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 June 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 of 1934)
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 of August 15, 2006 there were 1,348,984,946 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 - 7-11
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 3. Defaults upon Senior Securities 9
Item 6. Exhibits 9-11
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2006 2005
--------------- ---------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 251,243 $ 251,595
Accounts receivable 276,968 15,384
Accounts receivable-Unbilled 170,174 169,749
Prepaid expenses 84,665 69,372
Workers compensation insurance deposits 80,614 26,240
Restricted cash 182,568 179,855
--------------- ---------------
Total current assets 1,046,232 712,195
--------------- ---------------
Property and equipment, net of accumulated depreciation of
$163,197 and $133,031, respectively 108,971 125,380
--------------- ---------------
Other assets:
Other receivables 26,285 65,127
Retirement Plan - Director 185,954 162,230
Goodwill 652,872 368,200
Security deposits 11,152 11,152
--------------- ---------------
Total other assets 876,263 606,709
--------------- ---------------
Total assets $ 2,031,466 $ 1,444,284
=============== ===============
See accompanying notes to the consolidated financial statements.
F-2
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2006 2005
--------------- ---------------
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 144,600 $ 336,497
Payroll and payroll related liabilities 2,236,292 1,955,231
Accrued worksite employee payroll expense 163,869 163,626
Accrued expenses 2,017,914 1,857,454
Assumed Liabilities 493,133 493,133
Short term payables 719,414 1,081,359
Current Maturities of long term note 27,127 27,127
--------------- ---------------
Total current liabilities 5,802,349 5,914,427
--------------- ---------------
Long-term liabilities:
Notes Payable - Non Current portion 207,275 218,926
Deferred Compensation - Director Payable 408,567 335,233
--------------- ---------------
Total long term liabilities 615,842 554,159
--------------- ---------------
Total liabilities 6,418,191 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, 14,884,914 and 4,430
shares issued respectively 14,884 4
Additional paid-in capital 27,909,007 25,765,420
Cumulative currency translation adjustment (18,720) (18,720)
Accumulated deficit (32,293,396) (30,772,006)
--------------- ---------------
Total stockholders' (deficit) (4,386,725) (5,024,302)
--------------- ---------------
Total liabilities and stockholders' deficit $ 2,031,466 $ 1,444,284
=============== ===============
See accompanying notes to the consolidated financial statements.
F-3
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Six months ended Three months ended
June 30, June 30,
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
Revenue $ 1,988,281 $ 1, 490,511 $ 1,564,163 $ 663,894
Cost of services 1,509,604 1,177,739 1,194,382 537,597
--------------- --------------- --------------- ---------------
Gross profit 478,677 312,772 369,781 126,297
Operating costs and expenses:
General and administrative 1,177,938 1,500,434 644,606 686,887
Sales and marketing 15,828 350,138 8,542 116,615
Depreciation and amortization 30,165 29,920 16,003 15,476
Impairment of goodwill 197,720 131,950 158,176 -0-
--------------- --------------- --------------- ---------------
Total operating expenses 1,421,651 2,012,442 827,327 818,978
--------------- --------------- --------------- ---------------
Operating Loss (942,974) (1,699,670) (457,546) (692,681)
Other expenses:
Interest expense (170,920) (232,708) (106,187) (130,908)
Financing costs (409,508) (362,143) (85,714) (101,643)
--------------- --------------- --------------- ---------------
Total other expense (580,428) (594,851) (191,901) (232,551)
Net loss before discontinued operations (1,523,402) (2,294,521) (649,447) (925,232)
Discontinued operations:
Loss from discontinued operations of Asmara of
Florida and Partners PEO of the Carolinas -0- (134,708) -0- (112,875)
Loss from sale of assets to Allegro, Inc. -0- (485,953) -0- (18,213)
--------------- --------------- --------------- ---------------
Total loss on discontinued operations -0- (620,661) -0- (131,088)
Net loss $ (1,523,402) $ (2,915,182) $ (649,447) $ (1,056,320)
=============== =============== =============== ===============
Loss from discontinued operations per common and common equivalent share:
Basic $ -0- $ (134,708) $ -0- $ (112,875)
Diluted $ -0- $ (134,708) $ -0- $ (112.875)
Loss from sale of assets per common and common equivalent share:
Basic $ -0- $ (485,953) $ -0- $ (18,213)
Diluted $ -0- $ (485,953) $ -0- $ (18,213)
Net loss per common and common equivalent share:
Basic $ (0.21) $ (2,915,182) $ (0.06) $ (1,056,230)
Diluted $ (0.21) $ (2,915,182) $ (0.06) $ (1,056,230)
Weighted average shares outstanding:
Basic 7,325,561 1 10,329,529 1
Diluted 7,325,561 1 10,329,529 1
See accompanying notes to the consolidated financial statements.
