TransCoastal 10-Q 2010 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period EndedJune 30, 2010

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 number001-14665

CLAIMSNET.COM INC.

(Exact name of registrant as specified in its charter)

Delaware	75-2649230
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

14860 Montfort Dr, Suite 250
Dallas, Texas	75254
(Address of principal executive offices)	(Zip Code)

972-458-1701
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Large accelerated filero Accelerated filero Non-accelerated filero Smaller Reporting Companyþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $.001 par value, 34,874,696 shares outstanding as of July 29, 2010.

CLAIMSNET.COM INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements	2
Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009	2
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2010 and 2009	3
Consolidated Statements of Changes in Stockholders’ Deficit for the Year Ended December 31, 2009 and the Six Months Ended June 30, 2010 (unaudited)	4
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2010 and 2009	5
Notes to Consolidated Financial Statements	6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
ITEM 4T. Controls and Procedures	12
PART II. OTHER INFORMATION
ITEM 6. Exhibits	13
SIGNATURES	15
CERTIFICATIONS
31.1 Certification of Don Crosbie
31.2 Certification of Laura M. Bray
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley

PART I — FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

CLAIMSNET.COM INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	(Unaudited)
	June 30,			December 31,
	2010			2009
ASSETS
CURRENT ASSETS
Cash and equivalents	$	40		$	18
Accounts receivable, net of allowance for doubtful accounts of $5 and $6		306			313
Prepaid expenses and other current assets		53			43
Total current assets		399			374
EQUIPMENT, FIXTURES AND SOFTWARE
Total equipment, fixtures and software, net		113			119
INTANGIBLE AND OTHER ASSETS
Goodwill		138			138
TOTAL ASSETS	$	650		$	631
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable	$	344		$	369
Accrued payroll and other current liabilities		68			99
Accrued interest — related parties		84			70
Deferred revenues — current portion		14			18
Notes payable to related parties		990			875
Convertible notes payable to related parties		10			10
Total current liabilities		1,510			1,441
LONG-TERM LIABILITIES
Deferred revenues — long-term portion		11			14
Total long-term liabilities		11			14
Total liabilities		1,521			1,455
STOCKHOLDERS’ DEFICIT
Convertible 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 June 30, 2010 and December 31, 2009		—			—
Common stock, $.001 par value; 40,000,000 shares authorized; 34,874,696 shares issued and outstanding as of June 30, 2010 and December 31, 2009		35			35
Additional capital		44,896			44,896
Accumulated deficit		(45,802	)		(45,755	)
Total stockholders’ deficit		(871	)		(824	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	650		$	631

See notes to consolidated financial statements.

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CLAIMSNET.COM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
REVENUES	$	596		$	563		$	1,175		$	1,082
COST OF REVENUES		434			419			848			832
GROSS PROFIT		162			144			327			250
OPERATING EXPENSES
Selling, general and administrative		186			221			360			472
Total operating expenses		186			221			360			472
LOSS FROM OPERATIONS		(24	)		(77	)		(33	)		(222	)
OTHER INCOME (EXPENSE)
Interest expense — related parties		(7	)		(7	)		(14	)		(15	)
Interest expense — other		—			(3	)		—			(7	)
Total other income (expense)		(7	)		(10	)		(14	)		(22	)
NET LOSS	$	(31	)	$	(87	)	$	(47	)	$	(244	)
NET LOSS PER COMMON SHARE (BASIC AND DILUTED)	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.01	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (BASIC AND DILUTED)		34,875			34,078			34,875			33,352

See notes to consolidated financial statements.

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CLAIMSNET.COM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

Year Ended December 31, 2009 and the Six Months Ended June 30, 2010 (unaudited)

(In thousands)

	Number of				Number of
	Preferred				Common									Total
	Shares		Preferred		Shares		Common		Additional		Accumulated			Stockholders’
	Outstanding		Stock		Outstanding		Stock		Capital		Deficit			Deficit
Balances at December 31, 2008		1	$	—		31,147	$	31	$	44,001	$	(45,391	)	$	(1,359	)
Issuance of common stock in payment of accrued interest - related party		—		—		195		—		49		—			49
Issuance of common stock in payment of note principal — related party		—		—		3,533		4		846		—			850
Net loss		—		—		—		—		—		(364	)		(364	)
Balances at December 31, 2009		1		—		34,875		35		44,896		(45,755	)		(824	)
Net loss		—		—		—		—		—		(47	)		(47	)
Balances at June 30, 2010		1	$	—		34,875	$	35	$	44,896	$	(45,802	)	$	(871	)

See notes to consolidated financial statements.

