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
September 30, 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: 0-26731
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 as of October 27, 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
15
Item 3. Quantitative and
Qualitative Disclosures about Market Risk
20
Item 4. Controls and
Procedures
20
PART II OTHER INFORMATION
Item 1. Legal
Proceedings
20
Item 1A. Risk Factors
20
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
24
Item 6. Exhibits
24
Signatures
25
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial information set forth below with respect to
our balance sheet as of September 30, 2008 and our statements of operations for
the three and nine month periods ended September 30, 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 nine month
period ended September 30, 2008, are not necessarily indicative of results to be
expected for any subsequent period.
PACIFIC WEBWORKS, INC. AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pacific
Webworks, Inc.
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
September
30,
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
ASSETS
|
|
|
|
|
|
(Unaudited)
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
$
|
891,062
|
$
|
270,404
|
|
Receivables
|
|
|
|
|
|
|
|
|
|
Trade, less allowance
|
|
|
|
|
|
|
|
|
|
for doubtful receivables
of
|
|
|
|
|
|
|
|
|
|
$45,975 in 2007 and $0 in
2008
|
|
|
|
279,402
|
|
699,386
|
|
Prepaid expenses and other
current assets
|
|
|
166,446
|
|
222,086
|
|
Deferred Tax Asset
|
|
|
|
|
84,778
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
1,421,689
|
|
1,191,876
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET AT
COST
|
|
|
83,464
|
|
104,791
|
RESTRICTED CASH
|
|
|
|
|
487,473
|
|
654,359
|
GOODWILL
|
|
|
|
|
1,946,253
|
|
1,946,253
|
DEFERRED TAX ASSET
|
|
|
|
|
515,222
|
|
443,850
|
DEPOSITS
|
|
|
|
|
11,472
|
|
21,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
$
|
4,465,572
|
$
|
4,363,101
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
|
$
|
828,792
|
$
|
318,176
|
|
Accrued liabilities
|
|
|
|
|
71,413
|
|
79,130
|
|
Deferred revenue
|
|
|
|
|
10,494
|
|
7,474
|
|
Current liabilities from
discontinued operations
|
|
|
215,274
|
|
215,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
|
1,125,973
|
|
620,054
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
Total liabilities
|
|
|
|
|
1,125,973
|
|
620,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Common stock - par value
$0.001; authorized
|
|
|
|
|
|
|
|
50,000,000; issued and
outstanding 40,526,895 shares
|
|
|
|
|
|
|
|
in 2007 and 41,001,895
shares in 2008
|
|
|
40,527
|
|
41,002
|
|
Additional paid-in
capital
|
|
|
|
16,472,175
|
|
16,570,437
|
|
Accumulated deficit
|
|
|
|
|
(13,173,104)
|
|
(12,868,392)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders'
equity
|
|
|
|
3,339,599
|
|
3,743,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders' equity
|
|
$
|
4,465,572
|
$
|
4,363,101
|
The accompanying notes
are an integral part of these consolidated financial statements
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pacific
WebWorks, Inc.
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
Three months ended
|
|
|
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software,
access and license fees
|
|
$
|
972,377
|
$
|
408,908
|
$
|
322,571
|
$
|
91,409
|
|
Hosting,
gateway and maintenance fees
|
|
|
6,601,257
|
|
6,921,828
|
|
2,835,966
|
|
1,676,984
|
|
Training
and education
|
|
|
|
181,246
|
|
-
|
|
27,181
|
|
-
|
|
Merchant
accounts, design and other
|
|
|
241,578
|
|
21,142
|
|
-
|
|
6,770
|
|
|
|
|
|
|
|
|
|
7,996,458
|
|
7,351,878
|
|
3,185,718
|
|
1,775,162
|
Cost
of sales
|
|
|
|
|
|
305,665
|
|
169,031
|
|
52,373
|
|
69,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
|
|
7,690,793
|
|
7,182,847
|
|
3,133,346
|
|
1,706,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
|
|
5,414,232
|
|
4,668,232
|
|
2,020,679
|
|
1,080,093
|
Research
and development
|
|
|
|
222,200
|
|
215,190
|
|
73,577
|
|
67,465
|
General
and administrative
|
|
|
|
1,781,352
|
|
1,836,598
|
|
766,837
|
|
510,895
|
Depreciation
and amortization
|
|
|
|
22,065
|
|
25,114
|
|
7,258
|
|
8,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
|
7,439,849
|
|
6,745,134
|
|
2,868,351
|
|
