UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q10-Q/A
Amendment No. 1
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For Quarter Ended: March 31,September 30, 2001
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 000-26731
Pacific WebWorks, Inc.PACIFIC WEBWORKS, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0627910
(State of incorporation) (I.R.S. Employer
Identification No.)
180 South 300 West, Suite 400
Salt Lake City, Utah 84101
(801) 578-9020
(Address and telephone number of principal executive offices
and principal place of business)
1760 Fremont Avenue, Salt Lake City, Utah 84104
(Former address)
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 [ ]
As of April 27,November 1, 2001 the Registrant had a total of 18,626,68822,826,688 shares of
common stock issued and outstanding.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements..............................................3
Item 2: Management's Discussion andAnd Analysis or Plan of Operations.......11Financial Condition
And Results of Operations........................................16
Item 3: Quantitative and Qualitative Disclosure..........................14Disclosures About Market Risk.......21
PART II: OTHER INFORMATION
Item 1: Legal Proceedings.................................................15Proceedings................................................21
Item 2: Changes in Securities and Use of Proceeds.........................15
Item 3: Defaults Upon Senior Securities...................................16
Item 5: Other Information.................................................16Proceeds........................21
Item 6: Exhibits and Reports filed on Form 8-K ...........................16
Signatures................................................................18
2
8-K.......................... 22
Signatures................................................................23
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
The financial information set forth below with respect to our statements
of operations for the three monthsand nine month periods ended March 31,September 30, 2001
and 2000 is unaudited. This financial information, in the opinion of
management, includes all adjustments consisting of normal recurring entries
necessary for the fair presentationspresentation of such data. The results of operations
for the threenine months ended March 31,September 30, 2001, are not necessarily indicative
of results to be expected for any subsequent period.
32
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,September 30, December 31,
2001 2000
------------- -------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 40,786255,611 $ 163,801
Receivables
Trade, less allowance for doubtful receivables of $128,795 in 2001
and $88,487 in 2000 220,757136,560 257,492
Employee -2,096 2,469
Prepaid expenses 351,903252,475 275,022
------------- -------------
Total current assets 613,446646,742 698,784
------------- -------------
PROPERTY AND EQUIPMENT, NET AT COST (Note 4) 1,406,525331,801 374,259
OTHER ASSETS (Note 2 and 3) 5,789,5113,256,009 4,331,979
------------- -------------
$ 7,809,4824,234,552 $ 5,405,022
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long- term capital leases $ 278,9421,410 $ 2,425
Accounts payableCapital leases in default 440,174 -
Payables past due 291,351295,576 -
Overdraft in bank 23,766 -
Accounts payable 372,384331,165 611,950
Accrued liabilities 418,050 390,209300,235 193,161
Other current liabilities 228,058 197,048
Deferred revenue 755,053156,749 1,811,020
NoteNotes payable 216,580 216,580
Notes payable - related party (Note 5 and 8) 911,664parties - 250,000
------------- -------------
Total current liabilities 3,244,0241,993,713 3,282,184
------------- -------------
Long-term capital lease obligations 148,588- 670
COMMITMENTS AND CONTINGENCIES (Notes 4,5,7 and 8)
STOCKHOLDERS' EQUITY (Notes 5,6 & 8)
Common stock - par value $0.001; authorized
50,000,000; issued and outstanding 18,345,20022,826,688
in 2001 and 15,008,000 in 2000 18,34622,827 15,008
Additional paid-in capital 12,883,24014,874,633 10,153,603
Accumulated deficit (8,484,716)(12,656,621) (8,046,443)
------------- -------------
Total stockholders' equity 4,416,8692,240,839 2,122,168
------------- -------------
$ 7,809,4824,234,552 $ 5,405,022
============= ==============
The accompanying notes are an integral part of these statements.
3
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months ended Three months ended
September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues, net
Software, access and license fees $ 1,682,762 $ 2,913,515 $ 121,886 $ 1,509,443
Hosting and maintenance fees 827,624 311,419 330,732 160,067
Training, design and other 65,363 48,574 18,244 13,159
------------- ------------- ------------- -------------
2,575,749 3,273,508 470,862 1,682,669
Cost of sales 435,394 549,067 79,416 238,804
------------- ------------- ------------- -------------
Gross profit 2,140,355 2,724,441 391,446 1,443,865
Selling expenses 498,128 4,503,581 164,372 737,804
Research and development 343,164 645,372 88,087 246,972
General and administrative 1,313,460 1,918,994 389,445 528,141
Depreciation and amortization 1,540,941 730,052 365,556 349,024
Compensation expense for options and warrants 188,782 - 133,803 -
Impairment loss - goodwill and other
long-lived assets 2,688,300 - - -
------------- ------------- ------------- -------------
Total operating expenses 6,572,775 7,797,999 1,141,263 1,861,941
------------- ------------- ------------- -------------
Loss from operations (4,432,420) (5,073,558) (749,817) (418,076)
------------- ------------- ------------- -------------
Other income (expense)
Loss on sale or abandonment of assets (69,319) - - -
Interest and other income 5,493 - 181 -
Interest expense (106,036) (100,553) (19,958) (40,226)
Other expenses (7,896) - (7,896) -
------------- ------------- ------------- -------------
(177,758) (100,553) (27,673) (40,226)
------------- ------------- ------------- -------------
NET LOSS $ (4,610,178) $ (5,174,111) $ (777,490) $ (458,302)
============= ============= ============= =============
Net loss per common share - basic and diluted $ (0.23) $ (0.41) $ (0.03) $ (0.03)
Weighted-average number of shares outstanding
- basic and diluted 19,927,725 12,504,532 22,693,355 14,267,212
============= ============= ============= =============
The accompanying notes are an integral part of these statements.
F-1
4
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
March 31,
2001 2000
------------- -------------
Revenues, net $ 1,351,970 $ 372,972
Cost of sales 227,700 65,691
------------- -------------
Gross profit 1,124,271 307,281
Selling expenses 219,792 1,431,393
Research and development 143,095 81,116
General and administrative 451,782 695,099
Depreciation and amortization (Note 2) 574,422 32,842
Compensation expense for options and warrants 12,900 13,216
------------- -------------
Total operating expenses 1,401,991 2,253,666
------------- -------------
Loss from operations (277,721) (1,946,385)
------------- -------------
Other income (expense)
Non-recurring loss (Note 4) (122,685)
Interest income and other 3,566 -
Interest expense (41,434) (15,215)
------------- -------------
(160,553) (15,215)
------------- -------------
NET LOSS $ (438,273) $ (1,961,600)
============= =============
Net loss per common share - basic and diluted $ (0.03) $ (0.19)
============= =============
Weighted-average number of shares outstanding
- basic and diluted 17,132,209 10,400,342
============= =============
The accompanying notes are an integral part of these statements.
