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 January 31, 2005
[ ] 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 February 28, 2005 was
49,616,122.
EAUTOCLAIMS, INC.
INDEX TO FORM 10-Q
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PART I
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 2
Balance Sheets 3
Statements of Operations 4
Statement of Stockholders Deficiency 5
Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 23
Certifications 24
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The consolidated financial statements of eAutoclaims, Inc. (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 audited 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
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January 31, 2005 July 31, 2004
(unaudited)
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ASSETS
Current Assets:
Cash $ 546,313 $ 415,549
Accounts receivable, less allowance for doubtful accounts
of $201,000 and $161,000 respectively 645,409 728,776
Due from related parties 24,431 65,431
Prepaid expenses and other current assets 117,241 79,341
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 1,333,394 1,289,097
Property and Equipment, net of accumulated depreciation
of $1,596,258 and $1,326,462 respectively 922,547 1,073,409
Goodwill 1,093,843 1,093,843
Other Assets 25,800 25,800
Deferred Income Tax Asset, net of valuation
allowance of $9,328,000 and $9,002,000 respectively - -
- ---------------------------------------------------------------------------------------------------------------------
Total Assets $ 3,375,584 $ 3,482,149
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable and accrued expenses $ 4,486,472 $ 4,378,858
Note payable 100,000
Loans payable - stockholders - 36,866
Current portion of capital lease obligation 63,272 63,888
Convertible note payable 275,000
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,924,744 4,479,612
Convertible debenture 300,000
Capital Lease Obligation 174,437 195,621
Warrant liability 27,375
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 5,126,556 4,975,233
Stockholders' Deficiency:
Convertible preferred stock - $.001 par value; authorized 5,000,000 shares,
issued and outstanding 144 and 200 shares respectively 1 1
aggregate liquidation preference of $720,000 and $1,000,000 respectively
Common stock - $.001 par value; authorized 100,000,000 shares, issued
and outstanding 44,216,122 shares and 34,337,362 shares respectively 44,216 34,338
Additional paid-in capital 23,647,715 22,171,857
Accumulated deficit (25,442,904) (23,699,280)
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' Deficiency (1,750,972) (1,493,084)
- ---------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 3,375,584 $ 3,482,149
=====================================================================================================================
See Notes to Financial Statements
3
EAUTOCLAIMS, INC.
STATEMENTS OF OPERATIONS
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Three-month Three-month Six-month Six-month
Period Ended Period Ended Period Ended Period Ended
January 31,2005 January 31, 2004 January 31, 2005 January 31, 2004
(unaudited) (unaudited) (unaudited) (unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
Revenue:
Collision repairs management $ 2,699,251 $ 6,494,781 $ 5,968,858 $ 13,873,193
Glass repairs 107,340 288,231 268,428 688,541
Fleet repairs management 191,861 200,281 326,611 416,763
Fees and other revenue 527,117 526,066 1,081,471 1,221,372
- -------------------------------------------------------------------------------------------------------------------------------
Total revenue 3,525,569 7,509,359 7,645,368 16,199,869
- -------------------------------------------------------------------------------------------------------------------------------
Expenses:
Claims processing charges 2,674,492 6,190,356 5,874,979 13,313,062
Selling, general and administrative 1,326,602 1,407,418 2,656,874 2,834,958
Depreciation and amortization 133,104 135,750 267,687 265,772
- -------------------------------------------------------------------------------------------------------------------------------
Total expenses 4,134,198 7,733,524 8,799,540 16,413,792
- -------------------------------------------------------------------------------------------------------------------------------
Net loss $ (608,629) $ (224,165) $(1,154,172) $ (213,923)
Adjustment to net loss to compute loss per
common share:
Preferred stock dividends (19,273) (24,903) (35,401) (49,806)
Dividend to unit holders (554,051) (554,051)
- -------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $(1,181,953) $ (249,068) $(1,743,624) $ (263,729)
Loss per common share - basic and diluted $ (0.03) $ (0.01) $ (0.05) $ (0.01)
===============================================================================================================================
Weighted-average number of common
shares outstanding - basic and diluted 37,681,925 23,569,733 36,521,733 23,513,950
===============================================================================================================================
See Notes to Financial Statements
4
EAUTOCLAIMS, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
- -----------------------------------------------------------------------------------------------------------------------------
Six month period ended January 31, 2005
(unaudited) Additional
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 356,949 357 119,522 119,879
Accrued dividends on preferred stock (31,401) (31,401)
Issuance of common stock upon
conversion of preferred stock (48) 1,200,000 1,200 (1,200) 0
Issuance of common stock for
preferred stock dividends 355,176 355 70,451 70,806
Conversion of convertible debenture to equity 89,606 90 24,910 25,000
Issuance of common stock for interest
on convertible debt 45,171 45 12,558 12,603
Redemption of preferred stock (8) (40,000) (4,000) (44,000)
Proceeds from sale of common stock and
exercise of warrants, net of costs and
common stock warrants liability 5,475,000 5,475 737,922 743,397
Issuance of additional shares and warrants from
true-up on 2004 capital raise 2,339,358 2,339 551,712 (554,051) 0
Issuance of common stock upon exercise of 17,500 17 (17) 0
options
Net loss (1,154,172) (1,154,172)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 2005 144 $1 44,216,122 $44,216 $23,647,715 $(25,442,904) $(1,750,972)
=============================================================================================================================
See Notes to Financial Statements
5
EAUTOCLAIMS, INC.
STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------
Six-month Six-month
Period Ended Period Ended
January 31, 2005 January 31, 2004
(unaudited) (unaudited)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(1,154,172) $ (213,923)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 267,687 265,772
Amortization of discount on debentures 70,430
Common stock issued for services 119,879 75,833
Common stock issued for interest 12,603
Allowance for doubtful accounts 40,000
Changes in operating assets and liabilities
Accounts receivable 66,367 (100,157)
Prepaid expenses and other current assets (37,900) 13,376
Accounts payable and accrued expenses 187,317 (92,924)
- ---------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (498,219) 18,407
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activity:
Purchases of property and equipment (116,825) (163,839)
Payments from related parties 18,000 18,000
Payments to related parties (1,350)
Principal payments on shareholder loans (36,866) (39,385)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (135,691) (186,574)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock 743,397 163,250
Principal payments on capital lease (21,800) (19,303)
Proceeds from note payable 100,000
Payments on redemption of preferred stock (56,923)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 764,674 143,947
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 130,764 (24,220)
Cash at beginning of period 415,549 226,161
- ---------------------------------------------------------------------------------------------------------------
Cash at end of period $ 546,313 $ 201,941
===============================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 21,115 $ 31,517
===============================================================================================================
Supplemental disclosure of noncash investing and financing activities:
===============================================================================================================
Conversion of debentures to common stock $ 25,000
===============================================================================================================
Issuance of common stock for preferred stock dividends $ 70,806
===============================================================================================================
Accrued dividends on preferred stock $ 31,401 $ 49,806
===============================================================================================================
Gross proceeds from sale of equity $ 876,000
Less costs paid to raise equity $ (132,603)
- ---------------------------------------------------------------------------------------------------------------
Net proceeds from sale of equity $ 743,397
===============================================================================================================
Warrant liability $ 27,375
===============================================================================================================
Shares and warrants issued to unit holders $ 554,051
===============================================================================================================
See Notes to Financial Statements
6
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
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Note 1 - Basis of presentation
The accompanying unaudited 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 January 31, 2005 and its results of
operations for the three and six-month periods ended January 31, 2005 and 2004
and cash flows for the six-month periods ended January 31, 2005 and 2004.
Results of operations for the three and six-month period ended January 31, 2005
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 Six-month
period ended period ended
January 31, January 31,
--------------------- ------------------------
2005 2004 2005 2004
--------------------- ------------------------
Net loss $(608,629) $(224,165) $($1,154,172) $(213,923)
Deduct total stock based
employee compensation expense
determined under fair value
based methods for all awards (16,733) (96,039) (33,465) (96,039)
--------------------- ------------------------
Adjusted net loss $(625,362) $(320,204) $(1,187,637) $(309,962)
===================== =======================
Basic and diluted net loss per
share as reported $(.03) $(.01) $(.05) $(.01)
Pro forma basic and diluted loss
per share $(.02) $(.01) $(.03) $(.02)
7
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
January 31, 2005 and 2004, 26,493,938 and 7,203,316 options and warrants,
respectively, were excluded from the diluted loss per share computation, as
their effect would be antidilutive. Additionally, as of January 31, 2005 and
2004, 5,665,663 and 8,725,269 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 - Note Payable
The Company entered into temporary financing through a $100,000, 90 day, 5.25%
bank loan in order to pay certain debts. This note was initially guaranteed by a
shareholder until the Company relieved the shareholder from that guarantee once
funds from the equity investments were received.
