UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]

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

For the quarterly period ended September 30, 2010March 31, 2011

[  ]

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

For the transition period from ___ to ___

Commission file number: 000-26731

PACIFIC WEBWORKS, INC.

(Exact name of registrant as specified in its charter)

(801) 578-9020

(Registrant’s telephone number, including area code)

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

Yes  [X]   No [  ]

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

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

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

Yes [   ]   No [X]

The number of shares outstanding of the registrant’s common stock as of November 8, 2010April 30, 2012 was 49,713,895.

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TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

2

Consolidated Balance Sheets

3

Consolidated Statements of Operations (Unaudited)

4

Consolidated Statements of Cash Flows (Unaudited)

5

Notes to the Consolidated Financial Statements (Unaudited)

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

715

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

1220

Item 4. & nbsp;Controls and Procedures

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PART II – OTHER INFORMATION

Item 4.  Controls and Procedures

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PART II – OTHER INFORMATION

Item 1.  Legal Proceedings

1221

Item 1A.  Risk Factors

1321

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

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Item 5.  Other Information

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Item 6.  Exhibits

1825

Signatures

1826

EXPLANATORY NOTE

This report on Form 10-Q has been delayed because the Company’s financial information for the three month period ended March 31, 2011 was unavailable as of May 16, 2011.  Due to changes in our Chief Financial Officer at the end of 2010 and changes in our independent registered public accounting firms during 2011 the Company’s Form 10-K for the year ended December 31, 2010 was not filed until January 9, 2012.  These events have delayed the filing of all of our reports for the year ended December 31, 2011.  Accordingly, this report includes financial and non-financial information for the interim periods ended March 31, 2010 and 2011 and also includes descriptions of certain subsequent events occurring in 2012.

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

The financial information set forth below with respect to our balance sheets as of September 30, 2010March 31, 2011 and our statements of operations for the three month period ended March 31, 2011 and nine month periods ended September 30, 2010 and 2009 is unaudited.  This financial information, in the opinion of management, includes all adjustments consisting of normal recurring entries necessary for the fair presentation of such data.  The results of operations for the ninethree month period ended September 30, 2010March 31, 2011 are not necessarily indicative of results to be expected for any subsequent period.  

PACIFIC WEBWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010March 31, 2011

(Unaudited)

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

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

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PACIFIC WEBWORKS, INC. & SUBSIDIARIES

Notes to the Consolidated Financial Statements

March 31, 2011 and 2010

(Unaudited)

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations.  The information furnished in the interim condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements.  Although management believes the disclosures and information presented are adequate to makeadequately ensure that the information is not misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its December 31, 20092010 Annual Report on Form 10-K.  Operating results for the three and nine month periodsperiod ending September 30, 2010March 31, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2010.2011.

NOTE 2 – STOCKHOLDERS’ EQUITY

On April 22, 2010, options to purchase 900,000 shares granted under the Company’s 2001 Equity Incentive Plan were exercised.  The Company recognized income of $46,000.

On August 19, 2010, the Company issued 1,500,000 shares of common stock to convert debt of $180,000.

On August 26, 2010, the Company issued an aggregate of 1,940,000 shares of common stock to two entities to convert debt of $235,000.

NOTE 3 – NOTE PAYABLE

On January 27, 2010, the Company executed a Promissory Note Secured by a Deed of Trust with Assignment of Rents in the principal amount of $1,000,000 (the “Note”).  The Note holder is entitled to receive the entire principal amount with all accrued interest, at 7% interest per annum, payable on or before January 27, 2012.  On January 27, 2012, the maturity date of the Note was amended to January 27, 2015.  The Note is secured by a deed of trust with assignment of rents on commercial properties owned by the Company.  The Holder is entitled to collect rents and lease amounts, if any, from the buildings upon any default and may at its option elect to foreclose on the properties.  The Company may make payments prior to the due date and any payment will be applied first to the reduction of interest and the remaining balance to the outstanding principal.  In the event the Company fails to pay any amount when due, then the amount owing will become immediately due and a default interest rate of 15% shall apply to the principal amount.  

NOTE 4 - SUBSEQUENT EVENTS

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

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In this report references to “Pacific WebWorks,” “we,”  7;us,” “our” and “the Company” refer to Pacific WebWorks, Inc. and its subsidiaries.

FORWARD LOOKING STATEMENTS

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

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

Executive Overview

Pacific WebWorks enjoyed dramatic growth during 2009 and this growth was related largely to the continued upgrading of our marketing channels and the migration of our marketing towards a greater emphasis on the viability of our software products as a revenue generating tool, including the ability to use our tools in connection with the major retail site s.  However, this growth led to some abuses in our affiliate marketing system and management took actions to curtail these abuses in early 2010.  During the quarter ended September 30, 2010, management announced that it will no longer expose the Company to the risks associated with using the affiliate system to market our products. This has, and will continue to result in a significant decline in our revenues, but management anticipates continued profitability.  Consistent with this reduction in revenues, management has taken steps to reduce our overhead expense.  

The Company is seeking ways to market our existing products in a less risky manner. We are actively seeking additional marketing opportunities and other potential avenues through which we might grow the Company.  We will continue to ramp up our marketing expenditures through the remainder of 2010 as conditions allow.  We expect revenues for 2010 to be significantly less than those achieved in 2009, but we anticipate continued profitability.  Absent any currently unforeseeable events, we anticipate future growth moving forward from 2010 to be in the range of 10% to 20% per annum rather than the extreme growth we experienced in 2009.

Additionally, the Company is seeking merger and acquisition opportunities.  Given the Company’s strong balance sheet and continued moderate level of recurring revenues, management believes that there are opportunities in the marketplace to expand and diversify our operations to the benefit of our shareholders.

