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

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Pacific WebWorks, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

							THREE MONTHS ENDED MARCH 31, 2013		THREE MONTHS ENDED MARCH 31, 2014
Revenues
Hosting, gateway and maintenance fees						$	177,514	$	405,976
	Product sales						49,608		70,188
							227,122		476,164
Cost of sales							52,122		240,003
	Gross profit						175,000		236,161
Selling expenses							15,819		82,420
Research and development							58,735		54,933
General and administrative							236,356		364,404
Depreciation and amortization							8,451		1,065
	Total operating expenses						319,361		502,822
	Loss from operations						(144,361)		(266,661)
Other income (expense)
	Interest income (expense), net						1,804		3,032
	Loss on equity investments						(5,785)		-
	Total other income (expense)						(3,981)		3,032
	Loss before income taxes						(148,342)		(263,629)
Income tax benefit							59,900		-
		Net loss				$	(88,442)	$	(263,629)
LOSS PER SHARE
	Basic					$	(0.00)	$	(0.01)
	Diluted					$	(0.00)	$	(0.01)
Weighted-average common shares outstanding
	Basic						49,713,895		49,713,895
	Fully Diluted						49,713,895		49,713,895

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

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

 

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PACIFIC WEBWORKS, INC. & SUBSIDIARIES

Notes to the Consolidated Financial Statements

March 31, 2014 and 2013

(Unaudited)

NOTE 1 – BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations.  The information furnished in the interim condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements.  Although management believes the disclosures and information presented adequately ensure that the information is not misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its December 31, 2013 Annual Report on Form 10-K.  Operating results for the three month period ending March 31, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014.

Reclassifications

Certain prior period balances have been reclassified to conform to current period presentation.

NOTE 2 – NOTES PAYABLE

On January 27, 2010, the Company executed a Promissory Note Secured by a Deed of Trust with Assignment of Rents in the principal amount of $1,000,000.  The holder of the note was entitled to receive the entire principal amount with all accrued interest, at 7% interest per annum, payable on or before January 27, 2012.  On January 25, 2012, the maturity date of the note was extended to January 27, 2015.

On July 10, 2012, the Company executed a Promissory Note Secured by a Deed of Trust with Assignment of Rents in the principal amount of $100,000.  The holder of the note was entitled to receive the entire principal amount with all accrued interest, at 7% interest per annum, payable on or before December 31, 2012.  On November 2, 2012, the maturity date of the note was extended to January 10, 2014.

On August 31, 2012, the Company executed a Promissory Note Secured by a Deed of Trust with Assignment of Rents in the principal amount of $50,000.  The holder of the note was entitled to receive the entire principal amount with all accrued interest, at 7% interest per annum, payable on or before December 31, 2012.  On November 2, 2012, the maturity date of the note was extended to January 10, 2014.

The January 27, 2010, July 10, 2012 and August 31, 2012 Promissory Notes were secured by a deed of trust with assignment of rents on the Company’s principal office building and a second commercial building the Company owned in Salt Lake City, Utah.  Also, the Note holder was entitled to collect rents and lease amounts, if any, from the buildings upon any default and could at its option elect to foreclose on the properties.  The Company could make payments prior to the due date and any payments were to be applied first to the reduction of interest and the balance to the outstanding principal.   In the event that the Company failed to pay any amount when due, then the amount owing would become immediately due and a default interest rate of 15% would apply to the principal amount. On June 6, 2013, the Company sold its principal office building and second commercial building in

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PACIFIC WEBWORKS, INC. & SUBSIDIARIES

Notes to the Consolidated Financial Statements

March 31, 2014 and 2013

 (Unaudited)

NOTE 2 – NOTES PAYABLE – CONTINUED

Salt Lake City, Utah for a total of $1,850,000.  The proceeds of the sale satisfied the $1,340,597 in Promissory Notes dated January 27, 2010, July 10, 2012 and   August 31, 2012 in full including all accrued interest, with the remaining cash proceeds of $509,023 remitted directly to the Company.  A gain of $143,290 was recognized on the sale of these assets during the year ended December 31, 2013.

On December 2, 2011, the Company assumed a Promissory Note in the principal amount of $30,000 as part of its acquisition of Asher, LLC.  The holder of the note is entitled to receive the entire principal amount with all accrued interest, at 5% interest per annum, on or before January 1, 2014.  As of December 31, 2013, the principal and interest on this note had been satisfied in full.

On August 28, 2013 the Company entered into a $42,738 financing agreement for payment of its business insurance.  The financing agreement carries a 5.24% annual rate of interest and requires the Company to make 10 monthly payments of $4,377.  During the three month period ended March 31, 2014, the Company made principal payments of $12,821 and interest of $310.

