**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-QSB**

 
| **(Mark One)**                                                                                                                        |
|---------------------------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                            |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|                                                                                                                                  |   |   |
| **For the quarterly period ended November 30, 2003**                                                                             |
|                                                                                                                                  |   |   |
| **or**                                                                                                                                |
|                                                                                                                                  |   |   |
| **o**                                                                                                                                 |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|                                                                                                                                  |   |   |
| **For the transition period  from        to        ** |
|                                                                                                                                  |
| **Commission File Number 0-11791**                                                                                                    |

 

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**PURCHASESOFT, INC.**

(Exact Name of Small BusinessIssuer as Specified in Its Charter)

 

| **DELAWARE**                                                     |   | **13-2897997**                         |
|------------------------------------------------------------------|--------|----------------------------------------|
| (State or  Other Jurisdiction of  Incorporation or Organization) |   | (I.R.S.  Employer  Identification No.) |
|                                                             |   |                                   |
| **7514 Girard Ave Ste 1440  La Jolla, CA 92037**                 |
| (Address of  Principal Executive Offices)                        |
|                                                             |   |                                   |
| **(858) 456-6608**                                               |
| (Issuer’s  Telephone Number, Including Area Code)           |
|                                                                  |        |                                        |  |  |

 

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Check whether the issuer: (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

 

**STATE THE NUMBER OF SHARESOUTSTANDING OF EACH OF THE ISSUER’S CLASSES OF COMMON EQUITY, AS OF THE LATESTPRACTICABLE DATE.**

** **

| **Class**                                |   | **Outstanding at January10, 2004** |
|------------------------------------------|--------|------------------------------------|
| COMMON  STOCK, PAR VALUE $0.01 PER SHARE |   | 33,287,267  SHARES                 |

 

 

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**PURCHASESOFT,INC.**

**INDEX**

 
| **Item  Number** |                                                                                                                     |   |
|------------------|--------------------------------------------------------------------------------------------------------------------------|--------|
|             |                                                                                                                     |   |
| PART I.          | FINANCIAL INFORMATION                                                                                                    |   |
| Item 1.          | Financial Statements                                                                                                     |   |
|             | Balance Sheet as of November 30, 2003                                                                               |   |
|             | Statement of Operations  For the period from June 1, 2003 to November 30, 2003                                 |   |
|             | Statement of Changes in Net Liabilities in  Liquidation  For the period from June 1, 2002 to November 30, 2002 |   |
|             | Statement of Cash Flows  For the period from June 1, 2003 to November 30, 2003                                 |   |
|             | Notes to  the Financial Statements                                                                                       |   |
| Item 2.          | Management’s Discussion and Analysis of  Financial Condition                                                        |   |
| Item 3.          | Controls and Procedures                                                                                                  |   |
| PART II.         | OTHER INFORMATION                                                                                                        |   |
| Item 1.          | Legal Proceedings                                                                                                        |   |
| Item 6.          | Exhibits and Reports on Form 8-K                                                                                         |   |
| Signatures       |                                                                                                                     |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**ITEM1. FINANCIAL STATEMENTS**

**COMPANY FOR WHICH REPORT IS FILED:PURCHASESOFT, INC. (THE “COMPANY”)**

 

**PURCHASESOFT,INC.**

**BALANCE SHEET (Unaudited)**

**November 30,2003**

 
| **ASSETS**                                                                                                  |   |        |    |
|-------------------------------------------------------------------------------------------------------------|--------|-------------|---------|
| Current Assets                                                                                              |   |        |    |
| Cash                                                                                                        |   | $           | 16,362  |   |
| Accounts Receivable                                                                                         |   | 6,193       |    |
| Total current assets                                                                                        |   | 22,555      |    |
|                                                                                                        |   |        |    |
| Property and equipment, net of accumulated depreciation of $421                                             |   | 842         |    |
|                                                                                                        |   |        |    |
| Goodwill                                                                                                    |   | 150,803     |    |
|                                                                                                        |   |        |    |
| **TOTAL ASSETS**                                                                                            |   | $           | 174,200 |   |
|                                                                                                        |   |        |    |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                               |   |        |    |
| Current Liabilities                                                                                         |   |        |    |
| Accounts payable and accrued expenses                                                                       |   | $           | 33,371  |   |
| Deferred revenue                                                                                            |   | 10,964      |    |
| Short-term note payable                                                                                     |   | 110,000     |    |
| Total current liabilities                                                                                   |   | 154,335     |    |
|                                                                                                        |   |        |    |
| Stockholders’ Equity                                                                                   |   |        |    |
| Common stock, $0.01 par value, 50,000,000 shares authorized,  33,287,267 shares issued and outstanding |   | 332,873     |    |
| Paid-in capital                                                                                             |   | 43,155,822  |    |
| Accumulated deficit                                                                                         |   | (43,379,798 | )       |
|                                                                                                        |   | 108,897     |    |
| Treasury stock (4,780 shares), at cost                                                                      |   | (89,032     | )       |
| Total stockholders’ equity                                                                             |   | 19,865      |    |
|                                                                                                        |   |        |    |
| **TOTAL LIABILITIES AND STOCKHOLERS’ EQUITY**                                                          |   | $           | 174,200 |   |

