EACC eAutoclaims Inc (CE)

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN 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.

We control 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 2500 body shops throughout the United States to repair vehicles. These shops, referred to as our “provider network,” provide us a 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 our 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 provides 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 provide 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 many cases it also reduces the cost of the service partner to obtain and process the transaction, even after paying our transaction fee. This revenue provides additional margin without the additional personnel and operation costs.

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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 from repair facilities that are members of our provider network. The revenues generated from the vehicle repair facilities through our provider network accounted for 71% and 74%, respectively, of the revenue for the three and six-months ended January 31, 2008. We are paid a fee on a per claims basis from our insurance and fleet company customers for each claim that we process through our system. For the three and six-months ended January 31, 2008, 29% and 26% respectively, of the revenue has been received from claims processing fees and other revenue. Other revenue consists mostly of the sale of estimating software, license fees, fees from taking first notice of loss reports, fees from service partners (ASP fees) and subrogation income.

We have focused more resources on marketing products where we serve in the capacity of an Application Service Provider (ASP). Our applications are user-friendly, customizable to meet the client’s unique workflow, and are scalable. The applications currently offered under the ASP category include eJusterSuite, AuditPro, the Appraisal Management System, eDataTransfer and several custom applications for automotive collision and auto glass industry repair providers.

Our AuditPro product is a rules-based estimate auditing application that has been well received by existing clients and prospects, which has allowed us to grow our high margin ASP revenue. Large carriers can use AuditPro as a stand-alone model that can be integrated within their organization without the need for significant initial cost and without materially changing their internal workflow.

Critical Accounting Policies

Our discussion and analysis of our financial condition and the results of our operations are based upon our financial statements and the data used to prepare them. Our financial statements 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 for collision and fleet repairs and for certain glass repairs. This occurs 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 of repair costs for certain glass repairs. Revenue is recorded 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 records revenue generated from a co-marketing agreement net of the repair costs because in the agreement the Company is performing a fee for service. The party to the agreement sells and markets the Company’s services to the insurance companies, who are its customers and it collects the revenue and pays the repair shop.

The Company derives revenue from the sale of estimating software to shops within the Company’s repair shop network. Since the Company only resells and does not service the estimating software, the revenue and cost of revenue from the transaction is recognized on the date of shipment.

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We maintain an allowance for doubtful accounts for losses that we estimate will arise from the customers’ inability to make required payments. Collectability of the accounts receivable is estimated by analyzing historical bad debts, specific customer creditworthiness and current economic trends. At January 31, 2008 the allowance for doubtful accounts was approximately $49,000.

Accounting for income taxes

We record a valuation allowance to reduce our 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 $10,380,000 as of January 31, 2008. The deferred tax asset consists mainly of net operating losses previously not 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 reached profitability.

Valuation of long-lived assets

We identify and record impairment on long-lived assets, including goodwill, when events and circumstances indicate that such assets have been impaired. We periodically evaluate the recoverability of our long-lived assets based on expected undiscounted cash flows, and recognize impairment, if any, based on expected discounted cash flows. Factors we consider important which could trigger an impairment review include the following:

Management’s Operating Plan

We continue to pursue our growth strategy, the main points of which are outlined below, and have achieved success in fiscal 2008 in certain specific areas. We have recently concluded a modification to a client contract whereby we have migrated their business to our ASP model, thereby reducing significantly the costs associated with processing their business transactions. We have also completed the stand alone version of our “Audit Pro” estimating tool and anticipate deploying this product to several new clients beginning in the third quarter of fiscal 2008. We continue to enhance our current co-marketing relationships and continue to explore additional opportunities with other partners, both in the insurance industry and in compatible industries, which we anticipate will provide significant opportunities for revenue growth in the latter part of fiscal 2008 and into fiscal 2009. We have also substantially completed our business to consumer program and expect to have it deployed by the end of the third quarter of fiscal 2008.

Specifically, the main points of our growth strategy are as follows:

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Results of Operations

For the three and six-months ended January 31, 2008 compared to the three and six-months ended January 31, 2007.

Revenue

Total revenue for the three and six-months ended January 31, 2008 was approximately $1.6 million and $3.2 million, respectively. This is compared to the $3.4 million and $7.4 million, respectively, in revenue reported for the three and six-months ended January 31, 2007. During the three and six-months ended January 31, 2008 we derived 36% and 30% of our revenue from two customers. In April 2007, our formerly largest client completed their business migration off of our platform, thus ending our contractual relationship. This was the main reason for the decrease in total revenue as reported for the three and six-months ended January 31, 2008 as compared to the same time period in fiscal 2007.

