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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 April 30, 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
------ ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
110 East Douglas Road, Oldsmar, Florida 34677
--------------------------------------- -----
(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 May 31, 2005 was
54,671,033.
EAUTOCLAIMS, INC.
INDEX TO FORM 10-Q
- --------------------------------------------------------------------------------
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 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Certifications 26
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
- --------------------------------------------------------------------------------------------------------------------------
April 30, 2005 July 31, 2004
(unaudited)
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 416,231 $ 415,549
Accounts receivable, less allowance for doubtful accounts
of $206,000 and $161,000 respectively 729,234 728,776
Due from related parties 15,431 65,431
Prepaid expenses and other current assets 109,779 79,341
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 1,270,675 1,289,097
Property and Equipment, net of accumulated depreciation 859,456 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 $9,648,000 and $9,002,000 respectively - -
- --------------------------------------------------------------------------------------------------------------------------
Total Assets $ 3,249,774 $ 3,482,149
==========================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable and accrued expenses $ 4,504,969 $ 4,378,858
Loans payable - stockholders - 36,866
Current portion of capital lease obligation 86,337 63,888
Convertible debenture 275,000
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,866,306 4,479,612
Convertible debenture 300,000
Capital Lease Obligation, net of current portion 130,041 195,621
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,996,347 4,975,233
Stockholders' Deficiency:
Convertible preferred stock - $.001 par value; authorized 5,000,000 shares,
issued and outstanding 104 and 200 shares respectively 1 1
aggregate liquidation preference of $520,000 and $1,000,000 respectively
Common stock - $.001 par value; authorized 100,000,000 shares, issued
and outstanding 54,496,033 shares and 34,337,362 shares, respectively 54,496 34,338
Additional paid-in capital 24,867,468 22,171,857
Accumulated deficit (26,668,538) (23,699,280)
- --------------------------------------------------------------------------------------------------------------------------
Stockholders' Deficiency (1,746,573) (1,493,084)
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 3,249,774 $ 3,482,149
==========================================================================================================================
See Notes to Financial Statements
3
EAUTOCLAIMS, INC.
STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Three-month Three-month Nine-month Nine-month
Period Ended Period Ended Period Ended Period Ended
April 30, 2005 April 30, 2004 April 30, 2005 April 30, 2004
(unaudited) (unaudited) (unaudited) (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue:
Collision repairs management $ 2,793,224 $ 5,509,078 $ 8,762,082 $19,382,272
Glass repairs 104,405 288,064 372,833 976,605
Fleet repairs management 181,446 155,958 508,057 572,720
Fees and other revenue 473,123 610,122 1,554,594 1,831,493
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenue 3,552,198 6,563,222 11,197,566 22,763,090
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Claims processing charges 2,689,195 5,368,369 8,564,174 18,681,432
Selling, general and administrative 1,512,695 2,401,353 4,169,569 5,236,311
Depreciation and amortization 123,981 131,836 391,668 397,608
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 4,325,871 7,901,558 13,125,411 24,315,351
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss $ (773,673) $(1,338,336) $(1,927,845) $(1,552,261)
Adjustment to net loss to compute loss
per common share:
Preferred stock dividends (15,273) (22,564) (42,790) (72,370)
Dividend to unit holders (432,572) (986,623)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $(1,221,518) $(1,360,900) $(2,957,258) $(1,624,631)
====================================================================================================================================
Loss per common share - basic and diluted $ (0.02) $ (0.06) $ (0.07) $ (0.07)
====================================================================================================================================
Weighted-average number of common
shares outstanding - basic and diluted 51,529,115 24,666,084 41,231,707 24,620,543
====================================================================================================================================
See Notes to Financial Statements
4
EAUTOCLAIMS, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
- ---------------------------------------------------------------------------------------------------------------------------
Nine month period ended April 30, 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 708,736 709 180,170 180,879
Accrued dividends on preferred stock (42,790) (42,790)
Issuance of common stock upon
conversion of preferred stock (72) 1,800,000 1,800 (1,800) 0
Issuance of common stock for
preferred stock dividends 547,877 547 108,798 109,346
Conversion of convertible debenture to equity 89,606 90 24,910 25,000
Issuance of common stock for interest
on convertible debt 77,734 78 17,889 17,967
Redemption of preferred stock (24) (120,000) (12,000) (132,000)
Proceeds from sale of common stock and
exercise of warrants, net of costs and
common stock warrants liability 11,715,000 11,715 1,497,239 1,508,954
Dividends issued to unit holders in the form of
shares and warrants 4,502,218 4,502 982,121 (986,623) 0
Issuance of common stock upon exercise of 717,500 717 6,284 7,000
options
Net loss (1,927,845) (1,927,845)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at April 30, 2005 104 $1 54,496,033 $54,496 $24,867,468 $(26,668,538) $(1,746,573)
===========================================================================================================================
See Notes to Financial Statements
5
EAUTOCLAIMS, INC.
STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------
Nine-month Nine-month
Period Ended Period Ended
April 30, 2005 April 30, 2004
(unaudited) (unaudited)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(1,927,845) $(1,552,261)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation and amortization 391,668 397,608
Loss on disposal of property and equipment 77,457
Amortization of discount on debentures 105,645
Common stock issued for services 180,879 101,713
Issuance of compensatory stock options 861,006
Common stock issued for interest 17,967
Bad debts 45,000
Changes in operating assets and liabilities
Accounts receivable (45,458) 329,817
Prepaid expenses and other current assets (30,438) (32,997)
Accounts payable and accrued expenses 231,365 (1,114,212)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,136,862) (826,224)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activity:
Purchases of property and equipment (177,715) (347,232)
Payments from related parties 50,000 26,750
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (127,715) (320,482)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of convertible debentures 250,000
Proceeds from sale of common stock 1,508,954 1,395,198
Proceeds from exercise of stock options 7,000
Principal payments on capital lease (43,131) (23,972)
Payments on redemption of preferred stock (170,698)
Principal payments on shareholder loans (36,866) (59,911)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,265,259 1,561,315
- ----------------------------------------------------------------------------------------------------------------------
Net increase in cash 682 414,609
Cash at beginning of period 415,549 226,161
- ----------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 416,231 $ 640,770
======================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 32,779 $ 44,506
======================================================================================================================
Supplemental disclosure of noncash investing and financing activities:
======================================================================================================================
Fair value of warrants issued in conjunction with
convertible debenture $ 89,286
======================================================================================================================
Recognition of beneficial conversion feature on
convertible debenture $ 89,286
======================================================================================================================
Conversion of debentures to common stock $ 25,000
======================================================================================================================
Issuance of common stock for preferred stock dividends $ 109,346 $ 33,567
======================================================================================================================
Accrued dividends on preferred stock $ 42,790 $ 72,370
======================================================================================================================
Gross proceeds from sale of equity $ 1,724,000 $ 1,505,040
Less costs paid to raise equity $ (215,046) $ (109,842)
Net proceeds from sale of equity $ 1,508,954 $ 1,395,198
======================================================================================================================
Shares and warrants issued to unit holders $ 986,623
======================================================================================================================
Common stock issued for services $ 180,879 $ 101,713
======================================================================================================================
Issuance of compensatory stock options $ 861,006
======================================================================================================================
See Notes to Financial Statements 6
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 April 30, 2005 and its results of operations
for the three and nine-month periods ended April 30, 2005 and 2004 and cash
flows for the nine-month periods ended April 30, 2005 and 2004. Results of
operations for the three and nine-month periods ended April 30, 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 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 Nine-month period ended
April 30, April 30,
2005 2004 2005 2004
----------------------- -------------------------
Net loss $(773,673) $(1,338,336) $(1,927,845) $(1,552,261)
Deduct: total stock based
employee compensation expense
determined under fair value)
based methods for all awards (12,212) (877,738) (40,094) (973,778)
Stock based employee
compensation expense included
in reported net loss 861,006 861,006
----------------------- -------------------------
Adjusted net loss $(785,885) $(1,355,068) $(1,967,939) $(1,665,033)
======================= =========================
Basic and diluted net loss
per share as reported $(.02) $(.06) $ (.07) $ (.07)
Pro forma basic and diluted
loss per share $(.02) $(.06) $ (.05) $ (.07)
7
Note 1 - Basis of presentation (cont.)
