UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

☐     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 incorporation or organization)		(I.R.S. Employer Identification Number)

 

6363 North State Highway 161, Suite 310, Irving, Texas		75038
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: 972-476-1000

 

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 ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
(Do not check if a 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 ☐   No ☒

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date 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). ☒

 

As of November 16, 2015, there were 99,259,070 shares of Company’s common stock, par value $0.0001 per share, issued and outstanding.

 

 

 

EXCEL CORPORATION

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014	3
Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014 (unaudited)	4
Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 2015 and 2014 (unaudited)	5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (unaudited)	6
Notes to Unaudited Consolidated Financial Statements	7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	14
Overview	14
Results of Operations	15
Liquidity and Capital Resources	16
Significant Accounting Policies	17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	19
ITEM 4. CONTROLS AND PROCEDURES	19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	19
ITEM 1A. RISK FACTORS	19
ITEM 2. OTHER INFORMATION	19
ITEM 3. EXHIBITS	20

 

 

Excel Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

 

		September 30,				December 31,
		2015				2014
		(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	222,165			$	326,788
Accounts receivable			412,879				383,657
Prepaid expenses			9,964				46,229
Shares receivable			90,000				90,000
Inventory			2,415				7,119
Total current assets			737,423				853,793
Other Assets
Fixed assets, net of depreciation			318,963				230,632
Goodwill			4,440,355				4,440,355
Other long-term assets			61,153				68,027
Total other assets			4,820,471				4,739,014
Total assets		$	5,557,894			$	5,592,807
LIABILITIES & STOKHOLDERS' EQUITY
Current Liabilities
Accounts payable		$	1,301,946			$	806,981
Accrued compensation			1,000,525				602,683
Other accrued liabilities			835,694				426,431
Notes payable-current portion			447,277				581,674
Total current liabilities			3,585,442				2,417,769
Long-term liabilities
Notes payable - long-term portion			351,565				681,361
Other long-term liabilities			31,966				29,748
Total long-term liabilities			383,531				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 shares issued and outstanding as of September 30, 2015 and December 31, 2014.			-				-
Common stock, $.0001 par value, 200,000,000 shares authorized 99,259,070 and 97,259,070 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively.			9,926				9,726
Additional paid-in capital			4,450,504				4,232,342
Accumulated deficit			(2,871,509	)			(1,778,139	)
Total stockholders' equity			1,588,921				2,463,929
Total Liabilities and Stockholders' Equity		$	5,557,894			$	5,592,807

 

See accompanying notes to unaudited consolidated financial statements.

 

 

Excel Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
Revenues
Equipment lease revenue		$	2,889,381			$	2,768,930			$	9,093,792			$	4,644,546
Transaction and processing fees			1,060,224				725,366				3,274,158				1,129,922
Other revenue			21,623				-				21,623				-
Total revenues			3,971,228				3,494,296				12,389,573				5,774,468
Costs and expenses
Cost of products sold			877,992				689,171				2,596,666				1,114,312
Payroll			2,631,657				2,557,227				7,821,752				4,786,689
Outside commissions			322,957				589,379				1,202,980				892,396
Other selling, general, and administrative expenses			497,803				673,946				1,648,172				1,420,477
Total costs and expenses			4,330,409				4,509,723				13,269,570				8,213,874
Net loss from operations			(359,181	)			(1,015,427	)			(879,997	)			(2,439,406	)
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			66,773				111,354				213,373				314,739
Net income (loss) before income taxes			(425,954	)			(1,126,781	)			(1,093,370	)			220,956
Income tax expense (benefit)
Current			(157,603	)			(381,258	)			(404,547	)			(81,297	)
Deferred			157,603				394,537				404,547				81,297
Total income tax expense			-				13,279				-				-
Net income (loss)		$	(425,954	)		$	(1,113,502	)		$	(1,093,370	)		$	220,956
Earnings (Loss) Per Share
Basic & Diluted		$	(0.004	)		$	(0.012	)		$	(0.011	)		$	0.003
Weighted Average Shares Outstanding
Basic & Diluted			99,259,070				96,759,070				98,152,843				84,558,609

 

See accompanying notes to unaudited consolidated financial statements.