NOTE 3 – NOTES RECEIVABLE

On July 28, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, established a revolving line of credit facility and issued an initial $400,000 promissory note to Bsquare Red, LLC, a Utah limited liability company, to be used as working capital in their internet marketing business.  The note carries a 15% effective annual rate of interest.  On October 3, 2011, the principal amount of the promissory note was increased to $500,000.  On July 31, 2012, the maturity date of the promissory note was extended to August 1, 2013.  On July 23, 2013, the maturity date of the promissory note was extended to August 1, 2014.  It is noted that Bsquare Red, LLC is owned by family members of the Company’s CEO.  On December 30, 2013, the promissory note was repaid in full.

On August 3, 2011, the Company, through its World Commerce Network, LLC subsidiary, issued a $250,000 promissory note to Bryan Development, LLC, a Utah limited liability company, for use as working capital in its business investment activities.  On December 31, 2012, the maturity date of the promissory note was extended to December 31, 2013 and on December 31, 2013, the maturity date of the promissory note was extended to June 30, 2014.

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 is 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 resurgent demand that is especially driven by emerging markets around the world.  However, as of August 31, 2013 Grupo Zapata Arce is in default under the promissory note and Headlamp Ventures has initiated legal action to collect the amount due.  (See Note 6 – Litigation Matters, below.)

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PACIFIC WEBWORKS, INC. & SUBSIDIARIES

Notes to the Consolidated Financial Statements

March 31, 2014 and 2013

 (Unaudited)

NOTE 4 – INVESTMENTS

On April 21, 2011, Pacific WebWorks invested $250,000 in common units of Middlebury Ventures II, LLC, a Delaware limited liability company formed for the purpose of participating in the Fisker Holdings, Inc. Series C-1 and subsequent rounds of financing.  On December 27, 2011, the Company invested an additional $93,280 in common units of Middlebury Ventures II, LLC.  On March 28, 2012, the Company invested an additional $25,000 in common units of Middlebury Ventures II, LLC.  The funds are to be used by Middlebury Ventures II, LLC for the acquisition of Fisker Holdings, Inc. Series D-1 Shares pursuant to the Fisker Series D-1 transaction documents.  Fisker Holdings, Inc. is an automotive company competing in the luxury hybrid-electric vehicle market. During August, 2012, Middlebury Ventures II, LLC changed its name to Ridgemaker Ventures II, LLC.  On November, 22, 2013, Fisker Holdings, Inc. filed for Chapter 11 bankruptcy and on December 31, 2013, the Company recognized an $82,531 unrealized loss on its investment to impair its carrying value to $0, the current estimated market value.

On November 11, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, invested a total of $250,000 in Payroll Innovations, LLC and PickYourPayday.com, LLC, sister companies having common ownership and management and providing payroll debit card and online payroll advance service to small and mid-sized employers.  For value received, the Company holds a 25% ownership position in Payroll Innovations, LLC and PickYourPayday.com, LLC.  On May 30, 2012, the Company invested an additional total of $30,000 in Payroll Innovations, LLC and PickYourPayday.com, LLC to meet a capital call approved by the members.  During September, October and November, 2012, the Company invested an additional total of $34,500 and in March, 2013, the Company invested an additional total of $2,000 in Payroll Innovations, LLC and PickYourPayday.com, LLC to meet capital calls approved by the members.  For the year ended December 31, 2013 the Company recognized a $210,717 loss on its equity investment.

NOTE 5 – COMMITMENTS & CONTINGENCIES

The Ridgemaker Ventures II, LLC operating agreement contains a 40% capital call provision specifically associated with the Fisker D-1 round of financing, which includes a 40% capital call component.  Members of Ridgemaker Ventures II, LLC are required to invest an amount up to 40% of their investment to date at the time of the capital call, based on the percentage of the total capital call. Those members failing to meet the capital call encounter an automatic conversion of their shares into common shares on a 2:1 basis.  Those members that meet the capital call will convert their shares into common shares on a 1:1 basis at such time when there is a market for Fisker securities.  An updated operating agreement was instituted in association with the Fisker E-1 round of financing.  The updated operating agreement contains a 30% capital call provision specifically associated with the Fisker E-1 round of financing, which provides for an exchange of D-1 shares on a 1:5.8418 basis for investors that meet their E-1 capital call obligation.

The Payroll Innovations, LLC and PickYourPayday.com, LLC operating agreements provide for capital calls upon approval by 75% of the membership voting interest.  The total amount of each approved capital call is also subject to approval by 75% of the membership voting interest.  In a capital call each member is required to invest its proportionate share based on its membership interest.  No member’s interest in the companies can be diluted without unanimous approval by the members.

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PACIFIC WEBWORKS, INC. & SUBSIDIARIES

Notes to the Consolidated Financial Statements

March 31, 2014 and 2013

 (Unaudited)

NOTE 5 – COMMITMENTS & CONTINGENCIES – CONTINUED

During the year ended December 31, 2013, the Company entered into a lease agreement for commercial office space.  The lease runs through May 31, 2018 and provides for monthly payments of $4,300 in year one, $4,425 in year two, $4,550 in year three, $4,700 in year four and $4,825 in year five.  A security deposit in the amount of $4,825 was required upon lease execution.

