##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 (Mark One)
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2007
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 For the Transition Period from  to
 Commission file number 001-14665
 CLAIMSNET.COM INC.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    75-2649230
(I.R.S. Employer
Identification No.)
 
 
 
 þ o
 o þ
  o þ




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##### 



PART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsConsolidated Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006 (audited)Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2007 and 2006Consolidated Statements of Changes in Stockholders Deficit for the Year Ended December 31, 2006 (audited) and the Three Months Ended March 31, 2007 (unaudited)Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2007 and 2006Notes to Consolidated Financial StatementsITEM 2. Managements Discussion and Analysis or Plan of OperationITEM 3. Controls and ProceduresPART II. OTHER INFORMATIONITEM 5. Other InformationITEM 6. ExhibitsSIGNATURESCERTIFICATIONS31.1 Certification of Don Crosbie31.2 Certification of Laura M. Bray32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Don Crosbie32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Laura M. Bray
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(Unaudited)
    
    
    (Audited)March 31,
    
    
    December 31,2007
    
    
    2006ASSETSCURRENT ASSETSCash and equivalents
    
    $
    243
    
    
    $
    251Accounts receivable, net of allowance for
doubtful accounts of $6
    
    
    220
    
    
    
    207Prepaid expenses and other current assets
    
    
    35
    
    
    
    38Total current assets
    
    
    498
    
    
    
    496EQUIPMENT, FIXTURES AND SOFTWARETotal equipment, fixtures and software, net
    
    
    213
    
    
    
    230TOTAL ASSETS
    
    $
    711
    
    
    $
    726LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIESAccounts payable
    
    $
    175
    
    
    $
    168Accrued payroll and other current liabilities
    
    
    85
    
    
    
    91Accrued interest
    
    
    119
    
    
    
    97Capital leases  current portion
    
    
    37
    
    
    
    35Deferred revenues  current portion
    
    
    41
    
    
    
    44Notes payable to related parties  current portion
    
    
    145
    
    
    
    175Convertible notes payable to related parties  current portion
    
    
    200
    
    
    
    200Convertible notes payable  current portion
    
    
    200
    
    
    
    200Total current liabilities
    
    
    1,002
    
    
    
    1,010LONG-TERM LIABILITIESOther long-term liabilities
    
    
    2
    
    
    
    3Capital leases  long-term portion
    
    
    72
    
    
    
    82Deferred revenues  long-term portion
    
    
    21
    
    
    
    23Convertible notes payable to related parties  long-term portion
    
    
    710
    
    
    
    700Convertible notes payable  long-term portion
    
    
    100
    
    
    
    Total long-term liabilities
    
    
    905
    
    
    
    808Total liabilities
    
    
    1,907
    
    
    
    1,818STOCKHOLDERS DEFICITConvertible preferred stock, $.001 par value; 4,000,000 shares authorized; 720
Shares of Series D (liquidation preference of $180) and 50 shares of Series E
(liquidation preference of $15) issued and outstanding, convertible into common
shares at 1,000 common shares per 1 convertible preferred share as of March 31,
2007 and December 31, 2006
    
    
    
    
    
    
    Common stock, $.001 par value; 40,000,000 shares authorized; 26,051,180
shares issued and outstanding as of March 31, 2007 and 26,001,180 as of
December 31, 2006
    
    
    26
    
    
    
    26Additional capital
    
    
    43,169
    
    
    
    43,166Accumulated deficit
    
    
    (44,391
    )
    
    
    (44,284
    )Total stockholders deficit
    
    
    (1,196
    )
    
    
    (1,092
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
    
    $
    711
    
    
    $
    726
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Three Months EndedMarch 31,2007
    
    
    2006REVENUES
    
    $
    415
    
    
    $
    331COST OF REVENUES
    
    
    301
    
    
    
    218GROSS PROFIT
    
    
    114
    
    
    
    113OPERATING EXPENSESSelling, general and administrative
    
    
    198
    
    
    
    180Total operating expenses
    
    
    198
    
    
    
    180LOSS FROM OPERATIONS
    
    
    (84
    )
    
    
    (67
    )OTHER INCOME (EXPENSE)Interest expense  related parties
    
    
    (18
    )
    
