UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended January 31, 2004
[ ] 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
Indicate by check whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
[ X ] Yes [ ] No
Indicate by check whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [ X ] No
Indicate the number of shares outstanding of each of the
Issuer's classes of common stock, $.001 Par Value, as of February 29,
2004 was 23,991,746.
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
INDEX TO FORM 10-Q
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PART I
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 2
Balance Sheets 3
Statements of Operations 4
Statement of Stockholders Deficiency 5
Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
Certifications 19
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, 2003.
2
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EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
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January 31, 2004 July 31, 2003
(unaudited)
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ASSETS
Current Assets:
Cash $ 201,941 $ 226,161
Accounts receivable, less allowance for
doubtful accounts of $204,000 and
$242,000 respectively 1,298,921 1,198,764
Due from related parties 95,171 111,821
Prepaid expenses and other current assets 39,456 52,832
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Total current assets 1,635,489 1,589,578
Property and Equipment, net of accumulated
depreciation of $1,300,471 and
$1,034,701, respectively 931,618 1,033,551
Goodwill 1,093,843 1,093,843
Other Assets 40,540 40,540
Deferred Income Tax Asset, net of valuation
allowance of $6,370,000 and $6,315,000,
respectively - -
--------------------------------------------------------------------------------
Total Assets $3,701,490 $3,757,512
================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable and accrued expenses $6,216,205 $6,259,323
Loans payable - stockholders 78,608 117,993
Current portion of capital lease obligation 32,959 33,925
Convertible debenture, net of unamortized
discount 241,308 170,878
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Total current liabilities 6,569,080 6,582,119
Capital Lease Obligation 67,988 86,325
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Total liabilities 6,637,068 6,668,444
Stockholders' Deficiency:
Convertible preferred stock - $.001 par
value; authorized 5,000,000 shares, issued
and outstanding 247 shares, aggregate
liquidation preference of $1,235,000 1 1
Common stock - $.001 par value; authorized
50,000,000 shares, issued and outstanding
23,605,280 shares and 22,828,955 shares,
respectively 23,605 22,829
Additional paid-in capital 18,697,532 18,459,225
Accumulated deficit (21,656,716) (21,392,987)
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Stockholders' Deficiency (2,935,578) (2,910,932)
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Total Liabilities and Stockholders' Deficiency $3,701,490 $3,757,512
================================================================================
See Notes to Consolidated Financial Statements
3
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EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
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Three-month Three-month Six-month Six-month
Period Ended Period Ended Period Ended Period Ended
January 31, 2004 January 31, 2003 January 31, 2004 January 31, 2003
(unaudited) (unaudited) (unaudited) (unaudited)
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Revenue:
Collision repairs management $ 6,494,781 $ 6,940,059 $ 13,873,193 $ 14,196,252
Glass repairs 288,231 144,796 688,541 316,324
Fleet repairs management 200,281 188,514 416,763 406,275
Fees and other revenue 526,066 561,204 1,221,372 1,080,548
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Total revenue 7,509,359 7,834,573 16,199,869 15,999,399
Expenses:
Claims processing charges 6,190,356 6,527,086 13,313,062 13,383,555
Selling, general and administrative 1,407,418 1,719,424 2,834,958 3,785,939
Depreciation and amortization 135,750 125,721 265,772 244,415
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Total expenses 7,733,524 8,372,231 16,413,792 17,413,909
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Net loss $ (224,165) $ (537,658) $ (213,923) $ (1,414,510)
====================================================================================================================================
Adjustment to net loss to compute loss per common
share:
Preferred stock dividends (24,903) (25,847) (49,806) (52,180)
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Net loss applicable to common stock $ (249,068) $ (563,505) $ (263,729) $ (1,466,690)
====================================================================================================================================
Loss per common share - basic and diluted $ (0.01) $ (0.03) $ (0.01) $ (0.08)
====================================================================================================================================
Weighted-average number of common shares outstanding
- basic and diluted 23,569,733 19,562,796 23,513,950 19,172,565
====================================================================================================================================
See Notes to Consolidated Financial Statements
4
