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, 2005
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 of August 19, 2005 there were 463,440,333 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
June 30, December 31,
2005 2004
-------------- -------------
(Unaudited) (Audited)
ASSETS
------
Current assets:
Cash $ 550,386 $ 117,052
Client deposit and advance payments 66,129 826,598
Accounts receivable 17,873 230,469
Accounts receivable-Unbilled 393,190 310,845
Prepaid expenses 78,906 110,408
Workers compensation insurance deposits 92,825 139,089
Restricted cash 228,114 913,009
-------------- -------------
Total current assets 1,427,423 2,647,470
-------------- -------------
Property and equipment, net of accumulated depreciation of
$100,355 and $70,436, respectively 156,316 147,831
-------------- -------------
Other assets:
Allegro receivable 104,034 -0-
Retirement Plan-Director 138,436 154,772
Goodwill 465,423 1,075,432
Security deposits 18,358 15,182
-------------- -------------
Total other assets 726,251 1,245,386
-------------- -------------
Total assets $ 2,309,990 $ 4,040,687
============== =============
See accompanying notes to the consolidated financial statements.
F-2
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2005 2004
------------------- -------------------
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 599,894 $ 242,210
Payroll and payroll related liabilities 2,101,292 2,511,224
Accrued worksite employee payroll expense 376,429 300,391
Accrued expenses 1,747,979 1,330,456
Assumed Liabilities 493,133 493,133
Client deposits and advance payments 66,129 826,598
Prepaid Payroll 30,353 -0-
Short term payables 2,528,213 2,158,251
Sales taxes payable 676 -0-
------------------- -------------------
Total current liabilities 7,944,098 7,862,263
Long-term liabilities:
Notes Payable 232,187 -0-
Deferred Compensation-Director Payable 138,436 154,772
------------------- -------------------
Total long term liabilities 370,623 154,772
Total liabilities 8,314,721 8,017,035
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
Common stock, .001 par value, 10,000,000,000 shares
authorized, 50,975,944 and 1,773
shares issued respectively 50,976 2
Additional paid-in capital 23,239,158 22,403,333
Cumulative currency translation adjustment (18,720) (18,720)
Accumulated deficit (29,277,145) (26,361,963)
------------------- -------------------
Total stockholders' (deficit) (6,004,731) (3,976,348)
------------------- -------------------
Total liabilities and stockholders' deficit $ 2,309,990 $ 4,040,687
=================== ===================
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,
2005 2004 2005 2004
---- ---- ---- ----
Revenue $ 1,490,511 $ 1,677,963 $ 663,894 $ 866,238
Cost of services 1,177,739 1,294,127 537,597 647,178
---------------- --------------- -------------- ---------------
Gross profit 312,772 383,836 126,297 219,060
Operating costs and expenses:
General and administrative 1,500,434 1,069,695 686,887 491,663
Sales and marketing 350,138 145,197 116,615 58,831
Depreciation and amortization 29,920 13,496 15,476 6,996
Loss on impairment of goodwill 131,950 -0- -0- -0-
---------------- --------------- -------------- ---------------
Total operating expenses 2,012,442 1,228,388 818,978 557,490
---------------- --------------- -------------- ---------------
Operating Loss (1,699,670) (844,552) (692,681) (338,430)
Other expenses:
Interest expense (232,708) (106,181) (130,908) (65,024)
Financing costs (362,143) (1,355,714) (101,643) (1,110,714)
---------------- --------------- -------------- ---------------
Total other expense (594,851) (1,461,895) (232,551) (1,175,738)
Net loss before discontinued operations (2,294,521) (2,306,447) (925,232) (1,514,168)
Discontinued operations:
Loss from discontinued operations of Asmara of
Florida and Partners PEO of the Carolinas (134,708) (171,680) (112,875) (76,948)
Loss from sale of assets to Allegro, Inc. (485,953) -0- (18,213) -0-
---------------- --------------- -------------- ---------------