Note 4 - Equity Transactions
During the six-months ended January 31, 2005, the Company issued 285,661 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 six-months ended
January 31, 2005, the Company expensed approximately $65,000, or 181,495 shares,
which was approximately equal to the fair market value of the shares when
earned. As of January 31, 2005, 104,166 of the shares of common stock issued
with a fair value of $37,500 were reflected in the financial statements as a
prepayment of their annual retainer.
During the six-months ended January 31, 2005, the Company issued 71,288 shares
of common stock in exchange for $24,951 in legal services.
In the six-months ended January 31, 2005, 48 shares of preferred stock with a
face value of $240,000 plus dividends of $70,806 were converted into 1,555,176
shares of common stock. Also in January 2005 the Company elected to redeem 8
shares of preferred stock with a face value of $40,000 and $12,923 of accrued
dividends for $56,923, which included a ten percent premium of $4,000.
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 six-months ended January 31, 2005, the Company issued options to
purchase 62,500 shares of common stock to three Board members for services
rendered in accordance with an approved compensation plan. The Company also
issued an option to purchase 1,000 shares of common stock to an employee under
an approved compensation plan. All options issued had strike prices of $0.24 to
$0.30 per share, which was the market price at the date of issuance.
8
Note 4 - Equity Transactions (cont.)
Options to purchase 17,500 shares of the Company's common stock with a strike
price of $0.01 per share were exercised by a consultant. Additionally, options
to purchase 180,499 shares of common stock were canceled.
During January 2005, the Company raised $876,000 from the sale of 5,475,000
Units at $0.16 per Unit to four (4) investors. Each Unit consists of one (1)
share of common stock and one-half (1/2), 3-year, common stock purchase warrant
with an exercise price of $0.30 per share. The warrants are not callable during
their first year. After the first year, the Company has the right to call the
warrants for nominal consideration at the average closing per share if any 20
consecutive trading days exceeds the warrant exercise price by $.50 or more. The
warrants contain "full ratchet" anti-dilution protection to avoid dilution of
the equity interest represented by the underlying shares upon the occurrence of
certain events, such as share dividends or stock splits or the issuance of
equity securities with an issuance, conversion or exercise price less than $.30
The Company paid Noble International Investment, Inc. ("Noble") total
commissions and expenses of $91,980 in connection with the issuance of these
securities and incurred $13,248 of other expenses. Noble also earned placement
agent warrants to purchase 821,250 Units at $0.16 per Unit.
Pursuant to the terms of the registration rights agreement entered in connection
with the transaction, within 30 days of the closing of the private placement,
the Company was required to file with the Securities and Exchange Commission
(the "SEC") a registration statement under the Securities Act of 1933, as
amended, covering the resale of all the common stock purchased and the common
stock underlying the warrants. Additionally, within 120 days of closing, the
Company was required to cause such registration statement to become effective.
The registration rights agreement further provided that if a registration
statement is not filed, or does not become effective, within the defined time
periods, then in addition to any other rights the holders may have, the Company
would be required to pay each holder up to 10% additional shares of stock, as
damages. The registration statement was filed within the allowed time and was
declared effective as of March 8, 2005. Therefore, no additional shares will be
issued as damages.
In accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed To, and Potentially Settled in a Company's Own Stock," and the terms of
the warrants and the transaction documents, the warrants were accounted for as a
liability. On March 8, 2005, the registration statement covering the shares
underlying the warrants was declared effective. Accordingly, the fair value of
the warrants at that date will be reclassified to additional paid in capital.
In order to obtain an appropriate valuation of the warrants that were issued as
of January 31, 2005, in connection with the offering of the units, issuance of
placement warrants and the $250,000 convertible debenture the Company hired an
investment banker. The investment banker employed several valuation models and
provided a valuation of $0.01 to $0.015 per warrant. The Company estimated the
value of each warrant to be $0.01
Also, as part of the provisions of the sales of equities in March through May of
2004 there is a requirement to meet certain claims volume targets under the ADP
Co-Marketing Agreement. If we fail to meet those targets, up to 100% of the
original Units (as defined in that document) would have to be issued to those
2004 investors for no additional consideration (True up). In order to help
resolve this open issue, in December 2004 we offered the 2004 investors 50% of
the total potential True up Units in exchange for releasing the Company from the
9
Note 4 - Equity Transactions (cont.)
remaining target volume commitment. Investors representing 4,678,716 of these
units accepted our offer. We therefore granted 2,339,358 units to the investors
that agreed to the True Up amendment. We are still subject to the target volumes
on the remaining 4,325,713 units and the 790,200 placement agent unit warrants
if they are exercised. As part of that agreement we gave them piggyback
registration rights on these units, which were registered along with the
securities described above.