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EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
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Six month period ended January 31, 2004 - unaudited
Additional
Preferred Stock Common Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Deficiency
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Balance at July 31, 2003 247 $1 22,828,955 $22,829 $18,459,225 $(21,392,987) $(2,910,932)
Shares issued to board members 184,928 185 75,648 75,833
Accrued dividends on preferred stock (49,806) (49,806)
Issuance of common stock for cash 591,397 591 162,659 163,250
Net loss (213,923) (213,923)
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Balance at January 31, 2004 247 $1 23,605,280 $23,605 $18,697,532 $(21,656,716) $(2,935,578)
====================================================================================================================================
See Notes to Consolidated Financial Statements
5
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EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
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Six-month Six-month
Period ended Period ended
January 31, 2004 January 31, 2003
(unaudited) (unaudited)
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Cash flows from operating activities:
Net loss $ (213,923) $ (1,414,510)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 265,772 244,415
Amortization of discount on debentures 70,430
Common stock issued for services 75,833 148,775
Changes in operating assets and liabilities:
Increase in accounts receivable (100,157) (416,926)
Decrease in due from related parties - 7,988
Decrease in prepaid expenses and other current assets 13,376 41,098
Increase in other assets (9,610)
(Decrease) Increase in accounts payable and accrued expenses (92,924) 1,708,030
Decrease in deferred software subscription revenue (49,022)
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Net cash provided by operating activities 18,407 260,238
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Cash flows from investing activity:
Purchases of property and equipment (163,839) (287,605)
Payments from related parties 18,000
Payments to related parties (1,350)
Principal payments on shareholder loans (39,385)
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Net cash used in investing activities (186,574) (287,605)
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Cash flows from financing activities:
Proceeds from sale of common stock 163,250
Proceeds from exercise of stock options 3,964
Principal payments on capital lease (19,303) (13,471)
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Net cash provided by (used in) financing activities 143,947 (9,507)
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Net decrease in cash (24,220) (36,874)
Cash at beginning of period 226,161 44,655
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Cash at end of period $ 201,941 $ 7,781
====================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 31,517 $ 21,287
====================================================================================================================================
Supplemental disclosure of noncash investing and financing activities:
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Issuance of common stock for amount due to shareholders 10,000
====================================================================================================================================
Issuance of stock for preferred stock dividends 13,722
====================================================================================================================================
Accrued dividends on preferred stock 49,806 52,180
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Equipment acquired by capital lease 90,055
====================================================================================================================================
See Notes to Consolidated Financial Statements
6
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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 January 31, 2004 and its results of operations for the
three and six-month periods ended January 31, 2004 and 2003 and cash flows for
the six-month periods ended January 31, 2004 and 2003. Results of operations for
the three and six-month period ended January 31, 2004 are not necessarily
indicative of the results that may be expected for the year ending July 31,
2004.
The Company derives revenue primarily from collision repairs, glass repairs
and fleet repairs. Revenue is recognized when an agreement between the Company
and its customer exists, the repair services have been completed, the Company's
revenue is fixed and determinable and collection is reasonably assured.
The Company records revenue gross when the Company is the primary obligor
in its arrangements, the Company has latitude in establishing price, the Company
controls what services are provided and where the services will take place, the
Company has discretion in supplier selection, the Company is involved in the
determination of product or service specifications and the Company has credit
risk. The Company records revenue net when situations occur whereby the supplier
(not the Company) is the primary obligor in an arrangement, the amount the
Company earns is fixed or the supplier (and not the Company) has credit risk.
