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EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, - Excel Corp | f10k2014ex32i_excelcorp.htm |
EX-31.1 - CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER - Excel Corp | f10k2014ex31i_excelcorp.htm |
EX-31.2 - CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER - Excel Corp | f10k2014ex31ii_excelcorp.htm |
EXCEL - IDEA: XBRL DOCUMENT - Excel Corp | Financial_Report.xls |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2014
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 333-173702
Excel Corporation
(Exact name of registrant as specified in its charter)
Delaware | 27-3955524 | |
(State or other jurisdiction of | (I.R.S. Employer) | |
incorporation or organization) | Identification No.) | |
6363 North State Highway 161, Suite 310, Irving, Texas |
75038 | |
(Address of principal executive offices) | (Zip Code) |
972-476-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
None | N/A |
Securities registered pursuant to Section 12(g) of the Act: N/A
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
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 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12-months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | o | Accelerated filer | o | |
Non-Accelerated filer | o | Smaller reporting company | x | |
(Do not check if smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes Yes o No x
The number of shares of Common Stock held by non-affiliates as of March 26, 2015 was 37,963,364 shares, all of one class of common stock, par value $0.0001 per share, having an aggregate market value of approximately $1,290,754 based upon the closing price of registrant’s common stock on such date of $0.034 per share as quoted on the Over the Counter Bulletin Board. For purposes of the foregoing calculation, all directors, executive officers, and 5% beneficial owners have been deemed affiliates.
As of March 26, 2015, there were 97,259,070 shares of common stock, par value $0.0001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
PART I | ||
Item 1. | Business | 3 |
Item 1A. | Risk Factors | 6 |
Item 1B. | Unresolved Staff Comments | 14 |
Item 2. | Properties | 15 |
Item 3. | Legal Proceedings | 15 |
Item 4. | Mine Safety Disclosures | 15 |
PART II | ||
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 16 |
Item 6. | Selected Financial Data | 16 |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 20 |
Item 8. | Financial Statements and Supplementary Data | 21 |
Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 22 |
Item 9A. | Controls and Procedures | 22 |
Item 9B. | Other Information | 22 |
PART III | ||
Item 10. | Directors, Executive Officers and Corporate Governance | 23 |
Item 11. | Executive Compensation | 25 |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 27 |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 28 |
Item 14. | Principal Accountant Fees and Services | 28 |
PART IV | ||
Item 15. | Exhibits and Financial Statement Schedules | 29 |
Signatures | 30 |
2 |
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements,” all of which are subject to risks and uncertainties. Forward-looking statements can be identified by the use of words such as “expects,” “plans,” “will,” “forecasts,” “projects,” “intends,” “estimates,” and other words of similar meaning. One can identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address our growth strategy and financial results. One must carefully consider any such statement and should understand that many factors could cause actual results to differ from our forward looking statements. These factors may include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward looking statement can be guaranteed and actual future results may vary materially.
Information regarding market and industry statistics contained in this Report is included based on information available to us that we believe is accurate. It is generally based on industry and other publications that are not produced for purposes of securities offerings or economic analysis. We have not reviewed or included data from all sources, and cannot assure investors of the accuracy or completeness of the data included in this Report. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of our services. We do not assume any obligation to update any forward-looking statement. As a result, investors should not place undue reliance on these forward-looking statements.
PART I
Item 1. Business.
Introduction
We sell integrated financial and transaction processing services to small and medium sized businesses throughout the United States. We provide these services through our wholly-owned subsidiary, Payprotec Oregon, LLC d/b/a Securus Payments (“Securus”), which we acquired in April 2014. We are a national full service retail credit/debit card processor Independent Sales Organization (“ISO”) and Merchant Services Provider (“MSP”), with primary sales and merchant support offices in Portland, Oregon and West Palm Beach, Florida, which supplement our network of approximately 120-150 independent sales representatives located throughout the country. Working with the Company's primary processing partner, First Data Corporation, we provide for the rapid clearing of payments, including Apple Pay, a new mobile payment and digital wallet service by Apple Inc. that lets users make payments using the iPhone 6 and iPhone 6 Plus, with the highest level of data security available in the industry. Our merchant account solutions, combined with the latest site and cloud based technologies, are designed to meet the unique needs of each business segment serviced, and offer a variety of credit, debit, gift and loyalty card processing options and equipment to scale with the distinctive business plans of each client.
Prior to the acquisition of Securus in April of 2014, we were considered a developmental stage company. With the acquisition of Securus, we are no longer in a development stage and maintain as our primary business operations the sale of merchant processing and servicing, as well as a limited number of merchant cash advance transactions on behalf of our merchant customers. We are actively seeking acquisition opportunities in related industries including, but not limited to, merchant services and merchant cash advance companies. Although management believes that there are acquisition opportunities, there can be no assurance that we will be able to complete any such transactions.
Corporate History
Excel Corporation (the “Company”) was organized November 13, 2010 as a Delaware corporation. The Company has two wholly owned subsidiaries, Excel Business Solutions, Inc., and Payprotec Oregon, LLC (d/b/a Securus Payments), (“Securus”).
On February 17, 2014 the Company entered into a Securities Exchange Agreement (the “SEA”) with Securus, Mychol Robirds and Steven Lemma, to purchase 90% of the membership interests of Securus and its subsidiary Securus Consultants, LLC. On April 21, 2014 the Company completed the acquisition of 100% of Securus pursuant to the SEA and through a Securities Exchange Agreement (“E-Cig Agreement) with E-Cig Ventures LLC. The Company issued 22,400,000 shares of common stock for the acquisition of Securus. In addition, the Company issued two shares of Series A Preferred Stock to Messrs Lemma and Robirds as a part of the SEA. As holders of the Series A Preferred Stock. Each of Messrs Lemma and Robirds are entitled to exchange one share of the Series A Preferred Stock for a 24.5% interest in Securus should the Company enter into a transaction that would sell a majority of the membership interest of Securus or its assets. Messrs Lemma and Robirds will be entitled to these exchange rights as long as they own a total of 9,000,000 shares individually.
The Company’s primary operations focus on the merchant processing and servicing business as a single source provider for virtually all types of merchant payment processing needs. The Company operates nationally as an Independent Sales Organization (“ISO”) and Merchant Services Provider (“MSP”), using its own fully integrated sales and marketing teams and systems to promote such services. The Company maintains primary sales and merchant support offices in Portland, Oregon and West Palm Beach, Florida providing the highest level of data security available in the industry today. The Company offers merchant account processing solutions, together with the latest physical site and cloud-based technologies, designed to meet the unique needs of each industry segment the Company services, and offer a variety of credit, debit, gift, and loyalty card processing options and equipment to scale with the distinctive business plans of each client.
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The Industry, The payment processing industry provides merchants with credit, debit, gift, and loyalty card and other payment processing services, along with related information services. The industry continues to grow as a result of wider merchant acceptance, increased consumer use of bankcards, and advances in payment processing and telecommunications technology. According to The Nilson Report dated February 2012, combined consumer and commercial credit, debit, and prepaid cards generated $3.595 trillion in purchase volume in 2011, up 10.4% from 2010. The proliferation of bankcards has made the acceptance of bankcard payments a virtual necessity for many businesses, regardless of size, in order to remain competitive. This use of bankcards, enhanced technology and security initiatives, efficiencies derived from economies of scale and the availability of more sophisticated products and services to all market segments has led to a highly competitive and specialized industry.
The detailed network of a credit card transaction includes several aspects: credit card associations (i.e. Visa and MasterCard); card issuers; merchants; merchant acquirers; processors; the consumers who are buying the goods; and merchants that are selling them. The card issuers distribute cards to consumers, bill them, and collect payment from them. The processor is responsible for delivering the transaction to the appropriate card issuer so that the customer is billed and the merchant receives funds for the purchase. The merchant acquirer recruits merchants to accept cards and provides the front-end service of routing the transaction to the network’s processing facilities. Merchant acquirers often delegate the actual processing to third-party service providers.
Merchant acquirer revenue is primarily comprised of credit and debit card fees charged to merchants, net of association fees, otherwise known as Interchange, for payment processing services, including authorization, capture, clearing, settlement and information reporting of electronic transactions. Fees are calculated on either a percentage of the dollar volume of the transaction or a fixed fee or a hybrid of the two and are recognized at the time of the transaction.
Bankcard processing revenue from contracted merchants is typically recurring in nature. The industry average term of a merchant processing contract is three years. Our combined product offerings in the form of receivable purchases and upgraded credit card terminal leases have the added value of establishing a longer term relationship with the customer, as they have the ability to use us for many service needs.
We anticipate the uptrend in credit card use to continue. As consumers age, we expect that they will continue to use the payment technology to which they have grown accustomed. Young consumers have become accustomed to using bankcards and other electronic payment methods for purchase. As these consumers, who have witnessed the wide adoption of card products, technology and the Internet, comprise a greater percentage of the population and increasingly enter the work force, it can be expected that purchases using card-based payment methods will comprise an increasing percentage of total consumer spending.
The proliferation of credit and debit cards has made the acceptance of bankcards a necessity for businesses, both large and small, in order to remain competitive. As a result, many of these small to medium-sized businesses are seeking to provide customers with the ability to pay for merchandise and services using credit or debit cards, including those in industries that have historically accepted cash and checks as the only forms of payment for their products. Previously, larger acquiring banks have marketed credit card processing services to national and regional merchants and have not focused on small to medium-sized merchants, as small to medium-sized merchants have often been perceived as too difficult to identify and expensive to service. These merchants generally have a lower volume of credit card transactions, are difficult to identify and have traditionally been underserved by credit card processors.
Market researchers expect dramatic growth in card-not-present transactions due to the rapid growth of the Internet. According to Forrester Research, US online sales were $155 Billion in 2009 and projected to be nearly $250 Billion in 2014. This growth is based on the continued shift of sales away from traditional brick and mortar stores to online and catalog purchases and the trend is projected to continue. Furthermore, where concerns around secure transactions had once been in the forefront, as those concerns continue to subside, the reluctance to use bankcards will further diminish and the uptrend in bankcard volume will likely be bolstered.
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Sales and Marketing, Our sales and marketing efforts consist of extensive in-house direct sales and marketing teams, combined with a large, national external sales and distribution network of Company-branded independent sales agents. We generate leads using in-house telemarketing personnel in our Portland Oregon and West Palm Beach Florida sales offices. Utilizing our customized Customer Relationship Management or CRM software, these leads are forwarded to either outside independent sales agents or our internal sales teams. We believe that our ability to continue to generate effective leads is critical to our success in attracting and retaining independent sales agents and ultimately our sales growth. We use a network of approximately 120 to 150 independent sales agents throughout the United States as our primary sales force.
Government Regulations, The industry in which we operate is subject to extensive governmental regulation. In particular, there are numerous laws and regulations restricting the purchase, sale, and sharing of personal information about consumers. The electronic payment processor is subject to regulation by federal, state and professional governing bodies. Prospective financial institution customers, including commercial banks and credit unions, operate in markets that are subject to rigorous regulatory oversight and supervision. As an ISO, we are less susceptible to these regulations than processors and banks because we do not have possession of customer level data.
Competition, The payment processing industry is highly competitive. We compete with other ISOs for the acquisition of merchant agreements. Several large processors including First National Bank of Omaha, Chase Paymentech, L.P., Bank of America Merchant Services, as well as Wells Fargo, frequently solicit merchants directly or through their own network of ISOs. Competition is based upon a number of factors including price, service and product offerings. Many of these competitors are larger and have substantially greater resources than us. We believe we remain competitive to these processors and competitive ISOs through a combination of beneficial pricing and services to our merchant customers.
Material Customers, The Company utilizes First Data Corporation (“First Data”) for its processing services and leasing, First Data accounted for 91.4% of consolidated revenues of $9,111,892 for the year ended December 31, 2014. The Company has a non-exclusive marketing agreement with First Data and Wells Fargo to represent Wells Fargo and First Data as an independent sales organization. This agreement expires February 28, 2017. The Company believes that were First Data to terminate or not renew this contract, the Company could utilize alternative vendors for processing and/or leasing. If we were unable to renew our contract with First Data or find a suitable alternative it could have a material adverse effect on the results of operations of the Company.
Employees
As of March 15, 2015, we have 156 full-time employees. Three of these employees are located in our corporate offices in Irving, Texas and 153 are employed by Securus. None of our employees are covered by collective bargaining agreements. We consider our employee relations to be satisfactory.