The Company continues to expend time and money to defend itself in the legal actions brought against the Company during the past year.  We anticipate that the legal actions will continue into 2011 and possibly beyond.  In an effort to end the litigatio n, motions to dismiss the legal actions in Illinois and Washington have been filed (See Part II, Item 1, below).  

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

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we must address shifting public attitudes for technology products.  These challenges could pose a threat to our success.  

Liquidity and Capital Resources

We have relied primarily on revenues to fund operations for the past two years.  We expect to continue to generate positive cash flows through further development of our business and distribution channels and we plan to address only the liabilities of our operating subsidiaries with our current cash balances and cash inflows.  Of course cash outflows can exceed monthly cash inflows based on timing differences between marketing campaigns and sales.

Our net income for the 2010 periods decreased a s compared to the 2009 periods, but a $1,000,000 loan obtained in January 2010 supplemented our cash resources.  The $1,000,000 promissory note is discussed in more detail, below (See “Commitments and Contingent Liabilities”).  We intend to use our cash for operating capital and we believe that we will be able to fund our operations with our revenues and available cash for the next twelve months.

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

To conserve our cash, in August 2010 we issued an aggregate of 3,440,000 shares of common stock to convert debt of $235,000 (See Part II, Item 2, below).  In the future, if we decide to rely on equity offerings for additional services or funding, then we will likely use private placements of our common stock pursuant to exemptions from the registration requirements provided by federal and state securities laws.  However, we currently have only 286,105 common shares authorized and we will need to increase our authorized common stock to conduct any future offerings.  In any future offering, the purchasers and manner of issuance will be determined according to our financial needs and the available exemptions.  We also note that if we issue more shares of our common stock our stockholders may experience dilution in the value per share of their common stock.  

We believe that we will be able to sustain our operations with existing cash and future cash flows during the next twelve to twenty-four months and possibly beyond.  Should we need to raise money in the future we believe funding may be obtained through additional debt arrangements or equity offerings in addition to our internally generated cash flows.  However, if we are unable to obtain additional funds on acceptable terms, then we might be forced to delay or abandon some or all of our product development, marketing or business plans, and growth could be slowed, which may result in declines in our operating results and common stock market price.  

Commitments and Contingencies

Current Liabilities: Our total current liabilities at September 30, 2010, included accounts payable, accrued liabilities and current liab ilities from discontinued operations.  Accounts payable of $128,163 were related to operating costs such as marketing and advertising expenses and professional fees.  Our accrued liabilities of $109,381 were primarily the result of payroll related liabilities and income tax payable, offset by estimated refunds and receivables.   

The Company is involved in several legal actions, but as of September 30, 2010, management has not recorded any contingent liability because management believes that we will be successful in those litigations.

Current liabilities from discontinued operations were $101,799 and were related to World Commerce Network, LLC.  The operations of World Commerce Network, LLC, our subsidiary, are ceased and discontinued.  These liabilities decreased from $215,274 in 2007 to $101,799 as a result of a recovery of previously recognized ex penses related to the defunct World Commerce Network operations.  Management continues to attempt to negotiate settlements of World Commerce Network’s accrued liabilities.  As of September 30, 2010, World Commerce

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Network’s accrued liabilities totaled $101,799.  Management believes the recorded liabilities are sufficient to cover any resulting liability.  There has been no activity on any of these accounts for over three years.

Promissory Note:  Our long term liabilities include a promissory note in the amount of $1,000,000.  On January 27, 2010, Pacific WebWorks, executed a Promissory Note Secured by a Deed of Trust with Assign ment of Rents in the principal amount of $1,000,000 (the “Note”).  The holder of the Note, Principal Development LLC, a Nevada limited liability company (the “Holder”), is entitled to receive the entire principal amount with all accrued interest, at 7% interest per annum, on or before January 27, 2012.  The Note is secured by a deed of trust with assignment of rents on our principal office building and a second commercial building we own in Salt Lake City, Utah.  Also, the Holder is entitled to collect rents and lease amounts, if any, from the buildings upon any default and may at its option elect to foreclose on the properties.  

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

Results of Operations

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

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

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

Our net revenues decreased significantly for the three month period ended September 30, 2010 (“2010 third quarter”) and the 2010 nine month period compared to the 2009 third quarter and 2009 nine month period as a result of our shift in marketing approaches.  During 2009 we relied upon an affiliate marketing approach, but due to abuses in that type of system we no longer expose our operations to the risks with affiliate marketing and we are focusing on developing alternative means of marketing.  Management anticipates that revenues will grow from the reduced 2010 levels and then will grow at a lower rate in 2011.  

Cost of sales includes costs related to fulfillment, customer service, certain royalties and commissions, amortization of purchased customer portfolios, service personnel, telecommunications and data center costs.  Cost of sales increased in the 2010 th ird quarter and nine month periods as compared to the 2009 periods.  Cost of sales was 4.6% of net revenues for the 2010 nine month period as compared to 0.9% of net revenues for the 2009 nine month period.  Cost of sales was lower in the 2009 periods due to the affiliate marketing strategy.  Management anticipates that cost of sales will remain higher in the short term as we continue our new marketing strategies.

Total operating expenses decreased for the 2010 periods compared to the 2009 periods primarily due to decreases in selling expenses.  Selling expenses include advertising expense, commissions and personnel expenses for sales and marketing and these expenses were higher in 2009 due to higher sales and commissions related to the affiliate marketing approach.  

General and administrative expenses include personnel expenses for executive, finance, and internal support personnel.  In addition, general and administrative expenses include fees for bad debt costs, professional legal and accounting services, insurance, office space, banking and merchant fees, and other overhead-related costs.  General

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and administrative expenses decreased for the 2010 third quarter compared to the 2009 third quarter because the number of customer accounts were higher in 2009 and consistent with the higher number of customer accounts, we increased our staff to provide services for the new customer accounts.  General and administrative expenses increased 6.2% for the 2010 nine month period as compared to the 2009 nine month period due to legal expense and other expense related to transitionin g our business.  

