The accompanying notes are an integral part of these consolidated financial statements.
31
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
NOTE 1 THE COMPANY AND BASIS OF PRESENTATION
The Company
Pacific WebWorks, Inc. and its subsidiaries, engage in the development and distribution of web tools software, electronic business storefront hosting, and internet payment systems for individuals and small to mid-sized businesses. The Company also diversifies its business by engaging in venture investment and small business acquisition activities.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Pacific WebWorks, Inc. and its wholly owned subsidiaries, Intellipay, Inc., TradeWorks Marketing, Inc., FundWorks, Inc., PWI, LLC, World Commerce Network, LLC, Promontory Marketing, Inc., Thrifty Seeker, LLC, Headlamp Ventures, LLC and Dynamic WebTools, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates used in preparing the financial statements are reasonable and prudent; however, actual results could differ from these estimates. Significant estimates include the allowance for doubtful accounts, impairment assessments of goodwill, valuation of deferred tax assets, rebilling collections and certain accrued liabilities such as contingent liabilities.
Cash Equivalents
The Company considers all highly liquid instruments maturing in three months or less when purchased to be cash equivalents.
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risks consist of cash and cash equivalents, accounts receivable and accounts payable. The Company places its cash and cash equivalents at well-known quality financial institutions. At times, such cash and investments may be in excess of the FDIC insurance limit. The Company had amounts in excess of federally insured limits of $507,335 and $885,471 as of December 31, 2011 and 2012, respectively.
Depreciation and amortization
Depreciation of property and equipment is provided on the straight-line method over the estimated useful lives of the assets. Accelerated methods of depreciation of property and equipment are used for income tax purposes.
Restricted Cash
Restricted cash includes cash maintained in a reserve account with the Companys merchant banks in connection with the Companys acceptance of credit card payments for its services.
Goodwill
The Company adopted FASB ASC 350-10 in 2002. Under FASB ASC 350-10 goodwill is no longer amortized, but is tested for impairment at a reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying
32
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
NOTE 1 THE COMPANY AND BASIS OF PRESENTATION CONTINUED
amount. Events or circumstances which could trigger an additional impairment review include a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends or projected future results of operations. For purposes of financial reporting and impairment testing in accordance with FASB ASC 350-10, the Companys Intellipay business unit operates in one principal business segment, a provider of online credit card gateway services.
In testing for a potential impairment of goodwill, the estimated fair value of the business unit is compared with book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the Company is less than book value, then the carrying amount of the goodwill is compared with its implied fair value. The estimate of implied fair value of goodwill may require independent valuations of certain internally generated and unrecognized intangible assets such as our paying monthly gateway portfolio, software and technology and trademarks. If the carrying amount of our goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess. In accordance with FASB ASC 350-20, the Company performed goodwill impairment tests during 2011 and 2012 and concluded that the carrying amount of goodwill did not exceed the implied fair value of the goodwill, accordingly no impairment losses were recognized during the years ended December 31, 2011 and 2012.
Fair Value Measurements
We adopted ASC Topic 820 for financial instruments measured at fair value on a recurring basis. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
·
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
·
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
·
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
33
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
NOTE 1 THE COMPANY AND BASIS OF PRESENTATION CONTINUED
We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at December 31, 2012:
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for
|
|
Significant
Other
Observable
|
|
Significant
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
|
|
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
82,531
|
$
|
-
|
$
|
-
|
$
|
82,531
|
Total assets measured at fair value
|
$
|
82,531
|
$
|
-
|
$
|
-
|
$
|
82,531
|
|
|
|
|
|
|
|
|
|
|
|
The table below presents our assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at December 31, 2012. We classify financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model.
|
|
|
|
| |
|
|
|
Available-for-sale securities
|
|
Total
|
Balance at December 31, 2011
|
$
|
343,280
|
$
|
343,280
|
Total gains or losses (realized and unrealized)
|
|
|
|
|
Included in net loss
|
|
(285,749)
|
|
(285,749)
|
|
Valuation adjustment
|
-
|
|
-
|
Purchases, issuances, and settlements, net
|
25,000
|
|
25,000
|
Transfers to Level 3
|
|
-
|
|
-
|
Balance at December 31, 2012
|
$
|
82,531
|
$
|
82,531
|
Fair Value of Financial Instruments
The fair value of the Companys cash and cash equivalents, receivables, accounts payable, accrued liabilities and capital lease obligations approximate carrying value based on their effective interest rates compared to current market prices.
Revenue Recognition
The Company recognizes revenue in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements and its revisions in SAB No. 104. SAB 101 and 104 clarify application of generally accepted accounting principles related to revenue transactions.
We receive revenue for hosting, gateway, and maintenance fees, software access and licensing fees and product sales. Revenues from up-front fees are deferred and recognized over the period in which services are performed, ranging from one month 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 when earned. Revenues for product sales are recorded when order fulfillment is complete.
34
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
NOTE 1 THE COMPANY AND BASIS OF PRESENTATION CONTINUED
The Company recognizes revenues when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectibility is reasonably assured.
