Heyu Biological Technology Corp - Annual Report: 2010 (Form 10-K)

Pacific WebWorks’ 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.

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We initially focused 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.

Pacific WebWorks is currently expanding operations to include an investment and business consulting arm which will seek expansion opportunities into synergistic areas.  Pacific WebWorks is also actively seeking acquisition opportunities that can add to our consolidated family of subsidiaries.

We have 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. 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. is dormant, but previously provided operating lease arrangements for certain TradeWorks’ customers.  In July of 2007 we formed Pacific WebWorks International, LTD to market our products and services in Europe and also provide a vehicle for the establishment of offshore credit card processing capabilities.  To date we have not initiated any of these activities offshore and have allowed that company’s registration to lapse.

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.

Additionally, we believe our new investment and consulting operation 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.

Pacific WebWorks Product Characteristics

Visual WebTools^TM 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

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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.

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

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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.

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

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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 7 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:

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

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

Sales and Marketing

As a result of recent difficulties related to the use of the affiliate market system in selling our products the Company is seeking ways to market our existing products in a less risky manner. We are actively discussing more controlled marketing opportunities through which our products can be sold.

Previously we have 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.   

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.  

At the present time, we have not identified any other companies that are using an identical approach to ours.  Nonetheless, it is probable that larger interests will choose to enter the market we are developing or that a new market may emerge.  Although we feel the market is vast and should accommodate many technology providers, competitor scale and volume may present a growing risk in the future.

In our estimation, few major competitors currently offer products comparable to the Visual WebTools™ product

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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 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:

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our ability to successfully maintain and sell existing products;

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

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

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

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

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

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

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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 10,000 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.  In the past 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.

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 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

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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.  

All 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, 2009, we recorded research and development expense of $422,829 primarily related to the maintenance of our technologies and the development of our new offerings.  The research and development expense for the year ended December 31, 2010 is not available at this time.

Material Contracts

In March 2007 we entered into a telecommunications and Internet access agreement with Verizon Business Services, Inc. (“Verizon”).  The Verizon agreement, accepted on October 9, 2007, provides local and long distance telephone service and Internet service from 10MB burstable to 45MB to our principle offices.

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 will be followed by a two year contract.

Employees

As of the date of this filing the Company has eight employees in Pacific WebWorks.  We have four employees in administration, two development engineers and two customer service personnel.  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.

ITEM 1A.  RISK FACTORS

Factors Affecting Future Performance

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

We rely upon our credit card merchant accounts to collect our monthly hosting payments and many of the limitations imposed upon us by the credit card associations, in the opinion of management, are unreasonable and

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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.   To address this issue we may sell a portion of our hosting portfolio in excess of merchant account limitations.

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

Based on our current growth plan we believe we will be able to support our operations from existing cash balances and future cash flows for at least the next twelve to twenty-four months.  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.

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.

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If employees or collaborators develop products independently that may be applicable to our products under development, disputes may arise about ownership of proprietary rights to those products or services.  Protracted and costly litigation could be necessary to enforce and determine the scope of our proprietary rights.  It would be impossible to predict whether litigation might be successful.

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

We rely on certain technology which we license from third parties, including software which is integrated with internally developed software and used in our software to perform key functions.  Our inability to maintain any of these technology licenses could result in delays in distribution of our services or increased costs of our products and services.  We cannot assure you that third party technology licenses will continue to be available to us on commercially reasonable terms, or at all.

We must update our products and services and may experience increased costs and delays which could reduce operating profit.

The electronic commerce, web hosting and merchant processing markets in which we compete are characterized by technological change, new product introductions, evolving industry standards and changing customer needs.  In order to remain competitive, we may be required to engage in a number of research and development projects, which carries the risks associated with any research and development effort, including cost overruns, delays in delivery and performance problems.  Any delay in the delivery of new products or services could render them less desirable by our customers, or possibly even obsolete.  Any performance problem with a new product or service may require significant funds to correct the problem.  As a result of these factors, our research and development efforts could result in increased costs that could reduce our operating profit, a loss of revenue if promised new products are not timely delivered to our customers, or a loss of revenue or possible claims for damages if new products and services do not perform as anticipated.

We may experience software defects which may damage customer relations.