Total loss on discontinued operations (620,661) (171,680) (131,088) (76,948)
Net loss $ (2,915,182) $ (2,478,127) $ (1,056,320) $ (1,591,116)
================ =============== ============== ===============
Loss from discontinued operations per common and common equivalent share:
Basic $ (0.02) $ (171,680) $ (0.007) $ (.04)
Diluted $ (0.02) $ (171,680) $ (0.007) $ (.04)
Loss from sale of assets per common and common equivalent share:
Basic $ (0.06) $ -0- $ (0.001) $ -0-
Diluted $ (0.06) $ -0- $ (0.001) $ -0-
Net loss per common and common equivalent share:
Basic $ (0.34) $ (2,478,127) $ (0.06) $ (.86)
Diluted $ (0.34) $ (2,478,127) $ (0.06) $ (.86)
Weighted average shares outstanding:
Basic 8,622,532 1 16,967,244 1,842,890
Diluted 8,622,532 1 16,967,244 1,842,890
F-4
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
2005 2004
------------------ ---------------------
Cash flows from operating activities:
Net loss $ (2,915,182) $ (2,478,127)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 29,920 13,496
Embedded interest 362,143 1,355,714
Other non-cash items 27,700 190,000
Loss on discontinued operations 103,000 -0-
Loss on sale of assets 485,954 -0-
Loss on impairment of goodwill 131,950 -0-
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 212,597 61,071
Accounts receivable-Unbilled (82,345) -0-
Other receivables -0- 82,901
Client deposits 760,469 -0-
Insurance deposits 46,263 (171,450)
Prepaid expenses 50,400 (78,080)
Security deposits (1,926) (3,540)
Increase (decrease) in liabilities:
Accounts payable 357,684 (187,749)
Accrued expenses 417,522 (11,161)
Accrued expenses-Director -0- (204,005)
Payroll and payroll related liabilities (416,050) (432,555)
Accrued work site employee payroll cost 76,038 -0-
Deferred revenue (760,469) -0-
Assumed liabilities -0- (565,622)
Prepaid payroll 30,353 -0-
Sales and income taxes payable 676 (2,532)
------------------ ---------------------
Net cash (used in) operating activities (1,083,303) (2,431,639)
Cash flows from investing activities:
Net purchases of property and equipment (13,385) (104,137)
Cash received from sale of assets 18,022 -0-
Cash CD-Restricted 684,895 (600,000)
------------------ ---------------------
Net cash (used in) investing activities 689,532 (704,137)
Cash flows from financing activities:
Repayments of notes payable (12,685) (62,218)
Issuance of notes payable -0- 90,000
Issuance of convertible notes payable 845,000 2,680,898
Repayments of lines of credit (5,210) (4,362)
Repayments of capital lease -0- (7,422)
------------------ ---------------------
Net cash provided by financing activities 827,105 2,696,896
------------------ ---------------------
Net increase (decrease) in cash and cash equivalents 433,334 (438,880)
Cash and cash equivalents, beginning of period 117,052 682,400
------------------ ---------------------
Cash and cash equivalents, end of period $ 550,386 $ 243,520
================== =====================
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,
2005 2004
------------------ ---------------------
Supplemental disclosure of cash flow information: Cash paid during the years
for:
Interest $ 11,410 $ 27,335
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, 2005
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, 2004. 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.
Note 2. 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.
Note 3. 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.
F-7
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2005
Note 3. Revenue Recognition.
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.
No allowance for doubtful accounts has been made.
Note 4. Common Stock.
In February and June 2005, the Company effected a one-for-one thousand
reverse stock split restating the number of common shares of the
Company at December 31, 2004 from 1,773,000,943 to 1,773. All
references to average number of shares, shares outstanding and prices
per share have been restated retroactively to reflect the split.
Note 5. Stock Compensation.