F-2
5
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the
Three Months
Ended March 31,
2001 2000
------------- -------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $ (438,273) $ (1,961,600)
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation & amortization 574,422 32,842
Issuance of options for compensation 12,900 -
Impairment loss 122,685 -
Bad debt expense 40,308 9,000
Loss on Investment - (25,000)
Changes in assets and liabilities
(Net of effects of acquisitions)
Receivables 2,065 (300,269)
Prepaid expenses and other assets (2,204) (193,891)
Other assets 1,796 -
Accounts payable 44,111 380,202
Deferred revenue (1,055,967) 1,619,060
------------- -------------
Total adjustments (259,884) 1,521,944
Net cash used in operating activities (698,157) (439,656)
------------- -------------
Cash flows from investing activities
Purchases of property and equipment (72,127) (18,788)
Cash paid for notes receivable - (153,000)
Cash acquired in acquisitions 5,058 5,628
------------- -------------
Net cash used in investing activities (67,069) (166,160)
------------- -------------
Cash flows from financing activities
Proceeds from issuance of notes payable 661,664 579,005
Cash received for contributed capita l1,475 -
Principal payments of long-term obligations (20,928) -
------------- -------------
Net cash provided by financing activities 642,211 579,005
------------- -------------
Net increase decrease in cash and cash
equivalents (123,015) (26,811)
Cash and cash equivalents at beginning of period 163,801 153,898
------------- -------------
Cash and cash equivalents at end of period $ 40,786 $ 127,087
============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,401 $ 11,854
Cash paid for income taxes - -
Non-cash financing activities:
Issuance of common stock for deposit and rent $ 268,600
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the
nine months
ended September 30,
2001 2000
------------- -------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $ (4,610,178) $ (5,174,111)
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation & amortization 1,540,941 730,051
Issuance of options and warrants for compensation 188,782 -
Impairment loss 2,688,300 -
Bad debt expense 55,000 18,000
Loss on sale or abandonment of property and equipment 69,319 -
Loss on investment - 25,000
Other adjustments 34,661 -
Changes in assets and liabilities
(Net of effects of acquisitions)
Receivables 69,474 (95,021)
Prepaid expenses and other assets 541,169 (346,018)
Accounts payable and accrued liabilities (32,244) 71,071
Deferred revenue (1,654,271) 2,719,588
------------- -------------
Total adjustments 3,501,131 3,122,671
Net cash used in operating activities (1,109,047) (2,051,440)
------------- -------------
Cash flows from investing activities
Purchases of property and equipment (78,319) (244,150)
Proceeds from sale of property and equipment 14,412 -
Cash paid for deposits - (500)
Cash acquired in acquisitions 5,058 9,718
------------- -------------
Net cash used in investing activities (58,849) (234,932)
------------- -------------
Cash flows from financing activities
Overdraft in bank 23,766 -
Proceeds from issuance of notes payable 900,000 597,446
Cash received for contributed capital 1,475 -
Net proceeds from issuance of stock 376,000 1,625,945
Principal payments of long-term obligations (41,536) (18,873)
------------- -------------
Net cash provided by financing activities 1,259,705 2,204,518
------------- -------------
Net increase decrease in cash and cash equivalents 91,809 (81,854)
Cash and cash equivalents at beginning of period 163,801 153,898
------------- -------------
Cash and cash equivalents at end of period $ 255,611 $ 72,044
============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 63,227 $ 98,715
Cash paid for income taxes - -
Non-cash financing activities:
Issuance of common stock for prepaid services,
deposit and rent $ 488,600 $ -
Purchase of Logio subsidiary for stock 2,450,000 -
Retired debt through escrow 1,214,000 -
Prepaid insurance for stock 70,000 -
The accompanying notes are an integral part of these statements.
F-3
65
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,September 30, 2001
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
The Company
- -----------
Pacific WebWorks, Inc. and its subsidiaries, engage in the development and
distribution of web tools software, electronic business storefront hosting,
and Internet payment systems for individuals and small to mid-sized
businesses.
The Company conducts its business within one industry segment.
Basis of Presentation
- ---------------------
The accompanying unaudited consolidated financial statements reflecthave been
prepared in accordance with the instructions for form 10-Q of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting standards have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. The accompanying
interim consolidated financial information reflects all adjustments
(consisting of normal recurring adjustments,adjustments), which, in the opinion of
management, are necessary for a fair presentation of the results for the
periods shown. These financial statements should be read in conjunction with
the audited consolidated financial statements and the notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2000. The results of operations for the quarter and nine months ended
September 30, 2001 may not be indicative of the results that may be expected
for the fiscal year ended December 31, 2001. Certain prior period balances
have been reclassified to conform with current period presentation.
The accompanying condensed consolidated financial statements include the
accounts of Pacific WebWorks, Inc. and its wholly owned subsidiaries,
Intellipay, Inc., World Commerce Network, LLC., and Logio, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Management
believes that the estimates used in preparing the financial statements are
reasonable and prudent; however, actual results could differ from these
estimates.
6
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - Continued
Revenue Recognition
- -------------------
The Company recognizes revenue in accordance with the Securities and Exchange
Commission, Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements." SAB 101 clarifies application of generally accepted
accounting principles to revenue transactions. The Company also follows SOP
97-2.
Revenues from up-front fees are deferred and recognized over the period
services are performed (which is generally one year). Revenues from monthly
hosting, maintenance, transaction and processing fees are recorded when
earned.
Impairment of Long-Lived and Intangible Assets
- ----------------------------------------------
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, which requires that impairment losses be recognized
on such assets when indicators of impairment are discovered and estimated
undiscounted future cash flows to be generated from those assets are less than
their carrying value. As of June 30, 2001, and as a result of certain events
and management's assessment of impaired assets, the Company recorded $911,532
in losses relating to the impairment of certain long-lived assets in Logio,
Inc. and $1,776,768 in losses relating to the impairment of goodwill for
Logio, Inc. and World Commerce Network.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141 (SFAS 141), "Business
Combinations" and No. 142 (SFAS 142), "Goodwill and Other Intangible Assets",
which establishes new standards for the treatment of goodwill and other
intangible assets. SFAS 142 is effective for fiscal years beginning after
December 31, 2001. SFAS 142 prescribes that amortization of goodwill will
cease as of the adoption date. Additionally, the Company will be required to
perform an impairment test on goodwill and other intangible assets as of the
adoption date, annually thereafter, and whenever events and circumstances
occur that might affect the carrying value of such assets. The Company
estimates that the effect of ceasing the amortization of goodwill related to
SFAS 142 will be material to the company's financial statements subsequent to
the adoption date. The Company amortizes approximately $906,000 annually of
goodwill for its Intellipay subsidiary. The Company has not yet determined
what effect, if any, the impairment test of goodwill and other intangible
assets will have on the Company's results of operations and financial
position. The Company does not believe that SFAS 141 will have a material
impact on its financial position and results of operations.
7
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - Continued
Recently Issued Accounting Pronouncements- Continued
- ----------------------------------------------------
In October 2001, the FASB issued Statement of Financial Accounting Standard
No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets". SFAS replaces Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS 144
prescribes, among other things, an accounting model for long-lived assets to
be disposed of including sales and discontinued operations. The Company is
evaluating the impact of this pronouncement on its financial position and
results of operations in future filings.
NOTE 2 - MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY
The Company's financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has a limited operating
history and has sustained losses since inception. In addition the Company had
negative cash flows from operations of $1,109,046 and $2,051,440 during the
nine-month periods ended September 30, 2001 and 2000, respectively and
$2,100,149 during the year ended December 31, 2000. The company had negative
working capital of $1,346,971 at September 30, 2001 and $2,583,400 at December
31, 2000. As a result, the Company has relied significantly upon equity and
debt funding to support certain of its operations.
The Company is working through various matters related to disputes with a
vendor and an employee claim, which may impact its cash position (see Note
10).
During the nine months ended September 30, 2001, the Company has taken steps
to reduce its burn rate in order to meet its monthly cash requirements from
operations with its reoccurring monthly cash revenues. This has been
accomplished through a reduction in personnel, relocation to lower-cost office
facilities and other expense reduction activities. The Company has also
focused its immediate attention to the operations and growth of its core
business units: Pacific WebWorks, Inc. and Intellipay, Inc. In the course of
these activities, the Logio, Inc. subsidiary, which had temporarily ceased
development and operations of its Internet products, became unable to make
payment on its payables and certain of its capital lease agreements related to
hardware and infrastructure. As a result of these defaults, Logio's most
significant creditor obtained possession of the equipment under its lease
agreements in May of 2001. These events have caused impairments related to
the loss of the equipment under capital leases, other long-lived assets
related to the equipment and the goodwill of the subsidiary to be recorded
during second quarter 2001 (see Note 5). Impairment losses recorded for these
events and the
8
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
NOTE 2 - MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY - Continued
assessment of impairment in the World Commerce Network subsidiary resulted in
$2,688,300 of impairment losses for the nine months ended September 30, 2001.
In May of 2001, the Company entered into a stock purchase agreement with
certain of its existing shareholders and other entities pursuant to the sale
of 4,000,000 shares of its common stock and warrants for $1,600,000 (see Note
8). The funding was used to retire certain debt and is being used to support
operations.
The Company expects to generate positive cash flows from operations through
continued burn rate reduction and our business development and sales
activities. The Company's cash requirements in excess of monthly cash inflows
until this point will be funded primarily by the net cash received from our
June offering (see Note 8). Further equity placements and debt issuance may
be required to support operations and to pay existing liabilities of the
Company.
There is substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to reflect
the possible effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.
