UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended October 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-23903
EAUTOCLAIMS.COM, INC.
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(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
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past
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
The number of shares outstanding of the Issuer's Common Stock,
$.001 Par Value, as of October 31, 2002 was 19,096,552.
Transitional Small Business Disclosure Format:
[ ] Yes [ X ] No
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
INDEX TO FORM 10-QSB
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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 9
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 16
Item 3. Control and Procedures 16
Item 5. Other Information 16
Signatures 16
Certification 17
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The consolidated financial statements of eAutoclaims.com, Inc. and Subsidiary
(collectively the "Company") included herein were prepared, without audit,
pursuant to rules and regulations of the Securities and Exchange Commission.
Because certain information and notes normally included in financial statements
prepared in accordance with generally accepted accounting principles were
condensed or omitted pursuant to such rules and regulations, these financial
statements should be read in conjunction with the financial statements and notes
thereto included in the audited financial statements of the Company as included
in the Company's Form 10-KSB for the year ended July 31, 2002.
2
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
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October 31, 2002 July 31, 2002
(unaudited)
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ASSETS
Current Assets:
Cash $ 138,297 $ 44,655
Accounts receivable, less allowance for doubtful accounts
of $400,000 816,006 864,352
Due from related parties 149,634 143,384
Prepaid expenses and other current assets 256,837 233,513
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Total current assets 1,360,774 1,285,904
Property and Equipment, net of accumulated depreciation
of $662,460 and $543,766, respectively 1,182,546 999,149
Goodwill, net of accumulated amortization
of $459,809 1,093,843 1,093,843
Other Assets 24,930 24,930
Deferred Income Tax Asset, net of valuation
allowance of $5,997,000 and $5,649,000 respectively - -
-----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 3,662,093 $ 3,403,826
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable and accrued expenses $ 6,249,904 $ 5,349,968
Deferred software subscription revenue 314,205 284,676
Loans payable - stockholders 135,000 135,000
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Total current liabilities 6,699,109 5,769,644
Capital Lease Obligation 103,392
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Total liabilities 6,802,501 5,769,644
Stockholders' Deficiency:
Convertible preferred stock - $.001 par value; authorized 5,000,000 shares,
issued and outstanding 257 shares and 268 shares respectively
aggregate liquidation preference of $1,285,000 and $1,340,000 respectively 1 1
Common stock - $.001 par value; authorized 50,000,000 shares, issued
and outstanding 19,096,552 shares and 18,390,118 shares respectively 19,096 18,390
Additional paid-in capital 17,851,118 17,723,229
Accumulated deficit (21,010,623) (20,107,438)
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Stockholders' Deficiency (3,140,408) (2,365,818)
-----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 3,662,093 $ 3,403,826
=============================================================================================================================
See Notes to Consolidated Financial Statements
3
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
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Three-month Three-month
Period ended Period ended
October 31, 2002 October 31, 2001
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(unaudited) (unaudited)
Revenue:
Collision repairs management $ 7,256,193 $ 6,624,155
Glass repairs 171,528 426,049
Fleet repairs management 217,761 321,474
Fees and other revenue 519,344 319,243
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Total revenue 8,164,826 7,690,921
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Expenses:
Claims processing charges 6,856,469 6,493,842
Selling, general and administrative 2,066,515 1,868,491
Depreciation and amortization 118,694 111,365
Amortization of beneficial conversion feature on convertible debentures and fair 555,551
value of warrants issued in connection with debentures
---------------------------------------------------------------------------------------------------------------------------------
Total expenses 9,041,678 9,029,249
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Net loss $ (876,852) $(1,338,328)
=================================================================================================================================
Adjustment to net loss to compute loss per common share:
Preferred stock dividends $ (26,333) $ (52,429)
Deduction relating to Series A Convertible Preferred Stock - (408,000)
---------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock (903,185) $ (1,798,757)
Loss per common share - basic and diluted $ (0.05) $ (0.15)
=================================================================================================================================
Weighted-average number of common shares outstanding - basic and diluted 18,782,334 12,257,787
=================================================================================================================================
See Notes to Consolidated Financial Statements
4
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
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Three month period ended October 31, 2002
Additional
Preferred Stock Common Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Deficiency
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Balance at July 31, 2002 268 1 18,390,118 $18,390 $17,723,229 $(20,107,438) $(2,365,818)
Issuance of common stock upon exercise of 9,259 9 84 93
options
Issuance of common stock for services 369,925 370 118,500 118,870
Accrued dividends on preferred stock (26,333) (26,333)
Issuance of common stock upon conversion (11) 278,481 278 (278) -
of preferred stock
Issuance of common stock for preferred 48,769 49 9,583 9,632
