UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10−Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2008
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File No. 0-33131
LEXICON UNITED INCORPORATED
(Exact name of small business issuer as specified in its charter)
DELAWARE | 06-1625312 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
4500 Steiner Ranch Blvd. |
Suite # 1708, Austin, Texas 78732 |
(Address of Principal Executive Offices) |
(512) 266-3507 |
(Registrant’s Telephone Number, Including Area Code) |
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 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.
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer o (Do not check if a smaller reporting company) | Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The numbers of shares outstanding of each of the issuer’s classes of common equity, as of November 1, 2008, are as follows:
Class of Securities | Shares Outstanding | |||
Common Stock, $0.001 par value | 8,691,134 |
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION | 3 | |
ITEM 1. | INTERIM FINANCIAL STATEMENTS | 3 |
ITEM 2. | MANAGEMENT'S DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION | 11 |
ITEM 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 18 |
ITEM 4A(T). | CONTROLS AND PROCEDURES | 19 |
PART II - OTHER INFORMATION | 19 | |
ITEM 1. | LEGAL PROCEEDINGS | 19 |
ITEM 1A | RISK FACTORS | |
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES | 19 |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 19 |
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 19 |
ITEM 5. | OTHER INFORMATION | 19 |
ITEM 6. | EXHIBITS | 20 |
SIGNATURES | 20 |
2
PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
3
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Sept 30 | December 31, | ||||||
2008 | 2007 | ||||||
(Unaudited) | |||||||
CURRENT ASSETS | |||||||
Cash and cash equivalents | $ | 444,576 | $ | 467,195 | |||
Accounts receivable | 311,563 | 288,588 | |||||
Other receivables | 268,893 | 205,013 | |||||
Prepaid expenses | 1,345 | 3,145 | |||||
Total current assets | 1,026,377 | 963,941 | |||||
FIXED ASSETS | |||||||
Building, equipment, and leasehold improvements, | |||||||
net of accumulated depreciation of $261,571 and | |||||||
$471,766 at September 30, 2008 and December 31, 2007, respectively | 611,869 | 740,525 | |||||
OTHER ASSETS | |||||||
Investment in receivable portfolios | 678,817 | - | |||||
Customer Lists, net of amortization of $141,273 and $102,744 at | 372,460 | 410,989 | |||||
September 30, 2008 and December 31, 2007, respectively | |||||||
Tradenames, net of amortization of $60,546 and $44,034 at | 159,625 | 176,137 | |||||
September 30, 2008 and December 31, 2007, respectively | |||||||
Goodwill | 853,141 | 853,141 | |||||
Security deposit | 1,350 | - | |||||
Total other assets | 2,065,393 | 1,440,267 | |||||
TOTAL ASSETS | $ | 3,703,639 | $ | 3,144,733 | |||
CURRENT LIABILITIES | |||||||
Loans payable to banks | $ | 298,064 | $ | 491,474 | |||
Current portion of long term debt | 276,573 | 270,603 | |||||
Bank Overdrafts | 400,724 | 378,514 | |||||
Note payable to an individual | 300,710 | - | |||||
Accounts Payable | 198,722 | 176,022 | |||||
Loans payable to officer | 197,157 | 52,504 | |||||
Accrued Expenses | 632,884 | 466,959 | |||||
Accrued Municipal Service Taxes | 148,523 | 159,841 | |||||
Accrued Payroll and related taxes | 1,264,031 | 1,366,938 | |||||
Accrued Employee Benefits | 167,485 | 180,819 | |||||
Total Current Liabilities | 3,884,873 | 3,543,674 | |||||
LONG TERM LIABILITIES | |||||||
Long term debt | 235,765 | 352,998 | |||||
Total Long Term Liabilities | 235,765 | 352,998 | |||||
TOTAL LIABILITIES | 4,120,638 | 3,896,672 | |||||
STOCKHOLDERS' DEFICIT | |||||||
Preferred stock $0.001 par value, 10,000,000 | |||||||
shares authorized, none issued and outstanding | - | - | |||||
Common stock $0.001 par value, 40,000,000 | |||||||
shares authorized, 8,691,134 and 8,459,250 shares | |||||||
issued and outstanding at September 30, 2008 and December 31, 2007 | |||||||
respectively | 8,691 | 8,456 | |||||
Paid in capital | 2,713,459 | 1,903,194 | |||||
Accumulated deficit | (2,648,714 | ) | (2,025,245 | ) | |||
Accumulated other comprehensive loss | (490,435 | ) | (638,344 | ) | |||
Total Stockholders' Deficit | (416,999 | ) | (751,939 | ) | |||
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 3,703,639 | $ | 3,144,733 |
See accompanying notes to financial statements.
