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EX-32.1 - EX-32.1 - TransCoastal Corpd79896exv32w1.htm
EX-31.2 - EX-31.2 - TransCoastal Corpd79896exv31w2.htm
EX-32.2 - EX-32.2 - TransCoastal Corpd79896exv32w2.htm
EX-14 - EX-14 - TransCoastal Corpd79896exv14.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2010
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                      to                     
Commission File Number: 001-14665.
CLAIMSNET.COM INC.
(Name of registrant 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)
Registrant’s telephone number: 972-458-1701
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.001 par value
Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Exchange Act of 1934. Yes o No þ
Indicate by checkmark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No þ
Indicate by checkmark whether the registrant: (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
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). Yes o No o
Indicate by checkmark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K þ
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 filer o   Accelerated filer o   Non-accelerated filer o   Smaller Reporting Company þ
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates, based on the average of bid and ask price of such common equity as of June 30, 2010, was $702,073.
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 February 24, 2011.
DOCUMENTS INCORPORATED BY REFERENCE            None.
 
 

 


 

PART I
ITEM 1. BUSINESS.
Claimsnet.com inc. (“Company”, “we”, “our”, or “us”) is a Delaware corporation originally formed in April 1996. We are an electronic commerce company engaged in healthcare transaction processing for the medical and dental industries by means of the Internet. Our proprietary software, which was developed over the last thirteen years, enables the efficient communication of data between healthcare payers and their provider networks and trading partners (claims clearinghouses, third party administrators, preferred provider organizations, health maintenance organizations, claim re-pricing organizations, independent physician associations, and managed service organizations), for the purpose of conducting administrative transactions required to effect financial reimbursement for healthcare services. Our systems, in addition to providing electronic communication between various parties, improve editing and checking of data accuracy in medical claims without the need for changes to customers IT systems. Both the ease of data exchange as well as the quality of the data being exchanged, allows users to realize increases in electronic transaction volumes compared to paper transactions. These processes improve the speed and accuracy of the transactions and enhance the auto adjudication percentage rates, thereby improving the productivity of claims adjusters and the speed of medical reimbursements to healthcare providers. Included in this process is real-time editing of the claims data for compliance with format and content requirements of payers to satisfy payers specific processing requirements, again adding to people productivity and speed of reimbursement turn around times. In addition, our software provides for secure encryption of all claims data transmitted in compliance with the regulations of the United States Centers for Medicare and Medicaid Services (formerly HCFA).
We believe that the following are significant advantages of our electronic transaction processing services:
  the ability to easily configure the system to meet the specific needs of our clients, both in the format and content of data being exchanged;
  the ability to accept input from a variety of sources (direct output from a provider’s practice management system, EDI files from clearinghouses and trading partners, and data conversion from scanned paper forms), pre-process the data, improve the data or reject the transaction according to client-specific business rules, and deliver the data in a consistent and client-defined format;
  the ability to create multiple custom website formats to be promoted by partners and sponsors without modification of the server-based processing systems;
  the ability of healthcare providers utilizing their websites to interactively process claims on the Internet and receive real time edits prior to claim submission; and
  the minimal software and processing power required for providers to utilize our proprietary software; and
  EHNAC certification statement.
We believe that the services offered by some of our competitors are generally based on legacy mainframe technology, proprietary networks, and proprietary file formats, which limit the ability of those competitors to offer interactive Internet-based processing services on an economical basis.
We generate recurring revenue primarily from implementation fees, development fees, license fees, support fees and transaction-based fees. We use the services of certain partners and vendors to assist with the conversion of scanned paper forms, the printing of paper forms from electronic data, and the delivery of certain electronic transactions.
ELECTRONIC CLAIMS PROCESSING MARKET
Healthcare claims are traditionally processed by clearinghouses using a similar operating structure to that which exists in the credit card industry. A merchant that accepts a credit card for payment does not send payment requests directly to the bank that issued the card, but sends the payment request to a clearinghouse. The payment request is processed and transmitted to the appropriate bank. Healthcare claim clearinghouses accept, sort, process, edit, and then forward the claims to the appropriate payers, either electronically or on paper. Many of the major healthcare clearinghouses operate in a mainframe computer environment. Furthermore, traditional clearinghouses process claims in off-line batches and return edit results to the submitters in a subsequent batch transmission. This operating configuration is both expensive and time consuming due to the source code changes required to continuously process claims correctly to meet payer requirements. In contrast, our healthcare transaction processing software system on the Internet is designed to operate in a real-time, open client-server configuration. This operating alternative offers the provider and payer a method of communicating directly in a rapid, accurate, and cost-effective manner.
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and the HITECH Act of 2009 include sections on administrative simplification requiring improved efficiency in health care delivery by standardizing electronic data interchange, and protection of confidentiality and security of health data through setting and enforcing standards. More specifically, HIPAA calls for (a) standardization of electronic patient health, administrative and financial data, (b) unique health identifiers for

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individuals, employers, health plans and health care providers, and (c) security standards protecting the confidentiality and integrity of “individually identifiable health information.” All healthcare organizations are affected, including health care providers, health plans, employers, public health authorities, life insurers, clearinghouses, billing agencies, information systems vendors, service organizations, and universities. HIPAA calls for severe civil and criminal penalties for noncompliance. The provisions relating to standards for electronic transactions, including health claims and equivalent managed care encounter information, became effective in October 2003 for clearinghouse and large payer organizations with implementation by all entities no later than October 2004. The provisions relating to standards for privacy were implemented in April 2003 for large organizations and April 2004 for small organizations. The provisions relating to security were implemented in April 2005. The provisions relating to national provider identifiers were implemented in May 2007. The ARRA, HITECH Act became effective in 2010, and the technical standards are being updated currently with full implementation compliance date of January 1, 2012. In October 2013, the standards for the new ICD 10 codes will be mandated.
We believe that the convergence of HIPAA mandates and the proliferation of Internet technology will cause sweeping changes in the health care claims processing market. At a minimum, it will cause all payers to implement secure electronic transaction processing capabilities for a full menu of administrative transactions. We expect the universal availability of data exchange between healthcare organizations to generate growth in the healthcare EDI industry. If the industry evolves toward direct payer submission of claims or real-time adjudication of claims, we believe our software will be able to offer efficient access to payers and healthcare providers in a HIPAA-compliant format.
BUSINESS STRATEGY
Our business strategy is as follows:
  to utilize our technology to help healthcare organizations achieve more efficient and less costly administrative operations;
  to market our services directly to the provider and 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 business strategies may not succeed, and we may never achieve our business objectives.
HEALTHCARE TRANSACTION PROCESSING SOFTWARE AND SECURITY
Our healthcare transaction processing software is designed for processing in-patient and outpatient healthcare claims and electronic remittance advice claims (ERA’s). The software is modular, providing valuable flexibility, and generally consists of the following components:
  core processing software developed by us which provides claims review, claims editing, and a “table-based” software coding of claims variables at a payer-specific level;
  data mapping software that allows us to accept a wide variety of data input formats;
  data format generating software developed by us that allows us to easily create a wide variety of data output formats;
  an integrated web-based user interface that can be easily configured to support co-branded and private-labeled deployment;
  industry standard website management software; and
  state-of-the-art commercial security and encryption software.
Our software replaces the expensive and time-consuming hard-coding routines required by traditional systems with a user-friendly system that is table-based. Our table-based systems makes payer-specific edits to meet the requirements of payers and avoids expensive onsite software changes. Our personnel input new edits. Once healthcare providers or trading partners connect to our secure website, our software edits claims on-line automatically, using a database containing more than 22,000 edit variables. In the event that a particular payer cannot accept submission of claims electronically, we either print and mail hard

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copies of the claims to these payers and charge the provider for this additional service or allow the provider to print and mail the claims.
Our healthcare transaction processing software is a web-based system, based upon a client-server computing model, and includes a variety of different software applications. Individual applications work together to provide the extraction and encryption of claims from a submitting system to our Internet claims processing server, where editing and formatting occurs in a secure environment. Our system then delivers the claims to the payer gateway. The different software applications have been purchased, licensed, or developed by us.
Our website user interface is structured into three sections: “PUBLIC INTERNET,” “CLIENT EXTRANET” and “PRIVATE INTRANET.” The PUBLIC INTERNET site provides company background, product demonstrations, and customer enrollment forms. The CLIENT EXTRANET provides a secure individual customer area for private customer communication and encrypted claims transmission. The United States Centers for Medicare and Medicaid Services (formerly HCFA) has defined security requirements for Internet communications including healthcare data. We operate in compliance with these requirements. The PRIVATE INTRANET site is designed for internal communications, website operating reports, customer support, and reporting.
Our personnel access the web server hosting environment remotely via a secure Virtual Private Network (VPN) for technical operations support. Examples of the type of support provided include migrating website changes to production, database administration, and Claims Processing Engine monitoring and management.
With the exception of the commercial software, such as that provided by Microsoft, we have either identified back-up sources for all the software used or, in the event of a business failure by the licensing vendor, we own the source code.
TRAINING AND HARDWARE REQUIREMENTS
The training for our various products and services is included in the initial setup fee. User manuals and reference information are available online through our client extranet to the provider, seven days a week, 24 hours a day. The tutorial and other training documents are always available at our web home page, the location of which is http://www.claimsnet.com.
No significant hardware investment by the customer is required in order to take advantage of our services. We communicate with our payer gateways using our public FTP server with PGP encryption, secure FTP with SSL protocol, secure site-to-site VPN, or point-to-point asynchronous communication protocol. The client extranet system requires the provider to use a 28,800 bps or better asynchronous modem and a PC with Windows95 or higher operating system installed. An Internet Service Provider, such as SBCYahoo, America Online or Comcast/Roadrunner, offers local telecommunication to the Internet. Our customers are responsible for obtaining and maintaining their Internet Service Provider connection.
INTERNET/INTRANET
Our processing configuration requires no electronic claims processing software to reside at the level of the healthcare provider. All editing and formatting takes place at our Internet application server site. All software updates and all format changes are available instantly to all customers.
Our processing does not take place on the Internet, but rather in an extranet configuration. The main advantage of this approach is to assure that the communication between our servers and a user takes place in a highly controlled, secure, and encrypted environment.
The dual encryption utilized by us occurs at the browser software and application server level. All processing and data storage occurs behind a firewall, providing secure and controlled access to all data.
CUSTOMERS
We view our customers as (1) the payers accepting claims, (2) the strategic partners and affiliates with which we jointly operate, and (3) the healthcare providers submitting claims. Revenues received from one customer represented a significant portion of our total revenues during the last two years. Revenues received from this customer represented 40% of our revenues for 2010 and 2009.
We enter into agreements with our clients. Generally, such agreements protect our intellectual property rights and define the financial terms of our relationship. We require each healthcare provider using our services to enter into an agreement, usually by

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agreeing to abide by the terms of our standard license agreement via our website. We also enter into agreements with the commercial medical and dental payers or clearinghouses to which we submit processed claims. Generally, such agreements provide for setup fees, recurring flat rate fees, and transaction fees that we receive for certain transactions and transaction fees that we pay for other transactions.
MARKETING
Our marketing strategy is two-fold.
First, we created strategic partnerships with organizations that:
  are engaged in electronic claims processing and expect to benefit by using our advanced technology; and
  serve or are engaged in direct sales and marketing to the healthcare market and desire to expand the products and services they offer to their clients without incurring substantial costs by using our advanced technology in a co-branded or private-label arrangement.
We have established several valuable strategic relationships and are actively seeking additional partners for alliances and joint ventures, including managed care companies, Internet service and information providers, traditional healthcare information systems providers, clearinghouses, payer organizations, and consulting firms, each seeking solutions to the costly handling of healthcare claims and other administrative transactions.
We may never secure any additional alliances or joint venture relations, and if we do, such alliances or joint venture relationships may never result in material revenues or be profitable.
Second, we have had and continue to reassess from time to time, a direct sales force with a direct sales campaign to the PPO, HMO, TPA, Medical Insurance carrier, and provider marketplace. We continue to review these sales and marketing policies to enable us to accelerate revenue growth. However, such efforts may not be successful.
In support of our marketing strategy, we have been and are presently a member of the Cooperative Exchange Association, an organization seeking to expand the delivery of HIPAA-defined transactions to the nation’s healthcare payers, and whereby member and non-member organizations transmit claims to each other as required.
Additionally, we have entered into several relationships with strategic partners for the marketing of our services and use of our proprietary technology, including arrangements entered into with business-to-business healthcare transaction service providers and application service providers such as DST Health (formerly Synertech Systems, Inc.), SourceLynx and Tela Sourcing to operate or provide each a co-branded or private-labeled version of our claims processing application to be marketed by the other party either directly throughout the United States or, as part of its own Internet-based service.
COMPETITION
Several large companies such as Emdeon, RelayHealth, Availity, ENS Ingenix and MedAvant dominate the claims processing industry in which we operate. Each of these companies operates a regional or national clearinghouse of medical and dental claims. In most cases, these companies have large existing capital and software investments and focus on large healthcare providers, such as hospitals and large clinics, or act as wholesale clearinghouses for smaller electronic claims processing companies. We estimate, based on information from various trade journals, that in addition to these large competitors, there are at least 100 or more small independent electronic claims processing companies and clearinghouses which operate as local sub-clearinghouses for the processing of medical and dental claims, many of which are larger and have greater financial resources than we do.
A number of additional companies, several of which have greater financial resources and marketing capabilities than us, have announced that they intend to enter the claims processing industry. Some of these companies have indicated a desire to primarily serve the payer community and some are primarily focused on the provider community.
All of these companies are considered competitors; however, several of these companies are already our strategic partners for co-branded or private label solutions using our technology.
We believe that the flexibility, configurability, and operational efficiency of our claims processing system will allow us to compete effectively in the payer market and to partner with clearinghouses and other vendors in the provider market. We anticipate that competition will increase in the processing of claims on the Internet. No assurance can be given that any significant revenues will result or that we will successfully compete in any market in which we conduct or may conduct operations.

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EMPLOYEES
As of December 31, 2010, we had a total of twelve employees. Ten of these employees were full-time employees and two were part-time employees. Two of these employees were executive officers and ten were technical and service personnel. None of our employees were represented by a labor organization. Most of our employees have been granted incentive stock options or warrants, and we believe that we have a satisfactory relationship with our employees.
SIGNIFICANT SUBSEQUENT EVENTS
On February 9, 2011, the Company terminated its agreement with Blackhawk Partners, effective March 9, 2011. The termination was in accordance with the terms of the agreement. The services to be rendered by Blackhawk in accordance with the agreement included seeking debt or equity financing for the Company potentially in connection with a merger or acquisition transaction. Upon execution, the Company tendered Blackhawk a non-refundable fee of $50,000. The Company also agreed to pay Blackhawk an advisory fee equal to 6.0% of the total equity gross amount funded to the Company outside of Blackhawk proprietary funds and 3.0% of the total debt gross amount similarly funded (“Advisory Fee”) in the event a transaction took place.Additionally, on the 1st day of every month beginning six months from the Effective Date and continuing for a period of six months, the Company was to pay Blackhawk a monthly non-refundable advisory fee of $12,000. The agreement was terminable by either party with 30 days written notice, although the Advisory Fee shall apply for 18 months after termination.