 

 

Excel Corporation and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(unaudited)

 

		Preferred Stock								Series A Preferred Stock								Common Stock								Additional Paid-in				Accumulated
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit
Balances, January 1, 2014						$								$					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 Securus											2								22,400,000				2240				2,537,024
Stock Compensation Expense																			5,465,608				547				356,818
Net income for the period January 1, 2014 - September 30, 2014																															220,956
Balances, September 30, 2014						$					2			$				$	96,759,070			$	9,676			$	4,114,606			$	(1,120,302	)
Balances, January 1, 2015						$					2			$				$	97,259,070			$	9,726			$	4,232,342			$	(1,778,139	)
Stock Compensation Expense																			2,000,000				200				218,162
Net loss for the period January 1, 2015 - September 30, 2015																															(1,093,370	)
Balances, September 30, 2015						$					2			$					99,259,070			$	9,926			$	4,450,504			$	(2,871,509	)

 

See accompanying notes to unaudited consolidated financial statements.

 

 

Excel Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

		For the Nine Months Ended
		September 30,
		2015				2014
Operating activities:
Net income (loss)		$	(1,093,370	)		$	220,956
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation			75,325				51,951
Stock based compensation			218,362				357,365
Gain on settlement of debt			-				(175,101	)
Changes in operating assets and liabilities:
Decrease (increase)
Accounts receivable			(29,222	)			(121,265	)
Inventory			4,704				45,510
Prepaid expenses			36,265				(37,700	)
Other long-term assets			6,874				(132,847	)
Increase (decrease)
Accounts payable			494,965				105,322
Accrued compensation			397,842				338,208
Other accrued liabilities			409,263				122,878
Other long-term liabilities			2,218				(3,062	)
Net cash provided by operating activities			523,226				772,215
Cash flows from investing activities:
Purchase of fixed assets			(163,656	)			(31,367	)
Disposal of fixed assets			-				45,816
Acquisition of Securus			-				34,563
Net cash provided by (used in) investing activities			(163,656	)			49,012
Cash flows from financing activities:
Issuance of notes			100,000				1,600,000
Issuance of common stock			-				210,000
Note and debt payments			(564,193	)			(2,274,612	)
Net cash used in financing activities			(464,193	)			(464,612	)
Net increase (decrease) in cash		$	(104,623	)		$	356,615
Cash - Beginning		$	326,788			$	8,328
Cash - Ending		$	222,165			$	364,943
Supplemental disclosure of cash flow information
Cash paid for interest			66,773				314,739

 

See accompanying notes to unaudited consolidated financial statements.

 

 

Excel Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

Unaudited

 

1.	ORGANIZATION AND OPERATIONS

 

Excel Corporation (the “Company”) was organized on November 16, 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) (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 payment 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. In June 2015 our subsidiary, Excel Business Solutions, began selling merchant cash advances under the trade name Mom and Pop Merchant Solutions “Mom and Pop”.  Mom and Pop operates as an ISO and does not directly fund any advances. The impact of Mom and Pop on the Company’s results of operations and financial position for the quarter ended September 30, 2015 was not material.

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited 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”).  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, these unaudited consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results of the interim periods.  These unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

Reclassification

 

Certain prior period amounts have been reclassified to conform to the current year’s presentation.

 

 

Excel Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

Unaudited

 

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 nine 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.

 

Notes Payable

 

The carrying values of notes payable approximate fair values, since these instruments bear market rates of interest.

 

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. At September 30, 2015, the Company had available unused operating loss carryforwards of $2,101,627 which generated a deferred tax benefit of $777,602. The Company had a 100% valuation allowance on the deferred tax assets at September 30, 2015.

 

 

Excel Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

Unaudited

 

5.	INCOME TAXES (Continued)

 

The Company’s provision for income taxes for the nine months ended September 30, 2015 consists of the following:

 

Income Tax Expense (Benefit)		Nine months Ended September 30, 2015
Current		$	(404,547	)
Deferred			404,547
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 Payprotec. As long as a former member holds at least 9,000,000 shares of the Company’s common stock, the member has the right to exchange his share of preferred stock for a 24.5% share of the membership interests of Payprotec upon a change of control in Payprotec (as defined). 