4
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
REVENUES | |||||||||||||
Service revenue | $ | 1,214,201 | $ | 785,090 | $ | 3,310,310 | $ | 2,053,775 | |||||
Revenue from receivable portfolios | 52,347 | 52,347 | |||||||||||
Total revenues | 1,266,548 | 785,090 | 3,362,657 | 2,053,775 | |||||||||
COST OF SERVICES | 756,360 | 495,525 | 2,031,296 | 1,342,970 | |||||||||
GROSS PROFIT | 510,188 | 289,565 | 1,331,361 | 710,805 | |||||||||
COSTS AND EXPENSES | |||||||||||||
Selling, general and administrative | 462,968 | 316,479 | 1,321,341 | 992,484 | |||||||||
Depreciation | 31,999 | 34,366 | 111,438 | 91,782 | |||||||||
Amortization | 18,347 | 18,348 | 55,041 | 55,042 | |||||||||
Interest expense | 172,250 | 99,478 | 433,847 | 244,325 | |||||||||
Total costs and expenses | 685,564 | 468,671 | 1,921,667 | 1,383,633 | |||||||||
OPERATING LOSS | (175,376 | ) | (179,106 | ) | (590,306 | ) | (672,828 | ) | |||||
OTHER INCOME (EXPENSE) | |||||||||||||
Interest income and other | (26,882 | ) | 8,373 | (25,998 | ) | 31,279 | |||||||
Total Other Income(expense) | (26,882 | ) | 8,373 | (25,998 | ) | 31,279 | |||||||
LOSS BEFORE INCOME TAX AND SOCIAL | |||||||||||||
CONTRIBUTION | (202,258 | ) | (170,733 | ) | (616,304 | ) | (641,549 | ) | |||||
Income tax and social contribution | 7,165 | 3,950 | 7,165 | 3,950 | |||||||||
NET LOSS | $ | (209,423 | ) | $ | (174,683 | ) | $ | (623,469 | ) | $ | (645,499 | ) | |
NET LOSS PER COMMON SHARE | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.07 | ) | $ | (0.08 | ) | |
WEIGHTED AVERAGE COMMON SHARES | |||||||||||||
OUTSTANDING | 8,691,134 | 8,456,250 | 8,558,866 | 8,456,250 |
See accompanying notes to financial statements.
5
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended | |||||||
September 30, | |||||||
2008 | 2007 | ||||||
CASH FLOWS FROM OPERATING ACTIVITES | |||||||
Net loss | $ | (623,469 | ) | $ | (645,499 | ) | |
Noncash items included in net loss | |||||||
Depreciation | 111,438 | 99,400 | |||||
Amortization of intangibles | 55,041 | 55,042 | |||||
Adjustment of fixed asset balances | 37,661 | - | |||||
Decrease (increase) in assets: | |||||||
Accounts receivable | (44,532 | ) | (17,677 | ) | |||
Other receivables | (80,899 | ) | (44,363 | ) | |||
Prepaid expenses | (255 | ) | 2,542 | ||||
Security deposit | (1,350 | ) | - | ||||
Investment in receivable portfolio | (351,700 | ) | - | ||||
Increase (decrease) in liabilities: | |||||||
Accounts payable | 35,846 | (91,614 | ) | ||||
Accrued expenses | 199,797 | 210,111 | |||||
NET CASH USED IN OPERATING ACTIVITIES | (662,422 | ) | (432,058 | ) | |||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Purchase of fixed assets | (24,246 | ) | (47,952 | ) | |||
NET CASH USED IN INVESTING ACTIVITIES | (24,246 | ) | (47,952 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Loan from Keyano Invest, Inc | 1,000,000 | - | |||||
Loan from related party | 88,788 | 56,012 | |||||
Net change in bank loans | - | 6,076 | |||||
Proceeds from new loans | 130,935 | 224,689 | |||||
Repayment of loans | (503,315 | ) | (205,830 | ) | |||
Issuance of common stock | 10,500 | - | |||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 726,908 | 80,947 | |||||
EFFECT OF EXCHANGE RATE OF CASH | (62,859 | ) | 12,422 | ||||
NET DECREASE IN CASH | (22,619 | ) | (386,641 | ) | |||
CASH, beginning of period | 467,195 | 896,531 | |||||
CASH, end of period | $ | 444,576 | $ | 509,890 | |||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||
Interest paid | $ | 423,935 | $ | 244,325 | |||
Non cash items | |||||||
Purchase of furniture and equipment | $ | 43,095 | $ | 91,470 | |||
Conversion of loan from Keyano Invest, Inc to common stock | $ | 800,000 | $ | - | |||
Loans and accounts payable incurred for acquisition of receivable portfolio | $ | 327,117 | - |
See accompanying notes to financial statements
6
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2008
NOTE A – BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the financial statements not misleading have been included. Results for the nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, refer to the financial statements and footnotes thereto included in the Lexicon United Incorporated annual report on Form 10-KSB for the year ended December 31, 2007 filed April 15, 2008.
NOTE B – PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Lexicon United Incorporated, its 80% owned subsidiary, ATN Capital E Participacoes Ltda and its 100% owned subsidiaries Engepet Energy Enterprises, Inc. and United Oil Services, Inc. All material intercompany transactions have been eliminated in consolidation.
