PACEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
UNAUDITED AUDITED
September 30, December 31,
2001 2000
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Current assets:
Cash and cash equivalents $ 175,247 $ 36,356
Accounts receivable, net of allowance for doubtful accounts 356,055 9,883
of $7,647 and $5,155 respectively
Inventory 64,347 17,213
Other receivables 55,249 64,760
Prepaid expenses 19,038 2,469
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Total current assets 669,936 130,681
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Property and equipment, net of accumulated depreciation
of $84,489 and $65,531 respectively 139,290 141,882
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Non-current assets:
Note receivable 71,000 71,000
Goodwill 541,499 8,106
Security deposits 11,880 9,089
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Total non-current assets 624,379 88,195
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Total assets $ 1,433,605 $ 360,758
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,197,563 $ 491,926
Accrued expenses 89,358 73,071
Loans payable officers-Stockholders 206,325 62,741
Notes payable convertible debenture 1,331,440 531,389
Notes payable bank 50,000 50,000
Other payables 267,798 0
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Total current liabilities 3,142,484 1,209,127
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Long term liabilities:
Equipment leases 98,582 --
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Total long term liabilities 98,582 --
Total liabilities 3,241,066 1,209,127
Minority interest
Commitments:
Stockholders' equity (deficit)
Preferred stock, no par value,
no liquidation value, 5,000,000 shares
authorized, issued 1,000,000 shares
1997 class A convertible preferred stock 11,320 11,320
Common stock - no par value,
150,000,000 shares authorized in 2001 and 2000,
respectively. 120,670,772 and 39,348,486 shares outstanding
in 2001 and 2000, respectively 5,984,325 5,155,914
Cumulative currency translation adjustment (15,738) (10,833)
Deficit (7,787,368) (6,004,770)
Total stockholders' equity (deficit) (1,807,461) (848,369)
----------- -----------
Total liabilities and stockholders' equity $ 1,433,605 $ 360,758
=========== ===========
See accompanying notes to consolidated financial statements
PACEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS NINE MONTHS THREE MONTHS THREE MONTHS
----------- ----------- ------------ ------------
ENDED ENDED ENDED ENDED
----- ----- ----- -----
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
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Sales $ 984,638 $ 184,363 $ 555,550 $ 68,406
Cost of Goods Sold 704,311 56,667 405,204 52,487
----------- ----------- ------------ -----------
Gross Profit 280,327 127,696 150,346 15,919
----------- ----------- ------------ -----------
Operating costs and expenses:
Research and development 306,806 926,382 87,521 52,803
Depreciation & Amortization 14,364 21,460 1,323 7,086
Interest expense 53,333 52,772 27,699 11,104
Sales and Marketing 104,425 390,285 36,334 171,780
Financing Expenses 276,273 -- 195,173 --
General and Administrative 1,310,520 1,250,394 329,252 755,221
----------- ----------- ------------ -----------
Total operating costs and expenses 2,065,721 2,641,293 677,302 997,994
----------- ----------- ------------ -----------
Other Income 2,796 4,180 932 (255)
Net (loss) $(1,782,598) $(2,509,417) $ (526,024) $ (982,330)
=========== =========== ============ ===========
Net (loss) per common share
Basic (0.03) (0.12) (0.01) (0.04)
Diluted (0.03) (0.12) (0.01) (0.04)
Weighted Average shares outstanding
Basic 69,606,484 21,016,674 105,171,915 22,378,608
Diluted 69,606,484 21,016,674 105,171,915 22,378,608
See accompanying notes to consolidated financial statements
PACEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2001 2000
---- ----
Cash flows from operating activities:
Net (loss) $(1,782,598) $(2,509,417)
Adjustments to reconcile net (loss) to net cash
(used in) provided by operating activities:
Depreciation 14,364 21,460
Provision for Bad Debts 2,492 598
Other non cash items 210,395 57,791
Increase (Decrease) in Cash from changes in:
Accounts receivable (348,664) 3,997
Other receivables 9,511 (22,942)
Inventory (47,134) (14,406)
Other assets 0 0
Security deposits (2,791) 15
Prepaid expenses (16,569) 13,168
Accounts payable 705,637 (48,713)
Accrued expense 16,287 (68,454)
Loans Payable Officers-Stockholders 143,584 (10,000)
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Net cash (used in) operating activities (1,095,486) (2,576,903)
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Cash flows from investing activities:
Purchase of property and equipment (13,856) (122,683)
----------- -----------
Net cash used in investing activities (13,856) (122,683)
----------- -----------
Cash flows from financing activities:
Notes payable convertible debenture 746,718 404,132
Proceeds from long term leases 98,582 0
Proceeds from sale of common stock and options 407,838 2,296,913
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Net cash provided by financing activities 1,253,138 2,701,045
----------- -----------
Effect of exchange rates on cash (4,905) (6,162)
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Net increase (Decrease) in cash and cash equivalents 138,891 (4,703)
Cash and cash equivalents at beginning of year 36,356 95,631
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Cash and cash equivalents at end of period $ 175,247 $ 90,928
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest 4,872 3,128
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See accompanying notes to consolidated financial statements
PACEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
SEPTEMBER 30, 2001
1. BASIS OF PRESENTATION
The unaudited financial statements 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. 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 December
31, 2000 consolidated financial statements and related notes included in the
Company's year ended certified financial statements. The results of operations
for the nine months are not necessarily indicative of the operating results for
the year. The Company presumes that users of the interim financial information
herein have read or have access to the audited financial statements for the
preceding fiscal year 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 for the
full year.