New Accounting Pronouncements - In December 2004, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment" which revised Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation". This
statement supercedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees." The revised statement addresses the accounting for share-based
payment transactions with employees and other third parties, eliminates the
ability to account for share-based compensation transactions using APB 25 and
requires that the compensation costs relating to such transactions be recognized
in the consolidated statement of operations. The revised statement is effective
for the Company beginning August 1, 2005. It is expected to have an impact on
the Company's consolidated financial statements similar to the pro forma
disclosure under Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation"("SFAS 123").
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
April 30, 2005 and 2004, 32,246,797and 15,738,960 options and warrants,
respectively, were excluded from the diluted loss per share computation, as
their effect would be antidilutive. Additionally, as of April 30, 2005 and 2004,
4,352,523 and 6,474,134 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. The Company paid off the note
at the maturity date, April 20, 2005.
Note 4 - Equity Transactions
During the nine-months ended April 30, 2005, the Company issued 387,448 shares
of common stock to three directors in exchange for their services. These shares
are being expensed over the year as they are earned. During the nine-months
ended April 30, 2005, the Company expensed approximately $91,678, or 335,365
shares, which was approximately equal to the fair market value of the shares
when earned. As of April 30, 2005, 52,083 of the shares of common stock issued
with a fair value of $18,750 were reflected in the financial statements as a
prepayment of their annual retainer.
During the nine-months ended April 30, 2005, the Company issued 71,288 shares of
common stock in exchange for $24,951 in legal services.
8
Note 4 - Equity Transactions (continued)
In the nine-months ended April 30, 2005, 72 shares of preferred stock with a
face value of $360,000 plus dividends of $109,346 were converted into 2,347,877
shares of common stock. Also in the nine-months ended April 30, 2005 the Company
elected to redeem 24 shares of preferred stock with a face value of $120,000 and
$38,698 of accrued dividends for $170,698, which included a ten percent premium
of $12,000.
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, for the nine months
ended April 30, 2005 interest on the debt of $17,967 was converted into 77,734
shares of common stock.
During the nine-months ended April 30, 2005, the Company issued options to
purchase 100,000 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 21,000 shares of common stock to two employees
under an approved compensation plan. All options issued had strike prices of
$0.14 to $0.30 per share, which was the market price at the date of issuance.
On April 12, 2005 an officer and director of the Company each exercised options
to purchase 350,000 shares of the Company's common stock, for a total of 700,000
shares, with a strike price of .01 per share. 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 on October 26, 2004. Additionally, options to purchase
188,000 shares of common stock were canceled.
During the period ended April 30, 2005, the Company raised $1,724,000 from the
sale of 10,775,000 Units at $0.16 per Unit to ten (10) 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 $185,520 in connection with the issuance of these
securities and incurred $29,526 of other expenses. Noble also earned placement
agent warrants to purchase 1,616,250 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.
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
9
Note 4 - Equity Transactions (continued)
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 was 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 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.
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 2,162,860 Units (one share of common
stock and one, 3-year, $0.16 warrant to purchase a common share) to the
investors who did not accept our December 2004 offer. These units caused the
Company to record a stock dividend to these shareholders valued at approximately
$433,000.
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.
10
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 54,496,033 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 Events
During the month of May, 2005 two employees exercised options to purchase a
total of 115,000 shares of the Company's common stock. Additionally, on May 18,
2005 a director of the Company exercised options to purchase 150,000 shares.