Licensing Business
Prior to the acquisition of Excel Business Solutions Inc and Securus, we were focused on bringing national and international brands to the retail marketplace. Our objective was to develop a diversified portfolio of iconic consumer brands by creating and facilitating relationships between Licensors and retail businesses, wholesale businesses, manufacturers, etc. (“Licensees”) who would sell products under the Licensor’s brand. We do not currently have any operations in the licensing business and do not expect to develop or expand upon the previous licensing business, which does not have significant assets or operations.
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Item 1A. Risk Factors.
We may not be able to raise the additional capital necessary to execute our business strategy which includes the acquisition of other companies, operations or asset portfolios.
We intend to grow in part through acquisitions, business combinations and or merchant portfolio purchases. Our ability to successfully execute these transactions may depend on our ability to raise additional debt and/or equity capital. Our ability to raise additional capital is uncertain and dependent upon numerous factors beyond our control, including but not limited to economic conditions, regulatory factors, continued high unemployment, reduced retail sales, increased taxation, reductions in consumer confidence, changes in levels of consumer spending, changes in preferences in how consumers pay for goods and services, weak housing markets and availability or lack of availability of credit. If we are unable to obtain additional capital, or if the terms thereof are too costly, we may be unable to successfully execute our acquisition strategy.
We may need more financing earlier than we anticipate if we:
● | expand faster than our internally generated cash flow can support; | |
● | purchase merchant portfolios from a large number of ISOs; | |
● | need to increase merchant portfolio purchase prices in response to competition; | |
● | acquire complementary products, businesses, technologies or residual ISO commissions. |
We have just recently begun operations and have not yet achieved profitability.
Until our acquisition of Securus in April 2014, we were considered a development stage company. Since our acquisition of Securus, we have incurred losses from operations. There can be no assurance that the Company will become profitable and it may require additional capital in order to fund its operations. The Company may not be able to source such funds on acceptable terms.
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Our business strategy includes additional acquisitions in the merchant cash advance industry as well as merchant processing. We may not be able to successfully identify and close any such acquisitions or successfully integrate them into our business.
Acquisitions are inherently uncertain. We have limited financial resources which will require us to seek debt or equity capital. There can be no assurances that we will be able to obtain financing. In addition, we compete for potential acquisition targets with other companies from within our industry as well as from financial buyers such as private equity firms and hedge funds. Many of these companies have significantly greater financial resources than the Company. Other risks related to acquisitions include:
● | the due diligence, financing and related transaction activities divert management attention from our current operations; |
● | we may devote substantial time and resources to acquisitions that do not close and; |
● | we may incur potential liabilities not detected during due diligence or make financial or other assumptions about an acquisition that turn out to be inaccurate. |
Unauthorized disclosure of merchant and cardholder data, whether through breach of our computer systems or otherwise, could expose us to liability and protracted and costly litigation.
We collect and store sensitive data about merchants, including names, addresses, social security numbers, driver’s license numbers and checking account numbers. Any loss of cardholder data by us or our merchants could result in significant fines and sanctions by the card networks or governmental bodies, which could have a material adverse effect upon our financial position and/or results of operations. Our computer systems could be in the future, subject to penetration by hackers and our encryption of data may not prevent unauthorized use. In this event, we may be subject to liability, including claims for unauthorized purchases with misappropriated bankcard information, impersonation or other similar fraud claims. We could also be subject to liability for claims relating to misuse of personal information, such as unauthorized marketing purposes. These claims also could result in protracted and costly litigation. In addition, we could be subject to penalties or sanctions from the card networks.
Although we generally require that our agreements with our service providers who have access to merchant and customer data include confidentiality obligations that restrict these parties from using or disclosing any customer or merchant data except as necessary to perform their services under the applicable agreements, these contractual measures may not prevent the unauthorized use or disclosure of data. In addition, our agreements with financial institutions most likely will require us to take certain protective measures to ensure the confidentiality of merchant and consumer data. Any failure to adequately enforce these protective measures could result in protracted and costly litigation.
If we fail to comply with the applicable requirements of the Visa and MasterCard bankcard networks, Visa or MasterCard could seek to fine us, suspend us or terminate our registrations. Fines could have an adverse effect on our operating results and financial condition, and if these registrations are terminated, we will not be able to conduct our business.
If we are unable to comply with Visa and MasterCard bankcard network requirements (including Payment Card Industry Data Security Standard, or PCI-DSS, compliance), Visa or MasterCard could seek to fine us, suspend us or terminate our registrations. We may receive notices of non-compliance and fines, which have typically related to excessive chargebacks by a merchant or data security failures on the part of a merchant. If we are unable to recover fines from our merchants, we would experience a financial loss. The termination of our registration, or any changes in the Visa or MasterCard rules that would impair our registration, could require us to stop providing Visa and MasterCard payment processing services, which would make it impossible for us to conduct our business.
We could face chargeback liability when our merchants refuse or cannot reimburse chargebacks resolved in favor of their customers, reject losses when our merchants go out of business, and merchant fraud. We cannot accurately anticipate these liabilities, which may adversely affect our results of operations and financial condition.
We have potential liability for fraudulent bankcard transactions initiated by merchants. Merchant fraud occurs when a merchant knowingly uses a stolen or counterfeit bankcard or card number to record a false sales transaction, processes an invalid bankcard or intentionally fails to deliver the merchandise or services sold in an otherwise valid transaction. We rely on our financial institution and transaction processor service providers to detect and reduce the impact of merchant fraud, but these measures may not be effective. It is possible that incidents of fraud could increase in the future. Failure by our financial institutions, transaction processing partners or ourselves to effectively manage risk and prevent fraud would increase our chargeback liability. Increases in chargebacks could have an adverse effect on our operating results and financial condition.
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Increased merchant attrition that we cannot offset with increased bankcard processing volume from same store sales growth or new accounts would cause our revenues to decline.
We may experience above normal attrition in merchant bankcard processing volume resulting from several factors, including business closures, transfers of merchants’ accounts to our competitors and account closures that we initiate due to heightened credit risks relating to, or contract breaches by, merchants, and when applicable same store sales contraction. We cannot predict the level of attrition in the future, and it could increase. Increased attrition in merchant bankcard processing volume may have an adverse effect on our financial condition and results of operations. If we are unable to establish accounts with new merchants or otherwise increase our bankcard processing volume in order to counter the effect of this attrition, our revenues will decline.
We rely on various financial institutions to provide clearing services in connection with our settlement activities. If we are unable to maintain clearing services with these financial institutions and are unable to find a replacement, our business may be adversely affected.
We rely on various financial institutions and transaction processing services providers to provide clearing services in connection with our settlement activities. Our primary relationships are with First Data Corporation and Wells Fargo. If we are unable to maintain clearing services with these financial institutions and transaction processing services providers, or are unable to find a replacement for them, we may no longer be able to provide processing services to certain and various customers which could negatively impact our revenue and earnings.
If we cannot pass increases in bankcard network interchange fees, assessments and transaction fees along to our merchants, our operating margins will be reduced.
We expect to pay interchange fees and other network fees set by the bankcard networks to the card issuing bank and the bankcard networks for each transaction we process. From time to time, the bankcard networks increase the interchange fees and other network fees that they charge payment processors and the sponsor banks. We expect that our potential sponsor bank will pass any increases in interchange fees on to us. If we are unable to pass these fee increases along to our merchants through corresponding increases in our processing fees in the future, our operating margins will be reduced.
Current or future bankcard network rules and practices could adversely affect our business.
We are registered with the Visa and MasterCard networks through our bank sponsors as an ISO with Visa and a Member Service Provider with MasterCard. The rules of the bankcard networks are set by their boards, which may be strongly influenced by card issuers, and some of those card issuers are our competitors with respect to these processing services. Many banks directly or indirectly sell processing services to merchants in direct competition with us. These banks could attempt, by virtue of their influence on the networks, to alter the networks’ rules or policies to the detriment of non-members like us. The bankcard networks or issuers who maintain our future registrations or arrangements or the bankcard network or issuer rules allowing us to market and provide payment processing services may not remain in effect. The termination of our registration or our status as an ISO and/or MSP, or any material changes in card network or issuer rules that would serve to limit our ability to provide payment processing services, could have an adverse effect on our bankcard processing volumes, revenues or operating costs. In addition, if we were precluded from processing Visa and MasterCard bankcard transactions, we would lose substantially all of our revenues.
Any new laws and regulations, or revisions made to existing laws, regulations, or other industry standards affecting our business may have an unfavorable impact on our operating results and financial condition.
Our business is impacted by laws and regulations that affect the bankcard industry. The number of new and proposed regulations has increased significantly, particularly pertaining to interchange fees on bankcard transactions, which are paid to the bank card issuer. In July 2010, Congress passed The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changed financial regulation. Changes included restricting amounts of debit card fees that certain issuer banks can charge merchants and allowing merchants to offer discounts for different payment methods. The impact which the Dodd-Frank Act will have on our operating results is difficult to determine, as the changes are not directed at us and final regulations on interchange fees are still to be set by the Federal Reserve Board. When final, these regulations could adversely affect our operating results and financial condition.
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Governmental regulations designed to protect or limit access to consumer information could adversely affect our ability to effectively provide our services to merchants.
Governmental bodies in the United States and abroad have adopted, or are considering the adoption of, laws and regulations restricting the transfer of, and safeguarding, non-public personal information. For example, in the United States, all financial institutions must undertake certain steps to ensure the privacy and security of consumer financial information. While our operations are subject to certain provisions of these privacy laws, we will limit our use of consumer information solely to providing services to other businesses and financial institutions. We will also limit sharing of non-public personal information to that necessary to complete the transactions on behalf of the consumer and the merchant and to that permitted by federal and state laws. In connection with providing services to the merchants and financial institutions that use our services, we will be required by regulations and contracts with our merchants to provide assurances regarding the confidentiality and security of non-public consumer information. These contracts may require periodic audits by independent companies regarding our compliance with industry standards and best practices established by regulatory guidelines. The compliance standards relate to our infrastructure, components, and operational procedures designed to safeguard the confidentiality and security of non-public consumer personal information shared by our clients with us. Our ability to maintain compliance with these standards and satisfy these audits will affect our ability to attract and maintain business in the future. The cost of such systems and procedures may increase in the future and could adversely affect our ability to compete effectively with other similarly situated service providers.
Our systems and our third-party providers’ systems may fail due to factors beyond our control, which could interrupt our service, cause us to lose business and increase our costs.
We depend on the efficient and uninterrupted operation of computer network systems, software, data center and telecommunications networks, as well as the systems of third parties. Our systems and operations or those of our third-party providers could be exposed to damage or interruption from, among other things, fire, natural disaster, power loss, telecommunications failure, unauthorized entry and computer viruses. Our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur. Defects in our systems or those of third parties, errors or delays in the processing of payment transactions, telecommunications failures or other difficulties could result in:
● | loss of revenues; | |
● | loss of merchants, although our contracts with merchants do not expressly provide a right to terminate for business interruptions; | |
● | loss of merchant and cardholder data; | |
● | harm to our business or reputation; | |
● | exposure to fraud losses or other liabilities; | |
● | negative publicity; | |
● | additional operating and development costs; and/or | |
● | diversion of technical and other resources. |
We do not own or maintain a processing network and expect to depend on outsourced suppliers for this and other essential service; our inability to obtain and retain such outsourced services would require us to discontinue our operations.
We do not own or maintain a computer system or software or communications network necessary to process debit or credit card transactions directly. We depend on outsourced vendors for these and other key functions, including credit card transaction processing, check guarantee and gift and loyalty card processing and provision of point of sale processing equipment. We will therefore be dependent on the continued capabilities of these vendors to provide such services on terms acceptable to us. Should any one of these vendors experience difficulties in providing processing services for any reason, or if we can no longer engage other vendors to provide such services, we would be required to discontinue operations.
We may experience software defects, undetected errors, and development delays, which could damage customer relations, decrease our potential profitability and expose us to liability.
We rely on technologies and software supplied by third parties that may contain undetected errors, viruses or defects. Defects in software products and errors or delays in processing of electronic transactions could result in additional costs, diversion of technical and other resources from our other efforts, loss of credibility with current or potential customers, harm to our reputation, or exposure to liability claims. In addition, the sophisticated software and computing systems that we rely on often encounter development delays and the underlying software may also contain undetected errors, viruses, or defects that could have a material adverse effect on our business, financial condition and results of operations.