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

Off-balance Sheet Arrangements

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

Critical Accounting Estimates3 – CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounti ngaccounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Estimates of particular significance in our financial statements include trade receivables and collections, goodwill, contingent liabilities, and valuing stock option compensation.

Trade receivables and collections - We apply a range of collection techniques to manage delinquent accounts.  Management reviews accounts receivable monthly and records an estimate of receivables determined to be uncollectible due to allowance for doubtful accounts and bad debt.  Accounts receivable and the corresponding allowance for doubtful accounts are reviewed for collectability by management quarterly and uncollectible accounts receivable are written off.

Revenue Recognition -The Company recognizes revenue in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements” and its revisions in SAB No. 104.  SAB 101 and 104 clarify application of generally accepted accounting principles related to revenue transactions.

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PACIFIC WEBWORKS, INC. & SUBSIDIARIES

Notes to the Consolidated Financial Statements

March 31, 2011 and 2010

(Unaudited)

NOTE 3 – CRITICAL ACCOUNTING POLICIES - CONTINUED

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

The Company recognizes revenues when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectibility is reasonably assured.

Goodwill - Goodwill related to Intellipay is assessed annually for impairment by comparing the fair valuesvalue of Intellipay to its carrying amount, including goodwill.  In testing for a potential impairment of goodwill, the estimated fair value of Intellipay is compared with book value, including goodwill.  If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary.  If, however, the fair value of Intellipay is less than book value, then an impairment loss is recognized equal to the excess of book value to estimated fair value. The estimate of implied fair value of goodwill may require independent valuations of certain internally generated and unrecognized intangible assets such as our paying monthly gateway portfolio, software and technology and trademarks.  If the carrying amount of our goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess.  The fair value of Intellipay is estimated using both cash flow information from internal budgets and multiples of revenue.  In the event that an impairment indicator arises prior to our annual impairment test of goodwill, we will provide a full test relative to the indicator in the period that the indicator is present.

Contingent liabilities - Material estimates for contingent liabilities include approximately $0 for our operating companies.  From a liquidity standpoint, any settlement or judgment received by the Company from pending or threatened litigation may have a direct effect on our cash balances.  Management believes that all amounts estimated and recorded as contingent liabilities approximate the amount of liabilities that could be owed to parties in the form of settlement or in a judgment.  We have had no conversation for over three years with any of the parties related to the contingent liabilities of our discontinued operations.  Any settlements that might occur below amounts accrued would result in a favorable impact to our earnings and working capital.

Valuing stock options - We measure and record compensation cost relative to performance stock option costs in accordance with FASB ASC 480-10, which requires the Company to use the Black-Scholes pricing model to estimate the fair value of options at the option date of grant.  The fair value of the option grant is established at the date of grant using the Black-Scholes option pricing model based on assumptions related to the five year risk free interest rate, dividend yield, volatility, and average expected term (years to exercise).

Fair Value Measurements - We adopted ASC Topic 820 (originally issued as SFAS 157, “Fair Value Measurements”) as of January 1, 2008 for financial instruments measured at fair value on a recurring basis.  ASC Topic 820 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.

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PACIFIC WEBWORKS, INC. & SUBSIDIARIES

Notes to the Consolidated Financial Statements

March 31, 2011 and 2010

(Unaudited)

NOTE 3 – CRITICAL ACCOUNTING POLICIES – CONTINUED

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

·

Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;

·

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and

·

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at March 31, 2011:

The table below presents our assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at March 31, 2011.  We classify financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model.

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PACIFIC WEBWORKS, INC. & SUBSIDIARIES

Notes to the Consolidated Financial Statements

March 31, 2011 and 2010

(Unaudited)

NOTE 3 – CRITICAL ACCOUNTING POLICIES - CONTINUED

Fair Value of Other Financial Instruments - The carrying amounts of our accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their immediate or short-term maturities.  The aggregate carrying amount of the notes payable approximates fair value as the individual notes bear interest at market interest rates and there hasn’t been a significant change in our operations and risk profile.

NOTE 4 - 2010 RESTATEMENT

The financial statements for the three month period ended March 31, 2010 were restated to reflect issues identified during a reaudit of the financial statements for that year.  Management and the board of directors concluded these restatements were necessary to reflect the changes described below.

[See following page.]

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PACIFIC WEBWORKS, INC. & SUBSIDIARIES

Notes to the Consolidated Financial Statements

March 31, 2011 and 2010

(Unaudited)

NOTE 4 - 2010 RESTATEMENT - CONTINUED

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

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PACIFIC WEBWORKS, INC. & SUBSIDIARIES

Notes to the Consolidated Financial Statements

March 31, 2011 and 2010

(Unaudited)

NOTE 4 - 2010 RESTATEMENT – CONTINUED

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

PACIFIC WEBWORKS, INC. & SUBSIDIARIES

Notes to the Consolidated Financial Statements

March 31, 2011 and 2010

(Unaudited)

NOTE 4 - 2010 RESTATEMENT – CONTINUED

NOTE 5 - SUBSEQUENT EVENTS

On April 21, 2011, the Company invested $250,000 in common units of Middlebury Ventures II, LLC, a Delaware limited liability company.  The funds are to be used by Middlebury Ventures II, LLC for the acquisition of Fisker Holdings, Inc. Series C-1 Shares pursuant to the Fisker Series C-1 transaction documents.

On June 9, 2011, the Company formed Headlamp Ventures, LLC as a wholly owned subsidiary for the purpose of pursuing business acquisitions and investments.  The new company was initially capitalized with $500,000.