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ITEM 1A. RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING OUR BUSINESS AND PROSPECTS.
CONDITIONS EXIST WHICH CAUSE SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
The report of our independent registered public accounting firm with respect to our financial statements as of December 31, 2010 and for the year then ended contains an explanatory paragraph with respect to our ability to continue as a going concern.
Management believes that available cash resources, together with anticipated revenues from operations and the proceeds of recently completed financing activities may not be sufficient to satisfy our capital requirements through June 30, 2011. Necessary additional capital may not be available on a timely basis or on acceptable terms, if at all. If we are unable to maintain or obtain sufficient capital, we may be unable to repay debt obligations as they become due, 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 is affected, to the extent it includes 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 may be unable to recoup any of their investment. Therefore, we are exploring alternatives in both the short and long term that may relieve our cash flow difficulties.
WE HAVE A HISTORY OF NET LOSSES AND LIMITED REVENUES, WE ANTICIPATE FURTHER LOSSES AND WE HAVE A WORKING CAPITAL DEFICIT.
We have incurred net losses since inception and expect to continue to operate at a loss for the foreseeable future. For the years ended December 31, 2006, 2007, 2008, 2009 and 2010, we incurred net losses of $389,000, $457,000, $650,000, $364,000 and $287,000, respectively. As of December 31, 2006, 2007, 2008, 2009 and 2010, we had working capital deficits of $514,000, $1,164,000, $789,000, $1,067,000 and $1,243,000, respectively. We generated revenues of $1,464,000, $1,648,000, $2,080,000, $2,207,000 and $2,326,000 for the years ended December 31, 2006, 2007, 2008, 2009 and 2010, respectively, which have not allowed us to become a viable, stable participant in our industry. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
If we continue to operate at a loss and are unable to increase our working capital, we may be unable to continue to operate our business.
ONE CUSTOMER GENERATED A SIGNIFICANT PORTION OF OUR REVENUES AND THE LOSS OF THIS CUSTOMER COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS PROSPECTS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues received from one customer represented a significant portion of our total revenues during the last two years. Revenues received from this customer represented 40% of our revenues for 2010 and 2009. The loss of this customer could have a material adverse effect on our business, prospects, financial condition, and results of operations
BECAUSE WE HAVE NOT BEEN ABLE TO ACHIEVE PROFITABLE OPERATIONS OR OBTAIN A MEANINGFUL POSITION WITHIN OUR INDUSTRY, OUR BUSINESS REMAINS LIMITED AND WE ARE THEREFORE PRONE TO ALL OF THE RISKS INHERENT IN THE ESTABLISHMENT OF A NEW BUSINESS VENTURE AND OUR SUCCESS IS HIGHLY SPECULATIVE.
Although we have been operating since April 1997, we are prone to all of the risks inherent to the establishment of a new business venture. Organized in April 1996, we were a development stage company through March 31, 1997. From March 1997 until September 2002, we operated as a full service clearinghouse serving primarily healthcare providers. In September 2002, we sold our healthcare provider clearinghouse service contracts to a strategic partner to generate cash, simplify our operations, and focus our attention on the payer market. We endeavored to diversify our business during the year ended December 31, 2000, through an asset acquisition, which, due to delay in market readiness, resulted in a large non-recurring loss. As a result of this loss, we changed our sales and marketing strategy and therefore should be viewed as having initiated our current operations in 2003. Consequently, you should consider the likelihood of our future success to be highly speculative in light of our operating history,

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our limited resources and problems, expenses, risks, and complications frequently encountered by companies in the early stages of development, particularly companies in new and rapidly evolving markets, such as electronic commerce. To address these risks, we must, among other things:
  maintain and increase our strategic partnerships,
  maintain and increase our customer base,
  implement and successfully execute our business and marketing strategy,
  continue to develop and upgrade our technology and transaction-processing systems,
  continually update and improve our website,
  provide superior customer service,
  respond to competitive developments,
  appropriately evaluate merger and acquisition opportunities, and
  attract, retain, and motivate qualified personnel.
We may not be successful in addressing all or some of these risks, and our failure to do so could have a material adverse effect on our business, prospects, financial condition, and results of operations.
WE EXPECT TO EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR FUTURE OPERATING RESULTS DUE TO A VARIETY OF FACTORS, MANY OF WHICH ARE OUTSIDE OUR CONTROL.
In comparison with our principal competitors, we are a relatively young company in the rapidly evolving and highly competitive Internet-based medical claims processing industry. Our ability to achieve operating results in this industry will depend on several factors, including:
  our ability to satisfy capital requirements in an investment climate that may be somewhat more reluctant generally to invest in Internet companies,
  our ability to retain existing customers, attract new customers at a steady rate, and maintain customer satisfaction in an industry in which significant changes are occurring,
  our ability to introduce new sites, services and products,
  our ability to effectively develop, implement and reposition our products, services and marketing efforts,
  the effect of announcements or introductions of new sites, services, and products by our competitors in a rapidly evolving industry,
  price competition or price increases in our industry,
  our ability to upgrade and develop our systems and infrastructure in a timely and effective manner,
  the amount of traffic on our website,
  the occurrence of technical difficulties, system downtime, or Internet brownouts to which we are acutely sensitive insofar as our medical claims processing service is Internet-based,
  the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations, and infrastructure which cannot be predicted with any large degree of accuracy in light of the rapidly evolving nature of the medical claims processing industry,
  our ability to comply with existing and added government regulations such as HIPAA, and
  general economic conditions and economic conditions specific to the Internet, electronic commerce, and the medical claims processing industry.
If we are unable to handle or satisfactorily respond to these factors, we may be unable to achieve the operating results we aim to achieve and the market price of our common stock would likely be materially adversely affected.

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OUR MARKETING STRATEGY HAS NOT BEEN SUFFICIENTLY TESTED AND MAY NOT RESULT IN SUCCESS.
To penetrate our target market, we will have to exert significant efforts and devote material resources to create awareness of and demand for our products and services. We may never experience material sales of our products and services. Our strategy may never be successful and we may never have adequate resources to support direct marketing of our products and services. Our failure to develop our marketing capabilities, successfully market our products or services, or recover the cost of our services would have a material adverse effect on our business, prospects, financial condition, and results of operations.
IF WE ARE UNABLE TO UPGRADE OUR SYSTEMS, AS WE BELIEVE IS CURRENTLY REQUIRED, WE MAY BE UNABLE TO PROCESS AN INCREASED VOLUME OF CLAIMS OR MAINTAIN COMPLIANCE WITH REGULATORY REQUIREMENTS.
A key element of our strategy is to generate a high volume of traffic on, and use of, our website and processing system. We are currently processing less than 10 million medical claims per year in an industry that processes approximately 4.7 billion claims annually. If the volume of traffic on our website or the number of claims submitted by customers substantially increases, as we hope to achieve, we will have to expand and further upgrade our technology, claims processing systems, and network infrastructure to accommodate these increases or our systems may suffer from unanticipated system disruptions, slower response times, degradation in levels of customer service, impaired quality and speed of claims processing, and delays in reporting accurate financial information, all of which will cause our customers to suffer by receiving payments later than otherwise. We operate in an industry that is undergoing change due to increasing regulatory requirements, some of which require us to upgrade our systems. We may be unable to effectively upgrade and expand our claims processing system or to integrate smoothly any newly developed or purchased modules with our existing systems, which could have a material adverse effect on our business, prospects, financial condition, and results of operations.
BECAUSE WE DEPEND UPON ONLY TWO SITES FOR OUR COMPUTER SYSTEMS WE ARE VULNERABLE TO THE EFFECTS OF NATURAL DISASTERS, COMPUTER VIRUSES, AND SIMILAR DISRUPTIONS.
Our ability to successfully receive and process claims and provide high-quality customer service largely depends on the efficient and uninterrupted operation of our computer and communications hardware systems. Our proprietary software serving the majority of our customers currently resides solely on our servers, most of which are currently located in a monitored server facility in Dallas, Texas. Our systems and operations are in a secured facility with hospital-grade electrical power, redundant telecommunications connections to the Internet backbone, uninterruptible power supplies, and generator back-up power facilities. Furthermore, we maintain copies of our system and backup copies of our data at off-site locations for backup and disaster recovery. Despite such safeguards, we remain vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-ins, tornadoes, earthquake, terrorist attacks, and similar events. In addition, we may not, and may not in the future, carry sufficient business interruption insurance to compensate us for losses that may occur. Despite our implementation of network security measures, our servers may be vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, which could lead to interruptions, delays, loss of data, or the inability to accept and process customer claims. The occurrence of any of these events could have a material adverse effect on our business, prospects, financial condition, and results of operations.
WE RELY ON INTERNALLY DEVELOPED ADMINISTRATIVE SYSTEMS THAT ARE INEFFICIENT, WHICH MAY PUT US AT A COMPETITIVE DISADVANTAGE.
Some of the systems and processes used by our business office to prepare information for financial, accounting, billing, and reporting, may be less efficient than our competitors. These inefficiencies may place us at a competitive disadvantage when compared to competitors with more efficient systems. We intend to continue our ongoing efforts to upgrade and expand our administrative systems and to integrate newly-developed and purchased modules with our existing systems in order to improve the efficiency of our reporting methods, although we are unable to predict if or when these upgrades will improve our competitive position or whether we will have sufficient resources to implement these upgrades.
WE HAVE LIMITED SENIOR MANAGEMENT RESOURCES, AND WE NEED TO ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL; WE MAY BE UNABLE TO EFFECTIVELY MANAGE GROWTH WITH OUR LIMITED RESOURCES.
Our senior management currently consists of Don Crosbie, our Chief Executive Officer, and Laura Bray, our Chief Financial Officer. We have limited staff, requiring employees to handle a large and diverse amount of responsibility. Expansion of our business would place a significant additional strain on our limited managerial, operational, and financial resources. In such event,

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we will be required to expand our operational and financial systems and to expand, train, and manage our work force in order to manage the expansion of our operations. Our failure to fully integrate our new employees into our operations could have a material adverse effect on our business, prospects, financial condition, and results of operations. Our ability to attract and retain highly skilled personnel is critical to our operations and expansion. We face competition for these types of personnel from other technology companies and more established organizations, many of which have significantly larger operations and greater financial, marketing, human, and other resources than we have. We may not be successful in attracting and retaining qualified personnel on a timely basis, on competitive terms, or at all. If we are not successful in attracting and retaining these personnel, our business, prospects, financial condition, and results of operations will be materially adversely affected.
BECAUSE OF THEIR SPECIALIZED KNOWLEDGE OF OUR PROPRIETARY TECHNOLOGY AND THE MEDICAL CLAIMS PROCESSING INDUSTRY, WE DEPEND UPON OUR SENIOR MANAGEMENT AND CERTAIN KEY PERSONNEL; THE LOSS OR UNAVAILABILITY OF ANY OF THEM COULD PUT US AT A COMPETITIVE DISADVANTAGE; OUR LIMITED RESOURCES WILL ADVERSELY AFFECT OUR ABILITY TO HIRE ADDITIONAL MANAGEMENT PERSONNEL.
We currently depend upon the efforts and abilities of our senior executives and key employees, currently comprised of Don Crosbie, our Chief Executive Officer, Laura Bray, our Chief Financial Officer, Gary Austin, our Vice President of Operations, and Scott Spurlock, our Vice President of Development, each of whom has a distinctive body of knowledge regarding electronic claims submissions and related technologies, the medical claims processing industry and our services. We may be unable to retain and motivate remaining personnel for an extended period of time in this environment. The additional loss or unavailability of the services of any senior management or such key personnel for any significant period of time could have a material adverse effect on our business, prospects, financial condition, and results of operations. We have not obtained key-person life insurance on any of our senior executives or key personnel. In addition, we do not have employment agreements with any of our senior executives or key personnel.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Our business is based in large part upon the proprietary nature of our services and technologies. Accordingly, our ability to compete effectively will depend on our ability to maintain the proprietary nature of these services and technologies, including our proprietary software and the proprietary software of others with which we have entered into software licensing agreements. We hold no patents and rely on a combination of trade secrets and copyright laws, nondisclosure, and other contractual agreements and technical measures to protect our rights in our technological know-how and proprietary services. In addition, we have been advised that trademark and service mark protection of our corporate name is not available. We depend upon confidentiality agreements with our officers, directors, employees, consultants, and subcontractors to maintain the proprietary nature of our technology. These measures may not afford us sufficient or complete protection, and others may independently develop know-how and services similar to ours, otherwise avoid our confidentiality agreements, or produce patents and copyrights that would materially and adversely affect our business, prospects, financial condition, and results of operations. We believe that our services are not subject to any infringement actions based upon the patents or copyrights of any third parties; however, our know-how and technology may in the future be found to infringe upon the rights of others. Others may assert infringement claims against us, and if we should be found to infringe upon their patents or copyrights, or otherwise impermissibly utilize their intellectual property, our ability to continue to use our technology could be materially restricted or prohibited. If this event occurs, we may be required to obtain licenses from the holders of their intellectual property, enter into royalty agreements, or redesign our products so as not to utilize their intellectual property, each of which may prove to be uneconomical or otherwise impossible. Licenses or royalty agreements required in order for us to use this technology may not be available on terms acceptable to us, or at all. These claims could result in litigation, which could materially adversely affect our business, prospects, financial condition, and results of operations.
BECAUSE WE ARE NOT CURRENTLY PAYING CASH DIVIDENDS, INVESTORS WILL LIKELY HAVE TO SELL OUR SHARES IN ORDER TO REALIZE THEIR INVESTMENT.
Whether we pay cash dividends in the future will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, and any other factor that the board of directors decides is relevant. In view of our losses and substantial financial requirements, we will not be in a position to pay cash dividends at any time in the reasonable future. Holders of our common stock may have to sell all or a part of their shares in order to recover all or a part of their investment.
WE HAVE A LIMITED NUMBER OF SHARES OF OUR COMMON STOCK REMAINING AVAILABLE FOR ISSUANCE.

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Although our articles of incorporation authorize the issuance 40,000,000 shares of common stock, we have issued or reserved for issuance a total of 39,981,196 shares. To the extent we need to sell common stock to raise capital or desire to issue common stock for any other reason, such as a merger, acquisition, or settlement of debt, we may not have a sufficient quantity of common stock to do so. In this event, we may be forced to abandon such plans or consider utilizing preferred stock or debt securities, among other things, or seek approval of our shareholders to amend our certificate of incorporation to increase the number of shares of common stock authorized for issuance.
SOME PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAY DETER OUR ACQUISITION.
A number of provisions of our certificate of incorporation, as amended, and Delaware law may be deemed to have an anti-takeover effect. Our certificate of incorporation and by-laws provide that our board of directors is divided into two classes serving staggered two-year terms, resulting in approximately one-half of the directors being elected each year and contain other provisions relating to voting and the removal of the officers and directors. Further, our by-laws contain provisions which regulate the introduction of business at annual meetings of our stockholders by other than the board of directors. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. In general, this statute prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.
In addition, our certificate of incorporation, as amended, authorizes our board of directors to issue up to 4,000,000 shares of preferred stock, which may be issued in one or more series, the terms of which may be determined at the time of issuance by the board of directors, without further action by stockholders, and may include voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion, and redemption rights, and sinking fund provisions that are unfavorable to the holders of our outstanding securities.
These anti-takeover provisions may make a takeover or change in control of us more difficult and therefore deprive security holders of benefits that could result from such an attempt, such as the realization of a premium over the market price. Moreover, the issuance of additional shares of common stock or preferred stock to persons friendly to the board could make it more difficult to remove incumbent management and directors from office even if such change were to be favorable to security holders generally.
ISSUANCE OF NEW SERIES OF PREFERRED STOCK COULD MATERIALLY ADVERSELY AFFECT HOLDERS OF COMMON STOCK AND ANY EXPANSION OR SALES OPPORTUNITIES.
We may be required to issue a new series of preferred stock for continued funding of operations. If so, our board of directors has the right to create and issue, without shareholder approval, a new series of preferred stock with expansive rights regarding voting and liquidation preferences superior to owners of our common stock shareholders. Therefore, any issuance of preferred stock could materially adversely affect the rights of holders of shares of our common stock and reduce the value of our common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party. The ability of the board of directors to issue preferred stock could have the effect of rendering more difficult, delaying, discouraging, preventing, or rendering more costly an acquisition of us or a change in control of us, thereby preserving our control by the current stockholders.
INTERNET SECURITY POSES RISKS TO OUR ENTIRE BUSINESS.
The electronic submission of healthcare claims and other electronic healthcare transaction processing services by means of our proprietary software involves the transmission and analysis of confidential and proprietary information of the patient, the healthcare provider, or both, as well as our own confidential and proprietary information. The compromise of our security or misappropriation of proprietary information could have a material adverse effect on our business, prospects, financial condition, and results of operations. We rely on encryption and authentication technology licensed from other companies to provide the security and authentication necessary to effect secure Internet transmission of confidential information, such as medical information. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the technology used by us to protect customer transaction data. Anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against security breaches or to minimize problems caused by security breaches. Concerns over the security of the Internet and other online transactions and the privacy of users may also inhibit the growth of the Internet and other online services generally, and the website in particular, especially as a means of conducting commercial transactions. To the extent that our activities or the activities of others involve the storage and transmission of proprietary information, such as diagnostic and treatment data, security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our security measures may not prevent security breaches. Our failure

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to prevent these security breaches may have a material adverse effect on our business, prospects, financial condition, and results of operations.
WE WILL ONLY BE ABLE TO EXECUTE OUR BUSINESS PLAN IF ELECTRONIC COMMERCE CONTINUES TO GROW GENERALLY AND SPECIFICALLY IN THE HEALTH CARE INDUSTRY.
The public in general, and the healthcare industry in particular, may not accept the Internet and other online services as a viable commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. To the extent that the Internet and other online “business to business” services continue to experience significant growth in the number of users, their frequency of use, or in their bandwidth requirements, the infrastructure for the Internet and online services may be unable to support the demands placed upon them. In addition, the Internet or other online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased governmental regulation. Changes in or insufficient availability of, telecommunications services to support the Internet or other online services also could result in slower response times and adversely affect usage of the Internet and other online services generally and our product and services in particular. If use of the Internet and other online services does not continue to grow or grows more slowly than we expect, if the infrastructure for the Internet and other online services does not effectively support the growth that may occur, or if the Internet and other online services do not become a viable commercial marketplace, our business, prospects, financial condition, and results of operations could be materially adversely affected.
WE MAY NOT BE ABLE TO ADAPT AS THE INTERNET, ELECTRONIC COMMERCE, AND CUSTOMER DEMANDS CONTINUE TO EVOLVE.
    The Internet and the medical claims processing industry are characterized by:
  rapid technological change,
 
  changes in user and customer requirements and preferences,
 
  changes in federal legislation and regulation,
 
  frequent new product and service introductions embodying new technologies, and
 
  the emergence of new industry standards and practices that could render our existing website and proprietary technology and systems obsolete.
Our success will depend, in part, on our ability to:
  enhance and improve the responsiveness and functionality of our online claims processing services,
 
  license leading technologies useful in our business and to enhance our existing services,
 
  comply with all applicable regulations regarding our industry and the Internet,
 
  develop new services and technology that address the increasingly sophisticated and varied needs of our prospective or current customers, and
 
  respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.
The development of our website and other proprietary technology will involve significant technical and business risks and require material financial commitment. We may not be able to adapt successfully to such demands. Our failure to respond in a timely manner to changing market conditions or customer requirements could have a material adverse effect on our business, prospects, financial condition, and results of operations.
WE HAVE NOT SUCCESSFULLY COMPETED AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY.
Based on total assets and annual revenues for the fiscal year ended in 2010, we are significantly smaller than the majority of our national competitors. We have not successfully competed and may not in the future successfully compete in any market in which we conduct or may conduct operations.

