UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM
10-Q
[X]
QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March
31, 2008
[
]
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: 000-26731
PACIFIC WEBWORKS, INC.
(Exact name of registrant as specified in
its charter)
|
|
Nevada
(State or other
jurisdiction of incorporation or organization)
|
87-0627910
(I.R.S. Employer
Identification No.)
|
230 West 400
South, Salt Lake City, Utah
(Address of principal
executive offices)
|
84111
(Zip
Code)
|
(801) 578-9020
(Registrants telephone number, including
area code)
The registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [
]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company:
|
|
Large accelerated filer [
]
Non-accelerated filer
[ ]
|
Accelerated filed [
]
Smaller reporting company
[X]
|
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X ]
The number of shares outstanding of the registrants
common stock was as of May 6, 2008 was 41,001,895.
1
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial
Statements
2
Consolidated
Balance Sheets
3
Consolidated
Statements of Operations
4
Consolidated
Statements of Cash Flows
5
Notes
to the Consolidated Financial Statements
6
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations
14
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
19
Item 4. Controls and
Procedures
19
PART II OTHER INFORMATION
Item 1A. Risk Factors
19
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
23
Item 6. Exhibits
23
Signatures
24
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial information set forth below with respect to
our statements of operations for the three month periods ended March 31, 2008
and 2007 is unaudited. This financial information, in the opinion of
management, includes all adjustments consisting of normal recurring entries
necessary for the fair presentation of such data. The results of
operations for the three month period ended March 31, 2008, are not necessarily
indicative of results to be expected for any subsequent period.
Pacific WebWorks, Inc. and
Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
(Unaudited)
2
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|
|
|
|
|
|
|
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|
|
|
|
|
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Pacific WebWorks, Inc.
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
December 31,
|
|
March 31,
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
ASSETS
|
|
|
|
|
|
(Unaudited)
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
$
891,062
|
|
$
1,119,823
|
Receivables
|
|
|
|
|
|
|
|
|
Trade,
less allowance
|
|
|
|
|
|
|
|
|
for
doubtful receivables of
|
|
|
|
|
|
|
|
|
$45,975
in 2007 and
|
|
|
|
|
|
|
|
|
$30,000
in 2008
|
|
|
|
279,402
|
|
245,776
|
Prepaid
expenses and other current assets
|
|
|
166,446
|
|
169,441
|
Deferred
Tax Asset
|
|
|
|
|
84,778
|
|
65,411
|
|
Total
current assets
|
|
|
|
1,421,689
|
|
1,600,451
|
|
|
|
|
|
|
|
|
|
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|
PROPERTY
AND EQUIPMENT, NET AT COST
|
|
|
|
83,464
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|
96,155
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|
|
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|
|
|
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|
RESTRICTED
CASH
|
|
|
|
|
|
487,473
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|
569,838
|
GOODWILL
|
|
|
|
|
|
1,946,253
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|
1,946,253
|
DEFERRED
TAX ASSET
|
|
|
|
|
|
515,222
|
|
515,222
|
DEPOSITS
|
|
|
|
|
|
11,472
|
|
21,970
|
|
|
Total
Assets
|
|
|
|
|
|
$
4,465,572
|
|
$
4,749,889
|
|
|
|
|
|
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LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
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|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
|
|
828,792
|
|
1,053,838
|
Notes
payable - Current
|
|
|
|
-
|
|
-
|
Accrued
liabilities
|
|
|
|
|
71,413
|
|
84,399
|
Deferred
revenue
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|
|
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|
10,494
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|
14,484
|
Current
liabilities from discontinued operations
|
|
|
215,274
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|
215,274
|
|
|
Total
current liabilities
|
|
|
|
|
|
1,125,973
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|
1,367,996
|
|
|
|
|
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|
|
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|
Total
liabilities
|
|
|
|
|
1,125,973
|
|
1,367,996
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|
|
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|
|
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|
Commitments
|
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|
|
-
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-
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|
STOCKHOLDERS
EQUITY
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|
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Common
stock - par value $0.001; authorized
|
|
|
|
|
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|
50,000,000;
issued and outstanding 40,526,895 shares
|
|
|
|
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|
in
2007 and 41,001,895 shares in 2008
|
|
|
40,527
|
|
41,002
|
Additional
paid-in capital
|
|
|
|
16,472,175
|
|
16,508,985
|
Prepaid
Expenses
|
|
|
|
|
|
|
(32,585)
|
Accumulated
deficit
|
|
|
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|
(13,173,104)
|
|
(13,135,510)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
|
3,339,599
|
|
3,381,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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$
4,465,572
|
|
$
4,749,889
|
|
|
|
|
|
|
|
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The accompanying notes
are an integral part of these consolidated financial statements
3
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Pacific WebWorks, Inc.
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
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|
(Unaudited)
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|
Three months ended
|
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|
|
|
|
|
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March 31,
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2007
|
|
2008
|
|
Revenues
|
|
|
|
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|
|
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|
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Software,
access and license fees
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|
$
218,859
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|
$
227,886
|
|
|
Hosting,
gateway and maintenance fees
|
|
|
1,104,070
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|
2,887,394
|
|
|
Training
and education
|
|
|
|
63,495
|
|
-
|
|
|
Merchant
accounts, design and other
|
|
|
121,331
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|
10,754
|
|
|
|
|
|
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|
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|
1,507,755
|
|
3,126,034
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|
Cost
of sales
|
|
|
|
|
138,067
|
|
34,371
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|
|
|
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|
|
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Gross
profit
|
|
|
|
|
1,369,688
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|
3,091,663
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Selling
expenses
|
|
|
|
|
978,031
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2,278,363
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|
Research
and development
|
|
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|
67,612
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80,630
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General
and administrative
|
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|
440,011
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|
687,482
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|
Depreciation
and amortization
|
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|
7,379
|
|
8,088
|
|
|
Total
operating expenses
|
|
|
|
1,493,033
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|
3,054,563
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Net
income (loss) from operations
|
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|
(123,345)
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|
37,100
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Other
income (expense)
|
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Interest
income
|
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|
4,472
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|
4,855
|
|
|
Interest
Expense
|
|
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|
|
(2,000)
|
|
-
|
|
|
Other
income (expense), net
|
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|
7,758
|
|
15,006
|
|
|
Total
other Income (Expense)
|
|
|
10,230
|
|
19,861
|
|
|
Net
income (loss) from continuing operations
|
|
|
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|
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|
before
income taxes
|
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|
(113,115)
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|
56,961
|
|
|
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|
|
|
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|
Income
Tax Expense
|
|
|
|
|
-
|
|
19,367
|
|
|
|
|
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|
NET
INCOME (LOSS)
|
|
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|
$
(113,115)
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|
$
37,594
|
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Income
(Loss) from continuing operations
|
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Basic
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|
$
(0.00)
|
|
$
0.00
|
|
|
|
Fully
Diluted
|
|
|
|
|
$
(0.00)
|
|
$
0.00
|
|
|
Net
Income (Loss) per share
|
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|
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|
|
|
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|
Basic
|
|
|
|
|
$
(0.00)
|
|
$
0.00
|
|
|
|
Fully
Diluted
|
|
|
|
|
$
(0.00)
|
|
$
0.00
|
|
|
|
|
|
|
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|
Weighted-average
common shares outstanding
|
|
|
|
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|
Basic
|
|
|
|
|
|
35,513,625
|
|
41,001,895
|
|
|
Fully
Diluted
|
|
|
|
|
35,513,625
|
|
49,479,546
|
The accompanying notes
are an integral part of these consolidated financial statements
4
|
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Pacific WebWorks, Inc.