For the three and six-months ended January 31, 2008, collision repair management revenue, including glass repair revenue, was approximately $.9 million and $2.0 million, respectively compared to $2.6 million and $5.8 million, respectively, for the three and six-months ended January 31, 2007. This decrease in revenue is the result of the loss of business from our formerly largest customer as described above as well as a reduction in revenue earned from customers acquired through our co-marketing agreement. As previously stated, the revenue from our co-marketing agreement is recorded at net, which significantly reduces the amount of gross revenue reported, although the overall gross margin is increased as a result of not having to pay the shops for the work performed.

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Fleet repair revenue decreased by approximately $26,000 from approximately $207,000 for the three months ended January 31, 2007 to approximately $181,000 for the three months ended January 31, 2008. For the six months ended January 31, 2008, fleet repair revenue decreased by approximately $47,000 to approximately $381,000 from approximately $428,000 for the six months ended January 31, 2007. This decrease is due to normal business fluctuations from our existing fleet customers.

For the three and six-months ended January 31, 2008, fees and other revenue decreased approximately $112,000 and $362,000, respectively as compared to the three and six-months ended January 31, 2007. The year to date decrease is primarily the result of earning approximately $120,000 less revenue this year from current clients for taking first notice of loss reports, less transaction fee revenue and less gross revenue for sales of estimatic software. The sales of estimatic software decreased by approximately $94,000 and $200,000, respectively, for the three and six-months ended January 31, 2008 as compared to the three and six-months ended January 31, 2007. The primary reason for this decrease is due to a change in the estimatic sales program. The old program required the purchase and resale of each unit sold, whereas under the terms of the new program, we are paid a net commission for the units sold which results in lower revenue being reported for each sale. Transaction, license, subrogation and file handling fee revenue increased by approximately $33,000 for the three months ended January 31, 2008 and decreased by approximately $40,000 for the six-months ended January 31, 2008 as compared to the three and six-months ended January 31, 2007. The increase in fee revenue for the three months ended January 31, 2008 compared to the same period in fiscal 2007 is attributable to increased license fees received from a new client.

Claims Processing Charges

Claims processing charges include the costs of collision, fleet and glass repairs paid to repair shops within our repair shop network. Claims processing charges for the three and six-months ended January 31, 2008, were approximately $876,000 and approximately $1.8 million, respectively. This compares to approximately $2.3 million and approximately $5.2 million, respectively, for the three and six-months ended January 31, 2007. Claims processing charges are primarily the costs of collision repairs paid by us to our collision repair shop network.

We are dependent upon our third party collision repair shops for insurance claims repairs. We currently have approximately 2,500 affiliated repair facilities in our 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 and internet charges, legal and other professional fees, and travel expenses. SG&A expenses for the three and six-months ended January 31, 2008 were approximately $1.0 million and $2.2 million, respectively. This represents decreases of 31% and 23%, respectively, from the approximately $1.5 million and the approximately $2.8 million for the three and six-months ended January 31, 2007. Payroll and benefit related expenses for the three and six-months ended January 31, 2008 totaled approximately $.6 million and $1.4 million respectively, compared to approximately $1.1 million and $2.0 million, respectively for the three and six-months ended January 31, 2007. The decrease in payroll expense and overall SG&A expense is primarily the result of the implementation of our staff reductions, which were put in place in April 2007, as well as expense reductions in telephone expense, professional fees and travel expense.

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SG&A expenses also include non-cash charges. These non-cash charges, excluding depreciation and changes to the bad debt reserve, totaled approximately $30,000 and $63,000 for the three and six-months ended January 31, 2008. The non-cash charges for the three months ended January 31, 2008 included approximately $37,000 of common stock issued to pay fees to directors for services rendered and to members of management as per their employment agreements and approximately $1,000 expensed as result of implementing SFAS 123R, which requires expensing of stock options as they become vested. In addition, a reduction to non-cash expense of approximately $27,000 was realized as a result of recognizing the gain on our building sale-leaseback transaction. Approximately $2,000 was amortized for the discount on the notes payable and $17,000 was expensed for the impairment of assets. For the three month period ending January 31, 2007 the non-cash charges, excluding depreciation and changes in the bad debt reserve, totaled approximately $30,000. This included approximately $51,000 of common stock issued to pay fees to directors and management according to terms of their service. In addition, a charge of approximately $6,000 was taken as a result of implementing SFAS 123R. We also recognized a reduction to non-cash expense of approximately $27,000 for the three months ended January 31, 2007 as a result of recognizing the gain on our building sale-leaseback transaction.