Note 5 - 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 44,216,122 indicated by the
Company's records. 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 6 - Subsequent Event
During February 2005, the Company raised an additional $848,000 from the sale of
5,300,000 Units at $0.16 per Unit to six (6) investors. Each Unit consists of
one (1) share of common stock and one-half (1/2), 3-year, common stock purchase
warrant with an exercise price of $0.30 per share. The Company paid Noble
commissions and expenses of $89,040 in connection with the issuance of these
securities. Noble also earned placement agent warrants to purchase 795,000 Units
at $0.16 per Unit. In addition, the Board agreed to issue the Company's legal
counsel 940,000 shares of the Company's common stock as part of his fee for
counsel and services rendered relating to the sale of these equity securities.
On February 22, 2005, the Company entered into a twelve month Investor Relations
Consulting Agreement. The Consultant will provide various investor relations
services for $6,500 per month plus 250,000 shares of the Company's common stock.
Either party can terminate the agreement after five months.
On March 1, 2005, the Company evaluated the claims volume that it had received
from customers generated by the ADP Claims Service Group Co-marketing agreement
as specified in the subscription agreements from the 2004 capital raise. In
accordance with those agreements, the Company did not meet the minimum volume
requirements and therefore had to issue 2,162,857 Units (one share of common
stock and one, 3-year, $0.16 warrant to purchase a common share). These units
caused the Company to record a stock dividend to these shareholders valued at
approximately $476,000.
On March 1, 2005 the holder of the Company's series A, preferred stock converted
12 shares of the preferred stock with a face value of $60,000, plus accrued
dividends of $19,660, for 398,301 shares of the Company's common stock. Also, in
February 2005 the Company elected to redeem 16 shares of preferred stock with a
face value of $80,000 and $25,775 of accrued dividends for $113,775, which
included a ten percent premium of $8,000.
10
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 will provide 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
reduces the customers' time and cost to process claims as well as reduces the
number of mistakes that occur in a manual process. In most cases it also reduces
11
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 operating 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 86% and 85% of the revenue
for the six and three-months ended January 31, 2005, respectively. 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 $65 per
claim depending upon the level of service required. For the six and three-months
ended January 31, 2005, 14% and 15%, respectively, 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 consolidated 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 faciolity, and
12
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.
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 six-month period ended
January 31, 2005.
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
January 31, 2005 the allowance for doubtful accounts was approximately $201,000.
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 $9,328,000 at January
31, 2005. The deferred tax asset 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 is still attempting to return to
profitability.
Because of the income tax regulations on net operating loss carryforwards, the
sale of additional shares to outside investors may impose limits on the amount
of the loss that can be used to offset income in future periods. The Company
will be evaluating this requirement in the coming months to determine what
limits if any may apply.
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
13
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.
At each balance sheet date, the Company 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
January 31, 2005.
Management's Interim Operating Plan
Four separate events happened during the second half of the 2004 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 2004 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 half 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 allowother 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 $116,000 in
the three-months ended January 31, 2004 to approximately $124,000 in the
three-months ended January 31, 2005 and increased from approximately
$213,000 in the six-months ended January 31, 2004 to $247,000 in the
six-months ended January 31, 2005. This increase came even though collision
outsourcing revenue, which help drive the results, was significantly
reduced during that same period. 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.
14
o Raising Additional Capital - The Company has an option to purchase the
building we are currently renting. The fair market value of the building is
estimated to be approximately $1 million more than the Company's option
price for the property. Management is currently exploring ways to leverage
this option to obtain additional working capital, but no agreement has been
reached, nor do we know how much we could raise from this transaction if
one was completed.
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
produced eight signed pilot agreements with insurance companies or third
party administrators, and has produced two annual agreements after the
pilot periods were completed. 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.
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 SIX AND THREE MONTHS ENDED JANUARY 31, 2005 COMPARED TO THE SIX AND
THREE-MONTHS ENDED JANUARY 31, 2004.