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REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS.
We are not currently subject to direct regulation by any government agency other than laws or regulations applicable to electronic commerce, but we process information which, by law, must remain confidential. The U.S. Centers for Medicare and Medicaid Services (formerly HCFA) has defined security requirements for Internet communications including healthcare data. We must operate in compliance in all material respects with these requirements. Due to the increasing popularity and use of the Internet and other online services, federal, state, and local governments may adopt laws and regulations, or amend existing laws and regulations, with respect to the Internet or other online services covering issues such as user privacy, pricing, content, copyrights, distribution, and characteristics and quality of products and services. Furthermore, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws to impose additional burdens on companies conducting business online. The adoption of any additional laws or regulations may decrease the growth of the Internet or other online services, which could, in turn, decrease the demand for our services and increase our cost of doing business, or otherwise have a material adverse effect on our business, prospects, financial condition, and results of operations. Moreover, the relevant governmental authorities have not resolved the applicability to the Internet and other online services of existing laws in various jurisdictions governing issues such as property ownership and personal privacy, and it may take time to resolve these issues definitively. Any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services could have a material adverse effect on our business, prospects, financial condition, and results of operations.
THE MARKET PRICE FOR OUR COMMON STOCK MAY BE HIGHLY VOLATILE.
The market price of our common stock has experienced, and may continue to experience, significant volatility. Our operating results, announcements by us or our competitors regarding acquisitions or dispositions, new procedures or technology, changes in general conditions in the economy, and general market conditions have caused and could in the future cause the market price of our common stock to fluctuate substantially. The equity markets have, on occasion, experienced significant price and volume fluctuations that have affected the market prices for many companies’ common stock and have often been unrelated to the operating performance of these companies. There are many days on which there are no trades or a low volume of trades of our common stock and the lack of trading volume may contribute to the volatility of the market price of our common stock.
OUR COMMON STOCK TRADES ON THE OTC BULLETIN BOARD; OUR COMMON STOCK IS SUBJECT TO “PENNY STOCK” RULES.
Since the opening of trading on March 6, 2002, our common stock has been trading in the over-the-counter market on the OTC Bulletin Board (“OTCBB”) established for securities that do not meet the Nasdaq Capital Market listing requirements. As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the price of, our shares.
As a result and based on the fact that our common stock trades below $5.00 per share, our common stock is subject to the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell these securities to persons other than established customers as defined under applicable rules and institutional accredited investors. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase, and must have received the purchaser’s written consent to the transaction prior to sale. As a result, the ability of broker-dealers to sell our common stock and the ability of purchasers of our stock to sell their shares in the secondary market is materially adversely affected.
FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD ADVERSELY AFFECT OUR STOCK PRICE.
The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market, or the perception that these sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
As of February 24, 2010, we had outstanding 34,874,696 shares of common stock, of which approximately 22,854,856 shares were “restricted securities” as that term is defined under Rule 144 promulgated under the Securities Act of 1933, as amended. These restricted shares are eligible for sale under Rule 144 at various times. We have entered into registration rights agreements currently requiring us to register the resale of approximately 5,106,500 shares of our common stock, including shares of common stock issuable upon the exercise of warrants and options. No prediction can be made as to the effect, if any, that sales of shares of common stock or the availability of such shares for sale will have on the market prices of our common stock prevailing from time to time. Nevertheless, the possibility that substantial amounts of our common stock may be sold in the public market may adversely affect prevailing market prices for the common stock and could impair our ability to raise capital through the sale of our equity securities.

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CAUTIONARY NOTES REGARDING THE 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 this report, the risk factors discussed in the documents incorporated by reference herein, 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;
 
  threats to Internet security; and
 
  acceptance of the Internet and other online services in the healthcare industry and in general.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
We currently lease 4,703 square feet of office space at a rent of approximately $6,454 per month, at 14860 Montfort Dr, Suite 250, Dallas, Texas 75254. The lease expires May 31, 2012. We believe that, in the event alternative or larger offices are required, such space is available at competitive rates. For our servers, we currently utilize at a cost of approximately $3,530 per month E-Link Systems, including a nationwide DS-3 backbone, a substantial dedicated web server management facility, and a 24-hour per day, 7 day per week Network Operations pursuant to an agreement expiring on November 30, 2011. We may obtain an extension of this arrangement, which may result in a material increase in cost.
ITEM 3. LEGAL PROCEEDINGS.
We are not currently a party to any material legal proceedings.

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ITEM 4. Removed and Reserved.

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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock, par value $0.001 (“Common Stock”), is traded on the OTC Bulletin Board (“OTCBB”) under the symbol “CLAI.OB”. The following table sets forth the quarterly high and low close prices, as reported by the OTCBB for the period from January 1, 2009 through December 31, 2010:
                 
    HIGH   LOW
2009
               
Three months ended March 31, 2009
    0.14       0.14  
Three months ended June 30, 2009
    0.11       0.11  
Three months ended September 30, 2009
    0.10       0.10  
Three months ended December 31, 2009
    0.12       0.05  
 
               
2010
               
Three months ended March 31, 2010
    0.10       0.04  
Three months ended June 30, 2010
    0.12       0.04  
Three months ended September 30, 2010
    0.06       0.03  
Three months ended December 31, 2010
    0.05       0.02  
All price quotations represent inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. As of February 24, 2010, there were approximately 93 holders of record of the Common Stock.
DIVIDEND POLICY
We have not paid any cash dividends on our Common Stock and, in view of net losses and our operating requirements, do not intend to pay cash dividends in the foreseeable future. If we achieve profitability, we intend to retain future earnings for reinvestment in the development and expansion of our business. Delaware law, where we are incorporated, contains certain restrictions on the payment of dividends. Any credit agreements, which we may enter into with institutional lenders but as of February 24, 2010 have not, may restrict our ability to pay dividends. Any preferred stock shareholders may receive preferential rights in the distribution of dividends, if any. Whether we pay cash dividends in the future will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, and any other factors that our board of directors determines to be relevant.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The information required by Item 201(d) of Regulation S-K is set forth in Item 12 below.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
As of December 31, 2010, we had a working capital deficit, defined by the excess of current liabilities over current assets, of $1,243,000 and stockholders’ deficit of $1,111,000. We generated revenues of $2,326,000 for the year ended December 31, 2010. We have incurred net losses since inception and had an accumulated deficit of $46,042,000 at December 31, 2010. We expect to continue to operate at a loss for the foreseeable future. We may never achieve profitability. In addition, during the year ended December 31, 2010, net cash used in operating activities was $160,000.
We have been in existence since 1996, have operated under several different business strategies. The relationships between revenue and cost of revenue, and between gross profit and operating expenses reflected in the financial information included in this report may not represent future expected financial results.

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We generally enter into services agreements with our customers to provide access to our software application 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 customers either host the application on their own servers or access our hosted software platform via the Internet. Our revenue is derived from customers paying implementation fees and transaction fees, both of which may be subject to monthly minimum provisions, and time and materials charges for additional services. Customer agreements may also provide for development fees related to private labeling of our software platform (i.e. access to our servers through a website which is in the name of and/or has the look and feel of the customer’s other websites) and some customization of the offering and business rules.
We have been dependent on issuances of our capital stock to meet our capital and liquidity needs. We anticipate we will continue to require similar infusions of capital for the foreseeable future, although our ability to do so may be impaired as a result of the limited number of shares of Common Stock we have authorized but unissued and not already reserved for another purpose. There is no assurance we will be able to obtain such funding.
PLAN OF OPERATIONS
Our business strategy is set forth in detail in ITEM 1. BUSINESS. We anticipate that our primary source of revenues will be revenue paid by healthcare payers and vendors for private-label or co-branded licenses and services. Historically, our primary sources of revenue were fees paid by healthcare providers for insurance claims and patient statement services and fees from medical and dental payers for processing claims electronically. 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 upgrade our technology and transaction-processing systems and continually update and improve our website to incorporate new technologies, protocols, and industry standards, but may not have the resources to do so. 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.
On February 20, 2008, we acquired substantially all the assets of Acceptius, Inc. (“Acceptius”). Acceptius was engaged in the business of providing transaction processing services to the healthcare industry. The acquisition expanded our current revenue generating opportunities by adding paper conversion and claims repricing, extended our claims processing capabilities and increased our client base.
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 website which is in the name of and/or has the look and feel of the customer’s other websites) 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.

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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, and labor-related costs. The software is amortized over its expected useful life of 3 years or the contract term, as appropriate.
Management evaluates the recoverability, valuation, and amortization of capitalized costs of software that we sell, lease or otherwise market, whenever events or changes in circumstances indicate that the carrying valuation 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2009, the FASB issued guidance that provides principles for allocation of consideration among a revenue arrangement’s multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. The guidance introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. It is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted. The potential impact of this standard is being evaluated. This will impact the timing of revenue recognition on our multiple element arrangements, however we do not expect the adoption to have a material impact on our consolidated financial statements or footnote disclosures.
In December 2010, FASB issued ASU No. 2010-28 When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts, which modifies goodwill impairment testing for reporting units with a zero or negative carrying amount. Under the new guidance, an entity must consider whether it is more likely than not that goodwill impairment exists for each reporting unit with a zero or negative carrying amount. If it is more likely than not that goodwill impairment exists, the second step of the goodwill impairment test in FASB Accounting Standards Codification TM (ASC) 350-20-35, Intangibles — Goodwill and Other: Goodwill, must be performed to measure the amount of goodwill impairment loss, if any. Under the new guidance, if the carrying amount of a reporting unit is zero or negative, an entity must assess whether it is more likely than not that goodwill impairment exists. To make that determination, an entity should consider whether there are adverse qualitative factors that could impact the amount of goodwill, including those listed in ASC 350-20-35-30. Those factors include, for example, an adverse business climate, unexpected competition, a loss of key personnel, or a more-likely-than-not expectation that part, or all, of the reporting unit will be disposed of. As a result of the new guidance, an entity can no longer assert that a reporting unit is not required to perform the second step of the goodwill impairment test because the carrying amount of the reporting unit is zero or negative, despite the existence of qualitative factors that indicate goodwill is more likely than not impaired. The amended guidance in ASU 2010-28 is effective for public entities for fiscal years, and for interim periods within those years, beginning after December 15, 2010, with early adoption prohibited. The Company believes the impact of this guidance could result in all or a portion of its goodwill being impaired upon adoption.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2010 AND 2009
REVENUES
Revenues increased 5% to $2,326,000 in 2010 from $2,207,000 in 2009. The increase in revenues was primarily due to the addition of several customers combined with increased revenues from our existing customers. Revenues received from one customer represented a significant portion of our total revenues during the last two years. Revenues received from this customer represented 40% of our revenues for 2010 and 2009.
COST OF REVENUES
Cost of revenues was $1,694,000 in 2010 compared to $1,680,000 for the prior year, an increase of 1%. The four recurring components of cost of revenues are data center expenses, third party transaction processing expenses, customer support operation expenses and amortization of software. Data center expenses were $40,000 for the year ended December 31, 2010 compared with $41,000 for 2009. Third party transaction processing expenses were $925,000 in 2010 compared to $734,000 in 2009, an increase of 26%. The increase in third party transaction processing expenses was primarily attributable to new contracts with clearing houses. Customer support operations expense decreased by 16% to $720,000 in 2010 from $858,000 in 2009. The decrease in customer support operations expenses was primarily attributable to a decrease in support personnel. Software amortization and development project amortization expenses decreased to $9,000 in 2010 compared to $47,000 in 2009. The decrease was primarily attributable to software and equipment fully amortized in the third quarter of 2009.

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RESEARCH AND DEVELOPMENT
Research and development expenses were $23,000 in 2010 and $12,000 in 2009. The increase in research and development expenses was primarily attributable to an $11,000 write off of purchased software never placed into service.
IMPAIRMENT
During 2010, $104,000 of previously capitalized software development costs was impaired. There was no software impairment in 2009.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $762,000 in 2010, compared with $842,000 in 2009, a decrease of 10%. The decrease is primarily related to reduction in personnel and personnel related expenses in the sales department.
INTEREST EXPENSE
Interest expense was $30,000 for 2010 compared with $37,000 for 2009. Included in the 2010 expense was $29,000 related to interest on notes payable to related parties compared with $28,000 for 2009. Interest expense of $4,000 in 2009 related to other notes payable. Interest of $1,000 and $5,000 respectively was paid to vendors in 2010 and 2009 for financing fees. Interest expense reductions in 2010 were primarily attributed to notes payable that were converted into shares of our Common Stock along with reduced interest rates on remaining notes payable.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2010, net cash used in operating activities of $160,000 was primarily attributable to a net loss of $287,000, adjusted for depreciation and amortization of $11,000, impairment of software development capitalized during prior years of $104,000, and a change in other working capital accounts of $24,000, offset by a decrease in deferred revenue of $12,000.
Net cash provided by financing activities in 2010 was $165,000 as a result of proceeds from debt financing from related parties.
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 our capital requirements through June 30, 2011. 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 repay debt obligations as they become due, forced to significantly reduce operating expenses to a point that 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 is affected, to the extent it includes equity securities, the holders of our 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 may be unable to recoup any of their investment. Therefore, we are exploring alternatives in both the short and long term that may relieve our cash flow difficulties.
OFF-BALANCE SHEET ARRANGEMENTS
None.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.