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
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|
|
|
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|
For the
|
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|
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|
|
|
|
|
three months ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
|
|
|
$
(113,115)
|
|
$
37,594
|
|
Adjustments
to reconcile net earnings (loss)
|
|
|
|
|
|
|
to
net cash used in operating activities
|
|
|
|
|
|
|
|
Depreciation
& amortization
|
|
|
|
7,379
|
|
8,088
|
|
|
Bad
debt expense
|
|
|
|
|
107,126
|
|
-
|
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
|
Deferred
tax asset
|
|
|
|
-
|
|
19,367
|
|
|
Receivables
|
|
|
|
(160,490)
|
|
33,626
|
|
|
Prepaid
expenses and other assets
|
|
|
(8,445)
|
|
(13,493)
|
|
|
Accounts
payable and accrued liabilities
|
|
528,088
|
|
238,033
|
|
|
Notes
Payable
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
|
|
37,931
|
|
3,990
|
|
|
|
Net
cash provided (used) by operating activities
|
|
398,474
|
|
327,205
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(655)
|
|
(20,779)
|
|
Cash
on reserve with bank (Restricted Cash)
|
|
|
(9,789)
|
|
(82,365)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used) by investing activities
|
|
(10,444)
|
|
(103,144)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Proceeds
on issuance of stock
|
|
|
|
-
|
|
4,700.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
-
|
|
4,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
388,031
|
|
228,761
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
392,633
|
|
891,062
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
|
$
780,664
|
|
$
1,119,823
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
Cash
Paid for Interest
|
|
|
|
$
-
|
|
$
-
|
|
|
Cash
paid for income taxes
|
|
|
|
$
-
|
|
$
1,200
|
|
Non-cash
financing activities:
|
|
|
|
$
-
|
|
$
-
|
|
|
Stock
issued for insurance
|
|
|
|
$
17,500
|
|
$
-
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes
are an integral part of these consolidated financial statements
5
Pacific WebWorks, Inc. and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2008
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
The Company
Pacific WebWorks, Inc. and its subsidiaries, engage in
the development and distribution of web tools software, electronic business
storefront hosting, and Internet payment systems for individuals and small to
mid-sized businesses.
Basis of Presentation
The accompanying condensed consolidated financial
statements include the accounts of Pacific WebWorks, Inc. and its wholly owned
subsidiaries, Intellipay, Inc., TradeWorks Marketing, Inc., FundWorks, Inc., and
World Commerce Network, LLC. All significant intercompany accounts and
transactions have been eliminated in consolidation. The operations of
World Commerce Network, LLC have been discontinued. On July 31, 2007 the Company
formed Pacific WebWorks International, LTD, a United Kingdom limited company.
We are in the process of forming Pacific WebWorks GmbH, an Austrian
company. Neither of these companies are currently operating.
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes.
Management believes that the estimates used in preparing the financial
statements are reasonable and prudent; however, actual results could differ from
these estimates. Significant estimates include the allowance for doubtful
accounts, impairment assessments of goodwill, and certain accrued liabilities
such as contingent liabilities.
Cash Equivalents
The Company considers all highly liquid instruments
maturing in three months or less when purchased to be cash equivalents.
Concentrations
Financial instruments that potentially subject the
Company to concentrations of credit risks consist of cash and cash equivalents,
accounts receivable and accounts payable. The Company places its cash and
cash equivalents at well known quality financial institutions. At times,
such cash and investments may be in excess of the FDIC insurance limit.
Depreciation and amortization
Depreciation of property and equipment is provided on the
straight-line method over the estimated useful lives of the assets.
Accelerated methods of depreciation of property and equipment are used for
income tax purposes.
Restricted Cash
Restricted cash includes cash maintained in a reserve
account with the Companies merchant bank in connection with the Companies
acceptance of credit card payment for its services.
Goodwill
The Company
adopted SFAS No. 142, Goodwill and Other Intangible Assets, in 2002. Under
SFAS No. 142, goodwill is no longer amortized, but is tested for impairment
at a reporting unit level on an annual basis and between annual tests if an
event occurs or circumstances change that would more likely than not reduce
6
Pacific WebWorks, Inc. and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2008
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION -
CONTINUED
the fair value of a reporting
unit below its carrying amount. Events or circumstances which could trigger an
impairment review include a significant adverse change in legal factors or in
the business climate, an adverse action or assessment by a regulator,
unanticipated competition, a loss of key personnel, significant changes in the
manner of our use of the acquired assets or the strategy for our overall
business, significant negative industry or economic trends or projected future
results of operations. For purposes of financial reporting and impairment
testing in accordance with SFAS No. 142, the Companys Intellipay business
unit operates in one principal business segment, a provider of online credit
card gateway services.
In testing for a potential
impairment of goodwill, the estimated fair value of the business unit is
compared with book value, including goodwill. If the estimated fair value
exceeds book value, goodwill is considered not to be impaired and no additional
steps are necessary. If, however, the fair value of the Company is less than
book value, then the carrying amount of the goodwill is compared with its
implied fair value. The estimate of implied fair value of goodwill may require
independent valuations of certain internally generated and unrecognized
intangible assets such as our paying monthly gateway portfolio, software and
technology and trademarks. If the carrying amount of our goodwill exceeds the
implied fair value of that goodwill, an impairment loss would be recognized in
an amount equal to the excess. In accordance with SFAS No. 142, the Company
performed a goodwill impairment test during 2006 and concluded that the carrying
amount of goodwill exceeds the implied fair value of the goodwill, accordingly
an impairment loss was recognized in December 2006 of $1,000,000.
Fair value of financial instruments
The fair value of the Companys cash and cash
equivalents, receivables, accounts payable, accrued liabilities and capital
lease obligations approximate carrying value based on their effective interest
rates compared to current market prices.
Revenue Recognition
The Company recognizes revenue in accordance with the
Securities and Exchange Commission, Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements and its revisions in SAB No. 104.
SAB 101 and 104 clarify application of generally accepted accounting
principles related to revenue transactions. In the third quarter 2003, the
company adopted EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables ("EITF Issue No. 00-21").
We receive revenue for hosting, gateway, and maintenance
fees, software access and licensing fees, training and education and the sale of
merchant accounts as well as custom website design work. Revenues from
up-front fees are deferred and recognized over the period services are performed
ranging from eight months to one year. Fees for the set-up of merchant
accounts are deferred and recognized as services are completed (which is
generally two months). Revenues from monthly hosting, maintenance,
transaction and processing fees are recorded when earned. Operating lease
revenues for merchant accounts and software are recorded as they become due from
customers.
The Company recognizes revenues when all of the following
criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery
of products and services has occurred, (3) the fee is fixed or determinable and
(4) collectibility is reasonably assured.
