thereto included in the
financial statements of the Company as included in the Company's Form
10-K for the year ended July 31, 2004.
2
EAUTOCLAIMS, INC.
BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------------
October 31, 2004 July 31, 2004
(unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 242,889 $ 415,549
Accounts receivable, less allowance for doubtful accounts
of $175,000 and $161,000 respectively 744,580 728,776
Due from related parties 59,471 65,431
Prepaid expenses and other current assets 102,802 79,341
Total current assets 1,149,742 1,289,097
Property and equipment, net of accumulated depreciation
of $1,463,155 and $1,326,462 respectively 1,010,263 1,073,409
Goodwill 1,093,843 1,093,843
Other assets 25,800 25,800
Deferred income tax asset, net of valuation
allowance $9,097,000 and $9,002,000 respectively
- ----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 3,279,648 $ 3,482,149
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable, advanced payments and accrued expenses $ 4,632,202 $ 4,378,858
Loan payable - stockholder 15,007 36,866
Current portion of capital lease obligation 66,679 63,888
Convertible debenture 275,000
Total current liabilities 4,988,888 4,479,612
Convertible debenture 300,000
Capital lease obligation 188,918 195,621
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,177,806 4,975,233
Stockholders' Deficiency:
Convertible preferred stock - $.001 par value; authorized 5,000,000 shares,
issued and outstanding 164 shares and 200 shares respectively
aggregate liquidation preference of $820,000 and $1,000,000 respectively 1 1
Common stock - $.001 par value; authorized 100,000,000 shares, issued
and outstanding 35,837,078 shares and 34,337,362 shares respectively 35,837 34,338
Additional paid-in capital 22,326,957 22,171,857
Accumulated deficit (24,260,953) (23,699,280)
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' Deficiency (1,898,158) (1,493,084)
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 3,279,648 $ 3,482,149
============================================================================================================================
See Notes to Financial Statements
3
EAUTOCLAIMS, INC.
STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------
Three-month Three-month
Period Ended Period Ended
October 31, 2004 October 31, 2003
(unaudited) (unaudited)
- ---------------------------------------------------------------------------------------------------------------
Revenue:
Collision repairs management $3,269,607 $ 7,378,412
Glass repairs 161,088 400,310
Fleet repairs management 134,749 216,482
Other revenue 554,352 695,306
- ---------------------------------------------------------------------------------------------------------------
Total revenue 4,119,796 8,690,510
Expenses:
Claims processing charges 3,200,486 7,122,706
Selling, general and administrative 1,330,271 1,427,540
Depreciation and amortization 134,584 130,022
- ---------------------------------------------------------------------------------------------------------------
Total expenses 4,665,341 8,680,268
- ---------------------------------------------------------------------------------------------------------------
Net loss $ (545,545) $ 10,242
===============================================================================================================
Adjustment to net loss to compute loss per common share:
Preferred stock dividends (16,128) (24,903)
- ---------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (561,673) $ (14,661)
===============================================================================================================
Loss per common share - basic and
diluted $ (0.02) $ (0.00)
===============================================================================================================
Weighted-average number of common
shares outstanding-basic and diluted 35,361,541 23,458,463
===============================================================================================================
See Notes to Financial Statements
4
EAUTOCLAIMS, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
- ---------------------------------------------------------------------------------------------------------------------------------
Three month period ended October 31, 2004 Additional
(unaudited) Preferred Stock Common Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Deficiency
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 2004 200 1 34,337,362 34,338 22,171,857 (23,699,280) (1,493,084)
Issuance of common stock for services 210,176 210 73,491 73,701
Accrued dividends on preferred stock (16,128) (16,128)
Issuance of common stock upon
conversion of preferred stock (36) 900,000 900 (900) 0
Issuance of common stock for
preferred stock dividends 261,675 261 51,845 52,106
Conversion of debt to equity 89,606 90 24,910 25,000
Isssuance of common stock for interest
on convertible debt 20,759 21 5,771 5,792
Issuance of common stock upon exercise of 17,500 17 (17) 0
options
Net loss (545,545) (545,545)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 2004 164 1 35,837,078 35,837 22,326,957 (24,260,953) (1,898,158)
================================================================================================================================
See Notes to Financial Statements
5
EAUTOCLAIMS, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Three-month Three-month
Period Ended Period Ended
October 31, 2004 October 31, 2003
(unaudited) (unaudited)
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) (545,545) $ 10,242
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 134,584 130,022
Amortization of discount on debentures 35,215
Common stock issued for services 73,701 26,831
Common stock issued for interest 5,792
Allowance for doubtful accounts 14,000
Changes in operating assets and liabilities
Accounts receivable (29,804) 3,519
Prepaid expenses and other current assets (23,461) (3,524)
Other assets 28,691
