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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 June 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
(State or other jurisdiction of
incorporation or organization)
    
    75-2649230
(I.R.S. Employer
Identification No.)
 14860 Montfort Dr, Suite 250
Dallas, Texas 75254
(Address of principal executive offices) 972-458-1701
(Issuers telephone number) N/A
(Former name, former address and former fiscal year, if changed since last report) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o State the number of shares outstanding of each of the issuers classes of common equity, as of the
latest practicable date: Common Stock, $.001 par value, 25,976,180 shares outstanding as of July
22, 2005. Transitional Small Business Disclosure Format (check one) Yes o No þ   1




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CLAIMSNET.COM INC. AND SUBSIDIARIES TABLE OF CONTENTS PART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsConsolidated Balance Sheets as of June 30, 2005 (unaudited) and December 31, 2004
(audited)Consolidated Statements of Operations (unaudited) for the Three Months Ended June
30, 2005 and 2004, and for the Six Months Ended June 30, 2005 and 2004Consolidated Statements of Changes in Stockholders Deficit for the Year Ended
December 31, 2004 (audited) and the Six Months Ended June 30, 2005 (unaudited)Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 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 2. Unregistered Sales of Equity Securities and Use of ProceedsITEM 6. ExhibitsSIGNATURESCERTIFICATIONSForm of Promissory NoteCertification of Don CrosbieCertification of Laura M. BrayCertification Pursuant to Section 906Certifcation Pursuant to Section 906
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION 
 ITEM 1: FINANCIAL STATEMENTS CLAIMSNET.COM INC. AND SUBSIDIARIES 
   (Unaudited)
    
    
    (Audited)June 30,
    
    
    December 31,2005
    
    
    2004ASSETSCURRENT ASSETSCash and equivalents
    
    $
    
    
    
    $
    68Accounts receivable, net of allowance for
doubtful accounts of $4 and $5, respectively
    
    
    189
    
    
    
    170Prepaid expenses and other current assets
    
    
    35
    
    
    
    22Total current assets
    
    
    224
    
    
    
    260EQUIPMENT, FIXTURES AND SOFTWAREComputer hardware and software
    
    
    1,078
    
    
    
    1,078Software development costs
    
    
    2,033
    
    
    
    1,982Furniture and fixtures
    
    
    31
    
    
    
    31Office equipment
    
    
    25
    
    
    
    25Leasehold improvements
    
    
    35
    
    
    
    353,202
    
    
    
    3,151Accumulated depreciation and amortization
    
    
    (3,097
    )
    
    
    (3,078
    )Total equipment, fixtures and software
    
    
    105
    
    
    
    73TOTAL ASSETS
    
    $
    329
    
    
    $
    333LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIESAccounts payable
    
    $
    157
    
    
    $
    91Accrued payroll and other current liabilities
    
    
    130
    
    
    
    150Deferred revenues
    
    
    165
    
    
    
    179Notes payable to related parties  short term
    
    
    75
    
    
    
    94Notes payable  short term
    
    
    25
    
    
    
    25Total current liabilities
    
    
    552
    
    
    
    539LONG TERM LIABILITIESNotes payable to related parties  long term
    
    
    200
    
    
    
    200Notes payable  long term
    
    
    200
    
    
    
    200Total long term liabilities
    
    
    400
    
    
    
    400Total liabilities
    
    
    952
    
    
    
    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 June 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
June 30, 2005 and December 31, 2004, respectively
    
    
    26
    
    
    
    25Additional capital
    
    
    43,154
    
    
    
    42,985Accumulated deficit
    
    
    (43,803
    )
    
    
    (43,616
    )Total stockholders deficit
    
    
    (623
    )
    
    
    (606
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
    
    $
    329
    
    
    $
    333
 See notes to consolidated financial statements. 3




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CLAIMSNET.COM INC. AND SUBSIDIARIES 
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004REVENUES
    
    $
    326
    
    
    $
    225
    
    
    $
    614
    
    
    $
    440COST OF REVENUES
    
    
    203
    
    
    