    
    (7
    )Interest expense  other
    
    
    (8
    )
    
    
    (5
    )Interest income
    
    
    3
    
    
    
    Total other income (expense)
    
    
    (23
    )
    
    
    (12
    )NET LOSS
    
    $
    (107
    )
    
    $
    (79
    )NET LOSS PER COMMON SHARE (BASIC AND DILUTED)
    
    $
    (0.00
    )
    
    $
    (0.00
    )WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (BASIC AND DILUTED)
    
    
    26,043
    
    
    
    25,976
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Number of
    
    
    
    
    
    
    Number ofPreferred
    
    
    
    
    
    
    Common
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalShares
    
    
    Preferred
    
    
    Shares
    
    
    Common
    
    
    Additional
    
    
    Accumulated
    
    
    StockholdersOutstanding
    
    
    Stock
    
    
    Outstanding
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    DeficitBalances at December 31, 2005
    
    
    1
    
    
    $
    
    
    
    
    25,976
    
    
    $
    26
    
    
    $
    43,154
    
    
    $
    (43,895
    )
    
    $
    (715
    )Warrants exercised for common stock
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    7Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (389
    )
    
    
    (389
    )Balances at December 31, 2006
    
    
    1
    
    
    
    
    
    
    
    26,001
    
    
    
    26
    
    
    
    43,166
    
    
    
    (44,284
    )
    
    
    (1,092
    )Warrants exercised for common stock
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Stock based
compensation
(reversal)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (107
    )
    
    
    (107
    )Balances at March 31, 2007
    
    
    1
    
    
    $
    
    
    
    
    26,051
    
    
    $
    26
    
    
    $
    43,169
    
    
    $
    (44,391
    )
    
    $
    (1,196
    )
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Three Months EndedMarch 31,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (107
    )
    
    $
    (79
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    23
    
    
    
    14Bad debt expense
    
    
    
    
    
    
    (2
    )Stock based compensation (reversal)
    
    
    (7
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (13
    )
    
    
    (18
    )Prepaid expenses and other current assets
    
    
    3
    
    
    
    (8
    )Current liabilities and deferred revenue
    
    
    17
    
    
    
    20Net cash used in operating activities
    
    
    (84
    )
    
    
    (73
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    
    
    
    
    (4
    )Capitalized software development costs
    
    
    (6
    )
    
    
    Net cash used in investing activities
    
    
    (6
    )
    
    
    (4
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on capital lease obligation
    
    
    (8
    )
    
    
    Proceeds from notes payable
    
    
    100
    
    
    
    25Payment of notes payable
    
    
    
    
    
    
    (10
    )Proceeds from notes payable to related parties
    
    
    10
    
    
    
    37Payment of notes payable to related parties
    
    
    (30
    )
    
    
    Proceeds from issuance of common stock
    
    
    
    
    
    
    Proceeds from exercise of stock warrants
    
    
    10
    
    
    
    Net cash provided by financing activities
    
    
    82
    
    
    
    52NET DECREASE IN CASH AND EQUIVALENTS
    
    
    (8
    )
    
    
    (25
    )CASH AND EQUIVALENTS, BEGINNING OF PERIOD
    
    
    251
    
    
    
    28CASH AND EQUIVALENTS, END OF PERIOD
    
    $
    243
    
    
    $
    3SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    4
    
    
    $
    Cash paid for taxes
    
    $
    
    
    
    $
    
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1.
    
    BASIS OF PRESENTATIONIn the opinion of management, the accompanying unaudited consolidated financial statements
include all necessary adjustments (consisting of normal recurring adjustments) and present
fairly the consolidated financial position of Claimsnet.com inc. and subsidiaries (the
Company) as of March 31, 2007 and the results of their operations and cash flows for the
three months ended March 31, 2007 and 2006, in conformity with generally accepted accounting
principles for interim financial information applied on a consistent basis. The results of
operations for the three months ended March 31, 2007 are not necessarily indicative of the
results to be expected for the full year.Certain information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been omitted.
These financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Companys Annual Report on Form
10-KSB for the year ended December 31, 2006, as filed with the Securities and Exchange
Commission on March 8, 2007.2.
    