Accounts payable and accrued expenses 289,322 42,180
- --------------------------------------------------------------------------------
Net cash (used in) provided by operating
activities (81,411) 273,176
- --------------------------------------------------------------------------------
Cash flows from investing activity:
Purchases of property and equipment (71,438) (93,285)
Payments from related parties 5,960 9,000
Loans to related parties (2,750)
- --------------------------------------------------------------------------------
Net cash used in investing activity (65,478) (87,035)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock 163,250
Principal payments on capital lease (3,912) (9,383)
Principal payments on shareholder loans (21,859) (19,399)
- --------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities (25,771) 134,468
- --------------------------------------------------------------------------------
Net (decrease) increase in cash (172,660) 320,609
Cash at beginning of period 415,549 226,161
- --------------------------------------------------------------------------------
Cash at end of period $242,889 $546,770
================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 9,751 $ 17,390
================================================================================
Supplemental disclosure of noncash investing
and financing activities:
Conversion of debentures to common stock $ 25,000
================================================================================
Conversion of preferred stock and accrued
dividends for common stock $ 232,106
================================================================================
Accrued dividends on preferred stock $ 16,128 $ 24,903
================================================================================
See Notes to Financial Statements
6
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1 - Basis of presentation
The accompanying unaudited financial statements contain all adjustments
(consisting only of those of a normal recurring nature) necessary to present
fairly the financial position of eAutoclaims, Inc. as of October 31, 2004 and
its results of operations and cash flows for the three-month periods ended
October 31, 2004. Results of operations for the three-month period ended October
31, 2004 are not necessarily indicative of the results that may be expected for
the year ending July 31, 2005.
The Company derives revenue primarily from collision repairs, glass repairs and
fleet repairs. Revenue is recognized when an agreement between the Company and
its customer exists, the repair services have been completed, the Company's
revenue is fixed and determinable and collection is reasonably assured.
The Company records revenue gross when the Company is the primary obligor in its
arrangements, the Company has latitude in establishing price, the Company
controls what services are provided and where the services will take place, the
Company has discretion in supplier selection, the Company is involved in the
determination of product or service specifications and the Company has credit
risk. The Company records revenue net when situations occur whereby the supplier
(not the Company) is the primary obligor in an arrangement, the amount the
Company earns is fixed or the supplier (and not the Company) has credit risk.
The Company accounts for its employee incentive stock option plans using the
intrinsic value method in accordance with the recognition and measurement
principles of Accounting Principles Board Opinion No 25, "Accounting for Stock
Issued to Employees," as permitted by SFAS No. 123. Had the Company determined
compensation expense based on the fair value at the grant dates for those awards
consistent with the method of SFAS 123, the Company's net income (loss) per
share would have been increased to the following pro forma amounts:
Three-month
period ended
October 31,
2004 2003
------- -------
Net income (loss) as reported $(545,545) $ 10,242
Deduct total stock based employee
compensation expense determined under
fair value based methods for all awards (16,733) (91,114)
--------- ---------
Pro forma net loss $(562,278) $ (80,872)
========== =========
Basic and diluted net loss per share
as reported $(.02) $(.00)
Pro forma and diluted basic loss per share $(.02) $(.00)
7
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2 - Per share calculations
Basic loss per share is computed as net loss available to common stockholders'
divided by the weighted- average number of common shares outstanding for the
period. Diluted loss per share reflects the potential dilution that could occur
from common shares issuable through stock-based compensation including stock
options, restricted stock awards, warrants and convertible securities. As of
October 31, 2004 and 2003, 19,753,245 and 6,784,850 options and warrants,
respectively, were excluded from the diluted loss per share computation, as
their effect would be antidilutive. Additionally, as of October 31, 2004 and
2003 6,250,000 and 7,085,000 of shares respectively, that would be issuable upon
conversion of convertible securities plus accrued interest were excluded from
the dilutive loss per share computation, as their effect would be antidilutive.
Note 3 - Equity Transactions
During the three-months ended October 31, 2004, the Company issued 138,888
shares of common stock to two directors in exchange for their services. These
shares are being expensed over the year as they are earned. During the
three-months ended October 31, 2004, the Company expensed $12,500, or 34,722
shares, which was approximately equal to the fair market value of the shares
when earned. As of October 31, 2004, 104,166 of the shares of common stock
issued with a fair value of $36,250 were reflected in the financial statements
as a prepayment of their annual retainer.
During the three-months ended October 31, 2004, the Company issued 71,288 shares
of common stock in exchange for $24,951 in legal services.