1,667,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from operations
|
|
|
250,944
|
|
437,713
|
|
264,995
|
|
38,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
15,288
|
|
6,557
|
|
6,630
|
|
1,702
|
|
Interest
Expense
|
|
|
|
|
(16,800)
|
|
-
|
|
(4,800)
|
|
-
|
|
Other
income (expense), net
|
|
|
|
28,527
|
|
16,592
|
|
(16)
|
|
(903)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Total
other Income (Expense)
|
|
|
|
27,015
|
|
23,149
|
|
1,814
|
|
799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing
operations before income taxes
|
|
|
277,958
|
|
460,862
|
|
266,809
|
|
39,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Tax Expense
|
|
|
|
|
-
|
|
156,150
|
|
-
|
|
13,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
|
$
|
277,958
|
$
|
304,712
|
$
|
266,809
|
$
|
26,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before
income taxes
|
$
|
0.01
|
$
|
0.01
|
$
|
0.01
|
$
|
-
|
|
Income
tax expense
|
|
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|
Net
income
|
|
|
|
$
|
0.01
|
$
|
0.01
|
$
|
0.01
|
$
|
0.00
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before
income taxes
|
$
|
0.01
|
$
|
0.01
|
$
|
0.01
|
$
|
0.00
|
|
Income
tax expense
|
|
|
|
-
|
|
0.01
|
|
-
|
|
-
|
|
Net
income
|
|
|
|
$
|
-
|
$
|
0.02
|
$
|
0.01
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
35,825,247
|
|
40,963,756
|
|
36,026,895
|
|
41,001,895
|
|
Fully
Diluted
|
|
|
|
|
36,785,247
|
|
44,563,756
|
|
36,986,895
|
|
44,601,895
|
The accompanying notes
are an integral part of these consolidated financial statements
4
|
|
|
|
|
|
|
|
|
|
|
Pacific
WebWorks, Inc.
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine
months ended
|
|
|
|
|
|
|
|
September
30,
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Operating
Activities
|
|
|
|
|
|
|
Net earnings (loss)
|
|
|
|
|
$
|
277,958
|
$
|
304,712
|
Adjustments to reconcile net
earnings (loss)
|
|
|
|
|
|
|
to net cash used in
operating activities
|
|
|
|
|
|
|
|
Depreciation &
amortization
|
|
|
|
22,065
|
|
25,114
|
|
Stock issued for
services
|
|
|
|
-
|
|
32,585
|
|
Valuation of Stock Options
|
|
|
|
8,595
|
|
61,652
|
|
Bad debt expense
|
|
|
|
|
170,504
|
|
-
|
Changes in assets and
liabilities
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
|
|
|
-
|
|
156,150
|
|
Receivables
|
|
|
|
|
(169,719)
|
|
(412,038)
|
|
Prepaid
expenses and other assets
|
|
|
(40,492)
|
|
(66,141)
|
|
Accounts
payable and accrued liabilities
|
|
|
583,198
|
|
(511,045)
|
|
Deferred
revenue
|
|
|
|
|
7,077
|
|
(3,020)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
operating activities
|
|
859,186
|
|
(412,031)
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing
Activities
|
|
|
|
|
|
|
Purchases of property and
equipment
|
|
|
|
(11,600)
|
|
(46,441)
|
Cash on reserve with bank
(Restricted Cash)
|
|
|
|
(525,810)
|
|
(166,886)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) by investing
activities
|
|
(537,410)
|
|
(213,327)
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing
Activities
|
|
|
|
|
|
|
Proceeds on issuance of stock
from exercise of options
|
|
|
-
|
|
4,700
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
-
|
|
4,700
|
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash
and cash equivalents
|
321,776
|
|
(620,658)
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
beginning of period
|
|
|
|
392,633
|
|
891,062
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
end of period
|
|
|
$
|
714,409
|
$
|
270,404
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
32,585
|
5
Pacific
WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 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 the fair
6
Pacific
WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION -
CONTINUED
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. At September 30, 2008, the company determined that there was
no impairment to goodwill.
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
7
Pacific
WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION -
CONTINUED
probable 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.
The Company had bad debt expense of $0 and $170,504 for the period ended
September 30, 2008 and 2007.
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 nine months ended September 30, 2007 and 2008 was
$222,200 and $215,190 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.