The company accounts for its employee incentive stock option plans using
the intrinsic value method in accordance with the recognition and measurement
principles of Accounting Principles Board Opinion No 25, "Accounting for Stock
Issued to Employees," as permitted by SFAS No. 123. Had the Company determined
compensation expense based on the fair value at the grant dates for those awards
consistent with the method of SFAS 123, the Company's net income (loss) per
share would have been increased to the following pro forma amounts:
Three-month Six-month
period ended period ended
January 31, January 31,
2004 2003 2004 2003
---------- ---------- ---------- ------------
Net loss $(224,165) $(537,658) $(213,923) $(1,414,510)
Deduct total stock based employee
compensation expense determined
under fair value based methods
for all awards (96,039) (188,066) (96,039) (376,131)
---------- ---------- ---------- ------------
Adjusted net loss $(320,204) $(725,724) $(309,962) $(1,790,641)
========== ========== ========== ============
Basic and diluted net loss per
share as reported $(.01) $(.03) $(.01) $(.08)
======= ======= ======= ========
Pro forma basic and diluted
loss per share $(.01) $(.04) $(.02) $(.10)
======= ======= ======= ========
7
Note 2 - Per share calculations
-------------------------------
Basic loss per share is computed as net loss available to common
stockholders' divided by the weighted- average number of common shares
outstanding for the period. Diluted loss per share reflects the potential
dilution that could occur from common shares issuable through stock-based
compensation including stock options, restricted stock awards, warrants and
convertible securities. As of January 31, 2004 and 2003, 7,203,316 and 5,161,452
options and warrants, respectively, were excluded from the diluted loss per
share computation, as their effect would be antidilutive.
Note 3 - Equity Transactions
----------------------------
In August 2003, the Company raised a total of $165,000 from the sale of
equity securities. The Company paid finder's fees and legal fees of $1,750 for a
net of $163,250. In exchange for these funds the Company issued 591,397 shares
of common stock at $0.279 per share.
During the six-months ended January 31, 2004, the Company issued
184,928 shares of common stock to two directors in exchange for their services.
Of the shares of common stock issued 121,849 was a prepayment of an annual
retainer for the fiscal year ending July 31, 2004. These shares are being
expense over the year. The remaining 63,079 shares of common stock were for
director services rendered during the six-months ended January 31, 2004. The
Company charged operations $50,832, which was equal to the fair market value of
the shares when earned.
During the six-month period ended January 31, 2004, the Company issued
options to purchase common stock, where the exercise price of the options are
equal to or greater than the fair market value of the Company's common stock on
the date of the grant, as follows:
o Options to purchase 75,000 shares of common stock to the President and
CEO, in accordance with his contract.
o Options to purchase 50,000 shares of common stock to the Board of
Directors in accordance with their compensation agreement.
o Options to purchase 367,500 shares of common stock to the employees of
eAutoclaims, excluding senior management.
Additionally, options to purchase 401,720 shares of common stock were
canceled.
On October 23, 2003, the Company entered into an agreement to restructure
the preferred stock terms with the existing preferred stockholders. The
agreement provides the Company an opportunity to purchase a certain number of
preferred shares each month should we choose to do so. If the Company does not
purchase preferred shares in a month, and the holders elect to convert some
preferred shares, the holders must give the Company four days notice to arrange
a block trade in order to minimize the impact of the sale of converted shares in
the open market. The agreement also sets a minimum conversion price of $0.20 per
share for the conversion of preferred shares to common shares.
8
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EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 4 - Salary Commitments
---------------------------
During the quarter ended April 30, 2003 the Company entered into new or amended
employment agreements with five of its officers for two years. Minimum annual
commitments under the new agreements are as follows:
Fiscal years ended:
July 31, 2004 $624,700
July 31, 2005 $549,900
July 31, 2006 $148,300
----------
Total $1,322,900
==========
Note 5 - Additional information
-------------------------------
The Company's records and the records of its transfer agent differ with
respect to the number of outstanding shares of the Company's common stock.
According to the transfer agent, the number of shares of common stock
outstanding is approximately 31,500 shares greater than the 23,605,280 indicated
by the Company's records. The number of shares outstanding reflected in the
Company's financial statements do not include these shares or any adjustment
that might be necessary to resolve this difference.