On August 2, 2004, 12 shares of preferred stock with a face value of $60,000
plus dividends of $15,757 were converted into 379,933 shares of common stock. On
September 3, 2004, 12 shares of preferred stock with a face value of $60,000
plus dividends of $17,951 were converted into 389,753 shares of common stock. On
October 6, 2004, 12 shares of preferred stock with a face value of $60,000 plus
dividends of $18,398 were converted into 391,989 shares of common stock.
On August 24, 2004, an investor converted $25,000 of debt owed to him by the
Company into 89,606 shares of common stock. In addition, interest on the debt of
$5,792 was converted into 20,759 shares of common stock.
During the three-months ended October 31, 2004, Options with a strike price of
$0.01 were exercised to purchase 17,500 shares of the Company's common stock.
Additionally, options to purchase 138,333 shares of common stock were canceled.
8
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4 - Additional information
The Company's records and the records of its transfer agent differ with respect
to the number of outstanding shares of the Company's common stock. According to
the transfer agent, the number of shares of common stock outstanding is
approximately 31,500 shares greater than the 35,837,078 indicated by the
Company's records. The Company believes that its records are correct and is in
the process of resolving this difference. The number of shares outstanding
reflected in the Company's financial statements do not include these shares or
any adjustment that might be necessary to resolve this difference.
Note 5 - Subsequent Event
On November 9, 2004, 12 shares of preferred stock with a face value of $60,000,
plus dividends of $18,700 were converted into 393,501 shares of common stock.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Report on Form 10-Q, that are not purely
historical, are forward-looking information and statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These include statements regarding our expectations,
intentions, or strategies regarding future matters. All forward-looking
statements included in this document are based on information available to us on
the date hereof. It is important to note that our actual results could differ
materially from those projected in such forward-looking statements contained in
this Form 10-Q. The forward-looking statements contained herein are based on
current expectations that involve numerous risks and uncertainties. Assumptions
relating to the foregoing involve judgments regarding, among other things, our
ability to secure financing or investment for capital expenditures, future
economic and competitive market conditions, and future business decisions. All
these matters are difficult or impossible to predict accurately and many of
which may be beyond our control. Although we believe that the assumptions
underlying our forward-looking statements are reasonable, any of the assumptions
could be inaccurate and, therefore, there can be no assurance that the
forward-looking statements included in this form 10-Q will prove to be accurate.
General
- -------
eAutoclaims provide Internet based collision claims services for automobile
insurance companies, Managing General Agents (MGA) and third party claims
administrators (TPA) and self-insured automobile fleet management companies. Our
business strategy is to use the Internet to streamline and lower the overall
costs of automobile repairs and the claims adjustment expenses of our clients.
We believe that our proprietary web-based software products and services make
the management of collision repairs more efficient by controlling the cost of
the repair and by facilitating the gathering and distribution of information
required in the automobile repair process.
eAutoclaims controls the vehicle repair process from the reporting of the
accident through the satisfactory repair of damage. We bring together and
coordinate the activities of the insurance company, its insured, and the various
parties involved in evaluating a claim, negotiating the cost of the repair, and
performing necessary repair services. We have contracted with approximately
2,500 body shops throughout the United States to repair vehicles. These shops,
referred to as our "provider network," provide us 10% to 15% discount on the
vehicle repair because of the volume of repairs we provide to them. Because we
audit every line of every repair estimate and because we share a portion of the
volume discount with our customer, we are able to lower the average cost being
paid by our customer.
Our product, eJusterSuite, provides both outsourcing and ASP (application
service provider) solutions. The outsourcing solution requires eAuto personnel
to audit and coordinate the vehicle repair. The ASP solution allows the customer
to use our technology independent of our personnel; thereby, providing a
solution for the largest insurance companies that already have the staff to
process and control the claims process, while paying us a fee for every
transaction that is run through our system. The ASP model provides margin
without the associated personnel and operating costs.
eJusterSuite also builds in service partners that can provide the needed
services such as Independent adjustors, car rentals, tow trucks and accident
reporting by only clicking an Icon that is added to the screen of the customer's
desk top in the current system. The system automatically provides the service
partner the information already in our system via the Internet. The service
partner will systematically provided the requested services and pay us a fee for
each assignment they receive through our system. This process significantly
10
reduces the customers' time and cost to process claims as well as reduces the
number of mistakes that occur in a manual process. In many cases it also reduces
the cost of the service partner to obtain and process the transaction, even
after paying our transaction fee. This revenue provides additional margin
without the additional personnel and operation costs.