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We are dependent on a limited number of key executives and employees, the loss of which could negatively impact our business.
Our business is led by our CEO, Thomas A. Hyde Jr. and CFO, Robert L. Winspear. The operations of our Securus subsidiary are led by Steven Lemma and Mychol Robirds. The loss of one or more of these executives could negatively impact our business and operations.
We are subject to the business cycles and credit risk of our merchants, which could negatively impact our financial results.
A recessionary economic environment could have a negative impact on our merchants, which could, in turn, negatively impact our financial results, particularly if the recessionary environment disproportionately affects some of the market segments that represent a larger portion of our bankcard processing volume. If our merchants make fewer sales of their products and services, we will have fewer transactions to process, resulting in lower revenue. In addition, we have a certain amount of fixed and semi-fixed costs, including rent, processing contractual minimums and salaries, which could limit our ability to quickly adjust costs and respond to changes in our business and the economy.
In a recessionary environment our merchants could also experience a higher rate of business closures, which could adversely affect our business and financial condition. In the event of a closure of a merchant, we are unlikely to receive our fees for any transactions processed by that merchant in its final month of operation.
Our operating results are subject to seasonality, which could result in fluctuations in our quarterly revenue.
We expect to experience seasonal fluctuations in our revenues as a result of consumer spending patterns and the seasonality of our merchant customers’ businesses.
The payment processing industry is highly competitive and we compete with certain firms that are larger and have greater financial resources than we do. Such competition could increase, which would adversely influence our prices to merchants and, as a result, our operating margins.
The market for payment processing services is highly competitive. Other providers of payment processing services have established a sizable market share in the small- and medium-size merchant processing sector. The weakness of the current economic recovery could cause future growth in electronic payment transactions to slow compared to historical rates of growth. This competition may influence the prices we are able to charge. If the competition causes us to reduce the prices we charge, we will have to aggressively control our costs in order to maintain acceptable profit margins. In addition, some of our competitors are financial institutions, subsidiaries of financial institutions or well-established payment processing companies, including but not limited to, Heartland Payment Systems, Inc., Transfirst, LLC, Newtek Business Services, Inc., Global Payments Inc., First Data Corporation, Vantiv Inc., Calpian Inc., Fifth Third Processing Solutions, Chase Paymentech Solutions and Elavon, Inc. Our competitors that are financial institutions or subsidiaries of financial institutions do not incur the costs associated with being sponsored by a bank for registration with the card networks and can settle transactions more quickly for their merchants than we can for ours. These competitors have substantially greater financial, technological, management and marketing resources than we have. This may allow our competitors to offer more attractive fees to our current and prospective merchants, or other products or services that we do not offer. This could result in a loss of customers, greater difficulty attracting new customers, and a reduction in the price we can charge for our services.
In addition, many of our competitors may have the ability to devote more financial and operational resources than we can to the development of new payments technologies and services, including Internet payment processing services and mobile payment processing services that provide improved operating functionality and features to their product and service offerings. If successful, their development efforts could render our product and services offerings less desirable to customers, again resulting in the loss of customers or a reduction in the price we could demand for our offerings. Furthermore, we are facing competition from non-traditional competitors offering alternative payment methods, such as PayPal and Google. These non-traditional competitors have significant financial resources and robust networks and are highly regarded by consumers. If these non-traditional competitors gain a greater share of total electronic payments transactions, it could also have a material adverse effect on our business, financial condition and results of operation.
We expect to be subject to increased operating margin pressure, which could erode our margins and adversely affect our ability to retain merchants and attain and maintain profitability.
We expect to experience increasingly downward pricing pressure from merchants for merchant credit and debit card processing and acquiring services, similar to what many of our competitors have experienced. The services we plan to offer are a commodity and as such are not differentiable except using price. Low barriers to entry in becoming an ISO/MSP means that price competition in the industry is persistent and strong. Our management has noted this trend and does not anticipate that this trend will cease in the near future, if at all. Continued margin erosion could adversely affect our merchant retention and profitability. In addition, we may not be able to fully pass the cost of more expensive point of sale terminals on to our merchant customers through our leasing program resulting in lower margins.
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Our risk management policies and procedures may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk.
We operate in a rapidly changing industry. Accordingly our risk management policies and procedures may not be fully effective to identify, monitor, and manage our risks. If our policies and procedures are not fully effective or we are not always successful in capturing all risks to which we are or may be exposed, we may suffer uninsured liability, harm to our reputation or be subject to litigation or regulatory actions that could have a material adverse effect on our business, financial condition and results of operation.
We may become subject to additional U.S., state or local taxes that cannot be passed through to our merchants, which could negatively affect our results of operations.
Companies in the payment processing industry, including us, may become subject to taxation in various tax jurisdictions on our net income or revenues. Application of these taxes is an emerging issue in our industry and taxing jurisdictions have not yet adopted uniform positions on this topic. If we are required to pay additional taxes and are unable to pass the tax expense through to our merchants, our costs would increase and our net income would be reduced.
Our quarterly results may fluctuate and if we fail to meet the expectations of analysts or investors, our stock price could decline substantially.
Our quarterly operating results may fluctuate, and if we fail to meet or exceed the expectations of securities analysts or investors, the trading price of our common stock could decline. Some of the important factors that could cause our revenue and operating results to fluctuate from quarter to quarter include:
● | we are a small company with limited operating history;
| |
● | the scope of our marketing and advertising efforts; |
● | our ability to retain existing customers, attract new customers and satisfy our customers’ requirements;
| |
● | general economic conditions; |
● | changes in our pricing policies or those of our licensees;
| |
● | our ability to expand our business; |
● | the effectiveness of our personnel;
| |
● | new product introductions; |
● | costs associated with future acquisitions of brands; and
| |
● | extraordinary expenses such as litigation or other dispute-related settlement payments. |
Some of these factors are not within our control, and the occurrence of one or more of them may cause our operating results to vary widely. As such, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be meaningful and should not be relied upon as an indication of future performance.
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Risks Relating to Our Common Stock
There is only a limited public market for our securities.
Our common stock is traded on the OTC Market under the trading symbol “EXCC.” Our common stock is thinly traded, if traded at all, and a robust and active trading market may never develop. Most of our shares may not be sold into the market unless there is an effective registration statement covering the resale of such shares, or the shares are eligible to be sold under Rule 144. Stockholders who decide to sell some or all of their shares in a private transaction may be unable to locate persons who are willing to purchase the shares, given the restrictions. Also, because of the various risk factors described herein, the price of the publicly traded shares of common stock may be highly volatile and may not reflect the underlying value of the Company.
Our stock price could be volatile.
The market prices of securities of merchant services-related companies are extremely volatile and sometimes reach unsustainable levels that bear no relationship to the past or present operating performance of such companies. Factors that are expected to contribute to the volatility of the trading price of our common stock include, among others:
● | our quarterly results of operations; | |
● | the variance between our actual quarterly results of operations and predictions by stock analysts; | |
● | financial predictions and recommendations by stock analysts concerning companies engaged in merchant services-related and companies competing in our market in general, and concerning us in particular; | |
● | public announcements of regulatory changes or new ventures relating to our business, new products or services by us or our competitors, or acquisitions, joint ventures or strategic alliances by us or our competitors; | |
● | public reports concerning our services or those of our competitors; | |
● | the operating and stock price performance of other companies that investors or stock analysts may deem comparable to us; | |
● | large purchases or sales of our capital stock; | |
● | investor perception of our business prospects or the merchant card processing and acquisition industry in general; and | |
● | general economic, political, and financial conditions, and the occurrence of natural disasters and terrorist attacks. |
In addition to the foregoing factors, the trading prices for equity securities in the stock market in general, and of merchant services-related companies in particular, have been subject to wide fluctuations that may be unrelated to the operating performance of the particular company affected by such fluctuations. Consequently, broad market fluctuations may have an adverse effect on the trading price of our common stock, regardless of our results of operations.
Our common stock may be deemed to be a “penny stock” and therefore subject to special requirements that could make the trading of our common stock more difficult than for stock of a company that is not “penny stock.”
Our common stock may be deemed to be a “penny stock” as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Penny stocks are stocks (i) with a price of less than $5.00 per share; (ii) that are not traded on a “recognized” national exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet requirement (i) above); or (iv) of issuers with net tangible assets of less than $2,000,000 (if the issuer has been in continuous operation for at least three years) or $5,000,000 (if in continuous operation for less than three years), or with average revenues of less than $6,000,000 for the last three years.
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Section 15(g) of the Exchange Act, and Rule 15g-2 promulgated thereunder, require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 promulgated under the Exchange Act requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for investors in our common stock to resell their shares to third parties or to otherwise dispose of them.
We do not intend to pay dividends.
We have not paid any cash dividends on our common stock since our inception and we do not anticipate paying any cash dividends in the foreseeable future. Earnings, if any, that we may realize will be retained in the business for further development and expansion.
We need to raise capital, which may cause dilution or issue securities senior to our common stock.
In order to execute our business strategy which includes acquisitions, we will need to raise additional capital. We may issue stock directly for acquisitions or sell stock to third parties in order to raise capital. We may not be able to raise any such additional capital and we may not be able to raise such capital on acceptable terms. If we raise capital through the sale or issuance of equity securities, such transactions will dilute the value of our outstanding shares. We may also decide to issue securities, including debt securities or preferred stock that have rights, preferences, and privileges senior to our common stock.
Future sales of large amounts of our common stock could have a negative impact on our stock price.
Future sales of our common stock by existing stockholders pursuant to an effective registration statement covering the resale of such shares or Rule 144 could adversely affect the market price of our common stock and could materially impair our future ability to generate funds through sales of our equity securities.
Our Board of Directors has the authority, without stockholder approval, to issue preferred stock with terms that may not be beneficial to existing common stockholders and with the ability to affect adversely stockholder voting power and perpetuate their control over us.
Our certificate of incorporation allows us to issue shares of preferred stock without any vote or further action by our common stockholders. Our Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. As a result, our Board of Directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock.
Preferred stock could be used to dilute a potential hostile acquirer. Accordingly, any future issuance of preferred stock or any rights to purchase preferred shares may have the effect of making it more difficult for a third party to acquire control of us. This may delay, defer or prevent a change of control or an unsolicited acquisition proposal. The issuance of preferred stock also could decrease the amount of earnings attributable to, and assets available for distribution to, the holders of our common stock and could adversely affect the rights and powers, including voting rights, of the holders of our common stock.
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Provisions in our charter documents and Delaware law could discourage a takeover that our stockholders may consider favorable or could cause current management to become entrenched and difficult to replace.
Certain provisions of our Bylaws are intended to strengthen the board’s position in the event of a hostile takeover attempt. These provisions have the following effects:
● | they provide that only business brought before an annual meeting by the board or by a stockholder who complies with the procedures set forth in the Bylaws may be transacted at an annual meeting of stockholders; and | |
● | they provide for advance notice or certain stockholder actions, such as the nomination of directors and stockholder proposals. |
We are subject to the provisions of Section 203 of the DGCL, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an “interested stockholder” is a person who, together with affiliates and associates, owns, or within three years prior, did own, 15% or more of the voting stock.
Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.
Section 404 of the Sarbanes-Oxley Act requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each fiscal year and to include a management report assessing the effectiveness of our internal controls over financial reporting in our annual report. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.
We may rely on our member sponsors to provide financial data, such as revenue billed to merchants, to assist us with compiling our accounting records. As such, our internal controls over financial reporting could be materially affected, or could reasonably likely be materially affected, by the internal controls and procedures of our member sponsors in these markets. In order to mitigate this risk, we plan to implement internal controls over financial reporting which monitor the accuracy of the financial data being provided by our member sponsors.
While we continue to dedicate resources and management time to ensuring that we have effective controls over financial reporting, failure to achieve and maintain an effective internal control environment could have a material adverse effect on the market’s perception of our business and our stock price.
Item 1B. Unresolved Staff Comments.
Not Applicable
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Item 2. Properties.
We lease our executive offices in Irving Texas as well office space for our Securus subsidiary in Portland Oregon and West Palm Beach Florida.