In an arrangement with multiple deliverables, the
delivered item(s) is considered a separate unit of accounting if all of the
following criteria are met: (1) the delivered item(s) has value to the customer
on a standalone basis, (2) there is objective and reliable evidence of the fair
value of the undelivered item(s), and (3) if the arrangement includes a general
right of return, delivery or performance of the undelivered item(s) is
considered probable
7
Pacific WebWorks, Inc. and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2008
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION -
CONTINUED
and substantially in the control of the vendor. If all
the conditions above are met and there is objective and reliable evidence of
fair value for all units of accounting in an arrangement, the arrangement
consideration is allocated to the separate units of accounting based on their
relative fair values.
Trade Receivables and Collections
The Company applies a range of collection techniques to
manage deliquent accounts. Management reviews accounts receivable monthly
and records an estimate of receivables determined to be uncollectible to
allowance for doubtful accounts and bad debt. Accounts recieveable and the
correcsponding allowance for doubtful accounts are reviewed for collectiblitly
by management quarterly and uncollectible accounts receivable are written off.
Cost of sales
Cost of
sales includes costs related to fulfillment, customer service, certain royalties
and commissions, amortization of purchased customer portfolios, service
personnel, telecommunications and data center costs.
Sales and marketing
costs
Sales and marketing expenses include advertising expenses,
commissions and personnel expenses for sales and marketing. The Company has
expended significant amounts on sales and marketing. Marketing and advertising
costs to promote the Company's products and services are expensed in the period
incurred.
Research and development
costs
Product development expenses include expenses for the maintenance
of existing software and the development of new or improved software and
technology, including personnel expenses for the product engineering department.
Costs incurred by the Company to develop, enhance, manage, monitor and
operate the Company's technology services are generally expensed as incurred.
Total research and development costs for the three months ended March 31,
2007 and 2008 was $67,612 and $80,630 respectively.
General and administrative
costs
General and administrative expenses include personnel expenses for
executive, finance, and internal support personnel. In addition, general and
administrative expenses include fees for bad debt costs, professional legal and
accounting services, insurance, office space, banking and merchant fees, and
other overhead-related costs.
Income Taxes
The Company utilizes the liability method of accounting
for income taxes. Under the liability method, deferred income tax assets
and liabilities are provided based on the difference between the financial
statement and tax bases of assets and liabilities measured by the currently
enacted tax rates in effect for the years in which these differences are
expected to reverse. Deferred tax expense or benefit is the result of
changes in deferred tax assets and liabilities.
Capital Structure
The Company has 50,000,000 shares authorized of voting
common stock with 41,001,895 issued and outstanding.
Earnings (loss) Per Share
The computation of net earnings (loss) per share of
common stock is based on the weighted average number of shares outstanding
during each period presented. The Company utilizes the treasury stock method to
calculate diluted earnings (loss) per share. Potentially issuable common
shares totaling 7,822,651 related to options were excluded from the calculation
of diluted loss per share for the period ended March 31,
8
Pacific WebWorks, Inc. and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2008
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION -
CONTINUED
2007 because their effects were anti-dilutive.
Potentially issuable common shares totaling 8,477,651 related to options
were included in the calculation of diluted earnings per share for the period
ended March 31, 2008.
The following is the calculation for weighted average
common shares used in basic net earnings (loss) per share:
|
|
|
|
Period ended
March 31,
|
|
2007
|
2008
|
|
|
|
Income (loss) (numerator)
|
$
(113,115)
|
$
37,594
|
Weighted average shares outstanding
(denominator)
|
35,513,625
|
41,001,895
|
Per share amount
|
$
(0.00)
|
$
0.00
|
The following is the calculation for weighted average
common shares used in the fully diluted net earnings (loss) per share:
|
|
|
|
Period ended
March 31,
|
|
2007
|
2008
|
|
|
|
Income (loss) (numerator)
|
$
(113,115)
|
$
37,594
|
Weighted average shares outstanding including
shares related to options (denominator)
|
35,513,625
|
49,479,546
|
Per share amount
|
$
(0.00)
|
$
0.00
|
NOTE 2 OPERATING LEASE REVENUES
During the years 2005 and 2006, certain customers of
TradeWorks entered into operating lease agreements that were assigned to
FundWorks to purchase e-commerce software and merchant accounts
over 24 to 36 months for $59.95 per month. The
leases are non-cancelable and related revenue is recorded monthly as earned.
Future annual minimum lease receipts for FundWorks
operating leases as of March 31, 2008 are as follows:
|
|
Through
March 1
,
|
|
2009
|
$ 5,395.50
|
2010
|
-
|
2011
|
-
|
Thereafter
|
-
|
|
$
5,395.50
|
Collectability of future minimum lease receipts cannot be
assured as the customers placed in operating leases are of a higher credit risk.
9
Pacific WebWorks, Inc. and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2008
(Unaudited)
NOTE 3 - STOCKHOLDERS EQUITY
Stock Issuance
During January 2008, the Company issued 400,000 shares of
its common stock for payment of $32,585 related to insurance premiums. The
term of the policy coverage is August 2007 thru August 2008. The Company
will be recognizing the expense over the term of the policy on a straight-line
basis.
During January 2008, a former employee of the Company
exercised vested options. The Company issued 75,000 shares of its common
stock for payment of $4,700.
Equity Incentive Plan
On March 8, 2001, the Board of Directors
adopted the Pacific WebWorks, Inc. 2001 Equity Incentive Plan (the Plan). The
Plan allows for the granting of awards in the form of stock options, stock
appreciation rights or restricted shares to employees, independent directors and
certain consultants. The Plan was amended by the Company on March 15, 2007, to
allow for grant awards representing up to 10,000,000 shares of the Company's
common stock under the Plan. The Plan has not been approved by the
Companys shareholders as of March 31, 2008.
Information with respect to the Companys stock options
follows:
|
|
|
|
|
|
|
Weighted-average
|
|
Stock options
|
Exercise price
|
exercise price
|
|
|
|
|
Outstanding at December 31, 2006
|
7,822,651
|
$0.048 - $0.87
|
$0.25
|
Granted
|
1,540,000
|
$.061
|
$.061
|
Exercised
|
-
|
-
|
-
|
Forfeited
|
810,000
|
$0.048 - $0.087
|
$0.22
|
|
|
|
|
Outstanding at December 31, 2007
|
8,552,651
|
$0.048 - $0.87
|
$0.23
|
Granted
|
-
|
-
|
-
|
Exercised
|
75,000
|
$0.048 - $0.07
|
$0.06
|
Forfeited
|
-
|
-
|
-
|
|
|
|
|
Outstanding at March 31, 2008
|
8,477,651
|
$0.048 - $0.87
|
$0.23
|
10
Pacific WebWorks, Inc. and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2008
NOTE 3 - STOCKHOLDERS EQUITY - CONTINUED
Employee stock options outstanding and exercisable under
this plan as March 31, 2008 are:
|
|
|
|
|
|
Options outstanding
|
|
Exercise price
|
Number
Outstanding
|
Weighted-average
exercise price
|
Weighted-average
remaining
contractual life
(years)
|
|
0.87
|
40,151
|
0.87
|
2.75
|
|
0.75
|
1,562,500
|
0.75
|
3
|
|
0.23
|
1,120,000
|
0.23
|
.50
|
|
0.14
|
320,000
|
0.14
|
.25
|
|
0.12
|
1,620,000
|
0.12
|
2.25
|
|
0.07
|
1,310,000
|
0.07
|
1.25
|
|
0.048
|
1,020,000
|
0.048
|
2.75
|
|
0.061
|
1,485,000
|
0.061
|
4.50
|
|
|
8,477,651
|
|
|
Options exercisable
|
|
|
|
|
Exercise
price
|
Number
outstanding
|
Weighted-average
exercise price
|
Weighted-average
remaining
contractual life
(years)
|
|
0.87
|
40,151
|
0.87
|
3
|
|
0.75
|
1,562,500
|
0.75
|
3
|
|
0.23
|
1,120,000
|
0.87
|
0.50
|
|
0.14
|
320,000
|
0.14
|
.25
|
|
0.12
|
1,620,000
|
0.12
|
2.25
|
|
0.07
|
1,310,000
|
0.07
|
1.25
|
|
.048
|
1,020,000
|
.048
|
2.75
|
|
0.061
|
742,500
|
0.061
|
4.50
|
|
|
7,735,151
|
|
|
The Company had 742,500 non-vested options at the
beginning of the period with a weighted average grant date fair value of $0.061.