    NEED FOR ADDITIONAL CAPITAL AND LIQUIDITYManagement believes that available cash resources, together with anticipated revenues from
operations and the proceeds of recently completed financing activities and funding
commitments may not be sufficient to satisfy the Companys capital requirements past
December 31, 2007. Necessary additional capital may not be available on a timely basis or on
acceptable terms, if at all. In any of these events, the Company may be unable to implement
current plans for expansion or to repay debt obligations as they become due. If sufficient
capital cannot be obtained, the Company may be forced to significantly reduce operating
expenses to a point which would be detrimental to business operations, curtail research and
development activities, sell business assets or discontinue some or all of its business
operations, take other actions which could be detrimental to business prospects and result
in charges which could be material to its operations and financial position, or cease
operations altogether. In the event that any future financing should take the form of the
sale of equity securities, the holders of the common stock and preferred stock may
experience additional dilution. In the event of a cessation of operations, there may not be
sufficient assets to fully satisfy all creditors, in which case the holders of equity
securities will be unable to recoup any of their investment.3.
    
    EQUIPMENT, FIXTURES AND SOFTWAREEquipment, fixtures and softare consists of the following at March 31, 2007 (in thousands):
 Computer hardware and software
    
    $
    1,089Software development costs
    
    
    2,110Furniture and fixtures
    
    
    31Office equipment
    
    
    28Leasehold improvements
    
    
    35Equipment under capital lease
    
    
    1213,414Less accumulated depreciation and amortization
    
    
    (3,201
    )$
    213
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4.
    
    REVENUE RECOGNITIONThe Company generally enters into service agreements with its customers to provide access to
its hosted software platform for processing of customer transactions. The Company operates
the software application for all customers and the customers are not entitled to ownership
of its software at any time during or at the end of the agreements. The end users of the
Companys software application access its hosted software platform or privately hosted
versions of its software application via the internet with no additional software required
to be located on the customers systems. Customers pay implementation fees, transaction
fees and time and materials charges for additional services. Revenues primarily include
fees for implementation and transaction fees, which may be subject to monthly minimum
provisions. Customer agreements may also provide for development fees related to private
labeling of the Companys software platform (i.e. access to its servers through a web site
which is in the name of and/or has the look and feel of the customers other web sites) and
some customization of the offering and business rules. The Company accounts for its service
agreements by combining the contractual revenues from development, implementation, license,
support and certain additional service fees and recognizing the revenue ratably over the
expected period of performance. The Company currently uses an estimated expected business
arrangement term of three years which is currently the term of the typical contracts signed
by its customers. The Company does not segment these services and uses the underlying
contractual terms to recognize revenue because it does not have objective and reliable
evidence of fair value to allocate the arrangement consideration to the deliverables in the
arrangement. To the extent that implementation fees are received in advance of recognizing
the revenue, the Company defers these fees and records deferred revenue. The Company
recognizes service fees for transactions and some additional services as the services are
performed. The Company expenses the costs associated with its customer service agreements as
those costs are incurred.5.
    
    ACCOUNTING CHANGESIn June, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income Taxes(FIN48), to
create a single model to address accounting for uncertainty in tax positions. FIN 48
clarifies the accounting for income taxes by prescribing a minimum recognition threshold a
tax position is required to meet before being recognized in the financial statements. FIN 48
also provides guidance on derecognition, measurement, classification, interest, and
penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN
48 as of January 1, 2007 and the adoption did not have a material impact to the Companys
consolidated financial statements or effective tax rate and did not result in any
unrecognized tax benefits.Interest costs and penalties related to income taxes are classified as interest expense and
general and administrative costs, respectively, in the Companys consolidated financial
statements. For the three months ended March 31, 2007 and 2006, the Company did not
recognize any interest or penalty expense related to income taxes. It is determined not to
be reasonably possible for the amounts of unrecognized tax benefits to significantly
increase or decrease within the next 12 months. The Company is currently subject to a three
year statue of limitations by major tax jurisdictions. The Company and its subsidiaries file
income tax returns in the U.S. federal jurisdiction.6.
    
