SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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.
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(Exact name of registrant as specified in its charter)
VIRGINIA 54-1712558
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
7621 Little Ave, Suite 101
Charlotte, NORTH CAROLINA 28226
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(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 May 23, 2004, there were 930,701,020 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 - 7-9
Item 2. Management's Discussion and Analysis of Financial Results of Operations 3 - 7
Item 3. Controls and Procedures 7
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 2. Changes in Securities 8
Item 6. Exhibits and Reports 9
Item 7. Signatures 10
Item 8. Certifications 11 - 12
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
2005 2004
------------- ---------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 231,879 $ 117,052
Client deposit and advance payments 316,071 826,598
Accounts receivable 5,686 230,469
Accounts receivable-Unbilled 743,535 310,845
Prepaid expenses 86,179 110,408
Workers compensation insurance deposits 112,602 139,089
Restricted cash 916,089 913,009
------------- ---------------
Total current assets 2,412,041 2,647,470
------------- ---------------
Property and equipment, net of accumulated depreciation of
$84,879 and $70,436, respectively 171,793 147,831
------------- ---------------
Other assets:
Retirement Plan-Director 142,172 154,772
Goodwill 708,693 1,075,432
Security deposits 18,358 15,182
------------- ---------------
Total other assets 869,223 1,245,386
------------- ---------------
Total assets $ 3,453,057 $ 4,040,687
============= ===============
See accompanying notes to the consolidated financial statements.
F-2
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
2005 2004
------------- ---------------
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 409,908 $ 242,210
Payroll and payroll related liabilities 2,240,158 2,511,224
Accrued work site employee payroll expense 719,555 300,391
Accrued expenses 1,688,314 1,330,456
Assumed Liabilities 493,133 493,133
Client deposits and advance payments 316,071 826,598
Short term payables 2,288,295 2,158,251
Sales taxes payable 491 -0-
------------ ---------------
Total current liabilities 8,155,925 7,862,263
Long-term liabilities:
Notes Payable 239,781 -0-
Deferred Compensation-Director Payable 142,172 154,772
------------ ---------------
Total long-term liabilities 381,953 154,772
Total liabilities 8,537,878 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 1,000 1,000
Common stock, .001 par value, 10,000,000,000 shares
authorized, 927,726,020 and 1,773,001
shares issued and outstanding in 2005 and 2004
respectively. 927,726 1,773
Additional paid-in capital 22,225,998 22,401,562
Cumulative currency translation adjustment (18,720) (18,720)
Accumulated deficit (28,220,825) (26,361,963)
------------- ---------------
Total stockholders' (deficit) (5,084,821) (3,976,348)
------------- ---------------
Total liabilities and stockholders' deficit $ 3,453,057 $ 4,040,687
============= ===============
See accompanying notes to the consolidated financial statements.
F-3
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three months ended
March 31,
2005 2004
------------- ---------------
Revenue $ 423,787 $ 371,868
Cost of services 326,963 288,973
------------- ---------------
Gross profit 96,824 82,895
Operating costs and expenses:
General and administrative 643,090 382,398
Sales & Marketing 238,942 101,988
Depreciation and amortization 14,444 6,500
Loss on impairment of goodwill 599,689 -0-
------------- ---------------
Total operating expenses 1,496,165 490,886
------------- ---------------
Operating loss (1,399,341) (407,991)
Other expenses:
Interest expense 92,801 41,157
Financing costs 260,500 245,000
------------- ---------------
Total other expenses 353,301 286,157
Net loss before discontinued operations (1,752,642) (694,148)
Loss from discontinued operations of AsmaraHR 106,221 92,864
Net loss $ (1,858,863) $ (787,012)
============= ===============
Loss from discontinued operations per common and common equivalent share:
Basic $ (0.001) $ (30,954.67)
Diluted $ (0.001) $ (30,954.67)
Net loss per common and common equivalent share:
Basic $ (0.02) $ (262,337.33)
Diluted $ (0.02) $ (262,337.33)
Weighted average shares outstanding:
Basic 100,775,152 3
Diluted 100,775,152 3
See accompanying notes to the consolidated financial statements.