For our outsourcing customers, we approve all repair shops for inclusion in our
network and determine which repair shop will ultimately perform the repairs. We
receive a discount, ranging from 10% to 15%, from repair facilities that are
members of our provider network. The revenues generated from the vehicle repair
facilities through our provider network accounts for 87% of the revenue for the
three-months ended October 31, 2004. We are paid on a per claims basis from our
insurance and fleet company customers for each claim that we process through our
system. These fees vary from $10 to $60 per claim depending upon the level of
service required. For the three-months ended October 31, 2004, 13% of the
revenue has been received from claims processing fees and other income. Other
income consists mostly of the sale of estimating software, fees from service
partners (ASP fees) and subrogation income.
Critical Accounting Policies
- ----------------------------
Our discussion and analysis of our financial condition and the results of our
operations are based upon our financial statements and the data used to prepare
them. The Company's financials have been prepared in accordance with accounting
principles generally accepted in the United States. On an ongoing basis we
re-evaluate our judgments and estimates including those related to revenues, bad
debts, long-lived assets, and income taxes. We base our estimates and judgments
on our historical experience, knowledge of current conditions and our beliefs of
what could occur in the future considering available information. Actual results
may differ from these estimates under different assumptions or conditions. Our
estimates are guided by observing the following critical accounting policies.
Revenue recognition
- -------------------
The Company derives revenue primarily from collision repairs, glass repairs and
fleet repairs. Revenue is recognized when an agreement between the Company and
its customer exists, the repair services have been completed, the Company's
revenue is fixed and determinable and collection is reasonably assured.
The Company records revenue gross in the areas of collision and fleet repairs.
It also records at gross in certain glass repair transactions. Revenue is
recorded at gross in these areas when:
o The Company is the primary obligor in its arrangements. The Company is
responsible for the quality of the repair and must satisfy the customer if
the body shop fails to repair the vehicle properly.
o The Company has latitude in establishing price. The price is established
based on the Company's audit of the repair estimate submitted by the repair
facility. The repair facility cannot begin the repair until an agreed upon
price is established between the facility and the Company for the repair.
o The Company controls what is repaired with their contracted shops, as they
audit the estimate submitted by the repair facility. The Company must agree
that the repair is reasonable and necessary before the repair facility is
allowed to proceed with the work being requested.
o The Company has discretion in supplier selection. Through the use of
software, the Company prioritizes which repair facility is used based on
the efficiency and effectiveness of the repair facility, and
o The Company has credit risk. The Company is responsible to pay the repair
facility even if the customer does not pay for the repair.
11
The Company records revenue net of the repair costs when the supplier, not the
Company, is the primary obligor in an arrangement, the amount the Company earns
is fixed or the supplier has credit risk. This occurs when the repair has been
performed before it is referred to the Company. When they receive notice of the
transaction, they call the glass repair facility to ask them to become part of
our network and to negotiate a better price on the repair. If the Company is
able to negotiate a better price for the customer they keep a portion of the
added discount. In that situation the revenue is recorded net of the repair
costs even though the Company pays for the entire claim and are reimbursed by
the insurance company, since they did not have the risk of loss and are not
responsible for the repair.
The revenue generated from a co-marketing agreement with the ADP Claims Services
Group (ADP) will be recorded net of the repair costs because in the agreement
the Company is performing a fee for service. The insurance company is the
customer of ADP, who will be collecting the revenue and paying the shop. The
first claims from this agreement were processed in the three-month period ended
October 31, 2004.
The Company maintains an allowance for doubtful accounts for losses that they
estimate will arise from the customers' inability to make required payments.
Collectability of the accounts receivable is estimated by analyzing historical
bad debts, specific customer creditworthiness and current economic trends. At
October 31, 2004 the allowance for doubtful accounts was approximately $175,000.
Accounting for Income taxes
- ---------------------------
The Company records a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. While we consider
historical levels of income, expectations and risks associated with estimates of
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event that we
determine that we would be able to realize deferred tax assets in the future in
excess of the net recorded amount an adjustment to the deferred tax asset would
increase income in the period such determination was made. Likewise, should we
determine that we would not be able to realize all or part of the net deferred
tax asset in the future, an adjustment to the deferred tax asset would be
charged to income in the period such determination was made. We have recorded
valuation allowances against our deferred tax assets of 9,097,000 at October 31,
2004. The valuation allowance consists mainly of net operating losses previously
realized and stock compensation currently not deductible. The valuation
allowance was necessary because the use of these deductions is not reasonably
assured since the company has not reached profitability.
Valuation of long-lived assets
- ------------------------------
The Company identifies and records impairment on long-lived assets, including
goodwill, when events and circumstances indicate that such assets have been
impaired. The Company periodically evaluates the recoverability of its
long-lived assets based on expected undiscounted cash flows, and recognizes
impairment, if any, based on expected discounted cash flows. Factors we consider
important which could trigger an impairment review include the following:
o Significant negative industry trends
o Significant underutilization of the assets
o Significant changes in how we use the assets of our plans for their use.
