SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2006
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO _______________
Commission File Number: 0-29459
PACEL CORP.
(Exact name of registrant as specified in its charter)
NEVADA 54-1712558
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
7621 Little Ave Suite 101
Charlotte, NORTH CAROLINA 28226
---------------------------------------- -------------------------------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (704) 643-0676
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 day: Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company as defined in
Rule 12b-2 of the Exchange Act Yes [ ] No [X]
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE) Yes [ ] No [X]
State the number of Shares outstanding of each of the issuer's classes of common
equity, as of the latest date:
As November 10, 2006 there were 4,487,481,946 shares of the Registrant's common
stock outstanding.
PACEL CORP. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION (unaudited)
Item 1. Index to Consolidated Financial Statements
Consolidated Balance Sheets F - 2-3
Consolidated Statements of Operations F - 4
Consolidated Statements of Cash Flows F - 5-6
Notes to Consolidated Financial Statements F - 7-10
Item 2. Management's Discussion and Analysis of Financial Results of Operations 3 - 8
Item 3. Controls and Procedures 9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 6. Exhibits 10
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
2006 2005
--------------- ---------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 766,694 $ 251,595
Accounts receivable 247,085 15,384
Accounts receivable-Unbilled 212,002 169,749
Prepaid expenses 116,592 69,372
Workers compensation insurance deposits 42,195 26,240
Restricted cash 105,033 179,855
--------------- ---------------
Total current assets 1,489,601 712,195
--------------- ---------------
Property and equipment, net of accumulated depreciation of
$178,585 and $133,031, respectively 98,894 125,380
--------------- ---------------
Other assets:
Other receivables 25,350 65,127
Retirement Plan - Director 182,036 162,230
Goodwill 669,404 368,200
Security deposits 11,152 11,152
--------------- ---------------
Total other assets 887,942 606,709
--------------- ---------------
Total assets $ 2,476,437 $ 1,444,284
=============== ===============
See accompanying notes to the consolidated financial statements.
F-2
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
2006 2005
--------------- ---------------
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 102,152 $ 336,497
Payroll and payroll related liabilities 2,184,506 1,955,231
Accrued worksite employee payroll expense 196,639 163,626
Accrued expenses 2,072,186 1,857,454
Assumed Liabilities 493,133 493,133
Client Deposits 47,366 -0-
Short term payables 509,984 1,081,359
Current Maturities of long term note 27,128 27,127
--------------- ---------------
Total current liabilities 5,633,094 5,914,427
--------------- ---------------
Long-term liabilities:
Notes Payable - Non Current portion 200,029 218,926
Deferred Compensation - Director Payable 463,567 335,233
--------------- ---------------
Total long term liabilities 663,596 554,159
--------------- ---------------
Total liabilities 6,296,690 6,468,586
--------------- ---------------
Stockholders' equity (deficit):
Preferred stock, .001 par value, no liquidation value,
5,000,000 shares authorized, 1,000,000 shares
of 1997 Class A convertible preferred stock issued 1,000 1,000
Preferred stock, .001 par value, no liquidation value,
500,000 shares authorized, 500,000 shares
of 2006 Class C convertible preferred stock issued 500 -0-
Common stock, .001 par value, 10,000,000,000 shares
authorized, 4,075,481,946 and 1
shares issued respectively 4,075,482 -0-
Additional paid-in capital 25,179,884 25,765,424
Cumulative currency translation adjustment (18,720) (18,720)
Accumulated deficit (33,058,399) (30,772,006)
--------------- ---------------
Total stockholders' (deficit) (3,820,253) (5,024,302)
--------------- ---------------
Total liabilities and stockholders' deficit $ 2,476,437 $ 1,444,284
=============== ===============
See accompanying notes to the consolidated financial statements.
F-3
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Nine months ended Three months ended
September 30, September 30,
2006 2005 2006 2005
-------------- -------------- -------------- --------------
Revenue $ 2,723,851 $ 1,880,593 $ 1,044,152 $ 390,082
Cost of services 1,882,916 1,389,574 681,894 211,835
-------------- -------------- -------------- --------------
Gross profit 840,935 491,019 362,258 178,247
Operating costs and expenses:
General and administrative 1,843,679 2,038,878 674,576 538,444
Sales and marketing 62,587 422,870 37,924 72,732
Depreciation and amortization 45,554 45,396 15,389 15,476
Loss on impairment of goodwill 197,720 131,950 -0- -0-
-------------- -------------- -------------- --------------
Total operating expenses 2,149,540 2,639,094 727,889 626,652
-------------- -------------- -------------- --------------
Operating Loss (1,308,605) (2,148,075) (365,631) (448,405)
Other expenses:
Interest expense (237,008) (305,473) (66,087) (72,763)
Embedded Interest (742,691) (447,855) (333,184) (85,714)
-------------- -------------- -------------- --------------
Total other expense (979,699) (753,328) (399,271) (158,477)
Net loss before discontinued operations (2,288,304) (2,901,403) (764,902) (606,882)
Discontinued operations:
Loss from discontinued operations of Asmara of
Florida and Partners PEO of the Carolinas -0- (31,708) -0- -0-
Loss from sale of contracts to Allegro, Inc. -0- (600,652) -0- (11,699)
-------------- -------------- -------------- --------------
Total loss on discontinued operations -0- (632,360) -0- (11,699)
Net loss $ (2,288,304) $ (3,533,763) $ (764,902) $ (618,581)
============== ============== ============== ==============
Loss from discontinued operations per common and common equivalent share:
Basic $ (0.00) $ (632,360) $ (0.00) $ (0.00)
Diluted $ (0.00) $ (632,360) $ (0.00) $ (0.00)
Net loss per common and common equivalent share:
Basic $ (.004) $ (3,533,763) $ (0.004) $ (618,581)
Diluted $ (.004) $ (3,533,763) $ (0.004) $ (618,581)
Weighted average shares outstanding:
Basic 604,103,891 1 178,848,900 1
Diluted 604,103,891 1 178,848,900 1
See accompanying notes to the consolidated financial statements.