stock dividends
Net loss (876,852) (876,852)
------------------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 2002 257 1 19,096,552 $19,096 $17,851,118 $(21,010,623) $(3,140,408)
====================================================================================================================================
See Notes to Consolidated Financial Statements
5
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
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Three-month Three-month
Period ended Period ended
October 31, 2002 October 31, 2001
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(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (876,852) $ (1,338,328)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization 118,694 111,365
Amortization of discount on debentures 555,551
Common stock issued for services 118,870 40,589
Common stock issued for rent and option to purchase facility 43,659
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 48,346 (232,349)
(Increase) in due from related parties (6,250) (8,001)
(Increase) decrease in prepaid expenses and other current assets (23,324) 34,151
(Increase) in other assets - (49,313)
Increase in accounts payable and accrued expenses 860,420 864,188
Increase in deferred software subscription revenue 29,529 39,263
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Net cash provided by operating activities 269,433 60,775
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Cash flows from investing activity:
Purchases of property and equipment (175,884) (48,843)
Cash flows from financing activity:
Proceeds from exercise of stock options 93 1,920
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Net increase in cash 93,642 13,852
Cash at beginning of period 44,655 485,092
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Cash at end of period $ 138,297 $ 498,944
=============================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 9,226 $ 19,664
=============================================================================================================================
Supplemental disclosure of noncash investing and financing activities:
=============================================================================================================================
Conversion of debentures to common stock $ 650,000
=============================================================================================================================
Issuance of common stock for amount due to shareholders $ 44,000
=============================================================================================================================
Issuance of stock for payment of rent $ 49,373
=============================================================================================================================
Issuance of stock for preferred stock dividends $ 9,632
=============================================================================================================================
Accrued dividends on preferred stock $ 26,333
=============================================================================================================================
Property and equipment acquired under capital lease $ 126,207
=============================================================================================================================
See Notes to Consolidated Financial Statements
6
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Note 1 - Basis of presentation
------------------------------
The accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of those of a normal recurring nature) necessary to
present fairly the financial position of eAutoclaims.com, Inc. and it's wholly
owned subsidiary as of October 31, 2002 and its results of operations and its
cash flows for the three-month periods ended October 31, 2002 and 2001 and the
results of operations for the three-month periods ended October 31, 2002 and
2001. Results of operations for the three-month periods ended October 31, 2002
are not necessarily indicative of the results that may be expected for the year
ending July 31, 2003.
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.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets", which is required to be applied for fiscal years beginning
after December 15, 2001. The Company has adopted SFAS 142 as of August 1, 2002,
SFAS 142 eliminates the amortization of goodwill and certain other intangible
assets. It also requires eAutoclaims.com, Inc. to complete a test for impairment
of these assets annually, as well as a transitional goodwill impairment test
within six months from the date of adoption. SFAS 142 also requires disclosure
of what net loss applicable to common stock would have been in all periods
presented had SFAS 142 been in effect. The following table is provided to
disclose what net loss applicable to common stock would have been had SFAS 142
been adopted in prior periods:
For the three-months ended
October 31,
2002 2001
---------------------------------
Reported net loss applicable to common stock $ (903,185) $ (1,798,757)
Add back: goodwill amortization - 54,692
---------------------------------
Adjusted net loss applicable to common stock $ (903,185) $ (1,744,065)
=================================
Loss per common share - basic and
diluted as reported $ (0.05) $ (0.15)
=================================
Adjusted loss per common share - basic
and diluted $ (0.05) $ (0.14)
=================================
7
Note 2 - Per share calculations
-------------------------------
Basic loss per share is computed as net loss divided by the weighted-average
number of common shares outstanding for the period. Potential common shares have
not been included in diluted loss per share since the effect would be
anti-dilutive.
Note 3 - Equity Transactions
----------------------------
During the three-month period ended October 31, 2002, employees exercised 9,259
options to purchase shares of the Company's common stock.
During the three-month period ended October 31, 2002, the Company issued 322,865
shares of common stock in exchange for $106,870 of legal services.
During the three-month period ended October 31, 2002, the Company issued
additional options to employees to purchase 10,000 shares of common stock where
the exercise prices of the options are equal to or greater than the fair market
value of the Company's common stock on the date of each grant. Additionally,
options to purchase 296,534 shares of common stock were canceled.