Trade and Other Receivables and Collections
The Company applies a range of collection techniques to manage deliquent accounts. Management reviews accounts receivable monthly and records an estimate of receivables determined to be uncollectible to allowance for doubtful accounts and bad debt. Accounts recievable and the corresponding allowance for doubtful accounts are
reviewed for collectablitly by management quarterly and uncollectible accounts receivable are written off. The Company had bad debt expense of $150,000 and $216,661 for the years ended December 31, 2011 and 2012, respectively.
Cost of sales
Cost of sales includes costs related to fulfillment, customer service, certain royalties and commissions, service personnel, telecommunications and data center costs.
Sales and marketing costs
Sales and marketing expenses include advertising expenses, commissions and personnel expenses for sales and marketing. Marketing and advertising costs to promote the Company's products and services are expensed in the period incurred.
Research and development costs
Product development expenses include expenses for the maintenance of existing software and the development of new or improved software and technology, including personnel expenses for the product engineering department. Costs incurred by the Company to develop, enhance, manage, monitor and operate the Company's technology services are generally expensed as incurred. Total research and development costs for the years ended December 31, 2011 and 2012 were $235,348 and $231,275, respectively.
General and administrative costs
General and administrative expenses include personnel expenses for executive, finance, and internal support personnel. In addition, general and administrative expenses include fees for bad debt costs, professional legal and accounting services, insurance, office space, banking and merchant fees, and other overhead-related costs. The Company incurred legal fees of $257,537 in 2012, largely in defense of lawsuits brought by private class action law firms. See Note 6 for further discussion related to these lawsuits.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred income tax assets and liabilities are provided based on the difference between the financial statement and tax bases of assets and liabilities measured by the currently enacted tax rates in effect for the years in which these differences are expected to reverse. Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities.
Capital Structure
The Company has 50,000,000 shares authorized of $0.001 par value voting common stock with 49,713,895 shares issued and outstanding as of December 31, 2011 and 2012.
35
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
NOTE 1 THE COMPANY AND BASIS OF PRESENTATION CONTINUED
Inventories
Inventories are stated at the lower of average cost or market value. When there is evidence that the inventories value is less than original cost, the inventories are reduced to market value. Inventories, consisting of golf equipment, sports apparel, health supplements, electronics and iron ore mineral totaled $398,620 and $377,972 at December 31, 2011 and 2012, respectively.
Reclassifications
Certain amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no material effect on our consolidated financial statements.
Earnings per share
The computation of net earnings (loss) per share of common stock is based on the weighted average number of shares outstanding during each period presented. The Company utilizes the treasury stock method to calculate diluted earnings (loss) per share, which considers potentially issuable shares on common stock equivalents. In accordance with FASB ASC 260-10 common stock options have a dilutive effect when the average market price of the common stock during the period exceeds the exercise price of the options.
|
|
|
| |
Statement of Operations Summary Information:
|
Year ended
December 31,
|
2011
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
Net loss
|
$ (1,000,169)
|
|
$ (811,490)
|
|
|
|
|
|
Denominator:
|
Weighted-average common shares outstanding
|
|
|
|
|
Basic
|
49,713,895
|
|
49,713,895
|
|
Diluted
|
49,713,895
|
|
49,713,895
|
EARNINGS PER SHARE:
|
|
|
|
|
Basic
|
|
|
|
|
Net loss per share
|
$ (0.02)
|
|
$ (0.02)
|
|
Diluted
|
|
|
|
|
Net loss per share
|
$ (0.02)
|
|
$ (0.02)
|
Subsequent Events
The Company has evaluated subsequent events from the balance sheet date through the date the financial statements were issued and has determined that except for the events described in Note 14, below, there are no other events that would have a material impact on the financial statements.
36
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
NOTE 2 PROPERTY AND EQUIPMENT
|
|
|
| |
Property and equipment includes the following:
|
December 31,
|
Estimated useful
life (years)
|
|
2011
|
|
2012
|
|
Computer Equipment
|
$ 7,350
|
|
$ 7,350
|
3-5
|
Equipment
|
32,922
|
|
32,922
|
2-10
|
Software
|
4,358
|
|
4,358
|
1-3
|
Furniture and Fixtures
|
17,548
|
|
17,548
|
3-10
|
Building
|
820,000
|
|
820,000
|
30
|
Land
|
1,030,000
|
|
1,030,000
|
-
|
Leasehold Improvements
|
10,679
|
|
12,879
|
Lesser of Lease or Useful Life
|
Total
|
1,922,857
|
|
1,925,057
|
|
Less Accumulated Depreciation
|
(107,371)
|
|
(143,674)
|
|
|
$ 1,815,486
|
|
$ 1,781,383
|
|
Depreciation and amortization expense for the years ended December 31, 2011 and 2012 was $38,060 and $36,303, respectively.