F-4
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
2006 2005
--------------- ---------------
Cash flows from operating activities:
Net loss $ (2,288,304) $ (3,533,763)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 45,554 45,396
Embedded interest 742,691 447,855
Other non-cash items -0- 27,700
Loss on discontinued operations -0- 632,360
Loss on sale of contracts -0- -0-
Loss on impairment of goodwill 197,720 210,599
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (106,197) 222,099
Accounts receivable-Unbilled (42,253) (85,315)
Other receivables 39,777 -0-
Client deposits -0- 779,475
Insurance deposits 19,245 14,163
Prepaid expenses (47,220) 31,062
Security deposits -0- (1,926)
Retirement Plan Director (19,806)
Increase (decrease) in liabilities:
Accounts payable (234,055) 139,768
Accrued expenses 214,731 498,862
Deferred Compensation-Director 128,334 200,818
Payroll and payroll related liabilities 15,094 (573,540)
Accrued work site employee payroll cost 33,013 (108,164)
Client Deposits and advance payments 47,366 (779,474)
--------------- ---------------
Net cash (used in) operating activities (1,254,310) (1,832,025)
Cash flows from investing activities:
Net purchases of property and equipment (8,271) (15,124)
Sale of Contracts -0- 110,356
Cash CD-Restricted 74,822 734,496
Cash Acquired in United Personnel/World Wide Acquisition 79,406 -0-
--------------- ---------------
Net cash (used in) investing activities 145,957 829,728
Cash flows from financing activities:
Repayments of notes payable (45,948) (19,242)
Issuance of notes payable -0- -0-
Issuance of convertible notes payable 1,679,528 1,245,000
Repayments of lines of credit (10,125) (5,721)
Repayments of capital lease -0- -0-
--------------- ---------------
Net cash provided by financing activities 1,623,455 1,220,037
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 515,102 217,742
Cash and cash equivalents, beginning of period 251,595 117,052
--------------- ---------------
Cash and cash equivalents, end of period $ 766,697 $ 334,794
=============== ===============
See accompanying notes to the consolidated financial statements.
F-5
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
2005 2004
--------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid during the years for:
Interest $ 24,007 $ 15,091
Income taxes $ -0- $ -0-
See accompanying notes to the consolidated financial statements.
F-6
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2006
NOTE 1 BASIS OF PRESENTATION.
The unaudited financial statements of Pacel Corporation and
Subsidiaries (collectively, the Company) included in the Form 10-QSB
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-QSB and Item 310(b) of Regulation SB of the Securities and
Exchange Act of 1934. The financial information furnished herein
reflects all adjustments, which in the opinion of management, are
necessary for a fair presentation of the Company's financial position,
the results of operations and cash flows for the periods presented.
Certain information and footnote disclosures normally contained in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted, pursuant to such rules and
regulations.
These interim statements should be read in conjunction with the audited
consolidated financial statements and related notes thereto as
presented in the Company's certified financial statements for the year
ended December 31, 2005. The Company presumes that users of the interim
financial information herein have read or have access to such audited
financial statements and that the adequacy of additional disclosure
needed for a fair presentation may be determined in that context. The
results of operations for any interim period are not necessarily
indicative of the results expected or reported for the full year.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company has generated significant losses and is unable to predict
profitability for the future. These factors indicate that the Company's
continuation, as a going concern is dependent upon its ability to
obtain adequate financing. The Company plans to address the going
concern by obtaining equity financing and to grow the Company with
profitable sales both organically and through acquisitions. Management
believes successfully executing these tasks will lead to the removal of
the going concern comment from our audited financials.
NOTE 2 PRINCIPLES OF CONSOLIDATION.
The consolidated financial statements include the accounts of the
Company and all of its subsidiaries in which a controlling interest is
maintained. All significant inter-company accounts and transactions
have been eliminated in consolidation.
NOTE 3 USE OF ESTIMATES
Our consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States (US
GAAP). The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts in the
financial statements and accompanying notes. These estimates form the
basis for judgments we make about the carrying values of assets and
liabilities that are not readily apparent from other sources. We base
our estimates and judgments on historical experience and on various
other assumptions that we believe are reasonable under the
circumstances. However, future events are subject to change and the
best estimates and judgments routinely require adjustment. US GAAP
requires us to make estimates and judgments in several areas, including
those related to impairment of goodwill and equity investments, revenue
recognition, recoverability of inventory and receivables, the useful
lives of long lived assets such as property and equipment, the future
realization of deferred income tax benefits and the recording of
various accruals. The ultimate outcome and actual results could differ
from the estimates and assumptions used.
F-7
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2006
NOTE 4 REVENUE RECOGNITION.
The Company's revenue is attributable to fees for providing employment
services and commissions for the sale of insurance products. Our
revenues are primarily dependent on the number of clients enrolled, the
resulting number of worksite employees paid each period.