Location | Square Feet | Lease term | ||||
Irving, Texas (Corporate headquarters) | 2,755 | Expires 2019 | ||||
Portland, Oregon (Securus headquarters) | 12,643 | Expires 2017 | ||||
West Palm Beach, Florida | 5,719 | Expires 2016 | ||||
Carlsbad, California (not used) | 3,672 | Expires 2016 |
Item 3. Legal Proceedings.
The Company is party to a number of legal proceedings that arise in the ordinary course of business. Although litigation is subject to inherent uncertainties, the Company does not expect the outcome of these matters to have a material adverse effect on the business or operations of the Company.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our shares of common stock are quoted on the Over the Counter Bulletin Board (OTCBB) under the trading symbol “EXCC.” The following table sets forth the high and low sales prices as reported on the OTCBB. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
FISCAL YEAR 2013 | HIGH | LOW | ||||||
First Quarter | $ | .17 | $ | .08 | ||||
Second Quarter | $ | .09 | $ | .03 | ||||
Third Quarter | $ | .05 | $ | .01 | ||||
Fourth Quarter | $ | .38 | $ | .01 |
FISCAL YEAR 2014 | HIGH | LOW | ||||||
First Quarter | $ | .43 | $ | .05 | ||||
Second Quarter | $ | .33 | $ | .07 | ||||
Third Quarter | $ | .14 | $ | .08 | ||||
Fourth Quarter | $ | .08 | $ | .03 |
Holders
According to the records of our transfer agent, as of March 31, 2015, there were approximately 109 holders of record of our common stock. This number does not include the number of persons whose shares are in nominee or in “street name” accounts through brokers.
Dividend Policy
We have never declared or paid dividends on our common stock. We intend to retain earnings, if any, to support the development of our business and therefore do not anticipate paying cash dividends for the foreseeable future. Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs.
Securities Authorized for Issuance Under Equity Compensation Plans
In 2014, we issued options to purchase 1,000,000 shares of common stock with an exercise price of $0.09 per share pursuant to our 2010 Equity Incentive Plan. The options have a ten year term subject to certain restrictions.
Item 6. Selected Financial Data.
We are a smaller reporting company; as a result, we are not required to report selected financial data disclosures as required by Item 301 of Regulation S-K.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our results of operations and financial condition for the fiscal years ended December 31, 2014 and 2013 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this annual report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the “Risk Factors,” “Cautionary Notice Regarding Forward-Looking Statements” and “Description of Business” sections and elsewhere in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” “predict,” and similar expressions to identify forward-looking statements. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bounds of our knowledge of our business, our actual results could differ materially from those discussed in these statements. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future.
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Current Overview
We sell integrated financial and transaction processing services to small and medium sized businesses throughout the United States. We provide these services through our wholly-owned subsidiary, Securus which we acquired in April 2014. We are a national full service retail credit/debit card processor Independent Sales Organization (“ISO”) and Merchant Services Provider (“MSP”), with primary sales and merchant support offices in Portland, Oregon and West Palm Beach, Florida, which supplement our network of approximately 120 to 150 independent sales representatives located throughout the country. Working with the Company's primary processing partner, First Data Corporation, we provide for the rapid clearing of payments, including Apple Pay, a new mobile payment and digital wallet service by Apple Inc. that lets users make payments using the iPhone 6 and iPhone 6 Plus, with the highest level of data security available in the industry. Our merchant account solutions, married with the latest site and cloud based technologies, are designed to meet the unique needs of each business segment serviced, and offer a variety of credit, debit, gift and loyalty card processing options and equipment to scale with the distinctive business plans of each client.
On February 17, 2014 the Company entered into a Securities Exchange Agreement (the “SEA”) with Securus, Mychol Robirds and Steven Lemma, to purchase 90% of the membership interests of Securus and its subsidiary Securus Consultants, LLC. On April 21, 2014 the Company completed the acquisition of 100% of Securus pursuant to the SEA and through a Securities Exchange Agreement (“E-Cig Agreement) with E-Cig Ventures LLC. The Company issued 22,400,000 shares of common stock for the acquisition of Securus. In addition, the Company issued two shares of Series A Preferred Stock to Messrs Lemma and Robirds as a part of the SEA. As holders of the Series A Preferred Stock. Each of Messrs Lemma and Robirds are entitled to exchange one share of the Series A Preferred Stock for a 24.5% interest in Securus should the Company enter into a transaction that would sell a majority of the membership interest of Securus or its assets. Messrs Lemma and Robirds will be entitled to these exchange rights as long as they own a total of 9,000,000 shares individually.
Prior to the acquisition of Securus in April 2014, we were considered a developmental stage company. With the acquisition of Securus, we are no longer in a development stage and maintain as our primary business operations the sale of merchant processing and servicing, as well as a limited number of merchant cash advance transactions on behalf of our merchant customers. We are actively seeking acquisition opportunities in related industries including, but not limited to, merchant services and merchant cash advance companies. Although management believes that there are acquisition opportunities, there can be no assurance that the Company will be able to complete any such transactions.
Critical Accounting Policies
Our management’s discussion and analysis of our financial condition and results of operations are based on our audited consolidated financial statements included with this report that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in Note 2 to our audited consolidated financial statements. Our critical accounting policies are those where we have made the most difficult, subjective or complex judgments in making estimates, and/or where these estimates can significantly impact our financial results under different assumptions and conditions. Our critical accounting policies are:
Basis of presentation and consolidation
Our accounting and reporting policies conform with generally accepted accounting principles (“GAAP”) and include our subsidiaries, after elimination of all intercompany transactions in the consolidation.
Date of Management’s Review of Subsequent Events
Subsequent events were considered through March 30, 2015 which is the date the financial statements were available to be issued.
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Business Combinations
Acquisitions are accounted for using the acquisition method of accounting. The purchase price of an acquisition is allocated to the assets acquired and liabilities assumed using the estimated fair values at the acquisition date. Transaction costs are expensed as incurred.
Goodwill
Goodwill represents the excess of acquisition cost over the fair value of net tangible and intangible assets acquired in connection with an acquisition. Goodwill is assessed for impairment annually or more frequently if circumstances indicate impairment may have occurred.
Revenue Recognition
The Company’s revenue consists of proceeds from the sale of equipment leases of point of sale terminals and systems used to process credit and debit transactions. The Company records revenue when the sales process with respect to terminals and point of sale equipment is substantially complete.
In addition, the Company receives a percentage of recurring monthly fees comprised of credit and debit card fees charged to merchants, net of association fees, otherwise known as Interchange, as well as certain service charges and convenience fees, for payment processing services, including authorization, capture, clearing, settlement and information reporting of electronic transactions. Fees are calculated on either a percentage of the dollar volume of the transaction or a fixed fee or a hybrid of the two and are recognized at the time of the transaction.
Cash and Cash Equivalents
The Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less as cash and cash equivalents. The carrying amount of financial instruments included in cash and cash equivalents approximates fair value because of the short maturities for the instruments held.
Income Taxes
Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to tax net operating loss carryforwards. The deferred tax assets and liabilities represent the future tax return consequences of these differences, which will either be taxable or deductible when assets and liabilities are recovered or settled, as well as operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when in the judgment of management, it is more likely than not that such deferred tax assets will not become available. Because the judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond the Company’s control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term.
Reclassification
Certain prior period amounts have been reclassified to conform to the current year’s presentation.
Accounts Receivable
Accounts receivable represent contractual residual payments due from the Company's customers. These residual payments are determined based on the credit and debit card processing activity of merchants for which the Company initiated lease transactions. Based on collection experience and periodic reviews of outstanding receivables, management considers all accounts receivable to be fully collectible and accordingly, no allowance for doubtful accounts is required.
Inventory
The Company accounts for inventory at the lower of cost (using the first-in first-out method) or market. Inventory consists entirely of terminals and point of sale equipment classified as finished goods.
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Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from five to ten years. Leasehold improvements are amortized over the lesser of the expected term of the lease or the estimated useful life of the asset. Expenditures for repairs and maintenance are expensed as incurred.
Loss Per Share
Loss per share is based on the weighted average number of common shares. Diluted loss per share was not presented, as the company as of December 31, 2014 had outstanding options to purchase 1,000,000 shares of common stock which would have an anti-dilutive effect on earnings.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Off-Balance Sheet Financing Arrangements
We did not have any off-balance sheet financing arrangements as of December 31, 2014.
Results of Operations
We acquired Securus in April 2014. As a result of this acquisition, operating results for 2014 and 2013 are not comparable. Virtually all of the changes in the results of operations are due to the inclusion of Securus in the Company’s consolidated operations.
Revenues
During the year ended December 31, 2014, we had equipment lease revenues of $6,842,072 compared to $11,104 revenues for the year ended December 31, 2013. During the year ended December 31, 2014, we had transaction and processing fees revenue of $2,228,878 and advance commission and other revenues of $40,942, as compared to $92,092 and $329,265, respectively, during the year ended December 31, 2013.
Costs and Expenses
Our operating costs and expenses were $12,132,799 for the year ended December 31, 2014 as compared to $1,373,040 for the year ended December 31, 2013. Cost of sales for 2014 was $1,422,013 or 20.8% of equipment lease revenue. Outside commissions were $1,281,595 for the year ended December 31, 2014 or 14.1% of net revenues. The Company uses independent sales agents for a substantial portion of its business. Salaries and wages were $7,412,124 for the year ended December 31, 2014 as compared to $687,037 for the year ended December 31 2013.
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Other Income
Our other income was $2,975,101 for the year ended December 31, 2014, as compared to $0 for the year ended December 31, 2013. $2,800,000 of other income was derived from the sale of a $100,000 monthly residual. An additional $175,000 gain was recognized upon the execution of a settlement and release agreement with eCig Ventures which reduced the amount of debt owed by the Company.
Interest expense was $391,075 for the year ended December 31, 2014. $203,385 of the interest was recorded in the quarter ended June 30, 2014 and was related to Securus’s financing arrangements with e-Cig Ventures executed prior to our acquisition of Securus.
Net income
Our net losses were $436,881 and $940,579 for the years ended December 31, 2014 and 2013, respectively. Although it is possible we may continue to incur net losses in the future, our anticipation is that we will be able to achieve profitability in 2015.
Liquidity and Capital Resources
The following summarizes our cash flows:
Years ended December 31, | ||||||||
2014 | 2013 | |||||||
Net cash provided by (used in) operating activities | $ | 881,517 | $ | (521,161 | ) | |||
Net cash provided by investing activities | $ | 177,066 | $ | 3,353 | ||||
Net cash used in financing activities | $ | (740,123 | ) | $ | (120,000 | ) | ||
Net increase (decrease) in cash | $ | 318,460 | $ | (637,808 | ) |
Net cash provided by operating activities in 2014 was $881,517 as compared with $521,161 used in 2013. This increase of $1,402,678 was mainly attributable to the acquisition of Securus, which decreased net loss by $503,698 and increased cash flows from working capital.
Net cash provided by investing activities was $177,066 in 2014, compared with $3,353 in 2013. The increase of $173,713 was primarily the result of disposal of vehicles acquired in connection with the Securus acquisition.
Net cash used in financing activities was $740,123 for the year ended December 31, 2014 as compared to $120,000 during the year ended December 31, 2013.
As of December 31, 2014, we had cash and cash equivalents of $326,788, total current assets of $853,793 and total current liabilities of $2,417,769.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
Excel Corporation and Subsidiaries
December 31, 2014
Contents
Report of Independent Registered Public Accounting Firm | F-1 |
Consolidated Financial Statements | |
Consolidated Balance Sheet, December 31, 2014 and December 31, 2013 | F-2 |
Consolidated Statement of Operations | |
For the Years Ended December 31, 2014 and December 31, 2013 | F-3 |
Consolidated Statement of Stockholders' Equity | |
From the Years Ended December 31, 2013 to December 31, 2014 | F-4 |
Consolidated Statement of Cash Flows | |
For the Years Ended December 31, 2014 and December 31, 2013 | F-5 |
Notes to Consolidated Financial Statements | F-6 - F-13 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Excel Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Excel Corporation and Subsidiaries (a Delaware Corporation) as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2014 and 2013. Excel Corporation’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Excel Corporation and Subsidiaries as of December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for the for the years ended December 31, 2014 and 2013 in conformity with accounting principles generally accepted in the United States of America.
/s/ Connolly, Grady & Cha, P.C.