NOTE C – INVESTMENT IN RECEIVABLE PORTFOLIO
Under the guidance provided by AICPA Statement of Position 03-3 (“SOP 03-3”), “Accounting for Loans or Certain Securities Acquired in a Transfer”, the Company accounts for a portfolio of distressed debt assets purchased by its subsidiary, ATN Capital e Participacoes Limitada. The portfolio purchased from Ativos SA Securitizadora de Creditos Financeiros for R$1,299,458 (approximately $816,294) on June 2, 2008 consists of past due and unpaid debt from more than 41,000 Brazilian consumers and has a face value of approximately $ 305 million as of the purchase date. The Company has established three pools of accounts, with each pool recorded at cost.
SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least, in part, to credit quality. SOP 03-3 limits accretable yield to the excess of the investor's estimate of undiscounted cash flows over the investor's initial investment in the loan and prohibits the recognition of the non-accretable difference. Under SOP 03-3, subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan's yield over its remaining life while any decreases in cash flows expected to be collected should be recognized as impairments.
7
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2008
NOTE C – INVESTMENT IN RECEIVABLE PORTFOLIO (CON’T)
The following table reflects the initial carrying amount and cash flows expected to be collected for the quarters ending September 30 and December 31, 2008 and for the years ending December 31, 2009 through 2013:
Cash Flows | ||||||||||||||||
Beginning | Expected | Reduction of | ||||||||||||||
Year Ended | Carrying | to be | Interest | Carrying | Ending Carrying | |||||||||||
31-Dec | Amount | Collected | Income | Amount | Amount | |||||||||||
30-Sep-08 | $ | 678,816 | $ | 52,347 | $ | 52,347 | $ | 0 | $ | 678,816 | ||||||
31-Dec-08 | 678,816 | 57,554 | 40,469 | 17,085 | 661,731 | |||||||||||
31-Dec-09 | 661,731 | 239,331 | 156,517 | 82,814 | 578,917 | |||||||||||
31-Dec-10 | 578,917 | 239,331 | 136,930 | 102,401 | 476,516 | |||||||||||
31-Dec-11 | 476,516 | 239,331 | 112,710 | 126,621 | 349,895 | |||||||||||
31-Dec-12 | 349,895 | 239,331 | 82,987 | 156,344 | 193,551 | |||||||||||
31-Dec-13 | 193,551 | 239,331 | 45,780 | 193,551 | 0 | |||||||||||
Totals | $ | 1,306,556 | $ | 627,740 | $ | 678,816 |
Initial accretable yield has been calculated as follows:
Cash flows expected to be collected as of 9/30/08 | $ | 1,306,556 | ||
Less: Initial Investment | 678,816 | |||
Yield accreted to date | 52,347 | |||
Accretable Yield as of 9/30/08 | $ | 575,393 |
The Company purchased the receivable portfolio for R$1,299,458 (the US$ equivalent at September 30, 2008 is $678,816). The Company financed the purchase with cash and notes. At September 30, 2008, two Notes Payable totaling R$626,200 are outstanding. The notes are due December 2009 and bear interest at the rate of 1.5% per month. The notes are included in the caption loans from officer and loan from an individual on the balance sheet. The loan from an individual is deemed to be a related party because of his affiliation with the Company. At September 30, 2008, the balance of the loan from officer is $67,045 and the loan from an individual is $279,792.
Due to the strengthening US dollar, there has been a change in the value of the purchase price of the receivable portfolio from $816,294 at June 2008 to $678,816 at September 30, 2008. The difference of $137,478 is included in accumulated other comprehensive loss.
8
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2008
NOTE D – GOING CONCERN
As shown in the accompanying financial statements, the Company has incurred cumulative net operating losses of $2,648,714 since inception and the Company has a negative working capital of $2,858,496. The Company has recently formed two new subsidiaries, Engepet Energy Enterprises, Inc. and United Oil Services, Inc. It also seeks to raise capital for working capital and potential capital projects. However, even if the Company does raise capital in the capital markets, there can be no assurances that the revenues and profits will be sufficient to enable it to continue as a going concern. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE E – USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
NOTE F – REVENUE RECOGNITION
The Company derives its revenue primarily from collection of distressed debt by entering into non binding agreements with financial institutions to collect their delinquent debt. Once an agreement is reached with the debtor of the financial institution based upon established parameters, an installment agreement is established. The Company is then entitled to a commission on the agreed settlement. The Company earns and records the pro rata commission for each installment, when the installment payments are received from the debtors. Revenue from the collection of distressed debt owned by the Company is recognized based on the AICPA Statement of Position 03-3 using the interest method. The interest method applies an effective interest rate to the cost basis of each pool, which remains unchanged throughout the life of the pool unless there is an increase or decrease in subsequent cash flows. Revenue from receivable portfolios is accrued based on each pool’s effective interest rate applied to each pool’s adjusted cost. The cost basis of each pool is increased by revenue earned and decreased by gross collections and impairments.
9
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2008
NOTE G – PURCHASE OF FIXED ASSETS
During the quarter ended March 31, 2008, the Company purchased new air conditioning equipment. The equipment valued at approximately $28,000 is being financed over a three year period at 12% per year.
During the quarter ended June 30, 2008, the Company purchased new computer equipment. The equipment valued at approximately $6,600 is being financed over a three year period at 13.32% per year.
