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EXCEL - IDEA: XBRL DOCUMENT - PACIFIC WEBWORKS INCFinancial_Report.xls
EX-31 - CHIEF EXECUTIVE OFFICER CERTIFICATION - PACIFIC WEBWORKS INCex311k.htm
EX-31 - CHIEF FINANCIAL OFFICER CERTIFICATION - PACIFIC WEBWORKS INCex312k.htm
EX-32 - SECTION 1350 CERTIFICATION - PACIFIC WEBWORKS INCex32k11.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011


OR

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For transition period ___ 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, 1st Floor, Salt Lake City, Utah

(Address of principal executive offices)

84101         

(Zip Code)


Registrant’s telephone number:  (801) 578-9020


Securities registered under Section 12(b) of the Act:  None


Securities registered under Section 12(g) of the Act:  Common Stock


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes [   ]   No [X]


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.         Yes [   ]   No [X]


Indicate by check mark whether the registrant (1) 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  [X]   No [  ]


Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [X]




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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 filed [  ]

Smaller reporting company [X]


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes [  ]   No [X]


The aggregate market value of the 41,944,493 shares of voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of its most recently completed second fiscal quarter (June 30, 2011) was approximately $1,258,335.


The number of shares outstanding of the registrant’s common stock as of April 30, 2012 was 49,713,895.


Documents incorporated by reference:  None.



TABLE OF CONTENTS


PART I

Item 1.  Business

3

Item 1A.  Risk Factors

10

Item 2.  Properties

14

Item 3.  Legal Proceedings

14

Item 4.  Mine Safety Disclosures

16


PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters

and Issuer Purchases of Equity Securities

16

Item 6.  Selected Financial Data

17

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations         17

Item 8.  Financial Statements and Supplementary Data

25

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure        45

Item 9A.  Controls and Procedures

45

Item 9B.  Other Information

46


PART III

Item 10.  Directors, Executive Officers and Corporate Governance

46

Item 11.  Executive Compensation

48

Item 12.  Security Ownership of Certain Beneficial Owners and Management

and Related Stockholder Matters

49

Item 13.  Certain Relationships and Related Transactions, and Director Independence

51

Item 14.  Principal Accounting Fees and Services

52


PART IV

Item 15.  Exhibits, Financial Statement Schedules

53

Signatures

54





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In this annual report references to “Pacific WebWorks,” “we,” “us,” “our,” and “the Company” refer to Pacific WebWorks, Inc. and its subsidiaries.


EXPLANATORY NOTE


This report on Form 10-K has been delayed because the Company’s financial information for the year ended December 31, 2011 was unavailable as of March 30, 2012.  Due to changes in our Chief Financial Officer at the end of 2010 and changes in independent registered public accounting firms during 2011 the Company’s Form 10-K for the year ended December 31, 2010 was not filed until January 9, 2012.  These events have delayed the filing of all of our reports for the year ended December 31, 2011.  Accordingly, this report includes financial and non-financial information for the years ended December 31, 2010 and 2011 and also includes descriptions of certain subsequent events occurring in 2012.



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.


PART I


ITEM 1.  BUSINESS


Historical Development


The Company was incorporated in the state of Nevada on May 18, 1987, as Asphalt Associates, Inc. and changed its name to Pacific WebWorks, Inc. in January 1999.   During 2009 and 2010 we had four wholly-owned subsidiaries:  Intellipay, Inc., TradeWorks Marketing, Inc., and FundWorks, Inc, which are all Delaware corporations, and World Commerce Network, LLC, a Utah limited liability company and inactive subsidiary. Intellipay specializes in providing online, secure and real-time payment processing services for businesses of all sizes.  TradeWorks Marketing was incorporated to mass market our products and services.  FundWorks, Inc. was dormant in 2010, but previously provided operating lease arrangements for certain TradeWorks’ customers.


On November 11, 2008, Pacific WebWorks formed PWI, LLC, a Utah limited liability company.  The Company holds a 51% membership interest in this entity and Interform, a local sporting goods and apparel wholesaler, holds the remaining 49% membership interest.  PWI, LLC was formed to manage InterformDirect.com, a virtual golf equipment and accessories store.  This business is now dormant.


On May 8, 2008, Pacific WebWorks incorporated Promontory Marketing, Inc., a Wyoming corporation, as a wholly-owned subsidiary for the purpose of marketing Pacific WebWorks’ products.  This corporation was activated for business in 2010.


On June 9, 2011, Pacific WebWorks formed Headlamp Ventures, LLC, a Utah limited liability company, as a wholly-owned subsidiary for the purpose of pursuing business acquisitions and investments.


World Commerce Network, LLC had discontinued operations since July 2002, but on July 20, 2011, the Company’s Board of Directors resolved to revive World Commerce Network, LLC’s business operations.




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On August 2, 2011, the Company acquired Thrifty Seeker, LLC, a Utah limited liability company that competes in the daily deals space.


On August 19, 2011, the Company’s Board of Directors resolved to discontinue and dissolve Fundworks, Inc.


Our Business


From January 1999 until 2011 our business operations were focused on providing Internet application services to small to mid-sized businesses to establish a business presence on the Internet.  Then in 2011 the Company’s management decided to expand operations to include an investment and business consulting arm to seek expansion opportunities into synergistic industries or businesses.


Pacific WebWorks’ Web Site Business


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 turnkey applications allowing small- to medium-sized businesses to expand 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.  Additionally, we have integrated our product with many of the popular online auction/sales portals enabling our customers to easily sell their products at these portals using our Visual WebTools product.


We initially focused our business entirely on virtual retailing software solutions, meaning merchants that do not have a physical store location and would exist only on the Internet.  Due to requests in the marketplace, we expanded our technologies to include features for small to medium-sized physical “brick and mortar” entities, in addition to our virtual merchants. This is expected to give these businesses and other organizations a complete solution for all physical store and Internet concerns and at the same time reduce the costs of operations and introduce new profit centers for them.


Our Products


Even though small business, including small office/home office, typically understands how traditional brick and mortar businesses operate, we believe they need assistance in order to replicate business processes effectively and economically using the Internet.  Pacific WebWorks assists small businesses in succeeding online through our Visual WebTools software; including our eBay submission tool, the Intellipay payment systems and our hosting services.


We provide a comprehensive one-stop solution that incorporates our integrated suite of e-commerce software tools, plus hosting, site management, and web design services.  By leveraging a shared commerce platform across many customers, we bring economies of scale to our customers.  We believe this structure allows our customers to focus on their business instead of technology, enabling them to achieve a much faster return on investments made in technology and to experience more success on the Internet.


While we enjoyed great success marketing our WebTools product over the internet, we also experienced considerable difficulties in a number of areas as a result of our inability to control the misleading messages conveyed by many affiliates and networks on the internet in an effort to drive traffic to our product offerings. As a result of these issues we have discontinued marketing our WebTools product over the internet. This has resulted, and will continue to result, in a decrease in the revenues we will generate from that product. While we will seek to find other avenues through which to market this product we believe our resources can be better utilized pursuing other opportunities.


Consistent with the above we believe that our new investment and consulting operation, Headlamp Ventures, can provide valuable capital and management to a variety of companies both within our industry and elsewhere.  We

also believe there is opportunity to grow our product set through an acquisition strategy.




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Pacific WebWorks Product Characteristics


Visual WebToolsTM Version 5 is a suite of software programs that fit together to perform the basic business functions we believe are the most effective on the Internet.  The following products are included as part of this suite.

WebWizard is an easy-to-use web page design program that possesses a simple user interface and templates for the novice, yet has very powerful additional functionalities for web design professionals.  In February 2010 we released WebWizard 5 which incorporates sophisticated site components like tables, frames, flash and other multimedia capabilities in a straightforward, menu driven process.  No complicated programming skills are required to use the WebWizard tool.  Our customers can easily manage their sites’ layout, colors, content, tables and graphics. WebWizard includes a library of hundreds of graphics that are readily accessible by our customers. WebWizard allows our customers to quickly and easily create, update, modify and enhance their web sites.  It also integrates with social media outlets such as Twitter, Facebook and MySpace.  Changes can be uploaded to our servers within minutes, 24 hours a day, 7 days a week from any Internet-connected Microsoft Windows® computer.


ClipOn Commerce is an e-storefront and product management system, complete with shopping cart technology.  ClipOn Commerce allows our customers to build an Internet storefront.  They can create a complete product catalog, organize and search products by unlimited categories, and import/export to and from their database. ClipOn Commerce is designed to function with a third party merchant account and is integrated with our Intellipay payment system which allows our clients to accept all major credit cards online.  ClipOn Commerce has support for QuickBooks® accounting software enabling our customers to update between their accounting records and their Internet storefront.  ClipOn Commerce also features UPS shipping integration.


WebContacts is a contact management program.  Companies that use our system can utilize WebContacts to organize information about all the entities they do business with including customers, suppliers, distributors, potential customers, etc.  WebContacts also enables customers to capture information about people that visit their web site, if those visitors elect to supply contact information at the site, enabling our customers to be more effective when using the web as a marketing and communications tool.


WebChannels is an e-mail distribution program that enables our customers to send customized e-mails in either plaintext or HTML format to their WebContacts database of visitors.  Since email is the most popular activity on the web, and one of the most effective forms of Internet marketing, WebChannels provides our customers with a practical tool with which to promote their businesses.  For example, by using WebChannels, a client could easily send out a weekly newsletter, coupons or special offers to an entire customer base, certain visitor types or to a segment of their customers.


Web Profiling Tool is a form and survey creation tool that helps capture feedback and valuable demographic information from customers and web site visitors.  Our clients can create customizable forms, surveys and interactive questionnaires. The web profiling tool includes a catalog of pre-designed questions such as education level, hobbies, satisfaction level, etc.  The profiling forms may also be custom created by our customers.


WebStats enables our customers to analyze visitor activities on their web sites in order to track pages viewed, hits, time of access, etc.  WebStats is a statistics program that provides detailed reports and graphs related to referring pages, geographic location of visitors, browsers and the operating systems web site visitors are using, which web pages generate hits, and which pages are the most popular.  WebStats can produce reports of business information, including year-long trends and the effectiveness of the clients’ sites.


Auction Connection is a module that allows Visual WebTools users to list inventory items with eBay at the click of a button.





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Increase My Margin is a tool that allows eBay users to quickly and effectively analyze information and data related to the sale of products sold on eBay over a period of time.  


Intellipay Product Characteristics


Intellipay Payment System - This group of products offers payment technologies for business-to-business and business-to-customer uses on the Internet and in physical store locations.  These products allow our customers to accept real time credit card payments from their web site, Internet appliances, kiosks, remote locations through their Nextel cell phone or at the physical point of sale.  The Intellipay products use the same standards as all major commerce sites, including industry standard security components and methods.  The product has been tested under strict banking network procedures.  Once customers enter the necessary data in a secure form, Intellipay quickly processes the transaction in real-time (2 to 5 seconds) and returns the customer back to the business site.  Intellipay also provides methods for enterprise-level businesses to link Intellipay products, services and features into their ecommerce web sites and transmit transactional data for use in back-office systems.  Intellipay is entirely compliant with PCI 2.0, which is a combined security regulation for VISA and Mastercard.  As part of our new strategy we expect to pursue additional ways in which we can market and implement our Intellipay product.


ePayment System supports all major card types including Visa, MasterCard, American Express, Discover, Diners Club and JCB.  Also, support is provided for Visa and MasterCard debit (check) cards and Level Two corporate/commercial cards through various bank networks.  Transaction types include industry standard transactions such as normal authorizations, pre-authorizations intended for delayed settlement, the so-called “force” allowing a transaction authorized offline (such as a voice authorization) to be settled and credits for refunds.Intellipay’s innovative address verification system allows merchants to retrieve a score and verify account validity.