Revenue
Total revenue for the six-months ended January 31, 2005 was approximately $7.6
million, which is a 53% decrease from approximately $16.2 million of total
revenue for the six-months ended January 31, 2004. Total revenue for the
three-months ended January 31, 2005 was approximately $3.5 million. This
represents a 53% decrease from approximately $7.5 million of total revenue for
three-months ended January 31, 2004. The change in the six and three-month total
revenue is the net effect of changes in collision repair revenue, glass repair
revenue and fees and other revenue as described below.
The decrease in collision repair management revenue is primarily the result of
the loss of revenues from our two largest clients. During the six months ended
January 31, 2005 we derived 57% and 8% of our revenue from our two largest
clients. 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 from revenue from the
three-month period ended January 31, 2004 to the same period in 2005 and
approximately $5.3 million decrease in revenue from the six months period ended
January 31, 2004 to the same period in 2005. 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 network. We experienced approximately $1.0 million decrease in revenue
from the three month period ended January 31, 2004 to the same period in 2005
and approximately $2.0 million decrease in revenue from the six months period
ended January 31, 2004 to the same period in 2005. The quarter ended April 30,
2004 is the period that the Company started to experience the biggest decrease
15
in revenue from its two largest customers. Therefore, the largest contrast in
revenue is shown between this three-month period ended January 31, 2005 and the
three-month period ending January 31, 2004.
Fees and other revenue decreased from $1.2 million to $1.1 million, or 11% for
the six months ended January 31, 2005 compared to the six-months ended January
31, 2004. The six-month decrease is mainly a result of a reduction in file
handling fees from the reduced collision repair management revenue, and was
partially offset by an increase in the click fee revenue as explained above in
the management interim operating plan. Fees and other revenue for the
three-months ended January 31, 2005 of approximately $527,000 were slightly
higher compared to $526,000 for the three-months ended January 31, 2004. The
slight increase is a result of the increases in estimatic software revenue and
click fee revenue more than offsetting the reduction in the file handling fees
from the collision repair management product.
Glass repair revenues decreased by 61% and 63% for the six and three-months
ended January 31, 2005 compared to the six and three-months ended January 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 customer
to use a single source for all of their repair needs.
Claims Processing Charges
Claims processing charges include the costs of collision and glass repairs paid
to repair shops within our repair shop network, as well as the cost of the
estimating software sold to the Company's network of shops. Claims processing
charges for the six and three-months ended January 31, 2005 was $5.9 million and
$2.7 million, respectively. This was 77% and 76% of total revenue for the six
and three-months ended January 31, 2005, compared to 82% for both the six and
three-months ended January 31, 2004. The reduction in claims processing charges
as a percentage of total revenue is a result of the change in the percentage of
revenue generated from higher margin products as well as the increased emphasis
in click fees. If revenues from customers generated by the ADP Co-marketing
agreement grow as management expects, the margins will continue to increase.
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. We are dependent upon these third party collision
repair shops for insurance claims repairs. 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 charges, professional fees, advertising costs, and travel
expenses. SG&A expenses for the six and three-months ended January 31, 2005
totaled approximately $2.7 and $1.3 million, respectively. This is compared to
approximately $2.8 and $1.4 million for the six and three-months ended January
31, 2004. The decrease in SG&A expenses of approximately $200,000 and $100,000
for the six and three-month periods ended January 31, 2005 is primarily due to
lower personnel costs that comes with reduced claims 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 six-months ended January 31, 2005
and 2004 totaled approximately $1.7 million and $1.9 million, which is
approximately a 10% decrease. Payroll and benefit related expenses for the
three-months ended January 31, 2005 and 2004 totaled approximately $858,000 and
$937,000, which is approximately an 8% decrease. These decreases are the result
of personnel and salary reductions made during the last fiscal year as described
in the proceeding paragraph.
16
SG&A expenses also include non-cash charges of approximately $172,000 and
$84,000 for the six and three-month period ended January 31, 2005, respectively.
These non-cash charges include approximately $120,000 and $46,000 of common
stock issued to pay for services (fees to Directors and an attorney),
respectively. SG&A expenses also include non-cash charges of approximately
$146,000 and $79,000 for the six and three-month period ended January 31, 2004,
respectively. These non-cash charges include approximately $70,000 and $35,000
of amortization of debenture discount and approximately $76,000 and $49,000 of
common stock issued to pay fees to directors, respectively.