The Company's revenue is recognized in three distinct categories, two
categories are for service fees and the third is for the sale of
insurance products:
For service fee income, the Company typically enters into agreements
for either;
o a fixed fee per transaction (e.g., number of payees per
payroll);
o a fixed percentage of gross payroll;
We account for our revenues that is a fixed percentage of gross payroll
in accordance with Emerging Issues Task Force ("EITF") 99-19, Reporting
Revenues Gross as a Principal Versus Net as an Agent. Our revenues are
derived from our billings, which are based on:
o the payroll cost of our worksite employees; and
o a markup computed as a percentage of the payroll cost.
In determining the fixed percentage markup component of the billings,
we consider our estimates of the costs directly associated with our
worksite employees, including payroll taxes and workers' compensation
costs, plus an acceptable gross profit margin. We invoice the billings
concurrently with each periodic payroll of our worksite employees.
Revenues, which exclude the payroll cost component of billings, are
recognized ratably over the payroll period as worksite employees
perform their service at the client worksite. We include revenues that
have been recognized but not invoiced in unbilled accounts receivable
on our Consolidated Balance Sheets.
When our markup is computed as a percentage of payroll cost, revenues
are also affected by the payroll cost of worksite employees, which can
fluctuate based on the composition of the worksite employee base,
inflationary effects on wage levels and differences in the local
economies of our markets.
The primary direct costs associated with our revenue generating
activities are:
o employment-related taxes ("payroll taxes");
o workers' compensation claim costs.
Payroll taxes consist of the employer's portion of Social Security and
Medicare taxes under FICA, federal unemployment taxes and state
unemployment taxes. Payroll taxes are generally paid as a percentage of
payroll cost. The federal tax rates are defined by federal regulations.
State unemployment tax rates are subject to claim histories and vary
from state to state.
Due to the significance of the amounts included in billings to the
Company's clients and its corresponding revenue recognition methods,
the Company has provided the following reconciliation of billings to
revenue for the quarters ended September 30, 2006 and September 30,
2005.
Three Months Ended Three Months Ended
September 30, September 30,
2006 2005
------------------ ------------------
Reconciliation of billings to revenue recognized:
Billings to clients $ 8,049,497 $ 2,775,663
Less - Gross wages billed to clients (7,005,345) (2,385,581)
------------------ ------------------
F-8
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2006
Revenue from fees for service on a fixed percentage $ 324,135 $ 390,082
Revenue from fees for service on a fixed cost 714,359 0
Revenue from insurance commissions 5,658 0
------------------ ------------------
Total revenue as reported $ 1,044,152 $ 390,082
================== ==================
Employer portion of Social Security
And Medicare taxes $ 130,071 $ 154,156
State and Federal Unemployment taxes 77,221 17,374
Workers' Compensation Premiums 349,758 36,378
Other Misc. Expense 124,844 3,927
------------------ ------------------
Total Cost of Sales 681,894 211,835
------------------ ------------------
Gross Profit $ 362,258 $ 178,247
================= ==================
Due to the significance of the amounts included in billings to the
Company's clients and its corresponding revenue recognition methods,
the Company has provided the following reconciliation of billings to
revenue for the nine months ended September 30, 2006 and September 30,
2005.
Nine Months Ended Nine Months Ended
September 30, September 30,
2006 2005
------------------ ------------------
Reconciliation of billings to revenue recognized:
Billings to clients $ 18,543,704 $ 13,750,435
Less - Gross wages billed to clients (15,819,853) (11,869,842)
------------------ ------------------
Revenue from fees for service on a fixed percentage $ 1,197,428 $ 1,880,593
Revenue from fees for service on a fixed cost 1,520,765 0
Revenue from insurance commissions 5,658 0
------------------ ------------------
Total revenue as reported $ 2,723,851 $ 1,880,593
================== ==================
Employer portion of Social Security
And Medicare taxes $ 415,611 $ 796,316
State and Federal Unemployment taxes 239,138 239,692
Workers' Compensation Premiums 989,407 316,338
Other Misc. Expense 238,760 37,228
------------------ ------------------
Total Cost of Sales 1,882,916 1,389,574
------------------ ------------------
Gross Profit $ 840,935 $ 491,019
================== ==================
F-9
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2006
NOTE 5 COMMON STOCK.
In January and June 2006, the Company affected one-for-one thousand
reverse stock splits restating the number of common shares of the
Company at December 31, 2005 to 1. All references to average number of
shares, shares outstanding and earnings per share have been restated
retroactively to reflect the split.
NOTE 6 ACQUISITIONS.
In March 2006, the Company completed the purchase of all the
outstanding shares of stock of World Wide Personnel of Maine, Inc and
United Personnel Services, Inc. The effective date of the purchases was
April 1, 2006 and January 1, 2006 respectively. The Company issued
500,000 shares of Series "C" Convertible Preferred shares to the sole
stockholder for United Personnel Services, Inc. and World Wide
Personnel Services of Maine, Inc. The Preferred shares can be converted
into $500,000 of Common Stock, of which $100,000 has been attributed to
the purchase of United Personnel Services, Inc and the remaining
$400,000 is attributed to World Wide Personnel of Maine, Inc. Total
Assets acquired in the Acquisition of United Personnel Services and
World Wide Personnel of Maine were $223,106 which included $63,174 in
cash and $10,000 in fixed assets which consisted of Office/Computer
Equipment. Total Liabilities assumed in the Acquisition were $205,498.
Goodwill was valued at $482,392 of which $197,720 was impaired. The
fair value was determined using discounted cash flows. In September
2006, the Company transferred these assets to the Resourcing Solutions
Group, Inc., its majority owned subsidiary. The Company received a
$500,000 promissory note From The Resourcing Solutions Group, Inc. in
exchange for these assets.