During the quarter ended June 30, 2008, the Company purchased new computer equipment valued at approximately $7,200. The equipment is being financed over a one year period at 11.4% per year.
During the quarter ended September 30, 2008, the Company purchased new computer equipment valued at approximately $4,533.
During the quarter ended September 30, 2008, the Company purchased new computer equipment valued at approximately $1,750. The equipment is being financed over a three year period at 13.8% per year.
During the quarter ended September 30, 2008, the Company wrote off approximately $230,000 of fully depreciated assets that are no longer in use.
During the quarter ended September 30, 2008, the Company borrowed approximately $78,275 from an individual for working capital purposes. The loan is to be repaid over a period of 18 months at an interest rate of 1.8% per month.
NOTE H – RELATED PARTY
During the quarter ended March 31, 2008, Keyano Invest Inc., a related party, loaned the Company $1,000,000 for working capital purposes on terms and conditions to be determined on an arms length basis between the parties. During the quarter ended June 30, 2008, the Company repaid Keyano Invest Inc $200,000 and converted the remaining balance of $800,000 to a 2.5% convertible debenture. On June 4, 2008, the debenture was converted to 231,884 shares of common stock at a conversion price of $3.45 per share.
NOTE I – STOCKHOLDERS’ EQUITY
On May 13, 2008 the Company issued 3,000 shares of its common shares for $10,500, or $3.50 per share.
On June 5, 2008, the Company issued 231,884 shares of its commons shares in conversion of an $800,000 debenture from Keyano Invest, Inc, a related party. The shares were converted at $3.45 per share.
10
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion should be read in conjunction with our financial statements and the notes thereto.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND USE OF TERMS
This quarterly report contains forward-looking statements, which reflect our views with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These forward-looking statements are identified by, among other things, the words “anticipates”, “believes”, “estimates”, to expects”, “plans”, “projects”, “targets” and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors that may cause actual results to differ from those projected include the following factors:
• | our potential inability to raise additional capital; |
• | our potential inability to obtain the right to develop our target markets or to exploit the rights currently held by us; |
• | our potential inability to compete with other finance companies that may be more experienced and better capitalized than us; |
• | changes in domestic and foreign laws, regulations and taxes; |
• | changes in economic conditions; |
• | lack of resources compared to our competitors; |
• | uncertainties and risks related to the legal systems and economics in our target markets, including Brazil’s legal system and economic, political and social events in Brazil and other target markets; |
• | fluctuations in currency exchange rates; |
• | the effects of any applicable currency restrictions, including any restrictions on the repatriation of funds back to the United States; |
• | a general economic downturn or a downturn in the securities markets; |
• | Regulations of the Commission which affect trading in the securities of “penny stocks;” and |
• | other risks and uncertainties. |
Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
Except as otherwise indicated by the context, references in this report to:
11
• | “Lexicon,” “we,” “us,” “our,” or the “Company,” are references to Lexicon United Incorporated, and its consolidated subsidiary, including, after February 27, 2006, ATN; |
• | “ATN” are to ATN Capital E Participações Ltda. |
• | “Brazil” are to the Federative Republic of Brazil; |
• | “U.S. dollar,” “$” and “US$” are to the legal currency of the United States; |
��
• | “Real,” “R$,” and “Reais” are to the legal currency of Brazil; |
• | the “SEC” or the “Commission” are to the United States Securities and Exchange Commission; |
• | the “Securities Act” are to Securities Act of 1933, as amended; and |
• | the “Exchange Act” are to the Securities Exchange Act of 1934, as amended. |
Overview
Our Background and History
Our corporate name is Lexicon United Incorporated. We were incorporated on July 17, 2001 in the state of Delaware. We were a “blank check” company and had no operations other than organizational matters and conducting a search for an appropriate acquisition target until February 27, 2006 when we completed an acquisition transaction with ATN, a Brazilian limited company that had commenced business in April 1997. ATN is engaged in the business of managing and servicing accounts receivables for large financial institutions in Brazil.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with US generally accepted accounting principles and our discussion and analysis of our financial condition and results of operations require our management to make judgments, assumptions, and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material.
Management believes our critical accounting policies and estimates are those related to revenue recognition and the valuation of goodwill and intangible assets. Management believes these policies to be critical because they are both important to the portrayal of our financial condition and results, and they require management to make judgments and estimates about matters that are inherently uncertain.
Revenue Recognition
We derive our revenues primarily from collection of distressed debt by entering into non binding agreements with financial institutions to collect their debt. Once an agreement is reached with the debtor of the financial institution based upon established parameters, an installment agreement is established. We are then entitled to a commission on the agreed settlement. We earn and record the pro rata commission for each installment, when the installment payments are received from the debtors. Our average fee was approximately 15% during the fiscal years ended December 31, 2007 and 2006.
Revenue from the collection of distressed debt owned by the Company is recognized based on the AICPA Statement of Position 03-3 using the interest method. The interest method applies an effective interest rate to the cost basis of each pool, which remains unchanged throughout the life of the pool unless there is an increase or decrease in subsequent cash flows. Revenue from receivable portfolios is accrued based on each pool’s effective interest rate applied to each pool’s adjusted cost. The cost basis of each pool is increased by revenue earned and decreased by gross collections and impairments.
