Notes
to Consolidated Financial Statements
March
31, 2016
Unaudited
|
1.
|
|
ORGANIZATION
AND OPERATIONS
|
Excel
Corporation (the “Company”) was organized on November 13, 2010 as a Delaware corporation. The Company has three wholly
owned subsidiaries, Excel Business Solutions, Inc., Payprotec Oregon, LLC (d/b/a Securus Payments), (“Securus”), and
eVance Processing Inc. (“eVance”).
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.
Prior
to the acquisition of Securus in April of 2014, we were considered a developmental stage company as defined by FASB ASC 915-205-45-6.
With the acquisition of Securus, we ceased to be a development stage company.
On
November 30, 2015, eVance entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Calpian, Inc. (“Calpian”),
Calpian Residual Acquisition, LLC (“CRA”) and Calpian Commerce, Inc., a wholly owned subsidiary of Calpian (“CCI,”
and collectively with Calpian and CRA, the “Sellers”). Pursuant to the Purchase Agreement, eVance acquired substantially
all of the U.S. assets and operations of the Sellers. In consideration for the acquired assets, eVance assumed certain of the
Sellers’ liabilities, including an aggregate of $8,279,916 of notes payable and certain of the Sellers’ outstanding
contractual obligations.
On
April 30, 2016, Securus entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with Chyp LLC (“Chyp”).
In connection with the Purchase Agreement, Chyp executed a three year preferred marketing agreement with eVance.
Chyp
acquired substantially all of the operations of Securus including its sales and marketing operations located in Portland Oregon
and West Palm Beach Florida. Securus retained its approximately 5,000 merchants and related merchant processing residual portfolio.
|
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, 2015.
Reclassification
Certain prior period amounts have been reclassified
to conform to the current period’s presentation.
Excel
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
March
31, 2016
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 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, Other Receivables, 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.
Note
Receivable, Other Long Term Assets, Notes Payable, and Other Long Term Liabilities.
The
carrying amounts approximate the fair value as the notes bear interest rates that are consistent with current market rates.
|
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, 2018 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.
In
November 2015, the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
. ASU 2015-17 eliminates
the requirement to bifurcate deferred taxes between current and noncurrent on the balance sheet and requires that deferred tax
assets and liabilities be classified as noncurrent on the balance sheet. ASU 2015-17 may be applied retrospectively or prospectively
and early adoption is permitted. The Company does not believe that this standard will have a material impact on its financial
position.
In
February 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-02, Leases
(Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure
of leases for both parties to a contract. The new standard requires lessees to apply a dual approach, classifying leases as either
finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee.
This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line
basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases
with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted
for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an
approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.
ASU 2016-02 supersedes the previous leases standard, Leases (Topic 840). The standard is effective on January 1, 2019, with early
adoption permitted. The Company is currently evaluating the potential effect of this standard on its consolidated 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.
Excel
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
March
31, 2016
Unaudited
|
5.
|
|
DISCONTINUED
OPERATIONS
|
On
April 30, 2016, Securus entered into the Purchase Agreement with Chyp. In connection with the Purchase Agreement, Chyp executed
a three year preferred marketing agreement with eVance.
Chyp
acquired substantially all of the operations of Securus including its sales and marketing operations located in Portland Oregon
and West Palm Beach Florida. Securus retained its approximately 5,000 merchants and related merchant processing residual portfolio.
Securus also retained substantially all of its liabilities, including but not limited to, its note payable with Blue Acre Ventures,
trade payables as well as liabilities to merchants.
Pursuant
to the Purchase Agreement, Securus will provide financial assistance to Chyp in the form of a forgivable loan to support the transition
of Securus’ operations to Chyp. Securus will advance Chyp $75,000 per month for six months and $50,000 in the seventh and
eighth months for a total of $550,000. Accordingly, Chyp has executed a $550,000 promissory note (the “Chyp Note”)
in favor of the Securus. The Chyp Note bears an interest rate of 12% per annum with both the principal and interest due on May
1, 2017. If Chyp is in material compliance with this Purchase Agreement and related agreements for a period of 12 months, Securus
will forgive the Chyp Note. Securus will also reimburse Chyp for commissions payable to Chyp employees and agents on Securus’
residual portfolio as if those agents and employees were still employed by Securus. Chyp is owned by Steven Lemma and Mychol Robirds
who are former executives of Securus.