Goodwill was amortized using the straight-line method over 7 years through July
31, 2002. As of August 1, 2002 no additional amortization was recorded as a
result of the change in accounting standards as described below in "recently
issued financial accounting standards." At each balance sheet date, the Company
12
evaluates the period of amortization of intangible assets. The factors used in
evaluating the period of amortization include: (i) current operating results,
(ii) projected future operating results, and (iii) any other material factors
that effect the continuity of the business. No charge for impairment of this
asset was considered to be necessary as of October 31, 2004.
Management's Interim Operating Plan
- -----------------------------------
Four separate events happened during the second half of the fiscal year and in
September 2004 that has impacted the Company's financial position. First, our
largest customer, sold a substantial part of its U.S. based auto physical damage
business. Starting in January 2004, the business was expected to decrease
one-twelfth each month for one year; however, the reduction in policy run-off
accelerated in the last three months of the fiscal year and the expected drop in
revenue has already occurred. Second, we experienced a significant decrease in
revenue from our second largest customer because of a change in their state's
legislation regarding a special type of insurance policy requiring a direct
repair networks. That decrease in revenue also occurred in the second half of
the fiscal year. Third, in August and September 2004 our office was threatened
by four hurricanes, two of which impacted our community and operations. While
our facilities withstood the hurricanes, it interrupted our claims assignment
stream for several days; thereby, reducing revenue and cash flow. It also caused
us to incur additional expenses to insure that our business process would not be
interrupted in the future. Fourth, the ADP Co-Marketing Agreement took longer to
implement than expected. Specifically, there has been a time lag involved
between when we anticipated rolling out the ADP Sales & Marketing efforts on a
national basis and the actual time that this event has occurred. While we are
still very optimistic about the opportunities presented with the ADP
Co-Marketing Agreement. The effect of a delay has resulted in the Company
incurring additional expenses for carrying support personnel and ramping for the
remainder of fiscal 2004 and the first part of fiscal 2005.
As a result of these events, management is currently taking the following
actions that are expected to positively impact the Company's financial position:
o Rolling out Higher Margin Product Lines - Management is leveraging internally
developed ASP/technologies that will allow other companies in related
industries to significantly reduce labor costs and improve operating
efficiencies. These technologies have already been implemented in the
Company's operating processes and have shown themselves to be of significant
value. By modifying the interface to these technologies, the Company can
produce significant click fee revenue without adding significant operating
costs. The target market for these technologies will include a wide range of
organizations, including the largest (tier 1) insurance companies. The
Company's management believes this additional product line will result in a
greater growth in high volume, high margin revenues that will have a
meaningful impact to the Company's bottom-line. Management started this
process in fiscal year 2004. While total revenues decreased during the last
fiscal year, click fee revenue from the clients' use of the Company's
technology increased from approximately $96,000 in the three-months ended
October 31, 2003 to approximately $124,000 in the three-months ended October
31, 2004. While there are no guarantees these transactions or new business
will mature, management believes this will be a growth market for the Company
in the future.
o Raising Additional Capital - The Company is raising up to an additional $1.5
million of working capital to ensure the success of the initiative taken over
the last twelve months. This additional capital will allow management the
necessary resources to bring these initiatives to their successful
completion.
o ADP Co-Marketing Agreement - Management is concentrating on the national
rollout of the ADP Co-Marketing Agreement, which is the beginning of the
Company's Special Markets Division. Since August 2004 this agreement has
13
produced five signed pilot agreements with insurance companies or third party
administrators, and has produced two verbal commitments for additional pilot
agreement rollouts. In addition, there are other accounts in the sales cycle
that are expected to mature into new accounts. While there are no guarantees
that these pilot agreements will mature into annual or multi-year contracts,
maturing these accounts past the pilot stage could produce significant claims
volume. The Company would share the associated revenues with ADP Claims
Services Group. To date, we have received seven signed pilot agreements as a
result of this Co-Marketing agreement. One of those pilot agreements has been
converted to an annual contract; the others are still in the pilot period.
Based on the early results of the ADP Co-Marketing agreement and the expansion
of the Company's ASP/Technology sales, we expect to need the extra staff we are
currently carrying on our payroll. However, there are no guarantees this new
expected business will materialize; therefore the Company has developed a
contingency plan in the event these events do not occur. If necessary, the
Company would reduce staff positions currently being carried for the expected
new business from the ADP Co-Marketing agreement. In addition, our management
team would also take a second round of salary reductions ranging from 5% to 15%.
The senior management team would once again take the highest percentage
reductions.
Results of Operations
- ---------------------
For the three months ended October 31, 2004 compared to the three-months ended
October 31, 2003.
