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

(Registrant’s 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 registrant’s 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.  Management’s 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 Company’s 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.  MANAGEMENT’S 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 Network’s 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.


Management’s 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 owner’s 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 management’s 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)





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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.


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








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