For the six months ended January 31, 2008, non-cash charges, excluding depreciation and changes to the bad debt reserve, totaled approximately $63,000. This included approximately $69,000 for stock issued to directors and management according to agreements for services rendered, approximately $5,000 for amortization on the discount for the notes payable, approximately $26,000 for expensing of stock options according to SFAS 123R and $17,000 for the impairment of assets. A reduction to non-cash expense of approximately $54,000 was realized as a result of recognizing the gain on our building sale-leaseback transaction. For the six months ended January 31, 2007, non-cash charges, excluding depreciation and changes to the bad debt reserve, totaled approximately $169,000. This included approximately $211,000 for stock issued to directors for services rendered and management according to the terms of their employment agreements and approximately $12,000 for expensing of stock options according to SFAS 123R. A reduction to non-cash expense of approximately $54,000 was realized as a result of recognizing the gain on our building sale-leaseback transaction.

Also included in the SG&A is interest expense related to capital leases and notes payable. For the three and six-months ended January 31, 2008, this interest expense totaled approximately $26,000 and $52,000 respectively, of which approximately $17,000 and $33,000 respectively, was for the notes payable. This compares to interest expense on capital leases of approximately $4,000 and $9,000for the three and six-months ended January 31, 2007.

Depreciation

Depreciation of property and equipment of approximately $109,000 and $217,000 respectively, was recognized in the three and six-months ended January 31, 2008. This is compared to approximately $115,000 and $227,000 respectively, for the three and six-months ended January 31, 2007.

Net Income/Loss

For the three and six-months ended January 31, 2008 net loss totaled approximately $434,000 and $1,086,000, respectively. This amount includes approximately $27,000 and $54,000 respectively, of the gain recognized on our building sale-leaseback transaction and approximately $139,000 and approximately $280,000 respectively, of non-cash charges, including depreciation. Net loss for the three and six-months ended January 31, 2007 was approximately $516,000 and approximately $802,000 respectively, including approximately $27,000 and $54,000 respectively of the gain recognized on our building sale-leaseback transaction and approximately $145,000 and approximately $396,000 respectively, of non-cash charges, including depreciation.

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Liquidity and Capital Resources

At January 31, 2008, we had approximately $353,000 in cash and cash equivalents. This is a decrease of approximately $442,000 from July 31, 2007. We have a working capital deficiency of approximately $2.3 million as of January 31, 2008 compared to a deficiency of approximately $2.9 million as of January 31, 2007.

We have a $75,000 line of credit established with a bank. Under the terms of the agreement, we may borrow any amount up to the maximum value of the line and will pay monthly interest at a rate of prime plus 7% on the unpaid balance. As of January 31, 2008, we had no outstanding borrowings against this credit line.

We believe that cash generated from operations, 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 you that our cash resources will be sufficient for anticipated or unanticipated working capital and capital expenditure requirements for this period. During the period ended January 31, 2008 we have added $410,000 to working capital as a result of receiving a non-interest bearing loan from a shareholder in the amount of $100,000 and by restructuring our agreement with the beneficiary of an outstanding Letter of Credit which reduced the requirement from $730,000 to $420,000 and allowed $310,000 to be returned to working capital. We are currently working on obtaining additional funding through the exercise of outstanding warrants, as well as exploring additional options to secure the required funds. 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 or that we will be able to generate capital from any future sale of our securities.

We lease equipment and facilities under non-cancelable capital and operating leases expiring on various dates through 2012. The main operating lease consists of a 7-year lease for 30,000 square feet of a 62,000 square foot facility. This lease runs through December 2012. Our rent for 2008, including applicable taxes, is $23,005 per month and increases 3% each year through the remaining life of the lease.

Inflation

We believe that the impact of inflation and changing prices on our operations since the commencement of our operations has been negligible.

Seasonality

We typically experience a slow down in revenue during November and December each year. Consumers tend to delay repairing their vehicles during the holidays.

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