In May 2005 the Company entered into a new two year employment agreement with
its President and Chief Executive Officer. The agreement specifies an annual
base salary of $170,000, representing a voluntary pay cut in base taken by the
CEO. If the Company generates positive cumulative EBITDA (which excludes
non-cash compensatory and equity charges under GAAP) of greater than $50,000 for
any three consecutive months, the base salary will be increased to $200,000. The
individual will be entitled to receive a quarterly bonus equal to 3% of the
Company's EBITDA as computed under GAAP, which may be paid in cash or shares of
the Company's common stock, at the election of the individual. The individual
shall also be entitled to receive an option to purchase 25,000 shares of the
Company's common stock, exercisable at the fair market price, for each month the
Company has net income before taxes and extraordinary items, as computed in
accordance with GAAP. These options vest over the remaining term of the
employment agreement. The individual is entitled to a $750 per month automobile
allowance and a $1000 per month personal allowance. The Company issued the
individual 1,000,000 shares of its common stock upon execution of the agreement
and agreed to include the shares in an S-8 Registration Statement when filed by
the Company. If the individual loses his position for any reason other than for
cause during the term of the agreement, he will receive a lump sum payment equal
to two (2) times the current base salary. If the Company does not employ the
individual beyond the expiration term of the agreement, he will receive his
monthly base salary for the next twelve months. At the election of the
individual, any compensation including severance or termination payments, may be
made one-half (1/2) in cash and one-half (1/2) in the Company's shares valued at
75% of the average closing price over the 30 trading days preceding the
termination date. Any shares issued shall be registrable under a form S-8 and
shall have "piggyback" registration rights.
In addition, in May 2005 the Company entered into employment agreements ranging
in length from eighteen to twenty-four months with all four of the Company's
Senior executives that total $72,000 to $102,000 annually. This represents
voluntary base pay cuts taken by all of the previously contracted executives.
These executives also receive automobile allowances ranging from $400 to $700
per month and will receive 10,000 shares of the Company's common stock each
month, not to exceed 200,000 shares each. If their contracts are not renewed
they receive severance packages of six months of their annual compensation.
11
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
12
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 87% of the revenue
for the nine and three-months ended April 30, 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 nine and three-months
ended April 30, 2005, 14% and 13%, 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 facility, and
13
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 glass 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 nine-month period ended
April 30, 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
April 30, 2005 the allowance for doubtful accounts was approximately $206,000.
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 $9,648,000 at April 30,
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
14
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.
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
April 30, 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. However, the Company has recently seen sales efforts net results in
new pilots, and more specifically the early rollout of a Top-20 insurance client
that is expected to begin a national production rollout in late July. While we
are still very optimistic about the opportunities presented with the ADP
Co-Marketing Agreement, the effect of the early delays 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 ADP Co-Marketing Agreement - Management continues to focus on the sales
development of the ADP Co-Marketing Agreement, which is part of the
Company's Special Markets Division. The most material development is the
early rollout of a new top 20 insurance client. The client is past the
traditional "pilot" stage and has begun the user test phase for the start
of a national rollout. The user test phase validates work flows and
establishes needed adjustments to the overall program. The national
production rollout is currently scheduled to begin in late July of 2005.
Should the client continue with it's planned national rollout, the
Company would experience a meaningful improvement in it's operating
results, as this new client would become one of the largest clients of
eAutoclaims in a very short period.
Since August 2004 this agreement has produced eleven 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 would produce
significant claims volume. The Company would share the associated
revenues with ADP Claims Services Group.
15
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, as is the case with the Company's recently
announced new product "Audit Pro", a programmatic electronic estimate
auditing tool. Many of 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. Click fee revenue
increased from approximately $110,000 in the three-months ended April 30,
2004 to approximately $116,000 in the three-months ended April 30, 2005
and increased from approximately $323,000 in the nine-months ended April
30, 2004 to $363,000 in the nine-months ended April 30, 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.
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. In April, 2005 the Company entered into a
listing agreement for six months with a real estate agent, however no
sale agreement has been reached. The company is currently entertaining
other alternatives to this transaction in the event the marketing of the
property takes longer than expected.
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 NINE AND THREE MONTHS ENDED APRIL 30, 2005 COMPARED TO THE NINE AND
THREE-MONTHS ENDED APRIL 30, 2004.
Revenue
Total revenue for the nine-months ended April 30, 2005 was approximately $11.2
million, which is a 51% decrease from approximately $22.8 million of total
revenue for the nine-months ended April 30, 2004. Total revenue for the
three-months ended April 30, 2005 was approximately $3.6 million. This
represents a 46% decrease from approximately $6.6 million of total revenue for
16
three-months ended April 30, 2004. The change in the nine 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 nine months ended
April 30, 2005 we derived 56% and 6% 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.
