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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 September 30, 2005
 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
    
    75-2649230(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 
 
 
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  o þ




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PART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsConsolidated Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004 (audited)Consolidated Statements of Operations (unaudited) for the Three Months Ended September 30, 2005 and 2004, and for the Nine Months Ended September 30, 2005 and 2004Consolidated Statements of Changes in Stockholders Deficit for the Year Ended December 31, 2004 (audited) and the Nine Months Ended September 30, 2005 (unaudited)Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2005 and 2004Notes to Consolidated Financial StatementsITEM 2. Managements Discussion and Analysis or Plan of OperationITEM 3. Controls and ProceduresPART II. OTHER INFORMATIONITEM 6. ExhibitsSIGNATURESCERTIFICATIONSCertification of Don CrosbieCertification of Laura M. BrayCertification of Don Crosbie Pursuant to Section 906Certification of Laura M. Bray Pursuant to Section 906
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(Unaudited)
    
    
    (Audited)September 30,
    
    
    December 31,2005
    
    
    2004ASSETSCURRENT ASSETSCash and equivalents
    
    $
    33
    
    
    $
    68Accounts receivable, net of allowance for
doubtful accounts of $2 and $5, respectively
    
    
    181
    
    
    
    170Prepaid expenses and other current assets
    
    
    42
    
    
    
    22Total current assets
    
    
    256
    
    
    
    260EQUIPMENT, FIXTURES AND SOFTWAREComputer hardware and software
    
    
    1,078
    
    
    
    1,078Software development costs
    
    
    2,039
    
    
    
    1,982Furniture and fixtures
    
    
    31
    
    
    
    31Office equipment
    
    
    25
    
    
    
    25Leasehold improvements
    
    
    35
    
    
    
    353,208
    
    
    
    3,151Accumulated depreciation and amortization
    
    
    (3,110
    )
    
    
    (3,078
    )Total equipment, fixtures and software
    
    
    98
    
    
    
    73TOTAL ASSETS
    
    $
    354
    
    
    $
    333LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIESAccounts payable
    
    $
    162
    
    
    $
    91Accrued payroll and other current liabilities
    
    
    148
    
    
    
    150Deferred revenues
    
    
    147
    
    
    
    179Notes payable to related parties  short term
    
    
    132
    
    
    
    94Notes payable  short term
    
    
    36
    
    
    
    25Total current liabilities
    
    
    625
    
    
    
    539LONG TERM LIABILITIESNotes payable to related parties  long term
    
    
    200
    
    
    
    200Notes payable  long term
    
    
    200
    
    
    
    200Total long term liabilities
    
    
    400
    
    
    
    400Total liabilities
    
    
    1,025
    
    
    
    939STOCKHOLDERS DEFICITPreferred 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 as of
September 30, 2005 and December 31, 2004
    
    
    
    
    
    
    Common stock, $.001 par value; 40,000,000 shares authorized;
25,976,180 shares and 25,226,000 shares issued and outstanding as of
September 30, 2005 and December 31, 2004, respectively
    
    
    26
    
    
    
    25Additional capital
    
    
    43,154
    
    
    
    42,985Accumulated deficit
    
    
    (43,851
    )
    
    
    (43,616
    )Total stockholders deficit
    
    
    (671
    )
    
    
    (606
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
    
    $
    354
    
    
    $
    333
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004REVENUES
    
    $
    329
    
    
    $
    291
    
    
    $
    943
    
    
    $
    731COST OF REVENUES
    
    
    212
    
    
    
    184
    
    
    
    583
    
    
    
    492GROSS PROFIT
    
    
    117
    
    
    
    107
    
    
    
    360
    
    
    
    239OPERATING EXPENSESSelling, general and administrative
    
    
    153
    
    
    
    258
    
    
    
    563
    
    
    
    795Total operating expenses
    
    
    153
    
    
    
    258
    
    
    
    563
    
    
    
    795LOSS FROM OPERATIONS
    
    
    (36
    )
    