NOTE 3 - ACQUISITION OF LOGIO, INC.
On February 8, 2001, Pacific WebWorks completed its acquisition of Logio,
Inc., a development stage company, in a stock-for-stock exchange. Pacific
WebWorks exchanged 2,800,000 shares of its common stock for 18,425,830 shares
of common stock. This transaction was accounted for on the purchase method of
accounting using generally accepted accounting principles and valued at
approximately $2,450,000 representing the fair value of the Pacific WebWorks
shares on the date of exchange. Goodwill totaling $1,855,388 willbegan to be
amortized over three years and approximately $88,000$242,967 was amortized for the
period from acquisition to March 31,June 30, 2001. The Company's goodwill related to
the acquisition of Logio has been impaired in second quarter 2001 (see Notes 2
and 5). Logio's results of operations are included in the Pacific WebWorks,
Inc. consolidated results of operations from the acquisition date to March 31,June 30,
2001 and it's the fair values of its assets and liabilities have also been
recorded on the acquisition date and are included in the Pacific WebWorks,
Inc. consolidated balance sheet.
NOTE 3 - OTHER ASSETS
Other assets include the following: March 31,
2001 2000
-------------- -------------
Goodwill, net $ 5,568,145 $ 4,041,226
Software development costs, net 213,789 270,495
Other 7,577 20,258
-------------- -------------
$ 5,789,511 $ 4,331,979
============== =============
F-4
79
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,September 30, 2001
(Unaudited)
NOTE 4 - NON-RECURRING CHARGEPROPERTY AND EQUIPMENT
Property and equipment includes the following: September 30, December 31,
2001 2000
------------- -------------
Computer Equipment $ 421,898 $ 332,714
Equipment 83,781 96,833
Software 83,641 74,342
Furniture and Fixtures 93,672 72,090
Leasehold Improvements - 6,667
------------- -------------
682,992 582,646
Less Accumulated Depreciation (351,191) (208,387)
------------- -------------
$ 331,801 $ 374,259
============= =============
Impairment charges totaling $911,532 were recorded in Logio, Inc. during the
nine months ended September 30, 2001 representing equipment under capital
lease agreements under default, primarily returned to hardware vendors, cash
down payments and related equipment and software. Loss on sale or abandonment
of property and equipment totals $69,319 for the nine months ended September
30, 2001.
NOTE 5 - OTHER ASSETS
Other assets include the following: September 30, December 31,
2001 2000
------------- -------------
Goodwill $ 6,628,642 $ 4,773,255
Acquired technology 824,480 824,480
Other 19,250 20,258
------------- -------------
7,472,372 5,617,993
------------- -------------
Accumulated amortization (2,439,595) (1,286,014)
Impairment losses (1,776,768) -
------------- -------------
$ 3,256,009 $ 4,331,979
============= =============
10
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
NOTE 6 - ACCRUED AND OTHER LIABILITIES
Accrued liabilities consist of the following: September 30, December 31,
2001 2000
-------------- -------------
Payroll related liabilities $ 164,127 $ 139,096
Interest payable 48,940 14,192
Reseller commissions 55,490 39,400
Contingent liabilities 30,000 -
Other 1,678 473
------------- -------------
$ 300,235 $ 193,161
============= =============
Payroll related liabilities totaling $140,240 at September 30, 2001 includes
approximately $85,000 in estimated taxes, penalties and interest past due from
Intellipay, Inc. to the Internal Revenue Service for periods prior to and
immediately after its acquisition by Pacific WebWorks, Inc.
Other current liabilities consist of estimated returns and chargebacks from a
leasing company that funded customer purchases and placed them on a payment
plan during 2000. The Company is responsible for recourse on leases on which
customers have not made first payment. Estimated chargebacks and other
estimated returns and refunds approximates $228,058 at September 30, 2001 and
$197,000 at December 31, 2000 for all companies under consolidation. The
Company makes an effort to further collect all amounts that have fallen under
recourse with the leasing company.
NOTE 7 - PAYABLES AND CAPITAL LEASES IN DEFAULT
In March 2001, Logio, Inc., a subsidiary of Pacific WebWorks, Inc., was unable
to make payment on some of its capital lease obligations. Logio, Inc.
is
currently attempting a favorable negotiation withtransferred the leasing company and
anticipates that the equipment will be transferred back to the vendor.vendor in May of 2001. The default on
these and other capital lease obligations, which approximates $404,000approximating $440,000 at March 31, 2000,September
30, 2001, results in an impairment losslosses of $122,685, which representsrepresenting cash down
payments by Logio at the beginning of the leases that were being amortized
over the life of the leases.leases and $788,847 in equipment under capital leases and
related software and equipment. The leases expire through December 2002.
NOTE 5 - RELATED PARTY TRANSACTIONS
Building deposit and rent
- -------------------------
During January 2001, we entered into an agreement with a related party for
rental of our operations center. Monthly minimum rental payments total
$26,200 and the agreement expires in December 2001. We issued a total of
537,200 common shares to the related party for $268,600 related to a rental
deposit and three months of rental for our operations center in Salt Lake
City, Utah.
Notes Payable
- -------------
In January 2001, the Company was advanced $100,000 from related parties in
exchange for a note payable. The bears interest at 13% per year and is due
upon the earlier of $2,000,000 received in equity funding or June 1, 2001.
In February 2001, the Company was advanced $375,000 from related parties in
exchange for notes payable. The notes bear interest at 15% per year and are
due upon the earlier of $2,000,000 received in equity funding or through May
23, 2001.
In March 2001, the Company was advanced $175,000 in exchange for a notes
payable from related parties. The notes bear interest at 15% per year and are
due upon the earlier of $2,000,000 received in equity funding or through June
27, 2001.
The company is also committed to pay $11,664 in the form of a note payable to
a related party. The note, bears interest at 15% per year and is due upon
demand.
All Notes payable are collateralized by the business assets of the Company.
F-5
811
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,September 30, 2001
(Unaudited)
NOTE 68 - RELATED PARTY TRANSACTIONS
Unit Purchase Agreement
- -----------------------
On May 30, 2001, the Company entered into a unit purchase agreement with three
entities for the purchase of 4,000,000 units, each of which includes one share
of the company's common stock and one warrant for the purchase of one common
share at a price of $0.80 per share. The shares were issued in a private
placement into escrow and funding was also placed in escrow in accordance with
the agreement. The shares and monies were to be released to each party
provided that a registration statement was filed with the Securities and
Exchange Commission on or before July 25, 2001 to register the sale of the
shares and warrants and provided that the registration statement was declared
effective by the Securities and Exchange Commission on or before September 28,
2001. The Company would have been responsible for liquidated damages for
failure to meet the above requirements totaling five percent of the purchase
price of the then outstanding securities for every 30 calendar day period
until the registration statement was filed or made effective.
In mid July, the Securities and Exchange Commission notified the Company that
its registration statement (Form SB-2, as amended) would become effective.
Pursuant to the unit purchase agreement, a total of $1,600,000, representing a
$0.40 per unit sales price, was released from escrow as follows: a total of
$1,214,000 of notes payable and interest to shareholders was paid in full as
held in escrow, $10,000 was paid to the escrow agent for services rendered and
the remaining $376,000 was funded to the Company. The fair value of the
common stock component of each unit was $0.32 and the warrant component of
each unit was valued at $0.10 each using the Black Scholes valuation model.
The remaining $0.02 in value given per unit in excess of value received has
been recorded in the operating statement under compensation for warrants
totaling $77,134 during the third quarter 2001.
NOTE 9 - STOCKHOLDERS' EQUITY
INCENTIVE PLANEquity Incentive Plan
- ---------------------
On March 8, 2001, the Board of Directors adopted the Pacific WebWorks, Inc.
2001 Equity Incentive Plan (the Plan). The Plan allows for the granting of
awards in the form of stock options, stock appreciation rights or restricted
shares to employees, independent directors and certain consultants. The
Company may grant awards representing up to 2,500,0005,000,000 shares of the Company's
common stock under the Plan. This includes 901,858 options, each to purchase
one share of the Company's common stock, outstanding as of March 31, 2001. The Plan has not been approved by the Company's
shareholders as of March 31,September 30, 2001 12
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
NOTE 9 - STOCKHOLDERS' EQUITY - Continued
Equity Incentive Plan- Continued
- --------------------------------
During the threenine months ended March 31,September 30, 2001, the Company granted options
as follows:
In February 2001 the Company granted 195,252 options, each to purchaserepresenting one
share of the Company'sPacific WebWorks, Inc. common stock to employees and directors atdirectors.