Note 6 - Subsequent Event
-------------------------
On February 2, 2004 the holder of the Company's series A, preferred stock
converted 12 shares of the preferred stock with a face value of $60,000, plus
accrued dividends of $17,293, for 386,466 shares of the Company's common stock.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in this Report on Form 10-Q, that are not purely
historical, are forward-looking information and statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These include statements regarding our expectations,
intentions, or strategies regarding future matters. All forward-looking
statements included in this document are based on information available to us on
the date hereof. It is important to note that our actual results could differ
materially from those projected in such forward-looking statements contained in
this Form 10-Q. The forward-looking statements contained herein are based on
current expectations that involve numerous risks and uncertainties. Assumptions
relating to the foregoing involve judgments regarding, among other things, our
ability to secure financing or investment for capital expenditures, future
economic and competitive market conditions, and future business decisions. All
these matters are difficult or impossible to predict accurately and many of
which may be beyond our control. Although we believe that the assumptions
underlying our forward-looking statements are reasonable, any of the assumptions
could be inaccurate and, therefore, there can be no assurance that the
forward-looking statements included in this form 10-Q will prove to be accurate.
GENERAL
eAutoclaims provide Internet based collision claims services for automobile
insurance companies, Managing General Agents (MGA) and third party claims
administrators (TPA) and self-insured automobile fleet management companies. Our
business strategy is to use the Internet to streamline and lower the overall
costs of automobile repairs and the claims adjustment expenses of our clients.
We believe that our proprietary web-based software products and services make
the management of collision repairs more efficient by controlling the cost of
the repair and by facilitating the gathering and distribution of information
required in the automobile repair process.
eAutoclaims controls the vehicle repair process from the reporting of the
accident through the satisfactory repair of damage. We bring together and
coordinate the activities of the insurance company, its insured, and the various
parties involved in evaluating a claim, negotiating the cost of the repair, and
performing necessary repair services. We have contracted with approximately
2,500 body shops throughout the United States to repair vehicles. These shops,
referred to as our "provider network," provide us 10% to 15% discount on the
vehicle repair because of the volume of repairs we provide to them. Because we
audit every line of every repair estimate and because we share a portion of the
volume discount with our customer, we are able to lower the average cost being
paid by our customer.
Our product, eJusterSuite, provides both outsourcing and ASP (application
service provider) solutions. The outsourcing solution requires eAuto personnel
to audit and coordinate the vehicle repair. The ASP solution allows the customer
to use our technology independent of our personnel; thereby, providing a
solution for the largest insurance companies that already have the staff to
process and control the claims process, while paying us a fee for every
transaction that is run through our system. The ASP model will provide margin
without the associated personnel and operating costs.
eJusterSuite also builds in service partners that can provide the needed
services such as Independent adjustors, car rentals, tow trucks and accident
reporting by only clicking an Icon that is added to the screen of the customer's
desk top in the current system. The system automatically provides the service
partner the information already in our system via the Internet. The service
partner will systematically provided the requested services and pay us a fee for
each assignment they receive through our system. This process significantly
reduces the customers' time and cost to process claims as well as reduces the
number of mistakes that occur in a manual process. In most cases it also reduces
the cost of the service partner to obtain and process the transaction, even
10
after paying our transaction fee. This revenue provides additional margin
without the additional personnel and operating costs.
For our outsourcing customers, we approve all repair shops for inclusion in
our network and determine which repair shop will ultimately perform the repairs.
We receive a discount, ranging from 10% to 15%, from repair facilities that are
members of our provider network. The revenues generated from the vehicle repair
facilities through our provider network accounts for 92% and 93% of the revenue
for the six and three-months ended January 31, 2004, respectively. We are paid
on a per claims basis from our insurance and fleet company customers for each
claim that we process through our system. These fees vary from $10 to $60 per
claim depending upon the level of service required. For the six and three-months
ended January 31, 2004, 8% and 7%, respectively, of the revenue has been
received from claims processing fees and other income. Other income consists
mostly of the sale of estimating software, fees from service partners (ASP fees)
and subrogation income.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and the results of
our operations are based upon our consolidated financial statements and the data
used to prepare them. The Company's financials have been prepared in accordance
with accounting principles generally accepted in the United States. On an
ongoing basis we re-evaluate our judgments and estimates including those related
to revenues, bad debts, long-lived assets, and income taxes. We base our
estimates and judgments on our historical experience, knowledge of current
conditions and our beliefs of what could occur in the future considering
available information. Actual results may differ from these estimates under
different assumptions or conditions. Our estimates are guided by observing the
following critical accounting policies.