12
Valuation of Goodwill and Other Intangible Assets
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we are required to compare the fair values of goodwill and other intangible assets to their carrying amounts. If the fair value is less than the carrying value, an impairment loss is recognized. The Company had an independent valuation performed of its goodwill, customer lists and trademarks as of December 31, 2007.
Based upon this valuation, we believe that, as of December 31, 2007 and September 30, 2008, there is no impairment loss of goodwill or other intangible assets and an adjustment to the carrying values of the assets is not required.
Industry Wide Factors that are Relevant to Our Business
We are in the business of managing the recovery of credit accounts receivable in Brazil for our third-party clients who are either credit card issuers or transferees of credit accounts receivable. Our business, therefore, depends on the growth of the credit card sector in Brazil.
The credit card sector in Brazil became the third largest issuer worldwide after the United States and China, and according to the projections of major sources such as the Brazilian Association of Credit Cards Issuers (ABECS), the Brazilian Institute of Statistics (IBGE), the Brazilian Banks Federation (FERBABAN) and Citibank, this sector is poised to continue its double-digit growth.
During the last decade the volume of transactions has soared from 1.36 billion in 2004 to over 2 billion in 2006, with the number of plastic credit and debit cards dramatically increasing from 17 million in 1996 to 80 million in 2006. This trend reflects the inclusion of low-income consumers where at 32% of the GDP in Brazil, it is still well below the Chileans who are at 63% and the Bolivians who are at 42%.
This economic growth of the commercial credit sector is following the same pattern with the same projections. New bank accounts increased from 31.4 million in the year 2000 to 95.1 million in 2005 where consumers view the credit card as a financial instrument to be used in lieu of the check. The number of checks used dropped 27% from 1999 to 2005 while credit card payments increased by 240%. According to data from the Brazilian Central Bank, in 2005, payments by credit cards surpassed payments made by check.
Uncertainties that Affect our Financial Condition
We have approximately fifteen clients, but we currently rely on five major clients for a significant portion of our revenue. None of these major clients are contractually obligated to continue use of our services at historic levels or at all, subject only to notice periods for termination. If any of these clients were to significantly reduce their amount of service, fail to pay, or terminate their relationships with us altogether, our business could be harmed. The number of major clients on whom we rely has remained the same for fiscal years 2008 and 2007. During fiscal year 2007, no one customer has been responsible for more than 20% of our revenues.
The portfolios of consumer receivables that we service consist of one or more of the following types of consumer receivables:
· | charged-off receivables - accounts that have been written-off by the originators and may have been previously serviced by collection agencies; |
· | semi-performing receivables - accounts where the debtor is making partial or irregular monthly payments, but the accounts may have been written-off by the originators; and |
· | performing receivables - accounts where the debtor is making regular monthly payments that may or may not have been delinquent in the past. |
Charged-off receivables accounted for more approximately 99% of our business in 2007, while semi-performing and performing receivables each accounted for less than 1% of our business in the period.
ATN’s long period of operations and its demonstrated capacity to process millions of receivables, large and small, have made ATN an attractive resource for customers desiring to secure their receivables. Our success rate is measured by how long an outstanding debt is past due as well as whether such debt has been categorized as a performing, semi-performing or charged-off item. On average we recover between 2.5% and 8% of face value of our debt. Due to our level of professionalism and our successful performance we believe that we are in the top 5% of businesses in this field in Brazil.
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In order to further increase our revenue base and eliminate the uncertainty of our ability to continue as a going concern, with adequate capitalization, we plan to start using ATN’s consumer database and its vast experience in collections to start buying defaulted outstanding consumer loans and other assets, which are usually discounted to their legal principal balance or appraised value. We believe that the impact on our liquidity would be highly improved and we would have the opportunity to build our own short and long-term portfolio of restructured receivables. Purchased debts for our own account would also suppress the efforts and costs of collection monitoring and reporting back to original holders to the benefit of our bottom line.
Investment in Receivable Portfolio
Under the guidance provided by AICPA Statement of Position 03-3 (“SOP 03-3”), “Accounting for Loans or Certain Securities Acquired in a Transfer”, the Company accounts for a portfolio of distressed debt assets purchased by its subsidiary, ATN Capital e Participacoes Limitada. The portfolio purchased from Ativos SA Securitizadora de Creditos Financeiros for R$1,299,458 (approximately $816,294) on June 2, 2008 consists of past due and unpaid debt from more than 41,000 Brazilian consumers and has a face value of approximately $ 305 million as of the purchase date. The Company has established three pools of accounts, with each pool recorded at cost.
SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least, in part, to credit quality. SOP 03-3 limits accretable yield to the excess of the investor's estimate of undiscounted cash flows over the investor's initial investment in the loan and prohibits the recognition of the non-accretable difference. Under SOP 03-3, subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan's yield over its remaining life while any decreases in cash flows expected to be collected should be recognized as impairments.