NOTE 6 – LITIGATION MATTERS

During the year ended December 31, 2012, the Company was involved in five class action law suits.  All plaintiffs in these cases were represented by the same legal firm and each complaint sought class action certification.  The complaints alleged that Pacific WebWorks violated consumer protection laws, committed fraud and used deceptive trade practices in relation to the manner in which Pacific WebWorks charged for purchases of its products.  Each action sought compensatory and punitive damages, plus reasonable costs and attorney fees.  The actions are as follows:

On November 9, 2009, Barbara Ford filed an action in the Circuit Court of Cook County, Illinois, Chancery Division.  A second action was filed on November 12, 2009, by Deanna Pelletier in the Superior Court of the State of California, County of Solano.  A third action was filed by Lisa Rasmussen on November 20, 2009, in the Superior Court of Washington, Snohomish County.  On December 18, 2009, the Barbara Ford matter was removed to the United States District Court for the Northern District of Illinois.  On December 18, 2009, the Deanna Pelletier matter was removed to the United States District Court for the Eastern District of California.  On December 23, 2009, the Lisa Rasmussen matter was removed to the United States District Court for the Western District of Washington.  

On July 10, 2010, Thomas Aikens filed an action in the Circuit Court of Jackson County, Missouri, which matter was removed to the United States District Court for the Western District of Missouri. This matter was brought by the same law firm as the above cases.

On September 19, 2011, Lynette Booth filed an action in the Circuit Court of Cook County, Illinois, Chancery Division alleging violations of consumer protection laws by Pacific WebWorks.  This case was removed to the United States District Court for the Northern District of Illinois on December 1, 2011.  Damages are unspecified in this action.  Pacific WebWorks answered the complaint and denied liability, intent to defend against all such claims.

In response to these actions, Pacific WebWorks retained legal counsel to vigorously defend the Company in these lawsuits.  Discovery began on the class certification phase in the Illinois, Washington and California lawsuits.  Our legal counsel opposed class certification and filed motions to dismiss all claims in the Illinois and Washington actions, which motions were granted in part and denied in part. Pacific WebWorks renewed its motion to dismiss in the Illinois action, which motion has not yet been ruled upon.  In addition, Pacific Webworks brought motions to dismiss the Pelletier, Guffey and Aikens actions, which motions have not yet been ruled upon.

On May 24, 2012, the Company entered into a Stipulation of Class Action Settlement relating to its outstanding class action lawsuits.  The settlement agreement required the Company to contribute a maximum of $400,000 to the settlement fund, class counsel and claims administration fees.  The Company’s entry into the settlement agreement was intended to reduce its overall litigation expense by

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PACIFIC WEBWORKS, INC. & SUBSIDIARIES

Notes to the Consolidated Financial Statements

March 31, 2014 and 2013

 (Unaudited)

NOTE 6 – LITIGATION MATTERS – CONTINUED

putting an end to the significant legal fees continually incurred to defend against the actions.  As of December 31, 2011 and 2012, the Company had recorded a liability of $400,000 in contemplation of reaching settlement on its outstanding class action lawsuits.  As a part of the settlement agreement, the Company agreed to establish an escrow account and deposit the amount of their maximum contribution into the escrow account to be held there during the settlement approval process.  The escrow account was established and fully funded by the Company with the appropriate $400,000 maximum contribution on July 2, 2012.

On November 28, 2012, the Class Action Settlement received final approval in the Circuit Court of Cook County, Illinois.  On January 10, 2013, the $400,000 held in escrow was contributed to the settlement fund, class counsel and claims administration fees.  The Company considers this matter to be closed.

On September 6, 2013 our subsidiary, Headlamp Ventures, LLC, filed a complaint against Marc Didier in the Third District Court Salt Lake County State of Utah.  The complaint alleges that Headlamp Ventures loaned Grupo Zapata Arce (“Zapata”) $400,000 and Mr. Didier guaranteed the Loan Agreement and Note.  Zapata failed to repay the loan by the due date of August 31, 2013 and is in default.  Pursuant to the Guaranty and Security Agreement, Mr. Didier is obligated for all amounts due and owing.  Headlamp Ventures seeks repayment of the loan amount, plus interest, attorneys’ fees and punitive damages.

On November 15, 2013 Pacific WebWorks, Inc. was served a summons by the Third Judicial District Court in and for Salt Lake County, State of Utah.  The plaintiffs, Allen Stutelberg, Harold Schmunk and Michael Greer, filed a derivative action alleging Pacific WebWorks, Inc. and five former and current members of the board of directors, officers and/or employees of the Company committed corporate waste, breached fiduciary duties and committed civil conspiracy resulting in mismanagement of the Company’s assets and affairs and usurpation of corporate opportunities.  The plaintiffs seek general and punitive damages in excess of $300,000 for each of the five causes of action to be proven at a jury trial.  The Company retained legal counsel to vigorously defend against these allegations.  The Company’s counsel has filed an answer to the summons and filed a motion to disqualify plaintiff’s attorney due to a conflict.