Both companies are licensed Professional Employer Organizations
operating in the state of Maine. United Personnel was formed in 1999
and World Wide Personnel of Maine, Inc was formed in 1997. Both
companies offer full service human resource management services for
small and mid-sized businesses. Combined these acquisitions increase
the Company's work site employees by approximately 600. The purchase of
these companies extends the operating footprint of the Company from the
mid-Atlantic region to the northeast region of the country.
In September 2006, the Company acquired all the outstanding stock of
Consolidated Services, Inc. an insurance agency licensed in multiple
states and appointed to multiple insurance carriers. Acquiring
Consolidated allows the Company to receive insurance commissions paid
by the carriers to the producer. The effective date of the purchase was
September 1, 2006. The Company issued a Promissory Note for $34,090.
Total assets acquired in the acquisition were $27,802 which included
$16,232 in cash, $10,773 in receivables and $797 in furniture, fixtures
and equipment. Total liabilities assumed were $10,242; Goodwill was
valued at $16,532.
The following unaudited condensed pro forma financial information gives
effect to the Company's operations as if the United/World Wide and
Consolidated acquisition had occurred on January 1, 2005. Unaudited pro
forma financial information is not necessarily indicative of the
results that the Company would have achieved had the acquisition
occurred on either of those dates.
Pacel Corp and Subsidiaries with World Wide/United Personnel and
Consolidates Services, Inc.
Nine Months Ended Nine Months Ended
September 30, September 30,
2006 2005
------------------ ------------------
Revenue $ 3,878,297 $ 4,297,959
Cost of Services (2,928,234) (3,432,216)
------------------ ------------------
Gross Profit 950,063 865,743
------------------ ------------------
Total operating expenses 2,243,900 2,963,415
F-10
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2006
Net Operating Loss (1,293,837) (2,097,672)
------------------ ------------------
Other expenses (979,699) (753,328)
Net loss before discontinued operations (2,273,536) (2,851,000)
------------------ ------------------
Discontinued operations -0- (632,360)
Net Loss $ (2,273,536) $ (3,483,360)
================== ==================
Net loss from discontinued operations per common and common
equivalent share:
Basic $ -0- $ (632,360)
Diluted $ -0- $ (632,360)
Net loss per common and common equivalent share:
Basic $ (.004) $ (3,483,360)
Diluted $ (.004) $ (3,483,360)
Weighted average shares outstanding:
Basic 604,103,891 1
Diluted 604,103,891 1
NOTE 7. CONTINGENT LIABILITIES.
The Securities and Exchange Commission ("SEC") filed an action in
Federal District Court asserting various violations of securities laws
against the Company and its principal officer. The complaint alleges
that Mr. Frank Custable "orchestrated" a "scheme" to illegally obtain
stock from various companies, including the Company, through "scam
Commission Form S-8 registration statements, forged stock authorization
forms and at least one bogus attorney opinion letter arranged by
Custable." The complaint alleges that, in connection with this alleged
"scheme," the Company and its former CEO, David Calkins violated
Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of
the Exchange Act. The SEC asks that the Company and Calkins be
permanently enjoined from future violations, ordered to pay
disgorgement and civil penalties and Calkins be barred from continued
service as an officer and director. As part of an ex parte proceeding,
the District Court ordered the Company and Calkins to provide an
accounting of their assets and the transactions that are the subject of
the complaint. On April 7, 2005, grand jury proceedings in the Northern
District of Illinois indicted several individuals but not the Company.
Subsequently, the Court stayed the Commission's civil action pending
the resolution of the criminal proceedings arising from the actions of
the grand jury.
On or about September 9, 2005, an action was filed against the Company
in the Supreme Court of New York, County of New York.. The action
alleges that the Company is in default in the payment of amounts owing
on certain convertible notes issued by the Company in March 2001and
subsequently converted to term notes. The action seeks compensatory
damages in the amount of $312,000, plus interest and attorneys fees in
an amount yet unspecified. The Company is carrying these notes as part
of short term notes payable of $375,000. The Company has recognized the
obligation but, due to limited cash flows is unable to pay the
outstanding balance.
F-11
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2006
NOTE 8. SHORT-TERM PAYABLES CONSISTS OF:
September 30, December 31,
2006 2005
------------------ ------------------
Convertible Notes Payable $ 95,238 $ 600,507
Bank Line of Credit 5,727 15,852
Other Notes Payable 409,019 465,000
------------------ ------------------
Total Short-Term Payables $ 509,984 $ 1,081,359
================== ==================
NOTE 9. RELATED PARTY TRANSACTIONS.
A. Mr. Calkins employment agreement
In May 2005, David Calkins engaged the law firm of Hinshaw and Culbert
to defend himself in an action which occurred while Mr. Calkins was an
Officer and Director of the Company. The employment contract between
Mr. Calkins and the Company requires the Company to pay such legal
bills. The Company incurred $87,729 in fees to Hinshaw and Culbert for
the nine months ending September 30, 2006.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS.
The Company believes that any new accounting pronouncements since
December 31, 2005, will not have an affect on the Company's financial
statements.
F-12
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's discussion and analysis of results of operations and
financial condition include a discussion of liquidity and capital
resources. The following discussion should be read in conjunction with
the consolidated financial statements and notes thereto. Historical
results are not necessarily indicative of trends in operating results
for any future period.
In 2006, the Company continued its strategy for penetrating the Human
Resources Outsourcing ("HRO") industry based on its evaluation of its
business model and existing business initiatives completed in 2002. The
Company's intention to enter this business sector was announced in
September 2002 and was based on an evaluation of potential business
markets that provide the potential for success. The Company provides
human capital solutions through the provision of PEO services and
Administrative Service Organization ("ASO") services to such clients.