The options have exercise prices of $0.87 per share, which representsrepresenting the fair
market value of the common stock on the date of grant. The options are fully
vested and expire through February 2011.
On April 4, 2001, the Company granted a total of 3,055,000 options, each
representing one share of Pacific WebWorks, Inc. common stock to employees and
directors. The options have exercise prices of $0.75, representing the fair
value of the stock on the date of grant, expire through April 2011 and vest
1/6 on the day of grant and 1/6 every six months through October 4, 2001.
As of March 31,September 30, 2001, 583,779approximately 3,839,000 options were outstanding at
exercise prices ranging from $0.75 to $3.53 per share and approximately
1,745,000 options were exercisable at prices ranging from $0.87$0.75 to $3.44$3.53 per
share. Options forfeited during the nine months ended September 30, 2001
approximate 103,000 at exercise prices ranging from $0.75 to $3.53 per share.
Granting of warrants
- --------------------
On April 25, 2001, the Company entered into an agreement with a consultant to
provide investor relations, public relations, and fulfillment services related
to financing in exchange for warrants. A total of 500,000 warrants were
issued at an exercise price of $0.50 per share under the terms of
the agreement and 500,000 were issued at an exercise price of $0.75 per share
for a total of 1,000,000 warrants granted under this agreement. Vesting of
the warrants commences as follows: 25% immediately, 25% on July 1, 2001 and
50% on November 1, 2001. Deferred consulting charges related to this
agreement approximate $175,000 and represent the fair value of the warrants
using the Black Scholes valuation model. The services under this contract
will be performed through April 25, 2002 and the fair value of the warrants
are recognized ratably over the service period. The agreement terminates in
April of 2002 when the services are completed.
As discussed in Note 8, warrants to purchase 4,000,000 shares, valued at $0.10
each were granted in an equity offering at an exercise price of $0.80 per
share.
As of September 30, 2001, warrants for the purchase of 5,850,000 shares of the
Company's common stock were outstanding and warrants for the purchase of
5,350,000 shares of the Company's common stock were exercisable. The warrants
outstanding and exercisable have exercise prices ranging from $0.50 to $7.50
per share.
13
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
NOTE 79 - STOCKHOLDERS' EQUITY - Continued
Issuance of stock
- -----------------
In August 2001, the Company issued a total of 200,000 shares of its common
stock as a prepayment for certain insurance services totaling $70,000. The
services will be provided and related expenses will be recognized over the
one-year period in which the services are to be received by the Company.
As discussed in Note 8, common stock totaling 4,000,000 shares, valued at
$0.32 each, were issued in an equity offering.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Threatened litigation
- ---------------------
In February 2001, the Company received notice from the State of Utah Labor
Commission regarding an allegation of racial discrimination charged by a
former employee. The former employee claims that he was forced to resign as
our sales manager due to demotions and pay cuts based on differential
treatment based on his race and color. We have responded to the request for
information from the Labor Commission and have stated that we believe the
former employee was treated fairly while employed by the Company. At this
time, the former employee has not
identified any specific remedy and we are awaiting further action.
In April 2001, one of the Company's former vendors filed a complaint alleging
default under a certain application for credit and personal guaranty made by a
former officer of the Company. The vendor seeks approximately $65,000 plus
interest. The Company is defending the claim and believes the amount should
be reduced based upon the vendor's performance and other disputes. The
Company has filed an answer to the complaint and further litigation is
pending. The Company has recorded amounts in the consolidated financial
statements representing its estimated liability for this matter. Management
believes that the amount recorded is sufficient to cover the resulting
liability from this complaint, if any.
Although no formal proceedings have been instituted, we were aware of a
threatened copyright infringement claim by Business Software Alliance. The
Company settled this matter out of court for $5,000 in August 2001.
As previously discussed, in March 2001, Logio, Inc., a subsidiary of Pacific
WebWorks, Inc., was unable to make payment on some of its capital lease
obligations. Logio, Inc. transferred the
14
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
NOTE 10 - COMMITMENTS AND CONTINGENCIES - Continued
Threatened litigation- Continued
- --------------------------------
equipment back to the vendor in May of 2001. The default on these and other
capital lease obligations totals $440,174. These leases have been classified
as current liabilities in accordance with the terms of default under the lease
agreements. The creditor filed a complaint pursuant to the default seeking
the full amount of the default plus legal fees. This matter was dismissed
without prejudice in the State of Minnesota on September 24, 2001
The Company is involved in other various disputes and legal claims in the
normal course of business. It is not possible to state the ultimate
liability, if any, in these matters. In the opinion of management, any
resulting litigation will have no material effect on the financial position
and results of operations of the Company in excess of amounts accrued.
Consulting contractrecorded.
Other
- European exchanges
- ---------------------------------------------
In MayJune 2001, the Company entered intoreceived notice from a consulting services agreement in withleasing company that funded
customer purchases and placed them on a corporation. The agreement provides for, among other things, public
relations services relatedpayment plan during 2000 that certain
leases could be charged back to the European financial exchangesCompany. Lease documentation was
processed by third parties for six months
of service. The cost of the services totals $150,000World Commerce Network and has been prepaid by the Company in February and March 2001 and is
recognized ratably overunable to estimate the period in which services are received. Asextent of March 31, 2001, $25,000 has been
recordedincomplete documentation, if any, as investor relations expense related to this agreement.
F-6of
September 30, 2001.
9
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(Unaudited)
NOTE 8 - SUBSEQUENT EVENTS
Granting of warrants
- --------------------
On April 25, 2001, the Company entered into an agreement with a consultant to
provide investor relations, public relations, and fulfillment services related
to financing in exchange for warrants. A total of 500,000 warrants were
issued at an exercise price of $0.50 per share under the terms of this
agreement and 500,000 warrants were issued at an exercise price of $0.75 per
share for a total of 1,000,000 warrants granted under this agreement. Vesting
of the warrants commences as follows: 25% immediately, 25% on July 1, 2001
and 50% on November 1, 2001. Deferred consulting charges related to this
agreement approximate $170,000 and represent the fair value of the warrants
using the Black Scholes valuation model. The services under this contract
will be performed through April 25, 2001 and the fair value of the warrants
will be recognized ratably over the service period. The agreement terminates
in April of 2002 when the services are completed.
Issuance of stock
- ------------------
In April 2001, the Company issued a total of 289,166 shares of its common
stock as a prepayment for legal, investment banker, and insurance services
totaling $210,000. The services will be provided to the Company over two
years and related expenses will be recognized over the periods in which the
services are received.
Note payable - related party
- ----------------------------
In April 2001, the Company was advanced $100,000 in exchange for a note
payable from a related party. The note bears interest at 15% per year, is
collateralized by substantially all of the Company's assets and is due upon
the earlier of $2,000,000 received in equity funding or through May 23, 2001.
Stock options
- -------------
On April 4, 2001, the Company's Board of Directors resolved to amend the
Pacific WebWorks, Inc. 2001 Equity Incentive Plan and increased the total
awards that may be granted to up to 5,000,000 options under the Plan.
Also on April 4, 2001, the Company granted a total of 3,055,000 options, each
representing one share of Pacific WebWorks, Inc. common stock. The options
have an exercise price of $0.75, which equals the fair value of the stock on
the date of grant, expire through April 2011 and vest 1/6 on the day of grant
and 1/6 every six months through October 4, 2001.