 

3

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**PURCHASESOFT,INC.**

**STATEMENT OF OPERATIONS****(Unaudited)**

**Forsix months ending November 30, 2003**

 
|                                   |   | **Three  months ended  November 30, 2003** |    | **Six months  ended  November 30, 2003** |   |
|----------------------------------------|--------|-------------------------------------------------|---------|-----------------------------------------------|--------|
| **Revenue:**                           |   |                                            |    |                                          |   |
| Services                               |   | $                                               | 6,043   |                                          | $      | 10,293 |   |
| Total revenue                          |   | 6,043                                           |    | 10,293                                        |   |
|                                   |   |                                            |    |                                          |   |
| **Costs and expenses:**                |   |                                            |    |                                          |   |
| Cost of service revenue                |   | 4,733                                           |    | 8,333                                         |   |
| Sales and marketing                    |   | 105                                             |    | 369                                           |   |
| General and administrative             |   | 51,782                                          |    | 121,228                                       |   |
| Research and development               |   | —                                          |    | 1,625                                         |   |
| Total costs and expenses               |   | 56,620                                          |    | 131,555                                       |   |
|                                   |   |                                            |    |                                          |   |
| **Operating (loss)**                   |   | (50,577                                         | )       | (121,262                                      | )      |
|                                   |   |                                            |    |                                          |   |
| Interest expense                       |   | (1,025                                          | )       | (1,475                                        | )      |
| Total other expense                    |   | (1,025                                          | )       | (1,475                                        | )      |
|                                   |   |                                            |    |                                          |   |
| **Net (loss)**                         |   | $                                               | (51,602 | )                                             | $      | (122,737 | ) |
|                                   |   |                                            |    |                                          |   |
| Net (loss) per share-basic and diluted |   | $                                               | (0.00   | )                                             | $      | (0.00 | ) |
|                                   |   |                                            |    |                                          |   |
| Weighted average number of shares      |   | 33,287,267                                      |    | 33,287,267                                    |   |

 

4

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**PURCHASESOFT,INC.**

**STATEMENT OF CASH FLOWS****(Unaudited)**

**Forsix months ending November 30, 2003**

 
| **For Six Months ended**                                                       |   | **November 30,  2003** |     |
|--------------------------------------------------------------------------------|--------|-----------------------------|----------|
| Cash Flows from Operating Activities:                                          |   |                        |     |
| Net (loss)                                                                     |   | $                           | (122,737 | ) |
| Adjustments to reconcile net (loss) to net cash used in operating  activities: |   |                        |     |
| Depreciation                                                                   |   | 210                         |     |
| (Increase) in accounts payable                                                 |   | (6,193                      | )        |
| Increase (decrease) in:                                                        |   |                        |     |
| Accounts payable and accrued expenses                                          |   | 21,244                      |     |
| Deferred revenue                                                               |   | (4,100                      | )        |
| **Net cash flow used in operating activities**                                 |   | (111,576                    | )        |
|                                                                           |   |                        |     |
| Cash Flows from Investing Activities:                                          |   | —                      |     |
|                                                                           |   |                        |     |
| Cash Flows from Financing Activities:                                          |   |                        |     |
| Proceeds from issuance of notes payable                                        |   | 110,000                     |     |
| **Net cash flow provided by financing activities**                             |   | 110,000                     |     |
|                                                                           |   |                        |     |
| **Net (decrease) in cash**                                                     |   | (1,576                      | )        |
|                                                                           |   |                        |     |
| Cash balance at beginning of period                                            |   | 17,938                      |     |
|                                                                           |   |                        |     |
| **Cash balance at end of period**                                              |   | $                           | 16,362   |   |

 