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 7 – SEGMENT REPORTING

		Three Months Ended				Three Months Ended
		March 31, 2013a				March 31, 2014a
Business Unit		Revenues, net		Net income (loss)		Revenues, net		Net income (loss)
Pacific Web Works		$        51,473		$   (222,476)		$        25,208		$   (401,252)
IntelliPay		124,204		108,567		123,398		103,520
Headlamp Ventures		49,313		20,885		70,168		(8,068)
[See following page.]

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PACIFIC WEBWORKS, INC. & SUBSIDIARIES

Notes to the Consolidated Financial Statements

March 31, 2014 and 2013

 (Unaudited)

NOTE 7 – SEGMENT REPORTING – CONTINUED

		Three Months Ended				Three Months Ended
		March 31, 2013a				March 31, 2014a
Business Unit		Revenues, net		Net income (loss)		Revenues, net		Net income (loss)
TradeWorks		1,200		1,200		900		900
Thrifty Seeker		295		(157)		20		(130)
Promontory Marketing		-		(45)		-		(45)
World Commerce Network		-		3,065		-		3,125
Dynamic WebTools		637		519		256,470		38,321
Total		$      227,122		$     (88,442)		$      476,164		$   (263,629)

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

for consolidation.

NOTE 8 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events in accordance with the provisions of ASC 855 and has identified no reportable subsequent events.

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

FORWARD LOOKING STATEMENTS

The Securities and Exchange Commission (“SEC”) encourages reporting companies to disclose forward-looking information so that investors can better understand future prospects and make informed investment decisions.  This report contains these types of statements.  Words such as “may,” “expect,” “believe,” “anticipate,” “estimate,” “project,” or “continue” or comparable terminology used in connection with any discussion of future operating results or financial performance identify forward-looking statements.  You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report.  All forward-looking statements reflect our present expectation of future events and are subject to a number of important factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

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, due to legal matters that the Company encountered in 2010, 2011 and 2012, Management determined that it was prudent to stop marketing the Company’s products while the legal matters were addressed.  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.

The first quarter of 2014 was primarily devoted to the continued improvement of the Company’s Internet technology infrastructure and products and re-introducing our products to the marketplace.  As announced, the Company has developed alternative means to market our Visual WebTools™ product while at the same time expanding its Internet technology suite and establishing an international framework for marketing its products.

During the year ended December 31, 2013, the Company sold its principal office building and second commercial building in Salt Lake City, Utah and satisfied in full the majority of its promissory notes.  A gain of $143,290 was recognized on the sale of these assets during the year ended December 31, 2013.  On June 13, 2013, the Company also entered into a lease agreement for commercial office space that runs through May 31, 2018 (See “Commitments and Contingencies”).

Over the last two years we trimmed our staffing significantly and identified and hired the personnel necessary to address our legal and reporting issues and move the business forward.  One of our goals has been to find synergistic opportunities that help to diversify the Company’s operations.  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 March 31, 2014, the Company, directly or through our subsidiaries, has invested an aggregate of $712,780 in other businesses and has been issued an aggregate of $3,450,000 in notes receivable by other businesses, $2,800,000 of which has been repaid as of March 31, 2014 (See “Liquidity and Capital Resources,” below).

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 processing resources.  We also have the challenge of identifying and effectively implementing our products into

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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 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 have increased in 2014 as compared to the three month period ended March 31, 2013 as a result of growth in the Headlamp Ventures business and the renewed marketing of the Company’s software products. Our cash and cash equivalents decreased at March 31, 2014 as compared to the period ended December 31, 2013 as a result of increased legal expense to defend against a lawsuit brought against the Company in 2013 and other expenses supporting the Company’s operating activities.  During 2011 we assumed a $30,000 promissory note as part of the Asher, LLC acquisition which was satisfied in full at December 31, 2013.  On June 6, 2013, all other promissory notes issued by the Company were paid and satisfied in full.  On August 28, 2013 the Company entered into a $42,738 financing agreement for payment of its Director & Officer and business insurance.  The promissory notes are discussed in more detail below (See “Commitments and Contingencies”).  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.

Historically we have relied upon equity offerings to pay for additional services and funding; however, we currently have only 286,105 authorized common shares remaining.  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 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 upon 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.

Investments and Notes Receivable

In recent years, in addition to our web site business the Company, directly or through our subsidiaries, has invested in other businesses and was issued notes receivable by other businesses.  The Company expects to see returns on these investments and financial arrangements as they continue to mature.  However, there are certain risks associated with investing in early stage ventures and the Company recognizes that it may, from time to time, need to impair the carrying value of its investment assets.