8
Pacific
WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION -
CONTINUED
Earnings per share:
The computation of net earnings 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 per share, which considers potentially issuable shares on
common stock equivalents. In accordance with SFAS No. 128,
"Earnings
per Share,"
common stock options have a dilutive effect when the average
market price of the common stock during the period exceeds the exercise price of
the options. The average market price of the Company's common stock for
the six month periods ended September 30, 2007 and 2008 was $0.05 and $0.09,
respectively. The average market price of the Company's common stock for
the three month periods ended September 30, 2007 and 2008 was $0.06 and $0.07,
respectively. As such, potentially issuable common shares of 960,000 and
3,600,000 were included in the diluted earnings per share calculation for the
three and nine month periods ending September 30, 2007 and 2008,
respectively.
|
|
|
|
|
|
Nine months
ended
September 30,
|
Three months
ended
September
30,
|
|
2007
|
2008
|
2007
|
2008
|
Basic
|
|
|
|
|
Income from continuing operations before
income
taxes
|
$0.01
|
$0.01
|
$0.01
|
$0.00
|
Income tax expense
|
-
|
-
|
-
|
0.00
|
Net Income
|
$0.01
|
$0.01
|
$0.01
|
$0.00
|
|
|
|
|
|
|
|
|
|
2007
|
2008
|
2007
|
2008
|
Diluted
|
|
|
|
|
Income from continuing operations before
income
taxes
|
$0.01
|
$0.01
|
$0.01
|
$0.00
|
Income tax expense
|
-
|
0.01
|
-
|
0.00
|
Net income
|
$0.01
|
$0.02
|
$0.01
|
$0.00
|
Weighted-average common shares outstanding
|
|
|
|
|
Basic
|
35,825,247
|
40,963,756
|
36,026,895
|
41,001,895
|
Diluted
|
36,785,247
|
44,563,756
|
36,986,895
|
44,601,895
|
NOTE 2 - 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
recognized expenses of $8,146 immediately for the period between August 2007 and
December 31, 2007. The remaining amount has been recognized over the term
of the policy on a straight-line basis. At September 30, 2008 the
remaining amount of $24,439 has been recognized in the Companys statements of
operations.
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.
9
Pacific
WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
(Unaudited)
NOTE 2 - STOCKHOLDERS EQUITY - CONTINUED
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 September 30, 2008.
Information with respect to the Companys stock options
follows:
|
|
|
|
|
Stock options
|
Exercise price
|
Weighted-average
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 - $.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
|
(740,000)
|
$0.048 - $0.07
|
$0.23
|
Outstanding at September 30, 2008
|
7,737,651
|
$
0.048 -$ 0.87
|
$0.24
|
The Company has elected to measure and record
compensation cost relative to performance stock option costs in accordance with
Statement of Financial Accounting Standards No. 123 (R), "share-based payment",
which requires the Company to use the Black-Scholes pricing model to estimate
the fair value of options at the option date grant. As a result $42,083
and $61,652 was recognized for the nine months ended September 30, 2007 and 2008
respectively. The fair value of the option grant was established at the
date of grant using the Black-Scholes option pricing model with the following
assumptions:
|
|
|
|
2007
|
2008
|
Five Year Risk Free Interest Rate
|
3.90%
|
4.38%
|
Dividend Yield
|
0%
|
0%
|
Volatility
|
135%
|
86%
|
Average Expected Term (Years to Exercise)
|
5
|
5
|
10
Pacific
WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
(Unaudited)
NOTE 2 - STOCKHOLDERS EQUITY - CONTINUED
Employee stock options outstanding and exercisable under
this plan as September 30, 2008 are:
|
|
|
|
|
Options outstanding
|
|
Exercise
price
|
Number
outstanding
|
Weighted-average
exercise
price
|
Weighted-
average
remaining
contractual life
(years)
|
|
0.87
|
40,151
|
0.87
|
2.50
|
|
0.75
|
1,562,500
|
0.75
|
2.50
|
|
0.23
|
1,100,000
|
0.23
|
.25
|
|
0.12
|
1,435,000
|
0.12
|
1.75
|
|
0.07
|
1,235,000
|
0.07
|
.75
|
|
.048
|
960,000
|
0.048
|
2.25
|
|
0.061
|
1,405,000
|
0.061
|
4.00
|
|
|
7,737,651
|
|
|
Options exercisable
|
|
|
|
|
Exercise
price
|
Number
exercisable
|
Weighted average
-exercise price
|
Weighted-
average
remaining
contractual life
(years)
|
|
0.87
|
40,151
|
0.87
|
2.50
|
|
0.75
|
1,562,500
|
0.75
|
2.50
|
|
0.23
|
1,100,000
|
0.23
|
.25
|
|
0.12
|
1,435,000
|
0.12
|
1.75
|
|
0.07
|
1,235,000
|
0.07
|
.75
|
|
.048
|
960,000
|
.048
|
2.25
|
|
0.061
|
1,405,000
|
0.061
|
4.00
|
|
|
7,737,651
|
|
|
During the nine month period ended
September 30, 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 Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
(Unaudited)
NOTE 3 DISCONTINUED OPERATIONS
The following includes the net current
liabilities for the Companys discontinued operations as of December 31, 2007
and September 30, 2008:
|
|
|
|
December 31,
|
September
30,
|
|
2007
|
2008
|
|
World
|
World
|
|
Commerce
|
Commerce
|
|
Network,
LLC
|
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 September 30, 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 September 30, 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
September 30, 2008
(Unaudited)
NOTE 4 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
|
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 nine months ending September 30,
2008 and September 30, 2007 was $93,507 and $78,570, respectively.