In August 2002, the Company entered into a contract with a public relations
consultant for services. This agreement calls for the Company to issue 94,119
shares of common stock. During the three-month period ended October 31, 2002,
47,060 of these shares were earned resulting in a charge to operations of
$12,000.
On September 5, 2002, 11 shares of preferred stock with a face value of $55,000,
plus dividends of approximately $10,000 were converted into 327,250 shares of
common stock.
Note 4 - Additional information
-------------------------------
The Company's records and the records of its transfer agent differ with respect
to the number of outstanding shares of the Company's common stock. According to
the transfer agent, the number of shares of common stock outstanding is
approximately 31,500 shares greater than the 19,096,552 indicated by the
Company's records. The Company believes that its records are correct and is in
the process of resolving this difference. The number of shares outstanding
reflected in the Company's financial statements do not include these shares or
any adjustment that might be necessary to resolve this difference.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in this Report on Form 10-QSB, 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-QSB. 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-QSB will prove to be
accurate.
GENERAL
We 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
3,000 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.
We have also introduced our latest product, eJusterSuite. This new product
expands our potential customer base as well as provides significant new features
to our current customer base. Our long-standing Bricks-to-Clicks product is
solely an outsourcing solution that requires eAuto personnel to audit and
coordinate the vehicle repair. eJusterSuite allows both the outsourcing solution
and a true application service provider (ASP) solution whereby the insurance
company can use our technology independent of our personnel. The ASP solution
allows us to market our product to 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 provides significant new features to our current customers
because it 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
9
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 the cost
of the service partner to obtain and process the transaction, even after paying
our transaction fee. This added revenue will provide 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 94% of the revenue for the
three-months ended October 31, 2002. We are paid on a per claims basis from our
insurance and fleet company customers for each claim that we process through our
system. These fees vary from $10 to $60 per claim depending upon the level of
service required. For the three-months ended October 31, 2002, 6% of the revenue
has been received from claims processing fees and other 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 records it gross in certain glass repair transactions. It is recorded 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 as they audit the estimate
submitted by the repair facility. The Company must agree that the
repair is reasonable and necessary before the repair facility is
allowed to proceed with the work being requested.
o The Company has discretion in supplier selection. Through the use of
software, the Company prioritizes which repair facility is used based on
the efficiency and effectiveness of the repair facility, and
o The Company has credit risk. The Company is responsible to pay the repair
facility even if the customer does not pay for the repair.
10
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 us. When we receive notice of the
transaction, we call the glass repair facility to ask them to become part of our
network and to negotiate a better price on the repair. If we are able to
negotiate a better price for the customer we keep a portion of the added
discount. In that situation the revenue is recorded net of the repair costs even
though we pay for the entire claim and are reimbursed by the insurance company,
since we did not have the risk of loss and are not responsible for the repair.
We maintain an allowance for doubtful accounts for losses that we estimate will
arise from our customers' inability to make required payments. We make our
estimates of the collectibilty of our accounts receivable by analyzing
historical bad debts, specific customer creditworthiness and current economic
trends. At October 31, 2002 the allowance for doubtful accounts was $400,000.
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 $5,997,000 at October
31, 2002. The valuation allowance consists mainly of net operating losses
previously realized and stock compensation currently not deductible. The
valuation allowance was necessary because the use of these deductions is not
reasonably assured since the company has not yet reached profitability.
Valuation of long-lived assets
The Company identifies and records impairment on long-lived assets, including
goodwill, when events and circumstances indicate that such assets have been
impaired. The Company periodically evaluates the recoverability of its
long-lived assets based on expected undiscounted cash flows, and recognizes
impairment, if any, based on expected discounted cash flows. Factors we consider
important which could trigger an impairment review include the following:
o Significant negative industry trends
o Significant underutilization of the assets
o Significant changes in how we use the assets of our plans for their
use.
Goodwill was amortized using the straight-line method over 7 years through July
31, 2002. As of August 1, 2002 no additional amortization was recorded as a
result of the change in accounting standards as described below in "recently
issued financial accounting standards." At each balance sheet date, the Company
evaluates the period of amortization of intangible assets. The factors used in
evaluating the period of amortization include: (i) current operating results,
(ii) projected future operating results, and (iii) any other material factors
that effect the continuity of the business. No charge for impairment of this
asset was considered to be necessary as of October 31, 2002.
11
RESULTS OF OPERATIONS
FOR THE THREE-MONTHS ENDED OCTOBER 31, 2002 COMPARED TO THE THREE-MONTHS ENDED
OCTOBER 31, 2001.