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CLAIMSNET.COM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	June 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(47	)	$	(244	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		6			27
Bad debt expense		—			3
Changes in operating assets and liabilities:
Accounts receivable		7			(60	)
Prepaid expenses and other current assets		(10	)		(31	)
Current liabilities and deferred revenue		(49	)		11
Net cash used in operating activities		(93	)		(294	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investing activities		—			—
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligation		—			(25	)
Payment of note payable to related parties		—			(50	)
Proceeds from notes payable to related parties		115			375
Net cash provided by financing activities		115			300
NET INCREASE IN CASH AND EQUIVALENTS		22			6
CASH AND EQUIVALENTS, BEGINNING OF PERIOD		18			—
CASH AND EQUIVALENTS, END OF PERIOD	$	40		$	6
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest	$	—		$	12
Cash paid for taxes	$	—		$	—
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
Payment of accrued interest through issuance of common stock	$	—		$	49
Payment of note principal through issuance of common stock	$	—		$	750

See notes to consolidated financial statements.

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CLAIMSNET.COM INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1. BASIS OF PRESENTATION

In 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, 2010 and the results of their operations and cash flows for the three and six months ended June 30, 2010 and 2009, 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, 2010 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-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on March 4, 2010.

2. NEED FOR ADDITIONAL CAPITAL AND LIQUIDITY

Management 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, 2010. 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 SOFTWARE

Equipment, fixtures and software consists of the following at June 30, 2010 (in thousands):

Computer hardware and software	$	524
Software development costs		2,103
Furniture and fixtures		31
Office equipment		28
Leasehold improvements		35
		2,721
Less accumulated depreciation and amortization		(2,608	)
	$	113

4. LOANS FROM RELATED PARTIES

On February 16, 2010, the Company issued an unsecured promissory note upon receipt of $35,000 from Mr. Thomas Michel, a director (“Michel”). The note bears interest at the rate of 3% per annum. Payments equal to the principal and accrued and unpaid interest on the note are due on demand, with thirty days notice.

On March 18, 2010, the Company issued an unsecured promissory note upon receipt of $80,000 from National Financial Corporation, a related party (“NFC”). The note bears interest at the rate of 3% per annum. Payments equal to the principal and accrued and unpaid interest on the note are due on demand.

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5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company evaluates the fair value of certain of its financial assets and liabilities under FASB Accounting Standards Codification (“ASC”) Topic 820, based on the observability of the inputs used in the valuation techniques. The Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

— Level 1. Observable inputs such as quoted market prices in active markets

— Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly, and

— Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company’s cash and equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued payroll and other current liabilities, and deferred revenues carrying values approximates their fair value amounts due to their current maturities as of June 30, 2010. The Company’s goodwill is measured on a non-recurring basis and is in Level 3 of the fair value hierarchy. Notes payable do not approximate fair value, as they are with related parties, and do not bear market rates of interest. There were no movements of assets and liabilities between levels within the hierarchy as of June 30, 2010.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that are based on our current expectations, assumptions, beliefs, estimates and projections about our company, our industry and other related industries. The forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “should” and variations of such words or similar expressions.

We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances. Some of the factors that may cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements include the risk factors discussed under the heading “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2009 and the following:

• 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;

• the ability of our clients to pay their debts when they become due;

• threats to Internet security; and

• acceptance of the Internet and other online services in the healthcare industry and in general.

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, 2010, we had a working capital deficit of $1,111,000 and a stockholders’ deficit of $871,000. We generated revenues of $1,175,000 for the six months ended June 30, 2010 and $1,082,000 for the six months ended June 30, 2009. We have incurred net losses since inception and had an accumulated deficit of $45,802,000 at June 30, 2010. We expect to continue to operate at a loss in the near future.

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The majority of the cost of revenue and operating expenses reflected in our consolidated financial statements are associated with the cost of personnel and other expenditures which are fixed or semi-fixed in nature, and not directly related to the number of clients we serve or transactions we process to generate revenues. In the event we are successful in implementing our growth strategy, we believe our current infrastructure is sufficient to allow our operations to expand without significant expense.

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 December 31, 2010. 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 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.

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, 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.

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. One client accounted for 35.9% and 39.2% of our revenue for the second quarter and six months ended June 30, 2010, respectively.