    SHARE BASED PAYMENTSThe Company accounts for options and warrants issued to employees under Statement of
Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, as of January 1,
2006, using the modified prospective application method. This statement requires the
recognition of compensation expense when an entity obtains employee services in stock-based
payment transactions.Upon the adoption of SFAS 123(R), the Company began recording compensation cost related to
all new stock based compensation grants after our adoption date. The compensation cost to be
recorded is based on the fair value at the grant date.
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Three Months EndedMarch 31, 2007Unvested
    
    
    Unvested WarrantsStock Options
    
    
    for Common Stock
    
    
    TotalSelling, general and
administrative expense
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Total share-based compensation
(reversal)
    
    $
    
    
    
    $
    (7
    )
    
    $
    (7
    )
   WEIGHTEDNUMBER
    
    
    PER SHARE
    
    
    AVERAGEOF SHARES
    
    
    EXERCISE PRICE
    
    
    EXERCISE PRICEOutstanding options-December 31, 2006
    
    
    956,776
    
    
    $
    0.15-8.00
    
    
    $
    1.10Granted
    
    
    
    
    
    
    
    
    
    
    Expired or cancelled
    
    
    (50,000
    )
    
    
    0.15
    
    
    
    0.15Outstanding options-March 31, 2007
    
    
    906,776
    
    
    $
    0.30-8.00
    
    
    $
    1.15Options exercisable-March 31, 2007
    
    
    906,776
    
    
    $
    0.30-8.00
    
    
    $
    1.15
   WEIGHTEDNUMBER
    
    
    PER SHARE
    
    
    AVERAGEOF SHARES
    
    
    EXERCISE PRICE
    
    
    EXERCISE PRICEOutstanding warrants-December 31, 2006
    
    
    3,624,324
    
    
    $
    0.15-0.35
    
    
    $
    0.18Granted
    
    
    
    
    
    
    
    
    
    
    Expired or cancelled
    
    
    (1,000,000
    )
    
    
    0.25
    
    
    
    0.25Outstanding warrants-March 31, 2007
    
    
    2,624,324
    
    
    $
    0.15-0.35
    
    
    $
    0.18Warrants exercisable-March 31, 2007
    
    
    2,624,624
    
    
    $
    0.15-0.35
    
    
    $
    0.18
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7.
    
    LOANS FROM RELATED PARTIESOn January 23, 2007, the Company entered into an unsecured loan agreement in the amount of
$10,000 pursuant to a convertible long-term loan agreement with a director of the Company.
The note bears interest at the rate of 5.0% per annum. Payments equal to the principal
and accrued and unpaid interest on the note are due in 2010. At the option of the holder,
at any time or from time to time prior to the maturity date, all or any portion of the
outstanding principal may be converted into a number of shares of the Companys common
stock at a conversion price of 36,500 shares per $10,000 of principal. Interest is payable
on maturity.The conversion price for the convertible note was in excess of the trading price on the date
of issuance, therefore no beneficial conversion feature exists for the note.8.
    
    LOANSOn January 16, 2007, the Company entered into an unsecured loan agreement in the amount of
$100,000 pursuant to a convertible long-term loan agreement. The note bears interest at
the rate of 7.0% per annum. Payments equal to the principal and accrued and unpaid
interest on the note are due in 2010. At the option of the holder, at any time or from
time to time prior to the maturity date, all or any portion of the outstanding principal
may be converted into a number of shares of the Companys common stock at a conversion
price of 30,000 shares per $10,000 of principal. Interest is payable on maturity.The conversion price for the convertible note was in excess of the trading price on the date
of issuance, therefore no beneficial conversion feature exists for the note.
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
    
    our ability to raise additional capital and secure additional financing;
    
    our ability to successfully implement our revised business strategy;
    
    our ability to market our services;
    
    our ability to develop and maintain strategic partnerships or alliances;
    
    our ability to maintain and increase our customer base;
    
    our ability to protect our intellectual property rights;
    
    our ability to further develop our technology and transaction processing system;
    
    our ability to respond to competitive developments;
    
    our ability to attract and retain key employees;
    
    our ability to comply with government regulations;
    