On July 20, 2011, the Company’s Board of Directors resolved to resurrect its World Commerce Network, LLC business.  World Commerce Network, LLC is a wholly owned subsidiary of the Company and has been a Discontinued Operation since July, 2002.

On July 28, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, established a revolving line of credit facility and issued an initial $400,000 promissory note to Bsquare Red, LLC, a Utah limited liability company, to be used as working capital in their internet marketing business.  The note carries a 15% effective annual rate of interest.  It is noted that Bsquare Red, LLC is owned by family members of the CEO and CFO of the Company.

On August 2, 2011, the Company acquired Thrifty Seeker, LLC, a Utah limited liability company, for $18,000.  Thrifty Seeker, LLC competes in the daily deals space.

On August 3, 2011, the Company, through its World Commerce Network, LLC subsidiary, issued a promissory note in the amount of $250,000 to Bryan Development, LLC, a Utah limited liability company, for use as working capital in its business investment activities.  The note carries a 5% annual interest rate and can be converted, in whole or in part at the election of the Company, into common stock shares owned or held by Bryan Development, LLC.

On August 15, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, established a revolving line of credit facility and issued an initial $400,000 promissory note to Grupo Zapata Arce, a division of Metales y Minerales S.A. De C.V., a corporation organized under the laws of Mexico, for use in its iron ore exporting business.  Interest shall be charged on amounts outstanding in the form of a fee of $3.00 per Metric Ton of Iron Ore purchased with proceeds of the note.

On August 15, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, partnered with Grupo Zapata Arce, a division of Metales y Minerales S.A. De C.V. and Dominican Oil & Gas Exploration, LLC to form Grupo Zapata Arce Division Metales y Minerals S.A. de C.V., LLC, a Utah limited liability company, for the purpose of developing an iron ore brokering business.  For value received, the Company holds a 51% ownership position in Grupo Zapata Arce Division Metales y Minerales S.A. de C.V., LLC.

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PACIFIC WEBWORKS, INC. & SUBSIDIARIES

Notes to the Consolidated Financial Statements

March 31, 2011 and 2010

(Unaudited)

NOTE 5 – SUBSEQUENT EVENTS - CONTINUED

On August 19, 2011, the Company’s Board of Directors resolved to discontinue and dissolve Fundworks, Inc., a Delaware corporation and wholly owned subsidiary of the Company.  The only activity at Fundworks, Inc. during the years ended December 31, 2010 and 2009, was intercompany transactions which have been eliminated in the consolidation.  Therefore, the dissolution of this subsidiary does not result in the recognition of discontinued operations in the financial statements.

On September 20, 2011, Grupo Zapata Arce Division Metales y Minerals S.A. de C.V., LLC was added as a party to the revolving line of credit and promissory note originally established August 15, 2011 for Grupo Zapata Arce, a division of Metales y Minerales S.A. De C.V..

On October 3, 2011, the revolving line of credit and promissory note, originally established July 28, 2011 for Bsquare Red, LLC was amended to increase the amount to $500,000.  It is noted that Bsquare Red, LLC is owned by family members of the CEO and CFO of the Company.

On October 19, 2011, the Company’s Board of Directors resolved to authorize the investment of up to $1,200,000 in Rsignia, Inc.  Rsignia, Inc. is a leading provider of cyber security solutions and services including detection, mitigation, countermeasures and forensics.

On November 11, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, invested $100,000 in Payroll Innovations, LLC, a payroll debit card provider servicing small to mid-sized employers.  For value received, the Company holds a 25% ownership position in Payroll Innovations, LLC.

On November 11, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, invested $150,000 in PickYourPayday.com, LLC, an online payroll advance business servicing small to mid-sized employers.  For value received, the Company holds a 25% ownership position in PickYourPayday.com, LLC.

On December 2, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, invested $10,000 in Asher, LLC, a business specializing in design and production of gloves and apparel sold in the athletics industry.  For value received, the Company holds a 51% ownership position in Asher, LLC.  It is noted that the Headlamp Ventures, LLC interest in Asher, LLC was purchased from a relation by marriage of the CFO of the Company.

On December 31, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, extended the maturity date on the Promissory Note extended to Rsignia, Inc. to April 15, 2012.

On January 18, 2012, the Company, through its World Commerce Network, LLC subsidiary, issued a short term $300,000 promissory note to Bsquare Red, LLC, a Utah limited liability company, to be used as working capital in their internet marketing business.  The note has a maturity date of February, 15, 2012, carries a 15% effective annual rate of interest and a one-time fee equal to one percent of the total loan amount.  The note, including all interest and fees, was paid in full at maturity.  It is noted that Bsquare Red, LLC is owned by family members of the CEO and CFO of the Company.

On January 27, 2012, the maturity date on the $1,000,000 Promissory Note executed by the Company on January 27, 2010 (See Note 3, above) was amended to January 27, 2015.

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PACIFIC WEBWORKS, INC. & SUBSIDIARIES

Notes to the Consolidated Financial Statements

March 31, 2011 and 2010

(Unaudited)

NOTE 5 – SUBSEQUENT EVENTS - CONTINUED

On February 9, 2012, the Company, through its Headlamp Ventures, LLC subsidiary, established a new revolving line of credit facility and issued an initial $500,000 promissory note to Bsquare Red, LLC, a Utah limited liability company, to be used as working capital in their internet marketing business.  The note carries an 18% effective annual rate of interest.  It is noted that Bsquare Red, LLC is owned by family members of the CEO and CFO of the Company.

On April 16, 2012, the Promissory Note extended to Rsignia, Inc., went into default.  The Company subsequently provided Rsignia, Inc. with notice of default and a demand for repayment of all outstanding principal and accrued interest.  The Company is currently working with Rsignia, Inc. to collect payment in full.