Revenue
Total revenue for the three-months ended October 31, 2004 was $4.1 million,
which is a 53% decrease from the $8.7 million of revenue for the three-months
ended October 31, 2003. Collision repair management revenue decreased 55% to
$3.3 million for the three-months ended October 31, 2004 from $7.4 million for
the three-months ended October 31, 2003. This decrease is primarily the result
of the loss of revenues from our two largest clients. During the three months
ended 31, 2004 we derived 58% and 8% of our revenue from two customers. In
October 2003, our largest client announced that they were selling one-half of
their U.S. auto physical damage business to another insurance carrier. We have
experienced approximately a $2.5 million decrease in the revenue from the
three-month period ended October 31, 2003 to same period in 2004. We also
experienced a decrease in revenue from our second largest customer because of a
change in their state's legislation regarding a special type of insurance policy
requiring a direct repair networks. We experienced approximately a $1.0 million
decrease in the revenue from the three-month period ended October 31, 2003 to
the same period in 2004. The Company anticipates meaningful growth in new
clients based on the early results of its new co-marketing agreement with ADP
Claims Services Group. However, because of the competitive nature of our
business and the uncertainty of bring on enough business to offset the loss of
business, we may be unable to replace revenues quickly enough to sustain
profitability. However, the company's management will cut expenses in the event
we are unable to obtain profitability.
Glass repair revenues decreased by approximately $239,000 from approximately
$400,000 for the three months ended October 31, 2003 to approximately $161,000
for the three months ended October 31, 2004. This decrease is primarily due to
the loss of our second and third largest glass customers. The Company continues
to pursue additional glass customers as the glass repair business complements
our core business and allows our customers to use a single source for all their
repair needs.
Other revenue decreased by approximately $141,000 from approximately $695,000
for the three months ended October 31, 2003 to approximately $554,000 for the
three months ended October 31, 2004. This decrease is mainly a result of the
reduction in estimatic software sales and the reduction in the fee revenue
generated from the claims processed as explained above.
14
Claims Processing Charges
Claims processing charges include the costs of collision and glass repairs paid
to repair shops within our repair shop network. Claims processing charges for
the three-months ended October 31, 2004 was approximately $3.2 million. This was
78% of total revenue, compared to approximately $7.1 million, or 82% of total
revenue for the three-months ended October 31, 2003. Claims processing charges
are primarily the costs of collision repairs paid by the Company to its
collision repair shop network. The decrease in claims processing charges as a
percentage of total revenue is a result of the change in the product mix with a
higher percentage of higher margin products as compared to lower margin
products. This also includes the growth in click fees, which are fees charged
when a client uses our technology that has little to no associate cost of sale.
We are dependent upon our third party collision repair shops for insurance
claims repairs. eAutoclaims currently has approximately 2,500 affiliated repair
facilities in its network for claims repairs. We electronically and manually
audit individual claims processes to their completion using remote digital
photographs transmitted over the Internet. However, if the number of shops or
the quality of service provided by collision repair shops fall below a
satisfactory level leading to poor customer service, this could have a harmful
effect on our business.
Selling, General And Administrative (SG&A) Expenses
SG&A expense is mainly comprised of salaries and benefits, facilities related
expenses, telephone and internet charges, legal and other professional fees, and
travel expenses. SG&A expenses for the three-months ended October 31, 2004
totaled $1.3 million compared to $1.4 million for the three-months ended October
31, 2003. The decrease in SG&A expenses of approximately $110,000 in payroll is
primarily due to elimination of personnel as a result of the reduced claim
volume. We have maintained staff in anticipation of significant new business
expected to be generated by the ADP Co-Marketing Agreement.
Payroll and benefit related expenses for the three-months ended October 31, 2004
and 2003 totaled approximately $864,000 and $975,000, which is approximately an
11% decrease. This decrease is the result of personnel and salary cuts made
during the last fiscal year as described in the proceeding paragraph.
SG&A expenses also include non-cash charges of approximately $95,000 for the
three-month period ended October 31, 2004. These non-cash charges include
approximately $50,000 of common stock issued to pay fees to directors,
approximately $25,000 of common stock issued in exchange for legal services and
approximately $6,000 of common stock issued for accrued interest associated with
the conversion of debt. These non-cash charges for the three-month period ended
October 31, 2003 include approximately $35,000 of amortization of debenture
discount and approximately $27,000 of common stock issued to pay fees to
directors.
Also included in the SG&A is interest expense related to a loan from a
shareholder and capital leases. This interest expense totals approximately
$10,000 for the three-months ended October 31, 2004 compared to approximately
$17,000 for the three-months ended October 31 2003.