In March 2006, the Company completed the acquisition of two additional
PEO organizations and continues to evaluate other potential acquisition
candidates while also reviewing and implementing opportunities to
support organic growth in order to secure a position as an industry
leader. The Company sees this initiative in the Human Resources
Outsourcing ("HRO") industry as an opportunity to tap into the small
business market in the United States and intends to compliment the
provision of PEO and ASO services with information technology services,
business consulting services and financial services. In September 2006,
the Company completed the acquisition of Consolidated Services, Inc., a
full service insurance agency. Management believe the addition of an
insurance agency adds not only an additional profit center but also
compliments the Company's HR services thus allowing additional
marketing opportunity for both lines of service.
As part of its goal to bring the company to profitability and less
reliant on equity financing for ongoing operations, the company has
developed an aggressive marketing strategy as well as an investment to
significantly upgrade its HRIS (Human Resource Information System)
capabilities to service its current and prospective clients. This plan
includes hiring and training the sales team as well as marketing the
company's services through networks of national associations and
chains. During the nine months ending September 2006, the Company
increased its sales force. New sales began to matriculate in the second
quarter and continue to matriculate in the third quarter at which time
sales commission expenses increased and will continue to increase.
Through its PEO/ASO business unit, the Company markets to current and
prospective clients, typically small to medium-sized businesses with
between five and 1,500 employees, a broad range of products and
services that provide an outsourced solution for the clients' human
resources ("HR") needs. The Company's products include payroll
services, benefits administration (including health, welfare and
retirement plans), governmental compliance, risk management (including
safety training), unemployment administration other HR related services
and a full line of insurance products. The Company has established the
national and regional vendor relationships it believes are necessary to
effectively and competitively provide such services to a broad range of
clients. The Company is working to establish additional national and
vendor relationships to expand services and create additional revenue
sources.
In a further effort to bring the Company to profitability internal
operating costs are continually reviewed and evaluated. Management
continues to reduce operating costs and achieve additional efficiencies
as new acquisitions are integrated into existing operations.
3
PACEL CORP. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2005
Revenue for the nine months ended September 30, 2006 was $2,723,851
compared to revenue of $1,880,593 for the nine months ended September
30, 2005. The Cost of Service and Gross Profit significantly increased
over the same time period in 2005. These results are directly
attributable to the six months of ownership of World Wide Personnel
Services of Maine, Inc. and the nine months of ownership of United
Personnel Services, Inc which combined contributed $1,520,765 in total
revenue for the nine months ending September 30, 2006.
Due to the significance of the amounts included in billings to the
Company's clients and its corresponding revenue recognition methods,
the Company has provided the following reconciliation of billings to
revenue for the nine months ended September 30, 2006 and September 30,
2005.
Nine Months Ended Nine Months Ended
September 30, September 30,
2006 2005
----------------- -----------------
Reconciliation of billings to revenue recognized:
Billings to clients $ 18,543,704 $ 13,750,435
Less - Gross wages billed to clients (15,819,853) (11,869,842)
----------------- -----------------
Revenue from fees for service on a fixed percentage $ 1,197,428 $ 1,880,593
Revenue from fees for service on a fixed cost 1,520,765 0
Revenue from insurance commissions 5,658 0
----------------- -----------------
Total revenue as reported $ 2,723,851 $ 1,880,593
================= =================
Employer portion of Social Security
And Medicare taxes $ 415,611 $ 796,316
State and Federal Unemployment taxes 239,138 239,692
Workers' Compensation Premiums 989,407 316,338
Other Misc. Expense 238,760 37,228
----------------- -----------------
Total Cost of Sales 1,882,916 1,389,574
----------------- -----------------
Gross Profit $ 840,935 $ 491,019
================= =================
Cost of services for the nine months ended September 30, 2006 was
$1,882,916 compared to cost of services of $1,389,574 for the nine
months ended September 30, 2005 and is related directly to the delivery
of services to its PEO/ASO clients. The increase over 2005 is directly
related to the acquisition of United Personnel Services and World Wide
Personnel Services of Maine. For the nine months in which United
Personnel Services was owned by Pacel and the six months that Pacel
owned World Wide Personnel Services of Maine combined they incurred
$1,238,577 in cost of services for the nine months ended September 30,
2006.
General & administrative expenses, including salaries and wages, was
$1,843,679 for the nine months ended September 30, 2006, compared to
$2,038,878 in the corresponding period of 2005. The decrease was
attributed to the restructuring that occurred on May 15, 2005 which
included a reduction in internal staff and the continued use of
technology to reduce internal operating expenses. The decrease was
mitigated by a combined increase of $404,566 in expenses with nine
months of ownership of United Personnel Services and six months of
ownership of World Wide Personnel Services of Maine.
4
PACEL CORP. AND SUBSIDIARIES
Sales and marketing expense was $62,587 for the nine months ended
September 30, 2006, compared to $422,870 in the corresponding period of
2005. The decrease was attributed to the company's continued
transformation of its sales and marketing function that began in the
second quarter of 2005. Many of the expenses incurred were one-time
costs or contracts for specific periods of time. Sales and marketing
expenses decreased as these costs have been met and the sales and
marketing function shifts to a commission based system.
Depreciation and amortization expense was $45,554 for the nine months
ended September 30, 2006, compared to $45,396 for the corresponding
period of 2005. This increase was from the Human Resource Information
System and various other office equipment placed in service in the
third and fourth quarter of 2004.