At March 31, 2008 the Company had 742,500 non-vested options.
During the three month period ended March 31, 2007 and
2008, the Company received $0 and $4,700 upon the exercise of awards. The
Company realized no tax benefit due to the exercise of options as the Company
has historical net operating loss carry forwards.
11
Pacific WebWorks, Inc. and Subsidiarie
s
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2008
NOTE 4 DISCONTINUED OPERATIONS
The following includes the net current
liabilities for the Companys discontinued operations as of December 31, 2007
and March 31, 2008:
|
|
|
|
December 31, 2007
|
March 31, 2008
|
|
World Commerce
Network,LLC
|
World Commerce
Network,LLC
|
ASSETS
|
|
|
Current assets
|
$
-
|
$
-
|
Long-term assets
|
-
|
-
|
Total assets
|
$
-
|
$
-
|
|
|
|
LIABILITIES
|
|
|
Payables past due
|
64,010
|
64,010
|
Accrued liabilities
|
151,264
|
151,264
|
Total current
liabilities
|
$
215,274
|
$
215,274
|
|
|
|
Net current liabilities
|
$
215,274 .
|
$
215,274
|
Discontinued subsidiary World Commerce
Network, LLC
In July 2002, the Board of Directors of
Pacific WebWorks, Inc. resolved to discontinue World Commerce Network, LLC.
Negotiations and settlements of World Commerce liabilities are currently
underway as the LLC is phasing out its related operations. World Commerce
Network became a consolidated entity with the Company in March 2000.
Pending litigation
In September 2002, World Commerce Network, LLC received a
complaint from a leasing company for recourse obligations funded for customer
leases during 2000 for seminar related activities. The agreement between
World Commerce Network and the leasing company provides for recourse on leases
in which customers have not made first payment. Estimated recourse
obligations for World Commerce Network approximate $95,000 at December 31, 2007
and March 31, 2008 and have been recorded as an accrued liability.
Management believes that the recorded liability for this matter is
sufficient to cover any resulting judgment from this claim.
In April 2001, one of World Commerce Networks former
vendors filed a complaint alleging default under a certain application for
credit and personal guaranty made by a former officer of the Company. The
vendor seeks approximately $65,000 plus interest. The Company is defending
the claim and believes the amount should be reduced based upon the vendors
performance and other disputes. The Company has filed an answer to the
complaint and further litigation is pending. The Company has
recorded $20,000 to accrued liabilities in the consolidated financial statements
in December 31, 2007 and March 31, 2008 representing its estimated liability for
this matter. Management believes that the amount recorded is sufficient to
cover the resulting liability from this complaint.
12
Pacific WebWorks, Inc. and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2008
NOTE 5 COMMITMENTS
Operating Leases
The Company has entered into a 5 year lease in 2008 for
approximately 8,000 square feet of commercial business office space at $10,500
per month in the first year, escalating by approximately $350-$375 monthly at
the beginning of each new lease year. The following is a schedule of
future minimum lease payments under the operating lease agreement:
|
|
Year
March 31,
|
Lease
Commitment
|
2009
|
$108,387
|
2010
|
$130,500
|
2011
|
$135,000
|
2012
|
$139,200
|
2013
|
$143,400
|
The Company records rent on a straight line basis over
the life of the lease in accordance with FTB 85-3.
Rent expense for the quarters ending March 31, 2008 and
March 31, 2007 was $30,507 and $26,190, respectively.
Other matters
The Company is involved in other various disputes and
legal claims in the normal course of business. It is not possible to state
the ultimate liability, if any, in these matters. In the opinion of
management, any resulting litigation will have no material effect on the
financial position and results of operations of the Company in excess of amounts
recorded.
NOTE 6 - SEGMENT REPORTING
Segment reporting by business unit follows:
|
|
|
|
|
|
Three months ended
|
Pacific
|
|
Trade
|
Fund
|
Discontinued
|
March 31, 2007
a
|
WebWorks
|
Intellipay
|
Works
|
Works
|
Operations
b
|
|
|
|
|
|
|
Revenues, net
|
$
1,134,923
|
$
126,780
|
$
198,998
|
$
47,054
|
$
-
|
Net income (loss)
|
$
16,469
|
$
35,366
|
$ (186,027)
|
$
25,644
|
$
-
|
a
Amounts include all intercompany
receivables, payables, revenues and expenses prior to elimination for
consolidation.
b
Includes World Commerce Network, LLC.
a non-operating, discontinued subsidiary.
|
|
|
|
|
|
Three months ended
|
Pacific
|
|
Trade
|
Fund
|
Discontinued
|
March 31, 2008
a
|
WebWorks
|
Intellipay
|
Works
|
Works
|
Operations
b
|
|
|
|
|
|
|
Revenues, net
|
$
2,988,171
|
$
128,723
|
$
807
|
$
8,333
|
$
-
|
Net income (loss)
|
$
198,270
|
$
85,774
|
$ (250,089)
|
$
3,639
|
$
-
|
a
Amounts include all intercompany
receivables, payables, revenues and expenses prior to elimination for
consolidation.
b
Includes World Commerce Network, LLC.
a non-operating, discontinued subsidiary.
13
In this report references to Pacific WebWorks, we,
us, and our refer to Pacific WebWorks, Inc. and its subsidiaries.
FORWARD LOOKING STATEMENTS
The Securities and Exchange Commission (SEC) encourages
companies to disclose forward-looking information so that investors can better
understand future prospects and make informed investment decisions. This
report contains these types of statements. Words such as may, will,
expect, believe, anticipate, estimate, project, or continue or
comparable terminology used in connection with any discussion of future
operating results or financial performance identify forward-looking statements.
You are cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this report. All
forward-looking statements reflect our present expectation of future events and
are subject to a number of important factors and uncertainties that could cause
actual results to differ materially from those described in the forward-looking
statements.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview
The company consists of the operations of Pacific
WebWorks and its four operating subsidiaries: Intellipay, Inc., TradeWorks
Marketing, Inc., FundWorks, Inc. and Pacific WebWorks International LTD.