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

FORWARD LOOKING STATEMENTS

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

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

Executive Overview

Pacific WebWorks enjoyed dramatic growth during 2009 and this growth was related largely to the upgrading of our marketing channels and the migration of our marketing towards a greater emphasis on the viability of our software products as a revenue generating tool, including the ability to use our tools in connection with the major retail sites. However, this growth led to some abuses in our affiliate marketing system and management took actions to curtail these abuses in early 2010.  In November 2010 management announced that we would no longer expose the Company to the risks associated with using the affiliate system to market our products. This has, and will continue to result in a significant decline in our revenues.  Consistent with this reduction in revenues, management has taken steps to reduce our overhead expense.  

The first quarter of 2011 was primarily devoted to addressing items related to our ongoing legal issues as well as initiating discussions with a number of parties concerning merger, acquisition, joint venture or partnerships to pursue a wide variety of options for the future. As announced in 2010 the Company was focused on developing alternative avenues through which its resources might be profitably employed.

During the first quarter of 2011 the Company continued to expend time and money to defend itself in the legal actions brought against the Company during the prior two years.  The legal actions have continued through 2012 and may possibly continue beyond.  In an effort to end the litigation, motions to dismiss the legal actions in the various jurisdictions have been filed.

As of the filing date of this report, we have trimmed our staffing significantly and identified and hired the personnel necessary to implement our new business model.  Our goal is to find synergistic opportunities, but we will not limit ourselves if other areas of interest develop.  We formed Headlamp Ventures, LLC and activated World Commerce Network, LLC and funded these subsidiaries for the purpose of seeking out investment opportunities in other businesses.  As of February 2012 the Company has invested an aggregate of $1,400,000 in other businesses directly or through our subsidiaries (See Note 5 – Subsequent Events, above).

Liquidity and Capital Resources

During 2011 and 2010 we relied primarily on revenues to fund operations.  We expect to continue to generate positive cash flows through further development of our business and distribution channels and investments in other businesses.  We plan to address only the liabilities of our operating subsidiaries with our current cash balances and

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cash inflows.  Of course cash outflows can exceed monthly cash inflows based on timing differences between marketing campaigns and sales and returns on investment.

Our net revenues for 2010 decreased significantly as compared to 2009 due to the change in our marketing strategy and that trend continued into 2011.  However, our cash and cash equivalents increased at March 31, 2011 due to the receipt of certain receivables.   

Maintaining sufficient merchant account processing capabilities will continue to be a factor in our overall performance.  We work diligently with our existing merchant account providers and continually search for new merchant account providers in order to manage this risk.

We believe that we will be able to sustain our operations with existing cash and future cash flows during the next twelve to twenty-four months and possibly beyond.  Should we need to raise money in the future we believe funding may be obtained through additional debt arrangements in addition to our internally generated cash flows.  However, if we are unable to obtain additional funds on acceptable terms, then we might be forced to delay or abandon some or all of our product development, marketing or business plans, and growth could be slowed, which may result in declines in our operating results and common stock market price.  

Commitments and Contingencies

Current Liabilities:  Our total current liabilities at March 31, 2011 included accounts payable and accrued liabilities. Accounts payable of $40,307 was related to operating costs such as marketing and advertising expenses and professional fees.  Our accrued liabilities of $166,285 were primarily the result of payroll related liabilities and income tax payable, offset by estimated refunds and receivables.  The Company was involved in several legal actions, but as of March 31, 2011, management had not recorded any contingent liability because management believed that we would be successful in those litigations.

For the year ended December 31, 2010 we recorded current liabilities from discontinued operations of $101,799 related to World Commerce’s customer leases.  That liability was reduced to $95,122 during the first quarter of 2011 to more accurately reflect the potential payment requirement.  There has been no active discussion with the leasing company since 2002.

Also included in current liabilities at March 31, 2011 is $65,826 in deferred revenue primarily related to hosting services and $82,322 in accrued interest payable related to the Company’s $1,000,000 promissory note.

Promissory Note:  Our long term liabilities at March 31, 2011 included a promissory note in the amount of $1,000,000.  On January 27, 2010, Pacific WebWorks, executed a Promissory Note Secured by a Deed of Trust with Assignment of Rents in the principal amount of $1,000,000 (the “Note”).  The holder of the Note, Principal Development, LLC, a Nevada limited liability company (the “Holder”), is entitled to receive the entire principal amount with all accrued interest, at 7% interest per annum, on or before January 27, 2012.  On January 27, 2012, the maturity date of the Note was amended to January 27, 2015.  The Note is secured by a deed of trust with assignment of rents on our principal office building and a second commercial building we own in Salt Lake City, Utah.  Also, the Holder is entitled to collect rents and lease amounts, if any, from the buildings upon any default and may at its option elect to foreclose on the properties.  

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

Results of Operations

The following discussions are based on the consolidated financial statements of Pacific WebWorks, Intellipay,

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TradeWorks Marketing, FundWorks and World Commerce Network for the three month periods ended March 31, 2011 and 2010.  The following charts are a summary of our financial statements for those periods and should be read in conjunction with the financial statements, and notes thereto, included in this report at Part I, Item 1, above.

Total assets decreased at March 31, 2011 as compared to December 31, 2010 primarily as a result of a reduction in receivables related to the Visual WebTools business.  At March 31, 2011 total liabilities also decreased compared to the 2010 year end as a result of continued cost control measures.  Our accumulated deficit increased at March 31, 2011 as a result of posting a loss for the three month period ended March 31, 2011 (“2011 first quarter”).