Certified Public Accountants
Philadelphia, Pennsylvania
March 31, 2015
F-1 |
Excel Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, | December 31, | |||||||
2014 | 2013 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 326,788 | $ | 8,328 | ||||
Accounts receivable | 383,657 | 2,250 | ||||||
Prepaid expenses | 46,229 | 32,979 | ||||||
Shares receivable | 90,000 | - | ||||||
Inventory | 7,119 | - | ||||||
Total current assets | $ | 853,793 | $ | 43,557 | ||||
Other Assets | ||||||||
Fixed assets, net of depreciation | $ | 230,632 | $ | - | ||||
Goodwill | 4,440,355 | - | ||||||
Other long term assets | 68,027 | 7,939 | ||||||
Total other assets | $ | 4,739,014 | $ | 7,939 | ||||
Total assets | $ | 5,592,807 | $ | 51,496 | ||||
LIABILITIES & STOKHOLDERS' EQUITY | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 806,981 | $ | 146,949 | ||||
Accrued compensation | 602,683 | 66,113 | ||||||
Other accrued liabilities | 426,431 | 162,039 | ||||||
Notes payable - current portion | 581,674 | - | ||||||
Total current liabilities | $ | 2,417,769 | $ | 375,101 | ||||
Long-term liabilities | ||||||||
Notes payable - long term portion | $ | 681,361 | $ | - | ||||
Other long term liabilities | 29,748 | - | ||||||
Total long-term liabilities | $ | 711,109 | $ | - | ||||
Commitments and contingencies | ||||||||
STOCKHOLDERS' EQUITY | ||||||||
Preferred stock, $.0001 par value, 10,000,000 shares authorized, none issued and outstanding | $ | - | $ | - | ||||
Series A preferred stock, $.001 par value 2 and 0 shares issued and outstanding as of December 31, 2014 and December 31, 2013, respectively | - | - | ||||||
Common stock, $.0001 par value, 200,000,000 shares authorized 97,259,070 and 67,064,892 shares issued and outstanding as of December 31, 2014 and December 31, 2013, respectively | 9,726 | 6,706 | ||||||
Additional paid-in capital | 4,232,342 | 1,010,947 | ||||||
Accumulated (deficit) | (1,778,139 | ) | (1,341,258 | ) | ||||
Total stockholders' equity (deficit) | $ | 2,463,929 | $ | (323,605 | ) | |||
Total Liabilities and Stockholders' Equity | $ | 5,592,807 | $ | 51,496 |
See accompanying notes to consolidated financial statements.
F-2 |
Excel Corporation and Subsidiaries
Consolidated Statements of Operations
For the Years Ended | ||||||||
December 31, | ||||||||
2014 | 2013 | |||||||
Revenues | ||||||||
Equipment lease revenue | $ | 6,842,072 | $ | 11,104 | ||||
Transaction and processing fees | 2,228,878 | 92,092 | ||||||
Other revenue | 40,942 | 329,265 | ||||||
Total revenues | 9,111,892 | 432,461 | ||||||
Costs and expenses | ||||||||
Cost of products sold | 1,422,013 | 45,070 | ||||||
Payroll | 7,412,124 | 687,037 | ||||||
Outside commissions | 1,281,595 | - | ||||||
Other selling general and administrative expenses | 2,017,067 | 640,933 | ||||||
Total Costs & Expenses | 12,132,799 | 1,373,040 | ||||||
Net loss from Operations | (3,020,907 | ) | (940,579 | ) | ||||
Other income | ||||||||
Gain on sale of residual portfolio | 2,800,000 | - | ||||||
Gain on settlement of debt | 175,101 | - | ||||||
Total other income | 2,975,101 | |||||||
Interest expense | 391,075 | - | ||||||
Net loss before income taxes | (436,881 | ) | (940,579 | ) | ||||
Income Tax expense (benefit) | ||||||||
Current | (155,540 | ) | - | |||||
Deferred | 155,540 | - | ||||||
Total income tax expense (benefit) | - | - | ||||||
Net loss | $ | (436,881 | ) | $ | (940,579 | ) | ||
Loss Per Share | ||||||||
Basic & Diluted | $ | (0.005 | ) | $ | (0.014 | ) | ||
Weighted Average Shares Outstanding | ||||||||
Basic & Diluted | 94,009,760 | 65,548,471 |
See accompanying notes to consolidated financial statements.
F-3 |
Excel Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Preferred Stock | Series A Preferred Stock | Common Stock | Additional Paid-in | Accumulated | ||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | |||||||||||||||||||||||||
Balances, December 31, 2012 | $ | $ | 31,523,745 | $ | 3,152 | $ | 725,164 | $ | (400,679 | ) | ||||||||||||||||||||||
Issuance of common stock for exchange of subsidiaries preferred stock @ .1379 per share | 2,008,701 | 201 | 276,799 | |||||||||||||||||||||||||||||
Issuance of common stock for acquisition of Excel Business Solutions at par value (.0001 per share) | 33,532,446 | 3,353 | ||||||||||||||||||||||||||||||
Stock compensation expense | 8,984 | |||||||||||||||||||||||||||||||
Net loss for the year ended December 31, 2013 | (940,579 | ) | ||||||||||||||||||||||||||||||
Balances, December 31, 2013 | $ | $ | 67,064,892 | $ | 6,706 | $ | 1,010,947 | $ | (1,341,258 | ) | ||||||||||||||||||||||
Issuance of common stock at .09 per share | 1,628,570 | 163 | 149,837 | |||||||||||||||||||||||||||||
Issuance of common stock at .30 per share | 200,000 | 20 | 59,980 | |||||||||||||||||||||||||||||
Issuance of stock for acquisition of Payprotec Oregon LLC | 2 | 22,400,000 | 2,240 | 2,537,024 | ||||||||||||||||||||||||||||
Issuance of common stock at .10 per share | 500,000 | 50 | 49,950 | |||||||||||||||||||||||||||||
Stock compensation expense | 5,465,608 | 547 | 424,604 | |||||||||||||||||||||||||||||
Net loss for the year ended December 31, 2014 | (436,881 | ) | ||||||||||||||||||||||||||||||
Balances, December 31, 2014 | $ | 2 | $ | 97,259,070 | $ | 9,726 | $ | 4,232,342 | $ | (1,778,139 | ) |
See accompanying notes to consolidated financial statements.
F-4 |
Excel Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended | ||||||||
December 31, | ||||||||
2014 | 2013 | |||||||
Operating activities: | ||||||||
Net loss | $ | (436,881 | ) | $ | (940,579 | ) | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 76,161 | - | ||||||
Write-off of license | - | 150,000 | ||||||
Bad debt expense | - | 61,515 | ||||||
Stock based compensation | 425,151 | 8,984 | ||||||
Gain on settlement of debt | (175,101 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Decrease (increase) | ||||||||
Accounts receivable | (147,276 | ) | 5,250 | |||||
Inventory | 48,295 | - | ||||||
Prepaid expenses | 55,535 | (32,979 | ) | |||||
Other long term assets | 47,033 | (7,939 | ) | |||||
Increase (decrease) | ||||||||
Accounts payable | 364,816 | 6,435 | ||||||
Accrued compensation | 468,907 | 66,113 | ||||||
Other accrued liabilities | 142,512 | 12,039 | ||||||
Other long-term liabilities | 12,365 | 150,000 | ||||||
Net cash provided by (used in) operating activities | 881,517 | (521,161 | ) | |||||
Cash flows from investing activities: | ||||||||
Disposal of property and equipment | 142,503 | 3,353 | ||||||
Acquisition of Securus | 34,563 | - | ||||||
Net cash provided by investing activities | 177,066 | 3,353 | ||||||
Cash flows from financing activities: | ||||||||
Issuance of Notes | 1,600,000 | - | ||||||
Issuance of common stock | 260,000 | |||||||
Note and debt payments | (2,600,123 | ) | (120,000 | ) | ||||
Net cash used in financing activities | (740,123 | ) | (120,000 | ) | ||||
Net increase (decrease) in cash | $ | 318,460 | $ | (637,808 | ) | |||
Cash - Beginning | 8,328 | 646,136 | ||||||
Cash - Ending | $ | 326,788 | $ | 8,328 |
Supplemental disclosure of cash flow information | ||||||||
Cash paid for interest | 391,075 | |||||||
Supplemental disclosure of noncash items | ||||||||
Net assets and liabilities acquired | ||||||||
Accounts receivable | 234,131 | |||||||
Inventory | 55,414 | |||||||
Prepaid expenses | 68,785 | |||||||
Fixed assets, net of depreciation | 449,296 | |||||||
Other long term assets | 197,122 | |||||||
Accounts payable | 295,216 | |||||||
Accrued compensation | 67,663 | |||||||
Other accrued liabilities | 121,880 | |||||||
Notes payable | 2,438,260 | |||||||
Other long term liabilities | 17,383 |
See accompanying notes to consolidated financial statements.
F-5 |
Excel Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014
1. ORGANIZATION AND OPERATIONS
Excel Corporation (the “Company”) was organized on November 13, 2010 as a Delaware corporation. The Company has two wholly owned subsidiaries, Excel Business Solutions, Inc., and Payprotec Oregon, LLC (d/b/a Securus Payments), (“Securus”).
The Company had been considered a development stage company as defined by FASB ASC 915-205-45-6. However, on April 21, 2014, the Company acquired 100% of the membership interests of Payprotec Oregon LLC (d/b/a Securus Payments) (“Securus”) (see note 8). Following this transaction, the Company ceased to be a development stage company. The Company is currently devoting substantially all of its efforts to providing services in the merchant processing industry.
The Company provides payment processing services, which include credit and debit card processing, check approval, and ancillary processing equipment and software services to merchants that accept credit cards, debit cards, checks, and other non-cash forms of payment. In addition, the Company provides leases for point of sale and similar processing equipment to merchants which are in turn sold to a third party.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company’s financial statements are prepared on the accrual method of accounting.
The accounting and reporting policies of the Company conform with generally accepted accounting principles (GAAP). In the opinion of management, the accompanying consolidated financial statements of the Company contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the consolidated balance sheets as of December 31, 2014 and December 31, 2013, the consolidated statements of operations and comprehensive income for the years ended December 31, 2014 and 2013, and the consolidated statements of cash flows for the years ended December 31, 2014 and 2013. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”).
Date of Management’s Review of Subsequent Events
Subsequent events were considered through March 30, 2015, which is the date the financial statements were available to be issued.
Business Combinations
Acquisitions are accounted for using the acquisition method of accounting. The purchase price of an acquisition is allocated to the assets acquired and liabilities assumed using the estimated fair values at the acquisition date. Transaction costs are expensed as incurred.
Goodwill
Goodwill represents the excess of acquisition cost over the fair value of net tangible and intangible assets acquired in connection with an acquisition. Goodwill is assessed for impairment annually or more frequently if circumstances indicate impairment may have occurred.
Revenue Recognition
The Company’s revenue consists of proceeds from the sale of equipment leases of point of sale terminals and systems used to process credit and debit transactions. The Company records revenue when the sales process with respect to terminals and point of sale equipment is substantially complete.
In addition, the Company receives a percentage of recurring monthly fees comprised of credit and debit card fees charged to merchants, net of association fees, otherwise known as Interchange, as well as certain service charges and convenience fees, for payment processing services, including authorization, capture, clearing, settlement and information reporting of electronic transactions. Fees are calculated on either a percentage of the dollar volume of the transaction or a fixed fee or a hybrid of the two and are recognized at the time of the transaction.
F-6 |
Excel Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014
Cash and Cash Equivalents
The Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less as cash and cash equivalents. The carrying amount of financial instruments included in cash and cash equivalents approximates fair value because of the short maturities for the instruments held.
Income Taxes
Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to tax net operating loss carryforwards. The deferred tax assets and liabilities represent the future tax return consequences of these differences, which will either be taxable or deductible when assets and liabilities are recovered or settled, as well as operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when in the judgment of management, it is more likely than not that such deferred tax assets will not become available. Because the judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond the Company’s control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term.
Reclassification
Certain prior period amounts have been reclassified to conform to the current year’s presentation.
Accounts Receivable
Accounts receivable represent contractual residual payments due from the Company's customers. These residual payments are determined based on the credit and debit card processing activity of merchants for which the Company initiated lease transactions. Based on collection experience and periodic reviews of outstanding receivables, management considers all accounts receivable to be fully collectible and accordingly, no allowance for doubtful accounts is required.