We also have a non-operating, discontinued operations subsidiary, World
Commerce Network, LLC. Our revenues are primarily from the sale of access
to our software technology, financial services and continuing monthly service
and hosting fees. We also derive revenues for services related to web site
design, training, education and consulting.
Pacific WebWorks is an application service provider and
software development firm that develops business software technologies and
services for business merchants and organizations using Internet and other
technologies. We specialize in turn-key applications allowing small- to
medium-sized businesses to expand their business over the Internet. Our
product family provides tools for web site creation, management and maintenance,
electronic business storefront hosting, and Internet payment systems for the
small- to medium-sized business and organization. Pacific WebWorks assists
small businesses in succeeding online through our Visual WebTools software, the
Intellipay payment systems, education and hosting services.
Our subsidiary, Intellipay Inc., specializes in providing
online, secure and real-time payment processing services for businesses of all
sizes. Our TradeWorks Marketing, Inc. subsidiary mass markets Pacific
WebWorks and Intellipay products. FundWorks, Inc. provides operating lease
arrangements for certain TradeWorks customers. On July 31, 2007, we formed
Pacific WebWorks International LTD, a United Kingdom limited company. We
formed this company to help facilitate our international sales and merchant
account requirements.
During the first quarter of 2008 we enjoyed a significant
increase in revenues and profits over the first quarter of 2007. Our
financial strength continues to improve with increased liquidity and no long
term debt.
Challenges continue to revolve around dealing with our
rapid growth, in particular as it relates to retaining sufficient credit card
processing capabilities. Our major challenges continue to revolve around
the unreasonable and unrealistic requirements of credit card associations in
respect to Internet related transactions. We are in the process of
implementing a long term solution that should ease these difficulties. We
expect the implementation of this process to be completed during the second
quarter of 2008.
We expect to see continued growth through 2008 and
beyond. We have established excellent relationships with online media
firms throughout the United States and anticipate working closely with them to
continue these results. Our most immediate challenge is that of managing
this explosive growth and communicating our progress to the financial markets.
Competition throughout the Internet software industry
continues to intensify. In particular, competition for the small
office/home office business is intensifying with greater attention being
directed to this market from a larger variety of product and service providers
using new and more aggressive means to market to this industry. We believe
Pacific WebWorks has great potential in the marketplace, but we constantly need
more capital and greater resources. We also have the challenge of
14
identifying and effectively implementing our products
into new product distribution channels, responding to economic changes
generally, continuing to gain marketplace acceptance and we must address
shifting public attitudes for technology products. These challenges could
pose a threat to our success.
Liquidity and Capital Resources
Historically we have relied upon revenues, loans, and
equity transactions to fund our operations, but for the year ended December 31,
2007 we relied mainly upon revenues and proceeds from the sale of stock.
We expect to continue to generate positive cash flows through further
development of our business and distribution channels and we plan to address
only the liabilities of our operating subsidiaries with our current cash
balances and cash inflows.
We are dependent upon the efforts of our internal
marketing staff and on third party resellers, including our wholly-owned
reseller, TradeWorks Marketing, to increase our revenues. For the three
month period ended March 31, 2008 (the 2008 first quarter) our monthly cash
outflows were primarily related to selling expenses which totaled $2,278,363 and
general and administrative expenses that totaled $687,482. These cash
outflows can exceed monthly cash inflows based on timing differences between
marketing campaigns and sales.
A small portion of our revenues are comprised of deferred
revenue that we recognized over the year. We carried deferred revenue of
$14,484 on our books as a current liability as of March 31, 2008. Deferred
revenue includes up-front fees received for license fees, software services and
education not yet performed or delivered. These deferred revenues will be
recognized over the next eight to twelve months. It should be noted that
this liability does not require a specific cash outlay, but only that we remain
a going concern.
We also record monthly revenues from operating leases.
Certain customers of TradeWorks Marketing entered into operating leases to
purchase e-commerce software and merchant account agreements that were assigned
by TradeWorks Marketing to FundWorks. The customers pay $59.95 per month
for the operating lease agreement and the agreements have terms over 24 to 36
months and are non-cancelable. Related revenues are recorded monthly as
earned. The future annual minimum lease receipts for FundWorks operating
leases as of March 31, 2008 were approximately $5,395 through March 31, 2009.
Collectability of future minimum lease receipts cannot be assured because
the customers placed in these operating leases have a higher credit risk.
We believe that we may need an additional $1 to $2
million during the next twelve to twenty-four months to continue to keep up with
technological improvements and further our business development strategies.
We believe funding may be obtained through additional debt arrangements or
equity offerings in addition to internally generated cash flows. However,
if we are unable to obtain additional funds on acceptable terms, then we might
be forced to delay or abandon some or all of our product development, marketing
or business plans, and growth could be slowed, which may result in declines in
our operating results and common stock market price.
If we rely on equity offerings for funding or services,
then we will likely use private placements of our common stock pursuant to
exemptions from the registration requirements provided by federal and state
securities laws. The purchasers and manner of issuance will be determined
according to our financial needs and the available exemptions. We also
note that if we issue more shares of our common stock our stockholders may
experience dilution in the value per share of their common stock.
Results of Operations
The following discussions are based on the consolidated
financial statements of Pacific WebWorks, Intellipay, TradeWorks Marketing,
Fundworks and the discontinued operations of World Commerce Network, LLC, a
non-operating company for the three month periods ended March 31, 2008 and 2007.
The following chart is a summary of our financial statements for those
periods and should be read in conjunction with the financial statements, and
notes thereto, included with this report at Part I, Item 1, above.
15
|
|
|
Comparison of 2007 and 2006 Three Month Period
Operations
|
|
Three month period
ended March
31,
|
|
2008
|
2007
|
Revenues, net
|
$
3,126,034
|
$
1,507,755
|
Cost of sales
|
34,371
|
138,067
|
Gross profit
|
3,091,663
|
1,369,688
|
Total operating
expenses
|
3,054,563
|
1,493,033
|
Net income (loss) from
operations
|
37,100
|
(123,345)
|
Total other income
(expense)
|
19,861
|
10,230
|
Income tax expense
|
19,367
|
|
Net income (loss)
|
37,594
|
(113,115)
|
Net earnings (loss) per
share
|
$
0.00
|
$
(0.00)
|
Our net revenues increased for the 2008 first quarter as
compared to the three month period ended March 31, 2007 (the 2007 first
quarter) as a result of our continued marketing activities. Management
expects future revenue increases to come largely from recurring residual income
rather than from one time upfront fees. We recognize revenue from hosting,
gateway, and maintenance fees, software access and licensing fees, training and
education and the sale of merchant accounts, as well as custom website design
work. Revenues from up-front fees from customers are recorded on the
balance sheets as deferred revenues and are recognized over the period services
are performed, ranging from eight months to one year. Fees for the set-up
of merchant accounts are deferred and recognized as services are completed,
which is generally two months. Revenues from monthly hosting, maintenance,
transaction and processing fees are recorded when earned. Operating lease
revenues for merchant accounts and software are recorded as they become due from
customers.