We recognize revenue from hosting, gateway, and maintenance fees, software, access and licensing fees, the sale of merchant accounts and custom website design work.  Revenues from up-front fees from customers are recorded on the balance sheets as deferred revenues and are recognized over the period services are performed, ranging from eight months to one year.  Fees for the set-up of merchant accounts are deferred and recognized as services

17

are completed, which is generally two months.  Revenues from monthly hosting, maintenance, transaction and processing fees are recorded when earned.  Operating lease revenues for merchant accounts and software are recorded when earned.

Our net revenues decreased significantly for the 2011 first quarter compared to the 2010 first quarter as a result of our shift in marketing approaches.  Formerly we relied upon an affiliate marketing approach, but due to abuses in that type of system we no longer expose our operations to the risks associated with affiliate marketing. Management anticipates that revenues will grow from the reduced 2011 levels as new business opportunities are developed.

Cost of sales includes costs related to fulfillment, customer service, certain royalties and commissions, amortization of purchased customer portfolios, service personnel, telecommunications and data center costs.  Cost of sales increased in the 2011 first quarter as compared to the 2010 first quarter.  Cost of sales was 12.9% of net revenues for the 2011 first quarter as compared to 0.5% of net revenues for the 2010 first quarter largely due to a decline in sales against certain fixed costs.  Management anticipates that cost of sales will remain higher as a percentage of sales in the short term due to fixed costs as new revenue streams are developed.

Total operating expenses decreased for the 2011 first quarter compared to the 2010 first quarter primarily due to decreases in selling expenses, staff reduction and other cost control measures.  Selling expenses include advertising expenses, commissions and personnel expenses for sales and marketing and these expenses were higher in the 2010 first quarter due to higher sales and commissions related to the affiliate marketing approach.  

General and administrative expenses include personnel expenses for executive, finance, and internal support personnel.  In addition, general and administrative expenses include fees for bad debt costs, professional legal and accounting services, insurance, office space, banking and merchant fees, and other overhead-related costs.  General and administrative expenses decreased for the 2011 first quarter compared to the 2010 first quarter because the number of customer accounts were higher in 2010 and consistent with the higher number of customer accounts, we increased our staff to provide services for the new customer accounts.

Our net income for the 2011 first quarter reflects the decline in revenues related to the Visual WebTools business as the Company pursued other business opportunities.   

Off-balance Sheet Arrangements

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

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Estimates of particular significance in our financial statements include trade receivables and collections, goodwill, contingent liabilities, and valuing stock option compensation.

Trade receivables and collections - We apply a range of collection techniques to manage delinquent accounts. Management reviews accounts receivable monthly and records an estimate of receivables determined to be uncollectible due to allowance for doubtful accounts and bad debt.  Accounts receivable and the corresponding allowance for doubtful accounts are reviewed for collectability by management quarterly and uncollectible accounts receivable are written off.

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Revenue Recognition - The Company recognizes revenue in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements” and its revisions in SAB No. 104.  SAB 101 and 104 clarify application of generally accepted accounting principles related to revenue transactions.

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

The Company recognizes revenues when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectibility is reasonably assured.

Goodwill - Goodwill related to Intellipay is assessed annually for impairment by comparing the fair value of Intellipay to its carrying amount, including goodwill.  In testing for a potential impairment of goodwill, the estimated fair value of Intellipay is compared with its impliedbook value, including goodwill.  If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary.  If, however, the fair value of Intellipay is less than book value, then an impairment loss is recognized equal to the excess of book value to estimated fair value. The impairment test for 2010 resulted in an estimated fair value in excess of the book value of goodwill and no impairment was required.

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

Contingent liabilities - Material estimates for contingent liabilities include approximately $0 for our operating companies and approximately $101,799 in net current liabilities of our discontinued operations.companies.  From a liquidity standpoint, any settlement or judgment received by usthe Company from pending or threatened litigation may have a direct effect on our cash balances at September 30, 2010.  Any judgments that may be received by us for pending or threatened litigation related to discontinued operations may not have a direct effect on our assets as management does not intend to satisfy such claims with the assets of our operating companies.March 31, 2011.  Management believes that all amounts estimated and recorded as contingent liabilities approximate the amount of liabilities that could be owed to parties in the form of settlement or in a judgment.  We have had no communicationdiscussion for over three years with any of

11

the parties related to the contingent liabilities of our discontinued operations.liabilities.  Any settlements that might occur below amounts accrued would result in a favorable impact to our earnings and working capital.

Valuing stock options - We measure and record compensation cost relative to perform anceperformance stock option costs in accordance with FASB ASC 480-10, which requires the Company to use the Black-Scholes pricing model to estimate the fair value of options at the option date of grant.  The fair value of the option grant is established at the date of grant using the Black-Scholes option pricing model based on assumptions related to the five year risk free interest rate, dividend yield, volatility, and average expected term (years to exercise).

Fair Value Measurements - We adopted ASC Topic 820 (originally issued as SFAS 157, “Fair Value Measurements”) as of January 1, 2008 for financial instruments measured at fair value on a recurring basis.  ASC Topic 820 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to

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unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).  These tiers include:

·

Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;

·

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and

·

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Fair Value of Other Financial Instruments - The carrying amounts of our accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their immediate or short-term maturities.  The aggregate carrying amount of the notes payable approximates fair value as the individual notes bear interest at market interest rates and there hasn’t been a significant change in our operations and risk profile.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our filings underreports filed with the SEC pursuant to the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC.  This information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.  Our Chief Executive Officer who also serves as our principal financial officer,and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, hethey concluded that our disclosure controls and procedures were effective.ineffective for the first quarter ended March 31, 2011 because the Company did not file its periodic reports timely due to a delay in preparation of our financial statements for the year ended December 31, 2010.   The Company has engaged a new independent registered public accounting firm that will perform future audits and reviews of our periodic reports and the Company has hired new accounting personnel to manage the accounting procedures. Management expects these actions will ensure timely filing of our reports in the future.

