Heyu Biological Technology Corp - Quarter Report: 2010 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]

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

For the quarterly period ended June 30, 2010

[  ]

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

For the transition period from ___ to ___

Commission file number: 000-26731

PACIFIC WEBWORKS, INC.

(Exact name of registrant as specified in its charter)

Nevada                                                                                    (State or other jurisdiction of incorporation or organization)	87-0627910                                       (I.R.S. Employer Identification No.)
230 West 400 South, 1st Floor, Salt Lake City, Utah (Address of principal executive offices)	84101        (Zip Code)

(801) 578-9020

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  [X]   No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [  ]   No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ] Non-accelerated filer [  ]	Accelerated filer [  ] Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ]   No [X]

The number of shares outstanding of the registrant’s common stock as of July 28, 2010 was 46,273,895.

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TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

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Consolidated Balance Sheets

3

Consolidated Statements of Operations (Unaudited)

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Consolidated Statements of Cash Flows (Unaudited)

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Notes to the Consolidated Financial Statements (Unaudited)

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

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Item 4.  Controls and Procedures

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PART II – OTHER INFORMATION

Item 1.  Legal Proceedings

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Item 1A.  Risk Factors

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Item 6.  Exhibits

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Signatures

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PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

The financial information set forth below with respect to our balance sheets as of June 30, 2010 and our statements of operations for the three and six month periods ended June 30, 2010 and 2009 is unaudited.  This financial information, in the opinion of management, includes all adjustments consisting of normal recurring entries necessary for the fair presentation of such data.  The results of operations for the six month period ended June 30, 2010 are not necessarily indicative of results to be expected for any subsequent period.  

PACIFIC WEBWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

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Pacific WebWorks, Inc

CONSOLIDATED BALANCE SHEETS

 

 

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

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Pacific WebWorks, Inc

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

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

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Pacific WebWorks, Inc

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

					For the Six Months Ended June 30,
					2009		2010
Cash Flows From Operating Activities
	Net earnings (loss)			$	322,803	$	974,165
	Adjustments to reconcile net earnings (loss) to net cash   used in operating activities
		Depreciation and amortization			21,803		45,923
		Valuation of stock options			11,665		25,022
	Changes in assets and liabilities
			Deferred tax asset		132,528		(285,957)
			Receivables		(1,661,349)		(79,714)
			Prepaid expenses and other assets		6,203		392,789
			Inventory		4,502		--
			Accounts payable and accrued liabilities		1,863,851		(202,340)
			Deferred revenue		(3,192)		--
	Net cash provided (used) by operating activities				698,814		869,888
Cash Flows From Investing Activities
	Purchases of property and equipment				(34,285)		(14,668)
	Cash on reserve with bank (restricted cash)				(134,706)		(125,131)
	Net cash (used) by investing activities				(168,991)		(139,799)
Cash Flows From Financing Activities
	Proceeds from notes payable				--		1,000,000
	Proceeds on issuance of stock from exercise of options				--		46,000
	Net cash provided by financing activities				--		1,046,000
	Net increase/(decrease) in cash and cash equivalents				529,823		1,776,089
	Cash and cash equivalents at beginning of period				377,743		1,490,769
	Cash and cash equivalents at end of period			$	907,566	$	3,266,858
Supplemental disclosures of cash flow information:
	Cash paid for interest			$	--	$	--
	Cash paid for income taxes			$	1,200	$	1,200
Non-cash financing activities:
	Stock issued for insurance			$	--	$	--
	Stock issued for services			$	--	$	--

 

 

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

(Unaudited)

NOTE 1 -

BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations.  The information furnished in the interim condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements.  Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its December 31, 2009 Annual Report on Form 10-K.  Operating results for the three and six month periods ending June 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010.

NOTE 2 – STOCK ISSUANCES

During May 2010, employees and officers of the Company exercised vested options. The Company issued 1,150,000 of its common stock for payment of $46,000.

NOTE 3 – NOTES PAYABLE

On January 27, 2010, the Company executed a Promissory Note in the amount of $1,000,000.  The entire principal amount, which accrues at 7% interest per annum, is due on or before January 27, 2012.  The Note is secured by a deed of trust.