5

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**PURCHASESOFT,INC.**

**STATEMENT OF CHANGES****OF NET LIABILITIES IN LIQUIDATION (Unaudited)**

**For  six months ending November 30, 2002**

 
|                                                           |   | **Three Months  ended  November 30, 2002** |   | **Six Months  ended  November 30, 2002** |     |
|----------------------------------------------------------------|--------|-------------------------------------------------|--------|-----------------------------------------------|----------|
| Net  (liabilities) in liquidation as of beginning of period    |   |                                            |   | $                                             | (279,266 | ) |   |   | $ | (207,780 | ) |
|                                                           |   |                                            |   |                                          |     |   |   |   |   |
| Sources of  Additional Cash:                                   |   |                                            |   |                                          |     |   |   |   |   |
| Vendor  Refund                                                 |   |                                            |   | 20,717                                        |     |   |   | 21,370 |   |
|                                                           |   |                                            |   |                                          |     |   |   |   |   |
| Additional  Use of Cash:                                       |   |                                            |   |                                          |     |   |   |   |   |
| Office costs                                                   |   | (6,722                                          | )      |                                          |     | (6,929 | ) |   |   |
| Professional  fees                                             |   | (2,722                                          | )      |                                          |     | (9,491 | ) |   |   |
| Telephone  and utilities                                       |   | —                                          |   |                                          |     | (469 | ) |   |   |
| Other                                                          |   | —                                          |   | (9,444                                        | )        | (628 | ) | (17,517 | ) |
|                                                           |   |                                            |   |                                          |     |   |   |   |   |
| Adjustments  of estimated values                               |   |                                            |   | 2,000                                         |     |   |   | (62,066 | ) |
|                                                           |   |                                            |   |                                          |     |   |   |   |   |
| Net  (liabilities) in liquidation as of November 30, 2002 |   |                                            |   | $                                             | (265,993 | ) |   |   | $ | (265,993 | ) |

 

6

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**NOTES****TO UNAUDITEDINTERIM FINANCIAL STATEMENTS**

 

# **NOTE 1–SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

Basis of Presentation On December 21, 2001, the Board of Directors of the Companyapproved a plan to wind down the operations of the Company, which includessalvaging the value of its assets during the wind down.  As a result of the adoption of the Plan andthe imminent nature of the liquidation, the Company adopted the liquidationbasis of accounting effective December 1, 2001. The liquidation basis ofaccounting requires the Company to accrue an estimate for all liabilitiesrelated to expenses to be incurred during the wind down period. Additionally,assets are stated at their estimated net realizable value and liabilities arestated at their anticipated settlement amounts. The estimated net realizablevalue of assets represents management’s best estimated of the recoverable valueof the assets, net of selling expenses, and without consideration for theeffect that the settlement of any litigation may have on the value of theassets.

 

On November 8, 2002, the Board of Directorsapproved a plan for the restart of service and support to previous Company’scustomers and for the cessation of the wind down of operations. Under thisplan, the Company will engage certain subcontractors to provide management,sales and support through commissions and revenue sharing agreements.  With the first new revenue generated in thefourth quarter of fiscal year ended May 31, 2003, the Company changed itsaccounting method from liquidating basis to going concern basis effective onMarch 1, 2003.

 

Presentation of Interim Information The financial information atNovember 30, 2003 and for the three and six months then ended is unauditedbut includes all adjustments (consisting only of normal recurring adjustments)that the Company considers necessary for a fair presentation of the financialinformation set forth herein, in accordance with accounting principlesgenerally accepted in the United States of America (“U.S. GAAP”) for interimfinancial information, and with the instructions to Form 10-QSB. Accordingly,such information does not include all of the information and footnotes requiredby U.S. GAAP for annual financial statements. For further information refer tothe Financial Statements and footnotes thereto included in the Company’s AnnualReport on Form 10-KSB for the year ended May 31, 2003.

 

The results for the three and six months endedNovember 30, 2003 may not be indicative of results for the year endingMay 31, 2004 or any future periods.

 

The financial statements for the three and six monthsended November 30, 2002 were prepared on the liquidation basis ofaccounting, which contemplates realization of assets at their net realizablevalue and satisfaction of liabilities at their anticipated settlement amounts.

 

Accounts Receivable Management of the Company considers accounts receivable to be fullycollectible; accordingly, no allowance for doubtful accounts is required. Ifamounts become uncollectible, they will be charged to operations when thatdetermination is made.

 

Goodwill TheCompany assesses goodwill for recoverability if the market capitalization ofthe Company is less than its net assets. The Company measures declines in valueof goodwill that are other than temporary using the market value method. TheCompany measures the market value based on the quoted market price of theCompany that is most representative of the fair value of the Company’s commonstock multiplied by the number of common shares outstanding.  The Company did not recognize any impairmentloss for goodwill in the reported period.

 

Loss Per Common Share The Company accounts for income (loss) per share in accordance withSFAS No. 128, “Earnings Per Share.” SFAS No. 128 requires that presentation ofbasic and diluted earnings per share for entities with complex capital structures.Basic earnings per share includes no dilution and is computed by dividing netincome (loss) available to common stockholders by the weighted average numberof common stock outstanding for the period. Diluted earnings per share reflectthe potential dilution of securities that could share in the earnings of anentity. Diluted net loss per common share does not differ from basic net lossper common share since potential shares of common stock from the exercise ofstock options and warrants are anti-dilutive for all periods presented. Sharesexcluded from diluted loss per share totaled 168,750 on November 30, 2003.

