SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For Quarter Ended: March 31, 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.
(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, 2001 the Registrant had a total of 18,626,688 shares of
common stock issued and outstanding.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements..............................................3
Item 2: Management's Discussion and Analysis or Plan of Operations.......11
Item 3: Quantitative and Qualitative Disclosure..........................14
PART II: OTHER INFORMATION
Item 1: Legal Proceedings.................................................15
Item 2: Changes in Securities and Use of Proceeds.........................15
Item 3: Defaults Upon Senior Securities...................................16
Item 5: Other Information.................................................16
Item 6: Exhibits and Reports filed on Form 8-K ...........................16
Signatures................................................................18
2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
The financial information set forth below with respect to our statements of
operations for the three months ended March 31, 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
presentations of such data. The results of operations for the three months
ended March 31, 2001, are not necessarily indicative of results to be expected
for any subsequent period.
3
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2001 2000
------------- -------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 40,786 $ 163,801
Receivables
Trade, less allowance for doubtful
receivables of $128,795 in 2001
and $88,487 in 2000 220,757 257,492
Employee - 2,469
Prepaid expenses 351,903 275,022
------------- -------------
Total current assets 613,446 698,784
------------- -------------
PROPERTY AND EQUIPMENT, NET AT COST (Note 4) 1,406,525 374,259
OTHER ASSETS (Note 2 and 3) 5,789,511 4,331,979
------------- -------------
$ 7,809,482 $ 5,405,022
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long- term capital leases $ 278,942 $ 2,425
Accounts payable past due 291,351 -
Accounts payable 372,384 611,950
Accrued liabilities 418,050 390,209
Deferred revenue 755,053 1,811,020
Note payable 216,580 216,580
Notes payable - related party (Note 5 and 8) 911,664 250,000
------------- -------------
Total current liabilities 3,244,024 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 18,345,200
in 2001 and 15,008,000 in 2000 18,346 15,008
Additional paid-in capital 12,883,240 10,153,603
Accumulated deficit (8,484,716) (8,046,443)
------------- -------------
Total stockholders' equity 4,416,869 2,122,168
------------- -------------
$ 7,809,482 $ 5,405,022
============= =============
The accompanying notes are an integral part of these statements.
F-1
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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
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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 $ -
Purchase of Logio subsidiary for stock 2,450,000 -
The accompanying notes are an integral part of these statements.
F-3
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Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
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.
The accompanying unaudited consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments, which, in the opinion
of management, are necessary for a fair presentation of the results for the
periods shown. Certain prior period balances have been reclassified to conform
with current period presentation.
NOTE 2 - 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
$2,450,000 representing the fair value of the Pacific WebWorks shares on the
date of exchange. Goodwill totaling $1,855,388 will be amortized over three
years and approximately $88,000 was amortized for the period from acquisition
to March 31, 2001. Logio's results of operations are included in the Pacific
WebWorks, Inc. consolidated results of operations from the acquisition date to
March 31, 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
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Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(Unaudited)
NOTE 4 - NON-RECURRING CHARGE
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 with the leasing company and
anticipates that the equipment will be transferred back to the vendor. The
default on these obligations, which approximates $404,000 at March 31, 2000,
results in an impairment loss of $122,685 which represents cash down payments
by Logio at the beginning of the leases that were being amortized over the
life of the leases. 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
8
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(Unaudited)
NOTE 6 - EQUITY INCENTIVE PLAN
On March 8, 2001, the Board of Directors adopted the Pacific WebWorks, Inc.
2001 Equity Incentive Plan (the Plan). The Plan allows for the granting of
awards in the form of stock options, stock appreciation rights or restricted
shares to employees, independent directors and certain consultants. The
Company may grant awards representing up to 2,500,000 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, 2001
During the three months ended March 31, 2001, the Company granted 195,252
options, each to purchase one share of the Company's common stock to employees
and directors at exercise prices of $0.87 per share, which represents the fair
market value of the common stock on the date of grant. As of March 31, 2001,
583,779 options were exercisable at prices ranging from $0.87 to $3.44 per
share.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Threatened litigation
- ---------------------
The Company is involved in 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 contract - European exchanges
- ----------------------------------------
In May 2001, the Company entered into a consulting services agreement in with
a corporation. The agreement provides for, among other things, public
relations services related to the European financial exchanges for six months
of service. The cost of the services totals $150,000 and has been prepaid by
the Company in February and March 2001 and is recognized ratably over the
period in which services are received. As of March 31, 2001, $25,000 has been
recorded as investor relations expense related to this agreement.
F-6
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
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 WebWorks and its subsidiaries develop business software
technologies for Internet merchants, provide electronic storefront hosting and
Internet payment systems for individuals and small to mid-size businesses.
For the three month period ended March 31, 2001, Pacific WebWorks recorded
revenues of $1,351,970. This was a significant increase compared 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.
We have posted net losses from our inception and our independent auditors
reported that this history of losses raised doubts about our ability 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 be down throughout the remainder of fiscal 2001 due to the
alteration of our short-term goals.