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

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

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

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fire

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earthquake,

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power loss,

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terrorist attacks,

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harmful software programs,

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telecommunications failure, and

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unauthorized entry or other events.

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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 assure you that these contractual limitations on liability would be enforceable, or that our insurance coverage would be adequate to cover any liabilities we might sustain.

Also, a breach of our e-commerce security measures could reduce demand for our services.  The e-commerce industry is intensely focused on the need for Internet security, particularly with respect to the transmission and storage of confidential personal and financial data.  Any compromise or elimination of our security could erode customer confidence in our systems and could result in lower demand for our services or possible litigation.

We are dependent upon license renewal which cannot be assured to occur.

We derive revenues from user licenses and license renewals on a month-to-month arrangement.  We also intend to increase the brand recognition of our products among users through these types of relationships.  If a substantial number of our customers were to decline to renew their contracts for any reason, then we could experience a substantial drop in revenues. Our success in establishing our products as a recognized brand name and achieving their acceptance in the market will depend in part on our ability to continually engineer and deliver new product technologies and superior customer service, so that customers renew their licenses month to month.

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

We intend to expand our services and product offerings and anticipate evaluating potential acquisitions of businesses, services, products, or technologies.  These acquisitions may result in a potentially dilutive issuance of equity securities, the incurrence of debt and contingent liabilities, and amortization of expenses related to goodwill and other intangible assets.  In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, services, and products of the acquired companies; the diversion of management’s attention from other business concerns; risks of entering markets in which we have no or limited direct prior experience; and, the potential loss of key employees of the acquired company.  As of the date of this filing, we have no present commitment or agreement with respect to any material acquisition of other businesses, services, products, or technologies.

We may 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:

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rapid technological change;

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changes in advertiser and user requirements and preferences;

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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:

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enhance our existing products and develop new services and technology that address the increasingly sophisticated and varied needs of our prospective or current customers;

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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

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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 have required our cash flows to be directed to our 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, 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.  In October 2009 we offered to purchase the office building that currently houses our principal offices and a second commercial building for $1.85 million.  We closed this transaction on December 29, 2009.  Both buildings sit on approximately 0.82 acres of land located in the “central business district” of Salt Lake City, Utah.  We currently occupy 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 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

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.  

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On July 9, 2010 and July 10, 2010, two additional suits brought by the same law firm as the above three cases were filed in Missouri and Florida.  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 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.  

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.  

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.

Other Actions

On January 21, 2010, the State of Florida served Pacific WebWorks with a subpoena seeking production of documents related to an alleged violation of consumer protection laws in the state of Florida.  The Company has denied it has violated any Florida consumer protection laws.  Our counsel has responded to that subpoena, and it appears that the State of Florida and the Company have come to resolution as to a settlement of this dispute and are in the process of completing the settlement documents.

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 alleges 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.  Discovery has commenced in that action.

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.  [Reserved]

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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 Bulletin Board under the symbol “PWEB.”  The following table presents the range of the high and low bid prices of our common stock for each quarter for the past two years 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.

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 8, 2011 we had 415 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.

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ITEM 6.  SELECTED FINANCIAL DATA

Not applicable to smaller reporting companies.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

As reported in our Current Report on Form 8-K, on January 31, 2011 we dismissed our former auditing firm Chisholm, Bierwolf, Nilson & Morrill, LLC and engaged Morrill & Associates, LLC as our independent public registered accounting firm.  The Company intends to file a Current Report on Form 8-K to disclose the termination of  Morrill & Associates, LLC as our independent registered public accounting firm on April 13, 2011 and the engagement of Michael J. Larsen, Certified Public Accountant, as the Company’s independent registered public accounting firm on April 14, 2011.

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.  As of the date of this report we have one vacancy on our board of 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.  There are no family relationships between our directors and executive officers.

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.  He has not been involved in any legal proceedings during the past ten years that are material to

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an evaluation of his ability or integrity.

Christian R. Larsen:  Mr. Larsen has served as our President since April 1999.  He was appointed Secretary in October 2010.  He also 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.  He has not been involved in any legal proceedings during the past ten years that are material to an evaluation of his ability or integrity.

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, 2010, 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.

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 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.  The majority of all executive bonuses paid during 2010 were paid in the first quarter of that year, prior to the Company understanding the limitations placed upon its marketing efforts.