19


 


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Claimsnet.com, Inc.
We have audited the accompanying consolidated balance sheets of Claimsnet.com, Inc. and subsidiaries, as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Claimsnet.com, Inc. and subsidiaries as of December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the consolidated financial statements, the Company has generated losses since inception, incurred negative cash flows from operations, and has a working capital and stockholders’ deficit at December 31, 2010. Additionally, management does not believe that available cash resources, anticipated revenues from operations or proceeds from financing activities and funding commitments will be sufficient to satisfy the Company’s near term capital requirements. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
/s/ Whitley Penn LLP
Dallas, Texas
February 24, 2011

21


 

CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
                 
    December 31,  
    2010     2009  
ASSETS
               
CURRENT ASSETS
               
Cash and equivalents
  $ 23     $ 18  
Accounts receivable, net of allowance for doubtful accounts of $3 and $6
    339       313  
Prepaid expenses and other current assets
    31       43  
 
           
 
               
Total current assets
    393       374  
 
               
EQUIPMENT, FIXTURES AND SOFTWARE
               
Total equipment, fixtures and software, net
    4       119  
 
               
INTANGIBLE AND OTHER ASSETS
               
Goodwill
    138       138  
 
           
TOTAL ASSETS
  $ 535     $ 631  
 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
CURRENT LIABILITIES
               
Accounts payable
  $ 375     $ 369  
Accrued payroll and other current liabilities
    102       99  
Accrued interest — related parties
    99       70  
Deferred revenues — current portion
    10       18  
Notes payable to related parties
    1,040       875  
Convertible notes payable to related parties
    10       10  
 
           
Total current liabilities
    1,636       1,441  
 
               
LONG-TERM LIABILITIES
               
Deferred revenues — long-term portion
    10       14  
 
               
 
           
Total long-term liabilities
    10       14  
 
           
Total liabilities
    1,646       1,455  
 
               
COMMITMENTS & CONTINGENCIES
               
 
               
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 December 31, 2010 and December 31, 2009
           
Common stock, $.001 par value; 40,000,000 shares authorized; 34,874,696 shares issued and outstanding as of December 31, 2010 and December 31, 2009
    35       35  
Additional capital
    44,896       44,896  
Accumulated deficit
    (46,042 )     (45,755 )
 
           
Total stockholders’ deficit
    (1,111 )     (824 )
 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
  $ 535     $ 631  
 
           
See notes to consolidated financial statements.

22


 

CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
                 
    Year Ended  
    December 31,  
    2010     2009  
REVENUES
  $ 2,326     $ 2,207  
 
               
COST OF REVENUES
    1,694       1,680  
 
           
 
               
GROSS PROFIT
    632       527  
 
           
 
               
OPERATING EXPENSES
               
Research and development
    23       12  
Impairment of software
    104        
Selling, general and administrative
    762       842  
 
           
 
               
Total operating expenses
    889       854  
 
           
 
               
LOSS FROM OPERATIONS
    (257 )     (327 )
 
               
OTHER INCOME (EXPENSE)
               
Interest expense — related parties
    (29 )     (28 )
Interest expense — other
    (1 )     (9 )
 
           
 
               
Total other income (expense)
    (30 )     (37 )
 
           
NET LOSS
  $ (287 )   $ (364 )
 
           
 
               
NET LOSS PER COMMON SHARE (BASIC AND DILUTED)
  $ (0.01 )   $ (0.01 )
 
           
 
               
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (BASIC AND DILUTED)
    34,875       34,098  
 
           
See notes to consolidated financial statements.

23


 

CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(In thousands)
                                                         
    Number of Preferred             Number of Common                             Total Stockholders’  
    Shares Outstanding     Preferred Stock     Shares Outstanding     Common Stock     Additional Capital     Accumulated 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
                                  (287 )     (287 )
 
                                         
Balances at December 31, 2010
    1     $       34,875     $ 35     $ 44,896     $ (46,042 )   $ (1,111 )
 
                                         
See notes to consolidated financial statements.

24


 

CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
                 
    Year Ended December 31,  
    2010     2009  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net loss
  $ (287 )   $ (364 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    11       52  
Impairment of software development costs
    104        
Provision for doubtful accounts
          3  
Interest expense paid in stock
          7  
Changes in operating assets and liabilities:
               
Accounts receivable
    (26 )     (27 )
Prepaid expenses and other current assets
    12       1  
Accounts payable, accrued payroll, accrued interest and other liabilities
    38       23  
Deferred revenues
    (12 )     (11 )
 
           
Net cash used in operating activities
    (160 )     (316 )
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
 
           
Net cash provided by in investing activities
           
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Principal payments on capital lease obligation
          (46 )
Proceeds from notes payable — related parties
    165       430  
Payments of notes payable — related parties
          (50 )
 
           
Net cash provided by financing activities
    165       334  
 
           
NET INCREASE IN CASH AND EQUIVALENTS
    5       18  
CASH AND EQUIVALENTS, BEGINNING OF YEAR
    18        
 
           
CASH AND EQUIVALENTS, END OF YEAR
  $ 23     $ 18  
 
           
 
               
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
 
               
Cash paid for interest
  $     $ 30  
 
           
Cash paid for taxes
  $     $  
 
           
 
               
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
               
 
               
Payment of notes payable and accrued interest through issuance of common stock
  $     $ 892  
 
           
See notes to consolidated financial statements.

25


 

CLAIMSNET.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE A—ORGANIZATION, BACKGROUND AND LIQUIDITY
Claimsnet.com inc. (“Claimsnet.com” or the “Company”) is a Delaware corporation originally formed in April 1996. The Company owns, operates and licenses software used for processing medical insurance claims on the Internet. The Company completed an initial public offering in April 1999.
During 2009 and 2010, the Company entered into unsecured notes as detailed in NOTE E to these financial statements. In addition, the Company incurred interest on unsecured notes as detailed in NOTE E to these financial statements.
The Company has generated losses since inception and has incurred negative cash flow from operations. Through 2010, the Company generated minimal revenues and relied on an initial public offering, private equity placements, secured and unsecured debt, the sale of certain assets, and funding from a related entity to fund its operations and development activities. The Company’s business strategy and organization has been modified on several occasions in an effort to improve near-term financial performance.
Management believes that available cash resources, together with anticipated revenues from operations and the proceeds of recently completed financing activities may not be sufficient to satisfy the Company’s capital requirements through June 30, 2011. Necessary additional capital may not be available on a timely basis or on acceptable terms, if at all. Accordingly, the Company may be unable to repay debt obligations as they become due, 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 the Company’s operations and financial position, or cease operations altogether. In the event that any future financing is affected, to the extent it includes 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 may be unable to recoup any of their investment.
NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Claimsnet.com and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
CASH AND EQUIVALENTS
Cash and equivalents include time deposits, certificates of deposits and all highly liquid debt instruments with original maturities of three months or less when purchased.
The Company maintains deposits primarily in one financial institution, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation. At December 31, 2010 and 2009, the Company had no cash in excess of federally insured limits. The Company has experienced no losses related to uninsured deposits.
REVENUE RECOGNITION
The Company generally enters into services agreements with its customers to provide access to its software application for processing of customer transactions. The Company operates the software application for all customers and the customers are not entitled to ownership of the Company’s software at any time during or at the end of the agreements. The customers either host the application on their own servers or access the Company’s hosted software platform via the Internet. 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 the Company’s servers through a website which is in the name of and/or has the look and feel of the customer’s other websites) 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 the business arrangement. The Company currently uses an estimated expected business arrangements term of three years, which is currently the term of the typical contract signed by its customers. The Company does not segment these

26


 

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.
SOFTWARE FOR SALE OR LICENSE
The Company begins capitalizing costs incurred in developing a software product once technological feasibility of the product has been determined. Software development costs of $104,000 were impaired in 2010. No software development costs were capitalized in 2010 or 2009. Software development costs of $7,000 and $8,000 were amortized in 2010 and 2009, respectively. Capitalized computer software costs include direct labor and labor-related costs both internally and externally. The software is amortized after it is put into use over its expected useful life of 3 years.
Management 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 of the software may not be recoverable. As part of this review, management considers the expected undiscounted future net cash flows. If the cash flows are less than the stated value, capitalized software costs would be written down to fair value.
EQUIPMENT, FIXTURES AND INTERNAL USE SOFTWARE
Equipment and fixtures are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the depreciable assets, which range from three to seven years. Internal use software is amortized using the straight-line method over the estimated useful life of three years. Maintenance and repairs are expensed as incurred. Significant replacements and betterments are capitalized. Depreciation expense related to equipment and fixtures totaled $5,000 and $44,000 in 2010 and 2009, respectively.
GOODWILL
Goodwill, totaling $138,000 at December 31, 2010, represents the remaining cost in excess of fair value of net assets acquired in the February 2008 acquisition of Acceptius, Inc. (“Acceptius”).
In accordance with current accounting guidance, goodwill is not being amortized; however, the Company evaluates its goodwill for impairment annually in the fourth quarter or when there is reason to believe that the value has been diminished or impaired. Evaluations for possible impairment are based upon a comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned to the sum of the carrying value of the assets and liabilities of that unit including the assigned goodwill value. The fair values used in this evaluation are estimated based on the Company’s market capitalization, which is based on the outstanding stock and market price of the stock. Impairment is deemed to exist if the net book value of the unit exceeds its estimated fair value. No impairment was deemed to exist as of December 31, 2010.
INCOME TAXES
Deferred income taxes are provided for the tax effects of differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation reserves are provided for the deferred tax assets when, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Interest costs and penalties related to income taxes are classified as interest expense and general and administrative costs, respectively, in the Company’s consolidated financial statements. For the years ended December 31, 2010 and 2009, the Company did not recognize any interest or penalty expense related to income taxes or any uncertain tax positions. The Company determined the amounts of unrecognized tax benefits are not reasonably likely to significantly increase or decrease within the next 12 months. The Company is currently subject to a three year statute of limitations by major tax jurisdictions. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction.
LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares and dilutive common stock equivalents outstanding for each respective year. Common stock equivalents, representing convertible Preferred Stock, convertible debt, options and warrants totaling approximately 5,106,500 and 5,111,500 shares at December 31,

27


 

2010 and 2009, respectively, are not included in the diluted loss per share as they would be antidilutive. Accordingly, diluted and basic loss per share are the same.
        .
SEGMENT REPORTING
The Company operated during the two years presented in a single segment in accordance with current accounting guidance.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Revenues received from one customer represented a significant portion of our total revenues during the last two years. Revenues received from this customer represented 40% of our revenues for 2010 and 2009, respectively.
Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectibility of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. The Company generally does not require collateral. At December 31, 2010, the Company had one customer that made up 48% of the outstanding accounts receivable balance. At December 31, 2009, the Company had one customer that made up 49% of the outstanding accounts receivable balance.
USE OF ESTIMATES AND ASSUMPTIONS
Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. On an ongoing basis, management evaluates its estimates, including those related to customer programs and incentives including expected customer business arrangement periods, bad debts, intangible assets, contingencies and litigation. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates could change based on changing historical experience and changes in circumstances and assumptions. Actual results could vary from the estimates that were used.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs of $8,000 and $12,000 were incurred for each of the years ended December 31, 2010 and 2009, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable and other liabilities are carried at amounts that reasonably approximate their fair values due to their short term nature. Notes payable may not approximate fair value. Notes payable are with related parties and as a result do not bear market rates of interest. Management believes based on its current financial position that it could not obtain third party financing, and as such can not estimate the fair value of the notes payable.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2009, the FASB issued guidance that provides principles for allocation of consideration among a revenue arrangement’s multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. The guidance introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. It is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted. The potential impact of this standard is being evaluated. This will impact the timing of revenue recognition on our

28


 

multiple element arrangements; however we do not expect the adoption to have a material impact on our consolidated financial statements or footnote disclosures.
In December 2010, FASB issued ASU No. 2010-28 When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts, which modifies goodwill impairment testing for reporting units with a zero or negative carrying amount. Under the new guidance, an entity must consider whether it is more likely than not that goodwill impairment exists for each reporting unit with a zero or negative carrying amount. If it is more likely than not that goodwill impairment exists, the second step of the goodwill impairment test in FASB Accounting Standards Codification TM (ASC) 350-20-35, Intangibles — Goodwill and Other: Goodwill, must be performed to measure the amount of goodwill impairment loss, if any. Under the new guidance, if the carrying amount of a reporting unit is zero or negative, an entity must assess whether it is more likely than not that goodwill impairment exists. To make that determination, an entity should consider whether there are adverse qualitative factors that could impact the amount of goodwill, including those listed in ASC 350-20-35-30. Those factors include, for example, an adverse business climate, unexpected competition, a loss of key personnel, or a more-likely-than-not expectation that part, or all, of the reporting unit will be disposed of. As a result of the new guidance, an entity can no longer assert that a reporting unit is not required to perform the second step of the goodwill impairment test because the carrying amount of the reporting unit is zero or negative, despite the existence of qualitative factors that indicate goodwill is more likely than not impaired. The amended guidance in ASU 2010-28 is effective for public entities for fiscal years, and for interim periods within those years, beginning after December 15, 2010, with early adoption prohibited. The Company believes the impact of this guidance could result in all or a portion of its goodwill being impaired upon adoption.
NOTE C—PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, (in thousands):
                 
    2010     2009  
Computer hardware and software
  $ 395     $ 395  
Software development costs
    1,999       2,103  
Furniture and fixtures
    31       31  
Office equipment
    28       28  
Leasehold improvements
    35       35  
Equipment under capital lease
    129       129  
 
           
 
    2,617       2,721  
Less accumulated depreciation and amortization
    (2,613 )     (2,602 )
 
           
 
  $ 4     $ 119  
 
           
The assets held under capital leases have been included in property and equipment and total $129,000 in 2010 and 2009, with accumulated depreciation of $129,000 and $126,000 for the years ended December 31, 2010 and 2009, respectively. Amortization expense related to capital leases is included in depreciation expense.
NOTE D—INCOME TAXES
There was no provision or benefit for federal or state income taxes during the two years ended December 31, 2010 and 2009.
The differences between the actual income tax benefit and the amount computed by applying the statutory federal tax rate to the loss before incomes taxes are as follows (in thousands):
                 
    Year Ended December 31,  
    2010     2009  
Benefit computed at federal statutory rate
  $ (98 )   $ (124 )
Permanent differences
    16       15  
Increase in valuation reserve
    100       118  
Change in prior year estimate
    (18 )     (9 )
 
           
 
  $     $  
 
           

29


 

The components of the deferred tax assets and liabilities are as follows:
                 
    December 31,  
    2010     2009  
Deferred tax assets:
               
Net operating loss carryforwards
  $ 15,238     $ 15,170  
Fixed assets
    26       9  
Allowance for doubtful accounts
    1       2  
Deferred revenue
    7       11  
Other
    54       35  
 
           
Total deferred tax assets
    15,326       15,227  
Other deferred tax liabilities
    (9 )     (6 )
Valuation allowance for deferred tax assets
    (15,317 )     (15,221 )
 
           
 
               
Deferred income tax assets, net of deferred tax liabilities
  $     $  
 
           
At December 31, 2010, the Company has approximately $44,334,000 of federal net operating loss carryforwards, which begin to expire in 2012 subject to certain limitations as described below. The Company has approximately $164,000 of state tax credits for unused net operating losses as of December 31, 2010.
As a result of stock issued during 2006, 2007, 2008 and 2009, the Company may have experienced an ownership change as defined in Internal Revenue Code section 382. As a result, the Company’s ability to use net operating loss carryforwards and certain other deductions to offset future taxable income may be limited. The annual limit is an amount equal to the value of the Company at the date of an ownership change multiplied by approximately 5%. In addition, as the ability to generate future taxable income is highly uncertain, the Company has recorded valuation allowance against all of its net deferred tax assets.
NOTE E—RELATED PARTY TRANSACTIONS
On December 8, 2010, the Company entered into Amendment Number 1 (the “Michel Convertible Amendment”) to that certain Unsecured Convertible Promissory Note (the “Michel Convertible Note”), as the same may have been amended, entered into January 23, 2007 by and between Claimsnet and Thomas Michel (“Michel”), a related party. Pursuant to the Convertible Amendment, payments equal to the principal and accrued and unpaid interest on the Michel Convertible Note are now due on demand, with interest accruing at 1.75% per annum, effective as of December 1, 2010. All other terms of the Michel Convertible Note, as amended, remain in effect.
On December 8, 2010, the Company entered into various amendments (the “Michel Amendments”) to certain Unsecured Promissory Notes (each a “Michel Note”, and collectively, the “Michel Notes”), as the same may have been amended, entered into from time to time by and between Claimsnet and Michel. Pursuant to the Michel Amendments, effective December 1, 2010, the interest rate on each Michel Note is 1.75% per annum. All other terms of the Michel Notes, as amended, remain in effect.
On December 8, 2010, the Company entered into various amendments (the “NFC Amendments”) to certain Unsecured Promissory Notes (each and “NFC Note”, and collectively, the “NFC Notes”), as the same may have been amended, entered into from time to time by and between Claimsnet and National Financial Corporation, a related party (“NFC”). Pursuant to the NFC Amendments, effective December 1, 2010, the interest rate on each NFC Note is 1.75% per annum. All other terms of the NFC Notes, as amended, remain in effect.
On December 8, 2010, the Company entered into Amendment Number 1 (the “Novinvest Amendment”) to that certain Unsecured Promissory Note (the “Novinvest Note”) by and between Claimsnet and Novinvest Associated S.A. (“Novinvest”) dated September 9, 2010. Pursuant to the Novinvest Amendment, effective December 1, 2010, the Novinvest Note accrues interest at 1.75% per annum. All other terms of the original agreement remain in effect. Novinvest is a division of Elmira United Corporation.
On December 8, 2010, the Company entered into various amendments (the “Schellenberg Amendments”) to certain Unsecured Promissory Notes (each a “Schellenberg Note,” and collectively, the “Schellenberg Notes”), as they may have been amended, entered into from time to time, by and between Claimsnet and J. R. Schellenberg, a related party (“Schellenberg”) . Pursuant to the Schellenberg Amendments, effective December 1, 2010, the interest rate on each Schellenberg Note is 1.75% per annum. All other terms of the Schellenberg Notes, as amended, remain in effect.