F-7
10
15
In this report references to "Pacific WebWorks," "we," "us," and "our"
refer to Pacific WebWorks, Inc.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. For this
purpose any statements contained in this Form 10-Q that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "estimate," or "continue" or comparable terminology are intended
to identify forward-looking statements. These statements by their nature
involve substantial risks and uncertainties, and actual results may differ
materially depending on a variety of factors, many of which are not within
Pacific WebWork's control. These factors include but are not limited to
economic conditions generally and in the industries in which Pacific WebWorks
may participate; competition within Pacific WebWork's chosen industry,
including competition from much larger competitors; technological advances and
failure by Pacific WebWorks to successfully develop business relationships.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pacific WebWorksOverview
We and itsour subsidiaries developare engaged in the development and distribution
of web tools software, electronic business software
technologies for Internet merchants, provide electronic storefront hosting and Internet
payment systems for individuals and small to mid-sizemid-sized businesses. For the three month period ended March 31,In April
2001 Pacific WebWorks recorded
revenues of $1,351,970. This wasour management implemented a significant increase comparedwholesale distribution strategy in which we
discontinued our internal sales operations and focused on wholesaling to
the
$372,972 in revenues for the three month period ended March 31, 2000. Our net
loss was $438,273 or $0.03 per share, for the first quarter of 2001 compared
to $1,961,600, or $0.19 per share, for the first quarter of 2000.distributors and retailers.
We have posted neta limited operating history and have sustained losses since our
inception. However, we have taken steps to reduce our burn rate, including
reduction in personnel, relocation to lower-cost office facilities and other
expense reduction activities. Cash from our inception andcurrent sales channels is
insufficient to support our independent auditors
reportedexisting operations; but management believes that
this history of losses raised doubts aboutthe sales channels we are currently developing will provide sufficient
revenues by the fiscal year end to support our abilityoperations. Sales projections
are expected to continue as a going concern without financing. Management has taken several
steps during the past two quarters to restructure our operations with the
intent to generate profits. These steps included consolidation of operations
of Pacific WebWorks and its related companies, reductions in the number of
employees, and continued growth of our sales and marketing channels. We
anticipate sales to beremain down throughout the remainder of fiscal year 2001 due to the alteration
of our short-term goals.goals and our overall sales and marketing strategy.
Acquisitions
On April 4, 2000 we completed the acquisition of IntelliPay, Inc., a
Delaware corporation, as a wholly owned subsidiary. In an arms length
transaction, Pacific WebWorks issued 2,400,000 common shares, valued at
$4,320,000, in a stock-for-stock exchange for 1,000 shares of IntelliPay. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, IntelliPay's results of operation have been included with Pacific
WebWorks from the closing date in April 2000 and its consolidated assets and
liabilities have been recorded at their fair values on the same date.
Pacific WebWorks and U.S. Merchant Systems, Inc., a major customer
during fiscal year 1999, formed World Commerce Network, LLC, in December of
1999 as a joint venture. Originally, we held a 50% interest in World
Commerce, which was held on the equity method of accounting. In March 2000 we
completed the acquisition of an additional 1% interest in World Commerce for
4,663 shares of Pacific WebWorks common stock, valued at $9,180, which then
gave us a 51% total interest. In the third quarter of 2000, we determined
that we would acquire the remaining 49% of World Commerce. We and U.S.
Merchant Systems agreed to complete our scheduled seminars and then we would
assume the outstanding ownership of World Commerce held by US Merchant Systems
and continue forward with World Commerce operations. As a result we acquired
the remaining 49% interest for $100 in August 2000. The operations of World
Commerce are consolidated with our financials statements as a wholly owned
subsidiary of Pacific WebWorks. World Commerce discontinued seminar marketing
16
activities in June 2000.
In February 2001 we completed the acquisition of Logio, Inc., a
development stage Nevada corporation. We acquired Logio in an arms length
transaction by issuing approximately 2.8 million shares of our common stock
for 18,425,830 shares of Logio common stock. This transaction was valued at
$2,447,200. The acquisition was accounted for under the purchase method of
accounting using generally accepted accounting principles. Logio's results of
operation are included with ours from the closing date and its consolidated
assets and liabilities are recorded at their fair values at the same date.
Logio temporarily discontinued its development and operations of its Internet
products in October 2000 due to funding constraints and the pending
acquisition by Pacific WebWorks.
Results of Operations
The following table summarizes the results of our operations for the
three months ended March 31, 2001 and 2000.
The following discussions are based on the consolidated financial
statements included with this report of Pacific WebWorks and its wholly owned
subsidiaries, IntelliPay, Inc., Logio, Inc. and World Commerce Networks.
Three monthsand Logio. Comparisons are presented
for the three (the third quarter) and nine month periods ended March 31,September 30,
2001 2000
-------------- --------------
Revenues, net $ 1,351,970 $ 372,972
Cost of sales 227,700 65,691
-------------- --------------
Gross profit 1,124,271 307,281
Selling expenses 219,792 1,431,393
Research and development 143,095 81,116
General and administrative 451,782 695,099
Depreciation and amortization 574,422 32,842
Compensation expense for options and warrants 12,900 13,216
-------------- --------------
Total operating expenses $ 1,401,991 $ 2,253,666
============== ==============
11
Loss from operations $ (277,720) $ (1,946,385)
-------------- --------------
Total other income (expense) (160,553) (15,215)
-------------- --------------
NET LOSS $ (438,273) $ (1,961,600)
============== ===============2000.
Net Revenues.revenues. We receive revenues primarily from the sale of access to
our software technology and continuing monthly service and hosting fees.
Additionally, we derive revenues for services provided related to web site
design, training, education and consulting. Revenues are recognized when
persuasive evidence of an agreement exists, delivery has occurred and services
have been rendered, the price is fixed or determined and collectability is
reasonably assured. Up-front fees are non-refundable and are deferred and
recognized systematically over the period the product is delivered and
services are performed, which is generally one year. Monthly fees for our
services are recognized as services are performed.
Revenues increased $978,998, inNet revenues decreased $679,759 for the nine month period ended
September 30, 2001, first quarter as compared to the firstSeptember 30, 2000 quarter. A total of 82.3% ofperiod. Net revenues
decreased $1,211,807 for the net revenues were raised from
seminar related activities during 2000. However, the seminars were abandoned
duethird quarter ended September 30, 2001 compared
to the significant costs involvedsame quarter in running several seminar teams2000. The decrease for the three and nine month period
was primarily the cash flow concerns related to theresult of discontinued seminar marketing, operations.which resulted in
a decrease in sales of software, access and license fees. We expect our sales
for software, access and license fees to continue to decrease through the
fourth quarter of 2001 as a result of our change in sales plan. We anticipate
this decrease of these sales to level off in the first quarter of 2002. Our
sales recorded for hosting and maintenance fees are expected to increase
incrementally in the future as a result of our new sales and distribution
model.
Cost of sales.sales and gross profits. These include costs of merchant
accounts shipping and fulfillment costs, support and other third party products and
services. Cost of sales increased $162,009decreased $113,673 for the 2001 firstnine month period and
decreased $159,388 for the 2001 third quarter, respectively, compared to the
same periods in 2000. The cost of sales decrease in the 2001 three and nine
month periods was primarily related to personnel reductions and streamlined
operations. Gross profits decreased $584,086 for the 2001 nine month period
and decreased $1,052,419 for the 2001 third quarter compared to the 2000
first
quarter.
Operatingperiods due to decreased revenues in these periods.
Total operating expenses. Total operating expenses decreased
$851,675$1,225,224 in the 2001 firstnine month period compared to the 2000 nine month
period and decreased $720,678 in the 2001 third quarter compared to the 2000
firstthird quarter. TotalThe decrease in the nine month period was primarily the result
of decreases in selling expenses, research and development and general and
administrative expenses. Management reduced these expenses through personnel
reductions, pay cuts, the elimination of costly seminars and the relocation of
our offices. However, the decrease in operating expenses exceeded revenueswas offset by
$50,021 for thecompensation expense attributed to options and warrants earned by employees,
directors and consultants, along with impairment losses, which are discussed
below. The 2001 firstthird quarter decrease in total operating expenses was
primarily due to overall reduction in selling, research and by
$1,880,694 for the 2000 first quarter.development and
general and administrative expenses.
Selling Expenses.expenses. Selling expenses consist of both sales and
marketing expenses, including department salaries and benefits, advertising,
seminar costs, and commissions paid to resellers. Our selling expenses
decreased $1,211,601 in$4,005,453 for the 2001 fiscalnine month period and $573,432 for the 2001
third quarter compared to the 2000 first quarter.periods.