NOTE 4 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events for the period of June 30, 2010 through the date the financial statements were issued, and concluded there were no events or transactions occurring during this period that required recognition or disclosure in its condensed financial statements.

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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.  This growth was related largely to the continued 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 tool in connection with the major retail sites.  However, this growth led to some abuses in our affiliate marketing system and management took actions to curtail these abuses.

During the first quarter of 2010 the Company devoted a significant amount of time and energy towards resolving the legal matters we were facing; in particular, the Google matter.  We were able to obtain a settlement in the Google matter and were dismissed from that legal action in May 2010.  We also devoted time and energy towards gaining a full understanding of the new credit card association rules and Federal Trade Commission guidelines directed towards our industry.  All of these issues have, and will affect our operations today and into the future.  

Given these distractions the Company has only recently commenced testing our revised marketing offers.  After only a brief period of testing, management determined that it is in the Company’s best interest to delay marketing our Visual WebTools product for the time being.  We are actively seeking additional marketing opportunities and other potential avenues through which we might grow the Company.  We will continue to ramp up our marketing expenditures through the remainder of 2010 as conditions allow.  We expect revenues for 2010 to be significantly less than those achieved in 2009, but we anticipate continued profitability.  Absent any currently unforeseeable events, we anticipate future growth moving forward from 2010 to be in the range of 10% to 20% per annum rather than the extreme growth we experienced in 2009.

Competition throughout the Internet software industry continues to intensify.  In particular, competition for the small office/home office business is intensifying with greater attention being directed to this market from a larger variety of product and service providers using new and more aggressive means to market to this industry.  We believe Pacific WebWorks has great potential in the marketplace, but we constantly need more capital and greater resources.  We also have the challenge of identifying and effectively implementing our products into new product distribution channels, responding to economic changes generally, continuing to gain marketplace acceptance and we must address shifting public attitudes for technology products.  These challenges could pose a threat to our success.  

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Liquidity and Capital Resources

We have relied primarily on revenues to fund operations for the past two years.  We expect to continue to generate positive cash flows through further development of our business and distribution channels and 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.

Our net income for the 2010 periods increased as compared to the 2009 periods and the improved cash flows along with a $1,000,000 loan has resulted in cash and cash equivalents of $3,266,858 at June 30, 2010.  The $1,000,000 promissory note is discussed in more detail, below, see “Commitments and Contingent Liabilities.”  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 for the next twelve months.

Maintaining sufficient merchant account processing capabilities will continue to be a factor in our overall performance.  In the past when we have not been able to satisfy payables to marketing partners  to generate the needed cash we sold a portion of our hosting portfolio that was in excess of merchant account limitations.  We may periodically be required to enter into similar sale transactions with other entities to properly manage our merchant account processing requirements.

In the event that we decide to rely on equity offerings for additional funding or services, then we will likely use private placements of our common stock pursuant to exemptions from the registration requirements provided by federal and state securities laws.  The purchasers and manner of issuance will be determined according to our financial needs and the available exemptions.  We also note that if we issue more shares of our common stock our stockholders may experience dilution in the value per share of their common stock.

We believe that we will be able to sustain our operations with existing cash 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 or equity offerings 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.  

Commitments and Contingencies

Current Liabilities: Our total current liabilities at June 30, 2010, included accounts payable, accrued liabilities and current liabilities from discontinued operations.   Accounts payable of $112,046 were related to operating costs such as marketing and advertising expenses and professional fees.  Our accrued liabilities of $47,262 were primarily the result of payroll related liabilities and income tax payable, offset by estimated refunds and receivables.   

Current liabilities from discontinued operations were $101,799 and were related to World Commerce Network, LLC.  The operations of World Commerce Network, LLC, our subsidiary, are ceased and discontinued.  These liabilities decreased from $215,274 in 2007 to $101,799 as a result of a recovery of previously recognized expenses related to the defunct World Commerce Network operations.  Management continues to attempt to negotiate settlements of World Commerce Network’s accrued liabilities.  As of June 30, 2010, World Commerce Network’s accrued liabilities totaled $101,799.  Management believes the recorded liabilities are sufficient to cover any resulting liability.  There has been no activity on any of these accounts for over three years.

