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 March 31, 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 [ ]
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 May 18, 2006 there were 9,970,540,904 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
March 31, December 31,
2006 2005
--------------- ---------------
(Unaudited) (Audited)
ASSETS
------
Current assets:
Cash $ 637,046 $ 251,595
Accounts receivable 58,244 15,384
Accounts receivable-Unbilled 150,731 169,749
Prepaid expenses 89,843 69,372
Workers compensation insurance deposits 54,776 26,240
Restricted cash 181,192 179,855
--------------- ---------------
Total current assets 1,171,832 712,195
--------------- ---------------
Property and equipment, net of accumulated depreciation of
$147,193 and $133,031, respectively 114,975 125,380
--------------- ---------------
Other assets:
Other receivables 59,285 65,127
Retirement Plan - Director 163,908 162,230
Goodwill 456,772 368,200
Security deposits 11,152 11,152
--------------- ---------------
Total other assets 691,117 606,709
--------------- ---------------
Total assets $ 1,977,924 $ 1,444,284
=============== ===============
See accompanying notes to the consolidated financial statements.
F-2
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
2006 2005
--------------- ---------------
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable $ 358,640 $ 336,497
Payroll and payroll related liabilities 2,053,970 1,955,231
Accrued worksite employee payroll expense 145,241 163,626
Accrued expenses 1,976,406 1,857,454
Assumed Liabilities 493,133 493,133
Client deposits and advance payments 1,319 -0-
Short term payables 811,822 1,081,359
Current Maturities of long term note 27,127 27,127
--------------- ---------------
Total current liabilities 5,867,658 5,914,427
--------------- ---------------
Long-term liabilities:
Notes Payable - Non Current portion 214,339 218,926
Deferred Compensation - Director Payable 390,233 335,233
--------------- ---------------
Total long term liabilities 604,572 554,159
--------------- ---------------
Total liabilities 6,472,230 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, -0- shares
of 2006 Class C convertible preferred stock issued -0- -0-
Common stock, .001 par value, 10,000,000,000 shares
authorized, 9,970,540,904 and 4,430,273
shares issued respectively 997,054 4,430
Additional paid-in capital 26,160,301 25,760,994
Cumulative currency translation adjustment (18,720) (18,720)
Accumulated deficit (31,633,941) (30,772,006)
--------------- ---------------
Total stockholders' (deficit) (4,494,306) (5,024,302)
--------------- ---------------
Total liabilities and stockholders' deficit $ 1,977,924 $ 1,444,284
=============== ===============
See accompanying notes to the consolidated financial statements.
F-3
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three months ended
March 31,
2006 2005
--------------- ---------------
Revenue $ 424,118 $ 423,787
Cost of services 315,222 326,963
--------------- ---------------
Gross profit 108,896 96,824
Operating costs and expenses:
General and administrative 560,857 643,090
Sales and marketing 7,285 238,942
Depreciation and amortization 14,162 14,444
Loss on impairment of goodwill -0- 599,689
--------------- ---------------
Total operating expenses 582,304 1,496,165
--------------- ---------------
Operating Loss (473,408) (1,399,341)
Other expenses:
Interest expense (64,733) (96,158)
Embedded Interest (323,794) (257,143)
--------------- ---------------
Total other expense (388,527) (353,301)
Net loss before discontinued operations (861,935) (1,752,642)
Discontinued operations:
Loss from discontinued operations of Asmara of
Florida and Partners PEO of the Carolinas -0- (106,221)
--------------- ---------------
Total loss on discontinued operations -0- (106,221)
Net loss $ (861,935) $ (1,858,863)
=============== ===============
Loss from discontinued operations per common
and common equivalent share:
Basic $ (0.00) $ (106,221)
Diluted $ (0.00) $ (106,221)
Net loss per common and common equivalent share:
Basic $ (0.00) $ (1,858,863)
Diluted $ (0.00) $ (1,858,863)
Weighted average shares outstanding:
Basic 4,365,622,153 1
Diluted 4,365,622,153 1
See accompanying notes to the consolidated financial statements.