NOTE 3 ACCRUED AND OTHER LIABILITIES
|
|
| |
Accrued liabilities consist of the following:
|
December 31,
|
|
2011
|
|
2012
|
Payroll related liabilities
|
$ 67,415
|
|
$ 44,683
|
Income tax payable
Legal liabilities
|
92,654
400,000
|
|
92,654
400,000
|
Other
|
95,122
|
|
95,245
|
|
$ 655,191
|
|
$ 632,582
|
NOTE 4 NOTES PAYABLE
On January 27, 2010, the Company executed a Promissory Note Secured by a Deed of Trust with Assignment of Rents in the principal amount of $1,000,000. The holder of the note is entitled to receive the entire principal amount with all accrued interest, at 7% interest per annum, payable on or before January 27, 2012. On January 25, 2012, the maturity date of the note was extended to January 27, 2015.
On July 10, 2012, the Company executed a Promissory Note Secured by a Deed of Trust with Assignment of Rents in the principal amount of $100,000. The holder of the note is entitled to receive the entire principal amount with all accrued interest, at 7% interest per annum, payable on or before December 31, 2012. On November 2, 2012, the maturity date of the note was extended to January 10, 2014.
On August 31, 2012, the Company executed a Promissory Note Secured by a Deed of Trust with Assignment of Rents in the principal amount of $50,000. The holder of the note is entitled to receive the entire principal amount with all accrued interest, at 7% interest per annum, payable on or before December 31, 2012. On November 2, 2012, the maturity date of the note was extended to January 10, 2014.
The January 27, 2010, July 10, 2012 and August 31, 2012 Promissory Notes are secured by a deed of trust with assignment of rents on the Companys principal office building and a second commercial building the Company
37
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
NOTE 4 NOTES PAYABLE CONTINUED
owns in Salt Lake City, Utah. Also, the Note holder is entitled to collect rents and lease amounts, if any, from the buildings upon any default and may at its option elect to foreclose on the properties. The Company may make payments prior to the due date and any payment will be applied first to the reduction of interest and the balance to the outstanding principal. In the event that the Company fails to pay any amount when due, then the amount owing will become immediately due and a default interest rate of 15% shall apply to the principal amount. Management intends to use the proceeds from the notes for operational expenses. Accrued interest related to the notes was $134,822 and $209,328 as of December 31, 2011 and 2012, respectively.
On December 2, 2011, the Company assumed a Promissory Note in the principal amount of $30,000 as part of its acquisition of Asher, LLC. The holder of the note is entitled to receive the entire principal amount with all accrued interest, at 5% interest per annum, on or before January 1, 2014. As of December 31, 2012, the outstanding balance on this note was $16,627.
Following is the five year maturity schedule for our notes payable:
|
| |
Year Ended December 31,
|
|
Amount Due
|
2013
|
|
$ 16,627
|
2014
|
|
$ 150,000
|
2015
|
|
$ 1,000,000
|
2016
|
|
$ 0
|
2017
|
|
$ 0
|
NOTE 5 NOTES RECEIVABLE
On July 28, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, established a revolving line of credit facility and issued an initial $400,000 promissory note to Bsquare Red, LLC, a Utah limited liability company, to be used as working capital in their internet marketing business. The note carries a 15% effective annual rate of interest. On October 3, 2011, the principal amount of the promissory note was increased to $500,000. On July 31, 2012, the maturity date of the promissory note was extended to August 1, 2013. It is noted that Bsquare Red, LLC is owned by family members of the Companys CEO.
On August 3, 2011, the Company, through its World Commerce Network, LLC subsidiary, issued a $250,000 promissory note to Bryan Development, LLC, a Utah limited liability company, for use as working capital in its business investment activities. On December 31, 2012, the maturity date of the promissory note was extended to December 31, 2013.
On February 9, 2012, the Company, through its Headlamp Ventures, LLC subsidiary, established a new revolving line of credit facility and issued an initial $500,000 promissory note to Bsquare Red, LLC, a Utah limited liability company, to be used as working capital in their internet marketing business. The note carries an 18% effective annual rate of interest. It is noted that Bsquare Red, LLC is owned by family members of the Companys CEO. On September 27, 2012, the promissory note was repaid in full.
On April 16, 2012, the $1,200,000 Promissory Note previously extended to Rsignia, Inc., went into default. The Company subsequently provided Rsignia, Inc. with notice of default and a demand for repayment of all outstanding principal and accrued interest. After ten days in default, the interest rate on the note increased an additional two percent per annum, to four percent per the terms of the note. On November 26, 2012, the promissory note was
repaid in full.
38
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
NOTE 5 NOTES RECEIVABLE CONTINUED
On November 15, 2012, the Company, through its Headlamp Ventures, LLC subsidiary, issued a $300,000 promissory note to Bsquare Red, LLC, a Utah limited liability company, to be used as working capital in their internet marketing business. The note caries an 18% effective annual rate of interest. It is noted that that Bsquare Red, LLC is owned by family members of the Companys CEO. On December 20, 2012, the promissory note was repaid in full.