REVENUE
Total revenue for the three-months ended October 31, 2002 was $8.2 million,
which is a 6% increase in excess of the $7.7 million of revenue for the
three-months ended October 31, 2001. This increase in revenues is primarily the
result of growth in revenues attributed to our core collision repairs management
business and the associated fees. Collision repair management revenue increased
10% for the three-months ended October 31, 2002 compared to the three-months
ended October 31, 2001. Fees and other revenue increased 63% for the
three-months ended October 31, 2002 compared to the three-months ended October
31, 2001. This increase is a result of an increase in file handling fees, sales
of software and click fees from service partners. Glass repairs revenue
decreased 60% for the three-months ended October 31, 2002 compared to the
three-months ended October 31, 2001. This decrease is a result of the loss of a
major customer due to the maturing and increased competition for the glass
repair business. The customer was offered lower pricing that, at that time,
would have reduced margins below acceptable levels. Later in the fiscal year
ended July 31, 2002, we negotiated lower pricing from one of our larger glass
vendors, which will help our competitiveness in this market in the future. The
glass repair business complements our core business and allows our customers to
use a single source for all their repair needs. There was a decrease in the
fleet repairs management revenue from approximately $321,000 in the three-months
ended October 31, 2001 to approximately $218,000 in the fiscal year ended
October 31, 2002. This decrease is a normal fluctuation in the fleet repair
revenue due to the actual accident rate experienced by our customers for this
period.
During the three-months ended October 31, 2002, we derived 64% our revenues from
one customer. This one customer, with whom we have a five-year contract, is
ranked in the top 25 automobile property and casualty insurance companies in
revenue in the United States. We also have one customer that accounted for 14%
of total revenue for the three-months ended October 31, 2002.
CLAIMS PROCESSING CHARGES
Claims processing charges for the three-months ended October 31, 2002 were
approximately $6.9 million, or 84% of total revenue. This is an increase from
approximately $6.5 million, or 84.4%, of sales in the three-months ended October
31, 2001. Claims processing charges are primarily the costs of collision repairs
paid by eAutoclaims to its collision repair shop network. This decrease in the
percentage of the claims processing charges compared to total revenue over the
same period last year was mostly caused by the increase in Fees and other
revenue, including the click fee revenue as a result of the eJusterSuiteTM
product implementation.
We are dependent upon our third party collision repair shops for insurance
claims repairs. eAutoclaims currently has over 3,000 affiliated repair
facilities in its network for claims repairs. We electronically and manually
audit individual claims processes to their completion using remote digital
photographs transmitted over the Internet. However, if the quality of service
provided by collision repair shops fall below a satisfactory standard leading to
poor customer service, this could have a harmful effect on our business. We
control our service requirements by continually monitoring customer service
levels and providing staff inspections of our network shops and, if required,
establish similar relationships with other collision repair shops.
12
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES
SG&A expense is mainly comprised of salaries and benefits, facilities related
expenses, telephone charges, legal and other professional fees, advertising
costs, and travel expenses. SGA expenses for the three-months ended October 31,
2002 totaled $2.1 million compared to $1.9 million for the three-months ended
October 31, 2001. This represents an increase in these expenses compared to
total revenue for these quarters from 24% for the three-months ended October 31,
2001 to 25% for the three-months ended October 31, 2002. The increase in SG&A
expenses compared to total revenue is a result of the expensing of approximately
$127,000 of restructuring costs which reduced Company monthly expenses by
approximately $100,000, or $1.2 million per year. The Company expects the
percentage of SG&A expenses to total revenue to continue to decrease, as it has
in the past, as revenues continue to increase.
Payroll and benefit related expenses for the three-months ended October 31, 2002
and 2001 both totaled $1.3 million. As of October 31, 2002, management has cut
expenses by approximately $100,000 per month that will save the Company
approximately $300,000 per quarter, or approximately $1.2 million per year.
SG&A expenses also include non-cash charges of approximately $119,000 for the
three-month period ended October 31, 2002. These non-cash charges for the three
months ended October 31, 2002 include common stock issued to pay legal fees and
investor relation fees. Total non-cash charges for the three-months ended
October 31, 2001 that were included SG&A expense included approximately $84,000
in charges incurred pertaining to legal fees, board of director fees and an
options to purchase a facility. Other non-cash charges for the three-months
ended October 31, 2001 include $555,551 amortization of debenture discount that
was converted into common stock.
