UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended January 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-23903
EAUTOCLAIMS.COM, 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
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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 January 31, 2003 was 20,041,015.
Transitional Small Business Disclosure Format:
[ ] Yes [ X ] No
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
INDEX TO FORM 10-QSB
--------------------------------------------------------------------------------
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 16
Item 2. Changes in Securities 16
Item 3. Control and Procedures 17
Item 5. Other Information 17
Signatures 17
Certification 18
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
-----------------------------------------------------------------------------------------------------------------------------
January 31, 2003 July 31, 2002
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(unaudited)
ASSETS
Current Assets:
Cash $ 7,781 $ 44,655
Accounts receivable, less allowance for doubtful accounts
of $252,000 and $400,000, respectively 1,281,278 864,352
Due from related parties 135,396 143,384
Prepaid expenses and other current assets 192,415 233,513
-----------------------------------------------------------------------------------------------------------------------------
Total current assets 1,616,870 1,285,904
Property and Equipment, net of accumulated depreciation
of $788,181 and $543,766, respectively 1,132,394 999,149
Goodwill 1,093,843 1,093,843
Other Assets 34,540 24,930
Deferred Income Tax Asset, net of valuation
allowance of $6,030,000 and $5,649,000, respectively - -
-----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 3,877,647 $ 3,403,826
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable and accrued expenses $ 7,054,409 $ 5,307,921
Deferred software subscription revenue 235,654 284,676
Loans payable - stockholders 125,000 135,000
Current portion of capital lease obligation 20,336 17,375
-----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 7,435,399 5,744,972
Capital Lease Obligation 98,295 24,672
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities 7,533,694 5,769,644
Stockholders' Deficiency:
Convertible preferred stock - $.001 par value; authorized 5,000,000 shares,
issued and outstanding 253 shares and 268 shares respectively
aggregate liquidation preference of $1,265,000 and $1,340,000 respectively 1 1
Common stock - $.001 par value; authorized 50,000,000 shares, issued
and outstanding 20,041,015 shares and 18,390,118 shares respectively 20,041 18,390
Additional paid-in capital 17,898,039 17,723,229
Accumulated deficit (21,574,128) (20,107,438)
-----------------------------------------------------------------------------------------------------------------------------
Stockholders' Deficiency (3,656,047) (2,365,818)
-----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 3,877,647 $ 3,403,826
=============================================================================================================================
See Notes to Consolidated Financial Statements
3
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------------------
Three-month Three-month Six-month Six-month
Period Ended Period Ended Period Ended Period Ended
January 31 January 31 January 31 January 31
2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue:
Collision repairs management $ 6,940,059 $ 7,487,381 $ 14,196,252 $ 14,111,536
Glass repairs 144,796 174,057 316,324 600,106
Fleet repairs management 188,514 407,176 406,275 728,650
Fees and other revenue 561,204 412,480 1,080,548 731,723
------------------------------------------------------------------------------------------------------------------------------------
Total revenue 7,834,573 8,481,094 15,999,399 16,172,015
------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Claims processing charges 6,527,086 7,198,805 13,383,555 13,692,647
Selling, general and administrative 1,719,424 1,672,842 3,785,939 3,541,333
Depreciation and amortization 125,721 117,915 244,415 229,280
Amortization of beneficial conversion feature on convertible
debentures and fair value of warrants issued in connection
with debentures - 555,551
------------------------------------------------------------------------------------------------------------------------------------
Total expenses 8,372,231 8,989,562 17,413,909 18,018,811
------------------------------------------------------------------------------------------------------------------------------------
Net loss $ (537,658) $ (508,468) $ (1,414,510) $ (1,846,796)
====================================================================================================================================
Adjustment to net loss to compute loss per common share:
Preferred stock dividends (25,847) (45,862) (52,180) (98,291)
Deduction relating to Series A Convertible Preferred Stock (408,000)
------------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock (563,505) (554,330) (1,466,690) (2,353,087)
Loss per common share - basic and diluted $ (0.03) $ (0.04) $ (0.08) $ (0.18)
====================================================================================================================================
Weighted-average number of common shares outstanding
- basic and di1uted 19,562,796 13,280,782 19,172,565 12,769,285
====================================================================================================================================
See Notes to Consolidated Financial Statements
4
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