Depreciation
Depreciation of property and equipment of approximately $135,000
was recognized in the three-month period ended October 31, 2004. This is
compared to approximately $130,000 for the three-month periods ended October 31,
2003.
15
Net Income/Loss
Net loss for the three-months ended October 31, 2004 totaled approximately
$546,000 compared to a net income of approximately $10,000 for the three-month
period ended October 31, 2003. These amounts include non-cash expenses of
approximately $230,000 and $192,000, respectively. The loss in the current
fiscal quarter is due to the decrease in revenue from our two largest customers.
Liquidity and Capital Resources
- -------------------------------
At October 31, 2004, we had approximately $243,000 in cash. This is a decrease
of approximately $173,000 from July 31, 2004. We have a working capital
deficiency of approximately $3.8 million. The primary source of our working
capital during the three-month period ended October 31, 2004, was from cash flow
generated by operations and available cash balance. However, there is no
assurance that we will be able to continue to provide cash through operations.
As described in management's interim operating plan above, we expect to sell up
to an additional $1.5 million in equity securities in the near future, which
will be used for operating working capital and to pay certain past due
obligations to repair facilities. We cannot assure you that we will be able to
sell these securities or that such securities will be sold by us on favorable
terms. If we raise additional funds for the issuance of our securities, such
securities may have rights, preferences or privileges similar to those of the
rights of our common stock and our stockholders may experience additional
dilution. In addition, we have secured a non-cancelable line of equity from a
shareholder in the amount of $2,000,000, which we do not have plans to use but
could do so if necessary.
We believe that cash generated from operations and additional financing will be
sufficient to meet our working capital requirements for the next 12 months. This
estimate is a forward-looking statement that involves risks and uncertainties.
The actual time period may differ materially from that indicated as a result of
a number of factors so that we cannot assure that our cash resources will be
sufficient for anticipated or unanticipated working capital and capital
expenditure requirements for this period.
Debt and Contractual Obligations
- --------------------------------
Our commitments for debt and other contractual arrangements as of October 31,
2004 are summarized as follows:
Years ending October 31,
------------------------------------------
2005 2006 2007 Total
------------------------------------------
Property lease 220,000 227,000 19,000 466,000
Equipment lease 96,000 110,000 95,000 301,000
Loan payable to stockholder 15,000 15,000
Convertible debenture 275,000 275,000
Employee compensation 744,000 29,000 773,000
----------------------------------------
1,350,000 366,000 114,000 1,830,000
==========================================
The Company leases equipment and facilities under non-cancelable capital and
operating leases expiring on various dates through 2007. The main operating
lease consists of a 5-year lease for 30,000 square feet of a 62,000 square foot
facility. The Company has an option to buy the entire facility with the
associated land for $2,950,000.
16
As of October 31, 2004 the Company had one loan outstanding to a stockholder
totaling $15,007. The loan bears interest at the rate of 12% per annum and is
being paid over 18 months with principal and interest payments of $7,582 per
month through December of 2004. The fair value of the loan approximates its
carrying amount based on rates available to the Company for similar loans.
In October 31, 2004 the Company owed $275,000, 8% convertible note payable with
a maturity date of August 2005. This note is convertible at the discretion of
the creditor at a fixed rate of $0.279 per share. The interest can be paid in
either cash or common shares at the Company's discretion at the end of the loan.
The Company has a two-year employment agreement with its President and Chief
Executive officer. On March 27, 2003, the Board of Directors approved an Amended
and Restated Employment Agreement with its President and Chief Executive
Officer. The new two-year agreement specifies an annual base salary of $185,000,
effective February 1, 2003 through December 31, 2003. From January 1, 2004
through February 1, 2005, the minimum annual base salary will be $200,000. The
individual receives bonuses equal to 3% of the Company's earnings before
interest, taxes, depreciation and amortization as defined by generally accepted
accounting principles (GAAP), and may elect to receive part or the entire bonus,
if any, in shares of our Common Stock valued at 90% of the then current market
value. Each month that the Company is profitable on a GAAP basis, the individual
also has the right to receive options to purchase 25,000 shares of the Company's
common stock, with a term of five years at an exercise price equal to the
stock's fair market value at the date of grant. These options vest over the
remaining life of his contract. The individual is entitled to a $750 per month
automobile allowance and $1,000 of personal allowances. The individual is
entitled to up to 299% of his current base salary if the individual loses his
position, unless terminated for cause. He took a voluntary pay reduction
of 15% of his pay effective May 1, 2004 until the Company returns to
profitability. This adjustment was reflected in the debts and contractual
obligation table above.