17
The decrease is primarily a result ofin selling expenses occurred due to discontinuing our seminar
marketing program.program, management in this department taking pay cuts of
approximately 37.5% and a reduction in personnel in this department from
fifteen to five employees. The cessation of the seminar marketing program
eliminated printing and mailing costs, travel expenses, show crew costs, hotel
ballroom rental and other costs associated with the seminars. Our sales
efforts since the fourth quarter of 2000 have been primarily focused on
business development and strategic alliance with large distributors of our
products and services.
Research and Development Expenses.development expenses. Research and development consists
primarily of personnel expenses related to product design, programming, and
quality control. Research and development expenses increased $61,979 indecreased $302,208 and
$158,885 for the 2001 firstnine month period and third quarter, respectively, as
compared to the 2000 first quarter.comparable periods. The increase wasdecrease resulted primarily
duefrom personnel reductions from sixteen to research and development and completion of IntelliPay's
SmartPages and duplicate payment request detection, and Pacific WebWorks'
Visual WebTools Version 4.1.three engineers.
General and Administrative Expense.administrative expense. General and administrative
expenses consist of all finance and administrative salaries and benefits,
rental of office space, professional fees and other general office expenses.
General and administrative expenses decreased $243,317$605,534 and $138,696 for the
2001 nine month period and third quarter, respectively, compared to the same
time periods in 2000. The decreases were due to management taking pay cuts
of approximately 12.5% in the 2001 first quarter
compared to the 2000 first quarter due to reductionsnine month period, implementation of a hire
and raise freeze, reduction in personnel consolidationfrom nine to six, limits placed on
travel, automation of operations,certain administrative and financial processes and
moving our offices to a concerted effort to reduce administrative
costs where necessary.less expensive office building.
Depreciation and amortization. These expenses include depreciation of
property and equipment and amortization of goodwill and other assets. These
expenses increased $541,580$810,889 in the 2001 firstnine month period and increased
$16,532 for the 2001 third quarter compared to the 2000 first quarter. We have also amortized goodwill relatedtime periods primarily
due to our acquisitionthe property and equipment increases from the consolidation of Logio over three years with approximately $88,000 being amortized for the 2001
first quarter. Depreciation expense for the first quarter 2001 includes
$137,088 of Logio depreciation.Logio's
operations beginning in February 2000.
Compensation expense for options and warrants. These expenses relate to
stock options earned by employees, directors and consultants. We granted
options to employees in September 2000 and the strike price of these options
was less than the fair value on the date of grant, creating intrinsic value.
We recognized the expense of these options over the one-year vesting period
and recorded $12,900 during$38,700 for the first quarter2001 nine month period. Included in the 2001
nine month period is the recognition of $72,948 of compensation expense
related to the fair value over the period earned of one million warrants
granted to a consultant and $77,134 of expense related to the fair value of
warrants issued in conjunction with completion of our Unit Purchase Agreement
with investors in July 2001.
Impairment loss. As of September 30, 2001, as a result of certain
events and management's assessment of impaired assets, we recorded $911,532 in
losses related to impairment of long-lived assets in Logio and $1,776,768 in
losses related to impairment of goodwill for Logio and World Commerce for the
2001 nine month period. (See, "Liquidity and Capital Resources," below, for
details of the impairment losses.)
Total other income (expense). We have recorded a non-recurring loss of
$122,685 related to Logio's
12
failure to make a payment on a capital lease obligation. This loss is a
significant factorTotal other expenses increased $77,205
and decreased $12,553, respectively, for the $145,338 increase in other expenses for2001 nine month period and the
first2001 third quarter of 2001 compared to the 2000 first quarter.periods. Interest expense related to
$1.2 million in notes payable and losses on the sale or abandonment of assets
related to Logio were the primary reasons for the increase in the 2001 nine
month period.
Net Loss. Our net loss was 32.4%decreased $563,933 in the 2001 nine month
period compared to the same period in 2000; however, the net loss increased
$319,188 in the 2001 third quarter compared to the 2000 third quarter. The
nine month period net loss decrease is primarily the result of revenuesmanagement's
steps to shift our business model away from costly seminar activities to a
focus on client acquisition for monthly hosting and maintenance fee revenues.
However, the impairment losses for the 2001 firstperiods reduced the overall cost
reductions. The increase in net loss for the 2001 third quarter period is due
primarily to the large reduction in sales recognized from software, access and
license fees due to our shift in the sales and distribution model. We expect
to see similar results through the end of 2001. We recorded a net loss per
common share of $0.23 for the 2001 nine month period compared to 525.9% of revenues$0.41 for the
2000 first quarter. Duringnine month period. For the 2001 firstthird quarter thea net loss attributable to our operations wasremained at
$0.03 compared to
$0.19 per share
for the first quarter of 2000. The primary cause of our loss
in the 2001 first quarter related to the acquisition of Logio and its
additional depreciation and non-recurring loss, along with the amortization of
its good will. The primary source of our losses in the first quarter of 2000
related to our investment in the growth of our marketing subsidiary, World
Commerce Network.18
Liquidity and Capital Resources
At March 31,September 30, 2001, we had $40,786$255,611 cash on hand with total current
assets of $613,446$646,742 compared to $163,801 cash on hand with total current
assets of $698,784 at December 31, 2000. Total current liabilities were
$3,244,024$1,993,713 for the first quarter of 2001 nine month period compared to $3,282,184 at December
31, 2000. Capital leases in default, past due payables and bank overdraft
accounted for $759,516, or 38.1%, of total current liabilities. Deferred
revenue, which has been deferred in accordance with SAB101 and recognized on a
ratable basis over the period the service revenues are earned, represented
$755,053,$156,749, or 23.2%7.9%, of total current liabilities for theas of September 30, 2001,
first quarter. Accounts payable, including past due amounts, accounted for
$663,735, or 20.5% percent, of the total current liabilities for the 2001
first quarter. Deferred revenues werecompared to 55.2% and accounts payable were 18.6%
of the total current liabilities as of December 31, 2000. Our accumulated deficit totaled
$8,484,716 for the$12,656,621 as of September 30, 2001, first quarter and we had negative working capital
totaling $2,630,587.$1,346,971.
Net cash used in operating activities for the 2001 first quarternine month period
was $698,157.$1,109,047. Net cash used in investing activities for the quarterperiod was
$67,069,$58,849, which was primarily used for the purchase of capital equipment.fixed assets additions. Net cash
provided by financing activities was $642,211,$1,259,705, with $661,664$900,000 provided from
the issuance of notes payable. Financing activities during the first quarterpayable and $376,000 net proceeds from issuance of
2001
included advancements of an aggregate of $661,664 from related parties in
exchange for notes payable. Thesecommon stock. The notes payable were paid in full in July 2001.
As of the year ended December 31, 2000, management decided as a cost
saving measure to discontinue the seminar marketing activities of World
Commerce. Prior to our acquisition of Logio, its management had temporarily
ceased its corporate development and operations of its Internet products. Our
management intended to revisit the operations of these subsidiaries, but due
to market forces and cash flow shortages decided it was in our best interest
to focus our immediate attention on our core business of Pacific WebWorks and
IntelliPay. As a result, Logio was unable to satisfy its obligations under
certain notes payable and capital leases. Accordingly, we have varying interest rates
ranging from 13%recorded
impairment losses for the 2001 nine month period of $911,532 related to
15%Logio's return of hardware to a vendor in May 2001, cash down payments made by
Logio under agreements which are in default and are due upon the earlier of our receipt of
$2,000,000other losses related to
equipment and software. In addition, $1,776,768 in equity funding, or June 1, 2001.
Despite converting debt duringlosses were related to
impairment to goodwill for Logio and World Commerce.
During fiscal year 2000, our shift in business
strategy has resulted in decreased cash inflow. During 2000 we entered into agreements with the holders of
a majority of our debt to convert those debts into equity. WeIn June 2000 we
converted notes payable with interest of $2,637,536$2,037,536 into 2,040,0001,440,000 common
shares of which 400,000 common shares were converted for $1,000,000 along with
warrants for the purchase of an additional 600,000 common shares at strike
prices ranging from $5.00 to $7.50 per share. Then in September 2000 we
converted a $600,000 note payable to 600,000 common shares. However,As of December
31, 2000, we had notes payable of $250,000, including principal and interest.