    
    (151
    )
    
    
    (203
    )
    
    
    (556
    )OTHER INCOME (EXPENSE)Gain on settlement of liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91Interest
expense  related parties
    
    
    (6
    )
    
    
    (4
    )
    
    
    (16
    )
    
    
    (12
    )Interest expense  other
    
    
    (6
    )
    
    
    (1
    )
    
    
    (16
    )
    
    
    (3
    )Total other income (expense)
    
    
    (12
    )
    
    
    (5
    )
    
    
    (32
    )
    
    
    76NET LOSS
    
    $
    (48
    )
    
    $
    (156
    )
    
    $
    (235
    )
    
    $
    (480
    )NET LOSS PER COMMON SHARE (BASIC AND DILUTED)
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (BASIC AND DILUTED)
    
    
    25,976
    
    
    
    25,014
    
    
    
    25,756
    
    
    
    24,204
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Number of
    
    
    
    
    
    
    Number ofPreferred
    
    
    
    
    
    
    Common
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalShares
    
    
    Preferred
    
    
    Shares
    
    
    Common
    
    
    Additional
    
    
    Accumulated
    
    
    StockholdersOutstanding
    
    
    Stock
    
    
    Outstanding
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    DeficitBalances at January 1, 2004
    
    
    1
    
    
    $
    
    
    
    
    23,201
    
    
    $
    23
    
    
    $
    42,582
    
    
    $
    (42,959
    )
    
    $
    (354
    )Issuance of common stock
in payment of notes
payable and accrued
interest  related party
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5Warrants exercised for
common stock
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    2
    
    
    
    398
    
    
    
    
    
    
    
    400Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (657
    )
    
    
    (657
    )Balances at December 31,
2004
    
    
    1
    
    
    
    
    
    
    
    25,226
    
    
    
    25
    
    
    
    42,985
    
    
    
    (43,616
    )
    
    
    (606
    )Sale of common stock
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    1
    
    
    
    99
    
    
    
    
    
    
    
    100Warrants exercised for
common stock
    
    
    
    
    
    
    
    
    
    
    350
    
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    70Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (235
    )
    
    
    (235
    )Balances at September 30,
2005
    
    
    1
    
    
    $
    
    
    
    
    25,976
    
    
    $
    26
    
    
    $
    43,154
    
    
    $
    (43,851
    )
    
    $
    (671
    )
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Nine Months EndedSeptember 30,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (235
    )
    
    $
    (480
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    32
    
    
    
    32Provision for doubtful accounts
    
    
    6
    
    
    
    (3
    )Gain on settlement of liabilities
    
    
    
    
    
    
    (91
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (17
    )
    
    
    (46
    )Prepaid expenses and other current assets
    
    
    (20
    )
    
    
    3Current liabilities
    
    
    37
    
    
    
    61Net cash used in operating activities
    
    
    (197
    )
    
    
    (524
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    
    
    
    
    (9
    )Capitalized software development costs
    
    
    (57
    )
    
    
    (2
    )Net cash used in investing activities
    
    
    (57
    )
    
    
    (11
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from notes payable
    
    
    12
    
    
    
    50Proceeds from notes payable to related parties
    
    
    57
    
    
    
    70Payment of notes payable
    
    
    (1
    )
    
    
    Payment of notes payable to related parties
    
    
    (19
    )
    
    
    Proceeds from issuance of common stock
    
    
    100
    
    
    
    400Proceeds from exercise of stock warrants
    
    
    70
    
    
    
    Net cash provided by financing activities
    
    
    219
    
    
    
    520NET DECREASE IN CASH AND EQUIVALENTS
    
    
    (35
    )
    
    
    (15
    )CASH AND EQUIVALENTS, BEGINNING OF PERIOD
    
    
    68
    
    
    
    66CASH AND EQUIVALENTS, END OF PERIOD
    
    $
    33
    
    
    $
    51SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:Payment of notes payable and accrued interest through issuance of
common stock
    
    $
    
    
    
    $
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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 September 30, 2005 and the results of its operations and cash flows for the
three and nine months ended September 30, 2005 and 2004, in conformity with generally
accepted accounting principles for interim financial information applied on a consistent
basis. The results of operations for the three and nine months ended September 30, 2005 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
consolidated 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, 2004, as filed with the Securities and Exchange Commission on
March 16, 2005.2.
    