F-4
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
2006 2005
--------------- ---------------
Cash flows from operating activities:
Net loss $ (1,523,402) $ (2,915,182)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 30,165 29,920
Embedded interest 409,508 362,143
Other Non Cash Items -0- 27,700
Loss on discontinued operations -0- 134,708
Loss on Sale of assets -0- 485,954
Impairment of goodwill 197,720 131,950
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (146,853) 212,597
Accounts receivable-Unbilled (425) (82,345)
Other receivables 38,842 -0-
Client deposits -0- 760,469
Insurance deposits (19,173) 46,263
Prepaid expenses (15,293) 50,400
Security deposits -0- (1,926)
Retirement Plan - Director (23,724) (16,336)
Increase (decrease) in liabilities:
Accounts payable (190,323) 349,805
Accrued expenses 157,931 417,522
Payroll and payroll related liabilities 78,092 (409,932)
Deferred revenue -0- (760,469)
Accrued work site employee payroll cost 243 76,038
Client Deposits and advance payments -0- 30,353
Deferred Compensation Director 73,334 (16,366)
Sales and income taxes payable -0- 676
--------------- ---------------
Net cash (used in) operating activities (933,358) (1,086,058)
Cash flows from investing activities:
Purchases of property and equipment (3,756) (10,630)
Cash received from sale of assets -0- 18,022
Cash CD-Restricted (2,713) 684,895
Cash acquired in United Personnel Acquisition 63,174 -0-
--------------- ---------------
Net cash (provided by) investing activities 56,705 692,287
Cash flows from financing activities:
Repayments of notes payable (11,651) (12,685)
Issuance of convertible notes payable 902,100 845,000
Repayments of lines of credit (14,148) (5,210)
--------------- ---------------
Net cash provided by financing activities 876,301 827,105
--------------- ---------------
Net increase (decrease) in cash and cash equivalents (352) 433,334
Cash and cash equivalents, beginning of period 251,595 117,052
--------------- ---------------
Cash and cash equivalents, end of period $ 251,243 $ 550,386
=============== ===============
See accompanying notes to the consolidated financial statements.
F-5
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
2006 2005
--------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid during the years for:
Interest $ 11,592 $ 6,629
Income taxes $ -0- $ -0-
See accompanying notes to the consolidated financial statements.
F-6
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 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
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 quarters ended June 30, 2006 and June 30, 2005.
Three Months Ended Three Months Ended
June 30, June 30,
2006 2005
-------------------- --------------------
Reconciliation of billings to revenue recognized:
Billings to clients $ 7,898,575 $ 4,820,211
Less - Gross wages billed to clients (6,334,412) (4,156,317)
-------------------- --------------------
Revenue from PEO services $ 1,564,163 $ 663,894
-------------------- --------------------
Total revenue as reported $ 1,564,163 $ 663,894
==================== ====================
Employer portion of Social Security
And Medicare taxes $ 439,230 $ 304,554
State and Federal Unemployment taxes 111,956 81,476
Workers' Compensation Premiums 539,491 129,146
Other Misc. Expense 103,705 22,421
-------------------- --------------------
Total Cost of Sales 1,194,382 537,597
-------------------- --------------------
Gross Profit $ 369,781 $ 126,297
==================== ====================
F-8
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 six months ended June 30, 2006 and June 30, 2005.
