UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
[X]
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended
March 31, 2009
[
]
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)
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X]
No [ ]
Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes [ ] 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. See the
definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.
|
|
Large
accelerated filer [ ]
Non-accelerated
filer [ ]
|
Accelerated
filer [ ]
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 May 1, 2009 was 41,663,895.
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
7
Item
3. Quantitative and Qualitative Disclosures about Market Risk
12
Item
4T. Controls and Procedures
12
PART II
OTHER INFORMATION
Item
1. Legal Proceedings
12
Item
1A. Risk Factors
12
Item
6. Exhibits
17
Signatures
18
PART
I FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
The financial
information set forth below with respect to our balance sheets as of March 31,
2009 and our statements of operations for the three month periods ended March
31, 2009 and 2008 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, 2009 are not necessarily
indicative of results to be expected for any subsequent period.
PACIFIC WEBWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2009
(Unaudited)
2
|
|
|
|
|
|
|
|
|
|
|
|
Pacific WebWorks, Inc. and Subsidiaries
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
March 31,
|
|
|
|
ASSETS
|
|
|
|
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
$
|
377,743
|
$
|
408,790
|
|
Receivables
|
|
|
|
|
|
|
|
|
|
|
Trade,
less allowance
|
|
|
|
|
|
|
|
|
|
|
for
doubtful receivables of
|
|
|
|
|
|
|
|
|
|
$0
in 2008 and
|
|
|
|
|
|
|
|
|
|
|
$0
in 2008
|
|
|
|
|
|
518,709
|
|
1,604,238
|
|
Prepaid
expenses and other current assets
|
|
|
|
142,824
|
|
133,137
|
|
Inventory
|
|
|
|
|
|
139,423
|
|
134,340
|
|
Deferred
tax asset
|
|
|
|
|
74,187
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
|
1,252,886
|
|
2,280,505
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET AT COST
|
|
|
|
96,665
|
|
96,960
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
|
|
|
649,899
|
|
396,690
|
Goodwill
|
|
|
|
|
|
|
1,946,253
|
|
1,946,252
|
Deferred
tax asset
|
|
|
|
|
|
525,813
|
|
440,460
|
Deposits
|
|
|
|
|
|
|
10,699
|
|
10,699
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
|
|
$
|
4,482,215
|
$
|
5,171,566
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
|
|
$
|
382,014
|
$
|
746,852
|
|
Accrued
liabilities
|
|
|
|
|
|
39,311
|
|
45,656
|
|
Deferred
revenue
|
|
|
|
|
|
3,192
|
|
-
|
|
Current
liabilities from discontinued operations
|
|
|
101,799
|
|
101,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
|
|
526,316
|
|
894,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
|
|
|
526,316
|
|
894,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock - par value $0.001; authorized
|
|
|
|
|
|
|
|
50,000,000;
issued and outstanding 41,663,895 shares
|
|
|
|
|
|
|
in
2008 and 41,663,895 shares in 2009
|
|
|
|
41,664
|
|
41,664
|
|
Additional
paid-in capital
|
|
|
|
|
16,596,474
|
|
16,608,139
|
|
Accumulated
deficit
|
|
|
|
|
(12,682,239)
|
|
(12,372,544)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
|
|
|
|
3,955,899
|
|
4,277,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
|
$
|
4,482,215
|
$
|
5,171,566
|
The
accompanying notes are an integral part of these financial statements
.