Interest expense is interest paid and accrued on the Convertible Notes,
unpaid payroll taxes, notes payable, and bank financing. Interest
expense was $237,008 for the nine months ended September 30, 2006
compared to $305,473 for the same period of 2005.
Embedded Interest for the nine months ended September 30, 2006 was
$742,691 compared to embedded interest expense of $447,855 for the nine
months ended September 30, 2005. The Company recorded embedded interest
in conjunction with the issuance of convertible debentures during the
period
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2005
Revenue for the quarter ended September 30, 2006 was 1,044,152 compared
to revenue of $390,082 for the quarter ended September 30, 2005. Gross
billings to clients and gross wages billed to clients significantly
increased due to the acquisition of World Wide Personnel Services of
Maine which contributed total revenue of $714,359. These results are
directly attributable to the acquisition as well as the restructuring
of clients and the Company which occurred on May 15, 2005.
The company experienced an increase in the number work-site employees
under management over the same time period in 2005. This increase is
attributable to results from a more aggressive sales and marketing
campaign resulting in organic growth and the acquisition of United
Personnel Services and World Wide Personnel Services of Maine.
Due to the significance of the amounts included in billings to the
Company's clients and its corresponding revenue recognition methods,
the Company has provided the following reconciliation of billings to
revenue for the quarters ended September 30, 2006 and September 30,
2005.
Quarter Ended Quarter Ended
September 30, September 30,
2006 2005
----------------- -----------------
Reconciliation of billings to revenue recognized:
Billings to clients $ 8,049,497 $ 2,775,663
Less - Gross wages billed to clients (7,005,345) (2,385,581)
----------------- -----------------
Revenue from fees for service on a fixed percentage $ 324,135 $ 390,082
Revenue from fees for service on a fixed cost 714,359 0
Revenue from insurance commissions 5,658 0
----------------- -----------------
Total revenue as reported $ 1,044,152 $ 390,082
================= =================
5
PACEL CORP. AND SUBSIDIARIES
Employer portion of Social Security
And Medicare taxes $ 130,071 $ 154,156
State and Federal Unemployment taxes 77,221 17,374
Workers' Compensation Premiums 349,758 36,378
Other Misc. Expense 124,844 3,927
----------------- -----------------
Total Cost of Sales 681,894 211,835
----------------- -----------------
Gross Profit $ 362,258 $ 178,247
================= =================
Cost of services for the three months ended September 30, 2006 was
$681,894 compared to cost of services of $211,835 for the three months
ended September 30, 2005 and is related directly to the delivery of
services to its PEO clients. This increase was directly related to the
acquisition of United Personal Services and World Wide Personnel
Services of Maine, Inc which amounted to $543,290 for the three months
ended September 30, 2006.
General & administrative expenses, including salaries and wages, was
$674,576 for the three months ended September 30, 2006, compared to
$538,444 in the corresponding period of 2005. This increase was
directly related to the acquisition of United Personal Services and
World Wide Personnel Services of Maine, Inc which amounted to $107,433
for the three months ended September 30, 2006.
Sales and marketing expense was $37,924 for the three months ended
September 30, 2006, compared to $72,732 in the corresponding period of
2005. The decrease was attributed to the company's continued
transformation of its sales and marketing function that began in the
second quarter of 2004. The decrease in expenses in the third quarter
results from the completion of planned fixed expenses and the
expiration of marketing contracts.
Depreciation and amortization expense was $15,389 for the three months
ended September 30, 2006, compared to $15,476 for the corresponding
period of 2005. This decrease was from the Human Resource Information
System and various other office equipment placed in service in the
third and fourth quarter of 2004 which has become fully depreciated.
Interest expense is interest paid and accrued on the Convertible Notes,
unpaid payroll taxes, notes payable, and bank financing. Interest
expense was $66,087 for the three months ended September 30, 2006
compared to $72,763 for the same period of 2005. The decrease is
primarily attributable to the reduction of carrying costs of unpaid
liabilities and Convertible Notes.
Embedded interest for the three months ended September 30, 2006 was
$333,184 compared to finance expense of $85,714 for the three months
ended September 30, 2005. The Company recorded embedded interest in
conjunction with the issuance of convertible debentures during the
period.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at September 30, 2006 was $766,694 compared
to $251,595 at December 31, 2005. The Companies use of cash from
operation was $1,253,966 and $1,832,023 for the nine months ended
September 30, 2006 and September 30, 2005, respectively. The net loss
of $2,288,304 was offset by $985,965 of non-cash items, the increase in
accrued expenses, payroll liabilities and deferred compensation off set
by the increase in accounts receivable, insurance deposits and prepaid
expenses.
6
PACEL CORP. AND SUBSIDIARIES
Net cash provided by investing activities for the nine months ended
September 30, 2006 was $145,957 compared to $829,728 for the nine
months ended September 30, 2005. During the nine months ended September
30, 2006, the cash provided by investment activities was from the
acquisition of cash in the United Personnel Services of Maine and
Worldwide of Maine, as well as the redemption of a Certificate of
Deposit that was being held for the State of Texas offset by the
purchase of fixed assets.
During 2003, the Company entered into three separate $10,000,000 equity
lines of credit. Borrowing from this equity line allows the repayment
by issuing shares of the Company's stock at a discount rate of up to
50% off the closing bid stock price. The equity line is being used to
fund acquisitions and shortfalls in working capital. These shares were
issued pursuant to Section 3(a)(10) of the Securities Act of 1933, as
amended, after a hearing with notice to, and an opportunity to be heard
from, interested parties, as to the fairness of each transaction. The
balance remaining on these equity lines of credit at September 30, 2006
was $19,819,574. From January 1, 2006 until September 30, 2006, in
connection with the funding of working capital shortfalls, the Company
converted $2,247,749 of convertible debentures and issued a total of
4,075,481,946 shares of its common stock with a par value of $.001.