 

7.	STOCK OPTIONS AND COMPENSATION

 

On November 16, 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 of Directors 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 August 28, 2014, the Company issued options to purchase a total of 1,000,000 shares of the Company’s Common Stock at an exercise price of $.09 per share. The options are exercisable for a ten-year period subject to certain restrictions. The shares vest ratably over 36 months. The following table summarizes the Company’s stock options.

 

Options outstanding			1,000,000
Vested			361,111
Unvested			638,889

 

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.  

 

On June 1, 2015, the Company issued 2,000,000 shares of stock to an executive.  500,000 of the shares vested upon grant and an additional 500,000 will vest on June 1, 2016, 2017, and 2018.

The Company recorded stock compensation expense in the amount of $218,362 for the nine months ended September 30, 2015 related to the stock grants and issuance of stock options.

 

 

Excel Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

Unaudited

 

8.	ACQUISITION OF SUBSIDIARY

 

On April 21, 2014, the Company purchased 90% of the membership interests of Securus and its subsidiary Securus Consultants, LLC through a Securities Exchange Agreement (the “Agreement”) with Mychol Robirds and Steven Lemma.

 

In exchange for their membership interests in Securus and Securus Consultants LLC, 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.  Payprotec 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 guaranty 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.

 

 

Excel Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

Unaudited

  

9.	FIXED ASSETS

 

Property and equipment consists of the following as of September 30, 2015:

 

Computer software		$	183,266
Equipment			162,524
Furniture & fixtures			83,299
Leasehold improvements			118,882
Total cost			547,971
Less accumulated depreciation and amortization			(229,008	)
Fixed assets – net		$	318,963

 

 

Excel Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

Unaudited

 

10.

LEASES

 

Securus leases its Oregon office facilities under an operating lease expiring in June 2019. Monthly lease payments range from $18,824 to $24,795 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 nine months ended September 30, 2015 was $309,166, compared to $176,359 for the nine months ended September 30, 2014.

 

The future minimum lease payments required under long-term operating leases as of September 30, 2015 are as follows:

 

2015		$	145,948
2016			412,403
2017			361,010
2018			369,558
2019 and after			232,224
Total		$	1,521,143

 

11.	NOTES PAYABLE

 

The following summarizes the Company’s current outstanding notes payable:

 

Note payable to Blue Acre Ventures, due in monthly installments of $48,333 through May 2017, including simple interest at 15%, secured by the Company’s primary residual portfolio		$	777,903
Note payable to Payment Processing Technologies LLC, due in monthly installments of $10,653 beginning January 2015 through October 2015, including interest at 14%, secured by the Company’s residual portfolio with Payment Processing Technologies LLC			20,939
Total			798,842
Less current portion			(447,277	)
Long-term portion of notes payable		$	351,565

 

 

Excel Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

 

11.	NOTES PAYABLE (Continued)

 

Future maturities of notes as of September 30, 2015 are as follows:

 

2015		$	117,481
2016			454,628
2017			226,733
Total		$	798,842

  

12.	RELATED PARTY TRANSACTIONS

 

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.

 

 

13.	SUBSEQUENT EVENTS

 

Portfolio Purchase Agreement

 

On October 15, 2015, the Company entered into a new Portfolio Purchase Agreement with SME Funding, LLC (“SME”) whereby Payprotec sold $22,259 of its monthly residuals for an immediate cash payment of $445,180. This will be recognized as a gain on the Company’s Statements of Operations in the fourth quarter 2015. Payprotec had a note payable to Payment Processing Technologies, LLC for a portion of the residual portfolio sold. The note balance of $20,939 at execution date was paid in full using the proceeds from the sale.

 

 

  

ITEM 2. 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 three and nine months ended September 30, 2015 and 2014 should be read in conjunction with our interim financial statements and the notes to those financial statements that are included elsewhere in this quarterly report on Form 10-Q.  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 included in our Annual Report on Form 10-K for the year ended December 31, 2014.  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.

 

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 mobile payment and digital wallet service by Apple Inc. that lets users make payments using the iPhone 6 and iPhone 6 Plus. 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. In June 2015, our subsidiary, Excel Business Solutions, began selling merchant cash advances under the trade name Mom and Pop Merchant Solutions “Mom and Pop”.  Mom and Pop operates as an ISO and does not directly fund any advances. The impact of Mom and Pop on the Company’s results of operations and financial position for the quarter ended September 30, 2015 was not material.