6
|
|
|
|
|
|
|
|
|
|
|
|
Pacific WebWorks, Inc. and Subsidiaries
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Software,
access and license fees
|
|
|
$
|
227,886
|
$
|
66,870
|
|
Hosting,
gateway and maintenance fees
|
|
|
|
2,887,394
|
|
3,165,133
|
|
Training
and education
|
|
|
|
|
-
|
|
-
|
|
Merchant
accounts, design and other
|
|
|
|
10,754
|
|
5,915
|
|
|
|
|
|
|
3,126,034
|
|
3,237,919
|
Cost
of Sales
|
|
|
|
|
|
34,371
|
|
50,593
|
|
|
Gross
Profit
|
|
|
|
|
|
3,091,663
|
|
3,187,326
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
|
|
|
2,278,363
|
|
1,966,419
|
Research
and development
|
|
|
|
|
80,630
|
|
81,799
|
General
and administrative
|
|
|
|
|
687,482
|
|
663,531
|
Depreciation
and amortization
|
|
|
|
|
8,088
|
|
8,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
|
|
3,054,563
|
|
2,719,959
|
|
|
Net
Income from Operations
|
|
|
|
|
37,100
|
|
467,367
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
4,855
|
|
1,868
|
|
Interest
expense
|
|
|
|
|
|
-
|
|
-
|
|
Other
income (expense), net
|
|
|
|
|
15,006
|
|
-
|
|
|
Total
Other Income (Expense)
|
|
|
|
19,861
|
|
1,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income from Continuing Operations Before Income Taxes
|
|
|
|
56,961
|
|
469,235
|
|
|
|
|
|
|
|
|
|
|
Income
Tax Provision/(Benefit)
|
|
|
|
|
-
|
|
|
Income
Tax Expense
|
|
|
|
|
|
19,367
|
|
159,540
|
Income
from Continuing Operations
|
|
|
|
$
|
37,594
|
$
|
309,695
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations
|
|
|
|
|
|
|
|
|
|
Income
from operations of discontinued World
|
|
|
|
|
|
|
|
|
Commerce
Network, LLC (including income
|
|
|
|
|
|
|
|
on
disposal of $20,000, net of tax)
|
|
|
$
|
-
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
|
|
$
|
37,594
|
$
|
309,695
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
$
|
0.00
|
$
|
0.01
|
|
|
Income
from discontinued operations, net of tax
|
|
$
|
-
|
$
|
-
|
|
|
Net
income
|
|
|
|
|
$
|
0.00
|
$
|
0.01
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
$
|
0.00
|
$
|
0.01
|
|
|
Income
tax expense
|
|
|
|
|
-
|
$
|
-
|
|
|
Net
income
|
|
|
|
|
$
|
0.00
|
$
|
0.01
|
Weighted-average
common shares outstanding
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
40,873,873
|
|
41,663,895
|
|
Fully
Diluted
|
|
|
|
|
|
42,376,423
|
|
41,663,895
|
The
accompanying notes are an integral part of these financial statements
.
7
|
|
|
|
|
|
|
|
|
|
|
|
Pacific WebWorks, Inc. and Subsidiaries
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unadutied)
|
|
|
|
|
|
For the three months ended
|
|
|
|
|
March 31,
|
|
|
|
|
2008
|
|
2009
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
Net
Income
|
|
|
|
$
|
37,594
|
$
|
309,695
|
|
Adjustments
to reconcile net income
|
|
|
|
|
|
|
to
net cash used in operating activities
|
|
|
|
|
|
|
|
Depreciation
& amortization
|
|
|
|
8,088
|
|
8,210
|
|
|
Stock
issued for services
|
|
|
|
-
|
|
-
|
|
|
Valuation
of stock options
|
|
|
|
-
|
|
11,665
|
|
|
Bad
debt expense
|
|
|
|
-
|
|
-
|
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
|
Deferred
tax asset
|
|
|
|
19,367
|
|
159,540
|
|
|
Receivables
|
|
|
|
|
33,626
|
|
(1,085,528)
|
|
|
Prepaid
expenses and other assets
|
|
|
(13,493)
|
|
9,687
|
|
|
Inventory
|
|
|
|
|
-
|
|
5,083
|
|
|
Accounts
payable and accrued liabilities
|
|
238,033
|
|
371,183
|
|
|
Current
liabilities from discontinued operations
|
|
-
|
|
-
|
|
|
Deferred
revenue
|
|
|
|
3,990
|
|
(3,192)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by operating activities
|
|
327,205
|
|
(213,657)
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(20,779)
|
|
(8,505)
|
|
Cash
on reserve with bank (restricted cash)
|
|
|
(82,365)
|
|
253,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by investing activities
|
|
(103,144)
|
|
244,704
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
Proceeds
on issuance of stock from exercise of options
|
|
4,700.00
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
-
|
|
|
|
Net
cash provided by financing activities
|
|
4,700
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase/(decrease) in cash and cash equivalents
|
228,761
|
|
31,047
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
891,062
|
|
377,743
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,119,823
|
$
|
408,790
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
Cash
Paid for Interest
|
|
|
$
|
-
|
$
|
-
|
|
|
Cash
paid for income taxes
|
|
|
|
1,200
|
|
1,200
|
|
Non-cash
financing activities:
|
|
|
|
-
|
|
-
|
|
|
Stock
issued for services
|
|
|
|
-
|
|
-
|
The
accompanying notes are an integral part of these financial statements
.
8
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
NOTE 1 -BASIS OF
FINANCIAL STATEMENT PRESENTATION
The accompanying
unaudited consolidated financial statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in accordance with such rules and
regulations. The information furnished in the interim condensed
consolidated financial statements includes normal recurring adjustments and
reflects all adjustments, which, in the opinion of management, are necessary for
a fair presentation of such financial statements. Although management
believes the disclosures and information presented are adequate to make the
information not misleading, it is suggested that these interim consolidated
financial statements be read in conjunction with the Companys audited financial
statements and notes thereto included in its December 31, 2008 Annual Report on
Form 10-K. Operating results for the three-months ended March 31, 2009 are
not necessarily indicative of the results to be expected for year ending
December 31, 2009.