F-4
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
2006 2005
--------------- ---------------
Cash flows from operating activities:
Net loss $ (861,935) $ (1,858,863)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 14,162 14,444
Embedded interest 323,794 257,143
Loss on impairment of goodwill -0- 599,689
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (38,867) 224,783
Accounts receivable-Unbilled 19,017 (432,690)
Other receivables 5,842 -0-
Client deposits -0- 510,527
Insurance deposits (28,536) 26,486
Prepaid expenses (20,470) 43,129
Security deposits -0- (1,926)
Retirement Plan - Director (1,678) -0-
Increase (decrease) in liabilities:
Accounts payable 22,143 167,698
Accrued expenses 118,952 357,858
Payroll and payroll related liabilities 78,101 (277,186)
Accrued work site employee payroll cost (18,385) 419,164
Client Deposits and advance payments 1,319 (510,527)
Deferred Compensation Director 55,000 -0-
Sales and income taxes payable -0- 491
--------------- ---------------
Net cash (used in) operating activities (331,541) (459,780)
Cash flows from investing activities:
Net purchases of property and equipment (3,756) (13,384)
Cash CD-Restricted (1,337) (3,080)
Investment in United Personnel Services, Inc. (100,000) -0-
Cash acquired in United Personnel Acquisition 28,073 -0-
--------------- ---------------
Net cash (used in) investing activities (77,020) (16,464)
Cash flows from financing activities:
Repayments of notes payable (4,588) (6,273)
Issuance of notes payable 100,000 -0-
Issuance of convertible notes payable 702,100 600,000
Repayments of lines of credit (3,500) (2,656)
--------------- ---------------
Net cash provided by financing activities 794,012 591,071
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 385,451 114,827
Cash and cash equivalents, beginning of period 251,595 117,052
--------------- ---------------
Cash and cash equivalents, end of period $ 637,046 $ 231,879
=============== ===============
See accompanying notes to the consolidated financial statements.
F-5
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
2006 2005
--------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid during the years for:
Interest $ 6,629 $ 10,080
Income taxes $ -0- $ -0-
See accompanying notes to the consolidated financial statements.
F-6
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 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
Note 4. Revenue Recognition.
We account for our revenues 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 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:
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 quarter ended March 31, 2006 and March 31, 2005.
Quarter Ended Quarter Ended
March 31, March 31,
2006 2005
--------------- ---------------
Reconciliation of billings to revenue recognized:
Billings to clients $ 2,595,632 $ 3,467,634
Less - Gross wages billed to clients (2,171,514) (3,043,847)
--------------- ---------------
Revenue from PEO services $ 424,118 $ 423,787
--------------- ---------------
Total revenue as reported $ 424,118 $ 423,787
=============== ===============
Employer portion of Social Security
And Medicare taxes $ 154,893 $ 217,087
State and Federal Unemployment taxes 49,960 21,691
Workers' Compensation Premiums 100,158 84,158
Other Misc. Expense 10,211 4,027
--------------- ---------------
Total Cost of Sales 315,222 326,963
--------------- ---------------
Gross Profit $ 108,896 $ 96,824
=============== ===============
F-8
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2006
Note 5. Common Stock.
In January 2006, the Company affected a one-for-one thousand reverse
stock split restating the number of common shares of the Company at
December 31, 2005 to 4,430,273. 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 will issue
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. At the present time the Company does not
enough shares available to convert the Series "C" preferred stock.
$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. 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 acquired $32,066 in assets, $20,638 in liabilities and
recorded $88,527 of goodwill. The Company recorded $100,000 in short
term payables to the shareholder of United Personnel, Inc. Payable will
be repaid upon issuance of the Series "C" Preferred Shares.