As a result of this, we have experienced approximately a $2.3 million decrease
from revenue from the three-month period ended April 30, 2004 to the same period
in 2005 and approximately $7.6 million decrease in revenue from the nine month
period ended April 30, 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 $475,000 decrease in
revenue from the three month period ended April 30, 2004 to the same period in
2005 and approximately $2.4 million decrease in revenue from the nine months
period ended April 30, 2004 to the same period in 2005.
Fees and other revenue decreased from $1.8 million to $1.6 million, or 15% for
the nine months ended April 30, 2005 compared to the nine-months ended April 30,
2004. The nine-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 April 30, 2005 of approximately $473,000 decreased $137,000 compared to
the fee revenue of approximately $610,000 for the three-months ended April 30,
2004.
Glass repair revenues decreased by 62% and 63% for the nine and three-months
ended April 30, 2005 compared to the nine and three-months ended April 30, 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 nine and three-months ended April 30, 2005 was $8.6 million and
$2.7 million, respectively. This was 77% and 76% of total revenue for the nine
and three-months ended April 30, 2005, compared to 82% for both the nine and
three-months ended April 30, 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 nine and three-months ended April 30, 2005
17
totaled approximately $4.2 and $1.5 million, respectively. This is compared to
approximately $5.2 and $2.4 million for the nine and three-months ended April
30, 2004. The 2004 figures include a one time charge of $860,000 for expensing
employee stock options that was recorded in the period ended April 30, 2004 .
The decrease in SG&A expenses of approximately $200,000 and $100,000 for the
nine and three-month periods ended April 30, 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 nine-months ended April 30, 2005
and 2004 totaled approximately $2.6 million and $3.8 million respectively.
Payroll and benefit related expenses for the three-months ended April 30, 2005
and 2004 totaled approximately $900,000 and $1.9 million respectively. The 2004
figures include a one time charge of $860,000 for expensing employee stock
options that was recorded in the period ended April 30, 2004. After adjusting
for the stock option charge, expenses for the nine months ended April 30 2005
were approximately $300,000 less than for the same period in 2004 and expenses
for the three months ended April 30, 2005 were approximately $100,000 less than
for the same period in 2004. These 9% and 8% respective decreases are the result
of personnel and salary reductions made during the last fiscal year as described
in the preceding paragraph.
SG&A expenses also include non-cash charges of approximately $244,000 and
$71,000 for the nine and three-month periods ended April 30, 2005, respectively.
These non-cash charges include approximately $180,000 and $61,000 of common
stock issued to pay for services (fees to Directors and a consultant),
respectively. SG&A expenses also include non-cash charges of approximately
$1,100,000 and $920,000 for the nine and three-month periods ended April 30,
2004, respectively. These non-cash charges include approximately $105,000 and
$35,000 of amortization of debenture discount and approximately $102,000 and
$26,000 of common stock issued to pay fees to directors, respectively. In
addition, a non-cash charge of approximately $77,000 for losses on disposal of
fixed assets is included in the nine month period and a charge for $860,000 for
expensing employee stock options is reflected in both the nine and three month
periods.
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 $33,000 and $12,000 for the nine and three-months
ended April 30, 2005 compared to approximately $45,000 and $13,000 for the nine
and three-months ended April 30, 2004. There was no interest income from cash
reserves for the nine or three-months ended April 30, 2005 compared to
approximately $2,000 and $1,000 for the nine and three-months ended April 30,
2004, respectively.
Depreciation
Depreciation of property and equipment of approximately $392,000 and $124,000
was recognized in the nine and three-months ended April 30, 2005. This is
compared to approximately $398,000 and $132,000 for the nine and three-months
ended April 30, 2004.
Net Loss
The net loss for the nine and three-months ended April 30, 2005 totaled
approximately $1,928,000 and $774,000 compared to a net loss of approximately
$1,552,000 and $1,338,000 from the nine and three-months ended April 30, 2004.