This Intellipay product allows our customers to control transaction level behavior depending on AVS scores, duplicate transaction attempt detection, and more.  Intellipay also automatically settles merchant batches nightly so our customers are freed from forcing settlement via manual or programmatic methods, which also helps reduce our customer’s costs by settling within the 24-hour window mandated by most merchant accounts.  The Intellipay system is fully transportable; meaning that a customer can switch web site hosting companies, move between most e-commerce software programs or change to or from many merchant account providers.  Our products can grow and change with our customer at little or no additional charge, and with minimal technology issues.


ExpertLink is Intellipay's proprietary connection protocol for high-volume Internet businesses requiring reliable, high velocity real-time transaction authorizations linked to their own secure web site and/or back office systems. ExpertLink is a standards-based secure communications method allowing web and application developers to build in ePayment processing and features like batch management commands, duplicate transaction detection and management, and more.  Our customers usually purchase ExpertLink or LinkSmart, and both come with Smart Terminal and the Secure Account Management System.


LinkSmart gives our online customers ePayment features with minimal technical installation required. With LinkSmart, our customer does not need to pay for installation and maintenance of expensive secure servers since LinkSmart serves the secure, customizable payment pages for them.  LinkSmart offloads many expensive mission-critical e-commerce tasks from the merchant.


Smart Terminal allows our customers to securely log into their Intellipay account from any Internet browser and authorize manual transactions and orders they have received through offline methods.  Smart Terminal supports industry-standard transactions including normal authorizations, authorization-only for delayed settlement, settlement for non-Intellipay authorized transactions, credits, partial credits and more. Most clients receive Smart Terminal along with LinkSmart or ExpertLink, but Smart Terminal can also be purchased as a stand-alone product.





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Secure Account Management System (“SAMS”) allows Intellipay customers to securely log into

Intellipay's Secure Account Management System from any web browser to configure and control various Intellipay components and behaviors. Customers can manage current day authorized transaction batches, control passwords, enforce transaction data components, control features such as our duplicate transaction detection and management system, control email transaction receipts, access Smart Terminal, control LinkSmart payment page contents, target returning live data streams, configure Visa-required invoice numbering, and more.  Customers can also view transaction histories for any day in the trailing 180 day period.


IntelliPay Desktop Terminal (“IDT”) brings all of the functionality of a Virtual Terminal application to your desktop while supporting hardware such as a card reader and receipt printer.  This allows merchants to receive a qualified discount rate on their transactions and reduce equipment and processing fee costs.  They can also take advantage of sharing printers on their network by allowing several terminals to print to the same receipt printer in order to reduce hardware requirements.


IntelliPay Wireless Terminal (“IWT”) submits wireless transactions with retail qualifications using Nextel data service.  This allows a merchant to accept either swiped or keyed transactions with a Nextel Cellular / Data phone using a card reader. The merchant has all of the benefits of retail rates with the added value of visual batch management and settlement process.  IntelliPay Wireless Terminal is an attractive solution for all mobile merchants that also use a cellular phone.


Other Services and Products


Technical Support is offered via online chat or e-mail from 8 a.m. to 5 p.m. (MST), or by phone from 8 a.m. to 5 p.m. (MST).


Our PCI compliant hosting infrastructure allows us to host our customers’ web sites, therefore eliminating the cost of hardware investment and maintenance for them.


Domain Names are offered to customers online at retail prices.  These include “.com,” “.org,” “.biz,” “.net,” “.us” and “.info.”


Additionally, we have several complimentary product offers including:

·

Amazing WebStores – allows users to set up a store to sell Amazon products directly from their web site.

·

“eSuccess2U.com” – our proprietary e-mail marketing system.


These products continue to receive enthusiastic reception amongst our customer base and are a positive component of our virtual product portfolio.


Sales and Marketing


Previously we had marketed and sold our products primarily through a variety of online marketing partners and programs.  Due to the inability to control the marketing message delivered through this manner of marketing we are seeking other methods of distribution for our products. This may limit the speed with which we are able to increase revenues moving forward, however, we believe it will result in a more satisfied customer who will remain with our service for a more extended period of time. We believe the ease and versatility of our products, which allows small businesses to participate in Internet commerce by creating and managing their own Internet web sites and storefronts at a reasonable cost, will continue to be a major selling point.


We do not believe that our competitors are effectively targeting our market niche: A totally Internet based, end-to-end business solution for small- and medium-sized businesses.  We believe that our products will allow businesses to generate leads, sell products, run sales promotions, capture demographic information about web site visitors, communicate with web site visitors, and obtain intelligent information about who is visiting their web sites and what they are doing while they are there.  Our products allow our customers to stay in complete control of their web sites and provide tools that can facilitate a successful Internet experience for them.   




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Competition


Our market is quickly evolving, is very competitive and subject to rapid technological change.  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 companies enter our markets.  Many companies are now providing Internet services to small businesses.  Our success in our target market will depend upon our ability to establish successful ongoing marketing programs, build name brand recognition and to provide quality, cost-effective products and services to our customers.  


In our estimation, few major competitors currently offer products comparable to the Visual WebTools product family.  We believe that our product provides a comparable service for a lower price than that provided by our competitors.  In addition, because we have focused our efforts on small businesses, including providing Internet tools which allow businesses to develop their own web sites, we believe that we are better able to address our customer’s web site development needs.


Our Intellipay payment system competes with AuthorizeNet products and certain VeriSign products, along with other companies that provide e-commerce solutions.  Our ability to successfully compete will depend upon a number of factors, including:


our ability to successfully maintain and sell existing products;

our ability to conceive, develop, improve, and market new products;

our ability to identify and take advantage of emerging technological trends within our target markets;

our ability to respond effectively to technological changes or new product announcements by competitors;

our ability to carve out “niche” markets in combination with our technologies;

our ability to recruit resellers who can market and sell our products and services in significant volumes to the market;

our ability to maintain satisfactory relationships with our online marketing partners; and

our ability to manage and maintain our merchant accounts.  


We believe that we will need to make significant expenditures for research and development and marketing in the future to compete effectively.


The rapidly increasing competitive landscape along with the difficulties we have incurred in affiliate marketing has played a significant role in our decision to expand our horizons to include other investment opportunities and to add other potential product offerings to our operations.


Major Customers


Our client base includes approximately 5,000 active customer accounts.  We rely on the efforts of our internal marketing staff and on third party resellers, including our wholly-owned reseller, TradeWorks Marketing, to add accounts to our customer base.  Prior to 2010 a significant portion of our customer accounts were provided by previous Pacific WebWorks and Intellipay resellers who no longer resell our products and services.  We are now primarily dependent upon our internal marketing staff and our online marketing partners for our product sales.


We also note that a significant portion of Intellipay sales are with Fundtech Corporation (formerly Bankserv) whom we view as a major customer.


Trademark, Licenses and Intellectual Property


We own trademarks for Visual WebTools (United States Patent and Trademark Office Serial No. 567,136) that we acquired and became responsible for upon our merger with Utah WebWorks.  In addition we have trademarks for Pacific WebWorks and ClipOn Commerce.  


On August 2, 2007 we received notice of acceptance and acknowledgment from the U.S. Department of


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Commerce Patent and Trademark Office validating our registration of a trademark for “Intellipay.”  The mark has been renewed for 10 years subject to constructive notice by July 24, 2013 of our claim to exclusive ownership.


On August 30, 2007 we received notice of acceptance and acknowledgment from the U.S. Department of Commerce Patent and Trademark Office validating our registration of a trademark for “Increase My Margin.”  The mark has been registered for 10 years subject to constructive notice of our claim to exclusive ownership by August 13, 2013.


Our success will depend, in part, on our ability to obtain and protect our trademark and trade secrets and operate without infringing upon the proprietary rights of others in the United States and other countries.  If we were to become involved in a dispute regarding our intellectual property, it may become necessary for us to participate in interference proceedings before the United States Patent and Trademark Office to determine whether we have a valid claim to the rights involved.  We could also be forced to seek a judicial determination concerning the rights in question.  These proceedings could be costly and time consuming, even if we were to eventually prevail.  Should we not prevail, we could be forced to pay significant damages, obtain a license to the technology in question, or stop marketing one or more of our products.  


The majority of our core technology was developed internally by either our engineers or by the engineers of Utah WebWorks and Intellipay.  Other than Internet connectivity and other information technology infrastructure, the performance of our products does not significantly rely on any third party technology, although we continue to support as many third party technologies as possible.


We also rely upon trade secrets, proprietary know-how, and confidentiality provisions in agreements with employees, consultants, and resellers to protect our intellectual property rights.  There are risks that these other parties may not comply with the terms of their agreements with us, and that we may not be able to adequately enforce our rights against these parties.  We have adopted a policy of requiring our employees and resellers to execute confidentiality agreements when they commence employment with us or resell our products.  These agreements generally provide that all confidential information developed or made known to the employees or resellers during the course of their relationship with us is to be kept confidential and not disclosed to third parties, except under certain specific circumstances.  In the case of employees, the agreements also provide that all inventions conceived by the employees in the course of their employment will be the Company’s exclusive property.


Research and Development


We continue to improve our existing products and release new related products.  During the year ended December 31, 2011, we recorded research and development expense of $235,348 and during the year ended December 31, 2010, we recorded research and development expense of $386,151 primarily related to the maintenance of our technologies and the development of our new offerings.  


Material Contracts


On September 21, 2009 we entered into an agreement with XO Communications to install new fiber optics and electronics into our principle offices.  This new connection will provide four times the bandwidth we had relied upon during 2009 and 2010.  Construction commenced in April 2010 and has been completed and we are now fully operational on the XO Communications line for our internet and telephone service.


Employees


As of the date of this filing, Pacific WebWorks has a total of seven full time employees and one part time employee. We have three employees in administration, two development engineers, one business manager, one customer service employee and one part time sales employee.  Our employees are not presently covered by any collective bargaining agreement.  We have not experienced any work stoppages and believe that our relations with

our employees are good.




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Investments and Business Consulting


Subsequent to the year ended December 31, 2010, the Company’s management decided to expand operations to include an investment and business consulting arm which will seek expansion opportunities into synergistic industries or businesses.  Pacific WebWorks is also actively seeking acquisition opportunities to expand our consolidated family of subsidiaries.  The following transactions occurred during 2011.  


On August 2, 2011, Pacific WebWorks acquired Thrifty Seeker, LLC, (“Thrifty Seeker”), a company that competes in the “daily deals” space on the Internet, for $18,000.  Thrifty Seeker partners with various suppliers to offer short term discounts to generate sales through the Thrifty Seeker web site.  Thrifty Seeker primarily targets female Internet shoppers, especially those seeking deals on home crafts type products.  Thrifty Seeker pays suppliers a percentage of sales generated by Thrifty Seeker and the suppliers manage order fulfillment.  The most significant competitors in this space are Groupon and Living Social; however, Thrifty Seeker competes directly with various smaller daily deal sites.  