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On April 21, 2011, Pacific WebWorks invested $250,000 in common units of Middlebury Ventures II, LLC, a Delaware limited liability company formed for the purpose of participating in the Fisker Holdings, Inc. Series C-1 and subsequent rounds of financing.  On December 27, 2011, the Company invested an additional $93,280 in common units of Middlebury Ventures II, LLC.  On March 28, 2012, the Company invested an additional $25,000 in common units of Middlebury Ventures II, LLC.  The funds are to be used by Middlebury Ventures II, LLC for the acquisition of Fisker Holdings, Inc. Series D-1 Shares pursuant to the Fisker Series D-1 transaction documents. Fisker Holdings, Inc. is an automotive company competing in the luxury hybrid-electric vehicle market. During August, 2012, Middlebury Ventures II, LLC changed its name to Ridgemaker Ventures II, LLC.  On November, 22, 2013, Fisker Holdings, Inc. filed for Chapter 11 bankruptcy and on December 31, 2013, the Company recognized an $82,531 unrealized loss on its investment to impair its carrying value to $0, the current estimated market value.

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.

On July 28, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, established a revolving line of credit facility and issued an initial $400,000 promissory note to Bsquare Red, LLC, a Utah limited liability company, to be used as working capital in their Internet marketing business.  The note carries a 15% effective annual rate of interest.  On October 3, 2011, the principal amount of the promissory note was increased to $500,000.  On July 31, 2012, the maturity date of the promissory note was extended to August 1, 2013.  On July 23, 2013, the maturity date of the promissory note was extended to August 1, 2014.  It is noted that Bsquare Red, LLC is owned by family members of the Company’s CEO.  On December 30, 2013, the promissory note was repaid in full.

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 resurgent demand that is especially driven by emerging markets around the world.  However, as of August 31, 2013 Grupo Zapata Arce is in default under the promissory note.  Headlamp Ventures has therefore initiated legal action to collect the amount due and has recognized impairment expense of $353,000 to impair the iron ore inventory carrying value to $0.  (See Part II, Item 1. Legal Proceedings, below.)

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 World Commerce Network, into common stock shares owned or held by Bryan Development, LLC.  On December 31, 2012, the maturity date of the promissory note was extended to December 31, 2013 and on December 31, 2013, the maturity date of the promissory note was extended to June 30, 2014.  We are optimistic about the conversion possibilities associated with this note and continue to work with the borrower to identify promising investment opportunities.

On November 11, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, invested a total of $250,000 in Payroll Innovations, LLC and PickYourPayday.com, LLC, sister companies having common ownership and management and providing payroll debit card and online payroll advance service to small and mid-sized employers. For value received, the Company holds a 25% ownership position in Payroll Innovations, LLC and PickYourPayday.com, LLC.  On May 30, 2012, the Company invested an additional total of $30,000 in Payroll Innovations, LLC and PickYourPayday.com, LLC to meet a capital call approved by the members.  During September, October and November, 2012, the Company invested an additional total of $34,500 and in March, 2013, the Company invested an additional total of $2,000 in Payroll Innovations, LLC and PickYourPayday.com,

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LLC to meet capital calls approved by the members.  For the year ended December 31, 2013 the Company recognized a $210,717 loss on its equity investment.

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.

Commitments and Contingencies

Current Liabilities:  Our total current liabilities at March 31, 2014 included accounts payable, accrued liabilities and notes payable.  Accounts payable of $59,474 was related to operating costs such as marketing and advertising expenses and professional fees.  Our accrued liabilities of $134,650 were primarily the result of payroll related liabilities and a disputed payable from the past, offset by estimated refunds and receivables.  Notes payable of $12,821 was related to the Company’s August 28, 2013 insurance financing agreement.

Also included in current liabilities at March 31, 2014 is $47,840 in deferred revenue primarily related to hosting services.

During the year ended December 31, 2013, the Company entered into a lease agreement for commercial office space.  The lease runs through May 31, 2018 and provides for monthly payments of $4,300 in year one, $4,425 in year two, $4,550 in year three, $4,700 in year four and $4,825 in year five.  A security deposit in the amount of $4,825 was required upon lease execution.

Promissory Notes:  On January 27, 2010, the Company executed a Promissory Note Secured by a Deed of Trust with Assignment of Rents in the principal amount of $1,000,000.  The holder of the note, Principal Development, LLC, was entitled to receive the entire principal amount with all accrued interest, at 7% interest per annum, payable on or before January 27, 2012.  On January 25, 2012, the maturity date of the note was extended to January 27, 2015.

On July 10, 2012, the Company executed a Promissory Note Secured by a Deed of Trust with Assignment of Rents in the principal amount of $100,000.  Principal Development, LLC was entitled to receive the entire principal amount with all accrued interest, at 7% interest per annum, payable on or before December 31, 2012.  On November 2, 2012, the maturity date of the note was extended to January 10, 2014.

On August 31, 2012, the Company executed a Promissory Note Secured by a Deed of Trust with Assignment of Rents in the principal amount of $50,000.  Principal Development, LLC was entitled to receive the entire principal amount with all accrued interest, at 7% interest per annum, payable on or before December 31, 2012.  On November 2, 2012, the maturity date of the note was extended to January 10, 2014.