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 consolidated financial statements of Pacific WebWorks and its
subsidiaries, IntelliPay, Inc., Logio, Inc. and World Commerce Networks.
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 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)
============== ===============
Net Revenues. We receive revenues 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, in the 2001 first quarter as compared to the
first 2000 quarter. A total of 82.3% of the net revenues were raised from
seminar related activities during 2000. However, the seminars were abandoned
due to the significant costs involved in running several seminar teams and the
cash flow concerns related to the seminar marketing operations.
Cost of sales. These include costs of merchant accounts, shipping and
fulfillment costs, and other third party products and services. Cost of sales
increased $162,009 for the 2001 first quarter compared to the 2000 first
quarter.
Operating expenses. Total operating expenses decreased $851,675 in the
2001 first quarter compared to the 2000 first quarter. Total operating
expenses exceeded revenues by $50,021 for the 2001 first quarter and by
$1,880,694 for the 2000 first quarter.
Selling 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 the 2001 fiscal quarter compared to the 2000 first quarter. The
decrease is primarily a result of discontinuing our seminar marketing program.
Research and 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 in the
2001 first quarter compared to the 2000 first quarter. The increase was
primarily due to research and development and completion of IntelliPay's
SmartPages and duplicate payment request detection, and Pacific WebWorks'
Visual WebTools Version 4.1.
General and 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 in the 2001 first quarter
compared to the 2000 first quarter due to reductions in personnel,
consolidation of operations, and a concerted effort to reduce administrative
costs where necessary.
Depreciation and amortization. These expenses include depreciation of
property and equipment and amortization of goodwill and other assets. These
expenses increased $541,580 in the 2001 first quarter compared to the 2000
first quarter. We have also amortized goodwill related to our acquisition 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.
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 the first quarter of 2001.
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 factor for the $145,338 increase in other expenses for the first
quarter of 2001 compared to the 2000 first quarter.
Net Loss. Our net loss was 32.4% of revenues for the 2001 first quarter
compared to 525.9% of revenues for the 2000 first quarter. During the 2001
first quarter, the loss attributable to our operations was $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.
Liquidity and Capital Resources
At March 31, 2001, we had $40,786 cash on hand with total current assets
of $613,446 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 for
the first quarter of 2001 compared to $3,282,184 at December 31, 2000.
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, or 23.2%, of total current liabilities for the 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 were 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 2001 first quarter and we had negative
working capital totaling $2,630,587.
Net cash used in operating activities for the 2001 first quarter was
$698,157. Net cash used in investing activities for the quarter was $67,069,
which was primarily used for the purchase of capital equipment. Net cash
provided by financing activities was $642,211, with $661,664 from the issuance
of notes payable. Financing activities during the first quarter of 2001
included advancements of an aggregate of $661,664 from related parties in
exchange for notes payable. These notes payable have varying interest rates
ranging from 13% to 15% and are due upon the earlier of our receipt of
$2,000,000 in equity funding, or June 1, 2001.
Despite converting debt 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. We converted notes payable with interest of $2,637,536 into
2,040,000 common shares. However, 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 decreased substantially. Our
monthly cash outflows have also caused a similar decrease during the 2001
first quarter.
One source of funding which may offset our decrease in cash flows is
proceeds from the exercise of 1,250,000 warrants we have granted. As of March
31, 2001 we had outstanding warrants to purchase 250,000 common shares. 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. However, the holders of the warrants have total discretion
whether or not to exercise the 1,250,000 warrants. We cannot assure that all
of the warrants will be exercised before their expiration through April 2006.
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 will need an additional $2.5 million to 5 million in 2001
to continue to keep up with technological improvements 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.
* 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 notice of Charge No.
A1-0184 filed with 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 responded to the request for information from the Utah Labor
Commission and we are awaiting further action. Our management believes we
have no liability and intends to vigorously defend the claim.
We are involved in various disputes and legal claims arising in the
normal course 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.
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, 2000 through a recent date.
During January 2001 we issued an aggregate of 537,200 common shares
valued at $268,600 to Principal Property Management LLC in consideration for a
security deposit and monthly rent for our corporate office lease. 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.
On April 16, 2001, we issued an aggregate of 289,166 common shares in
consideration for services rendered. We issued 130,000 common shares 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 on an exemption from
registration under 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
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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,
research 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.
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, as
amended, file No. 0-26731, filed July 16, 1999.)
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.)
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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.
(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, 2001 we filed a report on Form 8-K under Item 5 regarding
the listing of our common stock on the Berlin Exchange.
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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.
5/14/01 /s/ Christian Larsen
Date: ________________ By: ___________________________________________
Christian R. Larsen, President and Director
5/14/01 /s/ Kenneth W. Bell
Date: ________________ By: ____________________________________________
Kenneth W. Bell, C.E.O. and Director
5/14/01 /s/ T. R. Eldredge
Date: ________________ By: _____________________________________________
Thomas R. Eldredge, Chief Financial Officer
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