F-4
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
2005 2004
------------- ---------------
Cash flows from operating activities:
Net loss $ (1,858,863) $ (787,012)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 14,444 6,500
Embedded interest 257,143 245,000
Other non-cash items -0- 90,000
Loss on impairment of goodwill 599,689 -0-
Increase (decrease) in cash from changes in assets:
Accounts receivable 224,783 54,598
Accounts receivable-Unbilled (432,690) -0-
Other receivables -0- 32,802
Client deposits 510,527 499,988
Insurance deposits 26,486 -0-
Prepaid expenses 43,129 (68,255)
Security deposits (1,926) (875)
Increase (decrease) in cash from changes in liabilities:
Accounts payable 167,698 (129,750)
Accrued expenses 357,858 (71,441)
Accrued expenses-Director -0- (52,442)
Payroll and payroll related liabilities (277,186) (536,624)
Accrued work site employee payroll cost 419,164 -0-
Deferred Revenue (510,527) (499,988)
Assumed liabilities -0- (189,190)
Sales and income taxes payable 491 (2,532)
------------- ---------------
Net cash (used in) operating activities (459,780) (1,409,221)
Cash flows from investing activities:
Net purchases of property and equipment (13,384) (50,262)
Cash CD-Restricted (3,080) -0-
------------- ---------------
Net cash (used in) investing activities (16,464) (50,262)
Cash flows from financing activities:
Repayments of notes payable (6,273) (33,000)
Issuance of notes payable -0- 90,000
Issuance of convertible notes payable 600,000 755,898
Receipts of stock subscription receivables -0- 50,000
Repayments of lines of credit (2,656) (1,732)
Repayments of capital lease -0- (6,829)
------------- ---------------
Net cash provided by financing activities 591,071 854,337
------------- ---------------
Net increase (decrease) in cash and cash equivalents 114,827 (605,146)
Cash and cash equivalents, beginning of period 117,052 682,400
------------- ---------------
Cash and cash equivalents, end of period $ 231,879 $ 77,254
============= ===============
See accompanying notes to the consolidated financial statements.
F-5
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
2005 2004
------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 10,080 $ 22,598
============= ===============
See accompanying notes to the consolidated financial statements.
F-6
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 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
March 31, 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.
Note 4. Common Stock.
In February 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 1,773,001. All references to
average number of shares, shares outstanding and prices per share have
been restated retroactively to reflect the split.
In January 2005, by written consent of a majority of stockholders, the
Company adopted an amendment to the Corporations' Certificate of
Incorporation to increase the number of authorized shares of common
stock, from 2,000,000,000 to 10,000,000,000 shares.
In January 2005, by written consent of a majority of stockholders, the
Company changed its corporate domicile from Virginia to Nevada. Due to
Nevada requirements, the Company's common stock par value changed from
no par value to .001 par value. As a result of this change, common
stock for the year ended December 31, 2004 was restated from
$22,443,015 to $1,773.
Note 5. 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 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.
F-8
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2005
Note 6. 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 CEO, David Calkins violated Section 17(a)
of the Securities Act and Section 10(b) and Rule 10b-5 of the Exchange
Act. The SEC asks that the Company and Calkins be permanently enjoined
from future violations, ordered to pay disgorgement and civil penalties
and Calkins be barred from continued service as an officer and
director. As part of an ex parte proceeding, the District Court has
ordered the Company and Calkins to provide an accounting of their
assets and the transactions that are the subject of the complaint.
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. Under
the current scheduling order fact discovery must be completed by June
21, 2005. Final dispositive pre-trial motion deadlines will be set by
the trial judge. A trial date has not yet been set.
Note 7. Client Deposit
The Company had $316,071 in Deferred Revenue on March 31, 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 Company is
currently in violation of this agreement.
Note 8. Restricted Cash
During the first quarter of 2005, as part of the Company acquiring new
office space, the landlord required the Company to secure an
irrevocable letters of credit with an interest bearing CD (certificate
of deposits). The value of the CD on March 31, 2005 was $100,239.
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. The value of
the CD on March 31, 2005 was $508,218.
Note 9. Subsequent Event
On May 15, 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 approximately $240,000
and is expected to report a net after tax loss of approximately
$468,000. The Company will receive the $240,000 over the next 12
months. The Company wrote off approximately $468,000 in Goodwill as a
result of the sale of these contracts. As a result of this sale,
activities related to these contracts have been accounted for as
discontinued operations.
F-9
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. approximately $240,000. The Company
will establish a receivable for $240,000 for the sale of these
contracts.
3
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Three Months ended March 31, 2005 compared to the Three Months ended
March 31, 2004
Revenue for the quarter ended March 31, 2005 increased approximately
$51,900 to $423,787 compared to revenue of $371,868 for the quarter
ended March 31, 2004. Revenues generated from the Rossar acquisition
accounted for $135,645 of the increase offset by a decrease of $83,726
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 March 31, 2005
compared to the quarter ended March 31, 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 March 31, 2005 and March 31, 2004.
Three months ended Three months ended
March 31, March 31,
2005 2004
------------------ ------------------
(Unaudited) (Unaudited)
Reconciliation of billings to revenue recognized:
Gross billings to clients $ 3,467,634 $ 2,341,908
Less - Gross wages billed to clients (3,043,847) (1,970,040)
------------------ ------------------
Total revenue as reported $ 423,787 $ 371,868
================== ==================
4
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Cost of services for the three months ended March 31, 2005 was $326,963
compared to cost of services of $288,973 for the three months ended
March 31, 2004 and is related directly to the delivery of services to
its PEO clients. This increase was directly related to the increase in
revenue.