    the effects of natural disasters, computer viruses and similar disruptions to our computer systems;
    
    threats to Internet security; and
    
    acceptance of the Internet and other online services in the healthcare industry and in general.
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
    
    to utilize our state of the art technology to help large healthcare organizations achieve more efficient and less
costly administrative operations;
    
    to market our services directly to the payer community and its trading partners;
    
    to aggressively pursue and support strategic relationships with companies that will in turn aggressively market our
services to large volume healthcare organizations, including insurers, HMOs, third party administrators, provider
networks, re-pricing organizations, clinics, hospitals, laboratories, physicians and dentists;
    
    to provide total claim management services to payer organizations, including internet claim submission, paper claim
conversion to electronic transactions, and receipt of EDI transmissions;
    
    to continue to expand our product offerings to include additional transaction processing solutions, such as HMO
encounter forms, eligibility and referral verifications, claim status inquiries, electronic remittance advices, claim
attachments, and other healthcare administrative services, in order to diversify sources of revenue;
    
    to license our technology for other applications, including stand-alone purposes, internet systems and private label
use, and for original equipment manufacturers; and
    
    to seek merger and acquisition opportunities that enhance our growth and profitability objectives.
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.
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3.1 (2)
    
    Certificate of Incorporation3.1(a) (2)
    
    Certificate of Amendment to Certificate of Incorporation3.1(b) (3)
    
    Certificate of Designation of Series A Preferred Stock3.1(c) (3)
    
    Certificate of Designation of Series B Preferred Stock3.1(d) (3)
    
    Certificate of Designation of Series C Preferred Stock3.1(e) (3)
    
    Certificate of Designation of Series D Preferred Stock3.1(f) (1)
    
    Certificate of Designation of Series E Preferred Stock3.2 (2)
    
    Bylaws, as amended4.1 (2)
    
    Form of Common Stock Certificate4.2 (3)
    
    Form of Warrant issued to Bo W. Lycke dated February 21, 20024.3 (1)
    
    Form of Warrant issued to Don Crosbie dated October 21, 20024.4 (4)
    
    Form of Warrant issued to Don Crosbie dated June 3, 20034.5 (4)
    
    Form of Warrant issued to certain employees dated June 3, 20034.6 (4)
    
    Form of Warrant issued to Thomas Michel dated June 3, 20034.7 (4)
    
    Form of Warrant issued to Alfred Dubach dated June 3, 20034.8 (5)
    
    Form of Warrant issued to Thomas Michel dated June 30, 2004.4.9 (5)
    
    Form of Warrant issued to Gary J. Austin dated September 21, 2004.4.10 (5)
    
    Form of Warrant issued to Laura M. Bray dated September 21, 2004.
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4.11 (5)
    
    Form of Warrant issued to Don Crosbie dated September 21, 2004.10.1 (6)
    
    Note dated January 16, 2007 between Claimsnet.com and Eganoc Services related to $100,000 loan.10.2 (6)
    
    Note dated January 23, 2007 between Claimsnet.com and Thomas Michel related to $10,000 loan.31.1
    
    Certification of Don Crosbie31.2
    
    Certification of Laura M. Bray32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, of Don Crosbie32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, of Laura M. Bray
 
 (1)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K, for the
Year Ended December 31, 2002 filed on April 1, 2003.(2)
    
    Incorporated by reference to the Registrants registration statement on Form S-1
(Registration No. 333-36209).(3)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K for the
year ended December 31, 2001 filed on April 15, 2002.(4)
    
    Incorporated by reference to the Registrants Current Report on Form 10-KSB dated
March 29, 2004.(5)
    
    Incorporated by reference to the Registrants Current Report on Form 10-KSB dated
March 16, 2005.(6)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-KSB for the
year ended December 31, 2006 filed on March 8, 2007.  -18-




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By:
    
    /s/ Don CrosbieDon CrosbieChief Executive Officer
  By:
    
    /s/ Laura M. BrayLaura M. BrayChief Financial Officer
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ExhibitNo.
    
    Description31.1
    
    Certification of Don Crosbie31.2
    
    Certification of Laura M. Bray32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, of Don Crosbie32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, of Laura M. Bray
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