Changes to Internal Control over Financial Reporting

Our ma nagementmanagement is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act).  Management conducted an evaluation of the effectiveness of our internal control over financial reporting and determined that there were no changes made in our internal control over financial reporting during the thirdfirst quarter of our 20102011 fiscal year that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.  The changes to internal control over financial reporting were incorporated to improve the effectiveness of control over accounting system maintenance and vendor payable and expenditure.

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PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Class Action Lawsuits

During Nov ember 2009 three lawsuitsthe period ended March 31, 2011 there were filed against Pacific WebWorks in various jurisdictions.  Theno new legal actions allege similar claims related to procedures we use to sell our productsproceedings initiated, nor any material developments in our ordinary course of business.  On November 9, 2009, Barbara Ford filed an action in the Circuit Court of Cook County, Illinois, Chancery Division.  A second action was filed on November 12, 2009, by Deanna Pelletier in the Superior Court of the State of California, County of Solano.  A third action was filed by Lisa Rasmussen on November 20, 2009, in the Superior Court of Washington, Snohomish County.  On December 18, 2009, the Barbara Ford matter was removed to the United States District Court for the Northern District of Illinois.  On December 18, 2009, the Deanna Pelletier matter was removed to the United States District Court for the Eastern District of California.  On December 23, 2009, the Lisa Rasmussen matter was removed to the United States District Court for the Western District of Washington.  legal proceedings.

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On July 9, 2010 and July 10, 2010, two additional suits brought by the same law firm as the above three cases were filed in Missouri and Florida.  On July 9, 2010, Randy Guffey filed an action in the Circuit Court for the Twentieth Judicial Circuit, Collier County, Florida, which action was removed to the United States District Court for the Middle District of Florida, Ft. Myers Division.  On July 10, 2010, Thomas Aikens filed an action in the Circuit Court of Jackson County, Missouri, which matter was removed to the United States District Court for the Western District of Missouri.  

All plaintiffs in t hese cases are being represented by the same legal firm and each complaint seeks class action certification.  The complaints allege that Pacific WebWorks violated consumer protection laws, committed fraud and used deceptive trade practices in relation to the manner in which Pacific WebWorks charged for purchases of its products.  Each action seeks compensatory and punitive damages, plus reasonable costs and attorney fees.  In response to these actions, Pacific WebWorks retained the law firm of Snell & Wilmer as legal counsel to vigorously defend the Company in these lawsuits.  Discovery began on the class certification phase in the Illinois, Washington and California lawsuits.  Our legal counsel intends to oppose class certification and has filed motions to dismiss all claims in the Illinois and Washington actions and a motion for summary judgment in the California action.  In addition, Pacific Webworks has brought a motion to dismiss the Guffey and Aikens actions, which mot ions have not yet been ruled upon.  

On December 18, 2010, another similar lawsuit was filed by Song Que Hahn, a California resident, in the United States District Court for the District of Utah.  On February 8, 2010, our legal counsel filed a motion to strike the class allegations and a motion to dismiss all claims, except the breach of contract claims.  On June 17, 2010, the Court granted our motion to dismiss and dismissed the entire complaint, but gave plaintiff the right to file a motion for leave to file an amended complaint.  Mr. Hahn did file such a motion, but that motion was denied by the Court on September 10, 2010.  Currently, no actions by Mr. Hahn are pending.

On February 3, 2010, a suit was brought against Pacific Webworks by Tommy Tompkins in the Circuit Court of Jefferson County, Alabama.  The complaint in that case alleges that Pac ific Webworks violated the Telephone Consumer Protection Act by calling Mr. Tompkins’ cellular telephone to make a sales solicitation.  Pacific Webworks has denied that it ever called Mr. Tompkins for any purpose whatsoever and its legal counsel will file a motion to dismiss that complaint.

Other

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

ITEM 1A.  RISK FACTORS

Factors Affecting Future Performance

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

We rely upon our credit card merchant accounts to collect our monthly hosting payments and many of the limitations imposed upon us by the credit card associations, in the opinion of management, are unreasonable and unnecessarily confining.  In the past, these merchant account limitations have forced management to restrict our business growth and this restriction of growth continues to impact our earnings in a negative manner.   To address this issue we may sell a portion of our hosting portfolio in excess of merchant account limitations

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

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

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

Based on our current growth plan we believe we will be able to support our operations from existing cash balances and future cash flows for at least the next twelve to twenty-four months.  Our success will depend upon our ability to generate future cash flows and, if needed in the future, the ability to access equity capital markets and borrow on terms that are financially advantageous to us.  Also, we may not be able to obtain additional funds on acceptable terms.  If we are unable to obtain additional capital, then we may not have sufficient working capital to develop products, finance acquisitions, or pursue business opportunities.  If we borrow funds, then we could be forced to use a large portion of our cash reserves to repay principal and interest on those funds.  If we issue our securities for capital, then the interests of investors and shareholders could be diluted.

We are subject to intense competition from large and small companies that limits our ability to obtain market share and may force our prices down.

We face competition in the overall Internet software market, as well as in the business opportunity market.  Our ability to earn significant revenues from our Visual WebTools™ or IntelliPay payment system will depend in part on their acceptance by a substantial number of online businesses.  Broad acceptance of our products and services and their use in large numbers is critical to our success because a large portion of our revenues are derived from one-time and recurring fees we charge to customers buying our products and services.  Our success in obtaining market share will depend upon our ability to build name brand recognition and to provide cost-effective products and services to our customers.  We have developed our products to meet the needs of small businesses and we

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believe the generality of our competitors’ services may be inadequately addressing the small business owner’s needs. We expect competition to persist, increase, and intensify in the future as the markets for our products and services continue to develop and as additional competitors enter our market.  In addition, many of our current or potential competitors have broad distribution channels that they may use to bundle competing products directly to end-users or purchasers.  If these competitors were to bundle competing products for their customers, it could adversely affect our ability to obtain market share and may force our prices down.