2. ACQUISITION OF ADVANTAGE SYSTEMS INC. (ASI)
In September 2001, Pacel Acquisition Corp. a wholly owned subsidiary
completed its acquisition of Advantage Systems, Inc. a computer manufacture, for
$70,000 and the assumption of $741,773 in debt. Pacel Acquisition Corp. has
accounted for the acquisition under the purchase method of accounting in
accordance with generally accepted accounting principles. Pacel has recorded in
its consolidated financial statements all of the assets and liabilities of
Advantage. Good will of $401,107 has been recorded on Pacel's books. On
September 14, 2001 Pacel Acquisition was merged into Pacel Corp. Pacel has
secured a $1,000,000 convertible note to purchase this company.
FORWARD-LOOKING STATEMENTS
When used in this document and in our filings with the Securities and
Exchange Commission, in our press releases or other public or shareholder
communications, and in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project" or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are subject
to certain risks and uncertainties, which could cause our actual results to
differ materially from our historical results and those we presently anticipate
or project. You should not place undue reliance on any forward-looking
statements, which speak only as of the date made. Various factors could affect
our financial performance and could cause our actual results for future periods
to differ materially from any opinions or statements we express with respect to
future periods in any current statement. These factors include, but are not
limited to, the following: increases in our operating expenses outpacing our
revenues; our inability to expand our sales and distribution channels; the
failure of strategic relationships to implement and promote our software
products; the failure of third parties to develop software components necessary
for the integration of applications using our software; and the use of our
intellectual property by others.
We do not undertake--and we specifically decline any obligation--to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL BUSINESS
PACEL's mission is to provide consumers and businesses with a full suite
of products and services that provide secure connectivity to and from the
Internet, including e-commerce transactions and personnel and company data
security. To that end, PACEL, and its subsidiaries, Fairfax Communications and
E-Business Store.Com, have been developing products and methods that meet that
need for both families and companies. The ChildWatch software suite of programs
puts the controls for family computer usage, including internet filtering,
access controls and community support for finding missing and abducted children
in the hands of the parents and is readily available at Zany Brany and
Electronic Boutique stores nationally. "e-Centurion" our latest technology
advancement (patent pending) software product will provide complete file and
data security. This new software is designed to guard both the Inner Door (full
protection on your PC from existing and new viruses), i.e., the Love Bug, and
someone trying to penetrate your PC and by-pass your password. As well as, the
Outer Door (full intruder protection from Internet data collection devices and
programs or hackers). Our current goal is to utilize and extend these
technologies in the production of derivative products to provide secure Internet
connectivity and enhanced desktop security for customers in the home and
business marketplaces.
RESULTS OF OPERATIONS
The following summarizes the basic results of operations for the periods
indicated in the Consolidated Statement of Operations.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED JUNE 30,
2000.