 

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.

 

 

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 September 30, 2015.

 

Results of Operations

 

We acquired Securus in April 2014. As a result of this acquisition, operating results for the nine months ended September 30, 2015 and 2014 are not directly comparable. The nine months ended September 30, 2014 included 162 days of operations for Securus as opposed to 273 days for the 2015 period.

 

Revenues

 

Net revenues for the three month and nine month periods ended September 30, 2015 were $3,971,228 and $12,389,573 as compared to net revenues of $3,494,296 and $5,774,468 for the three and nine month periods ended September 30, 2014. The increase in net revenues of 114.6% for the nine months ended September 30, 2015 as compared to September 2014 was due not only to a full three quarters of operations in 2015 but also to significantly higher equipment lease volume in the 2015 period as well as higher transaction and processing fees earned during the 2015 period.

 

Costs and Expenses

 

Our operating costs and expenses were $4,330,409 and $13,269,570 for the three and nine months ended September 30, 2015 as compared to $4,509,723 and $8,213,874 for the three and nine months ended September 30, 2014. Cost of products sold for the three and nine months ended September 30, 2015 were 30.4% and 28.6% of equipment lease revenues respectively as compared to 24.9% and 24.0% of equipment lease revenues for the same periods in 2014. The increase in cost of products sold as a percentage of equipment lease revenues was due to increased sales of more sophisticated point of sale units. Outside commissions decreased from $589,379 to $322,957 for the three month period ended September 30, 2015 as compared to the same period in 2014 and significantly declined as a percentage of net revenue from 16.9% to 8.1%. For the nine months ended September 30, 2015 outside commission expenses were $1,202,980 or 9.7% of net revenues as compared to $892,396 or 15.5% of net revenues for the same period in 2014. The decrease in outside commissions as a percentage of revenue is due to lower percentage of the Company’s sales being generated by independent sales agents. The Company uses independent sales agents for a substantial portion of its business. Salaries and wages were $2,631,657 and $7,821,752 for the three and nine months ended September 30, 2015 as compared to $2,557,227 and $4,786,689 for the three and nine months ended September 30, 2014. Other selling, general, and administrative expenses were $497,803 and $1,648,172 for the three and nine months ended September 30, 2015 as compared to $673,946 and $1,420,477 for the three months and nine months ended September 30, 2014. For the nine months ended September 30, 2015, other selling, general, and administrative expenses included a one-time charge of $258,367 for a litigation settlement with a former executive of the Company. Corporate overhead accounted for $1,510,899 and $1,928,832 of total costs and expenses for the nine months ended September 30, 2015 and 2014, respectively.

 

 

Other Income

 

On September 30, 2014, the Company and Payprotec entered into a refinancing pursuant to a Settlement and Release (“Settlement Agreement”) with E-Cig Ventures LLC (“E-Cig”) whereby the Company exercised an option to repurchase $200,000 of monthly residuals sold to E-Cig Ventures LLC (“E-Cig”) on January 28, 2014. The Company paid $2,400,000 cash and issued a note in favor of E-Cig in the amount of $300,000 in return for settling all amounts due under the Residual Purchase Agreement executed by Securus and E-Cig. In addition, upon final payment of the $300,000 note to E-Cig, E-Cig shall surrender 1,000,000 shares of the Company’s Common Stock previously issued to E-Cig in connection with the Company’s purchase of E-Cig’s 10% membership interest in Securus on April 21, 2014. The note to E-Cig bears interest at 6% per annum and is due in 12 equal monthly payments starting on October 1, 2014. The Company recorded a one-time gain of $175,101 in connection with this transaction. Simultaneously with the Settlement Agreement referred to above, the Company and Securus executed new financing arrangements with Blue Acre Ventures (“BAV”) including a Portfolio Purchase Agreement whereby Securus sold monthly residuals in the amount of $100,000 for a cash payment of $2,800,000 and the ability to receive additional payments totaling $400,000 over the next three years. The Company recorded a one-time gain in the amount of $2,800,000 in connection with this transaction.