The following unaudited condensed pro forma financial information gives
effect to the Company's operations as if the united 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 United Personnel
Quarter Ended
March 31,
2005
-----------------
Revenue $ 484,856
Cost of Services (377,600)
-----------------
Gross Profit 107,256
-----------------
Total expenses 1,957,099
-----------------
Net Loss $ 1,849,843
=================
Net loss per common and common equivalent share:
Basic $ (1,849,843)
Diluted $ (1,849,843)
Weighted average shares outstanding:
Basic 1
Diluted 1
F-9
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
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.
Note 8. Short-Term Payables consists of:
March 31, December 31
2006 2005
---------------- ----------------
Convertible Notes Payable $ 234,470 $ 600,507
Bank Line of Credit 12,352 15,852
Other Notes Payable 465,000 465,000
Payable to Share holder United
Personnel, Inc 100,000 -0-
---------------- ----------------
Total Short-Term Payables $ 811,822 $ 1,081,359
================ ================
Note 9. Discontinued Operations.
On May 15, 2005, The Resourcing Solutions Group, Inc. a subsidiary of
the Company discontinued the operation of Asmara of Florida and
Partners PEO of the Carolinas. The Company reported a loss from
discontinued operations for the three months ended March 31, 2005 equal
to $106,221. The consolidated financial statements have been
reclassified, where applicable, to reflect the discontinued operations.
F-10
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Note 10. 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. For the quarter ending March 31, 2006 the Company incurred
$44,770 in fees to Hinshaw and Culbert.
Note 11. 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.
Note 12. Subsequent Event
On May 11, 2006, the Company authorized an additional 500,000 shares of
Series "C" Convertible Preferred Stock. Series "C" Convertible may not
be converted to Common Stock until one year from its issuance date. The
stock will convert to $1.00 of Common Stock based on the closing bid
price of Common Stock on the day prior to the conversion to Common
Stock.
F-11
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 2005, the Company successfully completed the acquisition of an
additional PEO organization 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. In March 2006, the Company completed the
acquisition of two additional PEO organizations. 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 at a future time.
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 quarter ending March 2006, the Company increased its
sales force. New sales begin to matriculate in the second quarter at
which time sales commission expenses will 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 and other HR related
services. 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
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2005
Revenue for the three months ended March 31, 2006 was $424,118 compared
to of $423,787 for the three months ended March 31, 2005. Gross
billings to clients and gross wages billed to clients significantly
decreased with a slight increase in total revenue. These results are
directly attributable to the restructuring of clients and the Company
which occurred on May 15, 2005.
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 three months ended March 31, 2006 and March 31, 2005.
Three months ended Three months ended
March 31, March 31,
2006 2005
-------------------- --------------------
(Unaudited) (Unaudited)
Reconciliation of billings to revenue recognized:
Gross billings to clients $ 2,595,632 $ 3,467,634
Less - Gross wages billed to clients (2,171,514) (3,043,847)
-------------------- --------------------
Total revenue as reported $ 424,118 $ 423,787
==================== ====================
Cost of services for the three months ended March 31, 2006 was $315,222
compared to cost of services of $326,963 for the three months ended
March 31, 2005 and is related directly to the delivery of services to
its PEO/ASO clients.
General & administrative expenses, including salaries and wages, was
$560,857 for the three months ended March 31, 2006, compared to
$643,090 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.
Sales and marketing expense was $7,285 for the three months ended March
31, 2006, compared to $238,942 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 in
the first quarter as these costs have been met and the sales and
marketing function shifts to a commission based system.
Depreciation and amortization expense was $14,162 for the three months
ended March 31, 2006, compared to $14,444 for the corresponding period
of 2005.
Interest expense is interest paid and accrued on the Convertible Notes,
unpaid payroll taxes, notes payable, and bank financing. Interest
expense was $64,733 for the three months ended March 31, 2006 compared
to $92,801 for the same period of 2005. The decrease is primarily
attributable to the reaching the maximum penalties on outstanding
payroll tax liabilities.