NOTE 6 INVESTMENTS
On April 21, 2011, Pacific WebWorks invested $250,000 in common units of Middlebury Ventures II, LLC, a Delaware limited liability company formed for the purpose of participating in the Fisker Holdings, Inc. Series C-1 and subsequent rounds of financing. On December 27, 2011, the Company invested an additional $93,280 in common units of Middlebury Ventures II, LLC. On March 28, 2012, the Company invested an additional $25,000 in common units of Middlebury Ventures II, LLC. The funds are to be used by Middlebury Ventures II, LLC for the acquisition of Fisker Holdings, Inc. Series D-1 Shares pursuant to the Fisker Series D-1 transaction documents. Fisker Holdings, Inc. is an automotive company competing in the luxury hybrid-electric vehicle market. During August, 2012, Middlebury Ventures II, LLC changed its name to Ridgemaker Ventures II, LLC. On December 31, 2012, the Company recognized a $285,749 unrealized loss on its investment to impair its carrying value to the current estimated market value.
On November 11, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, invested a total of $250,000 in Payroll Innovations, LLC and PickYourPayday.com, LLC, sister companies having common ownership and management and providing payroll debit card and online payroll advance service to small and mid-sized employers. For value received, the Company holds a 25% ownership position in Payroll Innovations, LLC and PickYourPayday.com, LLC. On May 30, 2012, the Company invested an additional total of $30,000 in Payroll Innovations, LLC and PickYourPayday.com, LLC to meet a capital call approved by the members. During September, October and November, 2012, the Company invested an additional total of $34,500 in Payroll Innovations, LLC and PickYourPayday.com, LLC to meet a capital call approved by the members. For the year ended December 31, 2011 the Company recognized a $21,186 loss on its equity investment and for the year ended December 31, 2012 the Company recognized an $84,597 loss on its equity investment.
On April 11, 2012, the Company sold the $250,000 in municipal bonds it held and moved the proceeds into a certain money trust account.
NOTE 7 CONTINGENCIES
The Ridgemaker Ventures II, LLC operating agreement contains a 40% capital call provision specifically associated with the Fisker D-1 round of financing, which includes a 40% capital call component. Members of Ridgemaker Ventures II, LLC are required to invest an amount up to 40% of their investment to date at the time of the capital call, based on the percentage of the total capital call. Those members failing to meet the capital call encounter an automatic conversion of their shares into common shares on a 2:1 basis. Those members that meet the capital call will convert their shares into common shares on a 1:1 basis at such time when there is a market for Fisker securities. An updated operating agreement was instituted in association with the Fisker E-1 round of financing. The updated operating agreement contains a 30% capital call provision specifically associated with the Fisker E-1 round of financing, which provides for an exchange of D-1 shares on a 1:5.8418 basis for investors that meet their E-1 capital call obligation.
39
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
NOTE 7 CONTINGENCIES CONTINUED
The Payroll Innovations, LLC and PickYourPayday.com, LLC operating agreements provide for capital calls upon approval by 75% of the membership voting interest. The total amount of each approved capital call is also subject to approval by 75% of the membership voting interest. In a capital call each member is required to invest its proportionate share based on its membership interest. No members interest in the companies can be diluted without unanimous approval by the members.
NOTE 8 STOCKHOLDERS EQUITY
Stock Issuance
During August 2010, the Company issued an aggregate of 1,500,000 shares of its common stock for payment of $180,000 in prepaid services related to investor relations, consulting and public relations. The services were provided through the period of July 2010 through July 2011. The Company recognized expenses of $105,000 for the period between January 2011 and July 2011.
During August 2010, the Company issued an aggregate of 1,940,000 shares of its common stock to two separate companies for payment of $235,000 in prepaid consulting services and costs related to investor relations, consulting and public relations. The services were provided through the period of July 2010 through July 2011. The Company recognized expenses of $137,083 for the period between January 2011 and July 2011.
Equity Incentive Plan
On March 8, 2001, the Board of Directors adopted the Pacific WebWorks, Inc. 2001 Equity Incentive Plan (the Plan). The Plan allows for the granting of awards in the form of stock options, stock appreciation rights or restricted shares to employees, independent directors and certain consultants. The Plan was amended by the Company on March 15, 2007, to allow for grant awards representing up to 10,000,000 shares of the Company's common stock under the Plan. The Plan has not been approved by the Companys shareholders as of December 31, 2012.
During 2011 and 2012, the Company granted no stock options as part of the Plan and no options were outstanding at any time during the years ended December 31, 2011 and 2012.
NOTE 9 DISCONTINUED OPERATIONS
Discontinued subsidiary World Commerce Network, LLC
In July 2002, the Board of Directors of Pacific WebWorks, Inc. resolved to discontinue World Commerce Network, LLC. World Commerce Network became a consolidated entity with the Company in March 2000.
On July 20, 2011 the Board of Directors of Pacific WebWorks, Inc. resolved to activate World Commerce Network, LLC for the purpose of pursuing investment opportunities. All amounts that were classified as discontinued in the prior year have been reclassified.