In March 2006, the Company completed the purchase of all the
outstanding shares of stock of World Wide Personnel of Maine, Inc and
United Personnel Services, Inc. The effective date of the purchases was
April 1, 2006 and January 1, 2006 respectively. The Company issued
500,000 shares of Series "C" Convertible Preferred shares to the sole
stockholder for United Personnel Services, Inc. and World Wide
Personnel Services of Maine, Inc. The value of these shares is
$500,000. $100,000 has been attributed to the purchase of United
Personnel Services, Inc and the remaining $400,000 is attributed to
World Wide Personnel of Maine, Inc. Both companies are licensed
Professional Employer Organizations operating in the state of Maine.
United Personnel was formed in 1999 and World Wide Personnel of Maine,
Inc was formed in 1997. Total Assets acquired in the Acquisition of
United Personnel Services and World Wide Personnel of Maine were
$223,106 which included $63,174 in cash and $10,000 in fixed assets
which consisted of Office/Computer Equipment. Total Liabilities assumed
in the Acquisition were $205,498. Goodwill was valued at $482,392 of
which $197,720 was impaired. The fair value was determined using
discounted cash flows.
Both companies offer full service human resource management services
for small and mid-sized businesses. Combined these acquisitions
increase the Company's work site employees by approximately 600. The
purchase of these companies extends the operating footprint of the
Company from the mid-Atlantic region to the northeast region of the
country.
The Company's cash requirements for funding its administrative and
operating needs continue to greatly exceed its cash flows generated
from operations. Such shortfalls and other capital needs continue to be
satisfied through equity financing and convertible notes payable until
additional funds can be generated through acquisitions and organic
business growth. The liabilities of the Company consist of
over-extended accounts payable, payroll taxes, and interest expense.
As part of its goal to bring the Company to profitability and less
reliant on equity financing for ongoing operations, the company has
developed an aggressive marketing strategy as well as an investment to
significantly upgrade its HRIS (Human Resource Information System)
capabilities to service its current and prospective clients. This plan
includes hiring and training the sales team as well as marketing the
company's services through networks of national associations and
chains. The company has successfully negotiated joint marketing
programs to market the company's products and services. During the nine
7
PACEL CORP. AND SUBSIDIARIES
months ending September 2006 the Company has increased its sales force
resulting in an increased client base. New sales began to matriculate
in the second quarter and continue into the third quarter at which time
sales commission expenses will increase. The Company also purchased a
fully licensed insurance agency appointed to multiple national carriers
for property and casualty insurance lines. This acquisition allows the
company to retain insurance commissions as revenue.
In addition to an aggressive organic growth strategy, the Company
continues to evaluate potential acquisitions. The Company is seeking to
increase its market share in areas contiguous to its existing
operations. With the implementation of the HRIS system, the Company has
increased its operational capability. Increased market share through
acquisition will more fully utilize the HRIS system.
The Company will be able to add additional clients without increasing
its operational staff. The reorganization reduces the Company's heavy
industry and "blue collar" client base allowing it to expand at a
greater pace in other economic sectors which has been a stated goal of
the Company. The targeted clients to which the Company is marketing its
services have a greater capability to the more automated process
integral to the new HRIS system. The reorganization also reduced the
Company's reliance on outside equity funding.
The Company relies on equity financing to fund its ongoing operations
and investing activities. The Company expects to continue its investing
activities, including expenditures for acquisitions, sales and
marketing initiatives, HRIS (Human Resource Information System), and
administrative support. The loss of equity financing would seriously
hinder the Company's ability to execute its business strategy and
impair its ability to continue as a going concern.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off balance sheet arrangements that are
reasonably likely to have a current or future effect on our financial
condition, revenues, and results of operations, liquidity or capital
expenditures.
CRITICAL ACCOUNTING POLICIES
Basis of presentation-The accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business. The Company has generated significant losses and is unable to
predict profitability for the future. These factors indicate that the
Company's continuation, as a going concern is dependent upon its
ability to obtain adequate financing. The Company plans to address the
going concern by obtaining equity financing and to grow the Company
with profitable sales both organically and through acquisitions.
Management believes successfully executing these tasks will lead to the
removal of the going concern comment from our audited financials.
Use of Estimates-Our consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in
the United States (US GAAP). The preparation of these financial
statements requires us to make estimates and judgments that affect the
reported amounts in the financial statements and accompanying notes.
These estimates form the basis for judgments we make about the carrying
values of assets and liabilities that are not readily apparent from
other sources. We base our estimates and judgments on historical
experience and on various other assumptions that we believe are
reasonable under the circumstances. However, future events are subject
to change and the best estimates and judgments routinely require
adjustment. US GAAP requires us to make estimates and judgments in
several areas, including those related to impairment of goodwill and
equity investments, revenue recognition, recoverability of inventory
and receivables, the useful lives of long lived assets such as property
and equipment, the future realization of deferred income tax benefits
and the recording of various accruals. The ultimate outcome and actual
results could differ from the estimates and assumptions used.
8
PACEL CORP. AND SUBSIDIARIES
Revenue Recognition- The Company's revenue is attributable to fees for
providing employment services and commissions for the sale of insurance
products. Our revenues are primarily dependent on the number of clients
enrolled, the resulting number of worksite employees paid each period.