The following table reflects the initial carrying amount and cash flows expected to be collected for the quarters ending September 30 and December 31, 2008 and for the years ending December 31, 2009 through 2013:
Beginning | Cash Flows Expected | Reduction of | ||||||||||||||
Year Ended | Carrying | to be | Interest | Carrying | Ending Carrying | |||||||||||
31-Dec | Amount | Collected | Income | Amount | Amount | |||||||||||
30-Sep-08 | $ | 678,816 | $ | 52,347 | $ | 52,347 | $ | 0 | $ | 678,816 | ||||||
31-Dec-08 | 678,816 | 57,554 | 40,469 | 17,085 | 661,731 | |||||||||||
31-Dec-09 | 661,731 | 239,331 | 156,517 | 82,814 | 578,917 | |||||||||||
31-Dec-10 | 578,917 | 239,331 | 136,930 | 102,401 | 476,516 | |||||||||||
31-Dec-11 | 476,516 | 239,331 | 112,710 | 126,621 | 349,895 | |||||||||||
31-Dec-12 | 349,895 | 239,331 | 82,987 | 156,344 | 193,551 | |||||||||||
31-Dec-13 | 193,551 | 239,331 | 45,780 | 193,551 | 0 | |||||||||||
Totals | $ | 1,306,556 | $ | 627,740 | $ | 678,816 |
Initial accretable yield has been calculated as follows:
Cash flows expected to be collected as of 9/30/08 | $ | 1,306,556 | ||
Less: Initial Investment | 678,816 | |||
Yield accreted to date | 52,347 | |||
Accretable Yield as of 9/30/08 | $ | 575,393 |
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Results of Operations
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007.
The following table summarizes the results of our operations during the three-month period ended September 30, 2008, and 2007 and provides information regarding the dollar and percentage increase or (decrease) from the second fiscal quarter of 2008 to the same period of 2007.
ThreeMonths Ended September 30, 2008 | Three Months Ended September 30, 2007 | Increase (Decrease) | Percentage Increase (Decrease) | ||||||||||
Revenues | 1,266,548 | 785,090 | 481,458 | 61.33 | |||||||||
Net income (loss) | (209,423 | ) | (174,683 | ) | (34,740 | ) | (19.89 | ) | |||||
Cost of Services | 756,360 | 495,525 | 260,835 | 52.64 | |||||||||
Selling, General and Administrative Expense | 462,968 | 316,479 | 146,489 | 46.29 | |||||||||
Interest Expense | 172,250 | 99,478 | 72,772 | 73.15 | |||||||||
Earnings (Loss) per common share | (.02 | ) | (.02 | ) | (0.00 | ) | 0.00 |
Revenues. We had revenues of $1,266,548 in the three-month period ending September 30, 2008, compared to revenues of $785,090 during the same period in 2007. Our revenues increased $481,458 or 61.33% in the three-month period ending September 30, 2008 primarily due to an increase in collection of receivables, revenue from receivable portfolios from ATN and revenue from services provided by Engepet Energy Enterprises and United Oil Services, Inc.
Net Loss. During the three-month period ending September 30, 2008 we incurred a net loss of $(209,423) compared with $(174,683) for the same period in the prior year. The decrease in our loss is primarily due to an increase in expenses as described below offset by increased revenues.
Cost of Services. Our cost of services for the three-month period ending September 30, 2008 was $756,360 as compared to $495,525 during the same period in 2007. This increase of $260,835 or 52.64% is primarily the result of increased salaries and related expenses , transportation expenses ,and internship program expenses from ATN and expenses related to Engepet Energy Enterprises and United Oil Services, Inc.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $146,489 or 46.29%, to $462,968 in the three-month period ending September 30, 2008 compared to $316,479 in the same period in 2007. The increase is primarily due to increased communication costs during the third quarter.
Interest Expense. Interest expense in the three-month period ending September 30, 2008 was $172,250 and interest expense in the same period of 2007 was $99,478. Interest expense increased $72,772 or 73.15% in the three-month period ending September 30, 2008 mainly due to the increase of new borrowings over the past year.
Loss per Common Share. Loss per common share for the three-month period ending September 30, 2008 was $(.02) as compared to a loss of $(.02) during the same period of 2007.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007.
The following table summarizes the results of our operations during the nine-month period ended September 30, 2008, and 2007 and provides information regarding the dollar and percentage increase or (decrease) from the second fiscal quarter of 2008 to the same period of 2007.
Nine Months Ended September 30, 2008 | Nine Months Ended September 30, 2007 | Increase (Decrease) | Percentage Increase (Decrease) | ||||||||||
Revenues | 3,362,657 | 2,053,775 | 1,308,882 | 63.73 | |||||||||
Net income (loss) | (623,469 | ) | (645,499 | ) | 22,030 | 3.41 | |||||||
Cost of Services | 2,031,296 | 1,342,970 | 688,326 | 51.25 | |||||||||
Selling, General and Administrative Expense | 1,321,341 | 992,484 | 328,857 | 33.13 | |||||||||
Interest Expense | 433,847 | 244,325 | 189,522 | 77.57 | |||||||||
Earnings (Loss) per common share | (.07 | ) | (.08 | ) | .01 | (12.5 | ) |
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Revenues. We had revenues of $3,362,657 in the nine-month period ending September 30, 2008, compared to revenues of $2,053,775 during the same period in 2007. Our revenues increased $1,308,882 or 63.73% in the nine-month period ending September 30, 2008 primarily due to an increase in collection of receivables in ATN and revenue from Engepet Energy Enterprises and United Oil Services, Inc.