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.  The funds are to be used by Middlebury Ventures II, LLC for the acquisition of Fisker Holdings, Inc. Series C-1 Shares pursuant to the Fisker Series C-1 transaction documents. Fisker Holdings, Inc. is an automotive company competing in the luxury hybrid-electric vehicle market.


Headlamp Ventures, LLC:  Pacific WebWorks formed Headlamp Ventures, LLC (“Headlamp Ventures”) in June 2011 to pursue investment opportunities.   Headlamp Ventures has invested funds in six business opportunities. (See Item 7, “Liquidity and Capital Resources” for more information.)


World Commerce Network, LLC:  Pacific WebWorks activated World Commerce Network, LLC (“World Commerce”) in July 2011 to pursue investment opportunities. On August 3, 2011, World Commerce issued a promissory note in the amount of $250,000 to Bryan Development, LLC, a Utah limited liability company, for use as working capital in its business investment activities.  


Our subsidiaries’ search for business opportunities to invest in and this search will not be limited to any particular geographical area or industry.  Our subsidiaries’ management has unrestricted discretion in seeking a business opportunity, subject to the availability of such opportunities, economic conditions and other factors.  Business opportunity participation is governed by the parent company management and board of directors.  In addition, the selection of a business opportunity in which to participate is complex and extremely risky and will be made by the subsidiary’s management in the exercise of its business judgment.  We cannot be assured that the subsidiaries will be able to identify only business opportunities which will ultimately prove to be beneficial to the Company and our stockholders.  


ITEM 1A.  RISK FACTORS


Factors Affecting Future Performance


We may pursue investments in, or acquisitions of, complementary service product lines, technologies or business opportunity through our subsidiaries which may interfere with our operations and negatively affect our financial position.


We intend to expand our services and product offerings and anticipate evaluating potential acquisitions of or investments in businesses, services, products, or technologies.  These investments or acquisitions may result in the incurrence of debt and contingent liabilities, goodwill impairment charges and amortization of expenses related to




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other intangible assets.  In addition, acquisitions and investments involve numerous risks, including difficulties in the assimilation of the operations, technologies, services, and products of 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 an acquired company.  As of the date of this filing, other than those items detailed herein, we have no present commitment or agreement with respect to any material acquisition of other businesses, services, products, or technologies.


We cannot be assured that the subsidiaries will be able to identify only business opportunities which will ultimately prove to be beneficial to the Company and our stockholders.  


Our subsidiaries’ search for business opportunities to invest in and this search will not be limited to any particular geographical area or industry.  Our subsidiaries’ management has unrestricted discretion in seeking a business opportunity, subject to the availability of such opportunities, economic conditions and other factors.  Business opportunity participation is governed by the parent company management and board of directors.  In addition, the selection of a business opportunity in which to participate is complex and extremely risky and will be made by the subsidiary’s management in the exercise of its business judgment.  We cannot be assured that the subsidiaries will be able to identify only business opportunities which will ultimately prove to be beneficial to the Company and our stockholders.  


We may experience difficulty maintaining sufficient credit card processing capabilities to keep up with our transaction volume.


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.  In the past, these merchant account limitations have forced management to restrict our business growth and this restriction of growth continues to impact our earnings in a negative manner.   


We may need additional external capital and may be unable to raise it.


Our success will depend upon our ability to generate future cash flows and, if needed in the future, the ability to access equity capital markets and borrow on terms that are financially advantageous to us.  Also, we may not be able to obtain additional funds on acceptable terms.  If we are unable to obtain additional capital, then we may not have sufficient working capital to develop products, finance acquisitions, or pursue business opportunities.  If we borrow funds, then we could be forced to use a large portion of our cash reserves to repay principal and interest on those funds.  If we issue our securities for capital, then the interests of investors and shareholders could be diluted.


We are subject to intense competition from large and small companies that limits our ability to obtain market share and may force our prices down.


We face competition in the overall Internet software market, as well as in the business opportunity 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.





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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 and it would be impossible to predict whether litigation might be successful.


We rely in part on third party technology licenses which we cannot guarantee will be available to us in the future.


We rely on certain technology which we license from third parties, including software which is integrated with internally developed software and used in our software to perform key functions.  Our inability to maintain any of these technology licenses could result in delays in distribution of our services or increased costs of our products and services.  We cannot be assured 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




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reputation of our service or software, as well as damage our customer relations. We have detected errors, defects, and bugs in the past and have corrected them as quickly as possible.  Correcting any defects or bugs we may discover in the future may require us to make significant expenditures of capital and other resources.  We believe that we follow industry-standard practices relating to the identification and resolution of errors, defects, or bugs encountered in the development of new software and in the enhancement of existing features in our products.  As of the date of this filing we have not experienced any material adverse effect by reason of an error, defect, or bug.


We may experience breakdowns in our hosting services, infrastructure or payment processing systems, which may expose us to liabilities and cause customers to abandon our products and services.


We would be unable to deliver our payment processing services or hosting services if our system infrastructures break down or are otherwise interrupted.  Events that could cause system interruptions are:

*

fire,

*

earthquake,

*

power loss,

*

terrorist attacks,

*

harmful software programs,

*

telecommunications failure, and

*

unauthorized entry or other events.



Although we regularly back up data from operations, and take other measures to protect against loss of data, there is still some risk of such losses.  Despite the security measures we maintain, our infrastructure may be vulnerable to computer viruses, hackers, rouge employees or similar sources of disruption.  Any problem of this nature could result in significant liability to customers or financial institutions and also may deter potential customers from using our services.  We attempt to limit this sort of liability through back-up systems, contractual provisions, insurance and other security measures.  However, we cannot be assured 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 not be able to adapt as the Internet market changes, including changing marketing strategies and the associated risks.


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




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*

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;

*

respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis; and

*

continue to find acceptable means through which to market our products.



Our industry is experiencing increased legal actions related to Internet marketing strategies and our financial condition may be at risk due to such legal actions.


We experienced increased legal actions during 2009 and 2010 related to our marketing strategies and these legal actions required our cash flows to be directed to our legal defense.  Our marketing strategies had relied upon resellers and affiliate marketers and these third parties may lack sufficient knowledge regarding proper marketing activities.  As a result, we have been included in litigation alleging violations of consumer protection and federal RICO laws, fraud and use of deceptive trade practices.  These contingent liabilities may increase our cost of doing business.  


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 and increase our cost of doing business. The laws governing the Internet remain largely unsettled, even in areas where legislation has been enacted.  It may take years to determine whether and how existing laws, such as those governing intellectual property, privacy, libel, and taxation, apply to the Internet.  In addition, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business via the Internet.



ITEM 2.  PROPERTIES


Our principal offices, including our main office and data center, are located in Salt Lake City, Utah.  We own two commercial buildings on approximately 0.82 acres of land located in the “central business district” of Salt Lake City, Utah.  We currently occupy and lease to tenants one-half of the available 16,000 square feet of our office building located at 230 West 400 South.  The second commercial building adjoins the first on property located at 244 West 400 South. This 3,000 square foot retail commercial building, which is currently unoccupied, may provide additional space for our future growth.



ITEM 3.  LEGAL PROCEEDINGS


Google Litigation


On December 7, 2009, Google, Inc. filed a legal action against Pacific WebWorks in the United States District Court of Utah, Central Division.  Google alleged trademark infringement and unfair competition under state and federal law.  On December16, 2009, Google and Pacific WebWorks executed a Memorandum of Understanding




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under the terms of which  Pacific WebWorks agreed to fully cooperate with Google’s discovery and investigation and cease marketing any products using or violating Google’s trademark.  On May 28, 2010, Google, Inc. and Pacific WebWorks, Inc. agreed to the entry of a Stipulated Final Judgment and Order for Permanent Injunction by the Court to resolve all matters in dispute.


Class Action Lawsuits


During November 2009 three lawsuits were filed against Pacific WebWorks in various jurisdictions.  The legal actions allege similar claims related to procedures we use to sell our products in our ordinary course of business. 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.  


In January 2010 another class action lawsuit was filed in the United States District Court for the District of Utah. On February 8, 2010, our legal counsel filed a motion to strike the class allegations and a motion to dismiss the claims asserted in the complaint.  On September 10, 2010, the court granted the motion to dismiss, but gave the plaintiff leave to refile the case in the state court on the basis that no federal jurisdiction existed as alleged by the plaintiff.  The plaintiff has not refilled any claim in state court.


On July 9, 2010 suit was brought in Florida by the same law firm as the above three November 2009 cases.  On July 9, 2010, Randy Guffey filed an action in the Circuit Court for the Twentieth Judicial Circuit, Collier County, Florida, which action was removed to the United States District Court for the Middle District of Florida, Ft. Myers Division.


On January 21, 2010 the State of Florida served the Pacific WebWorks with a subpoena seeking production of documents related to an alleged violation of consumer protection laws in Florida.  We denied any violation of Florida consumer protection laws and responded to the subpoena.  The State of Florida and Pacific WebWorks have come to a resolution as to the settlement of this dispute with a Settlement Agreement being fully executed on July 11, 2011 which required the Company to pay $19,000 for costs, attorneys’ fees and future monitoring by the State of Florida Department of Legal Affairs Revolving Trust Fund.


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 has answered the complaint and denied liability and intends to defend against all such claims.


All plaintiffs in these cases are being represented by the same legal firm and each complaint seeks class action certification.  The complaints allege 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 seeks compensatory and punitive damages, plus reasonable costs and attorney fees.  In response to these actions, Pacific WebWorks retained the law firm of Snell & Wilmer as 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 intends to oppose class certification and filed motions to




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dismiss all claims in the Illinois and Washington actions, which motions were granted in part and denied in part. Pacific WebWorks has renewed its motion to dismiss in the Illinois action, which motion has not yet been ruled upon.  In addition, Pacific Webworks has brought motions to dismiss the Pelletier, Guffey and Aikens actions, which motions have not yet been ruled upon.  


As a result of the above class actions suits, Blooksy Interactive, LLC has threatened claims of indemnification against Pacific WebWorks.   We have denied that we have any duty to defend or indemnify Blooksy Interactive, LLC.  


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. 

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 4.  MINE SAFETY DISCLOSURES


Not applicable to our operations.



PART II



ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


Market Information


Our common stock is listed to trade on the OTC Pink tier of the OTC Markets under the symbol “PWEB.PK.” Prior to May 2011, our common stock traded on the OTC Bulletin Board.  Our goal is to return our listing to the OTC Bulletin Board in the near future.  The following table presents the range of the high and low trading prices of our common stock for each quarter of the year ended December 31, 2011 as reported by the OTC Markets.   The information for the year ended December 31, 2010 presents the range of the high and low bid prices of our common stock for each quarter as reported by the OTC Bulletin Board.  These quotations represent prices between dealers and may not include retail markups, markdowns, or commissions and may not necessarily represent actual transactions.