Cost of sales include costs related to fulfillment,
customer service, certain royalties and commissions, amortization of purchased
customer portfolios, service personnel, telecommunications and data center
costs. The cost of sales decreased for the 2008 first quarter compared to
2007 first quarter due to the reclassification of certain expenses as selling
expense. Management anticipates that cost of sales will remain lower in
the short term as we continue our new marketing strategies.
Total operating expenses increased for 2008 first quarter
compared to 2007 first quarter primarily due to increases in selling expenses.
Selling expenses include advertising expenses, seminar expenses,
commissions and personnel expenses for sales and marketing. Selling
expenses increased from $978,031 for the 2007 first quarter to $2,278,363 for
the 2008 first quarter. The increase was primarily due to increased costs
related to our online marketing programs. While selling expense increased
the long term recurring value of the revenues received, versus the one-time
upfront sale, more than justifies the increase.
General and administrative expenses include personnel
expenses for executive, finance, and internal support personnel. In
addition, general and administrative expenses include fees for bad debt costs,
professional legal and accounting services, insurance, office space, banking and
merchant fees, and other overhead-related costs. General and
administrative expenses increased from $440,011 for the 2007 first quarter to
$687,482 for the 2008 first quarter. This increase was largely due to an
increase in staff and related expenses necessary to facilitate our rapid growth.
Management expects to see increases in general and administrative expenses
in the short term consistent with continued increases in customer accounts
expected in the next twelve months.
Research and development expenses include expenses for
the maintenance of existing software and the development of new or improved
software and technology, including personnel expenses for the product
engineering department. Research and development expenses increased from
$67,612 for the 2007 first quarter to $80,630 for the 2008 first quarter.
The increase was due to the increased expense related to the development
of our new product offers.
16
Total other income for the 2008 first quarter included
interest income earned on certificates of deposit and miscellaneous income for
the recovery of a previously booked expense. Total other income for the
2007 first quarter included interest income earned on certificates of deposit
and the recovery of a previously booked expense; offset by interest expense
related to a loan payable.
Due to a successful 2008 first quarter showing marked
improvement in revenues we recorded net income for the 2008 first quarter
compared to a net loss for the 2007 first quarter.
Balance Sheet
- the following chart is a
summary of our balance sheet.
|
|
|
|
Summary
Balance Sheet Comparison
|
|
Three month
period ended
March 31,
2008
|
|
Year ended
Dec. 31,
2007
|
Cash and cash
equivalents
|
$
1,119,823
|
|
$
891,062
|
Total current assets
|
1,600,451
|
|
1,421,689
|
Total assets
|
4,749,889
|
|
4,465,572
|
Total current
liabilities
|
1,367,996
|
|
1,125,973
|
Total liabilities
|
1,367,996
|
|
1,125,973
|
Accumulated deficit
|
(13,135,510)
|
|
(13,173,104)
|
Total stockholders
equity
|
$
3,381,893
|
|
$
3,339,599
|
Total assets increased at March 31, 2008 as compared to
December 31, 2007 primarily as a result of an increase in cash. At March
31, 2008 total liabilities increased slightly compared to the 2007 year end
primarily as a result of increases in accounts payable related to our online
marketing budget. Our accumulated deficit decreased at March 31, 2008 as a
result of posting net income for the 2008 three month period.
Off-balance Sheet Arrangements
None.
Commitments and Contingent Liabilities
Our operating commitments include our operating lease for
our Salt Lake City office that approximates $10,500 per month. Our total
current liabilities at March 31, 2008, included accounts payable of $1,053,838
related to operating costs such as marketing and advertising expenses and
professional fees. Our accrued liabilities of $84,399 were primarily the
result of payroll related liabilities, contract seller commissions offset by
estimated refunds and factoring obligations. Deferred revenues of $14,484
included up-front fees received for license fees, software services and
education not yet performed or delivered. Current liabilities from
discontinued operations were $215,274 and are related to World Commerce Network,
LLC.
The operations of World Commerce Network, LLC, our
subsidiary, are ceased and discontinued. Management continues to
attempt to negotiate settlements of World Commerce Networks accrued
liabilities. As of March 31, 2008, World Commerce Networks accrued
liabilities totaled $151,264 and included estimated contingent recourse
obligations and attorneys fees approximating $95,000 and approximately $56,000
for estimated customer refunds. In addition, World Commerce Network had a
contingent liability of approximately $64,000 plus interest related to an
alleged default of application for credit and personal guaranty made by a former
officer of Pacific WebWorks. We continue to work through various matters
related to
17
these liabilities and management believes the recorded
liabilities are sufficient to cover any resulting liability. There has
been no activity on any of these accounts for nearly three years.
Critical Accounting Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes.
Estimates of particular significance in our financial statements include
deferred revenue calculations, trade receivables and collections, goodwill and
the annual tests for impairment of goodwill, contingent liabilities, and valuing
stock option compensation.
Deferred revenue - In the past deferred revenue
calculations materially affect our financial results. In this area cash
revenues received for certain product sales, such as revenues from up-front
fees, are recognized over the period services are performed. This requires
deferring the immediate recognition of those revenues from eight months to one
year and creating a deferred revenue liability account.
Trade receivables and collections - We apply a range of
collection techniques to manage delinquent accounts. Management reviews
accounts receivable monthly and records an estimate of receivables determined to
be uncollectible due to allowance for doubtful accounts and bad debt.
Accounts receiveable and the corresponding allowance for doubtful accounts
are reviewed for collectiblity by management quarterly and uncollectible
accounts receivable are written off.
Goodwill - Goodwill related to Intellipay is
assessed annually for impairment by comparing the fair values of Intellipay to
its carrying amount, including goodwill. In testing for a potential
impairment of goodwill, the estimated fair value of Intellipay is compared
with book value, including goodwill. If the estimated fair value exceeds
book value, goodwill is considered not to be impaired and no additional steps
are necessary. If, however, the fair value of Intellipay is less than book
value, then the carrying amount of the goodwill is compared with its implied
fair value.
The estimate of implied fair value of goodwill may
require independent valuations of certain internally generated and unrecognized
intangible assets such as our paying monthly gateway portfolio, software and
technology and trademarks. If the carrying amount of our goodwill exceeds
the implied fair value of that goodwill, an impairment loss would be recognized
in an amount equal to the excess. The fair value of Intellipay is
estimated using both cash flow information from internal budgets and multiples
of revenue. In the event that an impairment indicator arises prior to our
annual impairment test of goodwill, we will provide a full test relative to the
indicator in the period that the indicator is present. We performed a
goodwill impairment test during 2007 and concluded that was no impairment
indicators of good will.
Contingent liabilities - Material estimates for
contingent liabilities include approximately $74,000 for our operating companies
and approximately $151,000 in net current liabilities of our discontinued
operations. From a liquidity standpoint, any settlement or judgment received by
us from pending or threatened litigation may have a direct affect on our cash
balances at March 31, 2008. Any judgments that may be received by us for
pending or threatened litigation related to discontinued operations may not have
a direct affect on our assets as management does not intend to satisfy such
claims with the assets of our operating companies. Management believes
that all amounts estimated and recorded as contingent liabilities approximate
the amount of liabilities that could be owed to parties in the form of
settlement or in a judgment. We have had no communication for over three
years with any of the parties related to the contingent liabilities of our
discontinued operations. Any settlements that might occur below
amounts accrued would result in a favorable impact to our earnings and working
capital.