Also included in the SG&A is interest expense related to a loan from a
shareholder, capital leases and a convertible note payable. This interest
expense totals approximately $21,000 and $11,000 for the six and three-months
ended January 31, 2005 compared to approximately $31,000 and $14,000 for the six
and three-months ended January 31, 2004. There was no interest income from cash
reserves for the six or three-months ended January 31, 2005 compared to
approximately $2,000 and $1,000 for the six and three-months ended January 31,
2004, respectively.
Depreciation
Depreciation of property and equipment of approximately $268,000 and $133,000
was recognized in the six and three-months ended January 31, 2005. This is
compared to approximately $266,000 and $136,000 for the six and three-months
ended January 31, 2004.
Net Loss
The net loss for the six and three-months ended January 31, 2005 totaled
approximately $1,154,000 and $610,000 compared to a net loss of approximately
$214,000 and $224,000 from the six and three-months ended January 31, 2004. The
net loss amounts include non-cash expenses of approximately $440,000 and
$212,000 for the six and three-months ended January 31, 2005, respectively. The
net loss amounts for the six and three-months ended January 31, 2004 include
non-cash expenses of approximately $412,000 and $220,000, respectively. The
increase in the loss is primarily due to the decrease in revenue from our two
largest customers as explained above.
Forecast of Profitability
As a result of recent delays in the rollout of several key customers, management
does not expect to achieve its previously announced profit projections until
future periods. Management expects to return to profitability during the fourth
quarter of the fiscal year ended July 31, 2005.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2005, we had approximately $546,000 in cash. This is an increase
of approximately $130,000 from July 31, 2004. We have a working capital
deficiency of approximately $3.6 million as of January 31, 2005 as compared to
$4.9 million as of January 31, 2004. The decrease in the deficiency is a result
of the capital raised during 2004 and January 2005, which was partially offset
by operating losses.
The primary source of our working capital during the since July 31, 2004, was
from cash provided by the sale of $1,724,000 of equity securities, which netted
$1,543,000 after commissions. The equity securities consisted of 5,475,000
shares of common stock and 2,737,500 3-year warrants for common stock with an
exercise price of $0.30 per share. We registered these securities for resale
under the Securities Act of 1933, as amended. This registration statement was
declared effective on March 8, 2005
17
In January 2005, we also entered into temporary financing through a $100,000, 90
day, 5.25% bank loan in order to pay certain debts. This note was initially
guaranteed by a shareholder until the Company relieved the shareholder from that
guarantee as the funds from the equity investments were received.
We believe that cash generated from our operations, the effect of recent cost
cutting initiatives, the roll out of higher margin product lines through ASP
models and click fees, and the capital provided from our recent private
placement of securities should satisfy our short-term working capital needs
through the end of fiscal year 2005. However, there is no assurance that we will
continue to make up the loss of business from our largest customer. In addition,
we are subject to the risk that new contracts with larger insurance companies
pursuant to our ADP Co. Marketing Agreement will not come on line as
anticipated. Generally, it takes longer to procure a contract with a larger
national carrier than smaller regional or local carriers. However, many larger
carriers are currently evaluating our service. Larger carriers have an immediate
positive impact on the earning of the Company when implemented. Our estimate of
having sufficient working capital through the end of our current fiscal year 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 the remainder of our fiscal year.
The Company has an option to purchase the building we are currently renting. The
fair market value of the building is estimated to be approximately $1 million
more than the Company's option price for the property. Management is currently
exploring ways to leverage this option to obtain additional working capital.
However, we cannot assure you that we will be able to leverage this option or
that we will be able to raise additional capital or that such capital will be
available to us on favorable terms.
If we require additional capital, there is no assurance we will be able to raise
such capital through the sale of our debt or equity securities. If we raise
additional capital from the issuance of our securities, such securities may have
rights, preferences or privileges superior to those of the rights of our common
stock, and our stockholders may experience additional substantial dilution.
Our principle commitments at January 31, 2005 consist of monthly operating
rental payments, compensation of employees and accounts and notes payable.
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.
18
Debt and Contractual Obligations
Our commitments for debt and other contractual arrangements as of January 31,
2005 are summarized as follows:
Years ending January 31,
-------------------------------------------------------
2006 2007 2008 Total
-------------------------------------------------------
Property lease $222,000 $190,000 $412,000
Equipment lease 119,000 107,000 $70,000 296,000
Convertible debenture 275,000 275,000
Employee compensation 441,000 170,000 611,000
-------------------------------------------------------
$1,057,000 $467,000 $70,000 $1,594,000
=======================================================
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, less certain credits for portions of the rent
paid through December 2004.