 

 

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2011

 

2010

Fiscal Quarter Ended

 

High

Low

 

High

Low

March 31

June 30

September 30

December 31

 

$  0.09

0.07

0.05

0.07

$  0.06

0.03

0.02

0.01

 

$0.125

0.19

0.151

0.161

$ 0.051

0.03

0.05

0.00


Our shares are subject to Section 15(g) and Rule 15g-9 of the Securities and Exchange Act, commonly referred to as the “penny stock” rule.  The rule defines penny stock to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions.  These rules may restrict the ability of broker-dealers to trade or maintain a market in our common stock and may affect the ability of shareholders to sell their shares.  Broker-dealers who sell penny stocks to persons other than established customers and accredited investors must make a special suitability determination for the purchase of the security.  Accredited investors, in general, include individuals with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse, and certain institutional investors.  The rules require the broker-dealer to receive the purchaser’s written consent to the transaction prior to the purchase and require the broker-dealer to deliver a risk disclosure document relating to the penny stock prior to the first transaction.  A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the security.  Finally, monthly statements must be sent to customers disclosing recent price information for the penny stocks.


Holders   


As of April 30, 2012 we had 411 stockholders of record of our common stock, which does not include shareholders who hold shares in “street accounts” of securities brokers.


Dividends   


We have not paid cash or stock dividends and have no present plan to pay any dividends.  Instead, we intend to retain any earnings to finance the operation and expansion of our business.  We are not presently subject to any restriction on our present or future ability to pay any dividends, but the payment of any cash dividends on our common stock is unlikely.


Recent Sales of Unregistered Securities


None.


Issuer Purchase of Securities


None.



ITEM 6.  SELECTED FINANCIAL DATA


Not applicable to smaller reporting companies.



ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Executive Overview


Pacific WebWorks enjoyed dramatic growth during 2009 and this growth was related largely to the upgrading of our marketing channels and the migration of our marketing towards a greater emphasis on the viability of our software products as a revenue generating tool, including the ability to use our tools in connection with the major retail sites. However, this growth led to some abuses in our affiliate marketing system and management took actions to curtail these abuses in early 2010.  In November 2010 management announced that we would no longer expose the Company to the risks associated with using the affiliate system to market our products. This has, and will continue to result in a significant decline in our revenues.  Consistent with this reduction in revenues, management has taken steps to reduce our overhead expense.  




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The year ended December 31, 2011 was primarily devoted to addressing items related to our ongoing legal and reporting issues as well as initiating discussions with a number of parties concerning merger, acquisition, joint venture or partnerships to pursue a wide variety of options for the future. As announced in 2010 the Company is currently seeking alternative means to market our Visual WebTools product while at the same time examining other avenues through which the Company might profitably employ our existing resources.


Starting in December 2010 through October 2011 we trimmed our staffing significantly and identified and hired the personnel necessary to implement our new business model.  Our goal is to find synergistic opportunities, but we will not limit ourselves if other areas of interest develop.  We formed Headlamp Ventures, LLC and activated World Commerce Network LLC and funded these subsidiaries for the purpose of seeking out investment opportunities in other businesses.  As of August 2011 the Company has invested an aggregate of $1,400,000 in other businesses directly or through our subsidiaries (See “Liquidity and Capital Resources,” below).


The Company continues to expend time and money to defend itself in the legal actions brought against the Company during the past two years.  We anticipate that the legal actions could continue through 2012 and possibly beyond.  In an effort to end the litigation, motions to dismiss the legal actions in the various jurisdictions have been filed (See Part I, Item 3, above).  


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 appetites for technology products.  These challenges could pose a threat to our success.  


Liquidity and Capital Resources


We have relied primarily on revenues and loans to fund operations for the past two years.  We expect to continue to generate positive cash flows through further development of our business and distribution channels and investments in other businesses.  We plan to address only the liabilities of our operating subsidiaries with our current cash balances and cash inflows.  Of course cash outflows can exceed monthly cash inflows based on timing differences between marketing campaigns and sales and returns on investment.


Our net revenues and cash and cash equivalents for 2011 decreased significantly as compared to 2010 due to the change in our marketing strategy.  In January 2010 we obtained a loan of $1,000,000 to supplement our cash resources and during 2011 we assumed a $30,000 promissory note as part of the Asher, LLC acquisition.   The promissory notes are discussed in more detail below (See “Commitments and Contingent Liabilities”).  To conserve our cash, in August 2010 we issued an aggregate of 3,440,000 shares of common stock to pay for services valued at $415,000.  We intend to use our cash for operating capital and we believe that we will be able to fund our operations with our revenues and available cash and assets for the next twelve months.


Maintaining sufficient merchant account processing capabilities will continue to be a factor in our overall performance as an Internet application service provider.  We work diligently with our existing merchant account providers and continually search for new merchant account providers in order to manage this risk.


In 2010 we relied on equity offerings to pay for additional services and funding and we anticipate that we will likely use private placements of our common stock in the future.  However, we currently have only 286,105 authorized common shares remaining and we will need to increase our authorized common stock to conduct any future offerings.   Accordingly, management anticipates that the Company will conduct a stockholder’s meeting




18




within the next twelve months to amend the Company’s articles of incorporation to increase the authorized common stock.   In any future offering, the purchasers and manner of issuance will be determined according to our financial needs and the available exemptions.  We likely will rely on exemptions from the registration requirements provided by federal and state securities laws.  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.  


We believe that we will be able to sustain our operations with existing cash and assets and future cash flows during the next twelve to twenty-four months and possibly beyond.  Should we need to raise money in the future we believe funding may be obtained through additional debt arrangements in addition to our 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.  


2011 Investments  


During the year ended December 31, 2011, in addition to our web site business the Company has invested in other businesses directly or through our subsidiaries.  The Company expects to see returns on these investments within the next six to twelve months.  


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.  The funds are to be used by Middlebury Ventures II, LLC for the acquisition of Fisker Holdings, Inc. Series C-1 Shares pursuant to the Fisker Series C-1 transaction documents. Fisker Holdings, Inc. is an automotive company competing in the luxury hybrid-electric vehicle market.


On August 2, 2011, the Company acquired Thrifty Seeker, LLC, a Utah limited liability company, for $18,000. Thrifty Seeker, LLC competes in the daily deals space.  We foresee opportunity in the daily deals space and believe that Thrifty Seeker can be grown into a strong competitor by leveraging our connections and experience in Internet marketing, without incurring the risks previously experienced in Internet marketing.


On July 28, 2011, Headlamp Ventures established a revolving line of credit facility and issued an initial $400,000 promissory note to Bsquare Red, LLC to be used as working capital in its internet marketing business.  The note carries a 15% effective annual rate of interest.  On October 3, 2011, the revolving line of credit and promissory note was amended to increase the amount to $500,000.  (See Item 13, below.)  We are pleased with the rate of return on this financial instrument and have also ensured that there are satisfactory provisions securing the note.


On August 15, 2011, Headlamp Ventures established a revolving line of credit facility and issued an initial $400,000 promissory note to Grupo Zapata Arce, a division of Metales y Minerales S.A. De C.V., a corporation organized under the laws of Mexico, for use in its iron ore exporting business.  Interest shall be charged on amounts outstanding in the form of a fee of $3.00 per metric ton of iron ore purchased with proceeds of the note.  On September 20, 2011, Grupo Zapata Arce Division Metales y Minerals S.A. de C.V., LLC was added as a party to the revolving line of credit and promissory note originally established on August 15, 2011 for Grupo Zapata Arce. Grupo Zapata Arce is positioned in an industry experiencing consistently strong demand that is especially driven by emerging markets around the world.  We believe that as the company continues to establish its operations it will produce strong revenue growth and income.


On August 3, 2011, World Commerce Network issued a promissory note in the amount of $250,000 to Bryan Development, LLC for use as working capital in its business investment activities.  The note carries a 5% annual interest rate and can be converted, in whole or in part at the election of the Company, into common stock shares owned or held by Bryan Development, LLC.  We are optimistic about the conversion possibilities associated with this note and continue to work with the borrower to identify promising investment opportunities.





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On October 19, 2011, the Company’s Board of Directors resolved to authorize the investment of up to $1,200,000 in Rsignia, Inc.  Rsignia, Inc. is a leading provider of cyber security solutions and services including detection, mitigation, countermeasures and forensics.  The Company, through its Headlamp Ventures, LLC subsidiary, subsequently issued a promissory note in the amount of $1,200,000 to Rsignia, Inc. for use as working capital.  The note carries a 2% annual interest rate and can be converted, in whole or in part at the election of the Company, into common stock shares in an amount equal to 10% of the total outstanding shares at the time of conversion.  The note’s original maturity date of December 31, 2011 was amended to April 15, 2012.  On April 16, 2012, the note 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.  The Company is currently working with Rsignia, Inc. to collect payment in full.


On November 11, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, invested $100,000 in Payroll Innovations, LLC, a payroll debit card provider servicing small to mid-sized employers.  For value received, the Company holds a 25% ownership position in Payroll Innovations, LLC.


On November 11, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, invested $150,000 in PickYourPayday.com, LLC, an online payroll advance business servicing small to mid-sized employers.  For value received, the Company holds a 25% ownership position in PickYourPayday.com, 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, Headlamp Ventures holds a 51% ownership position in Asher, LLC.


On January 18, 2012, the Company, through its World Commerce Network, LLC subsidiary, issued a short term $300,000 promissory note to Bsquare Red, LLC, a Utah limited liability company and related party, to be used as working capital in their Internet marketing business.  The note has a maturity date of February, 15, 2012, carries a 15% effective annual rate of interest and a one-time fee equal to one percent of the total loan amount.  The note, along with all accrued interest and fees, was paid in full at maturity.  


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 to be used as working capital in their Internet marketing business.  The note carries an 18% effective annual rate of interest.  


Commitments and Contingencies


Current Liabilities: Our total current liabilities at December 31, 2011 included accounts payable and accrued liabilities.  Accounts payable of $151,135 was related to operating costs such as marketing and advertising expenses and professional fees.  Our accrued liabilities of $655,191 were primarily the result of payroll related liabilities, income tax payable and legal liabilities, offset by estimated refunds and receivables.   


The Company is involved in several legal actions and as of December 31, 2011 management has recorded a contingent liability of $400,000 in contemplation of the settlement of a number of litigation matters.  The Company was also required to pay $19,000 for costs, attorneys’ fees and future monitoring by the State of Florida Department of Legal Affairs Revolving Trust Fund in the State of Florida Settlement Agreement executed on July 11, 2011, and $15,000 into the client trust account of Henninger Garrison Davis, LLC as part of the Settlement Agreement in the matter of Tompkins et al. v. Pacific WebWorks, Inc. et al. entered into on March 29, 2012.


Also included in current liabilities at December 31, 2011 is $31,304 in deferred revenue primarily related to hosting services and $134,822 in accrued interest payable related to the Company’s $1,000,000 promissory note.


Promissory Notes:  Our long term liabilities include a promissory note in the amount of $1,000,000.  On January 27, 2010, Pacific WebWorks, executed a Promissory Note Secured by a Deed of Trust with Assignment of Rents in the principal amount of $1,000,000 (the “Note”).  The holder of the Note, Principal Development, LLC, a Nevada




20




limited liability company (the “Holder”), 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 27, 2012, the maturity date on the Note was amended to January 27, 2015.


The Note is secured by a deed of trust with assignment of rents on our principal office building and a second commercial building we own in Salt Lake City, Utah.  Also, the 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 Note also provides that we may make payments prior to the due date and that any payment will be applied first to the reduction of interest and the remaining balance to the outstanding principal.  In the event we fail 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.


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, Scott Johansen, is entitled to receive the entire principal amount with all accrued interest, at 5% interest per annum, on or before January 1, 2014.


Results of Operations


The following discussions are based on the consolidated financial statements of Pacific WebWorks and its subsidiaries.