We
accounted for the sale of the Securus operations to Chyp in accordance with ASC 205-20-45-1 and have classified the assets and
operations sold to Chyp as discontinued operations. The Company recorded loss on disposal of $840,641 related to the transaction.
The charge includes a $290,641 write-off of the net assets acquired by Chyp and $550,000 for the financial assistance to be provided
to Chyp during 2016.
A
summary of results of discontinued operations is as follows:
|
|
|
Quarter Ended
March 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Revenues
|
|
$
|
1,683,135
|
|
|
$
|
800,281
|
|
|
Operating expenses
|
|
|
(3,030,164
|
)
|
|
|
(1,780,286
|
)
|
|
Pre-tax loss from discontinued operations
|
|
|
(1,347,029
|
)
|
|
|
(980,005
|
)
|
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(1,347,029
|
)
|
|
$
|
(980,005
|
)
|
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 March 31, 2016 and March 31, 2015, the Company had available
unused operating loss carryforwards of $2,685,954 and $2,232,683, respectively, which generated a deferred tax benefits of $993,803
and $826,093, respectively. The Company had a 100% valuation allowance on the deferred tax assets at March 31, 2016.
Excel
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
March
31, 2016
Unaudited
|
6.
|
|
INCOME
TAXES (Continued)
|
The
Company’s provision for income taxes for the three months ended March 31, 2016 and 2015 consists of the following:
|
|
|
Three months
Ended
March 31, 2016
|
|
|
Three months Ended
March 31, 2015
|
|
|
Income Tax Expense
|
|
CONTINUING OPERATIONS
|
|
|
DISCONTINUED OPERATIONS
|
|
|
TOTAL
|
|
|
CONTINUING OPERATIONS
|
|
|
DISCONTINUED OPERATIONS
|
|
|
TOTAL
|
|
|
Current
|
|
$
|
80,022
|
|
|
$
|
(809,438
|
)
|
|
$
|
(729,416
|
)
|
|
$
|
168,744
|
|
|
$
|
(362,602
|
)
|
|
$
|
(193,858
|
)
|
|
Deferred
|
|
|
(80,022
|
)
|
|
|
809,438
|
|
|
|
729,416
|
|
|
|
(168,744
|
)
|
|
|
362,602
|
|
|
|
193,858
|
|
|
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 2013 through 2015 remain subject to examination by Federal and state
taxing authorities.
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, then the 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). In
connection with the transaction with Chyp on April 30, 2016, the Company acquired the two shares of Series A Preferred Stock.
On
November 30, 2015, in connection with its acquisition of the U.S. assets and operations of Calpian Inc., the Company issued warrants
to purchase an aggregate of 5,452,458 shares of the Company’s common stock at an exercise price of $0.05 per share, subject
to adjustments. The warrants expire on November 30, 2025.
We
estimate the fair value of warrants and stock options when issued or vested using the Black-Scholes options pricing model and
subsequent changes in fair value are not recognized. Option pricing models require the input of highly subjective assumptions.
We determined, using the Black-Scholes options pricing model, that these warrants have no current value, based on a maturity date
of 5 years, a risk-free interest rate of 2.230%, and a calculated volatility rate of 8.530%, using historical stock prices of
the Company.
On June 1, 2015, the Company issued
2,000,000 shares of its Common Stock to an executive in connection with the executive’s employment and the use of certain
trade names and brands owned by the executive. 500,000 shares vested upon grant and an additional 500,000 shares were scheduled
to vest on June 1, 2016, June 1, 2017, and June 1, 2018. The Company terminated the executive’s employment in January 2016,
and the shares subject to vesting (1,500,000) were forfeited. The executive is currently disputing the forfeiture of these shares.