Pending complaints
In September 2002, World Commerce Network, LLC received a complaint from a leasing company for recourse obligations funded for customer leases during 2000 for seminar related activities. The agreement between World Commerce Network and the leasing company provides for recourse on leases in which customers have not made first payment. Estimated recourse obligations for World Commerce Network approximate $95,000 and the
Company carried an accrued liability to provide for this amount through the year ended December 31, 2012. There has been no active discussion with the leasing company on this matter since 2002.
40
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
NOTE 9 DISCONTINUED OPERATIONS CONTINUED
Discontinued subsidiary Fundworks, Inc.
In August 2011, the Board of Directors of Pacific WebWorks, Inc. resolved to discontinue Fundworks, Inc. The business operations of Fundworks had been dormant for over a year and it had no outstanding liabilities when it was discontinued.
Discontinued subsidiary PWI, LLC
The Companys subsidiary, PWI, LLC has not generated any business activity since 2009. The Company has no plans to restart the business of PWI, LLC and considers it to be a discontinued subsidiary at this time.
NOTE 10 LITIGATION MATTERS
Class Action Lawsuits
During the years ended December 31, 2011 and 2012, the Company was involved in five class action law suits. All plaintiffs in these cases were represented by the same legal firm and each complaint sought class action certification. The complaints alleged that Pacific WebWorks violated consumer protection laws, committed fraud and used deceptive trade practices in relation to the manner in which Pacific WebWorks charged for purchases of its products. Each action sought compensatory and punitive damages, plus reasonable costs and attorney fees. The actions are as follows:
On November 9, 2009, Barbara Ford filed an action in the Circuit Court of Cook County, Illinois, Chancery Division. A second action was filed on November 12, 2009, by Deanna Pelletier in the Superior Court of the State of California, County of Solano. A third action was filed by Lisa Rasmussen on November 20, 2009, in the Superior Court of Washington, Snohomish County. On December 18, 2009, the Barbara Ford matter was removed to the United States District Court for the Northern District of Illinois. On December 18, 2009, the Deanna Pelletier matter was removed to the United States District Court for the Eastern District of California. On December 23, 2009, the Lisa Rasmussen matter was removed to the United States District Court for the Western District of Washington.
On July 10, 2010, Thomas Aikens filed an action in the Circuit Court of Jackson County, Missouri, which matter was removed to the United States District Court for the Western District of Missouri. This matter was brought by the same law firm as the above cases.
On September 19, 2011, Lynette Booth filed an action in the Circuit Court of Cook County, Illinois, Chancery Division alleging violations of consumer protection laws by Pacific WebWorks. This case was removed to the United States District Court for the Northern District of Illinois on December 1, 2011. Damages are unspecified in this action. Pacific WebWorks answered the complaint and denied liability, intent to defend against all such claims.
In response to these actions, Pacific WebWorks retained legal counsel to vigorously defend the Company in these lawsuits. Discovery began on the class certification phase in the Illinois, Washington and California lawsuits. Our legal counsel opposed class certification and filed motions to dismiss all claims in the Illinois and Washington actions, which motions were granted in part and denied in part. Pacific WebWorks renewed its motion to dismiss
in the Illinois action, which motion has not yet been ruled upon. In addition, Pacific Webworks brought motions to dismiss the Pelletier, Guffey and Aikens actions, which motions have not yet been ruled upon.
41
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
NOTE 10 LITIGATION MATTERS CONTINUED
On May 24, 2012, the Company entered into a Stipulation of Class Action Settlement relating to its outstanding class action lawsuits. The settlement agreement required the Company to contribute a maximum of $400,000 to the settlement fund, class counsel and claims administration fees. The Companys entry into the settlement agreement was intended to reduce its overall litigation expense by putting an end to the significant legal fees continually incurred to defend against the actions. As of December 31, 2011 and 2012, the Company had recorded a liability of $400,000 in contemplation of reaching settlement on its outstanding class action lawsuits. As a part of the settlement agreement, the Company agreed to establish an escrow account and deposit the amount of their maximum contribution into the escrow account to be held there during the settlement approval process. The escrow account was established and fully funded by the Company with the appropriate $400,000 maximum contribution on July 2, 2012.
On November 28, 2012, the Class Action Settlement received final approval in the Circuit Court of Cook County, Illinois. On January 10, 2013, the $400,000 held in escrow was contributed to the settlement fund, class counsel and claims administration fees. The Company considers this matter to be closed.
As a result of the above class actions suits, Blooksy Interactive, LLC had threatened claims of indemnification against Pacific WebWorks. We denied that we had any duty to defend or indemnify Blooksy Interactive, LLC.
On May 18, 2012, the Company entered into a settlement agreement with Bloosky Interactive, LLC in which the parties agreed to waive any and all indemnification claims against one another. The Company considers this matter to be closed.