At January 31, 2005 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 had a two-year employment agreement with its President and Chief
Executive Officer (CEO) that expired on February 1, 2005. The Compensation
Committee and the President and CEO are currently working to extend that
agreement. If the agreement is not extended then the expired agreement states
that the President and CEO is due two years compensation in a lump sum payment.
In addition, the Company has two-year employment agreements with four other
executives that expire April 30, 2005. 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.
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
19
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as of January 31, 2005. 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., including our consolidated subsidiaries, 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 January 31, 2005. We have not identified any significant
deficiency or materials weaknesses in our internal controls, and therefore there
were no corrective actions taken.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceeds outside the ordinary course of business or that is
estimated to potentially have a material impact to the Company's financial
condition.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
During the six-months ended January 31, 2005, the Company issued 285,661 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 six-months ended
January 31, 2005, the Company expensed approximately $65,000, or 181,495 shares,
which was approximately equal to the fair market value of the shares when
earned. As of January 31, 2005, 104,166 of the shares of common stock issued
with a fair value of $37,500 were reflected in the financial statements as a
prepayment of their annual retainer.
During the six-months ended January 31, 2005, the Company issued 71,288 shares
of common stock in exchange for $24,951 in legal services.
In the six-months ended January 31, 2005, 48 shares of preferred stock with a
face value of $240,000 plus dividends of $70,806 were converted into 1,555,176
shares of common stock. Also in January 2005 the Company elected to redeem 8
shares of preferred stock with a face value of $40,000 and $12,922 of accrued
dividends for $56,922, which included a ten percent premium of $4,000.
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 six-months ended January 31, 2005, the Company issued options to
purchase 62,500 shares of common stock to three Board members for services
rendered in accordance with an approved compensation plan. The Company also
issued an option to purchase 1,000 shares of common stock to an employee under
an approved compensation plan. All options issued had strike prices of $0.24 to
$0.30 per share, which was the market price at the date of issuance.
20
Options to purchase 17,500 shares of the Company's common stock with a strike
price of $0.01 per share were exercised by a consultant. Additionally, options
to purchase 180,499 shares of common stock were canceled.
During January 2005, the Company raised $876,000 from the sale of 5,475,000
Units at $0.16 per Unit to four (4) investors. Each Unit consists of one (1)
share of common stock and one-half (1/2), 3-year, common stock purchase warrant
with an exercise price of $0.30 per share. The warrants are not callable during
their first year. After the first year, we have the right to call the warrants
for nominal consideration at the average closing per share for any 20
consecutive trading days exceeds the warrant exercise price by $.50 or more. The
warrants contain "full ratchet" anti-dilution protection to avoid dilution of
the equity interest represented by the underlying shares upon the occurrence of
certain events, such as share dividends or stock splits or the issuance of
equity securities with an issuance, conversion or exercise price less than $.30
The Company paid Noble International Investment, Inc. ("Noble") total
commissions and expenses of $91,980 in connection with the issuance of these
securities and incurred $13,248 of other expenses. Noble also earned placement
agent warrants to purchase 821,250 Units at $0.16 per Unit.
Pursuant to the terms of the registration rights agreement entered in connection
with the transaction, within 30 days of the closing of the private placement,
the Company was required to file with the Securities and Exchange Commission
(the "SEC") a registration statement under the Securities Act of 1933, as
amended, covering the resale of all the common stock purchased and the common
stock underlying the warrants. Additionally, within 120 days of closing, the
Company was required to cause such registration statement to become effective.
The registration rights agreement further provided that if a registration
statement is not filed, or does not become effective, within the defined time
periods, then in addition to any other rights the holders may have, the Company
would be required to pay each holder up to 10% additional shares of stock, as
damages. The registration statement was filed within the allowed time and was
declared effective as of March 8, 2005. Therefore, no additional shares will be
issued as damages.
In accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed To, and Potentially Settled In a Company's Own Stock," and the terms of
the warrants and the transaction documents, the warrants were accounted for as a
liability. On March 8, 2005, the registration statement covering the shares
underlying the warrants was declared effective. Accordingly, the fair value of
the warrants at that date will be reclassified to additional paid in capital.