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In September 2010, the Company issued an unsecured promissory note upon receipt of $50,000 from Novinvest. The note bore interest at the rate of 3% per annum, until reduced as described above. Payments equal to the principal and accrued and unpaid interest on the note are due September 9, 2011.
In October 2009, the Company issued an unsecured promissory note upon receipt of $30,000 from Michel. The note bore interest at the rate of 3% per annum, until reduced as described above. Payments equal to the principal and accrued and unpaid interest on the note are due on demand.
In July 2009, the Company exercised its option to convert into Common Stock a debt evidenced by an unsecured promissory note with NFC. The Company issued the note to Eganoc Services Corp., (“Eganoc”), on January 16, 2007 with a maturity date of November 30, 2010, bearing interest at the rate of 7% per annum. NFC purchased the note from Eganoc in an unrelated transaction on July 22, 2009 The outstanding principal of $100,000 was converted into 300,000 shares of Common Stock at a conversion price of 30,000 shares per $10,000 of principal. In addition, $17,740 of accrued and unpaid interest due under this note was paid in cash at the time of conversion.
In July 2009, the Company issued an unsecured promissory note upon receipt of $25,000 from NFC. The note bore interest at the rate of 3% per annum, until reduced as described above. Payments equal to the principal and accrued and unpaid interest on the note are due on demand.
In May 2009, the Company exercised its option to convert into Common Stock a debt evidenced by an unsecured promissory note with Elmira United Corporation, a greater than 5% shareholder of the Company (“Elmira”). The Company issued the note on November 29, 2006 with a maturity date of November 30, 2010, bearing interest at the rate of 7% per annum, amended to 3% per annum effective January 1, 2009. The outstanding principal of $300,000 was converted into 1,095,000 shares of Common Stock at a conversion price of 36,500 shares per $10,000 of principal. In addition, $34,553 of accrued and unpaid interest was converted into 126,120 shares of Common Stock at a conversion price of 36,500 shares per $10,000 of interest.
In May 2009, the Company issued an unsecured promissory note upon receipt of $100,000 from NFC. The note bore interest at the rate of 3% per annum, until reduced as described above. Payments equal to the principal and accrued and unpaid interest on the note are due on demand.
In April 2009, the Company issued an unsecured promissory note upon receipt of $75,000 from NFC. The note bore interest at the rate of 3% per annum, until reduced as described above. Payments equal to the principal and accrued and unpaid interest on the note are due on demand.
In February 2009, the Company issued an unsecured promissory note upon receipt of $100,000 from NFC. The note bore interest at the rate of 3% per annum, until reduced as described above. Payments equal to the principal and accrued and unpaid interest on the note are due on demand.
In January 2009, the Company issued an unsecured promissory note upon receipt of $100,000 from NFC. The note originally bore interest at the rate of 5% per annum, until further reduced as described above. The note was amended on January 31, 2009 to decrease the interest rate to 3% per annum, effective January 6, 2009. Payments equal to the principal and accrued and unpaid interest on the note are due on demand, with thirty days notice.
In January 2009, upon the demand of Michel, the Company repaid all outstanding principal on a convertible note dated September 29, 2006 in the aggregate amount of $50,000 plus accrued interest of $8,558.
In January 2009, the Company exercised its option to convert into Common Stock a debt evidenced by an unsecured promissory note with Elmira. The Company issued the note on March 20, 2008 with a maturity date of March 31, 2011, bearing interest at the rate of 4% per annum. The outstanding principal of $250,000 was converted into 1,187,500 shares of Common Stock at a conversion price of 47,500 shares per $10,000 of principal. In addition, $8,712 of accrued and unpaid interest was converted into 41,383 shares of Common Stock at a conversion price of 47,500 shares per $10,000 of interest.
In January 2009, the Company exercised its option to convert into Common Stock a debt evidenced by an unsecured promissory note with Elmira. The Company issued the note on May 13, 2008 with a maturity date of March 31, 2011, bearing interest at the rate of 4% per annum. The outstanding principal of $200,000 was converted into 950,000 shares of Common Stock at a conversion price of 47,500 shares per $10,000 of principal. In addition, $5,786 of accrued and unpaid interest was converted into 27,485 shares of Common Stock at a conversion price of 47,500 shares per $10,000 of interest.
In January 2009, the Company issued amendments to two unsecured promissory notes with Michel. The notes originally bore

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interest at the rate of 5% per annum. The Company issued the first note on September 16, 2008 in the amount of $30,000. The Company issued the second note on September 29, 2008 in the amount of $20,000. The notes were amended to decrease the interest rate to 3% per annum, effective January 1, 2009.
In January 2009, the Company issued an amendment to an unsecured promissory note with NFC. The Company issued the note on November 16, 2006 in the amount of $100,000, originally bearing interest at the rate of 8% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009, until further reduced as described above.
In January 2009, the Company issued an amendment to an unsecured promissory note with NFC. The Company issued the note on December 13, 2007 in the amount of $100,000, originally bearing interest at the rate of 7% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009, until further reduced as described above.
In January 2009, the Company issued amendments to three unsecured promissory notes with NFC. The Company issued the first note on August 20, 2008 in the amount of $50,000. The Company issued the second note on October 28, 2008 in the amount of $50,000. The Company issued the third note on November 26, 2008 in the amount of $50,000. The notes originally bore interest at the rate of 5% per annum. The notes were amended to decrease the interest rate to 3% per annum, effective January 1, 2009, until further reduced as described above.
In January 2009, the Company issued an amendment to an unsecured promissory note with NFC. The Company issued the note on January 6, 2009 in the amount of $100,000, originally bearing interest at the rate of 5% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009, until further reduced as described above.
In January 2009, the Company issued an amendment to an unsecured promissory note with Mr. J.R. Schellenberg, a related party (“Schellenberg”). The Company issued the note on June 6, 2002 in the amount of $35,000, originally bearing interest at the rate of 9.5% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009, until further reduced as described above.
In January 2009, the Company issued an amendment to an unsecured promissory note with Schellenberg. The Company issued the note on August 1, 2002 in the amount of $10,000, originally bearing interest at the rate of 8% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009, until further reduced as described above.
In January 2009, the Company issued an amendment to an unsecured convertible promissory note with Michel. The Company issued the note on January 23, 2007 in the amount of $10,000, originally bearing interest at the rate of 5% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009, until further reduced as described above.
In January 2009, the Company issued an amendment to an unsecured convertible promissory note with Elmira. The Company issued the note on November 29, 2006 in the amount of $300,000, originally bearing interest at the rate of 5% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009, until further reduced as described above.
NOTE F—STOCKHOLDERS’ DEFICIT
In July 2009, the Company exercised its option and converted all $100,000 of an outstanding note’s principal into 300,000 shares of Common Stock at a conversion price of 30,000 shares per $10,000 of principal.
In May 2009, the Company exercised its option and converted all $300,000 of an outstanding note’s principal into 1,095,000 shares of Common Stock at a conversion price of 36,500 shares per $10,000 of principal. In addition, the Company converted $34,553 of accrued and unpaid interest into 126,120 shares of Common Stock at a conversion price of 36,500 shares per $10,000 of interest.
In January 2009, the Company exercised its option and converted all $250,000 of an outstanding note’s principal into 1,187,500 shares of Common Stock at a conversion price of 47,500 shares per $10,000 of principal. In addition, the Company converted $8,712 of accrued and unpaid interest into 41,383 shares of Common Stock at a conversion price of 47,500 shares per $10,000 of interest.
In January 2009, the Company exercised its option and converted all $200,000 of an outstanding note’s principal into 950,000 shares of Common Stock at a conversion price of 47,500 shares per $10,000 of principal. In addition, the Company converted $5,786 of accrued and unpaid interest into 27,485 shares of Common Stock at a conversion price of 47,500 shares per $10,000 of interest.

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NOTE G —STOCK BASED COMPENSATION ARRANGEMENTS
The Company’s 1997 Plan provides for the issuance to employees, officers, directors, and consultants of incentive and/or non-qualified options to acquire 1,307,692 shares of common stock. The options are to be issued at fair market value, as defined, and generally vest 33% each anniversary of the date of the option grant. Options generally expire 10 years from the date of grant and automatically expire on termination of employment.
The Company’s Directors’ Plan provides for the issuance to non-employee directors of options to acquire 361,538 shares of common stock. The options are to be issued at fair market value, as defined, and vest on the first anniversary from the date of the option grant. Options generally expire 10 years from the date of grant and automatically expire one year from the date upon which the participant ceases to be a Director. The Company did not grant any options for the years ended December 31, 2010 and 2009.
        .
There was no share-based compensation expense related to share-based awards for the years ended December 31, 2010 and 2009.
The following table summarizes the stock option activity under the two Plans related to the Company:
                         
                    WEIGHTED  
                    AVERAGE  
    NUMBER     PER SHARE     EXERCISE  
    OF SHARES     EXERCISE PRICE     PRICE  
Outstanding options-December 31, 2008
    800,776     $ 0.30-8.00     $ 1.25  
Granted
                 
Expired and/or Cancelled
    95,100       7.00-8.00       7.46  
 
                 
Outstanding options-December 31, 2009
    705,676     $ 0.30-2.38     $ 0.41  
Granted
                 
Expired and/or Cancelled
    5,000       2.38       2.38  
 
                 
Outstanding options-December 31, 2010
    700,676     $ 0.30-1.25     $ 0.40  
 
                 
Options exercisable-December 31, 2010
    700,676     $ 0.30-1.25     $ 0.40  
 
                 
Outstanding options as of December 31, 2010, had a weighted average remaining contractual life of approximately 2.3 years. Vested options had a weighted average remaining contractual life of 2.3 years as of December 31, 2010. At December 31, 2010, options available for grant under the Company’s 1997 Plan were 622,016. There were no options available for grant under the Company’s Directors’ Plan. There was no intrinsic value for unvested and vested options at December 31, 2010.
The following table summarizes the warrant activity related to employee grants:
                         
                    WEIGHTED  
    NUMBER     PER SHARE     AVERAGE  
    OF SHARES     EXERCISE PRICE     EXERCISE PRICE  
Outstanding warrants- December 31, 2008
    2,399,324     $ 0.15-0.35     $ 0.18  
Granted
                 
Expired and/or Cancelled
                 
 
                 
Outstanding warrants-December 31, 2009
    2,399,324     $ 0.15-0.35     $ 0.18  
Granted
                 
Expired and/or Cancelled
                 
 
                 
Outstanding warrants-December 31, 2010
    2,399,324     $ 0.15-0.35     $ 0.18  
 
                 
Warrants exercisable-December 31, 2010
    2,399,324     $ 0.15-0.35     $ 0.18  
 
                 

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Outstanding employee warrants as of December 31, 2010, had a weighted average remaining contractual life of approximately 2.6 years. Vested employee warrants had a weighted average remaining contractual life of 2.6 years at December 31, 2010. There was no intrinsic value for unvested and vested employee warrants at December 31, 2010.
In addition to employee warrants, the Company had 1,200,000 warrants to non-employees outstanding at December 31, 2010, with an exercise price of $0.15 that expire June 3, 2013.
NOTE H—NOTES PAYABLE TO RELATED PARTIES
The following is a summary of notes payable to related parties at December 31:
                 
             
    2010     2009  
Note payable to a Director. Principal due on demand with 30 days notice; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10; amended from 5% 1/1/09).
  $ 30,000     $ 30,000  
Note payable to a Director. Principal due on demand with 30 days notice; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10; amended from 5% 1/1/09).
    20,000       20,000  
Note payable to a Director. Principal due on demand with 30 days notice; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10)
    30,000       30,000  
Note payable to a Director. Principal due on demand with 30 days notice; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10)
    35,000        
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10; amended from 8% 1/1/09).
    100,000       100,000  
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10; amended from 5% 1/1/09; amended from 7% 3/20/08).
    100,000       100,000  
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10; amended from 5% 1/1/09).
    50,000       50,000  
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10; amended from 5% 1/1/09).
    50,000       50,000  
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10; amended from 5% 1/1/09).
    50,000       50,000  
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10; amended from 5% 1/1/09).
    100,000       100,000  
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10).
    100,000       100,000  
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10).
    75,000       75,000  
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10).
    100,000       100,000  
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10).
    25,000       25,000  
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10).
    80,000        
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10).
    50,000        

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The following is a summary of notes payable to related parties at December 31:
                 
             
    2010     2009  
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10; amended from 9.5% 1/1/09).
    35,000       35,000  
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 1.75% (amended from 3% 12/1/10; amended from 8% 1/1/09).
    10,000       10,000  
 
           
Current notes payable — related parties
  $ 1,040,000     $ 875,000  
 
           
 
               
The following is a summary of convertible notes payable at December 31:
               
 
    2010       2009  
 
           
Convertible note to a Director. Principal due on demand (amended from November 30, 2010 on 12/1/10), unsecured. Interest payable at 1.75% (amended from 3% 12/1/10; amended from 8% 1/1/09).(1)
    10,000       10,000  
 
           
 
               
Convertible notes payable — related parties
  $ 10,000     $ 10,000  
 
           
 
(1)   Payments equal to the principal and accrued and unpaid interest on the note are due on demand. At the option of the holder, at any time or from time to time prior to the maturity date, all or any portion of the outstanding principal may be converted into a number of shares of the Company’s common stock at a conversion price of 36,500 per $10,000 of principal. Interest is payable on maturity.
NOTE I—COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space under a lease agreement that expires on May 31, 2012. Rent expense totaled $80,000 and $82,000 for each of the years ended December 31, 2010 and 2009, respectively. The Company leases servers and web server management facilities under an agreement that expires in 2011. The Company has also entered into a software license commitment related to HIPAA validation software that expires in 2011. The Company’s aggregate lease and software license commitments are shown below.
Approximate future minimum operating lease obligations at December 31, 2010, are as follows:
         
    OPERATING  
    LEASES  
2011
  $ 133,000  
2012
    32,000  
2013
     
2014
     
2015 and thereafter
     
 
     
Total minimum lease obligations
  $ 165,000  
 
     
Interest expense incurred under capital lease obligations was $0 and $3,000 for the years ended December 31, 2010, and 2009, respectively.
On September 9, 2010, the Company signed a Client Engagement Letter (the “Letter”) with Blackhawk Partners, Inc. (“Blackhawk”). The services to be rendered by Blackhawk in accordance with the Letter included seeking debt or equity financing for the Company potentially in connection with a merger or acquisition transaction. Upon execution, the Company tendered Blackhawk a non-refundable fee of $50,000. The Company also agreed to pay Blackhawk an advisory fee equal to 6.0% of the total equity gross amount funded to the Company outside of Blackhawk proprietary funds and 3.0% of the total debt gross amount similarly funded (“Advisory Fee”) in the event a transaction took place. Additionally, on the 1st day of every month beginning six months from the Effective Date and continuing for a period of six months, the Company was to pay Blackhawk a

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monthly non-refundable advisory fee of $12,000. The Letter was terminable by either party with 30 days written notice, although the Advisory Fee shall apply for 18 months after termination. See Note K for details regarding the termination of this agreement.
From time to time in the normal course of business, the Company is a party to various matters involving claims or possible litigation. Currently there are no such asserted claims.
NOTE J—RETIREMENT PLAN
The Company utilizes a third party for the processing and administration of its payroll and benefits. Under the agreement, the third party is legally a co-employer of all of the Company’s employees, which are covered by the third party’s 401(k) retirement plan. Under the plan, employer contributions are discretionary. During 2010, the Company made $4,000 in matching contributions and paid $4,000 in fees. During 2009, the Company made $5,000 in matching contributions and paid $4,000 in fees.
NOTE K— —SUBSEQUENT EVENTS
On February 9, 2011, the Company terminated its agreement with Blackhawk Partners, effective March 9, 2011. The termination was in accordance with the terms of the agreement. For a description of the terms of the agreement, see Note I to these finanscial statements.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
DISCLOSURE 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 December 31, 2010 and concluded that the disclosure controls and procedures were not effective, because certain deficiencies involving internal controls constituted a material weakness as discussed below. 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.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles. Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our principal executive officer and principal accounting officer, conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on its evaluation, our management concluded that the disclosure controls and procedures were not effective, because certain deficiencies involving internal controls constituted a material weakness. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The material weakness 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 is 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.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.