The net loss amounts include non-cash expenses of approximately $635,000 and
$195,000 for the nine and three-months ended April 30, 2005, respectively. The
net loss amounts for the nine and three-months ended April 30, 2004 include
non-cash expenses of approximately $1,543,000 and $1,054,000, respectively. The
2004 non cash losses include a one time charge of $860,000 for expensing of
employee stock options as described in the preceding paragraphs. The increase in
the loss in 2005 from 2004, after adjusting for the one time charge, is
primarily due to the decrease in revenue from our two largest customers as
explained above.
18
Forecast of Profitability
Management expects to return to monthly profitability early in the fiscal year
ending July 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2005, we had approximately $416,000 in cash. This is approximately
the same cash balance as July 31, 2004. We have a working capital deficiency of
approximately $3.6 million as of April 30, 2005 as compared to $3.9 million as
of April 30, 2004. The decrease in the deficiency is a result of the capital
raised during 2005, which was partially offset by operating losses.
The primary source of our working capital since July 31, 2004, was from cash
provided by the sale of $1,724,000 of equity securities, which netted $1,509,000
after commissions. The equity securities consisted of 10,775,000 shares of
common stock and 5,387,500 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
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. The Company
paid off the note at the maturity date on April 20, 2005.
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. In
April, 2005 we entered into a six month listing agreement with a real estate
agent. The listing price of the building is $1.4 million more than the Company's
option price for the property. However, we cannot assure you that we will be
able to realize the full selling price 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.
19
Our principle commitments at April 30, 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.
Debt and Contractual Obligations
Our commitments for debt and other contractual arrangements as of April 30, 2005
are summarized as follows:
Years ending April 30,
---------------------------------------------------------
2006 2007 2008 Total
---------------------------------------------------------
Property lease 224,000 133,000 357,000
Equipment lease 117,000 105,000 42,000 264,000
Convertible debenture 275,000 275,000
Employee compensation 523,000 970,000 178,000 1,671,000
---------------------------------------------------------
1,139,000 1,208,000 220,000 2,567,000
=========================================================
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 April 30, 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.
In May 2005 the Company entered into a new two year employment agreement with
its President and Chief Executive Officer. The agreement specifies an annual
base salary of $170,000, representing a voluntary pay cut in base taken by the
CEO. If the Company generates positive cumulative EBITDA (which excludes
non-cash compensatory and equity charges under GAAP) of greater than $50,000 for
any three consecutive months, the base salary will be increased to $200,000. The
individual will be entitled to receive a quarterly bonus equal to 3% of the
Company's EBITDA as computed under GAAP, which may be paid in cash or shares of
the Company's common stock, at the election of the individual. The individual
shall also be entitled to receive an option to purchase 25,000 shares of the
Company's common stock, exercisable at the fair market price, for each month the
Company has net income before taxes and extraordinary items, as computed in
accordance with GAAP. These options vest over the remaining term of the
employment agreement. The individual is entitled to a $750 per month automobile
allowance and a $1000 per month personal allowance. The Company issued the
individual 1,000,000 shares of its common stock upon execution of the agreement
20
and agreed to include the shares in an S-8 Registration Statement when filed by
the Company. If the individual loses his position for any reason other than for
cause during the term of the agreement, he will receive a lump sum payment equal
to two (2) times the current base salary. If the Company does not employ the
individual beyond the expiration term of the agreement, he will receive his
monthly base salary for the next twelve months. At the election of the
individual, any compensation including severance or termination payments, may be
made one-half (1/2) in cash and one-half (1/2) in the Company's shares valued at
75% of the average closing price over the 30 trading days preceding the
termination date. Any shares issued shall be registrable under a form S-8 and
shall have "piggyback" registration rights.
In addition, in May 2005 the Company entered into employment agreements ranging
in length from eighteen to twenty-four months with all four of the Company's
Senior executives that total $72,000 to $102,000 annually. This represents
voluntary base pay cuts taken by all of the previously contracted executives.