    168
    
    
    
    371
    
    
    
    308GROSS PROFIT
    
    
    123
    
    
    
    57
    
    
    
    243
    
    
    
    132OPERATING EXPENSESSelling, general and administrative
    
    
    208
    
    
    
    269
    
    
    
    410
    
    
    
    536Total operating expenses
    
    
    208
    
    
    
    269
    
    
    
    410
    
    
    
    536LOSS FROM OPERATIONS
    
    
    (85
    )
    
    
    (212
    )
    
    
    (167
    )
    
    
    (404
    )OTHER INCOME (EXPENSE)Gain on settlement of liabilities
    
    
    
    
    
    
    91
    
    
    
    
    
    
    
    91Interest expense  related parties
    
    
    (5
    )
    
    
    (4
    )
    
    

    (10
    )
    
    
    (8
    )Interest expense  other
    
    
    (5
    )
    
    
    (1
    )
    
    
    (10
    )
    
    
    (2
    )Total other income (expense)
    
    
    (10
    )
    
    
    86
    
    
    
    (20
    )
    
    
    81NET LOSS
    
    $
    (95
    )
    
    $
    (126
    )
    
    $
    (187
    )
    
    $
    (323
    )NET LOSS PER COMMON SHARE (BASIC AND DILUTED)
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (BASIC AND DILUTED)
    
    
    25,751
    
    
    
    24,182
    
    
    
    25,645
    
    
    
    23,795
 See notes to consolidated financial statements. 4




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CLAIMSNET.COM INC. AND SUBSIDIARIES 
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (187
    )
    
    
    (187
    )Balances at June 30, 2005
    
    
    1
    
    
    $
    
    
    
    
    25,976
    
    
    $
    26
    
    
    $
    43,154
    
    
    $
    (43,803
    )
    
    $
    (623
    )
 See notes to consolidated financial statements. 5




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CLAIMSNET.COM INC. AND SUBSIDIARIES 
    Six Months EndedJune 30,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (187
    )
    
    $
    (323
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    18
    
    
    
    22Provision for doubtful accounts
    
    
    4
    
    
    
    Gain on settlement of liabilities
    
    
    
    
    
    
    (91
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (23
    )
    
    
    12Prepaid expenses and other current assets
    
    
    (13
    )
    
    
    26Current liabilities
    
    
    33
    
    
    
    8Net cash used in operating activities
    
    
    (168
    )
    
    
    (346
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    
    
    
    
    (9
    )Capitalized software development costs
    
    
    (51
    )
    
    
    Net cash used in investing activities
    
    
    (51
    )
    
    
    (9
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from notes payable to related parties
    
    
    
    
    
    
    20Payment of notes payable to related parties
    
    
    (19
    )
    
    
    Proceeds from issuance of common stock
    
    
    100
    
    
    
    300Proceeds from exercise of stock warrants
    
    
    70
    
    
    
    Net cash provided by financing activities
    
    
    151
    
    
    
    320NET DECREASE IN CASH AND EQUIVALENTS
    
    
    (68
    )
    
    
    (35
    )CASH AND EQUIVALENTS, BEGINNING OF PERIOD
    
    
    68
    
    
    
    66CASH AND EQUIVALENTS, END OF PERIOD
    
    $
    
    
    
    $
    31SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:Payment of notes payable and accrued interest through issuance of
common stock
    
    $
    
    
    
    $
    5
 See notes to consolidated financial statements. 6




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CLAIMSNET.COM INC. AND SUBSIDIARIES 
   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 June 30, 2005 and the results of its operations and cash flows for the three
and six months ended June 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 six months ended June 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
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 September 30, 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 7




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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 six months
ended June 30, 2005. The Company recorded no compensation expense associated with options
issued to employees during the three or six months ended June 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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss, as reported
    
    $
    (95
    )
    
    $
    (126
    )
    
    $
    (187
    )
    
    $
    (323
    )Stock-based compensation expense:Included in reported net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Determined using the fair value method
    
    
    (70
    )
    
    
    (60
    )
    
    
    (135
    )
    
    
    (105
    )Pro forma net loss
    
    $
    (165
    )
    
    $
    (186
    )
    
    $
    (322
    )
    
    $
    (428
    )Net loss per share  basic and dilutedAs reported
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )Pro forma
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
  6.
    