For the nine months ended September 30, 2001, sales were $984,638
compared to $184,363 for the nine months ended September 30, 2000 an increase of
$800,275 or 434%. The increase in revenues is attributed to the sales generated
from existing NATO contracts of Fairfax Communication Limited (FCL) and
Advantage Systems existing customer base. Sales for the month of September 2001
for Advantage Systems were $236,138. E-Business Store continues to increase
their sales in consulting and web development. With the acquisition of Advantage
Systems we are refocusing our efforts, to the distribution of hardware and
consulting services through (FCL) NATO contracts. We will continue to focus our
efforts on the marketing of Child Watch software and e-Centurion anti-virus
software as adequate funding becomes available. We believe that marketing delays
have prevented Child Watch and e-Centurion from penetrating their respective
markets. Accordingly only limited revenues from the Child Watch and e-Centurion
software have been realized to date. The Company's' marketing delays stem from
the inability to obtain adequate financing through the end of the third quarter.
We do not expect to see any significant revenue from these products until
adequate financing is available to market these products.
For the nine months ended September 30, 2001, direct cost of goods sold
were $704,311 compared to $56,667 for the nine months ended September 30, 2000
an increase of $647,644. The increase in direct cost of goods sold is directly
attributed to the sales generated from the NATO contracts and Advantage Systems
discussed above. FCL is selling computer hardware items through Dell and
Gateway. The mark up for computer hardware is typically greater in Great Britain
than in the United States. Advantage costs of goods sold are higher due to the
lower margins on hardware in the United States.
Research and development expenses consist principally of salaries for
software developers, outside consulting, and related facilities costs for
software development. Research and Development expenses for the nine months
ended September 30, 2001, were $306,806 compared to $926,382 for the nine months
ended September 30, 2000 a decrease of $619,576. The decrease is directly
attributable to being in the final phase of ChildWatch and e-Centurion software
development. We believe, however, that investments in research and development,
including the recruiting and hiring of software developers, are critical to
remaining competitive in the marketplace and are directly related to continued
timely development of new and enhanced products. Accordingly, we anticipate
making continuing investments in the development of our application software
products, including those targeted for the growing Internet market, as funds
permit.
Sales and marketing expenses include salaries, commissions, travel
expenses, and marketing expenses for our sales, marketing, customer support, and
distribution consultants. Sales and marketing expenses also includes
advertising, trade shows, public relations, and other market development
programs. Sales and marketing expenses for the nine months ended September 30,
2001, were $104,425 compared to $390,285 for the nine months ended September 30,
2000 a decrease of $285,860. The decrease in sales and marketing expense is due
to the lack of funds available to us for sales and marketing for the nine months
ended September 30, 2001.
General and administrative expenses consist principally of administrative
salaries and benefits, travel expenses, and related facilities costs for finance
and administration, human resources, legal, and information services. General
and administrative expenses for the nine months ended September 30, 2001 were
$1,310,520 compared to $1,250,394 for the nine months ended September 30, 2000
an increase of $60,126. The increase in general and administrative expenses is
due to increased expenses for outside legal and investment banking services
related to the Company's efforts to obtain continuing sources of financing and
its ongoing reporting obligations as a public reporting company. Increased
employee costs related with increased staffing have also contributed to the
increase in general and administrative expenses.
Interest expense and Financing expenses for the nine months ended September
30, 2001 were $329,606 compared to $52,772 for the nine months ended September
30, 2000 an increase of $276,834. We entered in various convertible notes, these
notes contained a "beneficial conversion feature" Per Emerging Issues Task force
(EITF) Number 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or contingently Adjustable Conversion Ratios", this
beneficial conversion feature was assigned an intrinsic value of $260,350, as
calculated under the provision of the EITF. This amount was immediately
expensed, as the Notes were convertible into common shares of the Company at the
time of the signing of the Agreement. The remaining interest of $69.256 is
accrued interest on the Convertible Notes and interest paid on the $50,000 with
the bank.
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000.
For the three months ended September 30, 2001, sales were $555,550
compared to $68,406 for the three months ended September 30, 2000 an increase of
$487,144. The increase in revenues is directly attributed to the sales generated
from existing NATO contracts of FCL and sales generated from Advantage Systems.
For the three months ended September 30, 2001, direct cost of goods sold
were $405,204 compared to $52,487 for the three months ended September 30, 2000
an increase of $352,717. The increase in direct cost of goods sold is directly
attributed to the sales generated from the NATO contracts discussed above.