During the first and second quarter of 2001, we borrowed additional funds
resulting in $950,000 of principal and interest resulting in $1.2 million of
outstanding debt with accrued interest, which was due and payable to various
parties.
In May 2001 we agreed to sell 4,000,000 units at $0.40 per unit for
$1,600,000 to four accredited investors. Each unit consisted of one common
share and a warrant to purchase one common share. Pursuant to the agreement,
the shares were issued in a private placement into escrow and the $1.6 million
was also placed in escrow. Three of the investors assumed our $1.2 million of
outstanding debt taking new notes payable with 15% interest and payable on the
earlier of September 20, 2001, or at such time as a resultwe received up to $1 million
in equity financing. These notes payable were also placed in the escrow.
Subsequently, in July 2001, $1.6 million was released from the escrow which
paid in full $1,214,000 of our marketingnotes payable with interest, $10,000 was paid to
the escrow agent and sales
strategies shifting away from costly seminarsthe remaining $376,000 was funded to business development during
the fourth quarter 2000, our monthly cash inflow decreased substantially. Our
monthly cash outflows have also caused a similar decrease duringPacific WebWorks.
During the 2001 first quarter.
One source of funding which may offset our decrease insecond quarter we sold units for cash flows is
proceeds from the exercise of 1,250,000 warrants we have granted. As of March
31, 2001 we had outstandingand granted
warrants to purchase 250,000 common shares.shares, which may provide additional sources of funding.
In April 2001 we agreed to issue warrants to Columbia Financial Group to
purchase 1,000,000 shares of our common stock at an aggregate exercise price
of $625,000 in exchange for their services to us for one year. Portions of
the warrants vest on a predetermined time schedule and the warrants expire in
April 2006. In May 2001 we sold 4,000,000 units to four accredited investors
and each unit included a warrant to purchase one common share at an exercise
price of $0.80 per share, expiring May 30, 2003. As a result of these and
previous transactions, as of September 30, 2001, we had outstanding warrants
to purchase 5,850,000 common shares which may result in maximum proceeds of
$7,450,000. However, the holders of the
19
warrants have total discretion whether or not to exercise the 1,250,000 warrants. Wewarrants and we
cannot assure that all of the warrants will be exercised before their
expiration through April 2006.
Our shift in business strategy resulted in decreased cash inflow. As a
result of our marketing and sales strategies shifting away from costly
seminars to business development during the fourth quarter 2000, our monthly
cash inflow remained down in the 2001 third quarter. We have payables past
due and accrued liabilities that, cumulatively, cannot be paid with cash on
hand or monthly cash flows. Thus, we require additional funding sources to
meet the requirements on our existing liabilities and the liabilities of our
subsidiaries.
We continue to fund our operations with loans and the sale of
unregistered stock where cash flows fall short of requirements. While we have
taken steps to reduce our monthly burn rate and move to become cash flow
positive, we believe we will need an additional $2.5$1 million to 5$3 million in 2001into
2002 to continue to keep up with technological improvementsfurther develop our products and services and further our business
development strategies during the next twelve months. We operate in a very
competitive industry in which large amounts of capital are required in order
to continually develop and promote products. Many of our competitors have
significantly greater capital resources than we do. We believe we will need
to continue to raise additional capital, both internally and externally, in
order to successfully compete. 13
While we may be able to fund a portion of our operations through our
revenues for the short term, we currently anticipate using private placements
of our common stock to fund operations over time. We intend to issue such
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.
Factors Affecting Future Performance
*. We may not be able to obtain additional funds on acceptable terms. If
we fail to obtain funds on acceptable terms, we might be forced to
delay or abandon some or all of our business plans, which could have a
material adverse effect on us.
*. Wide scale implementation of a new technology or payment method, such
as stored-value cards, electronic cash equivalents or wireless
communications, could force us to modify our payment services or
software to remain competitive, and could potentially render one or
more of our services or products obsolete
*. We currently are unable to finance our operations through our generated
revenues. Our revenues and operating results have varied significantly
from period to period. Although our earnings are becoming more
predictable as the market for our services and products begins to
mature, our revenues and operating results can be expected to fluctuate
somewhat for a variety of reasons beyond our control which may result
in our quarterly operating results from time to time being below the
expectations of public market analysts and investors. In that case, we
expect that the price of our common stock would be materially and
adversely affected.
*. We face intense competition that may slow our growth and force our
prices down. We expect this competition to intensify in the future,
with new competitors, and competitive services and products regularly
entering the market. If these competitors were to bundle competing
products for their customers, it could adversely affect our ability to
market our services.
*. We may experience software defects and development delays, damaging
customer relations. Or we may experience breakdowns or unauthorized
entry into our hosting services, infrastructure or payment processing
system, harming our business. We would be unable to deliver our
payment processing services or hosting services if our system
infrastructures break down or are otherwise interrupted.
*20
. 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.
*. We depend upon our proprietary rights, none of which can be completely
safeguarded against infringement. Intellectual property rights, by
their nature, are uncertain and involve complex legal and factual
questions. We may unknowingly infringe upon the proprietary rights of
others, thereby exposing us to significant liability and/or damages.
To the extent we rely upon confidential information to maintain our
competitive position, other parties may independently develop the same
or similar information.
*. Our stock price is volatile. The price of our common stock has been
and likely will continue to be subject to wide fluctuations in response
to a number of events and factors and these broad market fluctuations
may adversely affect the market price of our common stock, regardless
of our operating performance.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
14
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On February 12, 2001, Pacific WebWorks received noticeAlthough no formal proceedings were instituted, Business Software
Alliance had threatened a copyright infringement claim in June 2001. This
matter was settled out of Charge No.
A1-0184court for $5,000 in August 2001.
Sunrise International Leasing Corporation, a Minnesota corporation and
assignee of Sun Microsystems Finance, filed witha complaint in the Fourth District
Court, County of Hennepin, of the State of Utah Labor Commission regarding an allegation
of racial discrimination charged by Andrew Renfro, a former employee. Mr.
Renfro claims that he was forced to resign as our sales manager due to
demotions and pay cuts based on differential treatment based on his race and
color. At this time, Mr. Renfro has not identified the specific remedy he
seeks. We have respondedMinnesota related to the request for information fromdefault
under the Utah Labor
Commissionequipment lease agreement between Logio and we are awaiting further action. Our management believes we
have no liabilitySun Microsystems.
Sunrise International sought damages of $444,589.40 and intends to vigorously defend the claim.
We are involved in various disputescosts and legal claims arisingreasonable
attorney fees. On September 24, 2001, this matter was dismissed without
prejudice in the normal courseState of our business. In the opinion of management, any resulting
litigation will not have a material effect on our financial position and
results of operations over amounts accrued.Minnesota.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Changes in Securities
On March 8, 2001 our Board adopted the 2001 Equity Incentive Plan, which
requires shareholder approval. This plan allows the granting of awards in the
form of stock options, stock appreciation rights or restricted shares to
employees, independent directors and certain consultants. The Board initially
reserved 2,500,000 shares of our common stock for the plan, however, on April
4, 2001 the Board amended the reserved shares from 2,500,000 to 5,000,000. As
of March 31, 2001, options to purchase 901,858 common shares are outstanding
with exercise prices ranging from $0.87 to $3.44 per share.
In February 2001 our Board granted conversion of Logio options held on
the date of acquisition to Pacific WebWorks' options. A total of Logio
options to purchase 1,288,666 Logio common shares were converted to options to
purchase 195,252 Pacific WebWorks common shares. The rate of conversion was
one Pacific WebWorks option for every 6.6 Logio options held on February 8,
2001.
Recent Sales of Unregistered Securities
The following discussion describes all securities sold without
registration by Pacific WebWorks from December 31, 2000July 1, 2001 through a recent date.
During JanuaryOn August 28, 2001, we issued an aggregate of 537,200200,000 common shares to Universal
Business Insurance for General Liability, Director and Officer and Intrusion
Technology Insurance, valued at $268,600 to Principal Property Management LLC in consideration for a
security deposit and monthly rent for our corporate office lease.$70,000. We relied on an exemption from
registration under the Securities Act provided by Section
4(2) asfor a private transaction not involving a public distribution.
On April 16, 2001,distribution
provided by Section 4(2) under the Securities Act.