The Company issued stock to certain officers, key employees, and
non-employee directors which consisted of Series "B" Preferred Stock
(Series "B" Stock). The maximum number of shares of the Company's
Series "B" Stock available for issuance was 1 million shares with a par
value of $0.001. Each share of the Series "B" Stock is convertible to
50 shares of Common Stock without the payment of any additional
consideration. Shares issues are compensation to the recipients.
Effective June 30, the Company authorized and issued 1,000,000 shares
of Series"B" Preferred Stock to officers and directors of the Company.
The Company determined compensation costs based on the fair value at
the grant date for its stock. The value of each share price was
determined to be .0277 representing $27,700 in total compensation. The
Company used the Black-Scholes option-pricing model.
On June 30, the holders of the Series"B" Stock elected to convert all
of their shares to 50,000,000 shares of Common Stock.
The Black-Scholes option valuation model was developed for estimating
the fair value of traded options that have no vesting restrictions and
are fully transferable. Because option valuation models require the use
of subjective assumptions, changes in these assumptions can materially
affect the fair value of the options, and the Company's options do not
have the characteristics of traded options, the option valuation models
do not necessarily provide a reliable measure of the fair value of its
options.
F-8
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2005
Note 6. Acquisitions.
In January 2005, the Company, through its wholly-owned subsidiary The
Resourcing Solutions Group, Inc., completed the acquisition of certain
assets of Rossar HR LLC, a Pennsylvania limited liability company,
which operated under the name "Your Staff Solutions". Rossar HR LLC is
a Professional Employment Organization founded in 1987 which
specializes in quality human resource management services for small to
medium sized businesses. Consideration under such agreement did not
contemplate any cash paid to the seller at closing, but calls for a
Promissory Note of $272,000 to be paid in equal monthly installments
over ten years. The Company recorded the acquisition as a purchase and
recorded $52,000 of fees and $232,950 of goodwill in association with
this acquisition. The Company acquired assets consisting of office
equipment and cash on hand totaling $45,170 and assumed liabilities
equal to $6,100. During the first quarter of 2005, the Company recorded
an impairment of $131,950 reducing the value of goodwill to $101,000.
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. Pursuant to an agreement of the parties, an accounting
of the transactions at issue was provided on June 30, 2004. The Company
and Calkins answered the second amended complaint on March 23, 2005. On
April 7, 2005, a federal grand jury in the Northern District of
Illinois returned an indictment charging Custable and ten other
individuals and entities (The Company was not indicted) with engaging
in a fraudulent scheme based on the same allegations as the SEC's
action. On April 21, 2005, the District Court stayed the SEC's civil
action pending resolution of the criminal action.
Note 8. Customer Deposit.
The Company had $66,129 in Deferred Revenue on June 30, 2005 related to
amounts prepaid for 2005 services from a single client. The Company
executed a letter agreement in conjunction with receipt of these funds
that provides the funds be held in separate trust account by the
Company and not commingled with any other general use funds of the
Company. The Company draws down the pre-payment account as needed to
fund the payment of payroll, deposit taxes, benefits, fees and other
costs for this single client pursuant to the agreement. The funds are
required to be held in a separate trust account and at the present
time, the funds are commingled in our operating account which is a
violation of the agreement.
F-9
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2005
Note 9. Short-Term Payables consists of:
June 30, December 31
2005 2004
--------------- ----------------
Convertible Notes Payable $ 2,017,066 $ 1,669,020
Other Notes Payable 465,000 465,000
Rossar Note Payable 27,127 -0-
Bank Line of Credit 19,020 24,231
--------------- ----------------
Total Short-Term Payables $ 2,528,213 $ 2,158,251
=============== ================
Note 10. 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 and 2004
equal to $134,708 and $171,680 respectively. The consolidated financial
statements have been restated, where applicable, to reflect the
discontinued operations.
Note 11. Disposition of Assets.
On May 15, 2005, The Resourcing Solutions Group, Inc., a subsidiary of
the Company, sold all the assets of Asmara of Florida, Partners PEO of
the Carolinas, and Asmara Services II, Inc. to Allegro, Inc. for
$122,055 and reported a loss of $485,953, of which $608,008 was
goodwill. The Company will receive the $122,055 over the next 12 months
as it's earned as part of the agreement.