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CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2010 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.

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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
MANAGEMENT
Our directors and executive officers, their ages, and their positions held with us are as follows:
             
NAME   AGE   POSITION
Don Crosbie
    67     President, Chief Executive Officer, Chairman of the Board of Directors and Class I Director
Laura M. Bray
    53     Chief Financial Officer
Gary J. Austin
    66     Vice President of Operations
Alfred Dubach
    63     Vice Chairman of the Board of Directors and Class I Director
John C. Willems, III
    55     Class II Director
Thomas Michel
    59     Class II Director
K. Scott Spurlock
    43     Vice President of Development
The following is certain summary information with respect to our executive officers, directors and key employees.
DON CROSBIE has served as our President, Chief Executive Officer and Chairman of the Board since October 2002. From July 2001 until October 2002, Mr. Crosbie was President and CEO of Xactimed, a claims processing and clearinghouse company serving the hospital market. In the year he was at Xactimed, it experienced a dramatic turnaround, with revenue growing 150% over the prior year and an operating profit was achieved as compared to a significant operating loss for the prior year. From September 2000 to July 2001, Mr. Crosbie served as CFO and President of North American Operations of Blue Wave Systems, a high density DSP board supplier to the telecom infrastructure market, including media gateways and 2 1/2 and 3 G wireless. He joined Blue Wave with a corporate strategic direction to identify and complete a sale of the company. This was accomplished in July 2001 with the sale of the company to Motorola for $125 million. From September 1999 to June 2000, Mr. Crosbie served as President, COO and CFO of Ypay.com, an internet start up company in the free ISP/media rich advertising space. From June 1997 to December 1998, Mr. Crosbie served as CEO of Rheumatology Research International, a Site Management Organization performing clinical trials for pharmaceutical and biotech companies in pre-FDA approval trials for new arthritis drugs. Prior to Rheumatology Research International, Mr. Crosbie served as founder, Chairman and CEO of ComVest Partners Inc., an institutional research boutique with an emphasis on networking, wireless, voice and remote access; and Executive Vice President and Chief Financial Officer of InterVoice Inc, a high technology provider of customized voice response systems. The breadth of Mr. Crosbie’s experience led the board to believe this individual is qualified to serve on the board of directors.
LAURA M. BRAY, a Certified Public Accountant, was promoted to Chief Financial Officer in November 2004. Ms. Bray joined Claimsnet as Controller in January 2003 from Xactimed, where she served as Controller. Xactimed is a claims processing and clearing house company serving the hospital market. Ms. Bray has more than 20 years of financial management experience, including Accounting Manager of Blue Wave Systems, a high density DSP board supplier to the telecom infrastructure market, and Controller of EFS, a software sales and document management services firm. Ms. Bray began her career in the audit division of Alexander Grant & Co., followed by more than ten years as Business Manager and Controller in the radio broadcasting industry.
GARY J. AUSTIN joined us in March 2004 as our Chief Operating Officer. In April 2009, Mr. Austin resigned his position as an officer of the company and continued to be employed as Vice President of Operations. From September 2002 to December 2003, Mr. Austin served as the President and Chief Operating Officer of Gold Lake Technologies Corporation, a document management services firm. From March 1999 to September 2002, Mr. Austin served as the Senior Vice President and Chief Operating Officer of GTESS Corporation, a health claim processing service provider. Mr. Austin previously held a variety of executive and management positions with Peerless Group, Electronic Data Systems, Shared Medical Systems, and Crittenden Memorial Hospital.
ALFRED DUBACH has served as the Vice Chairman of our board of directors since January 2002. He has been an independent business consultant and financial advisor in Zurich, Switzerland for more than 10 years, working with non-food consumer goods, luxury goods, cosmetics, retail and wholesale, banking, e-banking, e-commerce, and pharmaceuticals. In 2004, he was named a board member of Orbiter, a developer and producer of special gears and gear boxes, and today he manages Orbiter’s successor organization, R.E.G. AG in Baden-Baden, Germany, as its chairman. From March 2001 to February 2002, Mr. Dubach served as the Chief Investment Officer for Swissquote Bank and a member of the Executive Management Team that developed the first

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pure Internet Bank in Switzerland. CASH magazine voted Swissquote Bank the best Swiss online broker in autumn 2001 and the bank reached a market share of twenty percent by the end of 2001. From June 1994 to February 2001, Mr. Dubach was a Director of Credit Suisse, where he served as a member of the project team for the legal integration of Volksbank and Credit Suisse as well as the restructuring of the Credit Suisse Group. Prior to June 1994, Mr. Dubach served in several capacities within management and executive management in the pharmaceutical industry and other leading Swiss banks (Louis Widmer Intl, Union Bank of Switzerland, Swiss Volksbank). The breadth of Mr. Dubach’s experience led the board to believe this individual is qualified to serve on the board of directors.
JOHN C. WILLEMS, III has served as a director of our Company since 1998. Mr. Willems has handled some of our Company’s legal needs since April 1996. Mr. Willems has been a solo practitioner in Dallas, Texas since November of 1998 representing a variety of business clients. From September 1993 through October of 1998, Mr. Willems was an attorney with the law firm of McKinley, Ringer & Zeiger, PC, (formerly McKinley, Hinton & Ringer, PC) in Dallas, Texas, practicing in the area of business law. From January 1982 to August 1993, Mr. Willems was employed by the law firm of SettlePou, PC (formerly Settle, Pou & Melton), also located in Dallas, Texas. The breadth of Mr. Willems’s experience led the board to believe this individual is qualified to serve on the board of directors.
THOMAS MICHEL was elected as a director of our Company in February 2002. Since 1996, Mr. Michel has been a Principal of Switzerland based CIMA Consulting, AG, of which he was a founder, and which provides financial and fund raising services in the form of venture capital, private equity, and bridge loan facilities. From 1980 to 1996, he served in various capacities at Swiss Bank Corporation in Zurich, Switzerland, such as VP Financial Planning and Head of SBC Portfolio Management, Inc., a subsidiary of the Bank. Mr. Michel currently serves on the Board of Directors for Best 243 AG, an automobile servicing company, R.E.G. AG, a developer of specialized high tech gears, and Spirit of Covey AG, a manufacturer of natural skincare products. The breadth of Mr. Michel’s experience led the board to believe this individual is qualified to serve on the board of directors.
K. SCOTT SPURLOCK has served as our Vice President of Development since joining us in June of 1997 through our acquisition of Medica Systems, Inc., a software development company serving the healthcare industry. From September 1994 through June 1997, Mr. Spurlock served as the Vice President and acted as architect and lead developer of a majority of the software developed by Medica. Mr. Spurlock has extensive software development experience in the healthcare arena, including over 20 years developing software for medical electronic data interchange (EDI). From August 1993 to September 1994, Mr. Spurlock was a Senior Developer for Vision Software, a vendor of healthcare practice management system software. Previously, Mr. Spurlock was an independent consultant developing customized accounting, appointment and patient record programs for various hospitals and medical groups.
Mr. Crosbie and Ms. Bray are our executive officers.
STRUCTURE OF THE BOARD OF DIRECTORS
Our board of directors is divided into two classes with each class consisting of, as nearly as possible, one-half of the total number of directors constituting the entire board of directors. The Class I directors currently are Messrs. Crosbie and Dubach, whose terms expire at the next annual meeting of stockholders, which we expect to hold in 2011. The Class II directors currently are Messrs. Willems and Michel, whose terms expire at the following annual meeting of stockholders. Each director is elected for a term of two years, except when the election is by the board to fill a vacancy, in which case, the director’s term expires at the next annual meeting of stockholders.
There are no family relationships among our directors and executive officers.
DIRECTOR INDEPENDENCE
The standards relied upon in determining whether a director is “independent” are those of the Nasdaq, which include the following objective standards: (a) a director who is an employee, or whose immediate family member (defined as a spouse, parent, child, sibling, father- and mother-in-law, son- and daughter-in-law and anyone, other than a domestic employee, sharing the director’s home) is an executive officer of the Company, would not be independent for a period of three years after termination of such relationship; (b) a director who receives, or whose immediate family member receives, compensation of more than $120,000 during any period of twelve consecutive months from the Company, except for certain permitted payments, would not be independent for a period of three years after ceasing to receive such amount; (c) a director who is or who has an immediate family member who is, a current partner of the Company’s outside auditor or who was, or who has an immediate family member who was, a partner or employee of the Company’s outside auditor who worked on the Company’s audit at any time during any of the past three years would not be independent until a period of three years after the termination of such relationship; (d) a director who is, or whose immediate family member is, employed as an executive officer of another company where any of the

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Company’s present executive officers serve on the other company’s compensation committee would not be independent for a period of three years after the end of such relationship; and (e) a director who is, or who has an immediate family member who is, a partner in, or a controlling shareholder or an executive officer of any organization that makes payments to, or receives payments from, the Company for property or services in an amount that, in any single fiscal year, exceeds the greater of $200,000, or 5% of such other company’s consolidated gross revenues, would not be independent until a period of three years after falling below such threshold.
In applying the above-referenced standards, we have determined that the Company’s current “independent” directors are: Alfred Dubach, John C. Willems, III, and Thomas Michel.
AUDIT COMMITTEE
At present, we do not have a separately standing audit committee and our entire board of directors acts as our audit committee. None of the members of our board of directors meet the definition of “audit committee financial expert” as defined in Item 407(d) of Regulation S-K promulgated by the Securities and Exchange Commission. We have not retained an audit committee financial expert because we do not believe that we can do so without undue cost and expense. Moreover, we believe that the present members of our board of directors, taken as a whole, have sufficient knowledge and experience in financial affairs to effectively perform their duties.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), requires officers, directors and persons who beneficially own more than 10% of a class of our equity securities registered under the Exchange Act to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us during fiscal 2009 and Forms 5 and amendments thereto furnished to us with respect to fiscal 2010, or written representations that Form 5 was not required for fiscal 2010, we believe that all Section 16(a) filing requirements applicable to each of our officers, directors and greater-than-ten-percent stockholders were fulfilled in a timely manner. We have notified all known beneficial owners of more than 10% of our common stock of their requirement to file ownership reports with the Securities and Exchange Commission.
CODE OF ETHICS
We have adopted a code of ethics that applies to all of our employees, executive officers and directors, including our principal executive officer, principal financial officer and principal accounting officer. The code of ethics includes provisions covering compliance with laws and regulations, insider trading practices, conflicts of interest, confidentiality, protection and proper use of our assets, accounting and record keeping, fair competition and fair dealing, business gifts and entertainment, payments to government personnel and the reporting of illegal or unethical behavior. The code of ethics is posted on our website at www.claimsnet.com. We intend to disclose any amendments to, or waivers from, our code of ethics that apply to our principal executive officer, principal financial officer, and principal accounting officer by posting such information on our website.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid or accrued by us for services rendered in all capacities during the years ended December 31, 2010 and 2009 by the chief executive officer and each of our most highly compensated executive officers whose compensation exceeded $100,000 during the year ended December 31, 2010.
SUMMARY COMPENSATION TABLE
                                 
                    ALL OTHER        
NAME AND           SALARY     COMPENSATION     TOTAL  
PRINCIPAL POSITION   YEAR     $     $ (1)     $  
Don Crosbie
    2009     $ 135,900     $ 1,360     $ 137,260  
CEO
    2010     $ 141,170     $ 1,412     $ 142,582  
 
                               
Gary Austin
    2009       113,500             113,500  
VP — Operations
    2010       130,535             130,535  
 
                               
K. Scott Spurlock
    2009       128,900             128,900  
VP — Development
    2010       132,215             132,215  
 
(1)    Company match on employee contributions to the Company’s 401(k) plan.

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The following table provides information on the value of each of the named executive officers’ options at December 31, 2010:
2010 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
                                         
    Option Awards  
                    Equity              
    Number of     Number of     Incentive              
    Securities     Securities     Plan Awards:              
    Underlying     Underlying     Number of              
    Unexercised     Unexercised     Securities              
    Options     Options     Underlying              
    (#)     (#)     Unexercised     Option        
                    Unearned     Exercise     Option  
                    Options     Price     Expiration  
Name   Exercisable     Unexercisable     (#)     ($)     Date  
Don Crosbie
    1,500,000 (1)                 0.15       6/3/13  
Don Crosbie
    200,000 (1)                 0.29       9/21/14  
 
                                       
Gary Austin
    400,000 (1)                 0.35       3/24/14  
Gary Austin
    100,000 (1)                 0.29       9/21/14  
 
                                       
K. Scott Spurlock
    20,000 (1)                 1.25       1/4/11  
K. Scott Spurlock
    30,000 (1)                 0.60       1/2/12  
K. Scott Spurlock
    400,000 (1)                 0.15       6/3/13  
 
(1)    These are shares underlying warrants and options that originally vested over 3 years. All the shares vested prior to 2010.
All options were granted at an exercise price not less than the fair value of the common stock on the date of the grant.
DIRECTOR COMPENSATION
During the year ended December 31, 2010, directors neither received nor accrued compensation for their services as directors other than reimbursement of expenses relating to attending meetings of the board of directors.
DIRECTORS’ STOCK OPTION PLAN (THE “DIRECTORS’ PLAN”)
In April 1998, we adopted the Directors’ Plan to tie the compensation of outside (non-employee) directors to future potential growth in our earnings, and encourage them to remain on our board of directors, to provide them with an increased incentive to make significant and extraordinary contributions to our long-term performance and growth, and to align their interests through the opportunity for increased stock ownership, with the interests of our stockholders. Only outside directors are eligible to receive options under the Directors’ Plan.
No shares of common stock are reserved for issuance to participants under the Directors’ Plan. In the event of any changes in the common stock by reason of stock dividends, split-ups, recapitalization, mergers, consolidations, combinations, or other exchanges of shares and the like, appropriate adjustments will be made by the board of directors to the number of shares of common stock available for issuance under the Directors’ Plan, the number of shares subject to outstanding options, and the exercise price per share of outstanding options, as necessary substantially to preserve option holders’ economic interests in their options.
The period for exercising an option ends ten years from the date the option is granted. Fifty percent of the options granted become exercisable on the first anniversary of the date of grant with the remainder becoming exercisable on the second anniversary of the date of grant. During the period an option is exercisable, the option holder may pay the purchase price in cash or, under some circumstances, by surrender of shares of common stock, valued at their then fair market value on the date of exercise, or by a combination of cash and shares.
Shares subject to an option which has not been exercised at the expiration, termination, or cancellation of an option will be available for future grants under the Directors’ Plan, but shares surrendered as payment for an option, as described above will not again be available for use under the Directors’ Plan. As of December 31, 2010 there were outstanding options, all granted prior to January 1, 2010, to purchase an aggregate of 15,000 shares at exercise prices ranging from $.30 to $.50 per share and no shares remained available for option grants.