In connection with this isolated issuance of our securities, we issued an aggregatebelieve
that the purchaser was aware that the securities had not been registered under
federal securities laws; acquired the securities for his/its own account for
investment purposes and not with a view to or for resale in connection with
any distribution for purposes of 289,166 common shares in
consideration for services rendered. We issued 130,000 common sharesthe federal securities laws; understood that
the securities would need to Mutual Ventures Corporation for business services valued at $65,000; we issued
20,000 shares to Daniel W. Jackson, attorney, for legal services valued at
$10,000; and 139,166 common shares to Universal Business Insurance for
insurance services valued at $83,000. We relied onbe indefinitely held unless registered or an
exemption from registration applied to a proposed disposition; and was aware
that the certificate representing the securities would bear a legend
restricting their transfer.
21
We believe that, in light of the foregoing, the sale of our securities
to the acquirer did not constitute the sale of an unregistered security in
violation of the federal securities laws and regulations by reason of the
exemptions provided under Sections 3(b) and 4(2) of the Securities, Act provided by Section 4(2) as a private
transaction not involving a public distribution.
On April 25, 2001, we granted warrants to purchase an aggregate of
1,000,000 common shares, valued at approximately $170,000, to Columbia
Financial Group in consideration for investor relations services for a term of
one year. Warrants to purchase 500,000 common shares have an exercise price
of $0.50 and the
remaining warrants
15
to purchase 500,000 common shares have an exercise price of $0.75. The
warrants may be exercised through April 2006. We relied on an exemption from
registration under the Securities Act provided by Section 4(2) as a private
transaction not involving a public distribution.
Use of Proceeds
In October 2000, we received $375,000 in proceeds from the exercise of
warrants at a strike price of $2.50 per share for 150,000 common shares
registered under our Form S-1 registration statement, as amended,
(registration No. 333-38026, declared effective on June 12, 2000). We have
used these funds for working capital including payment of salaries, rent,
researchrules and development, purchase of inventory and marketing expenses.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
In March 2001 Logio was unable to make a payment on a capital lease
obligation to Sun Microsystems Finance related to leases of certain computer
equipment. The default of approximately $404,000 resulted in a impairment
loss of $122,685 which represents the cash down payments Logio made at the
beginning of the leases which were amortized over the life of the lease. The
leases expire through December 2002. Logio is attempting to negotiate a
resolution to this default and is in the process of returning the equipment to
Sun Microsystems.
ITEM 5: OTHER INFORMATION
On May 7, 2001 we moved our principal offices back to our former office
location in the Westgate Business Center located in Salt Lake City, Utah. We
lease 4,500 square feet of commercial office space and the building has a
total of 200,000 square feet of office and common space. This location serves
as our main office and production facility.regulations promulgated thereunder.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Part II Exhibits.
Exhibit
Number Description
- ------- -----------
2.1 Agreement and Plan of Reorganization between Pacific WebWorks and
IntelliPay, dated April 4, 2000 (Incorporated by reference to exhibit
No. 2.1 for Pacific WebWork's Form 8-K, filed April 19, 2000.)
2.2 Agreement and Plan of Reorganization between Pacific WebWorks and
Logio, dated October 31, 2000 (Incorporated by reference to exhibit
No. 2.1 for Pacific WebWork's Form 8-K, filed November 14, 2000.)
3.1 Articles of Incorporation of Asphalt Associates, Inc. (Incorporated
by reference to exhibit No. 3.1 for Pacific WebWork's Form 10,WebWorks as amended file No. 0-26731, filed July 16, 1999.)and restated.
3.2 Articles of Merger for Asphalt Associates, Inc., dated January 6,
1999 (Incorporated by reference to exhibit No. 2.1 for Pacific
WebWork's Form 10, as amended, file No. 0-26731, filed July 16,
1999.)
3.3 Articles of Share Exchange, filed February 8, 2001.
3.4 Amended and Restated Bylaws of Pacific WebWorks, Inc. (Incorporated
by reference to exhibit No. 3.2 for Pacific WebWork's Form 10, as
amended, file No. 0-26731, filed July 16, 1999.)
10.1 Master Service Agreement between Electric Lightware, Inc., and Utah
WebWorks, Inc., dated February 2, 1998. (Incorporated by reference to
exhibit No. 10.1 for Pacific WebWork's Form 10, as amended, file No.
0-26731, filed July 16, 1999.)
10.2 Internet Access Agreement, Addendum to Master Service Agreement
between Electric Lightwave, Inc., and Utah WebWorks, Inc., dated
February 2, 1998 (Incorporated by reference to exhibit No. 10.2 for
Pacific WebWork's Form 10, as amended, file No. 0-26731, filed July
16, 1999.)
10.3 Form of Employment Agreement with management (Incorporated by
reference to exhibit No. 10.3 for Pacific WebWork's Form 10, as
amended, file No. 0-26731, filed July 16, 1999.) 16
10.4 Lease Agreement between Utah WebWorks, Inc. and Westgate Business
Center, dated January 11, 1999 (Incorporated by reference to exhibit
No. 10.6 for Pacific WebWork's Form 10, as amended, file No. 0-26731,
filed July 16, 1999.)
10.5 Strategic Reseller Agreement with U.S. Merchant Systems (Incorporated
by reference to exhibit No. 10.9 for Pacific WebWork's Form 10, as
amended, file No. 0-26731, filed July 16, 1999)
10.8 Purchase Agreement between Pacific WebWorks and U.S. Merchant Systems,
Inc., dated February 22, 1999 (Incorporated by reference to exhibit
No. 2.3 for Pacific WebWork's Form 10-K, filed March 10, 2000)
10.9 Registration Rights Agreement between Pacific WebWorks and Midwest
First National, Inc. and Condiv Investments, Inc. and Columbia
Financial Group, dated February 22, 2000 (Incorporated by reference to
exhibit No. 10.11 for Pacific WebWorks's Form S-1 Registration
Statement, File No. 333-38026, effective June 12, 2000.)
10.10 Lease Agreement between Pacific WebWorks and Principal Property
Management, LLC, dated January 1, 2001. (Incorporated by reference
to exhibit 10.10 to Form 10-K, filed April 2, 2001)
10.11 Lease Agreement between Logio and SunMicrosystems Finance, as
amended.
10.12 License Agreement between Logio and Oracle Corporation, as amended.
10.13 Consultant Agreement between Pacific WebWorks and Columbia Financial
Group, Inc., dated April 25, 2001.2001 (incorporated by reference to
exhibit 10.12 to Post-effective Amendment to Form S-1 filed June 19,
2001)
10.11 Unit Purchase Agreement between Investors and Pacific WebWorks, dated
May 30, 2001 (incorporated by reference to exhibit 10.13 to
Post-effective Amendment to Form S-1 filed June 19, 2001)
10.12 Registration Rights Agreement between Pacific WebWorks and the
Investors (incorporated by reference to exhibit10.14 to Form SB-2, as
amended, filed June 28, 2001)
(b) Reports on Form 8-K.
On January 3, 2001 we filed an amendment to the Form 8-K originally filed
on November 14, 2000 regarding the acquisition of Logio, Inc.
On February 5, 2001 we filed a report on Form 8-K under Item 5 regarding
Logio stockholder approval of the acquisition agreement.
On March 13,July 16, 2001 we filed a report on Form 8-K under Item 5 regarding the
listingeffective date of our common stockRegistration Statement on Form SB-2.
On July 26, 2001 we filed an amendment to our report on Form 8-K
originally filed on July 23, 2001, under Item 5 regarding the Berlin Exchange.effective date
of our Form S-1 Post-effective Amendment No. 3.
22
17
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.
5/14/12/03/01 /s/ Christian R. Larsen
Date: ___________________________________________ By: ________________________________________________________________________________
Christian R. Larsen, President and
Director
5/14/12/03/01 /s/ Kenneth W. Bell
Date: ___________________________________________ By: _________________________________________________________________________________
Kenneth W. Bell, C.E.O. and Director
5/14/12/03/01 /s/ T.Thomas R. Eldredge
Date: ___________________________________________ By: __________________________________________________________________________________
Thomas R. Eldredge, Chief Financial
Officer 18and Secretary/Treasurer
23