On
March 18, 2016, the Company issued 2,300,000 Shares of Series B Convertible Preferred Stock (“Series B Shares”) to
each of Thomas A. Hyde Jr. and Robert L. Winspear (each a “Holder” and collectively the “Holders”) at
a price of $0.05 per share pursuant to subscription agreements between the Company and the Holders. Mr. Hyde is the President,
Chief Executive Officer and a Director of the Company. Mr. Winspear is the Chief Financial Officer of the Company.
The
Series B Shares are convertible into shares of the Company’s common stock par value $0.0001 (“Common Stock”)
on a ratio of 1-to-1, subject to adjustment for stock splits and stock dividends. The Series B Shares rank senior to the Common
Stock and other preferred shares and carry a liquidation preference of $.05 per share. Holders of the Series B Shares are entitled
to receive dividends declared on the Company’s Common Stock on an as converted basis. Each Series B Share entitles the Holder
thereof to 20 votes per share on all matters subject to voting by holders of the Company’s Common Stock. The issuance of
a total of 4,600,000 shares of Series B Shares, entitles the Holders thereof to vote a combined 92,000,000 shares. Under the terms
of the Series B Shares, the Company has the right to require a Holder to convert the Series B Shares into Common Stock at any
time after the Holder resigns, is terminated or otherwise ceases to be an officer of the Company. In addition, the Company has
the right at any time after July 18, 2016 to repurchase and retire all but not less than all of the Series B Preferred Stock for
$0.05 per share provided that it gives notice to the Holder of the Company’s intent to redeem the shares and the Holder
does not elect to convert the Series B Shares into Common Stock in lieu of the redemption.
In
connection with the issuance of the Series B Shares, the Company and the Holders executed a Stockholders Agreement (the “Agreement”)
whereby the Holders agreed to not to initiate directly or indirectly any stockholder vote or action, by written consent or otherwise,
to increase the size or structure of the Company’s board of directors or remove any existing director, nor initiate directly
or indirectly any stockholder vote or action by written consent or otherwise, to affect Holders’ executive compensation,
bonus criteria and amounts, or other similar action. The Holders also agreed to convert the Series B Shares immediately upon termination,
whether voluntary or involuntary, or upon their resignation for any reason.
Excel
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
March
31, 2016
Unaudited
|
8
.
|
|
ACQUISITION
OF SUBSIDIARY
|
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 Calpian’s US assets had been consummated as of January 1, 2015. 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 Calpian been a combined entity during 2015.
|
Selected Pro Forma Financial Information
|
|
Excel
|
|
|
Calpian US Operations
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,153,709
|
|
|
$
|
4,487,397
|
|
|
$
|
5,641,106
|
|
|
Net income attributable to the Company
|
|
$
|
(523,940
|
)
|
|
$
|
901,492
|
|
|
$
|
377,552
|
|
|
Net loss attributable to the Company per common share - basic and diluted
|
|
$
|
(0.005
|
)
|
|
$
|
0.009
|
|
|
$
|
0.004
|
|
|
9
.
|
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment consists of the following as of March 31, 2016 and December 31, 2015:
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
Computer software
|
|
$
|
44,319
|
|
|
$
|
35,595
|
|
|
Equipment
|
|
|
124,730
|
|
|
|
123,074
|
|
|
Furniture & fixtures
|
|
|
33,336
|
|
|
|
33,336
|
|
|
Leasehold improvements
|
|
|
3,471
|
|
|
|
3,471
|
|
|
Total cost
|
|
|
205,856
|
|
|
|
195,476
|
|
|
Less accumulated depreciation and amortization
|
|
|
(36,649
|
)
|
|
|
(10,516
|
)
|
|
Property and equipment – net
|
|
$
|
169,207
|
|
|
$
|
184,960
|
|
Excel
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
March
31, 2016
Unaudited
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.
eVance
leases its Georgia office facilities under an operating lease expiring in June 2016. Monthly lease payments range from $2,248
to $7,295 throughout the term of the lease.