------------------------------------------------------------------------------------------------------------------------------------
Six month period ended January 31, 2003 - unaudited
Additional
Preferred Stock Common Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Deficiency
------------------------------------------------------------------------------------------------------------------------------------
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
options 396,315 397 3,567 3,964
Issuance of common stock for amounts due
to shareholder 84,034 84 9,916 10,000
Issuance of common stock for services 542,175 542 148,233 148,775
Accrued dividends on preferred stock (52,180) (52,180)
Issuance of common stock upon conversion (15) 528,481 528 (528) -
of preferred stock
Issuance of common stock for preferred 99,892 100 13,622 13,722
stock dividends
Net loss (1,414,510) (1,414,510)
------------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 2003 253 $1 20,041,015 $20,041 $17,898,039 $(21,574,128) $(3,656,047)
====================================================================================================================================
See Notes to Consolidated Financial Statements
5
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
Six-month Six-month
Period ended Period ended
January 31, 2003 January 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (1,414,510) $ (1,846,796)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 244,415 229,280
Amortization of discount on debentures - 555,551
Common stock issued for services 148,775 65,240
Common stock issued for rent and option to purchase facility - 43,659
Changes in operating assets and liabilities net of acquisition:
(Increase) decrease in accounts receivable (416,926) 375,438
Decrease (increase) in due from related parties 7,988 (21,801)
Decrease in prepaid expenses and other current assets 41,098 41,735
(Increase) in other assets (9,610) (37,025)
Increase in accounts payable and accrued expenses 1,708,030 915,797
(Decrease) increase in deferred software subscription revenue (49,022) 46,939
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 260,238 368,017
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activity:
Purchases of property and equipment (287,605) (349,857)
Cash flows from financing activities:
Proceeds from exercise of stock options 3,964 3,230
Principal payments on capital lease (13,471)
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Net cash provided (used) by financing activities (9,507) 3,230
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (36,874) 21,390
Cash at beginning of period 44,655 485,092
------------------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 7,781 $ 506,482
====================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 21,287 $ 13,701
====================================================================================================================================
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 $ 10,000 $ 44,000
====================================================================================================================================
Issuance of stock for payment of rent $ 49,373
====================================================================================================================================
Issuance of stock for preferred stock dividends $ 13,722 $ 25,821
====================================================================================================================================
Accrued dividends on preferred stock $ 52,180
====================================================================================================================================
Equipment acquired by capital lease $ 90,055
====================================================================================================================================
See Notes to Consolidated Financial Statements
6
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
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 January 31, 2003 and its results of operations and its
cash flows for the three and six-month periods ended January 31, 2003 and 2002
and the results of operations for the three and six -month periods ended January
31, 2003 and 2002. Results of operations for the three and six -month periods
ended January 31, 2003 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:
Three-month period ended Six-month period ended
January 31, January 31,
2003 2002 2003 2002
------------------------- ------------------------
Net loss $ 537,658) $ (508,468) $(1,414,510) $(1,846,796)
Add back:goodwill
amortization 54,692 109,384
----------------------- -------------------------
Adjusted net loss $(537,658) $ (453,776) $(1,414,510) $(1,737,412)
======================= =========================
Loss per common share
-basic and diluted as
reported $(0.03) $(0.04) $(0.08) $(0.18)
======================= =========================
Adjusted loss per common share
-basic and diluted $(0.03) $(0.04) $(0.08) $(0.18)
======================= =========================
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
On November 20, 2002, a shareholder and officer of the Company converted $10,000
of debt owed to him by the Company into 84,034 shares of common stock (using a
share price of 12 cents per share).
During the six-month period ended January 31, 2003, employees exercised 396,315
options to purchase shares of the Company's common stock.
During the six-month period ended January 31, 2003, the Company issued 412,521
shares of common stock in exchange for $118,525 of legal services.