Other Actions
On February 3, 2010, a suit was brought against Pacific WebWorks by Tommy Tompkins in the Circuit Court of Jefferson County, Alabama. The complaint in that case alleged that Pacific WebWorks violated the Telephone Consumer Protection Act by calling Mr. Tompkins cellular telephone to make a sales solicitation. Pacific WebWorks has denied that it ever improperly called Mr. Tompkins, or that it otherwise violated the Telephone Consumer Protection Act. In response to this action, Pacific WebWorks retained the law firm of Snell & Wilmer as legal counsel to vigorously defend the Company. The plaintiffs, along with other parties and the Company have come to resolution as to a settlement of this dispute with a Settlement Agreement being fully executed on March 29, 2012. Under the terms of this Settlement Agreement, the Company paid $15,000 to the client trust account of Henninger Garrison Davis, LLC to be allocated and distributed at the discretion of the plaintiffs and their counsel.
On November 1, 2011, the Company was named in a suit brought by Adrian O. Alegria in the District Court of the Central District of California. The complaint in that case alleged breach of contract and fraud. Pacific WebWorks retained Hirschi, Steele & Baer, PLLC and Single Oak Law Offices, APC as legal counsel to defend the Company. On April 24, 2012 the Companys motion to dismiss was granted by the Court and this matter is considered to be closed.
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.
NOTE 11 INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
42
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
NOTE 11 INCOME TAXES CONTINUED
Deferred tax assets and liabilities are adjusted for the effects of changes in the tax laws and rates on the date of the enactment.
Net deferred tax assets and liabilities consist of the following components as of December 31, 2011 and 2012:
|
|
| |
|
2011
|
|
2012
|
Deferred Tax Assets
|
|
|
|
NOL Carryforward
Contingent Liabilities
Contribution Carryforward
Cumulative Impairment Losses
|
$ 1,860,900
156,000
-
-
|
|
$ 2,325,800
156,000
300
40,200
|
Deferred Tax Liabilities
|
|
|
|
Depreciation
|
(8,500)
|
|
(4,300)
|
Valuation Allowance
|
-
|
|
-
|
Net Deferred Tax Asset
|
$ 2,008,400
|
|
$ 2,518,000
|
|
|
|
|
The income tax expense differs from the amount of income tax determined by applying the U.S. federal and state income tax rates to pretax income from continuing operations for the years ended December 31, 2011 and 2012 due to the following:
|
|
| |
|
2011
|
|
2012
|
|
|
|
|
Book Income
Minimum State Franchise Taxes
Federal Tax Refund
|
$ (659,800)
-
-
|
|
$ (471,500)
780
(244)
|
Change in Contingent Liabilities
|
156,000
|
|
-
|
Depreciation
|
4,000
|
|
4,500
|
Stock Based Expenses
|
108,000
|
|
-
|
Meals & Entertainment
|
6,000
|
|
2,600
|
NOL Carryforward
Impairment Loss
|
385,800
-
|
|
424,200
40,200
|
Valuation Allowance
|
-
|
|
-
|
|
$ -
|
|
$ 536
|
As of December 31, 2012, the Company had Net Operating Loss (NOL) carryforwards of approximately $5,963,500 that may be offset against future taxable income from the year 2013 through 2032. This amount includes a $103,675 increase to the beginning net operating loss balance based upon the results of the 2011 tax return filed by the Company.
Due to the change in ownership provisions of the Tax Reform Act of 1986, Net Operating Loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.
43
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
NOTE 11 INCOME TAXES CONTINUED
ASC No. 740 requires an asset and liability approach for accounting for income taxes and prescribes a comprehensive model of how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. ASC No. 740 states that a tax benefit from an uncertain position may be recognized if it is "more likely than not" that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest
amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information.
The Company estimates that the unrecognized tax benefit will not change significantly within the next twelve months. As of December 31, 2012, the Company prepared an amendment to its 2009 federal tax return which it has not filed. As a result of this amendment the Company has accrued a liability of $92,654 which includes $85,935 in income tax due based on the amendment and $6,719 in interest and penalties related to this additional tax. The following table summarizes the tax years open to scrutiny by taxing authorities for each major jurisdiction:
| |
Jurisdiction
|
Open Tax Years
|
Federal
|
2009 - 2012
|
Utah State
|
2009 - 2012
|
As the Company has significant net operating loss carry forwards, even if certain of the Companys tax positions were disallowed, it is not foreseen that the Company would have to pay any taxes in the near future. Consequently, the Company does not calculate the impact of interest or penalties on amounts that might be disallowed.
NOTE 12 SEGMENT REPORTING
Segment reporting by business unit follows:
|
|
|
| |
The year ended December 31, 2011
a
|
Business Unit
|
|
Revenues, net
|
|
Net income (loss)
|
Pacific WebWorks
|
|
$ 1,162,267
|
|
$ (1,406,698)
|
Headlamp Ventures
|
|
3,698
|
|
(26,509)
|
IntelliPay
|
|
523,901
|
|
412,552
|
Thrifty Seeker
|
|
4,251
|
|
(4,531)
|
TradeWorks
|
|
7,540
|
|
14,663
|
FundWorks
|
|
-
|
|
(1,463)
|
PWI
|
|
-
|
|
-
|
Promontory Marketing
Dynamic WebTools
|
|
-
-
|
|
(168)
-
|
World Commerce Network
|
|
-
|
|
11,985
|
Total
|
|
$ 1,701,657
|
|
$ (1,000,169)
|
a
Amounts include all intercompany receivables, payables, revenues and expenses prior to elimination
for consolidation.