Note 12. Related Party Transactions.
A. Employment Agreements
In July 2005, The Company entered into a ten year employment
contracts with F. Kay Calkins. Compensation will include an annual
base salary of $240,000 of which $60,000 is deferred until July
2006. Ms. Calkins is entitled to an incentive bonus plan based on
the EBITDA (earnings before interest, tax, depreciation and
amortization). The agreement also includes severance payments upon
termination of employment. Ms. Calkins will hold the title of
Chairman of the Board of Directors.
In July 2005, Mr. Calkins resigned as Chairman and Member of the
Board of Directors. Mr. Calkins was terminated as an employee of
the Company. The Company is currently negotiating a Termination
Agreement with Mr. Calkins.
Note 13. Recent Accounting Pronouncements.
The Company believes that any new accounting pronouncements since
December 31, 2004, will not have an affect on the Company's financial
statements.
F-10
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's discussion and analysis of results of operations and
financial condition include a discussion of liquidity and capital
resources. The following discussion should be read in conjunction with
the consolidated financial statements and notes thereto. Historical
results are not necessarily indicative of trends in operating results
for any future period.
In 2005, 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 2003, the Company successfully completed the acquisition of two
existing PEO organizations and continues to evaluate other potential
acquisition candidates while also reviewing and implementing
opportunities to support organic growth in order to secure a position
as an industry leader. The Company sees this initiative in the Human
Resources Outsourcing ("HRO") industry as an opportunity to tap into
the small business market in the United States and intends to
compliment the provision of PEO and ASO services with information
technology services, business consulting services and financial
services 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. The company has successfully negotiated joint marketing
programs to market the company's products and services. The company has
also engaged Thinkware Corporation to implement its new HRIS system.
This system will provide the company with "state-of-the-art" human
resource data necessary to service the growing needs of small to
mid-size clients as well as automate the company's internal processes.
The HRIS system became fully operational in January 2005.
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 is currently working to establish the national
vendor relationships it believes are necessary to effectively and
competitively provide such services to a broad range of clients.
In a further effort to bring the Company to profitability it evaluated
its internal operating costs and evaluated each existing client to
determine profitability. The Company determined that certain clients
were not producing sufficient gross profit. In May 2005, the Company
sold 16 contracts to Allegro, Inc. for $122,055. The Company recorded a
receivable for $122,055 that will be collected over the next 12 months.
The balance of this receivable at the quarter ended June 30, 3005, was
$104,034.
Commensurate with the sale of the 16 accounts the Company reorganized
its operations. The Company reduced its internal staff, and other
operating costs to the level necessary to serve the existing client
base. With the new HRIS system becoming operational 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. 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.
3
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Six Months ended June 30, 2005 compared to the Six Months ended June 30, 2004
Revenue for the six months ended June 30, 2005 was $1,490,511 compared
to revenue of $1,677,963 for the six months ended June 30, 2004.
Revenues generated from the Rossar acquisition accounted for $268,858
of the increase offset by a decrease of $456,310 from the Company's
existing clients.
The company experienced a decrease in the number of work site employees
it provided PEO services to during the six months ended June 30, 2005
compared to the six months ended June 30, 2004. The company generates
its revenue from services relating to work site employees. This
decrease in work site employees was primarily from large construction
and heavy industrial clients that terminated PEO services with the
company for reasons ranging from plant and company closings to clients
bringing the services typically offered in a PEO relationship in-house.
The PEO industry as a whole has found it more difficult to provide the
PEO services to construction and heavy industrial clients because of
its inability to obtain workers compensation insurance. The company has
focused its sales and marketing effort to white collar and light
industrial clients where workers compensation insurance is readily and
economically accessible.
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, 2005 and June 30, 2004.