During the six-months ended January 31, 2003, the Company issued 35,535 shares
of common stock to three directors in exchange for their services. The Company
charged operations $6,250, which was equal to the fair market value of the
shares when earned.
During the six-month period ended January 31, 2003, the Company issued
additional options to employees and board members to purchase 658,000 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 386,632 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 six-month period ended January 31, 2003, all
94,119 shares were earned resulting in a charge to operations of $24,000.
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. On January 15, 2003, 4 shares of preferred stock with a face value
of $20,000, plus dividends of approximately $4,100 were converted into 301,123
shares of common stock. On February 19, 2003, subsequent to the balance sheet
date, 6 shares of preferred stock with a face value of $30,000, plus dividends
of approximately $6,400 were converted into 484,778 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 20,041,015 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 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
systematically provided the requested services and pay us a fee for each
9
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 93% of the revenue for the
six-months ended January 31, 2003. 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 six -months ended January 31, 2003, 7% 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 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 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.
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
10
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 Company maintains an allowance for doubtful accounts for losses that they
estimate will arise from the customers' inability to make required payments.
Collectibilty of the accounts receivable is estimated by analyzing historical
bad debts, specific customer creditworthiness and current economic trends. At
January 31, 2003 the allowance for doubtful accounts was $224,000.
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 $6,030,000 at January
31, 2003. 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 January 31, 2003.
11
RESULTS OF OPERATIONS
FOR THE SIX AND THREE-MONTHS ENDED JANUARY 31, 2003 COMPARED TO THE SIX AND
THREE-MONTHS ENDED JANUARY 31, 2002.
REVENUE
Total revenue for the six-months ended January 31, 2003 was $16 million, which
is a 1% decrease in from the $16.2 million of revenue for the six-months ended
January 31, 2002. Total revenue for the three-months ended January 31, 2003 was
$7.8 million. This represents an 8% decrease from the $8.5 million of revenue
for three-months ended January 31, 2002. Collision repair management revenue
decreased 1% and 7% for the six and three-months ended January 31, 2003 compared
to the six and three-months ended January 31, 2002. These decreases in total and
collision repair management revenues are primarily the result of fluctuations in
claims experience of our two largest customers. Additionally, in order to
concentrate on profitability, the Company has made an effort to eliminate
customers who are not profitable because they have not provided the volume
committed to in their contract. The Company continues to pursue Collision repair
management outsource business. However, the Company has placed a greater focus
in higher margin products.
Fees and other revenue increased 48% and 36% for the six and three-months ended
January 31, 2003 compared to the six and three-months ended January 31, 2002,
respectively. This increase is mainly a result of the increase in the sale of
estimating software to the repair facilities on the eAutoclaims network and an
increase in file handling fess from customers and click fees from service
partners.
Glass repairs revenue decreased 47% and 17% for the six and three-months ended
January 31, 2003 compared to the six and three-months ended January 31, 2002,
respectively. 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 of 44% and 54% for
the six and three-months ended January 31, 2003 compared to the six and
three-months ended January 31, 2002, respectively. This decrease is mostly a
result of a lower accident rate experienced by our customers for this period.
During the six and three-months ended January 31, 2003, we derived 62% and 61%
of our revenues from one customer, respectively. 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 15% of total revenue for both the six and
three-months ended January 31, 2003.
CLAIMS PROCESSING CHARGES
Claims processing charges include the costs of collision and glass repairs paid
to repair shops within our repair shop network. Claims processing charges for
the six and three-months ended January 31, 2003 was $13.4 million and $6.5
million, respectively. These totals were 84% and 83% of total revenue, compared
to 85% of revenue for both the six and three-months ended January 31, 2002.
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 sale of software to network repair facilities, as well as
file handling and click fee revenue.
12
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.
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. SG&A expenses for the six-months ended January 31,
2003 totaled $3.8 million compared to $3.5 million for the six-months ended
January 31, 2002. The increase in SG&A expenses compared to total revenue is a
result of the expensing of approximately $237,000 of restructuring costs which
reduced Company monthly expenses by approximately $157,000, or $1.9 million per
year.