Litigation
Agami Media LLC (Agami) filed a complaint against
Pacific WebWorks, Inc. in the Superior Court of California County of San
Francisco on September 29, 2008. The complaint alleges that Pacific
WebWorks breached its contract with Agami and that Pacific WebWorks owes
approximately $70,000 to Agami for advertising. We dispute the amount of
the fees allegedly owed to Agami and we have engaged legal counsel to answer
this complaint.
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 5 - SEGMENT REPORTING
Segment reporting by business unit follows:
|
|
|
|
|
|
|
Nine months
ended
Sept. 30, 2007
a
|
Pacific
WebWorks
|
IntelliPay
|
TradeWorks
|
FundWorks
|
Discontinued
Operations
b
|
Total
|
Revenues, net
|
$7,009,287
|
$412,106
|
$477,350
|
$97,714
|
$
-
|
$7,996,458
|
Net income(loss)
|
$1,451,727
|
$80,757
|
$(1,303,885)
|
$ 29,359
|
$ 20,000
|
$277,958
|
___________________________________________________
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
Pacific
WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
(Unaudited)
NOTE 5 - SEGMENT REPORTING - CONTINUED
|
|
|
|
|
|
|
Nine months
ended
Sept. 30, 2008
a
|
Pacific
WebWorks
|
IntelliPay
|
TradeWorks
|
FundWorks
|
Discontinued
Operations
b
|
Total
|
Revenues, net
|
$6,961,984
|
$365,931
|
$10,075
|
$13,888
|
$
-
|
$7,351,878
|
Net income(loss)
|
$1,341,596
|
$115,843
|
$(1,136,856)
|
$(15,871)
|
$
-
|
$304,712
|
___________________________________________________
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.
Segment reporting by business unit follows:
|
|
|
|
|
|
|
Three months
ended
Sept. 30, 2007
a
|
Pacific
WebWorks
|
IntelliPay
|
TradeWorks
|
FundWorks
|
Discontinued
Operations
b
|
Total
|
Revenues, net
|
$2,984,023
|
$119,383
|
$59,650
|
$22,622
|
$ -
|
$3,185,718
|
Net income(loss)
|
$762,244
|
$(8,503)
|
$(476,931)
|
$(10,001)
|
$ -
|
$266,809
|
___________________________________________________
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
Sept.30, 2008
a
|
Pacific
WebWorks
|
IntelliPay
|
TradeWorks
|
FundWorks
|
Discontinued
Operations
b
|
Total
|
Revenues, net
|
$1,648,988
|
$120,127
|
$6,047
|
$
-
|
$ -
|
$1,775,162
|
Net income(loss)
|
$352,009
|
$36,606
|
$(356,161)
|
$(6,316)
|
$ -
|
$26,138
|
___________________________________________________
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.
14
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, 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.
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 past quarter we continued to make great
strides in combating the affiliate fraud that plagued us earlier in the year. We
believe that we have successfully developed a process that has dramatically
reduced the number of fraudulent accounts we accept. While this process
has initially resulted in a decrease in revenues, it will enhance our profit
margins on overall revenues as we now restore revenues to their previous
levels.
Additionally, we launched several new product offers
including our revolutionary new eSuccess2U.com proprietary e-mail marketing
system and a state of the art foreign exchange offer Forex GTG.com.
These products have received an enthusiastic reception in the marketplace
and have been a positive addition to our portfolio of virtual products.
While to this point we have not felt any dramatic effects
of the downturn in the U. S. economy, we expect that revenues could be impacted
somewhat over the next several quarters.