Six months ended Six months ended
June 30, June 30,
2005 2004
(Unaudited) (Unaudited)
Reconciliation of billings to revenue recognized:
Gross billings to clients $ 10,974,772 $ 10,844,449
Less - Gross wages billed to clients (9,484,261) (9,166,486)
---------------- ----------------
Total revenue as reported $ 1,490,511 $ 1,677,963
================ ================
Cost of services for the six months ended June 30, 2005 was $1,177,739
compared to cost of services of $1,294,127 for the six months ended
June 30, 2004 and is related directly to the delivery of services to
its PEO clients. This decrease was directly related to the decrease in
revenue.
General & administrative expenses, including salaries and wages, was
$1,500,434 for the six months ended June 30, 2005, compared to
$1,069,695 in the corresponding period of 2004. The increase was
attributed to additional expenditures used to support the existing
operations along with the cost to integrate the acquired RossarHR
operation.
Sales and marketing expense was $350,138 for the six months ended June
30, 2005, compared to $145,197 in the corresponding period of 2004. The
increase was attributed to the company's continued transformation of
its sales and marketing function that began in the second quarter of
2004.
Depreciation and amortization expense was $29,920 for the six months
ended June 30, 2005, compared to $13,496 for the corresponding period
of 2004. 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 $232,708 for the six months ended June 30, 2005 compared to
$106,181 for the same period of 2004. The increase is primarily
attributable to the continued use of financing for working capital.
4
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Six Months ended June 30, 2005 compared to the Six Months ended June 30, 2004
Finance expense for the six months ended June 30, 2005 was $362,143
compared to finance expense of $1,355,714 for the six months ended June
30, 2004. The decrease was the result of reduced funding provided for
administrative and operational needs. The Company recorded imbedded
interest in conjunction with the issuance of convertible debentures
during the period assuming conversion of such debt was available on an
immediate basis and has incurred fees associated with accessing its
lines of credit.
Three Months ended June 30, 2005 compared to the Three Months ended June 30,
2004
Revenue for the quarter ended June 30, 2005 was $663,894 compared to
revenue of $866,238 for the quarter ended June 30, 2004. Revenues
generated from the Rossar acquisition accounted for $148,696 of the
increase offset by a decrease of $351,040 from the Company's existing
clients.
The company experienced a decrease in the number of work site employees
it provided PEO services to during the quarter ended June 30, 2005
compared to the quarter ended June 30, 2004. The company generates its
revenue from services relating to work site employees. This decrease in
work site employees was primarily from large construction and heavy
industrial clients that terminated PEO services with the company for
reasons ranging from plant and company closings to clients bringing the
services typically offered in a PEO relationship in-house. The PEO
industry as a whole has found it more difficult to provide the PEO
services to construction and heavy industrial clients because of its
inability to obtain workers compensation insurance. The company has
focused its sales and marketing effort to white collar and light
industrial clients where workers compensation insurance is readily and
economically accessible.
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, 2005 and June 30, 2004.
Three months ended Three months ended
June 30, June 30,
2005 2004
(Unaudited) (Unaudited)
------------------ ------------------
Reconciliation of billings to revenue recognized:
Gross billings to clients $ 4,820,211 $ 5,609,017
Less - Gross wages billed to clients (4,156,317) (4,742,779)
------------------ ------------------
Total revenue as reported $ 663,894 $ 866,238
================== ==================
Cost of services for the three months ended June 30, 2005 was $537,597
compared to cost of services of $647,178 for the three months ended
June 30, 2004 and is related directly to the delivery of services to
its PEO clients. This decrease was directly related to the decrease in
revenue.
General & administrative expenses, including salaries and wages, was
$686,887 for the three months ended June 30, 2005, compared to $491,663
in the corresponding period of 2004. The increase was attributed to
additional expenditures used to support the existing operations along
with the cost to complete the integration of acquired RossarHR
operation.
5
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Sales and marketing expense was $116,615 for the three months ended
June 30, 2005, compared to $58,831 in the corresponding period of 2004.
The increase was attributed to the company's continued transformation
of its sales and marketing function that began in the second quarter of
2004.