 

**NOTE 2 – GOING CONCERN**

 

The Company’s financial statements have beenprepared on a going concern basis, which contemplates the realization of assetsand the settlement of liabilities and commitments in the normal course ofbusiness.  In the near term, the Companyexpects operating costs to continue to exceed funds generated from operations.  As a result, the Company expects to continueto incur operating losses and may not have enough money to grow its business inthe future.  The Company can give noassurance that it will achieve profitability or be capable of sustainingprofitable operations.  As a result,operations in the near future are expected to

 

7

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continueto use working capital.

 

Management is currently involved in activenegotiations to obtain additional financing and actively increasing marketingefforts to increase revenues, as discussed in note 7. The Company continuedexistence depends on its ability to meet its financing requirements and thesuccess of its future operations. The financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

**NOTE 3 –SHORT-TERM NOTES PAYABLE**

 

Short-termnotes payable at November 30, 2003 consist of the following:

 
| Promissory note-individual payable on 12/11/03; interest at 6% per  annum; unsecured   |   | $      | 60,000  |   |
|----------------------------------------------------------------------------------------|--------|--------|---------|--------|
| Promissory note-related party payable on 4/12/04; interest at 6% per  annum; unsecured |   | 25,000 |    |
| Promissory note-individual payable on 4/13/04; interest at 6% per  annum; unsecured    |   | 25,000 |    |
|                                                                                   |   |   |    |
| Total short-term notes payable                                                         |   | $      | 110,000 |   |

 

In addition, the Company granted the creditors stockwarrants to purchase up to aggregate of 225,000 shares at an exercise price of$0.01 per share commencing August 1, 2003 through April 16, 2004.None of these warrants were exercised at November 30, 2003.

 

**NOTE 4 – NET LOSS PER SHARE**

 

Thefollowing table sets forth the computation of basic and diluted net loss pershare:

 
|                                 |   | **Three  Months  ended  November 30, 2003** |    | **Six Months  ended  November 30, 2003** |   |
|--------------------------------------|--------|--------------------------------------------------|---------|-----------------------------------------------|--------|
| Numerator:                           |   |                                             |    |                                          |   |
| Net (Loss)                           |   | $                                                | (51,602 | )                                             | $      | (122,737 | ) |
|                                 |   |                                             |    |                                          |   |
| Denominator:                         |   |                                             |    |                                          |   |
| Weighted Average of Common Shares    |   | 33,287,267                                       |    | 33,287,267                                    |   |
|                                 |   |                                             |    |                                          |   |
| Net Loss per Share-basic and diluted |   | $                                                | (0.00   | )                                             | $      | (0.00 | ) |

 

**NOTE 5 – SEGMENT INFORMATION**

 

The Company is currentlymanaged and operated as one business. The entire business is managed by asingle management team that reports to the Company’s President. The Companydoes not operate separate lines of business or separate business entities withrespect to any of its product candidates. Accordingly, the Company does notprepare discrete financial information with respect to separate product areasor by location and dose not have separately reportable segments as defined bySFAS No. 131 “Disclosures about Segments of an Enterprise and RelatedInformation”.

 

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**NOTE 6 - GUARANTEES**

 

The Company from time to time enters into certaintypes of contracts that contingently require the Company to indemnify partiesagainst third party claims. These contracts primarily relate to certainagreements with the Company’s officers, directors and employees, under whichthe Company may be required to indemnify such persons for liabilities arisingout of their employment relationship.

 

The terms of such obligations vary. Generally, amaximum obligation is not explicitly stated. Because the obligated amounts ofthese types of agreements often are not explicitly stated, the overall maximumamount of the obligations cannot be reasonably estimated. Historically, theCompany has not been obligated to make significant payments for these obligations,and no liabilities have been recorded for these obligations on its balancesheet as of November 30, 2003.

 

**NOTE 7 –STRATEGIC PARTNERSHIP AND BUSINESS DEVELOPMENT AGREEMENTS**

 

In late November 2003, the Companyentered into a strategic partnership agreement and a business developmentagreement with the United States Mexico Chamber of Commerce (“USMCOC”) andCornerstone Communications, LLC (“Cornerstone”).

 

Pursuant to the strategic partnershipagreement (“Partnership”), contingent upon securing at least $24,000 infunding, the Company will provide their products and product knowledge, free ofcharge, to create an e-marketplace environment for the Partnership. The USMCOCwill provide the membership community for the e-marketplace environment.Cornerstone will facilitate communications and mange the overall relationshipbetween the Company and USMCOC.

 

Pursuant to the business developmentagreement, Cornerstone will provide business development and marketingexpertise of the Company’s products and services.

 

In consideration, the Company agreed to grantCornerstone stock warrants to purchase up to 400,000 shares of the Company’scommon stock at an exercise price of $0.02 per share commencingDecember 1, 2003 through May 31, 2004.  In addition, Cornerstone will receive 25% of the Company’srevenue generated within a territory to be mutually defined as allparticipating companies in the USMCOC community.