The January 27, 2010, July 10, 2012 and August 31, 2012 Promissory Notes were secured by a deed of trust with assignment of rents on the Company’s principal office building and a second commercial building the Company owned in Salt Lake City, Utah.  Also, Principal Development was entitled to collect rents and lease amounts, if any, from the buildings upon any default and could at its option elect to foreclose on the properties.  The Company could make payments prior to the due date and any payments were to be applied first to the reduction of interest and the balance to the outstanding principal.   In the event that the Company failed to pay any amount when due, then the amount owing would become immediately due and a default interest rate of 15% would apply to the principal amount. On June 6, 2013, the Company sold its principal office building and second commercial building in Salt Lake City, Utah and satisfied the Promissory Notes dated January 27, 2010, July 10, 2012 and August 31, 2012 in full. Accrued interest related to the notes was $0 as of December 31, 2013.

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 was entitled to receive the entire principal amount with all

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accrued interest, at 5% interest per annum, on or before January 1, 2014.  As of December 31, 2013, the principal and interest on this note had been satisfied in full.

On August 28, 2013 the Company entered into a $42,738 financing agreement for payment of its Directors and Officers insurance and its business insurance.  The financing agreement carries a 5.24% annual rate of interest and requires the Company to make 10 monthly payments of $4,377.  As of March 31, 2014, the outstanding balance was $12,821.

Results of Operations

The following discussions are based on the consolidated financial statements of Pacific WebWorks and its subsidiaries for the three month period ended March 31, 2014 and 2013.  The following charts are a summary of our financial statements for those periods and should be read in conjunction with the financial statements, and notes thereto, included in this report at Part I, Item 1, above.

SUMMARY BALANCE SHEET COMPARISON
	Year ended December 31, 2013		Three month period ended March 31, 2014
Cash and cash equivalents	$      1,928,821		$      1,607,252
Total current assets	$      2,368,746		$      2,063,216
Total assets	$      4,480,014		$      4,189,905
Total current liabilities	$         281,265		$         254,785
Total liabilities	$         281,265		$         254,785
Accumulated deficit	$  (13,920,680)		$  (14,184,309)
Total stockholders’ equity	$      4,198,749		$      3,935,120

Total assets decreased at March 31, 2014 as compared to December 31, 2013 primarily as a result of the reduction in cash and cash equivalents due to increased legal expense and other expenses supporting the Company’s operating activities.  At March 31, 2014 total liabilities also decreased compared to the 2013 year end as a result of reduction of the Company’s outstanding notes payable.  Our accumulated deficit increased at March 31, 2014 as a result of posting a net loss for the three month period ended March 31, 2014.

SUMMARY OPERATING RESULTS
	Three month period ended March 31,
	2013		2014
Revenues, net	$  227,122		$   476,164
Cost of sales	$    52,122		$   240,003
Gross profit	$  175,000		$   236,161
Total operating expenses	$  319,361		$   502,822

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SUMMARY OPERATING RESULTS – continued
	Three month period ended March 31,
	2013		2014
Loss from operations	$          (144,361)		$           (266,661)
Total other income (expense)	$              (3,981)		$                3,032
Income tax benefit	$             59,900		$                      -
Net loss	$            (88,442)		$           (263,629)
Earnings per share – basic	$               (0.00)		$                (0.01)

We receive revenue for hosting, gateway, and maintenance fees, software access and licensing fees and product sales. Revenues from up-front fees are deferred and recognized over the period in which services are performed, ranging from one month to one year.  Fees for the set-up of merchant accounts are deferred and recognized as services are completed (which is generally two months).  Revenues from monthly hosting, maintenance, transaction and processing fees are recorded when earned.  Operating lease revenues for merchant accounts and software are recorded when earned.  Revenues for product sales are recorded when order fulfillment is complete.

 

Our net revenues increased for the 2014 first quarter compared to the 2013 first quarter as a result of growth within the Company’s Headlamp Ventures business and the renewed marketing of the Company’s Internet technology products and service.

Cost of sales includes costs related to fulfillment, marketing, merchant fees, certain royalties and commissions, and amortization of purchased customer portfolios.  Cost of sales as a percentage of net revenues increased in the 2014 first quarter as compared to the 2013 first quarter.  Cost of sales was 50.4% of net revenues for the 2014 first quarter as compared to 22.9% of net revenues for the 2013 first quarter.  The increases in the 2014 interim period were due to increased commissions directly related to new customer acquisition and increased merchant fees related to processing sales and an increase in hard goods and fulfillment costs related to the Asher, LLC line of business.  Management anticipates that cost of sales will remain higher as a percentage of sales as the Company continues to pay commissions for new customer acquisitions and merchant fees to process sales.

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 and utilities, banking fees, internet fees and other overhead-related costs.  General and administrative expenses increased for the 2014 first quarter compared to the 2013 first quarter due to an increase in legal expense related to defense against the lawsuit filed against the Company.