9
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.
During the first
quarter of 2009 we successfully transitioned our marketing focus away from the
higher risk, less profitable incentivized marketing arena to a more efficient,
non-incentivized marketing approach, resulting in significantly higher profit
margins when compared to the first quarter of 2008. While revenues for the
first quarter of 2009 were up only slightly compared to the first quarter 2008,
profitability increased by a significant amount.
Our overall financial
condition and liquidity continue to improve. We expect revenues and earnings
will continue to grow. Our biggest challenge continues to be in the area of
maintaining sufficient credit card processing capabilities to keep up with our
growth. We are negotiating several new processing options that we believe
will relieve that strain. While conventional merchant accounts are
unreasonably confining and may affect our progress, the industry is beginning to
recognize the problems related to conventional merchant accounts and we expect
to see modified options develop in the marketplace.
Our market continues
to be highly competitive. We believe our product offerings and marketing
strategies are among the strongest in the industry. During the upcoming
year we intend to focus on these areas along with a commitment to increasing
customer retention through improved customer service and more targeted
marketing.
10
We expect to see
continued growth through 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
During 2008 and the
three month period ended March 31, 2009 (the 2009 first quarter) we have
relied primarily on revenues to fund our operations. 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.
The majority of our
revenues are from hosting, gateway and maintenance fees and 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 2009 first
quarter our cash outflows were primarily related to selling expenses which
totaled $1,966,418 and general and administrative expenses that totaled
$663,531. These cash outflows can exceed monthly cash inflows based on
timing differences between marketing campaigns and sales.
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.
In the event that we
decide to rely on equity offerings for additional 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.
Commitments and
Contingent Liabilities
Our operating
commitments include our operating lease for our Salt Lake City office that
approximates $10,875 per month as of February 2009. Our total current
liabilities at March 31, 2009 included accounts payable of $746,852 related to
operating costs such as marketing and advertising expenses and professional
fees. Our accrued liabilities of $45,656 were primarily the result of
payroll related liabilities and sales commission, offset by estimated refunds
and factoring obligations.
11
Current
liabilities from discontinued operations were $101,799 and were related to World
Commerce Network, LLC. The operations of World Commerce Network, LLC, our
subsidiary, are ceased and discontinued. These liabilities decreased from
$215,274 in 2007 to $101,799 for the 2009 first quarter as a result of a
recovery of previously recognized expenses related to the defunct World Commerce
Network operations. Management continues to attempt to negotiate
settlements of World Commerce Networks accrued liabilities.
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 nearly 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
month periods ended March 31, 2008 and 2009. 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, 2008
|
|
Three month
period ended
Mar. 31, 2009
|
Cash
and cash equivalents
|
$
377,743
|
|
$
408,790
|
Total
current assets
|
1,252,886
|
|
2,280,505
|
Total
assets
|
4,482,215
|
|
5,171,566
|
Total
current liabilities
|
526,316
|
|
894,307
|
Total
liabilities
|
526,316
|
|
894,307
|
Accumulated
deficit
|
(12,682,239)
|
|
(12,372,544)
|
Total
stockholders equity
|
$
3,955,899
|
|
$
4,277,259
|
Total assets
increased at March 31, 2009 as compared to December 31, 2008 primarily as a
result of an increase in receivables. At March 31, 2009 total liabilities
increased compared to the 2008 year end primarily as a result of increases in
accounts payable related to our online marketing budget. Our accumulated
deficit continued to decrease at March 31, 2009 as a result of posting net
income for the 2009 first quarter.
|
|
|
SUMMARY COMPARISON OF OPERATING
RESULTS
|
|
Three month period
ended March 31
|
|
2008
|
2009
|
Revenues,
net
|
$ 3,126,034
|
$ 3,237,918
|
Cost
of sales
|
34,371
|
50,593
|
12
|
|
|
|
Three month period
ended March 31
|
|
2008
|
2009
|
Gross
profit
|
3,091,663
|
3,187,325
|
Total
operating expenses
|
3,054,563
|
2,719,958
|
Total
other income (expense)
|
19,861
|
1,868
|
Net
income from continuing operations
|
56,961
|
469,235
|
Income
tax expense
|
19,367
|
159,540
|
Net
income
|
37,594
|
309,695
|
Net
income per share - basic
|
$
0.00
|
$
0.01
|
Our net revenues
increased for the 2009 first quarter compared to the three month period ended
March 31, 2008 (the 2008 first quarter) and our net income from continuing
operations increased for the 2009 first quarter as a result of decreased selling
expenses as compared to the 2008 first quarter. 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 increased for
the 2009 first quarter compared to the 2008 first quarter primarily due to
increased marketing. Management anticipates that cost of sales will
increase in the short term as we continue to focus on growth.