 

**NOTE8 – SUBSEQUENT EVENTS**

 

Note payable with detachable warrants

 

In December 2003, the Company issued twonotes payable in the total amount of $75,000 to raise additional operatingcapital.  The notes carry interest at 6%per annum and are due and payable within 180 days.  In addition, the Company granted the creditors stock warrants topurchase up to 225,000 shares, in aggregate, at an exercise price of $0.01 pershare commencing December 22, 2003 through June 30, 2004.

 

Pending Business Acquisition

 

On December 20, 2003, the Board ofDirectors proposed the acquisition of a software company in Germany.  The Company offered to pay 200,000 Euro incash and to issue 8 million shares of the Company’s common stock for all of theissued and outstanding shares of this German company. In addition, the Companyagreed to backup 50% of a loan security of 100,000 Euro that was provided bythe German shareholders and to issue a note payable of 250,000 Euro at aninterest rate of 7% per annum to one of these shareholders for the money hefunded for the acquisition of the assets from insolvency.

 

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**ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION**

 

The following discussion of our financialcondition and results of operations should be read in conjunction with ourfinancial statements and attached notes and the other financial informationincluded elsewhere in this report. This Management’s Discussion and Analysis ofFinancial Condition and Results of Operations section containsdescriptions of our expectations regarding future trends affecting our business.These forward-looking statements and other forward-looking statements madeelsewhere in this document are made in reliance upon the safe harbor provisionsof the Private Securities Litigation Reform Act of 1995. The discussion belowand under the heading “Risk Factors” sets forth numerous factors we believecould cause actual results to differ materially from those contemplated by theforward-looking statements. We are not under any obligation to update theinformation contained in this section.

 

**Overview**

 

In July 2003 the Company successfully settledthe last of the remaining liabilities that had been incurred prior to andduring the wind down period.  Management has been completely successful indischarging those liabilities, preserving the intellectual property and publicfiling status of the Company for the future benefit of all its existingshareholders.  With a clean and newly restated balance sheet atMay 31, 2003, the Company can now focus on the future and the task ofrebuilding shareholder value.

 

There were several significant events that occurredduring the first six months of fiscal year ending May 31, 2003 that rendera year over year comparative discussion of operating results and the Company’sfinancial condition problematic and essentially useless.

 

1.               On August 5th, 2002 theCompany announced a change in control in that L-R Global sold its 82% interestto Steven Flagg and Tom Marsh.  TheCompany had been put into wind down status by L-R Global.

 

2.               In the Company’s 10-QSB for the period endingFebruary 28,2003, the Company announced that it would be resumingoperations and will begin reporting as a going concern effective March 1st,2003.

 

As a result of this decision, the first six monthsof the fiscal year ending May 31, 2003 was reported using a liquidationmethod of accounting.  While the Company has resumed operations andreporting as a going concern with the results of the fourth quarter of the yearending May 31, 2003, the change in control accounting adjustments, theliquidation of all previous assets, liabilities, employees and locations, andthe change in business strategy make all comparative analysis with previousyears operating financial periods irrelevant.

 

**Current Operating Results, Liquidity andCapital Resources**

 

Revenue.  For the second quarter endingNovember 30, 2003 revenue increased to $6,043 from $4,250 in the previousquarter.  The increase was due to theresults of a full quarter of maintenance contract revenue from customers signedin the previous quarter, the addition of Country Companies Insurance to amaintenance contract and a training event with an existing customer.  There were no sales of new licenses in thequarter.  With the completion of the newrelease of PurchaseSoft 9.0, the Company expects revenue to increase from thesale of upgrades and new customers.

 

Operating Expenses. Operating Expenses for the quarter were $56,620 vs. $74,935 in theprevious quarter.  The decrease was dueto lower legal, travel and consulting expense related to the Company’sacquisition program.  Accounting and SECfiling and compliance costs also were lower. The Company expects these expenses to remain the same over the next fewquarters as a result of costs related to product development, marketing andsales expense for the 9.0 re-launch, and a full-time acquisition search.  The Company does not expect to be profitable or cash flow positive during thefirst three quarters of the year ending May 31, 2004.

 

Liquidity.  The Company’s cash balance andworking capital was $16,362 at November 30, 2003 compared to $9,199 atAugust 31, 2003.  The Companyraised $50,000 during the quarter.  TheCompany plans to finance the projected expenses associated with the acquisitionsearch with $125,000 in bridge loans with attached warrants from private investors.  A private placement is planned to provideworking capital in the event the Company is successful in the acquisition ofone or more businesses.

 

**Certain Business Risks**

 

Stockholders and prospective purchasers ofour common stock should carefully consider the following risk factors inaddition to the other information appearing in this Quarterly Report onForm 10-QSB.

 

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History of Losses and Accumulated Deficit; Uncertainty of FutureProfitability.