Total operating expenses increased for the 2014 interim period compared to the 2013 interim period primarily due to an increase in legal expense related to defense against the lawsuit filed against the Company.

Total other income increased for the 2014 interim period compared to the 2013 interim period primarily due interest income for loans.

As a result of the above changes in our operations, we recorded a net loss for the 2014 first quarter and the 2013 first quarter.

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.

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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 and product sales. Revenues from up-front fees are deferred and recognized over the period in which services are performed, ranging from one month to one year.  Fees for the set-up of merchant accounts are deferred and recognized as services are completed (which is generally two months).  Revenues from monthly hosting, maintenance, transaction and processing fees are recorded when earned. Operating lease revenues for merchant accounts and software are recorded when earned.  Revenues for product sales are recorded when order fulfillment is complete.

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, 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 2013 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 $0 for our operating companies.  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 March 31, 2014.  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.

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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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed with the SEC pursuant to the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC.  This information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.  Our Chief Executive Officer, who is also our Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, he concluded that our disclosure controls and procedures were effective for the quarter ended March 31, 2014.

Changes to Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting

(as defined in Rule 13a-15(f) under the Exchange Act).  Management conducted an evaluation of the effectiveness of our internal control over financial reporting and determined that there were no changes made in our internal control over financial reporting during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Class Action Lawsuits

During the years ended December 31, 2012 and 2013, the Company was involved in five class action law suits.  All plaintiffs in these cases were represented by the same legal firm and each complaint sought class action certification.  The complaints alleged that Pacific WebWorks violated consumer protection laws, committed fraud and used deceptive trade practices in relation to the manner in which Pacific WebWorks charged for purchases of its products.  Each action sought compensatory and punitive damages, plus reasonable costs and attorney fees.  The actions are as follows:

*

On November 9, 2009, Barbara Ford filed an action in the Circuit Court of Cook County, Illinois, Chancery Division.  On December 18, 2009, this matter was removed to the United States District Court for the Northern District of Illinois.  

*

A second action was filed on November 12, 2009, by Deanna Pelletier in the Superior Court of the State of California, County of Solano.  On December 18, 2009, this matter was removed to the United States District Court for the Eastern District of California.  

*

A third action was filed by Lisa Rasmussen on November 20, 2009, in the Superior Court of Washington, Snohomish County.  On December 23, 2009, this matter was removed to the United States District Court for the Western District of Washington.  

*

On July 10, 2010, Thomas Aikens filed an action in the Circuit Court of Jackson County, Missouri, which matter was removed to the United States District Court for the Western District of Missouri.  

*

On September 19, 2011, Lynette Booth filed an action in the Circuit Court of Cook County, Illinois, Chancery Division alleging violations of consumer protection laws by Pacific WebWorks.  This case was removed to the United States District Court for the Northern District of Illinois on December 1, 2011.  Damages are unspecified in this action.  Pacific WebWorks answered the complaint and denied liability, and intends to defend against all such claims.

In response to these actions, Pacific WebWorks retained legal counsel to vigorously defend the Company in these lawsuits.  Discovery began on the class certification phase in the Illinois, Washington and California lawsuits.  Our legal counsel opposed class certification and filed motions to dismiss all claims in the Illinois and Washington actions, which motions were granted in part and denied in part.  Pacific WebWorks renewed its motion to dismiss in the Illinois action.  In addition, Pacific Webworks brought motions to dismiss the Pelletier, Guffey and Aikens actions.

On May 24, 2012, the Company entered into a Stipulation of Class Action Settlement relating to its outstanding class action lawsuits.  The settlement agreement required the Company to contribute a maximum of $400,000 to the settlement fund, class counsel and claims administration fees.  The Company’s entry into the settlement agreement was intended to reduce its overall litigation expense by putting an end to the significant legal fees continually incurred to defend against the actions.  As of December 31, 2012 the Company had recorded a liability of $400,000 in contemplation of reaching settlement on its outstanding class action lawsuits.  As a part of the settlement agreement, the Company agreed to establish an escrow account and deposit the amount of their maximum contribution into the escrow account to be held there during the settlement approval process.  The escrow account was established and fully funded by the Company with the appropriate $400,000 maximum contribution on July 2, 2012.

On November 28, 2012, the Class Action Settlement received final approval in the Circuit Court of Cook County, Illinois.  On January 10, 2013, the $400,000 held in escrow was contributed to the settlement fund, class counsel and claims administration fees.  The Company considers this matter to be closed.

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Other Actions

On September 6, 2013 our subsidiary, Headlamp Ventures, LLC, filed a complaint against Marc Didier in the Third District Court Salt Lake County State of Utah.  The complaint alleges that Headlamp Ventures loaned Grupo Zapata Arce (“Zapata”) $400,000 and Mr. Didier guaranteed the Loan Agreement and Note.  Zapata failed to repay the loan by the due date of August 31, 2013 and is in default.  Pursuant to the Guaranty and Security Agreement, Mr. Didier is obligated for all amounts due and owing.  Headlamp Ventures seeks repayment of the loan amount, plus interest, attorneys’ fees and punitive damages.