 

On September 12, 2011 the Chief Financial Officer of Pacific WebWorks, Inc. concluded that the previously issued consolidated financial statements for the fiscal years ended December 31, 2009 and the interim periods for 2010 should no longer be relied upon because the consolidated financial statements for the year ended December 31, 2009 required a series of material adjustments.   In the course of the audit of our consolidated financial statements by our new independent registered public accounting firm, a series of adjustments were identified for the year ended December 31, 2009.   Accordingly, these adjustments resulted in material changes to our consolidated financial statements for that year and the subsequent interim periods related primarily to the misstatement of accounts receivable and payable, prepaid expenses, deferred revenue and related revenue, expenses and the erroneous recognition of impairment in 2009.  


The following chart is a summary of our financial statements for the years ended December 31, 2011 and 2010 and should be read in conjunction with the financial statements, and notes thereto, included with this report at Part II, Item 8, below.


 

 

Year ended December 31,

SUMMARY OF BALANCE SHEET

 

2010

 

2011

Cash and cash equivalents

 

$  3,449,560

 

$  1,283,569

Total current assets

 

4,880,114

 

3,742,830

Total assets

 

11,320,152

 

10,694,935

Total current liabilities

 

627,500

 

972,452

Total liabilities

 

1,627,500

 

2,002,452

Accumulated deficit

 

(8,426,777)

 

(9,426,946)

Total stockholders’ equity

 

$  9,692,652

 

$  8,692,483





21




Total assets decreased at December 31, 2011 as compared to December 31, 2010 primarily as a result of a decrease in cash and cash equivalents and decreases in receivables related to the Visual WebTools business.


At December 31, 2011 total current liabilities increased compared to 2010 primarily as a result of increased accrued liabilities related to the accrual of legal liabilities and accrued interest.  Long-term liabilities increased due to the Asher, LLC promissory note assumed in 2011.  Our accumulated deficit increased at December 31, 2011 as a result of posting a net loss for the year.


 

 

Year ended December 31,

SUMMARY OF OPERATING RESULTS

 

2010

 

2011

 

 

 

 

 

Revenues, net

 

$   8,568,635

 

$      1,701,657

Cost of sales

 

352,508

 

170,567

Gross profit

 

8,216,127

 

1,531,090

Total operating expenses

 

7,711,522

 

3,217,794

Income (loss) from continuing operations

 

504,605

 

(1,686,704)

Total other income (expense)

 

(49,418)

 

(5,365)

Income tax expense (benefit)

 

408,376

 

(691,900)

Net income (loss)

 

$        46,811

 

$   (1,000,169)

Basic net income (loss) per share from continuing operations

 

$           0.00

 

$          (0.02)


We recognize revenue from hosting, gateway, and maintenance fees, software, access and licensing fees, the sale of merchant accounts, custom website design work and product sales.  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 when earned.


Our net revenues decreased significantly for 2011 compared to 2010 resulting from a lack of low risk marketing avenues and customer attrition.  Management anticipated that revenues would continue to decline as we employed lower risk methods for marketing our products and worked toward returns on the Company’s acquisitions and investments.  


Cost of sales includes costs related to fulfillment, customer service, certain royalties and commissions, amortization of purchased customer portfolios, service personnel, telecommunications and data center costs.  Cost of sales was 10.02% of net revenues for 2011 as compared to 4.11% of net revenues for 2010.  Cost of sales as a percentage of sales was higher in the 2011 periods due to a decline in sales against certain fixed costs.  Management anticipates that cost of sales will remain higher as a percentage of sales in the short term due to fixed costs as new revenue streams are developed.


Total operating expenses decreased for 2011 compared to 2010 primarily due to decreases in selling expenses and reduction of staff.  Selling expenses include advertising expense, commissions and personnel expenses for sales and marketing.




22





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 for 2011 compared to 2010 due to staff reduction and lowered bad debt costs, merchant fees and other overhead-related costs.


Other income of $39,000 recorded in 2011 was primarily related to rent income.  Interest expense of $70,182 was recognized in 2011 related to notes payable, and interest income of $47,003 was recognized in 2011 related to notes receivable and bank account interest.


As a result of the above changes in our operations, we recorded net income for 2010, but recorded a net loss for 2011.


Off-balance Sheet Arrangements


We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.


Critical Accounting Policies


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 trade receivables and collections, 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.


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. 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.


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.


Goodwill - Goodwill related to Intellipay is assessed annually for impairment by comparing the fair value 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,




23




the fair value of Intellipay is less than book value, then an impairment loss is recognized equal to the excess of book value to estimated fair value. The impairment test for 2010 and 2011 also resulted in an estimated fair value in excess of the book value of goodwill and no impairment was required.


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.  


Contingent liabilities - Material estimates for contingent liabilities include approximately $400,000 for our operating companies related to the outcome of certain litigation matters.  From a liquidity standpoint, any settlement or judgment received by the Company from pending or threatened litigation may have a direct effect on our cash balances at December 31, 2011.  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.  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 FASB ASC 480-10, 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 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).


Fair Value Measurements - We adopted ASC Topic 820 (originally issued as SFAS 157, “Fair Value Measurements”) as of January 1, 2008 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.


Fair Value of Other Financial Instruments - The carrying amounts of our accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their immediate or short-term maturities.  The aggregate carrying amount of the notes payable approximates fair value as the individual notes bear interest at market interest rates and there hasn’t been a significant change in our operations and risk profile.







24




ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





PACIFIC WEBWORKS, INC.


CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2011 and 2010



INDEX


Report of Independent Registered Public Accounting Firm

26


Consolidated Balance Sheets

27


Consolidated Statements of Operations

28


Consolidated Statements of Stockholders’ Equity

29


Consolidated Statements of Cash Flows

30


Notes to the Consolidated Financial Statements

31




25





 

 

 




Report of Independent Registered Public Accounting Firm



To the Board of Directors

Pacific WebWorks, Inc.

Salt Lake City, Utah


We have audited the accompanying consolidated balance sheets of Pacific WebWorks, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pacific WebWorks, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.



/s/HJ & Associates, LLC


HJ & Associates, LLC
Salt Lake City, Utah
May 8, 2012




















26





Pacific WebWorks, Inc.

CONSOLIDATED BALANCE SHEETS

 

 

 

 

December 31,

 

December 31,

 

 

2010

 

2011

 

 

 

 

 

ASSETS

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

$

  3,449,560

$

1,283,569

 

Receivables

 

 

 

 

 

    Trade, less allowance for doubtful receivables

     of $0 in 2010 and $0 in 2011

 

      918,936

 

89,971

 

Prepaid expenses and other current assets

 

500,318

 

6,142

 

Inventory

 

     11,300

 

398,620

 

Notes receivable

 

-

 

1,950,000

 

Interest receivable

 

-

 

14,528

 

 

Total current assets

 

 4,880,114

 

  3,742,830

PROPERTY AND EQUIPMENT, NET

 

  1,851,296

 

  1,815,486

 

Restricted cash

 

  575,989

 

  359,872

 

Available-for-sale securities

 

  750,000

 

593,280

 

Investments

 

-

 

228,814

 

Goodwill

 

1,946,253

 

1,946,253

 

Deferred Tax Asset

 

    1,316,500

 

   2,008,400

 

 

 

 

   

 

   

 

 

Total Assets

$

  11,320,152

$

10,694,935

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable

$

        142,359

$

     151,135

 

Accrued liabilities

 

          317,769

 

    655,191

 

Accrued interest payable

 

64,822

 

134,822

 

Deferred revenue

 

102,550

 

31,304

 

 

Total current liabilities

 

        627,500

 

     972,452

LONG-TERM LIABILITIES

 

 

 

 

 

Notes payable

 

        1,000,000

 

   1,030,000

 

 

Total long term liabilities

 

        1,000,000

 

   1,030,000

 

 

Total liabilities

 

        1,627,500

 

   2,002,452

STOCKHOLDERS' EQUITY

 

 

 

 

 

Common stock - par value $0.001; authorized 50,000,000; issued and  

 

 

 

 

 

     outstanding 49,713,895 and  49,713,895 shares, respectively

 

          49,714

 

           49,714

 

Additional paid-in capital

 

   18,069,715

 

     18,069,715

 

Accumulated deficit

 

    (8,426,777)

 

     (9,426,946)

 

 

Total stockholders' equity

 

     9,692,652

 

     8,692,483

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

$

   11,320,152

$

  10,694,935

 

 

 

 

 

 

 



The accompanying notes are an integral part of these consolidated financial statements.




27







Pacific WebWorks, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

Year ended December 31,

 

 

2010

 

2011

 

 

 

 

 

Revenues

 

 

 

 

 

Hosting, gateway and maintenance fees

$

8,568,635

$

1,701,657

Cost of sales

 

352,508

 

170,567

 

Gross profit

 

8,216,127

 

1,531,090

 

 

 

 

 

Selling expenses

 

942,226

 

13,936

Research and development

 

386,151

 

235,348

General and administrative

 

6,345,511

 

2,930,450

Depreciation and amortization

 

37,634

 

38,060

 

Total operating expenses

 

7,711,522

 

3,217,794

 

Income (loss) from operations

 

504,605

 

(1,686,704)

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Interest income (expense), net

 

(64,822)

 

(23,179)

 

Gain (loss) on equity investment

 

-

 

(21,186)

 

Other income (expense), net

 

15,404

 

39,000

 

 

 

 

 

 

 

Total other Income (expense)

 

(49,418)

 

(5,365)

 

 

 

 

 

 

 

Income (loss) before income taxes

 

455,187

 

(1,692,069)

Income tax provision/(benefit)

 

395,000

 

(691,900)

Income tax expense

 

13,376

 

-

 

 

Net income (loss)

$

46,811

$

(1,000,169)

 

 

 

 

 

 

EARNINGS PER SHARE

 

 

 

 

 

Basic

$

          0.00

$

           (0.02)

 

Diluted

$

           0.00

$

           (0.02)

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

46,819,046

 

49,713,895

 

Fully Diluted

 

46,819,046

 

49,713,895


The accompanying notes are an integral part of these consolidated financial statements.





28





Pacific WebWorks, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the period January 1, 2010 through December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

Paid-in

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 Shares

 

 Amount

 

 

 

Capital

 

Deficit

 

Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2010

 

 

 

 

45,123,895

$

   45,124

 

 

$

 17,475,801

$

    (8,473,588)

$

      9,047,337

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

Issuance of common for exercised options

 

 

 

 

    1,150,000

 

       1,150

 

 

 

          44,850

 

                     -

 

           46,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock for consulting services

 

 

 

 

    3,440,000

 

       3,440

 

 

 

        411,560

 

                     -

 

         415,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of prior year stock options

 

 

 

 

                  -

 

               -

 

 

 

        137,504

 

                     -

 

         137,504

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the year ended December 31, 2010

 

 

 

 

                  -

 

               -

 

 

 

                   -

 

           46,811

 

           46,811

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2010

 

 

 

 

49,713,895

 

49,714

 

 

 

    18,069,715

 

    (8,426,777)

 

      9,692,652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year ended December 31, 2011

 

 

 

 

                   -

 

               -

 

 

 

                  -

 

   (1,000,169)

 

    (1,000,169)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          

 

 

 

 

 

Balances at December 31, 2011

 

 

 

 

49,713,895

$

  49,714

 

 

$

18,069,715

$

   (9,426,946)

$

     8,692,483

 

 



The accompanying notes are an integral part of these consolidated financial statements.