SG&A expenses for the three-months ended January 31, 2003 and 2002 both totaled
approximately $1.7 million. The SG&A expenses for the three-months ended January
31, 2003 includes approximately $110,000 of restructuring costs, which is
included in the restructuring costs described in the preceding paragraph.
Payroll and benefit related expenses for the six-months ended January 31, 2003
and 2002 both totaled approximately $2.4 million. Payroll and benefit related
expenses for the three-months ended January 31, 2003 totaled $1.1 million, which
is approximately an 8% decrease from the $1.2 million payroll and benefit
related expenses for the three-months ended January 31, 2002, and an 18%
decrease from the three-months ended October 31, 2002 of approximately $1.3
million. This decrease is the result of personnel and salary cuts made at the
end of October of 2002. Additional personnel and salary cuts of approximately
$45,000 per month or $540,000 per year were made late in January 2003. These
cost savings will be realized starting in the quarter ended April 30, 2003.
SG&A expenses also include non-cash charges of approximately $193,000 for the
six-month period ended January 31, 2003. These non-cash charges for the
six-month period ended January 31, 2003 include common stock issued to pay for
services (legal fees, director fee and investor relation fees) as well as
impairment of prepaid expenses. Total non-cash charges for the six-month period
ended January 31, 2002 include approximately $44,000 of stock issued to purchase
an option to buy an office facility and approximately $65,000 of common stock
issued to pay professional fees and board of director fees. Other non-cash
charges for the six-months ended January 31, 2002 include $555,551 amortization
of debenture discount that was converted into common stock.
SG&A expenses also include non-cash charges of approximately $74,000 for the
three-month period ended January 31, 2003. These non-cash charges for the
three-month period ended January 31, 2003 include common stock issued to pay for
services (legal fees, director fee and investor relation fees) as well as
impairment of prepaid expenses. Total non-cash charges for the three-month
period ended January 31, 2002 that were included SG&A expense included
approximately $34,000 in charges incurred pertaining to legal fees and board of
director fees.
Also included in the SG&A is interest expense related to loans from two
officers/shareholders and capital leases. This interest expense totals
approximately $21,000 and $12,000 for the six and three-months ended January 31,
2003 compared to approximately $23,000 and $7,000 for the six and three-months
ended January 31, 2002, respectively. Interest income from cash reserves totaled
approximately $10,000 and $1,000 for the six and three-months ended January 31,
2003 compared to approximately $17,000 and $8,000 for the six and three-months
ended January 31, 2002, respectively.
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DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment of approximately $244,000 and $126,000
was recognized in the six and three-month period ended January 31, 2003,
respectively. This is compared to approximately $120,000 and $63,000 for the six
and three-month periods ended January 31, 2002, respectively.
Amortization of the goodwill associated with the acquisitions of Premier Express
Claims, Inc. totaled approximately $109,000 and $55,000 for the six and
three-months ended January 31, 2002, respectively. There was no amortization
expense for the six and three-months ended January 31, 2003 as a result of a
change in the accounting rule on amortization of goodwill.
NET LOSS
Net loss for the three-months ended January 31, 2003 totaled approximately
$538,000 compared to approximately $877,000 for the three-months ended October
31, 2002, a 39% decrease. Non-cash expenses created approximately $200,000 and
$238,000 of those losses, respectively. The net loss before non-cash expenses
(cash loss) decreased from approximately $639,000 in the three-month period
ended October 31, 2002 to approximately $338,000 in the three-month period ended
January 31, 2003, or 47% decrease.
Net loss for the six-months ended January 31, 2003 totaled $1.4 million compared
to $1.8 million for the six-months ended January 31, 2002, a 23% decrease.
Non-cash expenses created approximately $438,000 and $903,000 of those losses,
respectively. The net loss before non-cash expenses increased from approximately
$944,000 in the six-month period ended January 31, 2002 to approximately
$977,000 in the six-month period ended January 31, 2003, or 4%. Both the $1.4
million net loss and the $977,000 net loss before non-cash expenses for the
six-months ended January 31, 2003 included a $237,000 restructuring charge that
was incurred in order to save approximately $157,000 per month or $1.9 million
per year.