    SUBSEQUENT EVENTSOn July 22, 2005, the Company entered into an unsecured short-term loan agreement with NFC pursuant to which NFC loaned the Company an aggregate amount of $40,000.  The principal amount plus interest, at 8% per annum on the unpaid principal, is due on demand. 8




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ITEM 2. Managements Discussion and Analysis of Financial Condition or Plan of Operation MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND OTHER
PORTIONS OF THIS REPORT CONTAIN FORWARD-LOOKING INFORMATION THAT INVOLVE RISKS AND UNCERTAINTIES.
OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE FORWARD-LOOKING
INFORMATION. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, AVAILABILITY
OF FINANCIAL RESOURCES FOR LONG TERM NEEDS, PRODUCT DEMAND, MARKET ACCEPTANCE AND OTHER FACTORS
DISCUSSED ELSEWHERE IN THIS REPORT. THIS MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT. IN GENERAL As of June 30, 2005, we had a working capital deficit of $(328,000) and stockholders deficit of
$(623,000). We generated revenues of $614,000 for the six months ended June 30, 2005 and $440,000
for the six months ended June 30, 2004. We have incurred net losses since inception and had an
accumulated deficit of $(43,803,000) at June 30, 2005. We expect to continue to operate at a loss
for the near future. PRIVATE PLACEMENTS, OPTIONS AND WARRANTS In January 2005, NFC, a related entity who, as of January 1, 2005 beneficially owned 1,081,603
shares of our common stock, representing 4.3% of our then issued and outstanding common stock,
purchased 400,000 shares of our common stock and tendered payment in the amount of $100,000 ($0.25
per share). $21,000 of the proceeds were used to repay debt and accrued interest, the remainder to
finance operations. In May and June 2005, NFC exercised previously issued warrants to purchase 350,000 shares of our
common stock at $0.20 per share or an aggregate amount of $70,000. The above sales of securities to NFC did not involve the use of an underwriter and no commissions
were paid in connection with these sales of securities. The certificates evidencing the shares of
common stock issued to NFC were appropriately legended as unregistered shares. Each offer and sale of securities to NFC was exempt from registration under the Securities Act of
1933 (the Act) 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. PLAN OF OPERATIONS Our business strategy is as follows:  
    
    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. Our primary source of revenues are fees paid by healthcare payers and vendors for private-label or
co-branded licenses and services. We expect most of our revenues to be recurring in nature. Our principal costs to operate are technical and customer support, transaction-based vendor
services, sales and marketing, research and development, acquisition of capital equipment, and
general and administrative expenses. We intend to continue to develop and 9