In addition, the Company has two-year employment agreements with four other
executives that expire April 30, 2006. The agreements provide for combined base
salaries of $448,945 in the second year. They also receive automobile allowance
ranging from $400 to $700 per month. If their contracts are not renewed they
receive severance packages ranging from six to nine months of their annual
compensation. These severance packages supersede the previous "Change in Control
and Termination Agreements," dated April 9, 2001, that each of these executives
had previously executed. These executives also took a pay reduction of 15% of
their aggregated contracted amount until the Company returns to profitability.
This adjustment was reflected in the debts and contractual obligation table
above.
Inflation
We believe that the impact of inflation and changing prices on our operations
since the commencement of our operations has been negligible.
Seasonality
The Company typically experiences a slow down in revenue during November and
December each year. Consumers tend to delay repairing their vehicles during the
holidays.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currently, we do not have any significant market risk. Market risk is the
potential loss arising from adverse change in market rates in prices such as
foreign currency exchange and interest rates. We do not have any foreign
currency exchange rate exposure. We do not have any long-term debt from
financial institutions. We do not hold any derivatives or other financial
instruments for trading or speculative purposes. Our financial position is not
affected by fluctuations in currency against the U.S. dollar since all of our
sales and assets occur within the United States.
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operations of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as of October 31, 2004. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective such that
the material information required to be included in our Securities and Exchange
Commission ("SEC") reports is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms relating to
eAutoclaims, Inc., and was made known to them by others within those entities,
particularly during the period when this report was being prepared.
b) Changes in internal controls over financial reporting.
In addition, there were no significant changes in our internal control over
financial reporting that could significantly affect these controls during the
quarter ended October 31, 2004. We have not identified any significant
deficiency or materials weaknesses in our internal controls, and therefore there
were no corrective actions taken.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
During the three-months ended October 31, 2004, the Company issued 138,888
shares of common stock to two directors in exchange for their services. These
shares are being expensed over the year as they are earned. During the
three-months ended October 31, 2004, the Company expensed $12,500, or 34,722
shares, which was approximately equal to the fair market value of the shares
when earned. As of October 31, 2004, 104,166 of the shares of common stock
issued with a fair value of $36,250 were reflected in the financial statements
as a prepayment of their annual retainer.
During the three-months ended October 31, 2004, the Company issued 71,288 shares
of common stock in exchange for $24,951 in legal services.
On August 2, 2004, 12 shares of preferred stock with a face value of $60,000
plus dividends of $15,757 were converted into 379,933 shares of common stock. On
September 3, 2004, 12 shares of preferred stock with a face value of $60,000
plus dividends of $17,951 were converted into 389,753 shares of common stock. On
October 6, 2004, 12 shares of preferred stock with a face value of $60,000 plus
dividends of $18,398 were converted into 391,989 shares of common stock.
On August 24, 2004, an investor converted $25,000 of debt owed to him by the
Company into 89,606 shares of common stock. In addition, interest on the debt of
$5,792 was converted into 20,759 shares of common stock.
During the three-months ended October 31, 2004, Options with a strike price of
$0.01 were exercised to purchase 17,500 shares of the Company's common stock.
Additionally, options to purchase 138,333 shares of common stock were canceled.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
- ---------- ------------------------
31 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of The Sarbanes-Oxley Act of
2002.
32 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.
32 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Item 5.02 Election of a new Board Member - John K. Pennington
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: December 14, 2004 By: /s/ Eric Seidel
-------------------- ---------------
Eric Seidel, President and
Chief Executive Officer
Date: December 14, 2004 By: /s/ Scott Moore
------------------- -----------------
Scott Moore, Chief Financial Officer
20
EXHIBIT 31
CERTIFICATIONS
I certify that:
1. I reviewed this report on Form 10-Q;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all materials respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
report (the "Evaluation Date"); and
c) presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
functions);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 14, 2004 /s/ Eric Seidel
----------------------- -----------------------------
President and C.E.O.
Date: December 14, 2004 /s/ Scott Moore
---------------------- -----------------------------
Chief Financial Officer
21
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of eAutoclaims.com, Inc. (the "Company")
on Form 10-Q for the period ending October 31, 2004 as filed with the Securities
and Exchange Commission on December 14, 2004 (the "Report"), I, Eric Seidel, the
President and CEO of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of
eAutoclaims.com, Inc.
/s/ Eric Seidel
- -------------------------
Print Name: Eric Seidel
Title: President & CEO
December 14, 2004
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of eAutoclaims.com, Inc. (the "Company")
on Form 10-Q for the period ending October 31, 2004 as filed with the Securities
and Exchange Commission on December 14, 2004 (the "Report"), I, Scott Moore, the
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of
eAutoclaims.com, Inc.
/s/ Scott Moore
- -------------------------
Print Name: Scott Moore
Title: Chief Financial Officer
December 14, 2004
22