 

The Company has experienced ongoing losses fromoperations.  The Company only resumed operations as a going concern inMarch 2003.  The Company expects that such losses may continue for atleast some period until product sales may be generated in sufficient volume tooffset expenses.  The Company does not expect to be profitable unless anduntil such time as sales of its software products and services generatesufficient revenue to fund its operations.

 

Uncertainty of Market Acceptance of PurchaseSoft Software.

 

The Company cannot offer any assurance that itsPurchaseSoft products and/or the products of any acquired business will achieveand sustain market acceptance.  The Company believes that its history offinancial performance has negatively affected its image in the marketplace andthat it may have forfeited business from potential customers who expressedconcerns about the Company’s financial status and ability to remainsolvent.   The Company believes that the ownership and management changesin PurchaseSoft will help position the Company to overcome these pastobjections.  The Company believes its largest challenge is to gain widespread market acceptance of its products.  The failure to obtain marketacceptance would have a material adverse affect on the Company’s business.

 

New Management, Ability to Recruit Sales, Service, and ImplementationPersonnel.

 

The Company’s management has a very limited historyin operating the Company although they are experienced in managing companieswith similar challenges similar.  There can be no assurance that theCompany’s management will be successful in meeting their plannedobjectives.  The ability to achieve anticipated revenues is substantiallydependent on the ability of the Company to attract on a timely basis and retainskilled personnel, especially key management, sales, support, and developmentpersonnel.  The Company believes that its future success will depend inlarge part on its ability to attract and retain highly skilled technical,managerial, marketing, and professional services personnel to ensure the highquality of products and services provided to its customers.  The Companycompetes in the market for such personnel against numerous companies, includinglarger, more established companies with significantly greater financialresources than the Company.  There can be no assurance that the Companywill be successful in attracting and retaining skilled personnel.  TheCompany’s inability to attract and retain qualified employees would have amaterial adverse effect on the Company’s business.

 

Intense Competition.

 

The software products industry is intenselycompetitive.  The Company faces competition from several sources rangingfrom large ERP vendors, medium sized ERP vendors, industry specific vendors andbest-of-breed vendors. These best-of-breed competitors have focused on certainmarket segments.  These competitors all offer software products performingfunctions similar to the Company’s products.  The market space in whichthe Company competes is experiencing tremendous growth and this will invite newcompetitors.  There can be no assurance that competitors do not have orwill not offer or develop products that are superior to the Company’s productsor that achieve greater market acceptance.  In addition, suppliers ofdatabase systems and companies that develop management information softwareapplications for large multinational manufacturers have begun to target theCompany’s potential customers and offer applications that compete in itsmarkets.  As a result, competition (including pricing competition) mayincrease, which could result in price reductions and loss of marketshare.  The Company may also face market resistance from potentialcustomers within the large installed base of legacy systems, who may bereluctant to commit the time and resources necessary to convert to a webservices, client-server or browser-based software product.  As theclient-server and/or browser-based computing market expands, a large number ofcompanies, many with significantly greater resources than the Company, mayenter the market or increase their market share by acquiring or entering intoalliances with competitors of the Company.  There can be no assurance thatthe Company will be able to compete successfully against its competitors orthat the competitive pressures faced by the Company will not adversely affectits financial performance.

 

Rapid Technological Change and New Products.

 

The market for the Company’s softwareproducts is characterized by rapid technological advances, evolving industrystandards, change in end-user requirements, and frequent new productintroductions and enhancements.  The introduction of products embodyingnew technologies and the emergence of new industry standards could render theCompany’s existing products and products currently under development asobsolete and unmarketable.  Accordingly, the Company’s future success willdepend upon its ability to enhance its current products and develop andintroduce new products that keep pace with technological developments, satisfyvarying end-user requirements, and achieve market acceptance.  Any failureby the Company to anticipate or respond adequately to technologicaldevelopments or end-user requirements, or any significant delays in productdevelopment or introduction, could severely damage the Company’s competitiveposition and have a material adverse effect on revenues.  There can be noassurance that the Company will be successful in developing and marketing newproducts or product enhancements on a timely basis or that the Company

 

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will not experience significant delays in the future which could have amaterial adverse effect on the Company’s results of operations.  In addition,there can be no assurance that new products or product enhancements developedby the Company will achieve market acceptance.

 

Dependence on a Single Product-Line.

 

Substantially all of the Company’s revenues areexpected to be derived from the sale of software products and related supportservices.  Accordingly, any event that adversely affects revenue generatedfrom the sale of software or from the professional fees derived from theinstallation of such products, such as competition from other products, significantflaws in the products, or incompatibility with third party hardware or softwareproducts, negative publicity or evaluation, or obsolescence of the hardwareplatforms or software environments in which the products run, could have amaterial adverse effect on the Company’s results of operations.  TheCompany’s future financial performance will depend on the continued developmentand introduction of new and enhanced versions of its software and otherproducts and on customer acceptance of such new enhanced products.

 

Fluctuation in Quarterly Operating Results.