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upgrade our technology and transaction-processing systems and continually update and improve our
website to incorporate new technologies, protocols, and industry standards. Selling, general and
administrative expenses include all corporate and administrative functions that serve to support
our current and future operations and provide an infrastructure to support future growth. Major
items in this category include management and staff salaries and benefits, travel, professional
fees, network administration, business insurance, and rent. CRITICAL ACCOUNTING POLICIES REVENUE RECOGNITION We generally enter into services agreements with our customers to provide access to our hosted
software platform for processing of customer transactions. We operate the software application for
all customers and the customers are not entitled to ownership of our software at any time during or
at the end of the agreements. The end users of our software application access our hosted software
platform or privately hosted versions of our 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 our software platform (i.e. access to our 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. We account for our 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. We currently use an
estimated expected business arrangement term of three years which is currently the term of the
typical contracts signed by our customers. We do not segment these services and use the underlying
contractual terms to recognize revenue because we do 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, we defer
these fees and record deferred revenue. We recognize service fees for transactions and some
additional services as the services are performed. We expense the costs associated with our
customer service agreements as those costs are incurred. SOFTWARE FOR SALE OR LICENSE We begin capitalizing costs incurred in developing a software product once technological
feasibility of the product has been determined. Capitalized computer software costs include direct
labor, labor-related costs and interest. The software is amortized over its expected useful life
of 3 years or the contract term, as appropriate. Management periodically evaluates the recoverability, valuation, and amortization of capitalized
software costs to be sold, leased, or otherwise marketed whenever events or changes in
circumstances indicate that the carrying amount on the software may not be recoverable. As part of
this review, management considers the expected undiscounted future net cash flows. If they are less
than the stated value, capitalized software costs will be written down to fair value. RESULTS OF OPERATIONS FOR THREE AND SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE AND SIX MONTHS
ENDED JUNE 30, 2004 REVENUES Revenues for the three months ended June 30, 2005 (the 2005 second quarter) were $326,000
compared to $225,000 for the three months ended June 30, 2004 (the 2004 second quarter),
representing an increase of 45%. Revenues for the 2005 second quarter from recurring revenue
sources totaled $323,000 and represented 99% of total revenues. Revenues from non-recurring sources
totaled $3,000 and were related to support and other fees. Revenues for the 2004 second quarter
from recurring revenue sources totaled $219,000 and represented 97% of total revenues. Revenues
from non-recurring sources totaled $6,000 and were related to support and other fees. The increase
in revenues for the three month comparable periods was the result of both the addition of new
clients and an increase in the volume of transactions processed for pre-existing clients. Revenues for the six months ended June 30, 2005 (the 2005 first half) were $614,000 compared to
$440,000 for the six months ended June 30, 2004 (the 2004 first half), representing an increase
of 40%. Revenues for the 2005 first half from recurring revenue sources totaled $606,000 and
represented 99% of total revenues. Revenues from non-recurring sources totaled $8,000 and were
related to support and other fees. Revenues for the 2004 first half from recurring revenue sources
totaled $423,000 and represented 96% of total revenues. Revenues from non-recurring sources totaled
$17,000 and were related to support and other fees. The increase in revenues for the six month
comparable periods was the result of both the addition of new clients and an increase in the volume
of transactions processed for pre-existing clients. 10