Net loss for the three-months ended January 31, 2003 totaled approximately
$538,000 compared to approximately $508,000 for the three-months ended January
31, 2002, a 6% increase. Non-cash expenses created approximately $200,000 and
$152,000 of those losses, respectively. The net loss before non-cash expenses
(cash loss) decreased from approximately $356,000 in the three-month period
ended January 31, 2002 to approximately $338,000 in the three-month period ended
January 31, 2003, or 5%. The net loss and cash loss for the three-months ended
January 31, 2003 both included approximately a $109,000 restructuring charge
that was incurred in order to save expenses in the future.
Liquidity and Capital Resources
At January 31, 2003, we had approximately $8,000 of cash in financial
institutions. This is a decrease of approximately $37,000 from January 31, 2002.
We have a working capital deficiency of approximately $5.8 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 proposed financing, 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. The
Company has deferred its plans on moving forward with the equity line of credit
until it determines that other forms of less dilutive financing are not
available.
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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
expected this financing and the equity line of credit to cover the operational
cash shortfall until we are able to reach profitability. This investor had
problems obtaining liquid assets to fund this commitment, but is working on
resolving this issue so he can honor his commitment.
Our management continues to analyze our operations and streamline where
appropriate. In October 2002 and January 2003, we instituted additional cost
cutting, which should result in savings of approximately $157,000 per month or
approximately $1.9 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.
Our current working capital pressures have not had a significant material effect
on our network of shops. However, if we are not able to honor our commitment to
shops it may have a negative impact on our future operations because it may
decrease the number of shops available to complete repairs and may hurt our
ability to generate new accounts.
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 superior 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 January 31, 2003 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
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
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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. This case has been removed
to federal court in South Carolina. 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 approximately $1.4
million of some past, but mostly future commissions relating to an account Mr.
Linka assisted in selling, plus damages for withholding his compensation. We
believe there are meritorious defenses to Mr. Linka's allegations and do not
believe he is entitled to any additional commissions from our accounts. We
further believe that Mr. Linka's computation of damages is unsupportable and
grossly overstated. We plan on vigorously defending this action by Mr. Linka.
Because this dispute is in its preliminary stages, it is too early to predict
with any certainty the ultimate outcome.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
On November 20, 2002, a shareholder and officer of the Company converted $10,000
of debt owed to him by the Company into 84,034 shares of common stock (using a
share price of 12 cents per share).
During the six-month period ended January 31, 2003, employees exercised 396,315
options to purchase shares of the Company's common
stock.
During the six-month period ended January 31, 2003, the Company issued 412,521
shares of common stock in exchange for $118,525 of legal services. During the
six-months ended January 31, 2003, the Company issued 35,535 shares of common
stock to three directors in exchange for their services. The Company charged
operations $6,250, which was equal to the fair market value of the shares when
earned.
During the six-month period ended January 31, 2003, the Company issued
additional options to employees and board members to purchase 658,000 shares of
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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 386,632 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 six-month period ended January 31, 2003, all
94,119 shares were earned resulting in a charge to operations of $24,000.
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. On January 15, 2003, 4 shares of preferred stock with a face value
of $20,000, plus dividends of approximately $4,100 were converted into 301,123
shares of common stock. On February 19, 2003, subsequent to the balance sheet
date, 6 shares of preferred stock with a face value of $30,000, plus dividends
of approximately $6,400 were converted into 484,778 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 15 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: March 12, 2003 By: /s/ Eric Seidel
-----------------------------------------------
Eric Seidel, Chief Executive Officer
By: /s/ Scott Moore
-----------------------------------------------
Scott Moore, Chief Financial Officer
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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: March 12, 2003 /s/ Eric Seidel
-------------------------- -------------------------
President and C.E.O.
Date: March 12, 2003 /s/ Scott Moore
-------------------------- -------------------------
Chief financial Officer
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