Inventory
The Company accounts for inventory at the lower of cost (using the first-in first-out method) or market. Inventory consists entirely of terminals and point of sale equipment classified as finished goods.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from five to ten years. Leasehold improvements are amortized over the lesser of the expected term of the lease or the estimated useful life of the asset. Expenditures for repairs and maintenance are expensed as incurred.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the evaluation of deferred tax assets.
F-7 |
Excel Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014
3. FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic No. 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as described below:
Level 1: Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets, quoted prices in markets that are not considered to be active, and observable inputs other than quoted prices such as interest rates.
Level 3: Level 3 inputs are unobservable inputs.
The following required disclosure of the estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The methods and assumptions used to estimate the fair values of each class of financial instruments are as follows:
Cash and Cash Equivalents, Accounts Receivable, Prepaid Expenses, Inventory, Accounts Payable, Accrued Compensation, Other Accrued Liabilities, and Income Taxes Payable.
The items are generally short-term in nature, and accordingly, the carrying amounts reported on the consolidated balance sheets are reasonable approximations of their fair values.
Fixed Assets, Goodwill, Other Long Term Assets, Notes Payable, and Other Long Term Liabilities.
The carrying amounts approximate the fair value.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers Topic 606 (“ASU 2014-09”) which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Revenue recorded under ASU 2014-09 will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for the Company’s fiscal year beginning January 1, 2017 and early adoption is not permitted. Management does not expect the adoption of this guidance to have a material impact on the Company’s financial statements.
Accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
5. INCOME TAXES
The Company accounts for income taxes in accordance with FASB Accounting Standards Codification Topic 740-10 which requires the Company to provide a net deferred tax asset/liability equal to the expected future tax benefit/expense of temporary reporting differences between book and tax accounting methods and any available operating loss or tax credit carryforwards.
F-8 |
Excel Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014
5. INCOME TAXES (Continued)
As of December 31, 2014, the Company had an estimated $1,775,297 million of available unused net operating loss carryforward. Given the company’s current effective tax rate, this results in an estimated $639,107 deferred tax benefit as of December 31, 2014. The Company has elected to report the asset using the full tax valuation allowance. The Company had a 100% valuation allowance on the deferred tax benefit at December 31, 2014. As such, the deferred tax asset and deferred tax benefit will have $0 net effect on both the balance sheet and income statement as of December 31, 2014. The tax asset will be used in future periods to offset future tax liabilities.
For the Year Ended December 31, 2014 | ||||
Income Tax Expense | ||||
Current | $ | (155,540 | ) | |
Deferred | 155,540 | |||
Total | $ | - |
The Company accounts for uncertainties in income taxes in accordance with FASB ASC Topic 740 “Accounting for Uncertainty in Income Taxes”. The Company has determined that there are no significant uncertain tax positions requiring recognition in its financial statements.
In the event the Company is assessed for interest and/or penalties by taxing authorities, such assessed amounts will be classified in the financial statements as income tax expense. Tax years 2011 through 2014 remain subject to examination by Federal and state taxing authorities.
6. STOCKHOLDERS EQUITY |
On April 21, 2014 the Company issued two shares of Series A Preferred Stock to the two previous members of Securus. As long as a former member holds at least 9,000,000 shares of the Company’s common stock, than that member has the right to exchange his share of preferred stock for a 24.5% share of the membership interests of Securus upon a change of control in Securus (as defined).
The Company issued 200,000 shares of common stock to TransBlue LLC in February 2014. The shares were issued in connection with the execution of an agreement with TransBlue LLC whereby the two companies would provide a form of transaction processing generally known as “point of banking” processing solutions. The agreement provides for the issuance of an additional 800,000 shares upon meeting certain operational goals. The Company does not presently expect these goals to be met nor any additional shares to be issued. In December 2014, The Company issued 500,000 shares of common stock to a law firm for services rendered during 2014, including services related to the acquisition of Securus.
7. STOCK OPTIONS AND COMPENSATION
On November 13, 2010 the Company’s Board of Directors (the “Board”) approved a stock plan pursuant to which the Company may grant incentive and non-statutory options to employees, non-employee members of the Board and consultants and other independent advisors who provide services to the Corporation. The maximum shares of common stock which may be issued over the term of the plan shall not exceed 4,000,000 shares. Awards under this plan are made by the Board or a committee of the Board. Options under the plan are to be issued at the market price of the stock on the day of the grant except to those issued to holders of 10% or more of the Company’s Common Stock which is required to be issued at a price not less than 110% of the fair market value on the day of the grant. Each option is exercisable at such time or times, during such period and for such numbers of shares shall be determined by the Plan Administrator. However, no option shall have a term in excess of 10 years from the date of the grant.
On May 13, 2014, The Company issued 2,732,804 shares of the Company’s Common Stock to each of two executives in connection with their employment agreements. One third of the shares vested upon grant and the balance vest ratably over a two-year period. The Company recorded stock compensation expense in the amount of $424,040 for the fiscal year ended December 31, 2014 related to these grants.
On August 28, 2014, the Company issued options for a total of 1,000,000 shares at an exercise price of $.09 per share. The options vest ratably over 36 consecutive months with 5,555 shares vesting on the last day of each calendar month commencing with September 30, 2014, and 5,575 shares vesting on the last day of the 36th month. Compensation expense recorded for the fiscal year ended December 31, 2014 was $1,111.
F-9 |
Excel Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014
8. ACQUISITION OF SUBSIDIARY
On April 21, 2014, the Company purchased 90% of the membership interests of Payprotec Oregon, LLC (d/b/a Securus Payments) (“Securus”) and its subsidiary Securus Consultants, LLC (“Securus Consultants”), through a Securities Exchange Agreement (the “Agreement”) with Mychol Robirds and Steven Lemma.
In exchange for their membership interests in Securus and Securus Consultants, the Company issued to Messrs. Robirds, and Lemma a total of 20,400,000 shares of the Company’s common stock and two shares of the Company’s Series A Preferred Stock. Securus also entered into three-year employment agreements (the “Employment Agreements”) with each of Messrs. Robirds and Lemma.
Pursuant to a Securities and Exchange Agreement ("E-Cig Agreement") dated April 21, 2014 between the Company and E-Cig Ventures, LLC ("E-Cig"), the Company acquired the remaining 10% of the membership interests of Securus in exchange for the issuance of 2,000,000 shares of the Company's common stock and the agreement to guarantee a $1.5 million loan (the “Guaranty”) from Shadow Tree Income Fund A LP (“Shadow Tree”) to E-Cig (the "E-Cig Transaction"). As a result of the two transactions, the Company owns 100% of the membership interests of Securus.
Securus focuses on servicing merchants primarily through its partnership with First Data Corporation and providing credit card processing services. Securus provides merchants with competitive pricing on processing fees and services, and leases credit card terminals to the merchants. Securus generates revenues through the sales of these leases, and through a percentage share in residual fees from the merchants’ processing volumes.
The addition of Securus provides the Company with an established operational base as well as a sales force to facilitate the marketing and servicing to merchants for a variety of products in the merchant processing industry.
The following is a summary of the estimated fair values of the assets acquired and liabilities assumed on April 22, 2014:
Cash and cash equivalents | $ | 34,563 | ||
Accounts receivable | 234,131 | |||
Inventory | 55,414 | |||
Prepaid expenses | 68,785 | |||
Fixed assets, net of depreciation | 449,296 | |||
Other long term assets | 197,122 | |||
Total assets | 1,039,311 | |||
Accounts payable | 295,216 | |||
Accrued compensation | 67,663 | |||
Other accrued liabilities | 121,880 | |||
Notes payable | 2,438,260 | |||
Other long term liabilities | 17,383 | |||
Total liabilities | 2,940,402 | |||
Fair value of net assets acquired | $ | (1,901,091 | ) | |
Fair value of stock issued | $ | 2,539,264 | ||
Goodwill recognized on acquisition | $ | 4,440,355 |
The fair value of the net assets acquired less the fair value of stock issued resulted in an amount of $4,440,355, which has been recorded as Goodwill on the Company’s consolidated balance sheet.
The consolidated statements of operations for the fiscal year ended December 31, 2014 includes the financial results of Securus since the date of acquisition, April 22, 2014, through December 31, 2014. During this period, Securus’s revenues were $9,083,343 and its net income was $1,676,469.
F-10 |
Excel Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014
8. ACQUISITION OF SUBSIDIARY (Continued)
Pro Forma Financial Information
The information that follows provides supplemental information about pro forma revenues and net income (loss) attributable to the Company as if the acquisition of Securus had been consummated as of January 1, 2013. Such information is unaudited and is based on estimates and assumptions which the Company believes are reasonable.
These results are not necessarily indicative of the consolidated statements of operations in future periods or the results that would have actually been realized had the Company and Securus been a combined entity during 2014 and 2013.
Years Ended December 31, | ||||||||
Selected Pro Forma Financial Information | 2014 | 2013 | ||||||
Revenues | $ | 13,187,380 | $ | 12,829,708 | ||||
Net income (loss) attributable to the Company | $ | (979,175 | ) | $ | 669,990 | |||
Net income (loss) attributable to the Company per common share - basic and diluted | $ | (0.01 | ) | $ | 0.01 |
9. REFINANCING
On June 30, 2014, the Company executed new financing arrangements with BlueAcre Ventures LLC (“BAV”) whereby Securus sold $100,000 of its monthly residuals for an immediate cash payment of $2,800,000, recognized as a gain on the Company’s income statement. The Company also has the ability to receive additional cash payments (“Additional Cash Payments”) totaling $400,000 over the next three years based on certain performance goals.
Simultaneous with the residual portfolio sale, BAV loaned $1.2 million to the Company under a promissory note bearing simple interest of 15% per year that may be reduced to as low as 11% per year (the “BAV Note”). Any interest rate reduction is conditioned on the achievement of certain milestones with respect to signing new merchant customer applications. The BAV Note is secured by current residuals and may be prepaid by the Company anytime during the first twelve months, subject to minimum prepayment penalties. In connection with the sale of the monthly residuals and the issuance of the BAV Note, Securus entered into a marketing agreement whereby it agreed to sign new customers for merchant processing services with an affiliate of BlueAcre. The ability of the Company to receive the Additional Cash Payments and interest rate reductions are tied to performance under the ISO agreement.
On June 30, 2014, the Company entered into a Settlement and Release Agreement with E-Cig Ventures LLC (“E-Cig”), settling all amounts due and exercising its option to repurchase $200,000 of monthly portfolio residuals previously sold under the Residual Purchase Agreement and the related Option Agreement executed by Securus and E-Cig on January 28, 2014. Under the terms of the settlement, the Company paid $2.4 million in cash and issued a note to E-Cig for $300,000, payable in 12 equal monthly payments starting on October 1, 2014, at a six percent annual interest rate (the “Note”). Upon final payment of the Note, E-Cig will surrender 1,000,000 shares of the Company’s common stock originally issued to E-Cig in connection with the Company’s purchase of E-Cig’s 10% membership interest in Securus in April 2014. The receivable for these shares are shown on the accompanying balance sheets as a $90,000 share receivable. The Company also received a release from the Guaranty to Shadow Tree (see Note 8). As a result of this settlement, the Company recognized a gain of $175,101.
10. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 2014:
December 31, 2014 | ||||
Computer software | $ | 6,588 | ||
Equipment | 162,524 | |||
Furniture & fixtures | 75,162 | |||
Construction in process | 30,000 | |||
Leasehold improvements | 110,041 | |||
Total cost | 384,315 | |||
Less accumulated depreciation and amortization | (153,683 | ) | ||
Property and equipment - net | $ | 230,632 |
F-11 |
Excel Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014
11. LEASES
Securus leases its Oregon office facilities under an operating lease expiring in June 2017. Monthly lease payments range from $16,153 to $17,808 throughout the term of the lease.
Securus leases its California office facilities under an operating lease expiring in March 2016. Monthly lease payments range from $6,059 to $6,426 throughout the term of the lease.
Securus leases its Florida office facilities under an operating lease expiring in December 2016. Monthly lease payments range from $3,180 to $3,374 throughout the term of the lease.
The Company executed a lease for its corporate offices in Irving Texas. The lease began on November 1, 2014 and has a term of 63 months with monthly payments ranging from $0 to $6,428.