Embedded Interests for the three months ended March 31, 2006 was
$323,794 compared to $260,500 for the three months ended March 31,
2005. The increase was the result of increase funding. The Company
recorded embedded interest in conjunction with the issuance of
convertible debentures during the period.
4
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at March 31, 2006 was $637,046 compared to
$251,595 at December 31, 2005. The Company's use of cash from operation
was $331,541 and $459,780 for the three months ended March 31, 2006 and
March 31, 2005, respectively. The net loss of $861,935 was offset by
$337,956 of non-cash items, the increase in accounts payable, accrued
expenses payroll liabilities and deferred compensation off set by the
increase in accounts receivable, insurance deposits and prepaid
expenses.
Net cash used in investing activities for the three months ended March
31, 2006 was $77,020 compared to the net cash used in investing
activities of $16,464 for the three months ended March 31, 2005. During
the three months ended March 31, 2006, the cash used in investment
activities was from the purchase of fixed assets and the acquisition of
United Personnel Services of Maine.
Net cash provided by financing activities in the three months ended
March 31, 2006 was $794,012 compared to $591,071 in the corresponding
period ended March 31, 2005. The cash provided during both periods is
primarily related to the Company's execution and utilization of its
equity-based lines of credit.
In August 2003, the Company entered into a $10,000,000 equity line of
credit from Compass Capital Inc., Kentan Ltd, and Reef Holding Ltd.
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, by a state court in
Florida who specifically determined, prior to declaring that the
transactions were exempt under Section 3(a)(10), that the transactions
were fair to the interested parties. The Company received $550,000 of
additional funding from January 1, 2006 until March 31, 2006 through
the issuance of these convertible notes. The balance remaining on this
equity line of credit at March 31, 2006 was $949,102.
In March 2003, the Company entered into a $10,000,000 equity line of
credit from Equities First, LLC. 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, by a state court in Illinois who specifically
determined, prior to declaring that the transactions were exempt under
Section 3(a)(10), that the transactions were fair to the interested
parties. Equities First, LLC interest and rights were transferred to
Bull Market Trading, LLC, WLSL Investments Inc. and Carl Horsely. The
Company received $152,100 of additional funding from January 1, 2006
until March 31, 2006 through the issuance of these convertible notes.
The balance remaining on this equity lines of credit at March 31, 2006
was $9,602,325
From January 1, 2006 until March 31, 2006, in connection with the
funding of working capital shortfalls, the Company converted $1,068,137
of convertible debentures and issued a total of 9,966,110,631 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 will issue
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. At the present time the Company does not enough shares
available to convert the Series "C" preferred stock. $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.
5
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
quarter ending March 2006 the Company has increased its sales force
resulting in an increased client base. New sales begin to matriculate
in the second quarter at which time sales commission expenses will
increase.
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.
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 its current 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
6
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.
Revenue Recognition- We account for our revenues 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
7
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.
Item 3. CONTROLS AND PROCEDURES.
As of March 31, 2006, an evaluation was performed under the supervision
and with the participation of the Company's management, including the
Principal Executive Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on
that evaluation, the Company's management, including the Principal
Executive Officer and the Principal Accounting Officer, concluded that
the Company's disclosure controls and procedures were effective as of
March 31, 2006. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect
internal controls subsequent to March 31, 2006.
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.
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 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 has
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.
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.
The $250,000 is included in the $375,000 short term notes payable.
8
Item 6. Exhibits
Exhibit No. Description Page
----------- ------------ ----
3(i) Articles of Incorporation *
3(ii) Amendments to Articles of Incorporation *
4.1 Designation of Series "B" Convertible Preferred
Stock *
Designation of Series "C" Convertible Preferred
4.2 Stock *
31.1 Rule 13a-14(a)/15d-14(a) Certification *
32.1 Section 1350 Certification *
* Incorporation by reference from previous reports and filings.
Item 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: May 18, 2006
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