Revenue recognition
The Company derives revenue primarily from collision repairs, glass repairs
and fleet repairs. Revenue is recognized when an agreement between the Company
and its customer exists, the repair services have been completed, the Company's
revenue is fixed and determinable and collection is reasonably assured.
The Company records revenue gross in the areas of collision and fleet
repairs. It also records at gross in certain glass repair transactions. Revenue
is recorded at gross in these areas when:
o The Company is the primary obligor in its arrangements. The Company is
responsible for the quality of the repair and must satisfy the customer if
the body shop fails to repair the vehicle properly.
o The Company has latitude in establishing price. The price is established
based on the Company's audit of the repair estimate submitted by the repair
facility. The repair facility cannot begin the repair until an agreed upon
price is established between the facility and the Company for the repair.
o The Company 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 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
11
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, 2004 the allowance for doubtful accounts was $204,000.
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 $6,370,000 at January
31, 2004. The deferred tax asset consists mainly of net operating losses
previously realized and stock compensation currently not deductible. The
valuation allowance was necessary because the use of these deductions is not
reasonably assured since the company just recently 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, 2004.
12
RESULTS OF OPERATIONS
For the six and three months ended January 31, 2004 compared to the six and
three-months ended January 31, 2003.
Revenue
Total revenue for the six-months ended January 31, 2004 was approximately
$16.2 million, which is a 1% increase from approximately $16.0 million of total
revenue for the six-months ended January 31, 2003. Total revenue for the
three-months ended January 31, 2004 was approximately $7.5 million. This
represents a 4% decrease from approximately $7.8 million of total revenue for
three-months ended January 31, 2003. The change in the six and three-month total
revenue is the net effect of changes in collision repair revenue, glass repair
revenue and fees and other revenue as described below.
Collision repair management revenue decreased 2% and 6% for the six and
three-months ended January 31, 2004 compared to the six and three-months ended
January 31, 2003, respectively. The decrease in collision repair management
revenue is primarily the result of the decrease in claims from our two largest
customers. In October 2003, our largest customer announced that they were
selling half of their auto physical damage insurance book of business to another
insurance carrier. We have started to see a decrease in their business as a
result of that announcement. We have experienced approximately a $758,000 or 15%
quarterly decrease in the revenue from that customer between the quarters ended
July 31, 2003 and January 31, 2004. We expect to see the other 35% decrease
begin gradually starting March 2004. The decrease is expected to occur
one-twelfth per month for twelve months until it reaches $1.7 million per
quarter. Management also expects to replace that business over the same time
period. A 12% decrease in revenue from the second largest customer occurred
because of a change in their state's legislation regarding a special type of
insurance policy requiring a direct repair networks. The Company doesn't expect
further reduction in revenue resulting from this legislation. Because of the
competitive nature of our business and the uncertainty of bring on enough
business to offset the loss of business, we may be unable to replace revenues
quickly enough to sustain profitability. However, the company's management will
cut expenses in the event we are unable to sustain profitability.
Fees and other revenue increased 13% and decreased 6% for the six and
three-months ended January 31, 2004 compared to the three-months ended January
31, 2003, respectively. The six-month increase is mainly a result of the
increase in the service partner click fees and the sale of estimating software
to the Company's network repair facilities, and to a lesser extent an increase
in file handling fees from customers. The three-month decrease is net effect of
the increase in service partner click fees and a decrease in the sale of
estimating software. Management believes that this decrease in estimating
software is temporary.