Net Loss. During the nine-month period ending September 30, 2008 we incurred a net loss of $(623,469) compared with $(645,499) for the same period in the prior year. The decrease in our loss is primarily due to an increase in expenses as described below offset by increased revenues.
Cost of Services. Our cost of services for the nine-month period ending September 30, 2008 was $2,031,296 as compared to $1,342,970 during the same period in 2007. This increase of $688,326 or 51.25% is primarily the result of increased salaries and related expenses , transportation expenses, and internship program expenses from ATN and expenses related to Engepet Energy Enterprises and United Oil Services, Inc.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $328,857 or 33.13%, to $1,321,341 in the nine-month period ending September 30, 2008 compared to $992,484 in the same period in 2007. The increase is primarily due to an increase in communication expenses.
Interest Expense. Interest expense in the nine-month period ending September 30, 2008 was $433,847 and interest expense in the same period of 2007 was $244,325. Interest expense increased $189,522 or 77.57% in the nine-month period ending September 30, 2008 mainly due to the increase of new borrowings over the past year.
Loss per Common Share. Loss per common share for the nine-month period ending September 30, 2008 was $(.07) as compared to a loss of $(.08) during the same period of 2007. This decrease in the loss per share is due to the decreased loss for the period ended September 30, 2008.
Cash Flow Items
The following table provides the statements of net cash flows for the nine-month period ended September 30, 2008:
Nine Months Ended September 30, | |||||||
2008 | 2007 | ||||||
Net Cash Provided By (used in) Operating Activities | (662,422 | ) | (432,058 | ) | |||
Net Cash Used in Investing Activities | (24,246 | ) | (47,952 | ) | |||
Net Cash Provided by Financing Activities | 726,908 | 80,947 | |||||
Net Increase (decrease) in Cash and Cash Equivalents | (22,619 | ) | (386,641 | ) | |||
Cash and Cash Equivalents - Beginning of Period | 467,195 | 896,531 | |||||
Cash and Cash Equivalents - End of Period | 444,576 | 509,890 |
We used $662,422 of cash from our operating activities during the nine months ended September 30, 2008 as compared to $432,058 cash used during the nine months ended September 30, 2007. The difference of $230,364 is mainly attributable to the purchase of a debt receivable portfolio for $351,700 offset by an increase in accounts payable of $117,146 and non cash items of $49,698.
We used $24,246 in cash from our investing activities during the nine months ended September 30, 2008, as compared to $47,952 used in the prior period ending September 30, 2007. These funds were used for the purchase of fixed assets.
We provided a net $726,908 from financing activities during the nine-month period ended September 30, 2008 as compared to $80,947 during the nine months ended September 30, 2007. The change is primarily due to a increase in new borrowings from a related party $1,000,000 offset by payments on notes payable. In June 2008, the balance of the related party borrowing ($800,000) was converted to 231,884 shares of common stock.
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Balance Sheet Items
As of September 30, 2008, we had total current assets of $1,026,377, as compared to $913,939 as of September 30, 2007. Our total assets as of September 30, 2008 were $3,703,639 as compared to $3,088,489 as of September 30, 2007. We had total current liabilities of $3,884,873 as of September 30, 2008 as compared to $3,848,097 as of September 30, 2007, and we had total liabilities of $4,120,638 as of September 30, 2008 as compared to $4,242,189 as of September 30, 2007.
The increase in total assets is primarily due to the purchase of a debt receivable portfolio for $678,817. The decrease in total liabilities is primarily due to a decrease in long term debt.
As of September 30, 2008, our total Stockholders’ Equity (deficit) was $(416,999) as compared to $(1,153,700) at September 30, 2007. This change was due to an increase in capital stock and paid in capital of $810,500 offset by operating losses and losses due to foreign exchange rates.
Liquidity and Capital Resources
We believe that we will be able to pay our normal and operating expenditures during the next twelve months with our cash reserves and additional cash generated from operations, and by reducing our accrued municipal services tax liability by restructuring such debt. We do not have any material capital commitments during the next twelve months, other than repayment of debt as it comes due, and we do not anticipate the issuance of additional debt (other than to refinance existing debt). We also do not anticipate any material changes in our operations during the next twelve months. As such, we believe that our current cash position is sufficient to retire our current short-term debt as it comes due and, if we are successful in adequately restructuring our municipal services tax liability, we believe that cash generated from operations will be sufficient to pay our operating expenses during the next twelve months.
We had cash and cash equivalents of approximately $444,576 as of September 30, 2008 and we had short-term liabilities in the amount of $3,884,873, as well as long-term liabilities in the amount of $235,765 as of September 30, 2008. The Company intends to use its cash to retire current debt as it comes due as well as to pay operating expenses as necessary.