44
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
NOTE 12 SEGMENT REPORTING CONTINUED
|
|
|
| |
The year ended December 31, 2012
a
|
Business Unit
|
|
Revenues, net
|
|
Net income (loss)
|
Pacific WebWorks
|
|
$ 460,246
|
|
$ (1,175,942)
|
Headlamp Ventures
|
|
132,225
|
|
(3,497)
|
IntelliPay
|
|
468,412
|
|
386,412
|
Thrifty Seeker
|
|
14,268
|
|
(8,886)
|
TradeWorks
|
|
6,501
|
|
6,369
|
FundWorks
|
|
-
|
|
1,463
|
PWI
|
|
-
|
|
11,258
|
Promontory Marketing
Dynamic WebTools
|
|
-
729
|
|
(191)
(47,695)
|
World Commerce Network
|
|
-
|
|
19,219
|
Total
|
|
$ 1,082,381
|
|
$ (811,490)
|
a
Amounts include all intercompany receivables, payables, revenues and expenses prior to elimination
for consolidation.
NOTE 13 RELATED PARTY TRANSACTIONS
The Company has entered into a number of related party transactions with Bsquare Red, LLC, a Utah limited liability company. Robert Brett Bell and William Marc Bell each hold a 50% membership interest in Bsquare Red, LLC. Both are brothers of our CEO, K. Lance Bell. See Note 5 for more detailed information on the note receivable transactions the Company has entered into with Bsquare Red, LLC.
On December 2, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, invested $10,000 in Asher, LLC, a business specializing in design and production of gloves and apparel sold in the athletics industry. For value received, the Company holds a 51% ownership position in Asher, LLC. The Headlamp Ventures, LLC interest in Asher, LLC was purchased from James Clayton Roundy, a brother-in-law of our CEO, K. Lance Bell.
NOTE 14 RECENT ACCOUNTING PRONOUNCEMENTS
ASU 2012-02, IntangiblesGoodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.
This ASU gives an entity the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test for indefinite-lived intangible assets other than goodwill. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entitys financial statements for the most recent annual or interim period have not yet been issued. As of December 31, 2012, this ASU has been adopted by the Company and has resulted in no significant impact.
ASU 2012-04, Technical Corrections and Improvements.
This ASU makes certain incremental improvements to U.S. GAAP, including, among other revisions, conforming amendments that identify when the use of fair value should be linked to the definition of fair value in ASC 820. The majority of the amendments in ASU 2012-04 were effective upon issuance on October 1, 2012, for both public entities and nonpublic entities. For public entities, the more substantive amendments that are subject to transition guidance are effective for fiscal periods beginning after December 15, 2012. As of December 31, 2012, this ASU has been adopted by the Company and has resulted in no significant impact.
45
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
NOTE 15 SUBSEQUENT EVENTS
The Company has evaluated subsequent events in accordance with the provisions of ASC 855 and has identified the following reportable subsequent event:
On January 10, 2013, the $400,000 held in escrow by the Company related to certain litigation matters was contributed to the class settlement fund, class counsel and claims administration fees per the terms of the Class Action Settlement agreement (see Note 10 Litigation Matters).
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
As reported in our Current Reports on Form 8-K, we dismissed our former auditing firm Chisholm, Bierwolf, Nilson & Morrill, LLC and engaged Morrill & Associates, LLC as our independent public registered accounting firm on January 31, 2011. On April 8, 2011 the Public Company Accounting Oversight Board (PCAOB) revoked the registration of Chisholm, Bierwolf, Nilson & Morrill, LLC. Accordingly, we may not include the audit reports or consents of Chisholm, Bierwolf, Nilson & Morrill, LLC in our filings with the Securities and Exchange Commission.
On April 13, 2011 we dismissed Morrill & Associates, LLC. We engaged Michael J. Larsen, Certified Public Accountant on April 14, 2011 and he resigned on April 18, 2011. On April 21, 2011, we engaged HJ & Associates, LLC, Certified Public Accountants and Consultants, as our independent registered public accounting firm.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed with the SEC pursuant to the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. Our Chief Executive Officer, who is also our 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, it was concluded that our disclosure controls and procedures were effective for the year ended December 31, 2012.
Managements Annual Report on Internal Control over Financial Reporting
Our management is responsible to establish and maintain adequate internal control over financial reporting. Our Principal Financial Officer is responsible to design or supervise a process that provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The policies and procedures include:
maintenance of records in reasonable detail to accurately and fairly reflect the transactions and dispositions of assets,
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors, and
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.