Glass repair revenues increased 118% and 99% for the six and three-months
ended January 31, 2004 compared to the six and three-months ended January 31,
2003. This increase is due to sales generated by a new customer. We negotiated
lower pricing from one of our larger glass vendors, which has helped our
competitiveness in this market. The glass repair business complements our core
business and allows our customers to use a single source for all their repair
needs.
During the six and three-months ended January 31, 2004, we derived 54% and
55% from one customer, respectively, and 14% of our revenues from a second
customer during those same time periods. As described above, our largest
customer sold one-half of their auto physical damage insurance business.
13
Claims Processing Charges
Claims processing charges include the costs of collision and glass repairs
paid to repair shops within our repair shop network, as well as the cost of the
estimating software sold to the Company's network of shops. Claims processing
charges for the six and three-months ended January 31, 2004 was $13.3 million
and $6.2 million. This was 82% of total revenue in both periods, compared to 84%
and 83% for six and three-months ended January 31, 2003.
We are dependent upon our third party collision repair shops for insurance
claims repairs. eAutoclaims currently has approximately 2500 affiliated repair
facilities in its network for claims repairs. We electronically and manually
audit individual claims processes to their completion using remote digital
photographs transmitted over the Internet. However, if the number of shops or
the quality of service provided by collision repair shops fall below a
satisfactory level leading to poor customer service, this could have a harmful
effect on our business.
Selling, General And Administrative (SG&A) Expenses
SG&A expense is mainly comprised of salaries and benefits, facilities
related expenses, telephone charges, professional fees, advertising costs, and
travel expenses. SG&A expenses for the six and three-months ended January 31,
2004 totaled approximately $2.8 and $1.4 million, respectively. This is compared
to approximately $3.8 and $1.7 million for the six and three-months ended
January 31, 2003. The decrease in SG&A expenses of approximately $951,000 and
$312,000 for the six and three-month periods ended January 31, 2004 is a result
of the more efficient use of resources through technology and the restructuring
of the corporate structure.
Payroll and benefit related expenses for the six-months ended January 31,
2004 and 2003 totaled approximately $1.9 million and $2.4 million, which is
approximately a 20% decrease. Payroll and benefit related expenses for the
three-months ended January 31, 2004 and 2003 totaled approximately $938,000 and
$1,075,000, which is approximately a 13% decrease. These decreases are the
result of personnel and salary cuts made during the last fiscal year.
SG&A expenses included a $35,000 settlement on a lawsuit with Decision
Support Services (DSS). In April 2003, DSS filed an arbitration demand against
the Company for $2.3 million. While management believed the Company had valid
defenses, it settled the case instead of incurring additional legal fees. The
legal fees charged during the three-month period relating to this arbitration
totaled approximately $25,000 for a total one time charge of approximately
$60,000 during the three-months ended January 31, 2004.
SG&A expenses also include non-cash charges of approximately $146,000 and
$84,000 for the six and three-month period ended January 31, 2004, respectively.
These non-cash charges for the six and three-month periods ended January 31,
2004 include approximately $70,000 and $35,000 of amortization of debenture
discount and approximately $76,000 and $49,000 of common stock issued to pay
fees to directors, respectively. SG&A expenses also include total non-cash
charges for the six and three-month period ended January 31, 2003 of
approximately $149,000 and $30,000. The non-cash charges include common stock
issued to pay for services (legal fees, director fee and investor relation
fees).
Also included in the SG&A is interest expense related to a loan from a
shareholder, capital leases and a convertible note payable. This interest
expense totals approximately $31,000 and $14,000 for the six and three-months
ended January 31, 2004 compared to approximately $21,000 and $12,000 for the six
and three-months ended January 31, 2003. Interest income from cash reserves
totaled approximately $2,000 and $1,000 for the six and three-months ended
January 31, 2004 compared to approximately $10,000 and $1,000 for the six and
three-months ended January 31, 2003, respectively.
14
Depreciation
Depreciation of property and equipment of approximately $266,000 and
$136,000 was recognized in the six and three-months ended January 31, 2004. This
is compared to approximately $244,000 and $126,000 for the six and three-months
ended January 31, 2003.