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

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

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

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

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

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

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

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

The electronic commerce, web hosting and merchant processing markets in which we compete are characterized by technological change, new product introductions, evolving industry standards and changing customer needs.  In order t oto remain competitive, we may be required to engage in a number of research and development projects, which carries the risks associated with any research and development effort, including cost overruns, delays in delivery and performance problems.  Any delay in the delivery of new products or services could render them less desirable by our customers, or possibly even obsolete.  Any performance problem with a new product or service may require significant funds to correct the problem.  As a result of these factors, our research and development efforts could result in increased costs that could reduce our operating profit, a loss of revenue if promised new

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products are not timely delivered to our customers, or a loss of revenue or possible claims for damages if new products and services do not perform as anticipated.

We may experience software defects which may damage customer relations.

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

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

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

·*

Firefire,

·*

earthquake,

·*

power loss,

·*

terrorist attacks,

·*

harmful software programs,

·*

telecommunications failure, and

·*

unauthorized entry or other events.

Although we regularly back up data from operations, and take other measures to protect against loss of data, there is still some risk of such losses.  Despite the security measures we maintain, our infrastructure may be vulnerable to

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computer viruses, hackers, rouge employees or similar sources of disruption.  Any problem of this nature could result in significant liability to customers or financial institutions and also may deter potential customers fro mfrom using our services.  We attempt to limit this sort of liability through back-up systems, contractual provisions, insurance and other security measures.  However, we cannot assure yoube assured that these contractual limitations on liability would be enforceable, or that our insurance coverage would be adequate to cover any liabilities we might sustain.

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

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

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

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

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

We may not be able to adapt as the Internet market changes, including changing marketing strategies and the associated risks.

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

·*

rapid technological change;

·*

changes in advertiser and user requirem entsrequirements and preferences;

·*

frequent new product and service introductions embodying new technologies; and

·*

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

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

·*

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

·*

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

·*

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

·*

continue to find acceptable means through which to market our products.

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

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

Our industry is experiencing increased legal actions related to Internet marketing strategies and our financial condition may be at risk due to such legal actions.

We experienced increased legal actions during 2009 and 2010 related to our marketing strategies and these legal actions have required our cash flows to be directed to our legal defense.  Our marketing strategies relyhad relied upon resellers and affiliate marketers and these thir dthird parties may lack sufficient knowledge regarding proper marketing activities.  As a result, we have been included in litigation alleging violations of consumer protection and federal RICO laws, fraud and use of deceptive trade practices.  These contingent liabilities may increase our cost of doing business.  

Regulation of the Internet and Internet-based services may decrease the demand for our services and/or increase our cost of doing business.

Due to the increasing popularity and use of the Internet and online services, federal, state, local, and foreign governments may adopt laws and regulations, or amend existing laws and regulations, with respect to the Internet and other online services.  These laws and regulations may affect issues such as user privacy, pricing, content, taxation, copyrights, distribution, and quality of products and services.  Any new legislation could hinder the growth in use of the Internet generally or in our industry and could impose additional burdens on companies conducting business online, which could, in turn, decrease the demand for our services and increase our cost of doing business. The laws governing the Internet remain largely unsettled, even in areas where legislation has been enacted.  It may take years to determine whether and how existing laws, such as those governing intellectual property, privacy, libel, and taxation, apply to the Internet.  In addition, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business via the Internet.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSWe cannot be assured that the subsidiaries will be able to identify only business opportunities which will ultimately prove to be beneficial to the Company and our stockholders.  

On August 19, 2010,Our subsidiaries’ search for business opportunities to invest in and this search will not be limited to any particular geographical area or industry.  Our subsidiaries’ management has unrestricted discretion in seeking a business opportunity, subject to the availability of such opportunities, economic conditions and other factors.  Business opportunity participation is governed by the parent company management and board of directors.  In addition, the selection of a business opportunity in which to participate is complex and extremely risky and will be made by the subsidiary’s management in the exercise of its business judgment.  We cannot be assured that the subsidiaries will be able to identify only business opportunities which will ultimately prove to be beneficial to the Company issued 1,500,000 shares of common stock to Liberty Partners LLC to convert debt of $180,000 related to investor relations fees paid onand our behalf.  We relied on an exemption from the registration requirements provided by Section 4(2) of the Securities Act of 1933 for a private transaction not involving a public distribution.

On August 26, 2010, the Company issued an aggregate of 1,940,000 shares of common stock to two entities to convert debt related to investor relations services provided to us.  We issued 840,000 shares to Empire Fund Managers, LLC to convert debt of $100,000 and we issued 1,100,000 shares to Maestro Investments to convert debt of $135,000.  We relied on an exemption from the registration requirements provided by Section 4(2) of the Securities Act of 1933 for a private transaction not involving a public distribution.stockholders.  

ITEM 5.  OTHER INFORMATION

On August 26, 2010 the Company had issued an aggregate 3,440,000 shares of common stock, which represents an

increase of 7.4% of the outstanding shares as compared to the amount of outstanding shares reported on our last periodic report.  The information regarding those transactions is described above in Item 2.  24

ITEM 6.  EXHIBITS

Part I Exhibits

No.

Description

31.1

Chief Executive Officer Certification

31.2

Principal Financial Officer Certification

32.1

Section 1350 Certification

Part II Exhibits

No.

Description

3.1

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

3.2

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

10.1

Service Agreement between Pacific WebWorks a nd

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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.

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