General & administrative expenses, including salaries and wages,
increased to $643,090 for the three months ended March 31, 2005,
compared to $382,398 in the corresponding period of 2004. The increase
was attributed additional expenditures needed to support the operations
along with the general and administrative expenses acquired with the
Rossar HR acquisition.
Sales and marketing expenses increased to $238,942 for the three months
ended March 31, 2005, compared to $101,988 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 expenses increased to $14,444 for the three months ended
March 31, 2005, compared to $6,500 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, bank financing, and capital
leases. Interest expense amounted to $92,801 for the three months ended
March 31, 2005 compared to $41,157 for the same period of 2004. The
increase is primarily attributable to the continued use of financing
for working capital.
Finance expense for the three months ended March 31, 2005 increased
$15,500 to $260,500 when compared to finance expense of $245,000 for
the three months ended March 31, 2004. The increase was the result of
increased funding requirements 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 March 31, 2005 increased to $231,879 from
$117,052 at December 31, 2004. Net cash used for operating activities
was $459,780 during the three months ended March 31, 2005 compared to
$1,409,221 in the corresponding period of 2004. The cash used in
operating activities is attributable to the decrease in accounts
receivable, insurance deposits, payroll and payroll related
liabilities, accounts payable and accrued expenses offset by increases
in net loss, unbilled accounts receivable, security deposits, and
payroll and payroll related liabilities.
Net cash used in investing activities for the three months ended March
31, 2005 was $16,464. The cash used in investing activities is
attributable to computer equipment and software purchased for the
company's business information system implementation and the increased
investment in CD's. This compares to net cash used for investing
activities for the three months ended March 31, 2004 of $50,262.
Net cash provided by financing activities in the three months ended
March 31, 2005 was $591,071 compared to $854,337 in the corresponding
period ended March 31, 2004. The cash provided during both periods is
directly related to the Company's execution and utilization of three
equity-based lines of credit.
5
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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,
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 three months ended March 31,
2005, the Company drew down $600,000 and issued 6,170,700,000 shares
unrestricted shares of the Company's .001 par common stock, before
adjusting such shares to reflect the effects of any stock splits
occurring subsequent to issuance. After giving effect to the
one-for-one hundred reverse split on February 28, 2005, 925,950,000
shares were issued in conjunction with this equity line. The balance
remaining on this equity line of credit at May 23, 2005 was $2,369,102.
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.
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 $52,000 of fees and $232,950 of
goodwill in conjunction with this acquisition.
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.
6
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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.
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 approximately $240,000. The
Company estimates the sales of these contracts will reduce annual
operating losses by approximately $325,000.
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 March 31, 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 March 31, 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 March 31, 2005.
7
PACEL CORP. AND SUBSIDIARIES
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 CEO, David Calkins violated
Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the
Exchange Act. The SEC asks that the Company and Calkins be permanently enjoined
from future violations, ordered to pay disgorgement and civil penalties and
Calkins be barred from continued service as an officer and director. As part of
an ex parte proceeding, the District Court has ordered the Company and Calkins
to provide an accounting of their assets and the transactions that are the
subject of the complaint. 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. Under the
current scheduling order fact discovery must be completed by June 21, 2005.
Final dispositive pre-trial motion deadlines will be set by the trial judge. A
trial date has not yet been set.
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities
In February 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 1,773,001. All references to average number of shares,
shares outstanding and prices per share have been restated retroactively to
reflect the split.
In January 2005, by written consent of a majority of stockholders, the Company
adopted an amendment to the Corporations' Certificate of Incorporation to
increase the number of authorized shares of common stock, from 2,000,000,000 to
10,000,000,000 shares.
In January 2005, by written consent of a majority of stockholders, the Company
changed its corporate domicile from Virginia to Nevada. Due to Nevada
requirements, the Company's common stock par value changed from no par value to
.001 par value. As a result of this change, common stock for the year ended
December 31, 2004 was restated from $22,443,015 to $1,773.
8
PACEL CORP. AND SUBSIDIARIES
Item 6. Exhibits and Reports
The following reports were filed during the period covered by this Form 10-QSB:
January 6, 2005 Item 2.01. Completion of acquisition or disposal of asset
Item 9.01. Financial Statements and Exhibits
January 12, 2005 Item 2.01. Completion of acquisition or disposal of asset
Item 9.01. Financial Statements and Exhibits
January 24, 2005 Item 5.02. Departure of directors or principal officers;
election of directors; appointment of principal
officers
Item 5.03. Amendment to articles of incorporation or bylaws;
changes in fiscal year
Item 8.01. Other events
March 11, 2005 Item 5.02. Departure of directors or principal officers;
election of directors; appointment of principal
officers
Item 5.03. Amendment to articles of incorporation or bylaws;
changes in fiscal year
March 25, 2005 Item 1.01. Entry into a material definitive agreement
Item 9.01. Financial Statements and Exhibits
9
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
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Gary Musselman, President, Chief Executive Officer, and Chief
Financial Officer
DATED: May 23, 2005
10