Total rent expense for the year ended December 31, 2014 was $279,995, compared to $36,000 for the year ended December 31, 2013.
The future minimum lease payments required under long-term operating leases as of December 31, 2014 are as follows:
2015 | $ | 387,471 | ||
2016 | 343,751 | |||
2017 | 181,118 | |||
2018 | 75,648 | |||
2019 and after | 83,454 | |||
Total | $ | 1,071,442 |
12. NOTES PAYABLE
The following summarizes the Company’s current outstanding notes payable.
Note payable to BAV, due in monthly installments of $48,333 through May 2017, including simple interest at 15%, secured by the Company’s residual portfolio | $ | 1,032,960 | ||
Note payable to E-Cig, due in monthly installments of $26,207 beginning October 2014 through September 2015, including interest at 6%, secured by 1,000,000 shares of the Company's common stock owed to the Company by E-Cig | 230,075 | |||
Total | 1,263,035 | |||
Less current portion | (581,674 | ) | ||
Long-term portion of notes payable | $ | 681,361 |
F-12 |
Excel Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014
12. NOTES PAYABLE (Continued)
Future maturities of notes as of December 31, 2014 are as follows: |
2015 | 581,674 | |||
2016 | 454,628 | |||
2017 | 226,734 | |||
Total | $ | 1,588,546 |
13. RELATED PARTY TRANSACTIONS
On January 14, 2013, the Company entered into an Agreement of Merger and Plan of Reorganization (the “Merger Agreement”) with Excel Business Solutions, Inc., a Delaware corporation (“EBSI”), and ECB Acquisition Corp., a newly formed, wholly-owned Delaware subsidiary (“Acquisition Sub”). In connection with this transaction, the Company issued 33,523,446 shares of Common Stock of which 6,789,641 was issued to current (or former) officers and directors of the Company.
On January 14, 2014, Ruben Azrak, Chairman of the Board and then Interim Chief Executive Officer, advanced the Company $25,000. This advance bears no interest and does not provide for a specific repayment date.
In connection with its acquisition of Securus, the Company acquired an advance made by Securus to Securus Contact Systems, LLC (“SCS”) in the amount of $178,246 (see Note 8). SCS is owned by the former members of Securus who are currently key employees of the Company. The advance was repaid in October 2014. In addition, SCS leases certain office space for which Securus has provided a guaranty. Under the terms of the lease, SCS is required to make monthly lease payments ranging from $4,601 to $5,438 through February 2016. Under the guaranty, Securus would be required to make lease payments on behalf of SCS if SCS is not able to make the lease payments. Management does not expect Securus to make such payments. There is no recorded liability for potential losses under this guaranty.
F-13 |
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
At no time have there been any disagreements with our accountants regarding any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
Item 9A. Controls and Procedures.
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 15d-15(e) promulgated under the Exchange Act, as of December 31, 2014. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with United States’ generally accepted accounting principles (“US GAAP”), including those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Based on this evaluation, management has concluded that as of December 31, 2014, our internal control over financial reporting was effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant rules of the SEC that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal control over financial reporting that occurred during the year ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth the names, ages, and positions of our executive officers, directors and key employees as of the date of this report. Executive officers are elected annually by our Board of Directors. Each executive officer holds his office until he resigns, is removed by the Board, or his successor is elected and qualified. Directors are elected annually by our stockholders at the annual meeting. Each director holds his office until his successor is elected and qualified or his earlier resignation or removal.
Name | Age | Position with the Company | ||||
Thomas A. Hyde Jr. | 53 | President and Chief Executive Officer | ||||
Robert L. Winspear | 49 | Vice President, Secretary, and Chief Financial Officer | ||||
Ruben Azrak | 63 | Chairman of the Board | ||||
Charles Azrak | 27 | Director | ||||
Steven Lemma | 30 | Chief Executive Officer of Securus | ||||
Mychol Robirds | 31 | President of Securus |
The term of office of each director ends at the next annual meeting of our stockholders or when such director's successor is elected and qualified. No date for the next annual meeting of stockholders is specified in our bylaws or has been fixed by the Board of Directors. The term of office of each officer ends at the next annual meeting of our Board of Directors, expected to take place immediately after the next annual meeting of stockholders, or when such officer's successor is elected and qualifies.
Biographies
Thomas A. Hyde Jr., President and Chief Executive Officer. Mr. Hyde, was elected President and Chief Executive Officer on May 13, 2014. Prior to joining the Company, Mr. Hyde had been the Principal, Managing Partner and Director of Red Shark Investments, LLC, since August 2013. From 2002 to 2013 Mr. Hyde served in various capacities for Teletouch Communications, Inc. (formerly OTC: TLLE) and its affiliates, most recently as a Director, President and COO. Subsequent to his tenure there, Teletouch filed for chapter 7 bankruptcy. Mr. Hyde holds a B.A. degree in Finance from the University of Texas at Austin.
Robert L. Winspear, Vice President Secretary and Chief Financial Officer. Mr. Winspear was elected Vice President, Secretary and Chief Financial Officer on May 13, 2014. Prior to joining the Company, Mr. Winspear had been the President of Winspear Investments LLC, a Dallas based private investment firm specializing in lower middle market transactions, since 2002. Winspear Investments has made investments in a wide range of industries including banking, real estate, distribution, supply chain management, mega yacht marinas and hedge funds. Mr. Winspear earned a Bachelor of Business Administration and a Masters of Professional Accounting from the University of Texas at Austin. Mr. Winspear is on the board of directors of Alpha Financial Technologies/EAM Corporation, located in Grapevine Texas and VII Peaks Co-Optivist Income BDC II, Inc. a management investment company located in Orinda, California.
Ruben Azrak, Chairman of the Board of Directors. Ruben Azrak is a founder of the Company and has been a director since our incorporation in November 2010. Mr. Azrak was our Chief Executive Officer from inception until January 2013 and also served as Chief Executive Officer from February to May 2014. Beginning in 1998, along with Russell Simmons, Mr. Azrak developed Phat Farm Licensing. Phat Farm Licensing was sold in 2004. Mr. Azrak is Chairman and a Director of RVC Enterprises. RVC licenses and produces Rocawear, the ladies sportswear line from the entertainer-entrepreneur Jay-Z. In addition, RVC owns the license for Ellen Tracy sportswear and Beverly Hills Polo Club. Mr. Azrak is also President and the sole director of Lifeguard Licensing Corp. and Lucky Star licensing. Mr. Azrak’s prior experience with both Phat Farm Licensing and RVC qualifies him to serve as a member of our Board of Directors. Mr. Azrak is the father of Charles Azrak.
Charles Azrak, Director. Charles Azrak has been a director of the Company since inception. Mr. Azrak was our Vice President and Secretary from inception until January 2013. He has been involved in all phases of RVC's operations since 2006; specifically, finance, sourcing of product and production. Charles Azrak is Vice President, Secretary and a director of RVC. Charles Azrak’s prior experience in licensing with RVC qualifies him to serve as a member of our Board of Directors. Charles Azrak is the son of Ruben Azrak.
Steven Lemma, Chief Executive Officer of Securus, Steven Lemma is a co-founder and has been the Chief Executive Officer of Securus since its inception in 2009. Mr. Lemma has an associate’s degree from Clackamass Community College
Mychol Robirds, President of Securus, Mychol Robirds is a co-founder and has been President of Securus since its inception in 2009. Mr. Robirds is a decorated veteran and 2004 Purple Heart recipient having served in Operation Iraqi Freedom.
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Compliance With Section 16(a) of the Exchange Act
Our common stock is not registered under Section 12 of the Exchange Act and therefore our directors, executive officers and beneficial holders of 10% or more of our outstanding common stock are not subject to Section 16 of the Exchange Act. Section 16(a) of the Exchange Act requires executive officers and directors, and persons who beneficially own more than 10% of a registered class of equity securities, to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of common stock and other equity securities.
Code of Ethics
We have adopted a written code of business conduct and ethics, to be known as our code of ethics, which applies to our principal executive officer, principal financial officer, principal accounting officer and all persons providing similar functions.
A code of ethics is a written standard designed to deter wrongdoing and to promote:
● | honest and ethical conduct; | |
● | full, fair, accurate, timely and understandable disclosure in regulatory filings and public statements; | |
● | compliance with applicable laws, rules and regulations; | |
● | the prompt reporting violation of the code; and | |
● | accountability for adherence to the code. |
We will provide a copy of the code of ethics free of charge upon request to any person submitting a written request to our Chief Executive Officer.
Board Committees
Our Board of Directors has no separate committees. No member of our Board of Directors qualifies as an audit committee financial expert.
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Item 11. Executive Compensation.
Summary Compensation Table
The table below summarizes the total compensation paid or awarded to our Named Executive Officers by Company during the years ended December 31, 2014 and 2013. Prior to 2013, none of our officers received compensation.
Summary Compensation Table | ||||||||||||||||||||||
Name and Principal Position | Year | Salary | Bonus | Stock Awards | Other Compensation | Total Compensation | ||||||||||||||||
Thomas A. Hyde, Jr., President and Chief Executive Officer (Principal Executive Officer) (a) | 2014 | $ | 222,727 | $ | 200,000 | $ | 401,722 | - | $ | 824,449 | ||||||||||||
Robert L. Winspear, Vice President, Secretary and Chief Financial Officer (Principal Financial and Accounting Officer) (a) | 2014 | $ | 222,727 | $ | 200,000 | $ | 401,722 | - | $ | 824,449 | ||||||||||||
Steven J. Lemma, Chief Executive Officer of Securus (b) | 2014 | $ | 615,385 | $ | - | - | - | $ | 615,385 | |||||||||||||
Mychol Robirds, President of Securus (b) | 2014 | 615,385 | - | - | - | 615,385 | ||||||||||||||||
David Popkin, Former Chief Executive Officer (c) | 2014 | $ | 20,357 | - | - | - | $ | 20,357 | ||||||||||||||
2013 | $ | 182,500 | - | - | - | $ | 182,500 | |||||||||||||||
Shawn Alcoba, Former Chief Financial Officer (d) | 2014 | $ | 180,000 | - | - | $ | 45,000 | $ | 225,000 | |||||||||||||
2013 | $ | 140,000 | - | - | $ | - | $ | 140,000 |
(a) Messrs. Hyde and Winspear receive base salaries of $350,000 per year pursuant to their employment agreements. They joined the Company on May 13, 2014.
(b) Messrs. Lemma and Robirds each receive a salary of $1,000,000 per year pursuant to their employment agreements which were executed in connection with the Company's acquisition of Securus on April 21, 2014.
(c) Mr. Popkin resigned as Chief Executive Officer on February 10, 2014.
(d) Mr. Alcoba served as Chief Financial Officer until May 13, 2014, but remained employed until December 12, 2014 as Controller. Mr. Alcoba received severance compensation in the amount of $45,000.
Grants of Plan Based Awards
The following table sets forth the grants of plan based awards made during 2014 to our named executive officers.
Grants of Plan Based Awards
Name | Grant Date | All other Stock awards: Number of shares | All other Option Awards: Number of shares | Exercise price of option awards ($/Sh) |
Grant date fair value of stock and option awards | |||||||||||||
Thomas A. Hyde, Jr. | May 13, 2014 | 2,732,804 | - | - | $ | 401,722 | ||||||||||||
Robert L. Winspear | May 13, 2014 | 2,732,804 | - | - | $ | 401,722 |
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Outstanding Equity Awards at Year end
The following table sets forth the outstanding equity awards at December 31, 2014 for the named executive officers.
Stock Awards | ||||||||
Number of shares of stock that have not vested | Market value of shares that have not vested | |||||||
Thomas A. Hyde, Jr. | 1,821,869 | $ | 61,944 | |||||
Robert L. Winspear | 1,821,869 | $ | 61,944 |
Options Exercised and Stock Vested
The following table sets forth the restricted stock grants vested during 2014 by our named executive officers.