Total
rent expense for the three months ended March 31, 2016 was $132,623, compared to $100,524 for the three months ended March 31,
2015.
The
future minimum lease payments required under long-term operating leases as of March 31, 2016 are as follows:
|
2016
|
|
$
|
78,062
|
|
|
2017
|
|
|
74,270
|
|
|
2018
|
|
|
75,648
|
|
|
2019 and after
|
|
|
83,454
|
|
|
Total
|
|
$
|
311,434
|
|
On December 23, 2015, a former employee
filed a complaint against Securus alleging, among other things, interference with the Oregon Family Leave Act and unlawful employment
practices. The former employee is seeking $500,000 in economic and non-economic damages. The Company intends to defend the matter
vigorously.
The
following summarizes the Company’s current outstanding notes payable:
|
|
|
March
31,
2016
|
|
|
December 31,
2015
|
|
|
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
|
|
$
|
578,411
|
|
|
$
|
681,361
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to SME Funding LLC, due
December 1,2016, bearing simple interest at 12%, secured by the Company’s residual portfolio
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable due December 1, 2016,
bearing interest at 12%, secured by the assets of eVance
|
|
|
8,029,916
|
|
|
|
8,029,916
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,108,327
|
|
|
|
9,211,277
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
(9,014,711
|
)
|
|
|
(8,984,544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of notes payable
|
|
$
|
93,616
|
|
|
$
|
226,733
|
|
Excel
Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
March
31, 2016
Unaudited
|
12.
|
|
NOTES
PAYABLE (Continued)
|
Future
maturities of notes as of March 31, 2016 are as follows:
|
2016
|
|
|
9,014,711
|
|
|
2017
|
|
|
93,616
|
|
|
Total
|
|
$
|
9,108,327
|
|
|
13.
|
|
RELATED
PARTY TRANSACTIONS
|
On February 15, 2016, SME Funding LLC purchased
$35,000 of the Company’s residuals for $700,000 cash pursuant to a residual purchase agreement (“RPA”). Under
the terms of the RPA, the Company is obliged to maintain the residual at $35,000 for a period of 20 months. In addition, the Company
has the right to repurchase the residuals for $770,000 until October 17, 2017. As a result of the repurchase option, the Company
accounted for the transaction as a liability and not as a sale. The $700,000 is included in other long term liabilities on the
accompanying balance sheet.
On
April 12, 2016, eVance entered into an agreement with the Sellers and a cancellation of securities acknowledgement with one of
eVance’s note holders whereby the noteholder cancelled their note in the amount of $720,084 and Calpian issued eVance a
note in the amount of $675,000 in exchange for eVance and the Sellers mutually waiving any claims either party has or could have
under the Purchase Agreement against one another. The $675,000 note bears simple interest of 12% per annum payable monthly and
matures on November 30, 2017. As part of the Purchase Agreement, eVance acquired several residual portfolios including the supporting
contracts (residual purchase agreements). eVance, as successor under one of these residual purchase agreements, has sued a third
party for breach of contract on the residual purchase agreement between the third party and Seller and has claimed damages in
excess of $1,500,000. eVance has agreed to apply any recovery from such litigation (less costs) against the principle balance
of the $675,000 note up to a maximum of $675,000. The Company reflected the reduction in the assumed debt by $720,084 as a reduction
in goodwill and a reduction in the debt assumed. In addition, the noteholder returned a warrant to purchase 360,042 shares of
the Company’s common stock.
On
April 30, 2016, Securus entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with Chyp LLC (“Chyp”).
In connection with the Purchase Agreement, Chyp executed a three year preferred marketing agreement with eVance.
Chyp
acquired substantially all of the operations of Securus including its sales and marketing operations located in Portland Oregon
and West Palm Beach Florida. Securus retained its approximately 5,000 merchants and related merchant processing residual portfolio.
Securus also retained substantially all of its liabilities, including but not limited to, its note payable with Blue Acre Ventures,
trade payables as well as liabilities to merchants.