Depreciation and amortization expense was $15,476 for the three months
ended June 30, 2005, compared to $6,996 for the corresponding period of
2004. 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 $130,908 for the three months ended June 30, 2005 compared
to $65,024 for the same period of 2004. The increase is primarily
attributable to the carrying costs of unpaid liabilities and
Convertible Notes.
Finance expense for the three months ended June 30, 2005 was $101,643
compared to finance expense of $1,110,714 for the three months ended
June 30, 2004. The decrease was the result of reduced funding provided
for administrative and operational needs. The Company recorded imbedded
interest in conjunction with the issuance of convertible debentures
during the period assuming conversion of such debt was available on an
immediate basis and has incurred fees associated with accessing its
lines of credit.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at June 30, 2005 was $550,386 compared to
$117,052 at December 31, 2004. The Company used cash from operations of
$1,083,303 and $2,431,639 for the six months ended June 30, 2005 and
June 30, 2004, respectively. The net loss of $2,915,182 was offset by
$1,140,667 of non-cash items, the reductions in accounts receivable and
payroll and payroll related liabilities, and the increases in accounts
payable and accrued expenses.
Net cash provided by investing activities for the six months ended June
30, 2005 was $689,532 compared to the net cash used in investing
activities of $704,137 for the six months ended June 30, 2004. During
the six months ended June 30, 2005, the cash provided by investment
activities was from the redemption of CD's (certificate of Deposits)
used to secure 2 standby letters of credit issued in 2004, proceeds
from the sale of assets, and the cash used in investing activities is
attributable to computer equipment and software purchased for the
company's business information. During the six months ended June 30,
2004, the cash used in investing activities is attributable to computer
equipment and software purchased for the company's business information
and an investment in a CD to secure a standby letter of credits.
6
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Net cash provided by financing activities in the six months ended June
30, 2005 was $827,105 compared to $2,696,896 in the corresponding
period ended June 30, 2004. 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 an equity line of credit for
$10,000,000 from Compass Capital Inc., Kentan Ltd, Reef Holding Ltd,
The Escrow Corp, and T&B Associates, Inc. Borrowing from this equity
line allows the repayment by issuing shares of the Company's stock at a
discount rate of up to 50%. The line is being used to fund acquisitions
and shortfalls in working capital. During the six months ended June 30,
2005, the Company drew down $245,000 and issued 6,170,745,000
unrestricted shares of the Company's .001 par common stock, before
adjusting such shares to reflect the effects of reverse stock splits
occurring subsequent to issuance. After giving effect to the
one-for-one thousand reverse split on February 28, 2005 and June 20,
2005, 970,950 shares were issued in conjunction with this equity line.
The balance remaining on this equity line of credit at August 2, 2005
was $2,249,102. The lenders are not obligated to fund the remaining
balance on this equity line of credit and may discontinue funding the
Company at any time without any further obligation.
During the second quarter of 2004, the Company entered into an
agreement with a national bank to develop a program that eliminates the
need for multiple banks. During the credit review process, the bank
required the Company to secure its ACH (automated clearing house)
exposure with a standby letter of credit. ACH transactions are used to
collect funds due from the Company's clients for PEO services along
with depositing funds into employee bank accounts that have elected
direct deposit as a means of wage payment. The Company secured this
standby letter of credit with an interest bearing CD (certificate of
deposit) in the amount of $600,000. In the first quarter of 2005, the
Company reduced the standby letter of credit to $500,000. In the second
quarter of 2005, the Company entered into an agreement with another
financial institution to process its ACH transaction thus allowing the
Company to cancel this standby letter of credit and the CD.
During the second quarter of 2004, as part of the renewal process for
one of its insurance carriers, the Company was required to secure the
annual policy premiums with an irrevocable letters of credit in the
amount of $178,790. This irrevocable letters of credit was secured with
an interest bearing CD's (certificate of deposits). During the second
quarter of 2005, the Company elected to terminate this insurance policy
thus allowing the Company to cancel this standby letter of credit and
the CD.