Also included in the SG&A is interest expense related to loans from two
officers/shareholders and capital leases. This interest expense totals
approximately $9,000 for the three-months ended October 31, 2002 compared to
approximately $16,000 for the three-months ended October 31, 2001. Interest
income from cash reserves totaled approximately $10,000 for the three-months
ended October 31, 2002 compared to approximately $9,000 for the three-months
ended October 31, 2001.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment of approximately $119,000 was recognized
in the three-month period ended October 31, 2002, respectively. This is compared
to approximately $57,000 for the three-months ended October 31, 2001.
Amortization of the goodwill associated with the acquisitions of Premier Express
Claims, Inc. totaled approximately $55,000 three-months ended October 31, 2001.
There was no amortization expense for the three months ended October 31, 2002 as
a result of a change in the accounting rule on amortization of goodwill.
NET LOSS
The net loss for the three-months ended October 31, 2002 totaled approximately
$877,000 compared to $1,338,000 for the three-months ended October 31, 2001, a
34% decrease. Non-cash expenses created approximately $238,000 and $751,000 of
those losses, respectively. The net loss before non-cash expenses increased by
approximately $52,000, from approximately $587,000 to approximately $639,000 for
the three-months ended October 31, 2001 to the three-months ended October 31,
2002. This increase is a result of non-reoccurring restructuring expenses of
approximately $127,000 that was incurred in order to save approximately $100,000
per month or $1.2 million per year.
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Liquidity and Capital Resources
At October 31, 2002, we had cash of approximately $138,000, approximately a
$94,000 increase from July 31, 2002, and a working capital deficiency of
approximately $5.3 million. The primary source of our working capital during the
three-month period ended October 31, 2002, was from cash flow generated by
operations. However, there is no assurance that we will be able to continue to
provide cash through operations.
On November 13, 2002 we signed a term sheet on a $10,000,000 equity line of
credit that will allow the Company, once the shares are registered, to access
funds over a 36-month period by selling registered shares of common stock at 94%
of the market value of the shares. Under this agreement, the amount of funds
available to the Company would be based on the volume of the previous 20 trading
days. The purchasing party offering the equity line of credit will receive
warrants for 3% of the shares sold as well as a 2% placement fee.
On November 12, 2002 we also received a commitment letter from a current
investor to invest an additional $1,000,000-$2,000,000 into eAutoclaims. We
expect this financing and the equity line of credit to cover the operational
cash shortfall until we are able to reach profitability
Our management continues to analyze our operations and streamline where
appropriate. In October 2002, we instituted additional cost cutting, which
should result in savings of approximately $100,000 per month or approximately
$1.2 million per year once fully instituted. These cost cutting focus primarily
upon the termination of personnel, deferral of new product development and
reduction in capital expenditures. We believe that cash generated from the
financing, and operations together with cost cuts will be sufficient to meet our
working capital requirements for the next 12 months.
However, we will need to raise additional capital to pursue other business or
technology acquisitions or if we experience losses that exceed our current
expectations. Although we will be able to continue to grow our business base, we
will not be able to grow as quickly as management would like without the
infusion of additional capital. We cannot assure that we will be able to raise
such funds or that such funds will be available to us on favorable terms. If we
raise additional funds for the issuance of our securities, such securities may
have rights, preferences or privileges similar to those of the rights of our
Common Stock and our stockholders may experience additional dilution.
We are currently restricted from raising other additional debt or equity without
the consent of the holders of our Series A Preferred Stock. The Series A
Preferred shareholder has exclusive rights to provide any future equity line
financing agreements through May 31, 2003.
Management expects revenue growth over the next fiscal year, which provides it's
own working capital. However, there is no assurance that we will continue to
sustain our growth. Our business has grown significantly since our inception.
This estimate is a forward-looking statement that involves risks and
uncertainties. The actual time period may differ materially from that indicated
as a result of a number of factors so that we cannot assure that our cash
resources will be sufficient for anticipated or unanticipated working capital
and capital expenditure requirements for this period.
Our principle commitments at October 31, 2002 consist of monthly operating
rental payments, compensation of employees and accounts and notes payable.
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Inflation
We believe that the impact of inflation and changing prices on our operations
since the commencement of our operations has been negligible.