For service fee income, the Company typically enters into agreements
for a fixed fee per transaction (e.g., number of payees per payroll) or
a fixed percentage of gross payroll. Commission income is paid to the
Company as a percentage of premiums paid by the insured to the
insurance company.
We account for our revenues that is a fixed percentage of gross payroll
in accordance with Emerging Issues Task Force ("EITF") 99-19, Reporting
Revenues Gross as a Principal Versus Net as an Agent. Our revenues are
derived from our billings, which are based on: the payroll cost of our
worksite employees; and a markup computed as a percentage of the
payroll cost.
In determining the pricing of the markup component of the billings, we
consider our estimates of the costs directly associated with our
worksite employees, including payroll taxes and workers' compensation
costs, plus an acceptable gross profit margin. We invoice the billings
concurrently with each periodic payroll of our worksite employees.
Revenues, which exclude the payroll cost component of billings, are
recognized ratably over the payroll period as worksite employees
perform their service at the client worksite. We include revenues that
have been recognized but not invoiced in unbilled accounts receivable
on our Consolidated Balance Sheets.
Our revenues are primarily dependent on the number of clients enrolled,
the resulting number of worksite employees paid each period. Because
our markup is computed as a percentage of payroll cost, revenues are
also affected by the payroll cost of worksite employees, which can
fluctuate based on the composition of the worksite employee base,
inflationary effects on wage levels and differences in the local
economies of our markets.
The primary direct costs associated with our revenue generating
activities are: employment-related taxes ("payroll taxes"); workers'
compensation claim costs.
Payroll taxes consist of the employer's portion of Social Security and
Medicare taxes under FICA, federal unemployment taxes and state
unemployment taxes. Payroll taxes are generally paid as a percentage of
payroll cost. The federal tax rates are defined by federal regulations.
State unemployment tax rates are subject to claim histories and vary
from state to state.
Principles of consolidation- The consolidated financial statements
include the accounts of the Company and all of its subsidiaries in
which a controlling interest is maintained. All significant
inter-company accounts and transactions have been eliminated in
consolidation.
FORWARD LOOKING STATEMENTS
The Company is making this statement in order to satisfy the "safe
harbor" provisions contained in the Private Securities Litigation
Reform Act of 1995.
This Form 10-QSB includes forward-looking statements relating to the
business of the Company. Forward-looking statements contained herein or
in other statements made by the Company are made based on management's
expectations and beliefs concerning future events impacting the Company
and are subject to uncertainties and factors relating to the Company's
operations and business environment, all of which are difficult to
predict and many of which are beyond the control of the Company, that
could cause actual results of the Company to differ materially from
those matters expressed in or implied by forward-looking statements.
The Company believes that the following factors, among others, could
affect its future performance and cause actual results of the Company
to differ materially from those expressed in or implied by
forward-looking statements made by or on behalf of the Company: (a) the
effect of technological changes; (b) increases in or unexpected losses;
(c) increased competition; (d) fluctuations in the costs to operate the
business; (e) uninsurable risks; and (f) general economic conditions.
9
PACEL CORP. AND SUBSIDIARIES
ITEM 3. CONTROLS AND PROCEDURES.
As required by Rule 13a-15 under the Exchange Act, we carried out an
evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures. This evaluation was carried out
under the supervision and with the participation of our management,
including our President and Chief Executive Officer. Based upon that
evaluation, we concluded that our disclosure controls and procedures
are effective in ensuring that material information related to us,
required to be disclosed by us in the reports we file or submit under
the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the rules and regulations of the SEC.
There have been no significant changes in our internal controls
subsequent to the date we carried out our evaluation. Disclosure
controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed
in our reports filed under the Exchange Act is accumulated and
communicated to management, including the Company's Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about September 9, 2005, an action was filed against the Company
in the Supreme Court of New York, County of New York, Case No.
603823/05, Thomas Kelly; W. David Mc Coy; Richard T. Garrett Trust vs.
Pacel Corp. The action alleges that the Company is in default in the
payment of amounts owing on certain convertible debentures issued by
the Company in March 2001and subsequently converted to term notes. The
action seeks compensatory damages in the amount of $312,000, plus
interest and attorneys fees in an amount yet unspecified.
Reference is made to the Company's previous reports on Form 10-QSB in
which the Company disclosed the action filed by the Securities and
Exchange Commission against the Company's former officers and directors
and the April 7, 2005 grand jury proceedings in the Northern District
of Illinois and the subsequent court stay of the Commission's civil
action pending the resolution of the criminal proceedings arising from
the actions of the grand jury.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is in default in the payment of the principle amount and
accrued interest on certain convertible debentures issued in March 2001
in the aggregate principle amount of $250,000. The amounts in default
exceed 5% of the Company's total assets as of the date of this report.
10
PACEL CORP. AND SUBSIDIARIES
ITEM 6. EXHIBITS
Exhibit No. Description Page
3(i) Articles of Incorporation *
3(ii) Amendments to Articles of Incorporation *
4 Designation of Series "B" Convertible Preferred Stock *
31.1 Rule 13a-14(a)/15d-14(a) Certification
32.1 Section 1350 Certification
* Incorporation by reference from previous reports and filings.
7. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, registrant has duly caused this report to be signed in its behalf
by the undersigned thereunto duly authorized.
Pacel Corp.
BY: /s/ GARY MUSSELMAN
-----------------------------------------
Gary Musselman, President, Chief Executive Officer,
and Chief Financial Officer
DATED: November 10, 2006
11