Net Loss
The net loss for the six and three-months ended January 31, 2004 totaled
approximately $214,000 and $224,000 compared to a net loss of approximately
$1,415,000 and $538,000 from the six and three-months ended January 31, 2003, an
improvement of approximately $1,201,000 and $314,000, respectively.
The net loss amounts include non-cash expenses of approximately $412,000
and $220,000 for the six and three-months ended January 31, 2004, respectively.
The net loss amounts for the six and three-months ended January 31, 2003 include
non-cash expenses of approximately $393,000 and $156,000, respectively.
Net cash income (net of non-cash items) for the six-months ended January
31, 2004 totaled approximately $198,000 compared to a net cash loss of
approximately $1,021,000 from the six-months ended January 31, 2003, an
improvement of approximately $1,219,000.
The $60,000 paid for the DSS litigation settlement and legal fees described
above caused the Company to have a $4,000 cash loss for the three-month period
ended January 31, 2004. Net cash loss for the three-months ended January 31,
2003 totaled approximately $382,000, an improvement of approximately $378,000.
The improvement in both the six and three-month periods is a result of reduced
costs and higher margins.
Liquidity and Capital Resources
At January 31, 2004, we had approximately $202,000 in cash. This is a
decrease of approximately $24,000 from July 31, 2003. We have a working capital
deficiency of approximately $4.9 million. The primary source of our working
capital during the six and three-month periods ended January 31, 2004, was from
cash provided by operations and the sale of $165,000 of equity securities.
However, there is no assurance that we will be able to continue to provide cash
through operations or the sale of additional securities.
In August 2003, the Company raised a total of $165,000 from the sale of
equity securities. The Company paid finder's fees and legal fees of $1,750 for a
net of $163,250. In exchange for these funds the Company issued 591,397 shares
of common stock at $0.279 per share. There were no warrants or other
consideration included in these transactions.
On October 27, 2003 the Company also received a commitment letter from a
current investor to invest an additional $1,000,000-$2,000,000 into eAutoclaims
if the funds were needed.
With the potential loss of business from our largest customer, additional
financing may be necessary. If revenues grow it will provide it's own working
capital, but because revenue growth is not guaranteed, we have solicited
proposals for additional financing. We cannot assure you 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.
15
We believe that cash generated from operations and additional financing, if
necessary, will be sufficient to meet our working capital requirements for the
next 12 months. This estimate is a forward-looking statement that involves risks
and uncertainties. The actual time period may differ materially from that
indicated as a result of a number of factors so that we cannot assure that our
cash resources will be sufficient for anticipated or unanticipated working
capital and capital expenditure requirements for this period.
Our principle commitments at January 31, 2004 consist of monthly operating
rental payments, compensation of employees and accounts and notes payable.
Inflation
We believe that the impact of inflation and changing prices on our
operations since the commencement of our operations has been negligible.
Seasonality
The Company typically experiences a slow down in revenue during November
and December each year. Consumers tend to delay repairing their vehicles during
the holidays.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Currently, we do not have any significant market risk. Market risk is the
potential loss arising from adverse change in market rates in prices such as
foreign currency exchange and interest rates. We do not have any foreign
currency exchange rate exposure. We do not have any long-term debt from
financial institutions. We do not hold any derivatives or other financial
instruments for trading or speculative purposes. Our financial position is not
affected by fluctuations in currency against the U.S. dollar since all of our
sales and assets occur within the United States.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of the design and operations of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as of January 31, 2004. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective such that
the material information required to be included in our Securities and Exchange
Commission ("SEC") reports is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms relating to
eAutoclaims.com, Inc., including our consolidated subsidiaries, and was made
known to them by others within those entities, particularly during the period
when this report was being prepared.
(b) Changes in internal controls over financial reporting.