Research and development expenses for the three months ended September 30,
2001, were $87,521 compared to $52,803 for the three months ended September 30,
2000 an increase of $34,718. The increase is attributable to increase in related
payroll and overhead expenses.
Sales and marketing expenses for the three months ended September 30,
2001, were $36,334 compared to $171,780 for the three months ended September 30,
2000 a decrease of $135,446. The decrease in sales and marketing expense is due
directly to a lack of funds available in the third quarter of 2001.
General and administrative expenses for the three months ended September
30, 2001 were $329,252 compared to $755,221 for the three months ended September
30, 2000 a decrease of $425,969. The decrease in general and administrative
expenses is due to the restructuring of administrative staff due to lack of
financing. (see discussion in liquity)
Interest expense and Financing expenses for the three months ended
September 30, 2001 were $222,872 compared to $11,104 for the three months ended
September 30, 2000 and increase of $211,768. We entered in various convertible
notes, these notes contained a "beneficial conversion feature" Per Emerging
Issues Task force (EITF) Number 98-5, "Accounting for Convertible Securities
with Beneficial Conversion Features or contingently Adjustable Conversion
Ratios", this beneficial conversion feature was assigned an intrinsic value of
$179,250, as calculated under the provision of the EITF. This amount was
immediately expensed, as the Notes were convertible into common shares of the
Company at the time of the signing of the Agreement. The remaining interest of
$43,622 is accrued interest on the Convertible Notes and interest paid on the
$50,000 with the bank
LIQUIDITY AND CAPITAL RESOURCES AS OF SEPTEMBER 30, 2001
In February 2001, we secured a $50,000 line of credit with a bank, at an
interest rate of Wall Street JOURNAL'S PRIME Rate, plus 1.00% to be renewed
annually. At September 30, 2001 the entire line was outstanding,
On September 1, 2001, Pacel Acquisitions Corp. a wholly owned subsidiary
purchased the stock of Advantage Systems, Inc. a computer manufacture. Pacel
Acquisitions Corp. will pay $70,000 and assume $741,773 in debt. On September
2001 Advantage Systems Inc. was merged into Pacel Corp., and is now a division
of Pacel Corp. Pacel has secured a $1,000,000 convertible note to purchase this
company and supply the necessary cash flow for the following year. The note
bears and interest rate of 8%. These funds are designated only for the expenses
related to the acquisition of Advantage Systems, Inc., and working capital for
FCL and Advantage. We believe that the purchase of this company will give FCL
the ability to sell our hardware rather than Gateway's or Dell's, to NATO. In
doing so our margins will increase substantially. This company will also allow
Pacel to use its established customer base for the distribution of its software
products.
Due to lack of funding and withdrawal of the registration statement we
began to lay off all nonessential personnel. We are in the process of
renegotiating our current office leases to reduce office space. We are also
evaluating all expenses and making the necessary cutbacks. We believe that with
this reduction in expenses, convertible notes and sales, we will have sufficient
working capital through the end of the year. Our ability to continue as a going
concern beyond December 2001 is dependent upon being able to successfully secure
long term financing either through the issuance of debt or equity.
Cash and cash equivalents increased to $175,247 for the period ended
September 30, 2001 from $36,356 at December 31, 2000. Trade accounts receivable
increased to $356,055 for the period ended September 30, 2001 compared to $9,883
at December 31, 2000. Other receivables decreased to $9,511 for the period ended
September 30, 2001 compared to $64,760 at December 31, 2000. Accounts payable
increased to $1,197,563 for the period ended September 30, 2001 compared to
$491,926 at December 31, 2000. Net cash used for operating activities was
$1,095,486 during the nine-month period ended September 30, 2001 compared to
$2,576,903 in the corresponding period of 2000. Net cash used for operating
activities primarily reflect the increase in account receivable, and inventory
offset by accounts payable and loans to officers.
Net cash used in investing activities for the nine months ended September
30, 2001 and 2000 was $13,856 and $122,683 respectively. The outlay reflects the
continual investment in computer related equipment for further development
efforts.
Net cash provided by financing activities for the nine months ended
September 30, 2001 and 2000 was $1,253,138 and $2,701,045, respectively. The
funds were raised primarily through the issuance of convertible debentures in
the period ended September 30, 2001. The funds raised for the period September
30, 2000 were raised in conjunction with the filing of an SB-2 registration
statement to raise $3,000,000.