On November 15, 2013 Pacific WebWorks, Inc. was served a summons by the Third Judicial District Court in and for Salt Lake County, State of Utah.  The plaintiffs, Allen Stutelberg, Harold Schmunk and Michael Greer, filed a derivative action alleging Pacific WebWorks, Inc. and five former and current members of the board of directors, officers and/or employees of the Company committed corporate waste, breached fiduciary duties and committed civil conspiracy resulting in mismanagement of the Company’s assets and affairs and usurpation of corporate opportunities.  The plaintiffs seek general and punitive damages in excess of $300,000 for each of the five causes of action to be proven at a jury trial.  The Company retained legal counsel to vigorously defend against these allegations.  The Company’s counsel filed an answer to the summons and filed a motion to disqualify plaintiff’s attorney due to a conflict.

We are involved in various other disputes and claims arising in the normal course of our business.  In the opinion of management, any resulting litigation from these disputes and claims will not have a material effect on our financial position and results of operations.

ITEM 1A.  RISK FACTORS

Factors Affecting Future Performance

We may 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 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.  

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Our expansion into international markets exposes our business to risks related to those economies which may result in loss of revenues.

We are selling our technology in the international markets and as a result, our future revenues may be affected by the economies of these countries.  Our international operations are subject to a number of risks, such as, longer payment cycles, unexpected changes in regulatory environments, potentially adverse recessionary environments and economies outside the United States, and possible political and economic instability.  

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 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 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

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on their acceptance by a substantial number of online businesses.  Broad acceptance of our products and services and their use in large numbers is critical to our success because a large portion of our revenues are derived from one-time and recurring fees we charge to customers buying our products and services.  Our success in obtaining market share will depend upon our ability to build name brand recognition and to provide cost-effective products and services to our customers.  We have developed our products to meet the needs of small businesses and we believe the generality of our competitors’ services may be inadequately addressing the small business owner’s needs. We expect competition to persist, increase, and intensify in the future as the markets for our products and services continue to develop and as additional competitors enter our market.  In addition, many of our current or potential competitors have broad distribution channels that they may use to bundle competing products directly to end-users or purchasers.  If these competitors were to bundle competing products for their customers, it could adversely affect our ability to obtain market share and may force our prices down.

We may be unable to achieve market acceptance because technological standards for payment processing are not established.

One obstacle to widespread market acceptance for the IntelliPay payment system is that widely adopted technological standards for accepting and processing payments over the Internet have not yet emerged.  As a result, merchants and financial institutions have been slow to select which service to use.  Until one or more dominant standards emerge, we must design, develop, test, introduce and support new services to meet changing customer needs and respond to other technological developments.  To be successful, we must obtain widespread acceptance of our technologies, or modify our products and services to meet whatever industry standards do ultimately develop. It is not certain that we will be able to do either.

We depend upon our proprietary rights, none of which can be completely safeguarded against infringement.

Our ability to compete effectively will depend, in part, upon our ability to protect our proprietary source codes for Visual WebTools™ and the IntelliPay payment system through a combination of licenses and trade secrets.  These agreements and procedures may not effectively prevent disclosure of our confidential information and may not provide us with an adequate remedy in the event of unauthorized disclosure of such information.  Intellectual property rights, by their nature, are uncertain and involve complex legal and factual questions.  We rely upon trade secrets with respect to our source code and functionalities and other unpatented proprietary information in our product development activities.  We seek to protect trade secrets and proprietary knowledge in part through confidentiality agreements with our employees, resellers, and collaborators.

If employees or collaborators develop products independently that may be applicable to our products under development, disputes may arise about ownership of proprietary rights to those products or services.  Protracted and costly litigation could be necessary to enforce and determine the scope of our proprietary rights 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 may experience software defects which may damage customer relations.

Despite rigorous testing, our software may nevertheless contain undetected bugs, errors or experience failures when introduced, or when the volume of services provided increases.  Any material errors could damage the reputation of our service or software, as well as damage our customer relations. We have detected errors, defects, and bugs in the past and have corrected them as quickly as possible.  Correcting any defects or bugs we may discover in the future

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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,

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power loss,

*

terrorist attacks,

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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 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

*

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.

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We experienced increased legal actions from 2009 until 2012 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 were included in litigation alleging violations of consumer protection and federal RICO laws, fraud and use of deceptive trade practices.  We have settled these legal actions; however, we may be subject to similar litigation in the future that 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.

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ITEM 6.  EXHIBITS

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SIGNATURES

Pursuant to the requirements 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.

Date:  May 15, 2014	By:  /s/ K. Lance Bell
	K. Lance Bell
	President, Chief Executive Officer,
	Principal Financial Officer, Treasurer
	and Chairman of the Board
Date:  May 15, 2014	By:   /s/ Tanner J. Purser
	Tanner J. Purser
	Secretary, Controller

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