Promissory Note:  Our long term liabilities include a promissory note in the amount of $1,000,000.  On January 27, 2010, Pacific WebWorks, executed a Promissory Note Secured by a Deed of Trust with Assignment of Rents in the principal amount of $1,000,000 (the “Note”).  The holder of the Note, Principal Development LLC, a Nevada limited liability company (the “Holder”), is entitled to receive the entire principal amount with all accrued interest, at 7% interest per annum, on or before January 27, 2012.  The Note is secured by a deed of trust with assignment of

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rents on our principal office building and a second commercial building we own in Salt Lake City, Utah.  Also, the Holder is entitled to collect rents and lease amounts, if any, from the buildings upon any default and may at its option elect to foreclose on the properties.  

The Note also provides that we may make payments prior to the due date and that any payment will be applied first to the reduction of interest and the remaining balance to the outstanding principal.  In the event we fail to pay any amount when due, then the amount owing will become immediately due and a default interest rate of 15% shall apply to the principal amount.  

Results of Operations

The following discussions are based on the consolidated financial statements of Pacific WebWorks, Intellipay, TradeWorks Marketing, FundWorks and the discontinued operations of World Commerce Network, LLC, a non-operating company, for the three and month periods ended June 30, 2010 and 2009.  The following charts are a summary of our financial statements for those periods and should be read in conjunction with the financial statements, and notes thereto, included with this report at Part I, Item 1, above.

SUMMARY BALANCE SHEET COMPARISON
	Year ended Dec. 31, 2009		Six month period ended June 30, 2010
Cash and cash equivalents	$ 1,490,769		$           3,266,858
Total current assets	4,328,041		6,018,528
Total assets	9,974,058		12,044,378
Total current liabilities	463,447		261,107
Total liabilities	463,447		1,261,107
Accumulated deficit	(7,864,775)		(6,890,610)
Total stockholders’ equity	$ 9,510,611		$        10,783,271

Total assets increased at June 30, 2010 as compared to December 31, 2009 primarily as a result of an increase in cash and cash equivalents resulting from loans and increased net income.  At June 30, 2010 total liabilities increased compared to the 2009 year end primarily as a result of increases in notes payable related to the promissory note for $1,000,000.  Our accumulated deficit continued to decrease at June 30, 2010 as a result of posting net income for the six month period ended June 30, 2010 (“2010 six month period”).

SUMMARY OPERATING RESULTS
	Three month period ended June 30,			Six month period ended June 30,
	2009	2010		2009		2010
Revenues, net	$     8,697,551	$    3,306,232		$     11,935,470		$    6,962,494
Cost of sales	84,893	281,819		135,486		299,834
Gross profit	8,612,658	3,024,413		11,799,984		6,662,660

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SUMMARY OPERATING RESULTS – Continued
	Three month period ended June 30,				Six month period ended June 30,
	2009	2010			2009		2010
Total operating expenses	8,750,584	1,949,805			11,470,543		5,179,629
Net income(loss) from operations	(137,926)	1,074,608			329,441		1,483,031
Total other income (expense)	157,786	4,172			159,654		(7,024)
Income tax expense	6,752	366,785			166,292		501,843
Income from continuing operations	13,108	711,995			322,803		974,165
Net income	13,108	711,995			322,803		974,165
Net income per share - basic	$               0.00	$           0.02			$              0.01		$            0.03

We recognize revenue from hosting, gateway, and maintenance fees, software, access and licensing fees, the sale of merchant accounts and custom website design work.  Revenues from up-front fees from customers are recorded on the balance sheets as deferred revenues and are recognized over the period services are performed, ranging from eight months to one year.  Fees for the set-up of merchant accounts are deferred and recognized as services are completed, which is generally two months.  Revenues from monthly hosting, maintenance, transaction and processing fees are recorded when earned.  Operating lease revenues for merchant accounts and software are recorded as they become due from customers.