Six Months Ended Six Months Ended
June 30, June 30,
2006 2005
-------------------- --------------------
Reconciliation of billings to revenue recognized:
Billings to clients $ 10,494,207 $ 11,168,887
Less - Gross wages billed to clients (8,505,926) (9,678,376)
-------------------- --------------------
Revenue from PEO services $ 1,988,281 $ 1,490,511
-------------------- --------------------
Total revenue as reported $ 1,988,281 $ 1,490,511
==================== ====================
Employer portion of Social Security
And Medicare taxes $ 594,123 $ 651,019
State and Federal Unemployment taxes 161,916 219,347
Workers' Compensation Premiums 645,962 274,523
Other Misc. Expense 107,603 32,850
-------------------- --------------------
Total Cost of Sales 1,509,604 1,177,739
-------------------- --------------------
Gross Profit $ 478,677 $ 312,772
==================== ====================
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 4,430. 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.
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 following unaudited condensed pro forma financial information gives
effect to the Company's operations as if the United/World Wide 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.
F-9
Pacel Corp and Subsidiaries with World Wide/United Personnel
Six Months Ended Six Months Ended
June 30, June 30,
2006 2005
-------------------- --------------------
Revenue $ 2,834,145 $ 3,102,088
Cost of Services (2,246,340) (2,539,500)
-------------------- --------------------
Gross Profit 587,805 562,588
-------------------- --------------------
Total operating expenses 1,516,011 2,228,656
Net Operating Loss (928,206) (1,666,068)
-------------------- --------------------
Other expenses (580,428) (594,851)
Net loss before discontinued operations (1,508,634) (2,260,919)
-------------------- --------------------
Discontinued operations -0- (620,661)
Net Loss $ (1,508,634) $ (2,881,580)
==================== ====================
Net loss from discontinued operations per common and common
equivalent share:
Basic $ -0- $ (620,661)
Diluted $ -0- $ (620,661)
Net loss per common and common equivalent share:
Basic $ (.21) $ (2,881,580)
Diluted $ (.21) $ (2,881,580)
Weighted average shares outstanding:
Basic 7,325,561 1
Diluted 7,325,561 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.
F-10
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:
June 30, December 31,
2006 2005
---------------- ----------------
Convertible Notes Payable $ 245,876 $ 600,507
Bank Line of Credit 8,538 15,852
Other Notes Payable 465,000 465,000
---------------- ----------------
Total Short-Term Payables $ 719,414 $ 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 six months ended June 30, 2005 equaled $620,661. The consolidated
financial statements have been reclassified, where applicable, to reflect
the discontinued operations.
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. The Company incurred $82,155 in fees to Hinshaw and Culbert for
the six months ending June 30, 2006
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.
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 six months ending
June 2006, the Company increased its sales force. New sales began to
matriculate in the second 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 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.
SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2005
Revenue for the six months ended June 30, 2006 was $1,988,281 compared to
that of $1,490,511 for the six months ended June 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 three months of
ownership of World Wide Personnel Services of Maine, Inc. and the six
months of ownership of United Personnel Services, Inc which combined
contributed $1,122,041 in total revenue for the six months ending June 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 six months ended June 30, 2006 and June 30, 2005.
3
Six Months Ended Six Months Ended
June 30, June 30,
2006 2005
-------------------- --------------------
Reconciliation of billings to revenue recognized:
Billings to clients $ 10,494,207 $ 10,974,772
Less - Gross wages billed to clients (8,505,926) (9,484,261)
-------------------- --------------------
Revenue from PEO services $ 1,988,281 $ 1,490,511
-------------------- --------------------
Total revenue as reported $ 1,988,281 $ 1,490,511
==================== ====================
Employer portion of Social Security
And Medicare taxes $ 594,123 $ 664,491
State and Federal Unemployment taxes 161,916 222,319
Workers' Compensation Premiums 645,962 279,960
Other Misc. Expense 107,603 10,969
-------------------- --------------------
Total Cost of Sales 1,509,604 1,177,739
-------------------- --------------------
Gross Profit $ 478,677 $ 312,772
==================== ====================
Cost of services for the six months ended June 30, 2006 was $1,509,604
compared to cost of services of $1,177,739 for the six months ended June
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 six months in which United Personnel Services was owned by Pacel and
the three months that Pacel owned World Wide Personnel Services of Maine
combined they incurred $1,003,869 in cost of services for the six months
ended June 30, 2006.