Stock Awards | ||||||||
Name | Number of shares acquired on vesting | Value realized on vesting | ||||||
Thomas A. Hyde, Jr. | 910,935 | $ | 133,907 | |||||
Robert L. Winspear | 910,935 | $ | 133,907 |
Employment Agreements and Compensation
The Company has employment agreements with Thomas A. Hyde, Jr. and Robert L. Winspear. The terms of their employment agreements are identical. Mr. Hyde, our Chief Executive Officer earns a salary of $350,000 per year. Mr. Winspear, our Chief Financial Officer, earns a salary of $350,000 per year. They are each entitled to receive an annual bonus (the “Annual Bonus”) equal to a minimum of 100% of the employee’s Base Salary, provided that the performance criteria established and mutually agreed upon by the Company’s Board of Directors (or the compensation committee thereof) and the employee has been achieved. For the 2014 fiscal year, the Annual Bonus shall be $200,000, subject to adjustment based upon the reasonable discretion of the Board of Directors of the Company or the compensation committee thereof. They each received a grant of common stock (the “Stock Grant”) equal to 2,732,804 or three percent (3%) of the Company’s outstanding common stock. One third (910,934 shares) vested immediately and an additional one-third (910,935 shares) shall vest on the first and second anniversary of the Effective Date. They are also entitled to participate in the Company’s benefit plans. Their employment agreements can be terminated, among the other things, by the Company for cause or by the employee for certain good reasons. Their employment agreements also contain customary provisions of confidentiality and non-competition or non-solicitation. In the event that the Company terminates the employee for reasons other than cause or if the employee terminates the agreement for good reason, the employee shall be entitled to severance in an amount equal to 100% of his annual salary.
Concurrently with the acquisition of Securus by the Company, Mr. Lemma entered into a three-year contract with Securus whereby Mr. Lemma would serve as Chief Executive Officer of Securus for an annual salary of $1,000,000. The employment agreement can be terminated, among the other things, by the Company for cause or by Mr. Lemma for certain good reasons. The employment agreement also contains customary provisions of confidentiality and non-competition or non-solicitation.
Concurrently with the acquisition of Securus by the Company, Mr. Robirds entered into a three-year contract with Securus whereby Mr. Robirds would serve as President of Securus for an annual salary of $1,000,000. The employment agreement can be terminated, among the other things, by the Company for cause or by Mr. Robirds for certain good reasons. The employment agreement also contains customary provisions of confidentiality and non-competition or non-solicitation.
Except as provided for in agreements that the Company may enter into with its executive officers, any bonus compensation to executive officers will be determined by our Board of Directors or a compensation committee based on factors it deems appropriate, including the achievement of specific performance targets and our financial and business performance.
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Compensation of Directors
None of our directors received compensation for the years ended December 31, 2014 or 2013.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following tables set forth certain information as of March 30, 2015 regarding the beneficial ownership of our stock by (i) each person or entity who, to our knowledge, owns more than 5% of any class of our stock; (ii) our executive officers; (iii) each director; and (iv) all of our executive officers and directors as a group. Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power.
Percentage | ||||||||||
Number of | Beneficially | |||||||||
Shares | Owned of | |||||||||
Name of Beneficial Owner | Title
of Class of Stock | Beneficially Owned | Respective Class (1) | |||||||
5% Owners : | ||||||||||
Steven Lemma (2) | Common | 10,200,000 | 10.5 | % | ||||||
Series A Preferred | 1 | 50.0 | % | |||||||
Mychol Robirds (2) | Common | 10,200,000 | 10.5 | % | ||||||
Series A Preferred | 1 | 50.0 | % | |||||||
Samuel Chanin Irrevocable Insurance Trust December 21, 2006 (4) | Common | 6,474,320 | 6.7 | % | ||||||
Series A Preferred | - | - | ||||||||
Executive Officers and Directors : | ||||||||||
Thomas A. Hyde Jr. (2) | Common | 2,732,804 | 2.8 | % | ||||||
Series A Preferred | - | - | ||||||||
Robert L. Winspear (2) | Common | 2,732,804 | 2.8 | % | ||||||
Series A Preferred | - | - | ||||||||
Ruben Azrak (2) (3) | Common | 6,294,200 | 6.5 | % | ||||||
Series A Preferred | - | - | ||||||||
Charles Azrak (2) | Common | 4,830,250 | 5.0 | % | ||||||
Series A Preferred | - | - | ||||||||
All executive officers and directors as a group (four persons) | Common | 16,590,058 | 17.1 | % | ||||||
Series A Preferred | - | - | % |
(1) | Based on 97,259,070 shares of our common stock issued and outstanding. | |
(2) | The address for all officers and directors, as well as Mr. Lemma and Mr. Robirds is c/o Excel Corporation 6363 N. State Hwy 161, Suite 310 Irving TX 75038 | |
(3) | Includes 3,104,600 shares held by Sarah Azrak, the wife of Ruben Azrak. | |
(4) | Lieba Chanin is a natural person with voting and dispositive power over 6,474,320 shares of our common stock as trustee for The Samuel Chanin Irrevocable Insurance Trust December 21, 2006. The address for the trust is 1 MetroTech Center Suite 2001 Brooklyn NY, 11201. |
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Change in Control
Pursuant to their employment agreements, Mr. Hyde and Mr. Winspear may be entitled to the following payments under a change in control as defined in their respective employment agreements:
Mr. Hyde | $ | 350,000 | ||
Mr. Winspear | $ | 350,000 |
Item 13. Certain Relationships and Related Transactions.
There has not been, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a party and in which any related person had or will have a direct or indirect material interest, in which the amount involved exceeded or will exceed the lesser of $120,000 or 1% of the average of the Company’s total assets at the end of the last two fiscal years.
Director Independence
The Company has determined that none of our directors would be considered independent.
Item 14. Principal Accountant Fees and Services.
During the fiscal years ended December 31, 2014 and December 31, 2013, the firm of Connolly, Grady & Cha, P.C. was our principal accounting firm. The following is a summary of fees paid or to be paid to them for services rendered.
Audit Fees : Aggregate fees billed by Connolly, Grady & Cha, P.C. for professional services rendered for the audit of our annual financial statements and review of our interim financial statements for the years ended December 31, 2014 and December 31, 2013 were $26,018 and $23,920, respectively.
All Other Fees : There were no additional fees billed by Connolly, Grady & Cha, P.C. other than those described above for the years ended December 31, 2014 and December 31, 2013.
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Part IV
Item 15. Exhibits, Financial Statement Schedules.
(a) List of Financial Statements
The following consolidated financial statements of the Company are included in “Financial Statements and Supplementary Data”:
Consolidated Balance Sheets | F-2 | |
Consolidated Statements of Operations | F-3 | |
Consolidated Statements of Stockholders’ Deficit | F-4 | |
Consolidated Statements of Cash Flows | F-5 | |
Notes to Consolidated Financial Statements | F-6 - F-15 |
(b) Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.
Exhibit Number | Description | |
31.1* | Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
31.2* | Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
32.1* | Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350. | |
32.2* | Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350. | |
101.INS** | XBRL Instance Document | |
101.SCH ** | XBRL Taxonomy Extension Schema Document | |
101.CAL ** | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF ** | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB ** | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE ** | XBRL Taxonomy Extension Presentation Linkbase Document |
* | Filed herewith. |
** | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EXCEL CORPORATION | ||
March 31, 2015 | By: | /s/ Thomas A. Hyde, Jr. |
Thomas
A. Hyde, Jr. Chief Executive Officer |
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Thomas A. Hyde, Jr. | Chief Executive Officer and Director | March 31, 2015 | ||
Thomas A. Hyde, Jr. | (principal executive officer) | |||
/s/ Robert L. Winspear | Chief Financial Officer and Comptroller | March 31, 2015 | ||
Robert L. Winspear | (principal financial and accounting officer) | |||
/s/ Ruben Azrak | Chairman of the Board | March 31, 2015 | ||
Ruben Azrak | ||||
/s/ Charles Azrak | Director | March 31, 2015 | ||
Charles Azrak |
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Exhibit Index
Exhibit No | Description | |
2.1 | Agreement of Merger and Plan of Reorganization, dated January 14, 2013 by and among Excel Corporation, ECB Acquisition Corp and Excel Business Solutions, Inc., is incorporated herein by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K dated January 18, 2013. | |
2.2 | Certificate of Merger, dated January 14, 2013, merging ECB Acquisition with Excel Business Solutions, is incorporated herein by reference to Exhibit 2.2 of Company’s Current Report on Form 8-K dated January 18, 2013. | |
3.1 | Certificate of Incorporation of Ruby Worldwide Ltd., dated November 11, 2010, is incorporated herein by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-1, as filed with the SEC on April 25, 2011 (File No. 333-173702). | |
3.2 | Certificate of Amendment of Certificate of Incorporation of Ruby Worldwide Ltd., dated December 1, 2012, is incorporated herein by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-1, as filed with the SEC on April 25, 2011 (File No. 333-173702). | |
3.3 | Certificate of Amendment of Certificate of Incorporation of Excel Corporation, dated January 19, 2011, is incorporated herein by reference to Exhibit 3.3 of the Company’s Registration Statement on Form S-1, as filed with the SEC on April 25, 2011 (File No. 333-173702). | |
3.4 | By-Laws of Excel Corporation is incorporated herein by reference to Exhibit 3.4 of the Company’s Registration Statement on Form S-1, as filed with the SEC on April 25, 2011 (File No. 333-173702). | |
10.1 | Employment Agreement, May 14, by and between Excel Corporation and Thomas A Hyde, Jr., is incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated May 15, 2014. | |
10.2 | Robert L. Winspear, is incorporated herein by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K May 15, 2014. | |
10.3 | Form of Lockup Agreement, dated January 14, 2013, by and between Excel Business Solutions and Excel Corporation, is incorporated herein by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K dated January 18, 2013. | |
10.4 | Equity Incentive Plan by Excel Corporation, dated for the year 2011, is incorporated herein by reference to Exhibit 10.1 of the Company’s Registration Statement on Form S-1, as filed with the SEC on April 25, 2011 (File No. 333-173702). | |
10.5 | Subscription Agreement, dated as of April 31, 2011, of and between Excel Corporation and Purchaser, is incorporated herein by reference to Exhibit 10.3 of the Company’s Registration Statement on Form S-1/A, as filed with the SEC on April 31, 2011 (File No. 333-173702). | |
10.6 | Portfolio Purchase Agreement effective June 30, 2014 between Payprotec Oregon, LLC (dba Securus Payments) and BlueAcre Ventures LLC is incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated July 7, 2014. | |
10.7 | Secured Residual Loan Agreement effective June 30, 2014 between Payprotec Oregon, LLC (dba Securus Payments) and BlueAcre Ventures LLC. is incorporated herein by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K dated July 7, 2014. | |
10.8 | Promissory Note effective June 30, 2014 between Payprotec Oregon, LLC (dba Securus Payments) and BlueAcre Ventures LLC is incorporated herein by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K dated July 7, 2014. |
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10.9 | Settlement Agreement and Release effective June 30, 2014 between Payprotec Oregon, LLC (dba Securus Payments), Excel Corporation, Steven Lemma, Mychol Robirds, Shalom Auerbach, and E-Cig Ventures, LLC is incorporated herein by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K dated July 7, 2014. | |
10.10 | Third Amended and Restated Operating Agreement of Payprotec Oregon, LLC (dba Securus Payments) effective June 30, 2014 is incorporated herein by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K dated July 7, 2014. | |
10.11 | Promissory Note effective June 30, 2014 between Excel Corporation and E-Cig Ventures, LLC is incorporated herein by reference to Exhibit 10.7 of the Company’s Current Report on Form 8-K dated July 7, 2014. | |
10.12 | Securities Exchange Agreement, dated February 17, 2014, between the Company, Payprotec Oregon, LLC (d/b/a Securus Payments), Mychol Robirds and Steven Lemma is incorporated herein by reference to Exhibit 10.01 of the Company’s Current Report on Form 8-K dated February 21, 2014. | |
10.13 | Amendment dated as of April 10, 2014 to the Securities Exchange Agreement, dated February 17, 2014, between the Company, Payprotec Oregon, LLC (d/b/a Securus Payments), Mychol Robirds and Steven Lemma is incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K/A dated April 11, 2014. | |
14.1 | Code of Business Conduct and Ethics Agreement by Excel Corporation, dated April 22, 2011, is incorporated herein by reference to Exhibit 14.1 of the Company’s Registration Statement on Form S-1, as filed with the SEC on April 25, 2011 (File No. 333-173702). | |
31.1 | Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Principal Executive Officer of Excel Corporation. | |
31.2 | Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Principal Financial Officer of Excel Corporation. | |
32.1 | Certification pursuant to 18 U.S.C, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Principal Executive Officer and Principal Financial Officer of Excel Corporation. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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