Seasonality
eAutoclaims does not deem its revenues to be seasonal.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 2001, the FASB issued Statement no. 142, "Goodwill and Other Intangible
Assets," which we adopted as of August 1, 2002, that changes the accounting
for goodwill from an amortization method to an impairment-only approach. As of
August 1, 2002, eAutoclaims ceased the amortization of goodwill. This statement
also requires companies with goodwill recorded on their financial statements to
evaluate if the goodwill has been impaired and if a charge should be recorded to
write-off any impairment. We do not expect this statement to have an impact on
our financial statements except to cease recording amortization expense of the
goodwill.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 2002, we received a letter from counsel to Body Shops Unlimited, which
included a copy of a complaint filed in a California State Court, which was not
served on us. We then filed and served a complaint upon Body Shops Unlimited,
Case No. 02-7390-CI-02I in and for the Sixth Judicial Circuit for Pinellas
County, Florida. Body Shops claims to have developed and delivered a software
program to us, which remains unpaid. We contend the software does not meet
specifications, and accordingly we are entitled to terminate the contract and
any related maintenance fees. Body Shop alleges it is owed $114,000 plus
potential damages for fraud and unjust enrichment. We dispute these allegations.
Body Shop has moved to have the case dismissed from the Pinellas County, Florida
Circuit Court for lack of jurisdiction. This case is in the early stages.
Although we believe these are meritorious defenses and claims against Body Shops
irrespective of the forum for litigation, it is too early to predict the
ultimate outcome of this dispute.
In August 2002, we were served with a complaint styled David B. Linka vs.
eAutoclaims.com, in and for the Court of Common Place for the Fifteenth Judicial
Circuit of South Carolina, Case No. 2001-CP-26-4726. Mr. Linka is a former
employee of ours and alleges he is due substantial past and future compensation
relating to his alleged improper termination. Mr. Linka advances various legal
theories based upon (i) a claim for wages, (ii) breach of express employment
contract, (iii) breach of contract implied in law and fact (iv) breach of
contract accompanied by fraudulent acts and (v) breach of covenant of good faith
and fair dealing. Essentially, this dispute concerns Mr. Linka's entitlement to
past and future commissions relating to an account Mr. Linka assisted in
selling.. We have made a motion to remove this case to federal court in South
Carolina. We believe there are meritorious defenses to Mr. Linka's allegations
and do not believe he is entitled to future commissions from our accounts.
Because this dispute is in its preliminary stages, it is too early to predict
with any certainty the ultimate outcome.
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ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
During the three-months ended October 31, 2002, employees exercised 9,259
options to purchase shares of eAutoclaims common stock.
During the three-months ended October 31, 2002, the Company issued 322,865
shares of common stock in exchange for $106,870 of legal services.
During the three-months ended October 31, 2002, the Company issued additional
options to employees to purchase 10,000 shares of common stock where the
exercise prices of the options are equal to or greater than the fair market
value of the Company's common stock on the date of each grant. Additionally,
options to purchase 296,534 shares of common stock were canceled.
In August 2002, the Company entered into a contract with a public relations
consultant for services. This agreement calls for the Company to issue options
to purchase 94,119 shares of common stock. For the three-months ended October
31, 2002, 47,060 of these shares were earned resulting in a charge to operations
of approximately $12,000.
On September 5, 2002, 11 shares of preferred stock with a face value of $55,000,
plus interest of approximately $10,000 were converted into 327,250 shares of
common stock.
ITEM 3. Control and Procedures
Within the 90 days prior to this report, the company carried out an evaluation,
under the supervision of our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as defined in the Securities Exchange Act
Rule 15d14(c). Based upon this evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely enabling the Company to record, process,
summarize and report information required to be included in the Company's
periodic SEC filings. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
ITEM 5. Other Information
The Company has signed a two-year contract with Lumbermens Mutual Casualty
Company, a subsidiary of Kemper Auto & Home Insurance Company, and its
affiliated insurance companies to provide online claims management to all 16 of
its offices in the continental United States. They will use the eJustersuiteTM
solution for automotive repairs, heavy equipment repairs and various eAutoclaims
service partners.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: December 10, 2002 By: /s/ Eric Seidel
-----------------------------------------------
Eric Seidel, Chief Executive Officer
By: /s/ Scott Moore
-----------------------------------------------
Scott Moore, Chief Financial Officer
16
CERTIFICATIONS
I certify that:
1. I reviewed this annual report on Form 10-QSB;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation
Date"); and
c) presented in this annual 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 annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 10, 2002 /s/ Eric Seidel
---------------------- -----------------------------------------
President and C.E.O.
Date: December 10, 2002 /s/ Scott Moore
---------------------- ------------------------------------------
Chief financial Officer
17