These executives also receive automobile allowances ranging from $400 to $700
per month and will receive 10,000 shares of the Company's common stock each
month, not to exceed 200,000 shares each. If their contracts are not renewed
they receive severance packages of six months of their annual compensation.
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 April 30, 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 April 30, 2005. We have not identified any significant deficiency
or materials weaknesses in our internal controls, and therefore there were no
corrective actions taken.
21
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 nine-months ended April 30, 2005, the Company issued 387,448 shares
of common stock to three directors in exchange for their services. These shares
are being expensed over the year as they are earned. During the nine-months
ended April 30, 2005, the Company expensed approximately $91,678, or 335,365
shares, which was approximately equal to the fair market value of the shares
when earned. As of April 30, 2005, 52,083 of the shares of common stock issued
with a fair value of $18,750 were reflected in the financial statements as a
prepayment of their annual retainer.
During the nine-months ended April 30, 2005, the Company issued 71,288 shares of
common stock in exchange for $24,951 in legal services.
In the nine-months ended April 30, 2005, 72 shares of preferred stock with a
face value of $360,000 plus dividends of $109,346 were converted into 2,347,877
shares of common stock. Also in the nine-months ended April 30, 2005 the Company
elected to redeem 24 shares of preferred stock with a face value of $120,000 and
$38,698 of accrued dividends for $170,698, which included a ten percent premium
of $12,000.
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, for the nine months
ended April 30, 2005 interest on the debt of $17,967 was converted into 77,734
shares of common stock.
During the nine-months ended April 30, 2005, the Company issued options to
purchase 100,000 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 21,000 shares of common stock to two employees
under an approved compensation plan. All options issued had strike prices of
$0.14 to $0.30 per share, which was the market price at the date of issuance.
On April 12, 2005 an officer and director of the Company each exercised options
to purchase 350,000 shares of the Company's common stock, for a total of 700,000
shares, with a strike price of .01 per share. 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 on October 26, 2004. Additionally, options to purchase
188,000 shares of common stock were canceled.
During the period ended April 30, 2005, the Company raised $1,724,000 from the
sale of 10,775,000 Units at $0.16 per Unit to ten (10) 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
22
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 $185,520 in connection with the issuance of these
securities and incurred $29,526 of other expenses. Noble also earned placement
agent warrants to purchase 1,616,250 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.
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 was 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 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.
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 2,162,860 Units (one share of common
stock and one, 3-year, $0.16 warrant to purchase a common share) to the
investors who did not accept our December 2004 offer. These units caused the
Company to record a stock dividend to these shareholders valued at approximately
$433,000.
23
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.
During the month of May, 2005 two employees exercised options to purchase a
total of 115,000 shares of the Company's common stock. Additionally, on May 18,
2005 a director of the Company exercised options to purchase 150,000 shares.
ITEM 3. Defaults Upon Senior Securities -
None.
ITEM 4. Submission of Matters to a Vote of Security Holders -
None.
ITEM 5. Other Information
None
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.
32.1 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.
32.2 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
Filed April 8, 2005 - Item 5.02 Departure and appointment of Principal
Officers
Filed June 10, 2005 - Item 1.01 Entry into a Material Definitive Agreement
24
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: June 14, 2005 By: /s/ Eric Seidel
------------------ --------------------------------------
Eric Seidel, Chief Executive Officer
By: /s/ Larry Colton
--------------------------------------
Larry Colton, Chief Financial Officer
25
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 officer 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 officer 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 over financial reporting 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 over financial reporting; 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: June 14, 2005 /s/ Eric Seidel
--------------------- -----------------------------
President and C.E.O.
Date: June 14, 2005 /s/ Larry Colton
--------------------- -----------------------------
Chief Financial Officer
26
EXHIBIT 32.1
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 April 30, 2005 as filed with the
Securities and Exchange Commission on June 14, 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
June 14, 2005
27
EXHIBIT 32.2
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 April 30, 2005 as filed with the
Securities and Exchange Commission on June 14, 2005 (the "Report"), I, Larry
Colton, 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/ Larry Colton
- --------------------------------
Print Name: Larry Colton
Title: Chief Financial Officer
June 14, 2005
28