Valuing stock options - As permitted by Statement of
Financial Accounting Standards No. 148, we continue to account for stock options
under APB Opinion No. 25, under which no compensation has been recognized.
The fair value of the options we have granted is estimated at the date of
grant using the Black-Scholes American option-pricing model. Option
pricing models require the input of highly sensitive assumptions, including
expected stock volatility. Also, our stock options have characteristics
significantly different from those of traded options, and changes in the
subjective input assumptions can materially affect the fair value estimate.
Management believes the best input assumptions available were used to
value the options and that the resulting option values are reasonable.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our reports
filed with the SEC pursuant to the Exchange Act is recorded, processed,
summarized and reported within the periods specified in the rules and forms of
the SEC. This information is accumulated and communicated to our executive
officers to allow timely decisions regarding required disclosure. Our
disclosure controls and procedures are designed to provide reasonable assurance
of achieving their objectives. Our Chief Executive Officer, who also acts
in the capacity of principal financial officer, evaluated the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this report. Based on that evaluation, he concluded that our disclosure
controls and procedures were effective.
Managements Report on Internal Control over
Financial Reporting
Our Chief Executive Officer, who also acts in the
capacity of principal financial officer, is responsible to design or supervise a
process to be effected by our board of directors that provides reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Our process of internal control over
financial reporting is designed to provide reasonable assurance of achieving the
following policies and procedures:
$
maintenance of records in reasonable
detail to accurately and fairly reflect the transactions and dispositions of
assets,
$
reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles,
and that receipts and expenditures are being made only in accordance with
authorizations of management and directors, and
$
reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of assets that could have a material effect on our financial statements.
Our management has determined that there were no changes
made in our internal controls over financial reporting during the first quarter
of 2008 that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS
Factors Affecting Future Performance
We have a history of losses and could incur future
losses.
In the past we have been unable to fund our day-to-day
operations from revenues alone and have recorded net losses. However, for
the 2008 first quarter and the year ended December 31, 2007, we recorded net
income from continuing operations. We anticipate revenue from operations
and equity transactions will fund our growth and operations for the next twelve
months; however, we cannot assure you that we will be able to maintain
profitability.
We may need additional external capital and may be
unable to raise it.
Based on our current growth plan we believe we may
require $1 to $2 million additional financing within the next twelve months to
remain competitive in our market. If we fail to obtain funds on acceptable
terms, then we might be forced to delay or abandon some or all of our business
plans. Our success will depend upon our ability to access equity capital
markets and borrow on terms that are financially advantageous to us. Also,
we may not be able to obtain additional funds on acceptable
19
terms. If we are unable to obtain additional
capital, then we may not have sufficient working capital to develop products,
finance acquisitions, or pursue business opportunities. If we borrow
funds, then we could be forced to use a large portion of our cash reserves to
repay principal and interest on those funds. If we issue our securities
for capital, then the interests of investors and shareholders could be diluted.
We are subject to intense competition from large and
small companies that limits our ability to obtain market share and may force our
prices down.
We face competition in the overall Internet software
market, as well as in the web site building market. Our ability to earn
significant revenues from our Visual WebTools or IntelliPay payment system will
depend in part on their acceptance by a substantial number of online businesses.
Broad acceptance of our products and services and their use in large
numbers is critical to our success because a large portion of our revenues are
derived from one-time and recurring fees we charge to customers buying our
products and services. Our success in obtaining market share will depend
upon our ability to build name brand recognition and to provide cost-effective
products and services to our customers. We have developed our products to
meet the needs of small businesses and we believe the generality of our
competitors services may be inadequately addressing the small business owners
needs. We expect competition to persist, increase, and intensify in the future
as the markets for our products and services continue to develop and as
additional competitors enter our market. In addition, many of our current
or potential competitors have broad distribution channels that they may use to
bundle competing products directly to end-users or purchasers. If these
competitors were to bundle competing products for their customers, it could
adversely affect our ability to obtain market share and may force our prices
down.
We may be unable to achieve market acceptance because
technological standards for payment processing are not established.
One obstacle to widespread market acceptance for the
IntelliPay payment system is that widely adopted technological standards for
accepting and processing payments over the Internet have not yet emerged.
As a result, merchants and financial institutions have been slow to select
which service to use. Until one or more dominant standards emerge, we must
design, develop, test, introduce and support new services to meet changing
customer needs and respond to other technological developments. To be
successful, we must obtain widespread acceptance of our technologies, or modify
our products and services to meet whatever industry standards do ultimately
develop. It is not certain that we will be able to do either.
We depend upon our proprietary rights, none of which
can be completely safeguarded against infringement.
Our ability to compete effectively will depend, in part,
upon our ability to protect our proprietary source codes for Visual WebTools
and the IntelliPay payment system through a combination of licenses and trade
secrets. These agreements and procedures may not effectively prevent
disclosure of our confidential information and may not provide us with an
adequate remedy in the event of unauthorized disclosure of such information.
Intellectual property rights, by their nature, are uncertain and involve
complex legal and factual questions. We rely upon trade secrets with
respect to our source code and functionalities and other unpatented proprietary
information in our product development activities. We seek to protect
trade secrets and proprietary knowledge in part through confidentiality
agreements with our employees, resellers, and collaborators.
If employees or collaborators develop products
independently that may be applicable to our products under development, disputes
may arise about ownership of proprietary rights to those products or services.
Protracted and costly litigation could be necessary to enforce and
determine the scope of our proprietary rights. It would be impossible to
predict whether litigation might be successful.
We rely in part on third party technology licenses
which we cannot guarantee will be available to us in the future.
We rely on certain technology which we license from third
parties, including software which is integrated with internally developed
software and used in our software to perform key functions. Our inability
to maintain any of these technology licenses could result in delays in
distribution of our services or increased costs of our products and services.
We cannot assure you that third party technology licenses will continue to
be available to us on commercially reasonable terms, or at all.
20
We must update our products and services and may
experience increased costs and delays which could reduce operating
profit.
The electronic commerce, web hosting and merchant
processing markets in which we compete are characterized by technological
change, new product introductions, evolving industry standards and changing
customer needs. In order to remain competitive, we may be required to
engage in a number of research and development projects, which carries the risks
associated with any research and development effort, including cost overruns,
delays in delivery and performance problems. Any delay in the delivery of
new products or services could render them less desirable by our customers, or
possibly even obsolete. Any performance problem with a new product or
service may require significant funds to correct the problem. As a result
of these factors, our research and development efforts could result in increased
costs that could reduce our operating profit, a loss of revenue if promised new
products are not timely delivered to our customers, or a loss of revenue or
possible claims for damages if new products and services do not perform as
anticipated.
We may experience software defects which may damage
customer relations.