 

The Company’s revenues and operating results canvary substantially from quarter to quarter.  Sales revenues in any quarterare substantially dependent on aggregate contracting activity and the Company’sability to recognize revenue in that quarter in accordance with its revenuerecognition policies and generally accepted accounting principles. Revenues may vary from quarter to quarter due to variances in prior quartercontracting activity, which may positively or adversely affect the Company’sfuture financial performance.  The Company’s sales cycle is relativelylong and variable.  The Company’s ability to increase revenue is dependenton its ability to grow sales activity which provides opportunities forconsulting, training and subsequent maintenance revenues.  Additionallythe Company may not be able to recruit, hire, and train sufficient numbers ofqualified consultants to perform such services.  Due to the forgoing, itis likely that in one or more future quarters the Company’s operating resultswill be below the expectations of public securities market analysts.  Insuch event, the price of the Company’s Common Stock would likely be materiallyadversely affected.

 

Intellectual Property and Proprietary Rights.

 

The Company relies on a combination of copyright,trademark and trade secret laws, employee and third party nondisclosureagreements, and other industry standard methods for protecting ownership of itsproprietary software and business practices.  There can be no assurance,however, that in spite of these precautions, an unauthorized third party willnot copy or reverse-engineer certain portions of the Company’s products orobtain and use information that the Company regards as proprietary.  Inaddition, the laws of some foreign countries do not protect the Company’sproprietary rights to the same extent as do the laws of the UnitedStates.  There can be no assurance that the mechanisms used by the Companyto protect its software will be adequate or that the Company’s competition willnot independently develop software products that are substantially equivalentor superior to the Company’s software products.  The Company expects that,as the number of software products in the industry increases and thefunctionality of these products further overlaps, software products willincreasingly be subject to claims of infringement on third party proprietaryrights.  Any such claim, whether with or without merit, could result incostly litigation and require the Company to enter into royalty or licensingarrangements.  Such royalty or license arrangements, if required, may notbe available on terms acceptable to the Company or at all.

 

Need for Additional Capital

 

The Company will need to raise additional capital tofinance its development and acquisition plans.  The availability offinancing for any plan will be critical to continue operations.  Financingmay not be available on terms that are favorable to us, or at all.

 

Future Sales of Common Stock

 

Our common stock is traded on the NationalAssociation of Securities Dealers OTC:Pink Sheets.  Our common stock hashistorically been highly illiquid.  Steven A. Flagg and Thomas B. Marsh,who serve on our Board of Directors, one of whom is President, in the aggregateowned approximately 69.2% of our common stock as of January 10,2004.  If either of these directors were to sell even a small portion oftheir total shares in a short time, the market price of our common stock wouldlikely decline dramatically.  Further, sales of a substantial number ofshares of our common stock by any holder in a short time would likely cause themarket price of our common stock to decrease significantly.  In addition,the sale of any of these shares may impair our future ability to raise capitalthrough the sale of additional stock.

 

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Inability to Influence the Outcome of Key Transactions 

 

The two directors of the Company, one of whom is ourPresident, in the aggregate owned approximately 69.2% of our common stock as ofJanuary 10, 2004.  These two directors have enough voting power toapprove or disapprove any matters that are determined by a majority vote of ourstockholders, which severely limits your ability to influence PurchaseSoftthrough voting your shares.

 

Maintenance of a Public Trading Market for Shares of Our Common Stock

 

Although shares of our common stock are presentlyquoted on the OTC Pink Sheets, we cannot assure you that they will continue tobe quoted in the future.  During the period of the Company’s wind down theCompany lost its market makers and has declined to establish new market makersuntil full and substantial operations are underway through product sales or anacquisition.  Furthermore, in contrast to stock that is quoted on theNASDAQ National Market or traded on a national securities exchange, as a resultof our stock being quoted on the OTC Pink Sheets, stockholders may:

 

•                  Findit more difficult to obtain accurate and timely quotations regarding the bidand asked prices;

•                  Experiencegreater spreads between bid and asked prices;

•                  Becharged relatively higher transactional costs when buying or selling our commonstock; and

•                  Encountermore difficulty in effecting sales or purchases of common stock.

 

Cost of Compliance with Securities Laws

 

While securities listed on the NASDAQ NationalMarket System or national securities exchanges are in many cases exempt fromthe registration requirements of state securities laws, securities traded onthe OTC Pink Sheets must comply with the registration requirements of statesecurities laws, which increases the time and costs associated with complyingwith state securities laws when raising capital.  We cannot assure thatthis cost of compliance will not have a material adverse effect on theviability of the Company.