In order to obtain an appropriate valuation of the warrants that were issued as
of January 31, 2005, in connection with the offering of the units, issuance of
placement warrants and the $250,000 convertible debenture the Company hired an
investment banker. The investment banker employed several valuation models and
provided a valuation of $0.01 to $0.015 per warrant. The Company estimated the
value of each warrant to be $0.01
Also, as part of the provisions of the sales of equities in March through May of
2004 there is a requirement to meet certain claims volume targets under the ADP
Co-Marketing Agreement. If we fail to meet those targets, up to 100% of the
original Units (as defined in that document) would have to be issued to those
2004 investors for no additional consideration (True up). In order to help
resolve this open issue, in December 2004 we offered the 2004 investors 50% of
the total potential True up Units in exchange for releasing the Company from the
remaining target volume commitment. Investors representing 4,678,716 of these
units accepted our offer. We therefore granted 2,339,358 units to the investors
that agree to the True Up amendment. We are still subject to the target volumes
on the remaining 4,325,713 units and the 790,200 placement agent unit warrants
if they are exercised. As part of that agreement we gave them piggyback
registration rights on these units, which were registered along with the
securities described above.
21
Subsequent to January 31, 2005:
During February 2005, the Company raised an additional $848,000 from the sale of
5,300,000 Units at $0.16 per Unit to six (6) investors. Each Unit consists of
one (1) share of common stock and one-half (1/2), 3-year, common stock purchase
warrant with an exercise price of $0.30 per share. The Company paid Noble
commissions and expenses of $89,040 in connection with the issuance of these
securities. Noble also earned placement agent warrants to purchase 795,000 Units
at $0.16 per Unit. In addition, the Board agreed to issue the Company's legal
counsel 940,000 shares of the Company's common stock as part of his fee for
counsel and services rendered relating to the sale of these equity securities.
On February 22, 2005, the Company entered into a twelve month Investor Relations
Consulting Agreement. The Consultant will provide various investor relations
services for $6,500 per month plus 250,000 shares of the Company's common stock.
Either party can terminate the agreement after five months.
On March 1, 2005, the Company evaluated the claims volume that it had received
from customers generated by the ADP Claims Service Group Co-marketing agreement
as specified in the subscription agreements from the 2004 capital raise. In
accordance with those agreements, the Company did not meet the minimum volume
requirements and therefore had to issue 2,162,857 Units (one share of common
stock and one, 3-year, $0.35 warrant to purchase a common share). These units
caused the Company to record a stock dividend to these shareholders valued at
approximately $476,000.
On March 1, 2005 the holder of the Company's series A, preferred stock converted
12 shares of the preferred stock with a face value of $60,000, plus accrued
dividends of $19,660, for 398,301 shares of the Company's common stock. Also, in
February 2005 the Company elected to redeem 16 shares of preferred stock with a
face value of $80,000 and $25,775 of accrued dividends for $113,775, which
included a ten percent premium of $8,000.
ITEM 3. Defaults Upon Senior Securities -
None.
ITEM 4. Submission of Matters to a Vote of Security Holders -
None.
ITEM 5. Other Information
None
22
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.
10.60 Unit Purchase Warrant.
10.61 Placement Agent Agreement.
(b) Reports on Form 8-K
Filed February 4, 2005 - Item 3.02 and 3.03 Sale of unregistered
securities.
Filed March 1, 2005 - Item 3.02 and 3.03 Sale of unregistered
securities - Amended.
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: March 17, 2005 By: /s/ Eric Seidel
------------------- -------------------------------------
Eric Seidel, Chief Executive Officer
By: /s/ Scott Moore
------------------------------------
Scott Moore, Chief Financial Officer
23
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 Ac 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: March 17, 2005 /s/ Eric Seidel
------------------------ -----------------------
President and C.E.O.
Date: March 17, 2005 /s/ Scott Moore
------------------------ -----------------------
Chief financial Officer
24
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, Inc. (the
"Company") on Form 10-Q for the period ending January 31, 2005 as filed with the
Securities and Exchange Commission on March 17, 2005 (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, Inc.
/s/ Eric Seidel
Print Name: Eric Seidel
Title: President & CEO
March 17, 2005
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, Inc. (the
"Company") on Form 10-Q for the period ending January 31, 2005 as filed with the
Securities and Exchange Commission on March 17, 2005 (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, Inc.
/s/ Scott Moore
Print Name: Scott Moore
Title: Chief Financial Officer
March 17, 2005
25