Despite rigorous testing, our software may nevertheless
contain undetected bugs, errors or experience failures when introduced, or when
the volume of services provided increases. Any material errors could
damage the reputation of our service or software, as well as damage our customer
relations. We have detected errors, defects, and bugs in the past and have
corrected them as quickly as possible. Correcting any defects or bugs we
may discover in the future may require us to make significant expenditures of
capital and other resources. We believe that we follow industry-standard
practices relating to the identification and resolution of errors, defects, or
bugs encountered in the development of new software and in the enhancement of
existing features in our products. As of the date of this filing we have
not experienced any material adverse effect by reason of an error, defect, or
bug.
We may experience breakdowns in our hosting services,
infrastructure or payment processing systems, which may expose us to liabilities
and cause customers to abandon our products and services.
We would be unable to deliver our payment processing
services or hosting services if our system infrastructures break down or are
otherwise interrupted. Events that could cause system interruptions
are:
$
fire,
$
earthquake,
$
power loss,
$
terrorist attacks,
$
harmful software programs,
$
telecommunications failure, and
$
unauthorized entry or other
events.
Although we regularly back up data from operations, and
take other measures to protect against loss of data, there is still some risk of
such losses.
Despite the security measures we maintain, our
infrastructure may be vulnerable to computer viruses, hackers, rouge employees
or similar sources of disruption. Any problem of this nature could result
in significant liability to customers or financial institutions and also may
deter potential customers from using our services. We attempt to limit
this sort of liability through back-up systems, contractual provisions,
insurance, and other security measures. However, we cannot assure you that
these contractual limitations on liability would be enforceable, or that our
insurance coverage would be adequate to cover any liabilities we might
sustain.
Also, a breach of our e-commerce security measures could
reduce demand for our services. The e-commerce industry is intensely
focused on the need for Internet security, particularly with respect to the
transmission and storage of confidential personal and financial data. Any
compromise or elimination of our security could erode customer confidence in our
systems and could result in lower demand for our services or possible
litigation.
21
We are dependent upon license renewal which cannot be
assured to occur.
We derive revenues from user licenses and license
renewals on a month to month arrangement. We also intend to increase the
brand recognition of our products among users through these types of
relationships. If a substantial number of our customers were to decline to
renew their contracts for any reason, then we could experience a substantial
drop in revenues. Our success in establishing our products as a recognized brand
name and achieving their acceptance in the market will depend in part on our
ability to continually engineer and deliver new product technologies and
superior customer service, so that customers renew their licenses month to
month.
We may pursue acquisitions of complementary service
product lines, technologies or business which may interfere with our operations
and negatively affect our financial position.
From time to time, we evaluate potential acquisitions of
businesses, services, products, or technologies. These acquisitions may
result in a potentially dilutive issuance of equity securities, the incurrence
of debt and contingent liabilities, and amortization of expenses related to
goodwill and other intangible assets. In addition, acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
technologies, services, and products of the acquired companies; the diversion of
managements attention from other business concerns; risks of entering markets
in which we have no or limited direct prior experience; and, the potential loss
of key employees of the acquired company. As of the date of this filing,
we have no present commitment or agreement with respect to any material
acquisition of other businesses, services, products, or technologies.
We may not be able to adapt as the Internet market
changes.
Our failure to respond in a timely manner to changing
market conditions or client requirements could have a material adverse effect on
our business, prospects, financial condition, and results of operations.
The Internet is characterized by:
$
rapid technological change;
$
changes in advertiser and user
requirements and preferences;
$
frequent new product and service
introductions embodying new technologies; and
$
the emergence of new industry
standards and practices that could render our existing service offerings,
technology, and hardware and software infrastructure obsolete.
In order to compete successfully in the future, we
must:
$
enhance our existing products and
develop new services and technology that address the increasingly sophisticated
and varied needs of our prospective or current customers;
$
license, develop or acquire
technologies useful in our business on a timely basis; and
$
respond to technological advances and
emerging industry standards and practices on a cost-effective and timely
basis.
Our future success depends on continued growth in the
use of the Internet and Internet-based services for small business.
Because the Internet is a rapidly evolving industry, the
ultimate demand and market acceptance for our products will be subject to a high
level of uncertainty. Significant issues concerning the commercial use of
the Internet and online service technologies, including security, reliability,
cost, ease of use, and quality of service, remain unresolved and may inhibit the
growth of Internet business solutions that use these technologies. 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.
22
Regulation of the Internet and Internet-based services
may decrease the demand for our services and/or increase our cost of doing
business.
Due to the increasing popularity and use of the Internet
and online services, federal, state, local, and foreign governments may adopt
laws and regulations, or amend existing laws and regulations, with respect to
the Internet and other online services. These laws and regulations may
affect issues such as user privacy, pricing, content, taxation, copyrights,
distribution, and quality of products and services. Any new legislation
could hinder the growth in use of the Internet generally or in our industry and
could impose additional burdens on companies conducting business online, which
could, in turn, decrease the demand for our services, increase our cost of doing
business. The laws governing the Internet remain largely unsettled, even
in areas where legislation has been enacted. It may take years to
determine whether and how existing laws, such as those governing intellectual
property, privacy, libel, and taxation, apply to the Internet. In
addition, the growth and development of the market for electronic commerce may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad, that may impose additional burdens on companies conducting
business via the Internet.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
On January 22, 2008 we issued 75,000 shares of common
stock to Brent Allsop upon exercise of options to purchase 50,000 shares at
$0.07 and 25,000 shares at $0.048. The options were granted under our
Incentive Stock Option Plan. We relied on an exemption from registration
for a private transaction not involving a public distribution provided by
Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS
Part I Exhibits
No.
Description
31.1
Chief Executive Officer
Certification
31.2
Principal Financial Officer
Certification
32.1
Section 1350 Certification
Part II Exhibits
No.
Description
3.1
Articles of Incorporation, as amended
(Incorporated by reference to exhibit No. 3.1 for Form 10-Q filed November 13,
2001)
3.2
Amended Bylaws of Pacific WebWorks,
Inc. (Incorporated by reference to exhibit No. 3.2 for Form 10, as amended, file
No. 0-26731, filed July 16, 1999.)
4.1
Pacific WebWorks, Inc. 2001 Equity
Incentive Plan (Incorporated by reference to exhibit 4.1 to Form S-8, effective
May 26, 2006)
10.1
Service Agreement between Pacific
WebWorks and Verizon Business Network Services, Inc., dated September 30, 2007
(Incorporated by reference to exhibit 10.1 for Form 10-K filed March 31,
2008)
10.2
Lease Agreement between Pacific
WebWorks, Inc. and Development Specialties, Inc., dated February 1, 2008
(Incorporated by reference to exhibit 10.2 for Form 10-K filed March 31,
2008)
10.3
Form of employment agreement for
executive officers, dated January 1, 2008 (Incorporated by reference to exhibit
10.4 for Form 10-KSB, filed April 2, 2007)
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
|
|
PACIFIC WEBWORKS, INC.
By:
/s/ Christian R. Larsen
Christian
R. Larsen
President
and Director
|
Date: May 14,
2008
|
By:
/s/ Kenneth W. Bell
Kenneth
W. Bell
Chief
Executive Officer, Treasurer,
Principal
Financial Officer,
and
Chairman of the Board
|
Date: May 14,
2008
|
By:
/s/ R. Brett Bell
R.
Brett Bell
Secretary
and Controller
|
Date: May 14,
2008
|
24