29





Pacific WebWorks, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Year ended December 31,

 

 

2010

 

2011

 

 

 

 

 

Cash Flows From Operating Activities

 

 

 

 

 

Net earnings (loss)

$

     46,811

$

      (1,000,169)

 

Adjustments to reconcile net earnings (loss) to net

    cash used in operating activities

 

 

 

 

 

 

Depreciation and amortization

 

        38,698

 

         38,060

 

 

Stock issued for services

 

       415,000

 

        -

 

 

Valuation of stock options

 

137,504

 

-

 

Changes in assets and liabilities

 

 

 

 

 

 

Deferred tax asset

 

       395,000

 

     (691,900)

 

 

Receivables

 

   (465,871)

 

      828,965

 

 

Restricted cash

 

        1,292,948

 

       216,117

 

 

Inventory

 

-

 

(387,320)

 

 

Interest receivable

 

-

 

(14,528)

 

 

Prepaid expenses and other assets

 

     746,372

 

     494,176

 

 

Accounts payable and accrued liabilities

 

       (349,338)

 

  416,198

 

 

Deferred revenue

 

       (594,333)

 

           (71,246)

 

 

 

 

 

 

 

 

 

   Net cash provided (used) by operating activities

 

1,662,791

 

(171,647)

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

Purchase of property and equipment

 

-

 

(2,250)

 

Purchase of investments

 

-

 

(228,814)

 

Cash paid for notes receivable

 

-

 

(1,950,000)

 

Proceeds from sale of available-for-sale securities

 

-

 

750,000

 

Purchase of available-for-sale securities

 

       (750,000)

 

(593,280)

 

   Net cash (used) by  investing activities

 

       (750,000)

 

(2,024,344)

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

Proceeds on issuance of stock from exercise of options

 

46,600

 

-

 

Proceeds from notes payable

 

        1,000,000

 

       30,000

 

 

 

 

 

 

 

   Net cash provided by financing activities

 

            1,046,000

 

         30,000

 

 

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

       1,958,791

 

     (2,165,991)

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

         1,490,769

 

     3,449,560

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

$

     3,449,560

$

    1,283,569

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for interest

$

                -

$

              -

 

Cash paid for income taxes

$

           -

$

           -



The accompanying notes are an integral part of these consolidated financial statements.




30




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010


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 Pacific WebWorks International, LTD, a United Kingdom limited company which is currently non-operating. 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, 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 $3,382,023 and $507,335 as of December 31, 2010 and 2011, 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 Company’s merchant banks in connection with the Company’s acceptance of credit card payments for its services.

 

Goodwill

The Company adopted FASB ASC 350-10 (prior authoritative literature SFAS No. 142, Goodwill and Other Intangible Assets) 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 amount. Events or




31




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010


NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION – CONTINUED


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 Company’s 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 2010 and 2011 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, 2010 and 2011.  


Fair Value Measurements

We adopted ASC Topic 820 (originally issued as SFAS 157, “Fair Value Measurements”) as of January 1, 2008 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.





32




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010


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, 2011:


 

 

 

 

Total

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

 

Significant Other Observable Inputs

(Level 2)

 

Significant Unobservable Inputs

(Level 3)

Assets

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 $

593,280 

 

 $

250,000 

 

343,280 

Total assets measured at fair value

$

593,280 

$

$

250,000 

$

343,280 

 

 

 

 

 

 

 

 

 

 

 

The table below presents our assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at December 31, 2011.  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, 2010

$

$

Total gains or losses (realized and unrealized)

 

 

 

 

   Included in net loss

 

 

 

Valuation adjustment

 

Purchases, issuances, and settlements, net

343,280 

 

343,280 

Transfers to Level 3

 

 

Balance at December 31, 2011

$

343,280 

$

343,280 

 

 

 

 

 

 

Fair Value of Financial Instruments

The fair value of the Company’s 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.





33




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010


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 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 collectiblitly by management quarterly and uncollectible accounts receivable are written off.  The Company had bad debt expense of $179,561 and $150,000 for the years ended December 31, 2010 and 2011, 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, 2010 and 2011 were $386,151 and $235,348, 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 $794,158 in 2011, 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, 2010 and 2011.





34




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010


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 $11,300 and $398,620 at December 31, 2010 and 2011, 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 (prior authoritative literature SFAS  No. 128, "Earnings per Share") common stock options have a dilutive effect when the average market price of the common stock during the period exceeds the exercise price of the options.  The average market price of the Company's common stock during the years ended December 31, 2010 and 2011 was $0.00 and $(0.02), respectively.  Potentially issuable common shares totaling 0 and 0 related to options were included in the calculation of diluted earnings per share for the periods ended December 31, 2010 and 2011, respectively.



Statement of Income Summary Information:

Year ended

December 31,

2010

 

2011

 

 

 

 

 

Numerator:

Net income

$          46,811

 

$   (1,000,169)

 

 

 

 

 

Denominator:

Weighted-average common shares outstanding

 

 

 

 

   Basic

46,819,046

 

49,713,895

 

   Diluted

46,819,046

 

49,713,895

EARNINGS PER SHARE:

 

 

 

 

Basic

 

 

 

 

   Net income (loss) per share

$              0.00

 

$           (0.02)

 

Diluted

 

 

 

 

   Net income (loss) per share

$              0.00

 

$           (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 11, below, there are no other events that would have a material impact on the financial statements.





35




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010


NOTE 2 – PROPERTY AND EQUIPMENT


Property and equipment includes the following:

December 31,

Estimated useful

life (years)

 

2010

 

2011

 

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

8,429

 

10,679

Lesser of Lease or Useful  Life

Total

1,920,607

 

1,922,857

 

Less Accumulated Depreciation

(69,311)

 

(107,371)

 

 

$ 1,851,296

 

$ 1,815,486

 


Depreciation and amortization expense for the years ended December 31, 2010 and 2011 was $37,634 and $38,060, respectively.


NOTE 3 – ACCRUED AND OTHER LIABILITIES


Accrued liabilities consist of the following:

December 31,

 

2010

 

2011

Payroll related liabilities

$     98,509

 

$     67,415

Income tax payable

Legal liabilities

116,988

-

 

92,654

400,000

Other

        473

 

95,122

 

$   215,970

 

$   655,191


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 “Note”).  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, 2015. Accrued interest related to the note was $64,822 and $134,822 as of December 31, 2010 and 2011, respectively.


The Note provides that the Company may make payments prior to the due date and that 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.  


The Note is secured by a deed of trust with assignment of rents on the Company’s principal office building and a second commercial building the Company 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.  Management intends to use the $1,000,000 proceeds from this note for operational expenses.


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, Scott Johansen, is entitled to receive the entire principal




36




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010


NOTE 4 – NOTES PAYABLE – CONTINUED


amount with all accrued interest, at 5% interest per annum, on or before January 1, 2014.  Management intends to use the $30,000 proceeds from this note for inventory purchases and operational expenses.


NOTE 5 - 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 $75,000 for the period between July 2010 and December 31, 2010.  The remaining amount was recognized over the remaining period of service on a straight-line basis.


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 $97,917 for the period between July 2010 and December 31, 2010.  The remaining amount was recognized over the period of service on a straight-line basis.


During April 2010, four employees of the Company exercised vested options.  As a result, the Company issued 1,150,000 shares of its common stock for cash proceeds of $46,000.


During July, 2009, the Company issued an aggregate of 2,420,000 shares of its common stock to three separate companies for payment of $363,000 in prepaid consulting services and costs related to investor relations, consulting and public relations.  The services were provided between July, 2009 and June, 2010.  The Company recognized this expense over the period of service on a straight-line basis.


During July, 2009, the Company issued 720,000 shares of its common stock for payment of $108,000 in consulting services.  The services were provided between July, 2009 and June, 2010.  The Company recognized this expense over the period of service on a straight-line basis.


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 Company’s shareholders as of December 31, 2011.


During 2010 and 2011, the Company granted no additional stock options as part of the Plan.


During 2010, the Company cancelled all outstanding stock options under the Plan effective December 31, 2010.  The stock options were cancelled in an effort to best position the Company for pursuit of new business opportunities.  All outstanding options at the time of cancellation were fully vested and exercisable.


The Company recognizes a stock options expense as options vest and recognized $137,504 and $0 in stock options expense related options vesting during the years ended December 31, 2010 and 2011, respectively.  In accordance




37




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010


NOTE 5 - STOCKHOLDERS’ EQUITY - CONTINUED


with FASB ASC Topic 718, there was no expense reversal upon cancellation of the vested stock options.  Since all cancelled options were fully vested and recognized in expense by the Company, there was also no unrecognized cost to be accelerated at the cancellation date.


A summary of our common stock options as of December 31, 2010 and 2011, and the changes during 2010 and 2011 are presented below:


 


Stock option

 


Exercise price

 

Weighted-average

    exercise price  

 

 

 

 

 

 

Balance at January 1, 2010

10,567,651

 

$ 0.04 - $ 0.87

 

$ 0.24

   Granted

(0)

 

$ 0.00

 

$ 0.00

   Exercised

(1,150,000)

 

$ 0.04

 

$ 0.04

   Forfeited

(3,797,651)

 

$ 0.12 - $ 0.87

 

$ 0.37

   Cancelled

(5,620,000)

 

$ 0.04 - $ 0.87

 

$ 0.11

Outstanding at December 31, 2010

(0)

 

$ 0.00

 

$ 0.00

 

 

 

 

 

 

Balance at January 1, 2011

(0)

 

$ 0.00

 

$ 0.00

   Granted

(0)

 

$ 0.00

 

$ 0.00

   Exercised

(0)

 

$ 0.00

 

$ 0.00

   Forfeited

(0)

 

$ 0.00

 

$ 0.00

   Cancelled

(0)

 

$ 0.00

 

$ 0.00

Outstanding at December 31, 2011

(0)

 

$ 0.00

 

$ 0.00

 

 

 

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB ASC 480-10 using the modified-prospective-transition method.  Total compensation costs for all share-based payments granted subsequent to January 1, 2006, have been recognized based on the grant date fair value estimated in accordance with FASB ASC 480-10.


There were no employee stock options outstanding and exercisable under this plan as of December 31, 2011.


NOTE 6 – 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




38




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010


NOTE 6 – DISCONTINUED OPERATIONS - CONTINUED


company carried an accrued liability to provide for this amount through the year ended December 31, 2011.  There has been no active discussion with the leasing company on this matter since 2002.


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.


NOTE 7 – LITIGATION MATTERS


Google Litigation

On December 7, 2009, Google, Inc. filed a legal action against Pacific WebWorks in the United States District Court of Utah, Central Division.  Google alleged trademark infringement and unfair competition under state and federal law.  On December16, 2009, Google and Pacific WebWorks executed a Memorandum of Understanding under the terms of which  Pacific WebWorks agreed to fully cooperate with Google’s discovery and investigation and cease marketing any products using or violating Google’s trademark.  On May 28, 2010, Google, Inc. and Pacific WebWorks, Inc. agreed to the entry of a Stipulated Final Judgment and Order for Permanent Injunction by the Court to resolve all matters in dispute.


Class Action Lawsuits

During November 2009 three lawsuits were filed against Pacific WebWorks in various jurisdictions.  The legal actions allege similar claims related to procedures we use to sell our products in our ordinary course of business. 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.  