Total operating
expenses decreased for the 2009 first quarter compared to the 2008 first quarter
primarily due to decreases in selling expenses. Selling expenses include
advertising expenses, seminar expenses, commissions and personnel expenses for
sales and marketing. Selling expenses decreased in 2009 first quarter due
to improved marketing efficiencies. Management anticipates that selling
expense will increase overall but decrease as a percentage of revenues in the
short term.
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 decreased
slightly for the 2009 first quarter compared to 2008 first quarter and
management expects to see increases in general and administrative expenses in
the short term consistent with continued increases in customer accounts expected
in 2009.
Total other income
for the 2009 first quarter included interest income from certificates of
deposit. Total other income for the 2008 first quarter represented
interest income earned on certificates of deposit and the recovery of a
previously booked expense offset by impairment of goodwill related to
Intellipay.
13
Due
to decreased selling expenses in the 2009 first quarter, our net income improved
significantly when compared to the 2008 first quarter and we also recorded net
earnings per share for the 2009 first quarter.
Off-balance
Sheet Arrangements
None.
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.
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 2008
and concluded that there were no impairment indicators of goodwill.
Contingent
liabilities - Material estimates for contingent liabilities include
approximately $0 for our operating companies and approximately $101,799 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 effect on our cash balances at March 31, 2009. Any
judgments that may be received by us for pending or threatened litigation
related to discontinued operations may not have a direct effect 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
- We measure and record compensation cost relative to performance stock option
costs in accordance with Statement of Financial Accounting Standards No. 123R,
"Accounting for Stock-Based Compensation", which requires the Company to use the
Black-Scholes pricing model to estimate the fair value of options at the option
date of grant. The fair value of the option grant is established at the
date of grant using the
14
Black-Scholes
option pricing model based on assumptions related to the five year risk free
interest rate, dividend yield, volatility, and average expected term (years to
exercise).
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 and determined that there were no changes made
in our internal control over financial reporting during the first quarter of our
2009 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 intend to vigorously
defend our position. In May 2009 we filed an answer to the complaint and
filed a cross complaint seeking damages.
We are involved in
various other disputes and claims arising in the normal course of our business.
In the opinion of management, any resulting litigation from these disputes
and claims will not have a material effect on our financial position and results
of operations.
ITEM 1A.
RISK FACTORS
Factors
Affecting Future Performance
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 to twenty-four months to remain competitive in our market
and to capitalize on growth opportunities. 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
15
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 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.
16
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.
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
17
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 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 experience
difficulty maintaining sufficient credit card processing capabilities to keep up
with our growth.
We rely upon our
credit card merchant accounts to collect our monthly hosting payments and many
of the limitations imposed upon us by the credit card associations, in the
opinion of management, are unreasonable and unnecessarily confining. These
limitations could limit our growth potential and impact our earnings in a
negative manner.
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.
Pursuant to Section
404 of the Sarbanes-Oxley Act of 2002, beginning with this annual report we are
required to furnish a report by our management on our internal control over
financial reporting. 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. In order to achieve
compliance with Section 404 of the Act within the prescribed period, we have
engaged in a process to document and evaluate our internal control over
financial reporting, which has been challenging. We cannot assure you as
to our independent auditors, conclusions at December 31, 2009 with respect to
the effectiveness of our internal control over financial reporting. There
is a risk that our independent auditors will not be able to conclude at December
31, 2009 that our internal controls over financial reporting are effective as
required by Section 404 of the Act.
18
If
we fail to achieve and maintain the adequacy of our internal controls, 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. Moreover, 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.
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.
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.
19
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 3.1 for Form
10-Q filed
November
13, 2001)
3.2
Amended
Bylaws of Pacific WebWorks, Inc. (Incorporated by reference to exhibit 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)
20
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.
|
|
PACIFIC
WEBWORKS, INC.
By:
/s/
Kenneth W. Bell
Kenneth
W. Bell
Chief
Executive Officer, Treasurer,
Principal
Financial Officer,
and
Chairman of the Board
|
Date:
May 14, 2009
|
By:
/s/ R. Brett Bell
R.
Brett Bell
Chief
Financial Officer and Secretary
|
Date:
May 14, 2009
|
21