Our principal costs to operate are technical and customer support, transaction-based vendor services, sales and marketing, acquisition of capital equipment, and general and administrative expenses. Going forward, as funds become available, we intend to continue to develop and 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.

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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 three 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, 2010 COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2009

REVENUES

Revenues for the three months ended June 30, 2010 (the “2010 second quarter”) were $596,000 compared to $563,000 for the three months ended June 30, 2009 (the “2009 second quarter”), representing an increase of 6%. The addition of new clients and an increase in the volume of transactions processed for existing clients accounted for the increase in revenues for the three month comparable periods.

Revenues for the six months ended June 30, 2010 (the “2010 first half”) were $1,175,000 compared to $1,082,000 for the six months ended June 30, 2009 (the “2009 first half”), representing an increase of 9%. The addition of new clients and an increase in the volume of transactions processed for existing clients accounted for the increase in revenues for the six month comparable periods.

COST OF REVENUES

Cost of revenues for the 2010 second quarter was $434,000, compared with $419,000 for the 2009 second quarter, representing an increase of 4%. Cost of revenues for the 2010 first half was $848,000, compared with $832,000 for the 2009 first half, representing an increase of 2%.

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The four ordinary components of our cost of revenues are data center expenses, transaction processing expenses, customer support operation expenses and software amortization. Only two of these components materially changed between the 2010 second quarter and the 2009 second quarter, and between the 2010 first half and the 2009 first half. Transaction processing expenses were $250,000 for the 2010 second quarter compared to $170,000 in the 2009 second quarter, while transaction processing expenses increased to $472,000 for the 2010 first half compared to $326,000 for the 2009 first half. The increase in third party transaction processing expenses for both periods was primarily attributable to the signing of new contracts with clearinghouses as well as new agreements to outsource some processing to third parties. Customer support operation expenses were $171,000 for the 2010 second quarter compared to $226,000 for the 2009 second quarter, while customer support operation expenses were $350,000 for the 2010 first half compared to $460,000 for the 2009 first half. These changes are primarily due to a reduction of personnel. Amortization and depreciation expenses for the 2010 second quarter included $2,000 of software amortization and development project amortization expenses compared with $2,000 for the 2009 second quarter, and $0 for depreciation associated with our capital lease equipment for the 2010 second quarter compared to $11,000 for the 2009 second quarter. Amortization and depreciation expenses for the 2010 first half included $4,000 of software amortization and development project amortization expenses compared with $4,000 for the 2009 first half, and $0 for depreciation associated with our capital lease equipment for the 2010 first half compared to $22,000 for the 2009 first half.

OPERATING EXPENSES

There were no research and development expenses for the 2010 or 2009 first half. Research and development expenses are comprised of personnel costs and related expenses. In 2006, we began development of a customer care application and two customer support inquiry tools that are still incomplete. We capitalized no development costs during the 2010 or 2009 first half.

Selling, general and administrative expenses for the 2010 second quarter were $186,000 compared with $221,000 for the 2009 second quarter, a decrease of 16%. Selling, general and administrative expenses were $360,000 for the 2010 first half, compared with $472,000 for the 2009 first half, a decrease of 24%. These changes are primarily due to the reduction of sales personnel and associated benefits.

OTHER INCOME (EXPENSE)

Interest expense of $7,000 and $14,000 was incurred for the 2010 second quarter and 2010 first half, respectively, on financing fees and related party debt compared with $10,000 and $22,000 for the 2009 second quarter and 2009 first half, respectively.

NET LOSS

The net loss for the second quarter of 2010 was $31,000, or $0.00 per share, compared to $87,000, or $0.00 per share, in the second quarter of 2009. The net loss for the first half of 2010 was $47,000, or $0.00 per share, compared to $244,000, or $0.01 per share, in the first half of 2009. The decrease was primarily attributable to a decrease in sales personnel and associated benefits.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities of $93,000 for the 2010 first half was primarily related to net loss of $47,000 and changes in working capital and non-current deferred revenue of $52,000, less depreciation of $6,000. Net cash used in operating activities of $294,000 for the 2009 first half was primarily related to net loss of $244,000 and changes in working capital and non-current deferred revenue of $77,000, less depreciation of $27,000.

Net cash used in investing activities for the 2010 and 2009 first half was $0.