In January 2005, the Company, through its wholly-owned subsidiary The
Resourcing Solutions Group, Inc., completed the acquisition of certain
assets of Rossar HR LLC, a Pennsylvania limited liability company,
which operated under the name "Your Staff Solutions". Rossar HR LLC is
a Professional Employment Organization founded in the 1987 which
specializes in quality human resource management services for small to
medium sized businesses. Consideration under such agreement did not
contemplate any cash paid to the seller at closing, but call for a
Promissory Note of $272,000 to be paid in equal monthly installments
over ten years. The Company recorded the acquisition as a purchase and
recorded $52,000 of fees and $232,950 of goodwill in association with
this acquisition. The Company acquired assets consisting of office
equipment and cash on hand totaling $45,170 and assumes liabilities
equal to $6,100. During the first quarter of 2005, the Company recorded
an impairment of $131,950 reducing the value of goodwill to $101,000.
7
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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. The company has
also engaged Thinkware Corporation to implement its new HRIS system.
This system will provide the company with "state-of-the-art" human
resource data necessary to service the growing needs of small to
mid-size clients as well as automate the company's internal processes.
The HRIS system became fully operational in January 2005.
In May 2005, The Resourcing Solutions Group, Inc. a subsidiary of the
Company, sold 16 PEO accounts located primarily in North Carolina,
South Carolina and Florida to Allegro, Inc. for $122,055 and reported a
loss of $485,953. The Company will receive the $122,055 over the next
12 months. Commensurate with the sale of the 16 accounts, the Company
reorganized its operations. The Company reduced its internal staff, and
other operating costs to the level necessary to serve the existing
client base. The Company anticipates a future continued reduction in
administrative costs as a as a result of this sale and the continued
focusing of marketing efforts on the non-"blue-collar" industries. With
the new HRIS system becoming operational 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.
8
PACEL CORP. AND SUBSIDIARIES
Forward Looking Statements
The Company is making this statement in order to satisfy the "safe
harbor" provisions contained in the Private Securities Litigation
Reform Act of 1995.
This Form 10-QSB includes forward-looking statements relating to the
business of the Company. Forward-looking statements contained herein or
in other statements made by the Company are made based on management's
expectations and beliefs concerning future events impacting the Company
and are subject to uncertainties and factors relating to the Company's
operations and business environment, all of which are difficult to
predict and many of which are beyond the control of the Company, that
could cause actual results of the Company to differ materially from
those matters expressed in or implied by forward-looking statements.
The Company believes that the following factors, among others, could
affect its future performance and cause actual results of the Company
to differ materially from those expressed in or implied by
forward-looking statements made by or on behalf of the Company: (a) the
effect of technological changes; (b) increases in or unexpected losses;
(c) increased competition; (d) fluctuations in the costs to operate the
business; (e) uninsurable risks; and (f) general economic conditions.
Item 3. CONTROLS AND PROCEDURES.
As of June 30, 2005, 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, 2005. 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, 2005.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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. Pursuant to an agreement of the parties, an accounting
of the transactions at issue was provided on June 30, 2004. The Company
and Calkins answered the second amended complaint on March 23, 2005. On
April 7, 2005, a federal grand jury in the Northern District of
Illinois returned an indictment charging Custable and ten other
individuals and entities (The Company was not indicted) with engaging
in a fraudulent scheme based on the same allegations as the SEC's
action. On April 21, 2005, the District Court stayed the SEC's civil
action pending resolution of the criminal action.
9
PACEL CORP. AND SUBSIDIARIES
Item 6. Exhibits
Exhibit No. Description Page
3(i) Articles of Incorporation *
3(ii) Amendments to Articles of Incorporation *
4 Designation of Series "B" Convertible Preferred Stock *
31.1 Rule 13a-14(a)/15d-14(a) Certification *
32.1 Section 1350 Certification *
* Incorporation by reference from previous reports and filings.
10
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 19, 2005