During 2007, the Company successfully negotiated with Brazilian authorities to favorably settle previously recorded municipal service taxes of $730,000. In addition, the company further evaluated related payroll tax provisions and reduced same by approximately $200,000.
If we are required to make any material and unplanned expenditures during the next twelve months, the company believes that it can raise additional capital in the equity markets through private placements in order to meet its short-term cash requirements. The company believes that such equity funding could also be used to liquidate all or a portion of the Company’s current bank loans or pay other operating expenses. However, we can provide no assurances that we will be able to raise additional capital in the equity markets on favorable terms, if at all or on a timely basis.
As of September 30, 2008, we had cash assets of $444,576 and total assets of $3,703,639 as compared to cash assets of $509,889 and total assets of $3,088,489 as of September 30, 2007. This increase is primarily due to the purchase of a debt receivable portfolio in the amount of $678,817. We have a $(2,858,496) negative working capital at September 30, 2008, of which $1,580,039 relates to municipal taxes and payroll expenses in connection with ATN’s prior and ongoing operations.
Loans Payable to Banks
The Company has several loans with various Brazilian banks and financial institutions. The loans are secured by personal guarantees of the Company’s principal shareholders. The loans mature at various months throughout the year and are generally renewed at maturity. The interest rates are fixed and bear interest at rates ranging from 9.6% to 12.84% per year. The balance of the loans at September 30 2008 was $298,064.
Long-Term Debt
During the year ended December 31, 2007, the Company purchased new computer equipment from DELL Brazil. The equipment valued at approximately $189,500 is financed over a three year period at rates ranging from 12% to 12.84% per year.
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In June, 2007, the Company refinanced a working capital loans from Banco Bradesco. The loan is valued at approximately $1,143,000 and is payable in 24 monthly installments at 2.6% per month, commencing July, 2007. The loans are guaranteed by a promissory note signed by ATN’s directors
In June, 2007, the Company borrowed two working capital loans from Caixa Economica Federal. The loans are valued at approximately $113,000 and are payable in 24 monthly installments at 2.73% per month, commencing July, 2007. The loans are guaranteed by a promissory note signed by ATN’s directors.
In September, 2007 the Company borrowed a working capital loan from Santander in the amount of $48,942. The loan is valued at approximately $51,000 and is payable in 16 monthly installments at an interest rate of 46.8% per year. The loan is guaranteed by a promissory note signed by ATN’s directors.
In January, 2008, the Company purchased new air conditioning equipment. The equipment valued at approximately $27,500 if financed over a three year period at 12% per year.
During the quarter ended June 30, 2008, the Company purchased new computer equipment. The equipment valued at approximately $6,600 is financed over a three year period at 13.32% per year.
During the quarter ended June 30, 2008, the Company purchased new computer equipment valued at approximately $7,200. The equipment is financed over a one year period at 11.4% per year.
During the quarter ended September 30, 2008, the Company purchased new computer equipment valued at approximately $1,750. The equipment is being financed over a three year period at 13.8% per year.
An analysis of the current and long-term portion of the debt at September 30, 2008 is as follows:
Total loans outstanding | $ | 512,338 | ||
Less: current portion | $ | 276,573 | ||
Long-term portion | $ | 235,765 |
Our financial statements have been prepared on the basis that we will continue as a going concern, which contemplates the realization and satisfaction of our liabilities and commitments in the normal course of business.
We believe that our increased revenues and our cash on hand will be sufficient to sustain our operations at our current levels for the next twelve months.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
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Item 4A(T). 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 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of September 30, 2008. 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 Securities and Exchange Commission’s rules and forms and that our disclosure and controls are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Internal Controls Over Financial Reporting
During the quarter ended September 30, 2008, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed that occurred during the fiscal quarter covered by this report 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.
There are no legal proceedings which are pending or have been threatened against us or any officer, director or control person of which management is aware.
ITEM 2.
UNREGISTERED SHARES OF EQUITY SECURITIES AND USE OF PROCEEDS.
We have not sold any equity securities during the fiscal quarter ended September 30, 2008 that were not previously disclosed in a report that was filed during that period.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the third quarter of fiscal year 2008 to a vote of security holders, through the solicitation of proxies or otherwise.
ITEM 5.
OTHER INFORMATION.
On May 13, 2008 the Company issued 3,000 shares of its common shares for $10,500, or $3.50 per share.
On June 5, 2008, the Company issued 231,884 shares of its commons shares in conversion of an $800,000 debenture from Keyano Invest, Inc, a related party. The shares were converted at $3.45 per share.
In June 2008, the Company formed United Oil Services, Inc., a Nevada corporation as a wholly-owned subsidiary. United intends to conduct operations in the oil services industry.
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ITEM 6.
EXHIBITS.
31.1 Certification of Principal Executive Officer and Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer and Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.
DATED: November 18, 2008
LEXICON UNITED INCORPORATED | ||
By: | /s/ Elie Saltoun | |
Elie Saltoun | ||
Chief Executive Officer, | ||
President and Treasurer |
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EXHIBIT INDEX
Exhibit
Number
Description
31.1
Certification of Principal Executive Officer and Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Principal Executive Officer and Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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