Net cash provided by financing activities in the 2010 first half was $115,000, which was related to proceeds from related party debt. Net cash provided by financing activities in the 2009 first half was $300,000, of which $375,000 was related to proceeds from related party debt offset by $50,000 of debt repayments and $25,000 of capital lease principal payments.

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On February 16, 2010, the Company issued an unsecured promissory note upon receipt of $35,000 from Mr. Thomas Michel, a director (“Michel”). The note bears interest at the rate of 3% per annum. Payments equal to the principal and accrued and unpaid interest on the note are due on demand, with thirty days notice.

On March 18, 2010, the Company issued an unsecured promissory note upon receipt of $80,000 from National Financial Corporation, a related party (“NFC”). The note bears interest at the rate of 3% per annum. Payments equal to the principal and accrued and unpaid interest on the note are due on demand.

OFF-BALANCE SHEET ARRANGEMENTS

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

ITEM 4T. Controls and Procedures

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2010 and concluded that the disclosure controls and procedures were not effective, because certain deficiencies involving internal controls constituted a material weakness as discussed in our Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on March 4, 2010. The material weakness identified did not result in the restatement of any previously reported financial statements or any other related financial disclosure, nor does management believe that it had any effect on the accuracy of the Company’s financial statements for the current reporting period.

The material weakness in our internal control over financial reporting that we identified in our Annual Report on Form 10-K for the year ended December 31, 2009 relates to the monitoring and review of work performed by our Chief Financial Officer in the preparation of financial statements, footnotes and financial data provided to the Company’s registered public accounting firm in connection with the annual audit. All of our financial reporting is carried out by our Chief Financial Officer, and we do not have an audit committee. This lack of accounting staff results in a lack of segregation of duties and accounting technical expertise necessary for an effective system of internal control.

In order to mitigate this material weakness to the fullest extent possible, all financial reports are reviewed by the Chief Operating Officer, the Chief Executive Officer as well as the Board of Directors for reasonableness. All unexpected results are investigated. At any time, if it appears that any control can be implemented to continue to mitigate such weaknesses, it will be immediately implemented. As soon as our finances allow, we will hire sufficient accounting staff and implement appropriate procedures for monitoring and review of work performed by our Chief Financial Officer.

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 6. Exhibits

The following exhibits are filed herewith:

3.1	(1)	Certificate of Incorporation.
3.1(a)	(1)	Certificate of Amendment to Certificate of Incorporation.
3.1(b)	(3)	Certificate of Designation of Series A Preferred Stock.
3.1(c)	(3)	Certificate of Designation of Series B Preferred Stock.
3.1(d)	(3)	Certificate of Designation of Series C Preferred Stock.
3.1(e)	(3)	Certificate of Designation of Series D Preferred Stock.
3.1(f)	(2)	Certificate of Designation of Series E Preferred Stock.
3.2	(1)	Bylaws, as amended.
4.1	(1)	Form of Common Stock Certificate.
4.2	(3)	Form of Warrant issued to Bo W. Lycke dated February 21, 2002.
4.3	(4)	Form of Warrant issued to Don Crosbie dated June 3, 2003.
4.4	(4)	Form of Warrant issued to certain employees dated June 3, 2003.
4.5	(4)	Form of Warrant issued to Thomas Michel dated June 3, 2003.
4.6	(4)	Form of Warrant issued to Alfred Dubach dated June 3, 2003.
4.7	(5)	Form of Warrant issued to Gary J. Austin dated September 21, 2004.
4.8	(5)	Form of Warrant issued to Laura M. Bray dated September 21, 2004.
4.9	(5)	Form of Warrant issued to Don Crosbie dated September 21, 2004.

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10.1		(6)	Unsecured Convertible Promissory Note between Claimsnet.com and Thomas Michel dated February 16, 2010.
10.2		(7)	Unsecured Promissory Note between Claimsnet.com and National Financial Corporation dated March 18, 2010.
	31.1		Certification of Don Crosbie.
	31.2		Certification of Laura M. Bray.
	32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Don Crosbie.
	32.2		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 registration statement on Form S-1 (Registration No. 333-36209).
(2)	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.
(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 Current Report on Form 8-K dated February 16, 2010 filed on February 18, 2010.
(7)	Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 18, 2010 filed on March 22, 2010.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CLAIMSNET.COM INC. (Registrant)
July 29, 2010
By:	/s/ Don Crosbie
	Don Crosbie
	Chief Executive Officer
July 29, 2010
By:	/s/ Laura M. Bray
	Laura M. Bray
	Chief Financial Officer

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