In January 2010 another class action lawsuit was filed in the United States District Court for the District of Utah. On February 8, 2010, our legal counsel filed a motion to strike the class allegations and a motion to dismiss the claims asserted in the complaint.  On September 10, 2010, the court granted the motion to dismiss, but gave the plaintiff leave to refile the case in the state court on the basis that no federal jurisdiction existed as alleged by the plaintiff.  The plaintiff has not refilled any claim in state court.


On July 9, 2010 suit was brought in Florida by the same law firm as the above three November 2009 cases.  On July 9, 2010, Randy Guffey filed an action in the Circuit Court for the Twentieth Judicial Circuit, Collier County, Florida, which action was removed to the United States District Court for the Middle District of Florida, Ft. Myers Division.


On January 21, 2010 the State of Florida served the Pacific WebWorks with a subpoena seeking production of documents related to an alleged violation of consumer protection laws in Florida.  We denied any violation of Florida consumer protection laws and responded to the subpoena.  The State of Florida and Pacific WebWorks have come to a resolution as to the settlement of this dispute with a Settlement Agreement being fully executed on July 11, 2011 which required the Company to pay $19,000 for costs, attorneys’ fees and future monitoring by the




39




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010


NOTE 7 – LITIGATION MATTERS – CONTINUED


State of Florida Department of Legal Affairs Revolving Trust Fund.


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 has answered the complaint and denied liability and intends to defend against all such claims.


All plaintiffs in these cases are being represented by the same legal firm and each complaint seeks class action certification.  The complaints allege 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 seeks compensatory and punitive damages, plus reasonable costs and attorney fees.  In response to these actions, Pacific WebWorks retained the law firm of Snell & Wilmer as 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 intends to oppose 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 has renewed its motion to dismiss in the Illinois action, which motion has not yet been ruled upon.  In addition, Pacific Webworks has brought motions to dismiss the Pelletier, Guffey and Aikens actions, which motions have not yet been ruled upon.  


As a result of the above class actions suits, Blooksy Interactive, LLC has threatened claims of indemnification against Pacific WebWorks.   We have denied that we have any duty to defend or indemnify Blooksy Interactive, LLC.  


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 Company’s 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 8 - 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




40




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010


NOTE 8 - INCOME TAXES – CONTINUED


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. 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, 2010 and 2011:


 

2010

 

2011

Deferred Tax Assets

 

 

 

    NOL Carryforward

    Contingent Liabilities

$   1,329,000

-

 

$   1,860,900

156,000

Deferred Tax Liabilities

 

 

 

    Depreciation

(12,500)

 

(8,500)

Valuation Allowance

-

 

-

Net Deferred Tax Asset

$   1,316,500

 

$   2,008,400


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, 2010 and 2011 due to the following:


 

2010

 

2011

 

 

 

 

Book income

$      172,000

 

$ (659,800)

Change in contingent liabilities

-

 

156,000

Depreciation

(6,000)

 

4,000

Stock Based Expenses

209,000

 

108,000

Meals & Entertainment

9,000

 

6,000

NOL Carryforward

(370,624)

 

385,800

Valuation Allowance

-

 

-

 

$        13,376

 

$              -


As of December 31, 2011, the Company had Net Operating Loss (NOL) carryforwards of approximately $4,772,000 that may be offset against future taxable income from the year 2012 through 2031.  This amount includes a $374,500 increase to the beginning net operating loss balance based upon the results of the 2010 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.


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




41




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010


NOTE 8 - INCOME TAXES – CONTINUED


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, 2011, 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

2008 - 2011

Utah State

2008 - 2011


As the Company has significant net operating loss carry forwards, even if certain of the Company’s 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 9 - SEGMENT REPORTING


Segment reporting by business unit follows:


The year ended December 31, 2010 a

Business Unit

 

Revenues, net

 

Net income (loss)

Pacific Web Works

 

$   7,984,916

 

$   (222,390)

IntelliPay

 

        587,440

 

        523,165

TradeWorks

 

          11,683

 

     (188,453)

Fund Works

 

                   -

 

       (38,057)

PWI

 

                   -

 

                   -

Promontory Marketing

 

     1,038,749

 

                   -

World Commerce Network

 

                   -

 

                   -

Total

 

$   9,622,788

 

$        74,265

aAmounts include all intercompany receivables, payables, revenues and expenses prior to elimination for

consolidation.


 

 

The year ended December 31, 2011 a

Business Unit

 

Revenues, net

 

Net income (loss)

Pacific Web Works

 

$   1,162,267

 

$   (1,298,798)

Headlamp Ventures

 

            3,698

 

          (26,509)

IntelliPay

 

        523,901

 

           412,552

Thrifty Seeker

 

            4,251

 

            (4,531)

TradeWorks

 

            7,540

 

             14,663

Fund Works

 

                   -

 

            (1,463)

  (continued)




42




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010


NOTE 9 - SEGMENT REPORTING – CONTINUED


 

 

The year ended December 31, 2011 a

Business Unit

 

Revenues, net

 

Net income (loss)

PWI

 

                   -

 

                      -

Promontory Marketing

 

                   -

 

               (168)

World Commerce Network

 

                   -

 

             11,985

Total

 

$   1,701,657

 

$       (892,269)

aAmounts include all intercompany receivables, payables, revenues and expenses prior to elimination

for consolidation.


NOTE 10 – RECENT ACCOUNTING PRONOUNCEMENTS


ASU 2010-13, Compensation – Stock Compensation (Topic 718) – Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades – a consensus of the FASB Emerging Issues Task Force

This ASU clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.  This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.  As of December 31, 2010, this ASU has been adopted by the Company and has resulted in no significant impact.


ASU 2010-28, Intangibles – Goodwill and Other (Topic 350) – When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts – a consensus of the FASB Emerging Issues Task Force

This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts.  F1or those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists.  In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist.  For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010.  As of December 31, 2010, this ASU has been adopted by the Company and has resulted in no significant impact.


ASU 2011-02, Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring

This ASU sets forth guidance to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment and for disclosure of troubled debt restructurings.  For public entities, the amendments are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011.  The disclosures required by FASB ASC paragraphs 310-10-50-33 through 50-34, which were deferred by ASU 2011-01 are effective for interim and annual periods beginning on or after June 15, 2011.





43




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010


NOTE 10 – RECENT ACCOUNTING PRONOUNCEMENTS – CONTINUED


ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment

This ASU gives an entity the option in its annual goodwill impairment test to first assess revised qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.


NOTE 11 – SUBSEQUENT EVENTS


On January 18, 2012, the Company, through its World Commerce Network, LLC subsidiary, issued a short term $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 has a maturity date of February, 15, 2012, carries a 15% effective annual rate of interest and a one-time fee equal to one percent of the total loan amount.  The note, along with all accrued interest and fees, was paid in full at maturity.  It is noted that Bsquare Red, LLC is owned by family members of the CEO and CFO of the Company.


On January 27, 2012, the maturity date on the $1,000,000 Promissory Note executed by the Company on January 27, 2010 was amended to January 27, 2015.  (See Note 4, above.)


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 CEO and CFO of the Company.


On April 16, 2012, the Promissory Note 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.  The Company is currently working with Rsignia, Inc. to collect payment in full.





44




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 and that firm has completed the audit of the financial statements for the years ended December 31, 2010 and 2011.  



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 and Chief 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, they concluded that our disclosure controls and procedures were ineffective for the year ended December 31, 2011 because the Company did not file its periodic reports timely due to a delay in preparation of our financial statements for the year ended December 31, 2010.   The Company engaged a new independent registered public accounting firm in early 2011 to perform audits and reviews of our periodic reports and the Company hired new accounting personnel to manage the accounting procedures. Management expects these actions will ensure timely filing of our reports in the future.


Management’s Annual Report on Internal Control over Financial Reporting


Our management is responsible to establish and maintain adequate internal control over financial reporting.   Our Chief Executive Officer and Chief Financial Officer are 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, 2011, 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 ineffective for the period covered by this report.





45




Specific areas of ineffectiveness for the year ended December 31, 2011 include:

Appropriate control over information required for evaluating the need to recognize a valuation allowance on our deferred tax asset to determine the probability of using the Company’s NOL carryforward amounts within the prescribed timeframe.

Appropriate control over information to support the valuation of the Company’s investments.


In response to this evaluation, management will take action to institute new internal controls for subsequent reporting periods.


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, 2011.  These changes were made to improve internal controls over financial reporting and to address weaknesses discovered during the evaluation made for the year ended December 31, 2010:

Accounting system software was upgraded to facilitate improved accounting system maintenance control.

Accounting system maintenance control was implemented to require CFO approval for significant accounting system entries.

Significant expenditures control was implemented to require both CEO and CFO approval for significant expenditures and payables.


This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.

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.  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.  K. Lance Bell is the son of Kenneth W. Bell.


Name

Age

Position Held

Director Term of Office


Kenneth W. Bell


62


Chairman of the Board

Chief Executive Officer

Treasurer


January 2001 until next annual meeting.

K. Lance Bell

38

Chief Financial Officer

President

Secretary

Director

May 2011 until next annual meeting.

Christian R. Larsen

37

Director

April 1999 until next annual meeting.





46




Kenneth W. Bell:   Kenneth Bell has served as Chairman of the Board since April 2004 and has served as Treasurer since July 2004.  He has served as our Chief Executive Officer since January 2001.  Prior to that time, he was President and Chief Executive Officer of Logio, Inc., our former subsidiary.  He formerly served as President and Chief Financial Officer of Kelmarc Corporation, a financial and management advisory company.  He has over thirty years experience in a variety of finance and management positions, including employment for fifteen years in the commercial banking industry in Utah and California.  Mr. Bell received a Bachelor’s degree from Brigham Young University.  


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.   Lance earned an MBA from Goizueta Business School at Emory University in Atlanta, Georgia.  He also has over 13 years of experience in the IT services industry, including domestic and international architecture and operations 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 Lance’s extensive contacts, domestic and international experience, management and business expertise will be a valuable component to our future success.  


Christian R. Larsen:  Mr. Larsen resigned as our President and Secretary on May 20, 2011, but he remains a director.  He had served as our President since April 1999 and served as our Chief Executive Officer from April 1999 through January 2001.  Prior to 1999 he served as Chief Operating Officer of Pacific WebWorks and as a consultant for Utah WebWorks.  He has over fifteen years experience providing computer consulting and business management services.  


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, 2011, 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.





47




Committees


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 entire board of directors, including Kenneth Bell, Lance Bell and Christian Larsen, acts as our nominating and audit committee.



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.


SUMMARY COMPENSATION TABLE



Name and Principal Position



Year


Salary

($)


Bonus

($)


Option

Awards (1)

($)

All Other Compen-sation

($)


Total

($)

Kenneth W. Bell

Chief Executive Officer

2011

190,800

45,000

0

16,971 (2)

252,771

2010

173,300

218,400

0

16,720 (3)

408,420

Christian R. Larsen

Former President

2011

25,850

25,000

0

12,340 (4)

63,190

2010

150,176

218,400

0

16,720 (5)

385,296

K. Lance Bell

Chief Financial Officer

2011

198,647

70,000

0

5,220 (6)

273,867

2010

0

0

0

0

0


(1)     All stock options granted to our executive officers in prior years were cancelled effective December 31, 2010.