 

Interest expense

 

Interest expense was $66,773 and $213,373 for the three months and nine months ended September 30, 2015 as compared to $111,354 and $314,739 for the three months and nine months ended September 30, 2014. The higher interest expense in the 2014 periods was primarily due to the transaction with E-Cig executed by Payprotec in January 2014, which was refinanced on September 30, 2014 as described above.

 

Net loss from operations

 

Net loss from operations decreased from $1,015,427 for the three months ended September 30, 2014 to $359,181 for the three month ended September 30, 2015. The significant decrease in the operating loss of $656,246 was due primarily to improved sales volume and operating margins at Securus. For the nine months ended September 30, 2015, net loss from operations decreased from $2,439,406 to $879,997. Excluding corporate overhead, Securus had operating income of $90,831 and $481,772 for the three months and nine months ended September 30, 2015.

 

Our net losses were $425,954 and $1,093,370 for the three and nine months ended September 30, 2015, respectively. Our net loss was $1,113,502 and net income was $220,956 for the three and nine months ended September 30, 2014. Net income for the nine month period in 2014 was the result of a $2,800,000 gain on the sale of the monthly residuals and a $175,101 gain on the settlement of debt described above which more than offset the operating losses incurred during that period.

 

It is possible we may continue to incur net losses in the future.

 

Liquidity and Capital Resources

 

The following summarizes our cash flows:

 

		Nine months ended September 30,
		2015				2014
Net cash provided operating activities		$	523,226			$	772,215
Net cash provided by (used in) investing activities			(163,656	)			49,012
Net cash used in financing activities			(464,193	)			(464,612	)
Net increase (decrease) in cash		$	(104,623	)		$	356,615

 

Net cash provided by operating activities for the nine months ended September 30, 2015 was $523,226 as compared with $772,215 in 2014.

 

 

Net cash used in investing activities was $163,656 for the nine months ended September 30, 2015 as compared to $49,012 provided by investing activities for the nine months ended September 30, 2014. Capital expenditures were primarily related to improvements in the Company’s information systems. 

 

Net cash used in financing activities was $464,193 for the nine months ended September 30, 2015 as compared to $464,612 for the nine months ended September 30, 2014. 

 

As of September 30, 2015, we had cash and cash equivalents of $222,165, total current assets of $737,423 and total current liabilities of $3,585,442.

 

The Company may seek to raise capital through the sale of debt or equity securities or a possible sale of a portion of its residual portfolio in order to improve its liquidity and financial position. There can be no assurances that such financing can be obtained on terms that are acceptable to the Company.

 

Off-Balance Sheet Financing Arrangements

 

We do not have any off-balance sheet financing arrangements.

 

Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements. The accompanying unaudited consolidated financial statements reflect the results of operations, financial position and cash flows of the Company, and include the accounts of the Company and subsidiaries, after elimination of all intercompany transactions in the consolidation.

 

 

Revenue Recognition

 

The Company’s revenue is derived 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 residual 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.

 

Earnings Per Share

 

Basic earnings per share is computed by dividing net income (loss) available for common stock by the weighted average number of common shares outstanding during the period.  Fully diluted earnings per share is the same as basic earnings per share as the Company had no material common stock equivalents outstanding during the periods presented.

 

 

Recent Accounting Pronouncements

 

Management does not currently believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed 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 and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2015 and found them to be effective.

 

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 fiscal quarter ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

  

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. Risk Factors 

 

Factors that could cause our actual results to differ materially from those in this report are any of the risks described in our Annual Report on Form 10-K for the year ended December 31 2014 filed with the SEC on March 31, 2015. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem not material may also impair our business or results of operations.

 

As of the date of this Report, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

ITEM 2.  OTHER INFORMATION

 

None

 

 

ITEM 3.  EXHIBITS

 

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.

 

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.

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	EXCEL CORPORATION
Dated: November 16, 2015	By:	/s/ Thomas A. Hyde, Jr.
		Thomas A. Hyde, Jr.
		Chief Executive Officer
		(Principal executive officer)

  

Dated: November 16, 2015	By:	/s/ Robert L. Winspear
		Robert L. Winspear
		Chief Financial Officer
		(Principal financial and accounting officer)

 

 

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