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COST OF REVENUES Cost of revenues for the 2005 second quarter was $203,000, compared with $168,000 for the 2004
second quarter, representing an increase of 21%. The four ordinary components of cost of revenues
are data center expenses, transaction processing expenses, customer support operation expenses and
software amortization. Data center expenses increased 6% to $17,000 for the 2005 second quarter
compared with $16,000 for the 2004 second quarter. Transaction processing expenses were $45,000 for
the 2005 second quarter compared to $9,000 in the 2004 second quarter. Customer support operations
expense were $136,000 for the 2005 second quarter compared to $135,000 for the 2004 second quarter.
The increases in third party transaction processing expenses and customer support operations
expense were primarily attributable to the signing of new contracts with clearinghouses and
additional personnel. Software amortization and development project amortization expenses
decreased to $5,000 for the 2005 second quarter from $8,000 for the 2004 second quarter. Cost of revenues for the 2005 first half was $371,000, compared with $308,000 for the 2004 first
half, representing an increase of 20%. Data center expenses increased 10% to $34,000 for the 2005
first half compared with $31,000 for the 2004 first half. Transaction processing expenses increased
to $69,000 for the 2005 first half compared to $9,000 for the 2004 first half. Customer support
operations expense were $259,000 for the 2005 first half compared to $252,000 for the 2004 first
half. The increases in third party transaction processing expenses and customer support operations
expense were primarily attributable to the signing of new contracts with clearinghouses and
additional personnel. Software amortization and development project amortization expenses
decreased to $9,000 for the 2005 first half from $16,000 for the 2004 first half. OPERATING EXPENSES There were no research and development expenses for 2005 or 2004. Research and development
expenses are comprised of personnel costs and related expenses. During the 2005 first quarter, we
began development of a HIPAA remediation project and capitalized development costs of $20,000 and
$51,000 during the 2005 second quarter and 2005 first half, respectively. No costs were
capitalized in 2004. Selling, general and administrative expenses for the 2005 second quarter were $208,000 compared
with $269,000 for the 2004 second quarter, a decrease of 23%, and $410,000 for the 2005 first half,
compared with $536,000 for the 2004 first half, a decrease of 24%. The reductions are a result of
cost containment measures including staff reductions. OTHER INCOME (EXPENSE) Interest expense of $10,000 and $20,000 was incurred for the 2005 second quarter and 2005 first
half, respectively, on financing fees and affiliate debt compared with $5,000 and $10,000 for the
2004 second quarter and 2004 first half, respectively. A $91,000 gain on settlement of liabilities
was recognized during the 2004 first half related to a settlement agreement with a nonaffiliated
creditor; such agreement being consummated during May 2004. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities of $168,000 for the 2005 first half was primarily related to
net loss of $187,000, less depreciation of $18,000 and provision for doubtful accounts of $4,000,
offset by changes in working capital of $3,000. Net cash used in operating activities of $346,000
for the 2004 first half was primarily related to net loss of $323,000, less depreciation of $22,000
and changes in working capital of $46,000, offset by a non-cash gain of $91,000 from settlement of
liabilities. Net cash used in investing activities for the 2005 first half was $51,000 related to the cost of
software development capitalized during the period compared with $9,000 for the 2004 first half
related to the cost of leasehold improvements made during the period. Net cash provided by financing activities in the 2005 first half was $151,000, of which $100,000
was related to the issuance of common stock and $70,000 related to proceeds from the exercise of
stock warrants, offset by $19,000 used to repay debt. Net cash provided by financing activities in
the 2004 first half was $320,000, of which $300,000 was related to the issuance of common stock and
$20,000 related to proceeds from debt financing. We believe that our 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 our capital requirements past September 30, 2005. Necessary additional capital
may not be available on a timely basis or on acceptable terms, if at all. In any of these events,
we may be unable to implement current plans for expansion or to repay debt obligations as they
become due. If sufficient capital cannot be obtained, we may be forced to significantly reduce
operating expenses to a point which would be detrimental to business operations, curtail research
and development activities, sell certain business assets or discontinue some or all of our business
operations, take other actions which could be detrimental to business prospects and result in
charges which could be material to our operations and financial position, or cease operations
altogether. In the event that any future financing should take the form of a sale of equity
securities, the holders of the common stock and preferred stock may experience additional dilution.
In the event of a 11




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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. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS Information contained or incorporated by reference in this quarterly report on Form 10-QSB and in
other SEC 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. 
 ITEM 3. Controls and Procedures The Companys management, including the Companys principal executive officer and principal
financial officer, has evaluated the effectiveness of the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)
as of the period ended June 30, 2005, the period covered by this Quarterly Report on Form 10-QSB.
Based upon that evaluation, the Companys principal executive officer and principal financial
officer have concluded that the disclosure controls and procedures were effective as of June 30,
2005 to provide reasonable assurance that material information relating to the Company is made
known to management including the CEO and CFO. There were no changes in the Companys internal control over financial reporting that occurred
during the period ended June 30, 2005 that have materially affected, or are reasonable likely to
materially affect, the Companys internal control over financial reporting. 12




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PART II  OTHER INFORMATION 
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds See Part I, Item 1, Note 4 for a description of equity securities sold by the Company during the
period covered by this Report that were not registered under the Act. 
 ITEM 5. Other Information See Part I, Item 1, Note 6
for a description of a promissory note that the Company entered into
with NFC in July 2005. 
 ITEM 6. Exhibits The following exhibits are filed herewith:  10.1
    
    Form of Promissory Note31.1
    
    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 13




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SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized. CLAIMSNET.COM INC.(Registrant)July 26, 2005By:
    
    /s/ Don CrosbieDon CrosbiePresident andChief Executive Officer, onbehalf of the RegistrantJuly 26, 2005By:
    
    /s/ Laura M. BrayLaura M. BrayChief Financial Officer
 14