Our net revenues decreased for the three month period ended June 30, 2010 (“2010 second quarter”) and the 2010 six month period compared to the 2009 six month period and 2009 second quarter as a result of our shift in marketing approaches.   During 2009 we relied upon an affiliate marketing approach, but due to abuses in that type of system we have limited our use of this system and are focusing on developing alternative means of marketing while developing additional controls against abuses within the affiliate system.   Management anticipates that revenues will grow from the reduced 2010 levels and then will grow at a lower rate in 2011.  Future revenues are expected to come largely from recurring residual income.  

Cost of sales includes costs related to fulfillment, customer service, certain royalties and commissions, amortization of purchased customer portfolios, service personnel, telecommunications and data center costs.  Cost of sales increased in the 2010 three and six month periods and was 4.3% of net revenues for the 2010 six month period as compared to 1.1% of net revenues for the 2009 six month period.  Cost of sales was lower in the 2009 periods due to the affiliate marketing strategy.  Management anticipates that cost of sales will remain higher in the short term as we continue our new marketing strategies.

Total operating expenses decreased for the 2010 periods compared to the 2009 periods primarily due to decreases in selling expenses.  Selling expenses decreased as a result of shifting away from an affiliate marketing approach.  Selling expenses include advertising expense, commissions and personnel expenses for sales and marketing and these expenses were higher in 2009 due to increased 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, banking and merchant fees, and other overhead-related costs.  General and administrative expenses decreased for the 2010 second quarter compared to the 2009 second quarter, but increased for the 2010 six month period as compared to the 2009 six month period.  The higher general and

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administrative expenses in the 2010 six month period were consistent with the increases in customer accounts and the need to increase our staff to provide services for the new customer accounts.  

Our net income for the 2010 periods reflect the leveling off of growth related expenses incurred to address the increased revenues in 2009.  

Off-balance Sheet Arrangements

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

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Estimates of particular significance in our financial statements include 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.

Goodwill -  Goodwill related to Intellipay is assessed annually for impairment by comparing the fair values of Intellipay to its carrying amount, including goodwill.  In testing for a potential impairment of goodwill, the estimated fair value of Intellipay is compared with book value, including goodwill.  If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary.  If, however, the fair value of Intellipay is less than book value, then the carrying amount of the goodwill is compared with its implied fair value.

The estimate of implied fair value of goodwill may require independent valuations of certain internally generated and unrecognized intangible assets such as our paying monthly gateway portfolio, software and technology and trademarks.  If the carrying amount of our goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess.  The fair value of Intellipay is estimated using both cash flow information from internal budgets and multiples of revenue.  In the event that an impairment indicator arises prior to our annual impairment test of goodwill, we will provide a full test relative to the indicator in the period that the indicator is present.  

Contingent liabilities - Material estimates for contingent liabilities include approximately $0 for our operating companies and approximately $101,799 in net current liabilities of our discontinued operations.  From a liquidity standpoint, any settlement or judgment received by us from pending or threatened litigation may have a direct effect on our cash balances at June 30, 2010.  Any judgments that may be received by us for pending or threatened litigation related to discontinued operations may not have a direct effect on our assets as management does not intend to satisfy such claims with the assets of our operating companies.  Management believes that all amounts estimated and recorded as contingent liabilities approximate the amount of liabilities that could be owed to parties in the form of settlement or in a judgment.  We have had no communication for over three years with any of the parties related to the contingent liabilities of our discontinued operations.  Any settlements that might occur below amounts accrued would result in a favorable impact to our earnings and working capital.

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Valuing stock options - We measure and record compensation cost relative to performance stock option costs in accordance with FASB ASC, which requires the Company to use the Black-Scholes pricing model to estimate the fair value of options at the option date of grant.  The fair value of the option grant is established at the date of grant using the Black-Scholes option pricing model based on assumptions related to the five year risk free interest rate, dividend yield, volatility, and average expected term (years to exercise).

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 (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC.  This information is accumulated to allow timely decisions regarding required disclosure.  Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, they concluded that our disclosure controls and procedures were effective.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act).  Management conducted an evaluation of the effectiveness of our internal control over financial reporting and determined that there were no changes made in our internal control over financial reporting during the second quarter of our 2010 fiscal year that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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.  