For the year ended December 31, 2012, our management has relied on the Committee of Sponsoring Organizations of the Treadway Commission (COSO), Internal Control - Integrated Framework, to evaluate the effectiveness of our internal control over financial reporting and based upon that framework management has determined that our internal control over financial reporting was effective for the period covered by this report.
Changes in Internal Controls over Financial Reporting
Our management has determined that there were changes made in the implementation of our internal controls over financial reporting during the year ended December 31, 2012. These changes were made to improve internal control over financial reporting and to address material weaknesses discovered during the evaluation made for the
47
year ended December 31, 2011:
A new filing system has been implemented to ensure the availability of all transaction records. Records will be kept in the filing system for a minimum of seven years.
A new control has been implemented to ensure sufficient analysis, including business performance projections, in determining the probability of using the Companys NOL carryforward amounts within the prescribed timeframe.
A new control has been implemented to ensure the appropriate application and documentation of generally accepted accounting principles in determining the accounting treatment and valuation of the Companys investments.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting because as a small reporting company we are not subject to that requirement.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The directors and executive officers of Pacific WebWorks are listed below, with their respective ages, positions and biographical information. Our bylaws provide for a board of directors consisting of at least three directors. At the time of this filing, the Company had two vacancies on its board. Our directors serve until our next annual meeting or until each is succeeded by a qualified director. Our executive officers are chosen by our board of directors and serve at its discretion. There are no family relationships between our directors and executive officers.
|
|
| |
Name
|
Age
|
Position Held
|
Director Term of Office
|
K. Lance Bell
|
39
|
Chairman of the Board
Chief Executive Officer
President
Principal Financial Officer
Treasurer
|
May 2011 until next annual meeting.
|
Tanner J. Purser
|
27
|
Secretary
Controller
|
|
K. Lance Bell:
On May 18, 2011, the Board appointed K. Lance Bell to fill the director vacancy on our Board and to serve until our next annual meeting or until he is succeeded by a qualified director. He was also appointed President, Secretary and Chief Financial Officer of the Company at that time. On December 1, 2012, the Board appointed Lance as Chairman, Chief Executive Officer and Treasurer. He also remains President and Principal Financial Officer, but resigned his positions as Secretary and Chief Financial Officer at that time. Lance earned an MBA from Goizueta Business School at Emory University in Atlanta, Georgia. He also has over 15 years of experience in the IT services industry, including domestic and international architecture and operations
48
management. From 2001 to 2011 Lance was employed by Cedarcrestone, Inc., a consulting and managed services firm with approximately 600 employees. He started with that company as a Technical Consultant and advanced to Manager of Application Development. He then progressed to Director of Application Management in 2006 and then Sr. Director of Information Technology in 2010. The Board believes Lances extensive contacts, domestic and international experience, management and business expertise are a valuable component to our future success.
Tanner J. Purser:
Tanner J. Purser joined Pacific WebWorks, Inc. in April, 2011, as Manager of Accounting. On December 1, 2012, Tanner was appointed Secretary and promoted to the position of Controller. Tanner has worked in the accounting field for over 9 years and has also founded and operated numerous small businesses. Prior to joining Pacific WebWorks, Tanner was employed at HJ & Associates, an audit and tax accounting firm in Salt Lake City, Utah, working in both the tax and audit departments. Tanner holds a Master of Accountancy degree from Westminster College in Salt Lake City, Utah.
During the past ten years none of our executive officers have been involved in any legal proceedings that are material to an evaluation of their ability or integrity; namely: (1) filed a petition under federal bankruptcy laws or any state insolvency laws, nor had a receiver, fiscal agent or similar officer appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing; (2) been convicted in a criminal proceeding or named subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) been the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him or her from or otherwise limiting his/her involvement in any type of business, securities or banking activities; or (4) been found by a court of competent jurisdiction in a civil action, by the SEC or the Commodity Futures Trading Commission to have violated any federal or state securities law, and the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated.
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and person who own ten percent or more of our common stock to file initial reports of ownership and reports of changes in ownership of our common stock with the SEC. Officers, directors and ten-percent beneficial owners are required by SEC regulations to furnish Pacific WebWorks with copies of all Section 16(a) reports they file. Based upon review of the copies of such forms furnished to us during the fiscal year ended December 31, 2012, and representations that Forms 5 are not required, we believe all forms were filed timely.
Code of Ethics
We have not adopted a code of ethics for our principal executive and financial officers. However, our management intends to promote honest and ethical conduct, full and fair disclosure in our reports to the SEC, and compliance with applicable governmental laws and regulations.
Corporate Governance
We are a smaller reporting company with a small number of directors and officers who have active roles in our operations. As a result, we do not have a standing nominating committee for directors, nor do we have an audit committee with an audit committee financial expert serving on that committee. Our board of directors, including K. Lance Bell, acts as our nominating and audit committee.
49
ITEM 11. EXECUTIVE COMPENSATION
Executive Officer Compensation
The following table shows the compensation paid to our named executive officers in all capacities during the past two years.