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The Directors’ Plan terminated on December 31, 2007.
1997 STOCK OPTION PLAN
In April 1997, our board of directors and stockholders adopted the 1997 Stock Option Plan (the “1997 Plan”). The 1997 Plan provides for the grant of options to purchase up to 1,307,692 shares of common stock to our employees, officers, directors, and consultants. Options may be either “incentive stock options” or non-qualified options under the Federal tax laws. Incentive stock options may be granted only to our employees, while non-qualified options may be issued to non-employee directors, consultants, and others, as well as to our employees.
The 1997 Plan is administered by “disinterested members” of the board of directors or the compensation committee, who determine, among other things, the individuals who shall receive options, the period during which the options may be exercised, the number of shares of common stock issuable upon the exercise of each option, and the option exercise price.
Subject to some exceptions, the exercise price per share of common stock subject to an incentive option may not be less than the fair market value per share of common stock on the date the option is granted. The per share exercise price of the common stock subject to a non-qualified option may be established by the board of directors, but shall not be less than 85% of the fair market value per share of common stock on the date the option is granted. The aggregate fair market value of common stock for which any person may be granted incentive stock options which first become exercisable in any calendar year may not exceed $100,000 on the date of grant.
No stock option may be transferred by an optionee other than by will or the laws of descent and distribution, and, during the lifetime of an optionee, the option will be exercisable only by the optionee. In the event of termination of employment or engagement other than by death or disability, the optionee will have no more than three months after such termination during which the optionee shall be entitled to exercise the option to the extent exercisable at the time of termination, unless otherwise determined by the board of directors. Upon termination of employment of an optionee by reason of death or permanent and total disability, the optionee’s incentive stock options remain exercisable for one year to the extent the options were exercisable on the date of such termination. Options may not be granted under the 1997 Plan beyond a date ten years from the effective date of the 1997 Plan. Subject to some exceptions, holders of incentive stock options granted under the 1997 Plan cannot exercise these options more than ten years from the date of grant. Options granted under the 1997 Plan generally provide for the payment of the exercise price in cash and may provide for the payment of the exercise price by delivery to us of shares of common stock already owned by the optionee having a fair market value equal to the exercise price of the options being exercised, or by a combination of these methods.
Any unexercised options that expire or that terminate upon an employee’s ceasing to be employed by us become available again for issuance under the 1997 Plan. As of December 31, 2010, there were outstanding options to purchase an aggregate of 685,676 shares at exercise prices ranging from $.35 to $1.25 per share and 622,016 shares remain available for option grants.
The following table summarizes and combines the stock option activity under the 1997 Plan and the Directors’ Plan through December 31, 2010 (none of the options granted have been exercised):
                         
                    WEIGHTED  
                    AVERAGE  
    NUMBER     PER SHARE     EXERCISE  
    OF SHARES     EXERCISE PRICE     PRICE  
Outstanding options-December 31, 2008
    800,776     $ 0.30-8.00     $ 1.25  
Granted
                 
Expired and/or Cancelled
    95,100       7.00-8.00       7.46  
 
                 
Outstanding options-December 31, 2009
    705,676     $ 0.30-2.38     $ .41  
Granted
                 
Expired and/or Cancelled
    95,100       7.00-8.00       7.46  
 
                 
Outstanding options-December 31, 2010
    700,676     $ 0.30-1.25     $ 0.40  
 
                 
Options exercisable-December 31, 2010
    700,676     $ 0.30-1.25     $ 0.40  
 
                 

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Outstanding options as of December 31, 2010, had a weighted average remaining contractual life of approximately 2.3 years. Vested options had a weighted average remaining contractual life of 2.3 years as of December 31, 2010. At December 31, 2010, 622,016 shares remain available for option grant under the Company’s 1997 Plan. There were no options available for grant under the Company’s Directors’ Plan. There was no intrinsic value for unvested and vested options at December 31, 2010.
WARRANTS
We have from time to time issued warrants to our employees and directors.
The following table summarizes the warrant activity related to employee grants:
                         
                    WEIGHTED  
    NUMBER     PER SHARE     AVERAGE  
    OF SHARES     EXERCISE PRICE     EXERCISE PRICE  
Outstanding warrants- December 31, 2008
    2,399,324     $ 0.15-0.35     $ 0.18  
Granted
                 
Expired and/or Cancelled
                 
 
                 
Outstanding warrants-December 31, 2009
    2,399,324     $ 0.15-0.35     $ 0.18  
Granted
                 
Expired and/or Cancelled
                 
 
                 
Outstanding warrants-December 31, 2010
    2,399,324     $ 0.15-0.35     $ 0.18  
 
                 
Warrants exercisable-December 31, 2010
    2,399,324     $ 0.15-0.35     $ 0.18  
 
                 
Outstanding employee warrants as of December 31, 2010, had a weighted average remaining contractual life of approximately 2.6 years. Vested employee warrants had a weighted average remaining contractual life of 2.6 years at December 31, 2010. There was no intrinsic value for unvested and vested employee warrants at December 31, 2010.
In addition to employee warrants, the Company had 1,200,000 warrants to non-employees outstanding at December 31, 2010, with an exercise price of $0.15 that expire June 3, 2013.
No employee options or warrants were exercised during 2010. No options or warrants were granted during 2010 to the individuals set forth in the Summary Compensation Table above.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth, as of February 24 2011,
    each person who is known by us to be the beneficial owner of more than 5% of the outstanding common stock,
 
    each director and each of our named executive officers,
 
    all of our directors and executive officers as a group, and
 
    the number of shares of common stock beneficially owned by each such person and such group and the percentage of the outstanding shares owned by each such person and such group.
As used in the table below and elsewhere in this report, the term “beneficial ownership” with respect to a security is interpreted in accordance with Rule 13d-3 of the Securities Exchange Act of 1934. Under this rule and related rules, a person is deemed to beneficially own a security if the person has sole or shared voting power, including the power to vote or direct the vote, and/or sole or shared investment power, including the power to dispose or direct the disposition, with respect to the security through any contract, arrangement, understanding, relationship, or otherwise, including a right to acquire such power(s). Under these rules more than one person may be deemed to be a beneficial owner of the same securities. However, for purposes of computing the aggregate number of shares owned by officers and directors as a group in the following table, the same shares are not counted more than once. Except as otherwise indicated, the stockholders listed in the table have sole voting and investment powers with respect to the shares indicated. The shares of preferred stock allow the holder to vote with the holders of common stock as though one class to the extent of the number of shares issuable upon conversion of the preferred stock. Each share of preferred stock is

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convertible into 1000 shares of the Company’s common stock. Beneficial ownership includes shares issuable upon exercise of options and warrants exercisable within sixty days, and issuable upon conversion of the preferred stock within sixty days.
Except as otherwise noted below, the address of each of the persons in the table is c/o Claimsnet.com inc., 14860 Montfort Dr., Suite 250, Dallas, Texas 75254.
Unless otherwise noted, beneficial ownership consists of sole ownership, voting, and investment power with respect to all common stock shown as beneficially owned by them.
                                 
            SHARES BENEFICIALLY OWNED  
            Amount and                
            Nature of             Percent of  
Name and Address of           Beneficial     Percent of     Voting  
Beneficial Owner   Class of Security     Ownership     Class     Power  
Don Crosbie (1)
  Common Stock     1,700,000       4.9       4.3  
 
                               
Gary Austin (2)
  Common Stock     500,000       1.4       1.3  
 
                               
Scott Spurlock (3)
  Common Stock     450,000       1.3       1.1  
 
                               
Laura Bray (4)
  Common Stock     150,000       *       *  
 
                               
John C. Willems, III (5)
  Common Stock     14,277       *       *  
 
                               
Thomas Michel (6)
  Common Stock     1,790,900       5.1       4.5  
 
  Series D Preferred Stock     720       100.0          
 
  Series E Preferred Stock     50       100.0          
 
                               
Alfred Dubach (7)
  Common Stock     1,220,000       3.5       3.1  
 
                               
Bo W. Lycke (8)
  Common Stock     2,581,326       7.4       6.5  
4730 Melissa Ln.
Dallas, Texas 75229
                               
 
                               
Robert H. Brown, Jr. (9)
  Common Stock     1,362,354       3.9       3.4  
2626 Cole Ave, #400
Dallas, Texas 75204
                               
 
                               
McKesson Corporation
  Common Stock     1,514,285       4.3       3.8  
One Post Street
San Francisco, CA 94104
                               
 
                               
J. R. Schellenberg (10)
  Common Stock     1,793,603       5.1       4.5  
Kohlrainstrasse 1
Kusnacht
Switzerland CH-8700
                               
 
                               
Elmira United
Corporation
  Common Stock     17,999,466       51.61       45.1  
Swiss Tower — 16th Floor
Panama
Republic of Panama
                               
 
                               
Acceptius Inc
  Common Stock     1,700,000       4.9       4.3  
15400 Knoll Trail, Ste 330
Dallas, TX 75248
                               
 
                               
All our directors and
  Common Stock     4,875,177       14.0       12.2  
executive officers as a
group (5 persons) (11)
  Series D Preferred Stock     720       100.0          
 
  Series E Preferred Stock     50       100.0          
 
                               

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*   Less than one percent.
 
(1)   Includes 1,700,000 shares which Mr. Crosbie has the right to acquire upon exercise of options or warrants.
 
(2)   Includes 500,000 shares which Mr. Austin has the right to acquire upon exercise of options or warrants.
 
(3)   Includes 450,000 shares which Mr. Spurlock has the right to acquire upon exercise of options or warrants.
 
(4)   Includes 150,000 shares which Ms. Bray has the right to acquire upon exercise of options or warrants.
 
(5)   Includes 5,000 shares which Mr. Willems has the right to acquire upon exercise of options or warrants.
 
(6)   Includes 770,000 shares which may be issued to Mr. Michel upon conversion of preferred stock, and 605,000 shares which Mr. Michel has the right to acquire upon exercise of options or warrants.
 
(7)   Includes 605,000 shares which Mr. Dubach has the right to acquire upon exercise of options or warrants.
 
(8)   Includes 1,051,603 shares of common stock owned of record by National Financial Corporation, of which Mr. Lycke is a 71.1% owner and 250,000 shares which Mr. Lycke has the right to acquire upon exercise of options or warrants.
 
(9)   Includes 1,051,603 shares owned of record by National Financial Corporation, of which Mr. Brown is a 17.7% owner.
 
(10)   Includes 1,051,603 shares owned of record by National Financial Corporation by virtue of Mr. Schellenberg serving as President and Director of MNS Enterprises, Inc, which in turn manages the activities of National Financial Corporation pursuant to a management agreement.
 
(11)   Includes an aggregate of 3,065,000 shares which they have a right to acquire upon exercise of options or warrants.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth, as of December 31, 2009, information regarding compensation plans under which equity securities are authorized for issuance.
                         
    NUMBER OF              
    SECURITIES TO BE     WEIGHTED-        
    ISSUED UPON     AVERAGE     NUMBER OF SECURITIES  
    EXERCISE     EXERCISE PRICE     REMAINING AVAILABLE  
    OF OUTSTANDING     OF OUTSTANDING     FOR FUTURE ISSUANCE  
    OPTIONS AND     OPTIONS AND     UNDER EQUITY  
    WARRANTS     WARRANTS     COMPENSATION PLANS*  
    (a)     (b)     (c)  
Equity Compensation Plans Approved By Stockholders
    700,676     $ 0.40       622,016  
 
                       
Equity Compensation Plans Not Approved By Stockholders
    3,599,324       0.17        
 
                 
Total
    4,300,000     $ 0.21       622,016  
 
                 
 
*   Excludes securities reflected in column (a).
Equity compensation plans approved by shareholders include the 1997 Stock Option Plan and the Directors’ Plan, as more fully described in Item 10.
Equity compensation plans not approved by shareholders include the following:
* In February 2002, we granted executive officers warrants to purchase 35,443 shares of common stock in exchange for voluntary salary reductions, of which 24,324 warrants remain outstanding. The exercise price of the warrants is $0.35 per share, they expire on the tenth anniversary of the grant, and are fully exercisable;
* In June 2003, we issued warrants to acquire an aggregate of 3,450,000 shares of common stock to certain employees, of which 1,975,000 warrants remain outstanding. The exercise price of these warrants is $0.15 per share, all are fully exercisable and expire in June 2013;
* In June 2003, we issued ten-year warrants to acquire an aggregate of 1,200,000 shares of common stock to two directors as compensation for services outside of their director duties. The exercise price of these warrants is $0.15 per share, all are fully exercisable and expire in June 2013; and

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* In September 2004, we issued ten-year warrants to acquire an aggregate of 550,000 shares of common stock to certain employees at an exercise price of $0.29 per share, of which 400,000 warrants remain outstanding. These warrants are fully exercisable and expire in September 2014.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On December 8, 2010, the Company entered into Amendment Number 1 (the “Michel Convertible Amendment”) to that certain Unsecured Convertible Promissory Note (the “Michel Convertible Note”), as the same may have been amended, entered into January 23, 2007 by and between Claimsnet and Thomas Michel (“Michel”), a related party. Pursuant to the Convertible Amendment, payments equal to the principal and accrued and unpaid interest on the Michel Convertible Note are now due on demand, with interest accruing at 1.75% per annum, effective as of December 1, 2010. All other terms of the Michel Convertible Note, as amended, remain in effect.
On December 8, 2010, the Company entered into various amendments (the “Michel Amendments”) to certain Unsecured Promissory Notes (each a “Michel Note”, and collectively, the “Michel Notes”), as the same may have been amended, entered into from time to time by and between Claimsnet and Michel. Pursuant to the Michel Amendments, effective December 1, 2010, the interest rate on each Michel Note is 1.75% per annum. All other terms of the Michel Notes, as amended, remain in effect.
On December 8, 2010, the Company entered into various amendments (the “NFC Amendments”) to certain Unsecured Promissory Notes (each and “NFC Note”, and collectively, the “NFC Notes”), as the same may have been amended, entered into from time to time by and between Claimsnet and National Financial Corporation, a related party (“NFC”). Pursuant to the NFC Amendments, effective December 1, 2010, the interest rate on each NFC Note is 1.75% per annum. All other terms of the NFC Notes, as amended, remain in effect.
On December 8, 2010, the Company entered into Amendment Number 1 (the “Novinvest Amendment”) to that certain Unsecured Promissory Note (the “Novinvest Note”) by and between Claimsnet and Novinvest Associated S.A. (“Novinvest”) dated September 9, 2010. Pursuant to the Novinvest Amendment, effective December 1, 2010, the Novinvest Note accrues interest at 1.75% per annum. All other terms of the original agreement remain in effect. Novinvest is a division of Elmira United Corporation.
On December 8, 2010, the Company entered into various amendments (the “Schellenberg Amendments”) to certain Unsecured Promissory Notes (each a “Schellenberg Note,” and collectively, the “Schellenberg Notes”), as they may have been amended, entered into from time to time, by and between Claimsnet and J. R. Schellenberg, a related party (“Schellenberg”) . Pursuant to the Schellenberg Amendments, effective December 1, 2010, the interest rate on each Schellenberg Note is 1.75% per annum. All other terms of the Schellenberg Notes, as amended, remain in effect.
In September 2010, the Company issued an unsecured promissory note upon receipt of $50,000 from Novinvest. 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 September 9, 2011.
In October 2009, the Company issued an unsecured promissory note upon receipt of $30,000 from 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.
In July 2009, the Company exercised its option to convert into Common Stock a debt evidenced by an unsecured promissory note with NFC. The Company issued the note to Eganoc Services Corp., (“Eganoc”), on January 16, 2007 with a maturity date of November 30, 2010, bearing interest at the rate of 7% per annum. NFC purchased the note from Eganoc in an unrelated transaction on July 22, 2009 The outstanding principal of $100,000 was converted into 300,000 shares of Common Stock at a conversion price of 30,000 shares per $10,000 of principal. In addition, $17,740 of accrued and unpaid interest due under this note was paid in cash at the time of conversion.
In July 2009, the Company issued an unsecured promissory note upon receipt of $25,000 from 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.
In May 2009, the Company exercised its option to convert into Common Stock a debt evidenced by an unsecured promissory note with Elmira United Corporation, a greater than 5% shareholder of the Company (“Elmira”). The Company issued the note on November 29, 2006 with a maturity date of November 30, 2010, bearing interest at the rate of 7% per annum, amended to 3% per annum effective January 1, 2009. The outstanding principal of $300,000 was converted into 1,095,000 shares of Common Stock at a conversion price of 36,500 shares per $10,000 of principal. In addition, $34,553 of accrued and unpaid interest was converted into 126,120 shares of Common Stock at a conversion price of 36,500 shares per $10,000 of interest.
In May 2009, the Company issued an unsecured promissory note upon receipt of $100,000 from 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.
In April 2009, the Company issued an unsecured promissory note upon receipt of $75,000 from NFC. The note bears interest at