In addition, there were no significant changes in our internal control over
financial reporting that could significantly affect these controls during the
quarter ended January 31, 2004. We have not identified any significant
deficiency or materials weaknesses in our internal controls, and therefore there
were no corrective actions taken.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 2003, we received a letter requiring arbitration in the state of
California on our contract with Decision Support Services (DSS). DSS alleged
that the Company owed them $2.3 million for breach of contract. While management
believed the Company had valid defenses, it settled the claim for $35,000
instead of incurring additional legal fees.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
In August 2003, the Company raised a total of $165,000 from the sale of
equity securities. The Company paid finder's fees and legal fees of $1,750 for a
net of $163,250. In exchange for these funds the Company issued 591,397 shares
of common stock at $0.279 per share. There were no warrants or other
consideration included in these transactions.
During the six-months ended January 31, 2004, the Company issued 184,928
shares of common stock to two directors in exchange for their services. Of the
shares of common stock issued 121,849 was a prepayment of an annual retainer for
the fiscal year ending July 31, 2004. These shares are being expense over the
year. The remaining 63,080 shares of common stock were for director services
rendered during the six-months ended January 31, 2004. The Company charged
operations $50,832, which was equal to the fair market value of the shares when
earned.
During the six-month period ended January 31, 2004, the Company issued
options to purchase common stock, where the exercise price of the options are
equal to or greater than the fair market value of the Company's common stock on
the date of the grant, as follows:
o Options to purchase 75,000 shares of common stock to the President and
CEO, in accordance with his contract.
o Options to purchase 50,000 shares of common stock to the Board of
Directors in accordance with their compensation agreement.
o Options to purchase 367,500 shares of common stock to the employees of
eAutoclaims, excluding senior management.
Additionally, options to purchase 401,720 shares of common stock were
canceled.
On October 23, 2003, the Company entered into an agreement to restructure
the preferred stock terms with the existing preferred stockholders. The
agreement provides the Company an opportunity to purchase a certain number of
preferred shares each month should we choose to do so. If the Company does not
purchase preferred shares in a month, and the holders elect to convert some
preferred shares, the holders must give the Company four days notice to arrange
a block trade in order to minimize the impact of the sale of converted shares in
the open market. The agreement also sets a minimum conversion price of $0.20 per
share for the conversion of preferred shares to common shares.
On February 2, 2004 the holder of the Company's series A, preferred stock
converted 12 shares of the preferred stock with a face value of $60,000, plus
accrued dividends of $17,293, for 386,466 shares of the Company's common stock.
17
ITEM 3. Defaults Upon Senior Securities -
None.
ITEM 4. Submission of Matters to a Vote of Security Holders -
None.
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description
------- ------------
31 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley
Act of 2002.
32 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
October 9, 2003 - Item 5/Item 9 - Potential loss of business from Royal
& Sun Alliance
November 17, 2003 - Item 5 - Amendment to terms of preferred stock
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 9, 2004 By: /s/ Eric Seidel
-------------
--------------------------------------
Eric Seidel, Chief Executive Officer
By: /s/ Scott Moore
--------------------------------------
Scott Moore, Chief Financial Officer
18
EXHIBIT 31
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 9, 2004 /s/ Eric Seidel
--------------- ----------------------------------------
President and C.E.O.
Date: March 9, 2004 /s/ Scott Moore
--------------- ---------------------------------------
Chief financial Officer
19
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of eAutoclaims.com, Inc. (the
"Company") on Form 10-QSB for the period ending January 31, 2004 as filed with
the Securities and Exchange Commission on March 15, 2004 (the "Report"), I, Eric
Seidel, the President and CEO of the Company, certify, pursuant to 18 U.S.C. ss.
1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of
eAutoclaims.com, Inc.
/s/ Eric Seidel
Print Name: Eric Seidel
Title: President & CEO
March 9, 2004
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of eAutoclaims.com, Inc. (the
"Company") on Form 10-QSB for the period ending January 31, 2004 as filed with
the Securities and Exchange Commission on March 15, 2004 (the "Report"), I,
Scott Moore, the Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of
eAutoclaims.com, Inc.
/s/ Scott Moore
Print Name: Scott Moore
Title: Chief Financial Officer
March 9, 2004
20