(2)   Represents $11,751 contributed to SIMPLE IRA and $5,220 contributed by the Company for country club membership dues.

(3)   Represents $11,500 contributed to SIMPLE IRA and $5,220 contributed by the Company for country club membership dues.

(4)   Represents $10,600 contributed to SIMPLE IRA and $1,740 contributed by the Company for country club membership dues.

(5)     Represents $11,500 contribution to SIMPLE IRA and $5,220 contributed by the Company for country club membership dues.

(6)   Represents $5,220 contributed by the Company for country club membership dues.


Employment Contracts


Except K. Lance Bell, during the year ended December 31, 2011 we did not have employment agreements with any of our named executive officers.  On January 1, 2011 the Company entered into an employment agreement with Lance Bell.  He was originally hired to serve as Executive Vice President of Finance and Administration.  His employment agreement provides for a term starting on January 1, 2011 and terminating on December 31, 2012.  The agreement provides for a salary of $190,000 a year, with paid vacation time and benefits.  The compensation amount is subject to annual increases starting December 31, 2011 and the agreement provides for annual incentive




48




bonuses to be determined by the Board.  Lance may be terminated only for cause and he is obligated to protect the proprietary information of the Company for a period of two years after termination of his employment.


In the event of a change in control (as defined in the agreement) that results in Lance’s resignation or discharge within the first year of employment, he is entitled to an amount equal to 1.5 times his salary.  After the first year, he is entitled to an amount equal to three times the average of the sum of the amounts paid for salary, bonus, and profit sharing for the prior three fiscal years, or such shorter time period, immediately preceding the date of the change in control.  In addition, Lance has the right to request that the Company register Company shares owned by him when, and if, a registration statement is filed by the Company.


Retirement Benefits or Other Arrangements


We offer a SIMPLE IRA plan to our full time employees, including our executive officers.  This plan provides that each employee may elect to contribute to an individual retirement plan through salary reduction contributions.   The Company contributes between 1% to 3% of the employee’s W-2 earnings or an amount equal to the employee’s annual contribution to the program, whichever is less.


As of the date of this report, we do not have any agreements with our named executive officers, other than those previously discussed, regarding resignation, retirement or other termination following a change in control.


Outstanding Equity Awards


The outstanding options granted under the Pacific WebWorks, Inc. 2001 Equity Incentive Plan have been cancelled as of December 31, 2010.  Accordingly, there are no outstanding equity awards held by our named executive officers at December 31, 2011.


Compensation of Directors  


We do not have any standard arrangement for compensation of our directors for any services provided as director, including services for committee participation or for special assignments.  Under our 2001 Equity Incentive Plan, an independent director is eligible to receive 5,000 shares of our common stock or options to acquire our common stock each year in which they serve as a member of our board of directors and 10,000 options upon joining our board of directors.  At this time we do not have any independent directors.



ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS


Securities Authorized Under Equity Compensation Plans


The following table lists the securities authorized for issuance under any equity compensation plans approved by our shareholders and any equity compensation plans not approved by our shareholders as of December 31, 2011.




49






EQUITY COMPENSATION PLAN INFORMATION








Plan category




Number of securities

 to be issued upon

exercise of

 outstanding options,

 warrants and rights

(a)



Weighted-average

 exercise price of

outstanding

options,

warrants and

rights

(b)

Number of securities

remaining available

for future issuance

under equity

compensation plans

(excluding

securities reflected

in column (a))

(c)

Equity compensation plans approved by security holders

0

$  0.00

0

Equity compensation plans

not approved by security holders

0

$ 0.00

8,720,000

Total

0

$ 0.00

8,720,000



2001 Equity Incentive Plan:   On March 8, 2001, Pacific WebWorks’ board of directors adopted the Pacific WebWorks, Inc. 2001 Equity Incentive Plan.  Under this plan we may grant stock options, stock appreciation rights or restricted shares to employees, independent directors and certain consultants.  This plan continues in effect until terminated by the board of directors.  The board of directors amended the plan to reserve 10,000,000 shares for the plan, subject to periodic adjustments for changes in the outstanding common stock occasioned by stock splits, stock dividends, recapitalizations or other similar changes.  In the event of a merger, consolidation or plan of exchange to which we are a party or a sale of all, or substantially all, of our assets the committee may continue, assume, substitute, accelerate or settle the outstanding awards.  The board of directors may suspend or terminate the plan at any time.


All of Pacific WebWorks and our subsidiaries’ employees are eligible for incentive stock options.  Employees, independent directors and consultants are eligible for restricted shares, non-qualified stock options and stock appreciation rights.  We currently have six employees, officers and directors eligible to participate in the plan.  An independent director is eligible to receive 5,000 shares of our common stock or options to acquire our common stock each year in which he or she serves as a member of our board of directors and 10,000 options upon joining our board of directors.  As of the date of this filing, we do not have any independent directors.


The plan is administered by our board of directors who are responsible for determining the type, amount and terms of any consideration awarded to a recipient.  Under the plan any options granted to a recipient are exercisable in accordance with the terms of the agreement governing the grant.  If the option is an incentive stock option, those terms must be consistent with the requirements of the Internal Revenue Code, as amended, and applicable regulations, including the requirement that the option price not be less than the fair market value of the common stock on the date of the grant.  If the option is not an incentive stock option, the option price may be any price determined by the committee.


As of December 31, 2010 options to purchase 1,280,000 shares of common stock had been exercised under the plan.  Effective December 31, 2010 the Company cancelled all of the outstanding stock options to purchase 5,620,000 shares of common stock that had previously been granted under the plan


Beneficial Ownership


The following table lists the beneficial ownership of our outstanding common stock by our management.  We are




50




unaware of any person or group who beneficially owns more than 5% of our voting stock.  Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.  Based on these rules, two or more persons may be deemed to be the beneficial owners of the same securities.  Except as indicated by footnote, the persons named in the table below have sole voting power and investment power with respect to the shares of common stock shown as beneficially owned by them.  The percentage of beneficial ownership is based on 49,713,895 shares of common stock outstanding as of April 30, 2012.


MANAGEMENT


Name of beneficial owner

Amount and nature

of beneficial ownership

Percent

of class

Kenneth W. Bell

542,311

1.09

K. Lance Bell

1,075

Less than 1%

Christian L. Larsen

1,178,000

2.37

All executive officers and directors as a group

1,721,386

3.46



ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE


Related Transactions


The following information summarizes transactions we have either engaged in since the beginning of the last two completed fiscal years, or propose to engage in, involving our executive officers, directors, more than 5% stockholders, or immediate family members of these persons.  These transactions were negotiated between related parties without “arms length” bargaining and, as a result, the terms of these transactions may be different than transactions negotiated between unrelated persons.


On July 28, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, established a revolving line of credit facility and issued a $500,000 promissory note, carrying a 15% effective annual rate of interest, to 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 sons of our Chief Executive Officer, Kenneth W. Bell, and both are brothers of our President and Chief Financial Officer, K. Lance Bell.


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 President and Chief Financial Officer, K. Lance Bell.


On January 18, 2012, the Company, through its World Commerce Network, LLC subsidiary, issued a short term $300,000 promissory note to Bsquare Red, LLC to be used as working capital in their internet marketing business. The note has a maturity date of February, 15, 2012, carries a 15% effective annual rate of interest and a one-time fee equal to one percent of the total loan amount.  The note, along with all accrued interest and fees, was paid in full at maturity.


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 to be used as working




51




capital in their internet marketing business.  The note carries an 18% effective annual rate of interest.


Director Independence


None of our directors are independent directors as defined by NASDAQ Stock Market Rule 5605(a)(2).  This rule defines persons as “independent” who are neither officers nor employees of the company and have no relationships that, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out their responsibilities as directors.  


ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES


Accountant Fees


The following table presents the aggregate fees for each of the last two fiscal years by our independent registered public accounting firms in connection with the audit of our financial statements and other professional services rendered.  


 

Prior auditor

 

HJ & Associates

 

2011

 

2010

 

2011

 

2010

Audit fees

$           0

 

$ 11,000

 

$  58,500

 

$   35,000

Audit-related fees

0

 

0

 

0

 

0

Tax fees

1,518

 

4,975

 

5,700

 

0

All other fees

$           0

 

$          0

 

$           0

 

$            0


Audit fees represent fees for professional services rendered by our principal accountants for the audit of our annual financial statements and review of the financial statements included in our Forms 10-Q or services that are normally provided by our principal accountants in connection with statutory and regulatory filings or engagements.


Audit-related fees represent professional services rendered for assurance and related services by the accounting firm that are reasonably related to the performance of the audit or review of our financial statements that are not reported under audit fees.  


Tax fees represent professional services rendered by the accounting firm for tax compliance, tax advice, and tax planning.  


All other fees represent fees billed for products and services provided by the accounting firm, other than the services reported for the other three categories.


Pre-approval Policies


We do not have a standing audit committee currently serving and as a result our board of directors performs the duties of an audit committee.  Our board of directors will evaluate and approve in advance, the scope and cost of the engagement of an accounting firm before the accounting firm renders audit and non-audit services.  We do not rely on pre-approval policies and procedures.






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PART IV


ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES


(a)(1)

Financial Statements


The audited financial statements of Pacific WebWorks, Inc. are included in this report under Item 8 on pages 25 through 44.


(a)(2) Financial Statement Schedules


All financial statement schedules are included in the footnotes to the financial statements or are inapplicable or not required.


(a)(3)

Exhibits


The following documents have been filed as part of this report.


No.

Description

3(i)

Articles of Incorporation, as amended (Incorporated by reference to exhibit No. 3.1 for Form 10-Q

Filed November 13, 2001)

3(ii)

Amended Bylaws of Pacific WebWorks, Inc. (Incorporated by reference to exhibit No. 3.2 for Form 10, as amended, file No. 0-26731, filed July 16, 1999.)

10.1

Service Agreement between Pacific WebWorks and Verizon Business Network Services, Inc., dated September 30, 2007 (Incorporated by reference to exhibit 10.1 for Form 10-K filed September 30, 2008)

10.2

Promissory Note between Pacific WebWorks and Principal Development LLC, dated January 27, 2010 (Incorporated by reference to exhibit 10.1 to Form 8-K filed February 19, 2010)

10.3

Employment agreement between Pacific WebWorks and K. Lance Bell, dated January 1, 2011

(Incorporated by reference to exhibit 10.1 to Form 8-K filed May 24, 2011)

21.1

Subsidiaries of Pacific WebWorks, Inc. (Incorporated by reference to exhibit 21.1 to Form 10-K,

filed January 9, 2012)

31.1

Chief Executive Officer Certification

31.2

Chief Financial Officer Certification

32.1

Section 1350 Certification

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Label Linkbase Document.

101.PRE

XBRL Taxonomy Presentation Linkbase Document.




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SIGNATURES


Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized


PACIFIC WEBWORKS, INC.





By:       /s/ K. Lance Bell

K. Lance Bell, President


Date:  May 8, 2012


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





By:       /s/ Kenneth W. Bell

Kenneth W. Bell

Chairman of the Board

Chief Executive Officer

Treasurer


Date:  May 8, 2012




By:       /s/ K. Lance Bell

K. Lance Bell

Chief Financial Officer

President

Secretary

Director


Date:  May 8, 2012




By:       /s/Christian R. Larsen

Christian R. Larsen

Director


Date:  May 8, 2012






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