Challenges continue to revolve around dealing with our
rapid growth, in particular as it relates to retaining sufficient credit card
processing capabilities and the unreasonable and unrealistic requirements of
credit card associations in respect to Internet related transactions. We
have implemented a long term solution that should ease these difficulties.
15
We expect to see an increase
in revenues moving into 2009 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
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
For the nine month period ended September 30, 2008 (the
2008 nine month period) we relied mainly upon revenues for our cash
requirements. We began generating positive cash flows in 2007 and expect
to continue to generate positive cash flows through further development of our
business and distribution channels. 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 2008
nine month period our monthly cash outflows were primarily related to selling
expenses, described below in Results of Operations. 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 recognize over the year. We carried deferred revenue of
$7,474 on our books as a current liability as of September 30, 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 believe that we can finance our growth internally;
however, we are constantly reviewing our overall capital requirements to
determine in advance the need for external capital to continue to keep up with
necessary technological improvements and further our business development
strategies. If needed, 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.
Contractual Obligations 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 September 30, 2008, included accounts payable of $318,176
related to operating costs such as marketing and advertising expenses and
professional fees. Our accrued liabilities of $79,130 were primarily the
result of payroll related liabilities, contract seller commissions offset by
estimated refunds and factoring obligations. Deferred revenues of $7,474
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.
16
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 September 30, 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 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 over three
years.
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 and nine month periods ended September 30,
2008 and 2007. The following charts are 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.
|
|
|
|
SUMMARY
BALANCE SHEET COMPARISON
|
|
Year ended
Dec. 31,
2007
|
|
Nine month
period ended
Sept. 30,
2008
|
Cash and cash
equivalents
|
$
891,062
|
|
$
270,404
|
Total current assets
|
1,421,689
|
|
1,191,876
|
Total assets
|
4,465,572
|
|
4,363,101
|
Total current
liabilities
|
1,125,973
|
|
620,054
|
Total liabilities
|
1,125,973
|
|
620,054
|
Accumulated deficit
|
(13,173,104)
|
|
(12,868,392)
|
Total stockholders
equity
|
$
3,339,599
|
|
$
3,743,047
|
Total assets decreased at September 30, 2008 as compared
to December 31, 2007 primarily as a result of a decrease in cash. At
September 30, 2008 total liabilities decreased compared to the 2007 year end
primarily as a result of decreases in accounts payable related to our online
marketing budget. Our accumulated deficit continued to decrease at
September 30, 2008 as a result of posting net income for the 2008 nine month
period.
|
|
|
|
|
SUMMARY
COMPARISON OF OPERATING RESULTS
|
|
Nine month
period
ended
September 30
|
Three month
period
ended
September 30
|
|
2007
|
2008
|
2007
|
2008
|
Revenues, net
|
$
7,996,458
|
$ 7,351,878
|
$
3,185,718
|
$
1,775,162
|
Cost of sales
|
305,665
|
169,031
|
52,373
|
69,040
|
Gross profit
|
7,690,793
|
7,182,847
|
3,133,346
|
1,706,122
|
Total operating
expenses
|
7,439,849
|
6,745,134
|
2,868,351
|
1,667,318
|
17
|
|
|
|
|
Net income (loss) from
operations
|
250,944
|
437,713
|
264,995
|
38,804
|
Total other income
(expense)
|
27,015
|
23,149
|
1,814
|
799
|
Income tax expense
|
|
156,150
|
|
13,465
|
Net income (loss)
|
277,958
|
304,712
|
266,809
|
26,138
|
Net income (loss) per share
- basic
|
$
0.01
|
$
0.01
|
$
0.01
|
$
0.00
|
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.
Net revenues have decreased for the 2008 nine and three
month periods compared to the 2007 nine and three periods. As discussed
above, the decrease in revenues for the 2008 interim periods was primarily due
to the transition of our credit card processing from mid-April to mid-May of
2008, the elimination of misleading revenues related to Internet fraud
perpetuated against us and the overall downturn in the economy. Management
expects revenues to recover during the next twelve months as a result of the
release of several new offers and products before the end of the year. In
addition, management expects future revenue increases to come largely from
recurring residual income rather than from one time upfront fees.
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 nine month period compared
to 2007 nine month period due to the reclassification of certain costs as
selling expense. In the short term, management anticipates that cost of
sales will remain relatively flat at approximately 3.8% of net revenues.