 

Liquidity Reduction due to “Penny Stock” Regulatory Requirements

 

The Securities and Exchange Commission has adoptedregulations imposing limitations upon the manner in which certain low pricedsecurities, referred to as a “penny stock,” are publicly traded.  Underthese regulations, a penny stock is defined as any equity security that has amarket price of less than $5.00 per share, subject to specifiedexceptions.  Unless an exception is available, the regulations require thedelivery, prior to any transaction involving a penny stock, of a disclosureschedule explaining the penny stock market and the risks associated withit.  Also, under these regulations, some broker-dealers who recommendthese types of securities to persons other than established customers and“accredited investors” must make a special written suitability determinationfor the purchaser and receive the purchaser’s written agreement to atransaction prior to sale.  Trading activities for penny stocks are moredifficult for broker-dealers than in the case of securities not defined aspenny stocks. Because our common stock may be a penny stock this may have theresult of depressing the market for our securities, and a stockholder may findit difficult to sell shares of our common stock.

 

**ITEM 3: CONTROLS AND PROCEDURES**

 

Within the 90 days prior to the filing of thisreport, we carried out an evaluation, under the supervision and with theparticipation of our President and Secretary/Treasurer, of the effectiveness ofthe design and operation of our disclosure controls and procedures. Ourdisclosure controls and procedures are designed with the objective of ensuringthat information required to be disclosed in our reports filed under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms. Based on thisevaluation, our President and Secretary/Treasurer concluded that our disclosurecontrols and procedures are effective in timely alerting them to materialinformation required to be included in our periodic SEC reports.

 

There have been no significant changes in ourinternal controls or in other factors which could significantly affect internalcontrols subsequent to the date of our most recent evaluation.

 

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**PART II: OTHER INFORMATION**

 

**ITEM1: LEGAL PROCEEDINGS.**

 

**None.**

 

**ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K**

 
| (a)    |   | Exhibits                 |
|--------|--------|--------------------------|
|   |   |                     |   |
| 1.     |   | 10.27                    | Note Payable – Steve Flagg |
|   |   |                     |   |
| 2.     |   | 10.28                    | Warrant- Steve Flagg |
|   |   |                     |   |
| 3.     |   | 10.29                    | Note Payable – Frank Redican |
|   |   |                     |   |
| 4.     |   | 10.30                    | Warrant- Frank Redican |
|   |   |                     |   |
| 5.     |   | 10.31                    | Note Payable – Brian Tauber |
|   |   |                     |   |
| 6.     |   | 10.32                    | Warrant- Brian Tauber |
|   |   |                     |   |
| 7.     |   | 10.33                    | Note Payable – Louis Blatt |
|   |   |                     |   |
| 8.     |   | 10.34                    | Warrant- Louis Blatt |
|   |   |                     |   |
| 9.     |   | 10.35                    | Cornerstone Business Development Agreement |
|   |   |                     |   |
| 10.    |   | 10.36                    | USMCOC Strategic Partnership Agreement |
|   |   |                     |   |
| 11.    |   | 10.37                    | Warrant – Virgil Horton |
|   |   |                     |   |
| 12.    |   | 10.38                    | Warrant – Al Zapanta |
|   |   |                     |   |
| 13.    |   | 10.39                    | Warrant – John Zuch |
|   |   |                     |   |
| 14.    |   | 10.40                    | Warrant – Joseph Lopez |
|   |   |                     |   |
| 15.    |   | 31.1                     | Certifications of the President & CEO |
|   |   |                     |   |
| 16.    |   | 31.2                     | Certifications of the Secretary/Treasurer & CFO |
|   |   |                     |   |
| 17.    |   | 32.1                     | Written statement of the CEO pursuant to 18 SSC Section 1350 |
|   |   |                     |   |
| 18.    |   | 32.2                     | Written statement of the CFO pursuant to 18 SSC Section 1350 |
|   |   |                     |   |
| (b)    |   | Reports on Form 8-K |
|   |   |                     |
| 1.     |   |                     | None. |
|        |        |                          |  |  |

 

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**SIGNATURES**

 

In accordance with Section 13 or 15(d) of theExchange Act, the Issuer caused this report to be signed on its behalf by theundersigned, thereunto to be duly authorized.

 
|                        | PurchaseSoft, Inc.                  |
|-----------------------------|-------------------------------------|
|                        | (Issuer)                            |
|                        |                                |
| Date: January 14, 2004 | /s/ Steven A. Flagg                 |   |
|                        |                                |
|                        | Steven A. Flagg                     |
|                        | President and Acting CEO            |
|                        |                                |
| Date: January 14, 2004 | /s/ Thomas B. Marsh                 |   |
|                        |                                |
|                        | Thomas B. Marsh                     |
|                        | Secretary, Treasurer and Acting CFO |

 

In accordance with the Exchange Act, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on January 14, 2004.

 
| **Signature**       |   | **Title** |
|---------------------|--------|-----------|
|                |   |      |
| /s/ Steven A. Flagg |   |      | Director |
| Steven A. Flagg     |   |      |
|                |   |      |
| /s/ Thomas B. Marsh |   |      | Director |
| Thomas B. Marsh     |   |      |

 

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