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 and federal RICO laws, committed fraud and used deceptive trade practices in relation to the manner in which Pacific WebWorks charges 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 and 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 move to dismiss all claims.

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On January 5, 2010 another similar lawsuit was filed by Song Que Hahn, a California resident, in the United States District Court for the District of Utah.  On February 8, 2010, our legal counsel filed a motion to strike the class allegations and a motion to dismiss all claims, except the breach of contract claims.  On March 9, 2010 Hahn filed an opposition to our motions and counsel intends to refute the arguments presented in the oppositions.  

Other

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

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

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

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

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

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

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

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

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

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

*

fire

*

earthquake,

*

power loss,

*

terrorist attacks,

*

harmful software programs,

*

telecommunications failure, and

*

unauthorized entry or other events.

Although we regularly back up data from operations, and take other measures to protect against loss of data, there is still some risk of such losses.  Despite the security measures we maintain, our infrastructure may be vulnerable to computer viruses, hackers, rouge employees or similar sources of disruption.  Any problem of this nature could result in significant liability to customers or financial institutions and also may deter potential customers from using our services.  We attempt to limit this sort of liability through back-up systems, contractual provisions, insurance and other security measures.  However, we cannot assure you that these contractual limitations on liability would be enforceable, or that our insurance coverage would be adequate to cover any liabilities we might sustain.

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

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

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

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

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

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We may not be able to adapt as the Internet market changes.

Our failure to respond in a timely manner to changing market conditions or client requirements could have a material adverse effect on our business, prospects, financial condition, and results of operations.  The Internet is characterized by:

*

rapid technological change;

*

changes in advertiser and user requirements and preferences;

*

frequent new product and service introductions embodying new technologies; and

*

the emergence of new industry standards and practices that could render our existing service offerings, technology, and hardware and software infrastructure obsolete.

In order to compete successfully in the future, we must:

*

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

*

license, develop or acquire technologies useful in our business on a timely basis; and

*

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

Our future success depends on continued growth in the use of the Internet and Internet-based services for small business.

Because the Internet is a rapidly evolving industry, the ultimate demand and market acceptance for our products will be subject to a high level of uncertainty.  Significant issues concerning the commercial use of the Internet and online service technologies, including security, reliability, cost, ease of use, and quality of service, remain unresolved and may inhibit the growth of Internet business solutions that use these technologies.  In addition, the Internet or other online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased governmental regulation.

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 marketing strategies and these legal actions have required our cash flows to be directed to our defense.  Our marketing strategies rely 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.

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Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could lead to loss of investor confidence in our reported financial information.

If we fail to achieve and maintain the adequacy of our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act (“Section 404").   Effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud.  If we cannot provide reliable financial reports or prevent fraud, then our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.  

Pursuant to Section 404, in our annual report for the year ended December 31, 2010 we will be required to provide an attestation from our independent registered public accounting firm as to the effectiveness of our internal control over financial reporting.  We cannot assure you as to our independent registered public accounting firm’s conclusions at December 31, 2010 with respect to the effectiveness of our internal control over financial reporting and there is a risk that our independent registered public accounting firm will not be able to conclude at that time that our internal controls over financial reporting are effective as required by Section 404.

ITEM 6.  EXHIBITS

Part I Exhibits

No.

Description

31.1

Chief Executive Officer Certification

31.2

Principal Financial Officer Certification

32.1

Section 1350 Certification

Part II Exhibits

No.

Description

3.1

Articles of Incorporation, as amended (Incorporated by reference to exhibit No. 3.1 for Form 10-Q filed November 13, 2001)

3.2

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

10.1

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

10.2

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

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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. By:   /s/ Christian R. Larsen         Christian R. Larsen         President and Director	Date:  August 14, 2010
By:  /s/ Kenneth W. Bell         Kenneth W. Bell         Chief Executive Officer, Treasurer,         and Chairman of the Board	Date:  August 14, 2010
By:  /s/ R. Brett Bell          R. Brett Bell          Chief Financial Officer and Secretary	Date:  August 14, 2010

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