    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, 2005. 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.
    
    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.4.
    
    SALE OF COMMON STOCKIn January 2005, National Financial Corporation (NFC), a related entity who, as of January
1, 2005 beneficially owned 1,081,603 shares of the Companys common stock, representing 4.3%
of the Companys then issued and outstanding common stock, purchased 400,000 shares of the
Companys common stock and tendered payment in the amount of $100,000 ($0.25 per share). In
May and June 2005, NFC exercised previously issued warrants to purchase 350,000 shares of the
Companys common stock at $0.20 per share or an aggregate amount of $70,000. The offer and
sale of the securities in each of these transactions referenced in the previous sentence was
exempt from registration under the Securities Act of 1933, as
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amended, by virtue of Section 4(2) thereof and the rules promulgated thereunder. NFC provided
representations to us that it is an accredited investor, as defined in Rule 501 under the
Act, as well as highly sophisticated.5.
    
    STOCK-BASED COMPENSATIONThe Company accounts for its stock-based employee compensation plan using the intrinsic
value-based method prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation expense is
recorded on the date of grant to the extent the current market price of the underlying stock
exceeds the exercise price. No employee stock based awards were issued during the nine months
ended September 30, 2005. The Company recorded no compensation expense associated with
options issued to employees during the three or nine months ended September 30, 2004. The
Companys calculations for employee grants were made using a Black-Scholes model using the
following assumptions:
 2004Expected life
    
    10 yearsRisk free rate
    
    
    3.84
    %Dividends
    
    NoneVolatility
    
    
    1.78
 If the computed values of all the Companys stock based awards were calculated and expensed
(over the vesting period of the awards) using the fair value method specified under SFAS 123
Accounting for Stock-Based Compensation, as amended by SFAS No. 148 Accounting for
Stock-Based Compensation  Transition and Disclosure, net loss would have been as follows
(in thousands, except per share data):
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss, as reported
    
    $
    (48
    )
    
    $
    (156
    )
    
    $
    (235
    )
    
    $
    (480
    )Stock-based compensation expense:Included in reported net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Determined using the fair value method
    
    
    (70
    )
    
    
    (60
    )
    
    
    (205
    )
    
    
    (165
    )Pro forma net loss
    
    $
    (118
    )
    
    $
    (216
    )
    
    $
    (440
    )
    
    $
    (645
    )Net loss per share  basic and dilutedAs reported
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )Pro forma
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.03
    )
 6.
    
    SUBSEQUENT EVENTSOn October 3, 2005, the Company granted employees options under its 1997 Stock Option Plan to
purchase an aggregate of 500,000 shares of common stock. The options contain an exercise
price of $0.13 per share, the market price on the date of grant, expire on the tenth
anniversary of the grant, and vest ratably over three years.
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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, HMOs, 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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Information contained or incorporated by reference in this quarterly report on Form 10-QSB and in
other Securities and Exchange Commission filings by the Company contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to various risks and uncertainties that could cause actual
results to vary materially from those projected in such forward-looking statements. These risks and
uncertainties are discussed in more detail in the Companys Annual Report on Form 10-KSB for the
year ended December 31, 2004 which was filed with the Securities and Exchange Commission on March
16, 2005. No assurance can be given that future results covered by the forward-looking statements
will be achieved.
 
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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
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By:
    /s/ Don CrosbieDon CrosbiePresident and
Chief Executive Officer  By:
    /s/ Laura M. BrayLaura M. BrayChief Financial Officer 14