General & administrative expenses, including salaries and wages, was
$1,177,938 for the six months ended June 30, 2006, compared to $1,500,434
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. The decrease was mitigated by a combined increase of
$295,505 in expenses with 6 months of ownership of United Personnel
Services and three months of ownership of World Wide Personnel Services of
Maine
Sales and marketing expense was $15,828 for the six months ended June 30,
2006, compared to $350,138 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 $30,165 for the six months ended
June 30, 2006, compared to $29,920 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 forth 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 $170,920 for the six months ended June 30, 2006 compared to $232,708
for the same period of 2005.
Embedded Interests for the six months ended June 30, 2006 was $409,508
compared to $362,143 for the six months ended June 30, 2005. The increased
was the result of increase funding. The Company recorded embedded interest
in conjunction with the issuance of convertible debentures during the
period.
4
PACEL CORP. AND SUBSIDIARIES
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2005
Revenue for the quarter ended June 30, 2006 was 1,564,163 compared to
revenue of $663,894 for the quarter ended June 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 $1,053,318. 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 June 30, 2006 and June 30, 2005.
Quarter Ended Quarter Ended
June 30, June 30,
2006 2005
-------------------- --------------------
Reconciliation of billings to revenue recognized:
Billings to clients $ 7,898,575 $ 4,820,211
Less - Gross wages billed to clients (6,334,412) (4,156,317)
-------------------- --------------------
Revenue from PEO services $ 1,564,163 $ 663,894
-------------------- --------------------
Total revenue as reported $ 1,564,163 $ 663,894
==================== ====================
Employer portion of Social Security
And Medicare taxes $ 439,230 $ 304,554
State and Federal Unemployment taxes 111,956 81,476
Workers' Compensation Premiums 539,491 129,146
Other Misc. Expense 103,705 22,421
-------------------- --------------------
Total Cost of Sales 1,194,382 537,597
-------------------- --------------------
Gross Profit $ 369,781 $ 126,297
==================== ====================
Cost of services for the three months ended June 30, 2006 was $1,194,382
compared to cost of services of $537,597 for the three months ended June
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 $939,764 for the three months ended June 30, 2006.
General & administrative expenses, including salaries and wages, was
$657,080 for the three months ended June 30, 2006, compared to $686,887 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. The decrease was mitigated by an increase in expenses due
to the acquisition of United Personnel Services and World Wide Personnel
Services of Maine which totaled $242,039 for the quarter ending June 30 ,
2006.
5
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at June 30, 2006 was $251,243 compared to
$251,595 at December 31, 2005. The Company's use of cash from operation was
$933,358 and $1,083,303 for the six months ended June 30, 2006 and June 30,
2005, respectively. The net loss of $1,523,402 was offset by $637,393 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.
Net cash used in investing activities for the six months ended June 30,
2006 was $56,705 compared to the net cash in investing activities of
$689,532 for the six months ended June 30, 2005. During the six months
ended June 30, 2006, the cash in investment activities was from the
purchase of fixed assets and the acquisition of United Personnel Services
of Maine and Worldwide of Maine.
Net cash provided by financing activities in the six months ended June 30,
2006 was $876,301 compared to $827,105 in the corresponding period ended
June 30, 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 $750,000 of additional funding
from January 1, 2006 until June 30, 2006 through the issuance of these
convertible notes. The balance remaining on this equity line of credit at
June 30, 2006 was $449,102.
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 June 30, 2006 through the
issuance of these convertible notes. The balance remaining on this equity
lines of credit at June 30, 2006 was $9,602,325
From January 1, 2006 until June 30, 2006, in connection with the funding of
working capital shortfalls, the Company converted $1,249,897 of convertible
debentures and issued a total of 4,924,339 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. 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.
6
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 six months ending June 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.
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 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.
7
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.
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
8
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.
Item 3. CONTROLS AND PROCEDURES.
As of June 30, 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 June 30, 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
June 30, 2006.
PART II. OTHER INFORMATION
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.
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 *
4.2 Designation of Series "C" 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.
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: August 15, 2006
9