Total operating expenses also decreased for 2008 interim
periods as compared to the 2007 interim periods, primarily due to decreases in
selling expenses and general and administrative expense. Selling expenses,
which include advertising expenses, seminar expenses, commissions and personnel
expenses for sales and marketing, continue to represent the majority of our
operating expenses. Selling expenses decreased in the 2008 interim periods
compared to the 2007 interim periods primarily due to decreased marketing
efforts during the transition of our credit card processing.
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 were relatively flat for the 2008 and 2007 nine month
periods, but decreased for the 2008 third quarter compared to the 2007 third
quarter primarily due to a decrease in costs directly related to revenues, i.e.,
merchant fees, personnel, etc.
Net income increased for the 2008 nine month period
compared to the 2007 nine month period, but decreased for the three month period
ended September 30, 2008 compared to the three month period ended September 30,
2007. The 2008 third quarter decrease was primarily due to decreased
revenues as described above. Management anticipates net income to increase
during the next twelve months.
Off-balance Sheet Arrangements
None.
18
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 receivable and the corresponding allowance for doubtful accounts
are reviewed for collectability 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 there were no impairment
indicators of good will.
Contingent liabilities Material estimates for
contingent liabilities include 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 September 30, 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.
19
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as
defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) that are designed
to ensure that information required to be disclosed in our filings under 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 to allow timely decisions regarding required disclosure. 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 management is responsible for establishing and
maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act). Management conducted an evaluation
of the effectiveness of our internal control over financial reporting based on
the criteria set forth in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management determined that there were no changes made in our internal
control over financial reporting during the third quarter of our 2008 fiscal
year that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Agami Media LLC (Agami) filed a complaint against
Pacific WebWorks, Inc. in the Superior Court of California County of San
Francisco on September 29, 2008. The complaint alleges that Pacific
WebWorks breached its contract with Agami and that Pacific WebWorks owes
approximately $70,000 to Agami for advertising. We dispute the amount of
the fees allegedly owed to Agami and we have engaged legal counsel to answer
this complaint.
ITEM 1A. RISK FACTORS
We may need additional external capital and may be
unable to raise it.
Based on our current growth plan we believe we can
provide financing from internally generated sources necessary to remain
competitive in our market. However, we may need to raise external capital
for development of technological products or services and 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 could be affected by 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 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
20
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. 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.
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.
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.
21
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.
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
22
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.
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.
Failure to achieve and maintain effective internal
controls in accordance with Section 404 of the Sarbanes-Oxley Act could lead to
loss of investor confidence in our reported financial information.
If we fail to achieve and maintain the adequacy of our
internal control over financial reporting, as such standards are modified,
supplemented or amended from time to time, we may not be able to ensure that we
can conclude on an ongoing basis that we have effective internal controls over
financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act
(Section 404"). Effective internal controls, particularly those
related to revenue recognition, are necessary for us to produce reliable
financial reports and are important to helping prevent financial fraud. If
we cannot provide reliable financial reports or prevent fraud, then our business
and operating results could be harmed, investors could lose confidence in our
reported financial information, and the trading price of our stock could drop
significantly.
Pursuant to Section 404, our annual report for the year
ended December 31, 2007 required a report by our management on the effectiveness
of our internal control over financial reporting. In our annual report for
the year ended December 31, 2009 we will be required to provide an attestation
from our independent registered public accounting firm as to the effectiveness
of our internal control over financial reporting. We cannot assure you as
to our independent registered public accounting firms conclusions at December
31, 2009 with respect to the
23
effectiveness of our internal
control over financial reporting and there is a risk that our independent
registered public accounting firm will not be able to conclude at December 31,
2009 that our internal controls over financial reporting are effective as
required by Section 404.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
On October 15, 2008 we issued options to purchase
1,775,000 shares of common stock to employees under our 2001 Equity Incentive
Plan. Under each grant, one-half of the options vested immediately and the
remaining one-half will vest on April 15, 2008. The options had an
exercise price of $0.25 and will expire October 15, 2013. We relied upon
an exemption from the registration requirements provided by provided by Section
4(2) of the Securities Act for a private transaction not involving a public
distribution.
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.)
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, 2008)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly 3caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
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|
PACIFIC WEBWORKS, INC.
By:
/s/ Christian R. Larsen
Christian
R. Larsen
President
and Director
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Date: November 13,
2008
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By:
/s/ Kenneth W. Bell
Kenneth
W. Bell
Chief
Executive Officer, Treasurer,
Principal
Financial Officer,
and
Chairman of the Board
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Date: November 13,
2008
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By:
/s/ R. Brett Bell
R.
Brett Bell
Secretary
and Controller
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Date: November 13,
2008
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