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the rate of 3% per annum. Payments equal to the principal and accrued and unpaid interest on the note are due on demand.
In February 2009, the Company issued an unsecured promissory note upon receipt of $100,000 from 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.
In January 2009, the Company issued an unsecured promissory note upon receipt of $100,000 from NFC. The note originally bore interest at the rate of 5% per annum. The note was amended on January 31, 2009 to decrease the interest rate to 3% per annum, effective January 6, 2009. Payments equal to the principal and accrued and unpaid interest on the note are due on demand, with thirty days notice.
In January 2009, upon the demand of Michel, the Company repaid all outstanding principal on a convertible note dated September 29, 2006 in the aggregate amount of $50,000 plus accrued interest of $8,558.
In January 2009, the Company exercised its option to convert into Common Stock a debt evidenced by an unsecured promissory note with Elmira. The Company issued the note on March 20, 2008 with a maturity date of March 31, 2011, bearing interest at the rate of 4% per annum. The outstanding principal of $250,000 was converted into 1,187,500 shares of Common Stock at a conversion price of 47,500 shares per $10,000 of principal. In addition, $8,712 of accrued and unpaid interest was converted into 41,383 shares of Common Stock at a conversion price of 47,500 shares per $10,000 of interest.
In January 2009, the Company exercised its option to convert into Common Stock a debt evidenced by an unsecured promissory note with Elmira. The Company issued the note on May 13, 2008 with a maturity date of March 31, 2011, bearing interest at the rate of 4% per annum. The outstanding principal of $200,000 was converted into 950,000 shares of Common Stock at a conversion price of 47,500 shares per $10,000 of principal. In addition, $5,786 of accrued and unpaid interest was converted into 27,485 shares of Common Stock at a conversion price of 47,500 shares per $10,000 of interest.
In January 2009, the Company issued amendments to two unsecured promissory notes with Michel. The notes originally bore interest at the rate of 5% per annum. The Company issued the first note on September 16, 2008 in the amount of $30,000. The Company issued the second note on September 29, 2008 in the amount of $20,000. The notes were amended to decrease the interest rate to 3% per annum, effective January 1, 2009.
In January 2009, the Company issued an amendment to an unsecured promissory note with NFC. The Company issued the note on November 16, 2006 in the amount of $100,000, originally bearing interest at the rate of 8% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009.
In January 2009, the Company issued an amendment to an unsecured promissory note with NFC. The Company issued the note on December 13, 2007 in the amount of $100,000, originally bearing interest at the rate of 7% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009.
In January 2009, the Company issued amendments to three unsecured promissory notes with NFC. The Company issued the first note on August 20, 2008 in the amount of $50,000. The Company issued the second note on October 28, 2008 in the amount of $50,000. The Company issued the third note on November 26, 2008 in the amount of $50,000. The notes originally bore interest at the rate of 5% per annum. The notes were amended to decrease the interest rate to 3% per annum, effective January 1, 2009.
In January 2009, the Company issued an amendment to an unsecured promissory note with NFC. The Company issued the note on January 6, 2009 in the amount of $100,000, originally bearing interest at the rate of 5% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009.
In January 2009, the Company issued an amendment to an unsecured promissory note with Mr. J.R. Schellenberg, a related party (“Schellenberg”). The Company issued the note on June 6, 2002 in the amount of $35,000, originally bearing interest at the rate of 9.5% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009.
In January 2009, the Company issued an amendment to an unsecured promissory note with Schellenberg. The Company issued the note on August 1, 2002 in the amount of $10,000, originally bearing interest at the rate of 8% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009.
In January 2009, the Company issued an amendment to an unsecured convertible promissory note with Michel. The Company issued the note on January 23, 2007 in the amount of $10,000, originally bearing interest at the rate of 5% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009.

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In January 2009, the Company issued an amendment to an unsecured convertible promissory note with Elmira. The Company issued the note on November 29, 2006 in the amount of $300,000, originally bearing interest at the rate of 5% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009.
All of the foregoing transactions involving related parties were on terms believed to be at least as favorable to us as obtainable from unaffiliated third parties and approved by a majority of our independent and disinterested directors. Additionally, all future transactions with related parties will be similarly on terms believed to be at least as favorable to us as obtainable from unaffiliated third parties and approved by a majority of our independent and disinterested directors.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of the fees billed to us by Whitley Penn LLP, our independent registered public accounting firm, for professional services rendered during the fiscal years ended December 31, 2010 and 2009.
Fiscal year ended December 31, 2010
         
FEE CATEGORY   WHITLEY PENN LLP  
Audit Fees (1)
  $ 42,000  
Audit-Related Fees (2)
     
Tax Fees (2)
     
All Other Fees (2)
     
 
     
Total
  $ 42,000  
 
     
Fiscal year ended December 31, 2009
         
FEE CATEGORY WHITLEY PENN LLP  
Audit Fees (1)
  $ 51,000  
Audit-Related Fees (2)
     
Tax Fees (2)
     
All Other Fees (2)
     
 
     
Total
  $ 51,000  
 
     
 
(1)   Audit Fees consist of aggregate fees billed for professional services rendered for the audit of our annual financial statements and review of the interim financial statements included in quarterly reports or services that are normally provided by the independent auditor in connection with statutory and regulatory filings or engagements during the fiscal years ended December 31, 2010 and December 31, 2009.
 
(2)   No such services were provided in 2010 or 2009.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS
At present, our entire board of directors acts as our audit committee and approves each engagement for audit or non-audit services before we engage a firm to provide those services.

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ITEM 15. EXHIBITS.
The following exhibits are filed herewith or are incorporated herein by reference:
         
3.1(2)  
Certificate of Incorporation
       
 
3.1(a) (2)  
Certificate of Amendment to Certificate of Incorporation
       
 
3.1(b) (4)  
Certificate of Designation of Series A Preferred Stock
       
 
3.1(c) (4)  
Certificate of Designation of Series B Preferred Stock
       
 
3.1(d) (4)  
Certificate of Designation of Series C Preferred Stock
       
 
3.1(e) (4)  
Certificate of Designation of Series D Preferred Stock
       
 
3.1(f) (1)  
Certificate of Designation of Series E Preferred Stock
       
 
3.2(2)  
Bylaws, as amended
       
 
4.1(2)  
Form of Common Stock Certificate
       
 
4.2 (4)  
Form of Warrant issued to Bo W. Lycke dated February 21, 2002
       
 
*4.3(5)  
Form of Warrant issued to Don Crosbie dated June 3, 2003
       
 
*4.4 (5)  
Form of Warrant issued to certain employees dated June 3, 2003
       
 
*4.5 (5)  
Form of Warrant issued to Thomas Michel dated June 3, 2003
       
 
*4.6 (5)  
Form of Warrant issued to Alfred Dubach dated June 3, 2003
       
 
*4.7 (6)  
Form of Warrant issued to Gary J. Austin dated September 21, 2004.
       
 
*4.8 (6)  
Form of Warrant issued to Laura M. Bray dated September 21, 2004.
       
 
*4.9 (6)  
Form of Warrant issued to Don Crosbie dated September 21, 2004.
       
 
*10.1(2)  
1997 Stock Option Plan, as amended through October 19, 2000
       
 
*10.2 (3)  
Amendment dated October 20, 2000 to 1997 Stock Option Plan
       
 
*10.3(2)  
Form of Indemnification Agreement
       
 
*10.4(2)  
Form of Non-Employee Director’s Plan
       
 
10.5 (1)  
Unsecured Promissory Note between Claimsnet.com and J. R. Schellenberg dated June 6, 2002.
       
 
10.6 (1)  
Unsecured Promissory Note between Claimsnet.com and J. R. Schellenberg dated August 1, 2002.
       
 
10.7(6)  
Form of Registration Rights Agreement
       
 
10.8(7)  
Unsecured Promissory Note between Claimsnet.com and National Financial Corporation dated November 16, 2006.
       
 
*10.9(8)  
Unsecured Convertible Promissory Note between Claimsnet.com and Thomas Michel dated January 23, 2007.
       
 
10.10(9)  
Unsecured Promissory Note between Claimsnet.com and National Financial Corporation dated December 13, 2007.
       
 
10.11(10)  
Unsecured Promissory Note between Claimsnet.com and National Financial Corporation dated August 20, 2008.
       
 
10.12(11)  
Unsecured Promissory Note between Claimsnet.com and Thomas Michel dated September 16, 2008.
       
 
10.13(12)  
Unsecured Promissory Note between Claimsnet.com and Thomas Michel dated September 29, 2008.
       
 
10.14(13)  
Unsecured Promissory Note between Claimsnet.com and National Financial Corporation dated October 28, 2008.
       
 
10.15(14)  
Unsecured Promissory Note between Claimsnet.com and National Financial Corporation dated November 26, 2008.
       
 

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10.16(15)  
Unsecured Convertible Promissory Note between Claimsnet.com and National Financial Corporation dated January 6, 2009.
       
 
10.17(18)  
Amendment No. 1, dated January 31, 2009, to the Unsecured Promissory Note by and between Claimsnet.com and Thomas Michel dated September 16, 2008.
       
 
10.18(18)  
Amendment No. 1, dated January 31, 2009, to the Unsecured Promissory Note by and between Claimsnet.com and Thomas Michel dated September 29, 2008.
       
 
10.19(18)  
Amendment No. 1, dated January 31, 2009, to the Unsecured Promissory Note by and between Claimsnet.com and National Financial Corporation dated November 16, 2006.
       
 
10.20(18)  
Amendment No. 2, dated January 31, 2009, to the Unsecured Promissory Note by and between Claimsnet.com and National Financial Corporation dated December 13, 2007.
       
 
10.21(18)  
Amendment No. 1, dated January 31, 2009, to the Unsecured Promissory Note by and between Claimsnet.com and National Financial Corporation dated August 20, 2008.
       
 
10.22(18)  
Amendment No. 1, dated January 31, 2009, to the Unsecured Promissory Note by and between Claimsnet.com and National Financial Corporation dated October 28, 2008.
       
 
10.23(18)  
Amendment No. 1, dated January 31, 2009, to the Unsecured Promissory Note by and between Claimsnet.com and National Financial Corporation dated November 26, 2008.
       
 
10.24(18)  
Amendment No. 1, dated January 31, 2009, to the Unsecured Promissory Note by and between Claimsnet.com and National Financial Corporation dated January 6, 2009.
       
 
10.25(18)  
Amendment No. 1, dated January 31, 2009, to the Unsecured Promissory Note by and between Claimsnet.com and J. R. Schellenberg dated June 6, 2002.
       
 
10.26(18)  
Amendment No. 1, dated January 31, 2009, to the Unsecured Promissory Note by and between Claimsnet.com and J. R. Schellenberg dated August 1, 2002.
       
 
10.27(18)  
Amendment No. 1, dated January 31, 2009, to the Unsecured Convertible Promissory Note by and between Claimsnet.com and Thomas Michel dated January 23, 2007.
       
 
10.28(16)  
Unsecured Convertible Promissory Note between Claimsnet.com and National Financial Corporation dated February 4, 2009.
       
 
10.29(17)  
Unsecured Promissory Note between Claimsnet.com and National Financial Corporation dated April 15, 2009.
       
 
10.30(19)  
Unsecured Promissory Note between Claimsnet.com and National Financial Corporation dated May 11, 2009.
       
 
10.31(20)  
Unsecured Promissory Note between Claimsnet.com and National Financial Corporation dated July 28, 2009.
       
 
10.32(21)  
Unsecured Promissory Note between Claimsnet.com and Thomas Michel dated October 13, 2009.
       
 
10.33(22)  
Unsecured Promissory Note between Claimsnet.com and Thomas Michel dated February 16, 2010.
       
 
10.34(23)  
Unsecured Promissory Note between Claimsnet.com and National Financial Corporation dated March 18, 2010.
       
 
10.35(24)  
Unsecured Promissory Note between Claimsnet.com and Novinvest Associated S.A. dated September 9, 2010.
       
 
10.36(25)  
Amendment No. 1, dated December 8, 2010, to the Unsecured Convertible Promissory Note by and between Claimsnet.com and Thomas Michel dated January 23, 2007.
       
 
10.37(25)  
Amendment No. 2, dated December 8, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and Thomas Michel dated September 16, 2008.
       
 
10.38(25)  
Amendment No. 2, dated December 31, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and Thomas Michel dated September 29, 2008.
       
 
10.39(25)  
Amendment No. 1, dated December 8, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and Thomas Michel dated October 13, 2009.
       
 
10.40(25)  
Amendment No. 1, dated December 31, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and Thomas Michel dated February 16, 2010.

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10.41(25)  
Amendment No. 2, dated December 31, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and National Financial Corporation dated November 16, 2006.
       
 
10.42(25)  
Amendment No. 3, dated December 31, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and National Financial Corporation dated December 13, 2007.
       
 
10.43(25)  
Amendment No. 2, dated December 31, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and National Financial Corporation dated August 20, 2008.
       
 
10.44(25)  
Amendment No. 2, dated December 31, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and National Financial Corporation dated October 28, 2008.
       
 
10.45(25)  
Amendment No. 2, dated December 31, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and National Financial Corporation dated November 26, 2008.
       
 
10.46(25)  
Amendment No. 2, dated December 31, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and National Financial Corporation dated January 6, 2009.
       
 
10.47(25)  
Amendment No. 1, dated December 31, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and National Financial Corporation dated February 4, 2009.
       
 
10.48(25)  
Amendment No. 1, dated December 31, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and National Financial Corporation dated April 15, 2009.
       
 
10.49(25)  
Amendment No. 1, dated December 31, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and National Financial Corporation dated May 11, 2009.
       
 
10.50(25)  
Amendment No. 1, dated December 31, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and National Financial Corporation dated July 28, 2009.
       
 
10.51(25)  
Amendment No. 1, dated December 31, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and National Financial Corporation dated March 18, 2010.
       
 
10.52(25)  
Amendment No. 1, dated December 31, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and Novinvest Associated S.A. dated September 9, 2010.
       
 
10.53(25)  
Amendment No. 2, dated December 31, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and J. R. Schellenberg dated June 6, 2002.
       
 
10.54(25)  
Amendment No. 2, dated December 31, 2010, to the Unsecured Promissory Note by and between Claimsnet.com and J. R. Schellenberg dated August 1, 2002.
       
 
14      
Code of Ethics
       
 
21.1      
Subsidiaries of Claimsnet.com inc.
       
 
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
 
*   Contract with management or compensatory arrangement.
 
(1)   Incorporated by reference to the Registrant’s Annual Report on Form 10-K, for the Year Ended December 31, 2002 filed on April 1, 2003.
 
(2)   Incorporated by reference to the Registrant’s registration statement on Form S-1 (Registration No. 333-36209).
 
(3)   Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000 filed on April 16, 2001 and amended on October 3, 2001

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(4)   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.
 
(5)   Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2003, filed on March 29, 2004.
 
(6)   Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2004, filed on March 16, 2005.
 
(7)   Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 16, 2006.
 
(8)   Incorporated by reference to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended March 31, 2007, filed on April 26, 2007.
 
(9)   Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 13, 2007.
 
(10)   Incorporated by reference to the Registrant’s Current Report on Form 8-K dated August 20, 2008.
 
(11)   Incorporated by reference to the Registrant’s Current Report on Form 8-K dated September 16, 2008.
 
(12)   Incorporated by reference to the Registrant’s Current Report on Form 8-K dated September 29, 2008.
 
(13)   Incorporated by reference to the Registrant’s Current Report on Form 8-K dated October 28, 2008.
 
(14)   Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 27, 2008.
 
(15)   Incorporated by reference to the Registrant’s Current Report on Form 8-K dated January 6, 2009 filed on January 9, 2009.
 
(16)   Incorporated by reference to the Registrant’s Current Report on Form 8-K dated February 4, 2009 filed on February 6, 2009.
 
(17)   Incorporated by reference to the Registrant’s Current Report on Form 8-K dated April 15, 2009 filed on April 20, 2009.
 
(18)   Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 filed on April 28, 2009.
 
(19)   Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 11, 2009 filed on May 12, 2009.
 
(20)   Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 filed on July 30, 2009.
 
(21)   Incorporated by reference to the Registrant’s Current Report on Form 8-K dated October 13, 2009 filed on October 15, 2009.
 
(22)   Incorporated by reference to the Registrant’s Current Report on Form 8-K dated February 16, 2010 filed on February 18, 2010.
 
(23)   Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 18, 2010 filed on March 22, 2010.
 
(24)   Incorporated by reference to the Registrant’s Current Report on Form 8-K dated September 9, 2010 filed on September 14, 2010.
 
(25)   Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 8, 2010 filed on December 13, 2010.

54


 

SIGNATURES
In accordance with Section 13 or 15(d) 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)
 
 
  By:   /s/ Don Crosbie    
    Don Crosbie   
    President and Chief Executive Officer   
Date: February 24, 2011
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 24, 2011.
         
  /s/ Don Crosbie    
  Don Crosbie   
  Chief Executive Officer,
Class I Director and
Chairman of the Board 
 
 
  /s/ Laura M. Bray    
  Laura M. Bray   
  Chief Financial Officer and Principal Accounting Officer   
 
  /s/ Alfred Dubach    
  Alfred Dubach   
  Class I Director and
Vice Chairman of the Board 
 
     
  /s/ John C. Willems, III    
  John C. Willems, III   
  Class II Director   
     
  /s/ Thomas Michel    
  Thomas Michel   
  Class II Director