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, 2009
¨ 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 has submitted electronically and posted on its corporate Website, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes No ¨
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 ¨ | Accelerated Filer ¨ | Non-Accelerated Filer ¨ (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 10, 2009, are as follows:
Class of Securities | Shares Outstanding | |
Common Stock, $0.001 par value | 8,708,134 |
TABLE OF CONTENTS
_________________
PART I - FINANCIAL INFORMATION | ||
ITEM 1. | INTERIM FINANCIAL STATEMENTS | 3 |
ITEM 2. | MANAGEMENT'S DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION | 12 |
ITEM 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 20 |
ITEM 4A(T). | CONTROLS AND PROCEDURES | 20 |
PART II - OTHER INFORMATION | ||
ITEM 1. | LEGAL PROCEEDINGS | 21 |
ITEM 1A | RISK FACTORS | 21 |
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES | 21 |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 22 |
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 22 |
ITEM 5. | OTHER INFORMATION | 22 |
ITEM 6. | EXHIBITS | 22 |
SIGNATURES | 23 |
2
PART I - FINANCIAL INFORMATION
ITEM 1. | INTERIM FINANCIAL STATEMENTS |
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 133,741 | $ | 291,453 | ||||
Accounts receivable | 391,304 | 342,144 | ||||||
Other receivables | 226,994 | 211,520 | ||||||
Prepaid expenses | 2,176 | 163 | ||||||
Total current assets | 754,215 | 845,280 | ||||||
FIXED ASSETS | ||||||||
Building, equipment, and leasehold improvements, net of accumulated depreciation of $398,360 and $237,570 at September 30, 2009 and December 31, 2008, respectively | 548,601 | 478,896 | ||||||
OTHER ASSETS | ||||||||
Investment in receivable portfolios | 625,216 | 529,742 | ||||||
Customer Lists, net of amortization of $192,645 and $154,116 at September 30, 2009 and December 31, 2008, respectively | 321,088 | 359,617 | ||||||
Tradenames, net of amortization of $82,563 and $66,050 at September 30, 2009 and December 31, 2008, respectively | 137,608 | 154,120 | ||||||
Goodwill | 693,141 | 693,141 | ||||||
Security deposit | 1,350 | 1,350 | ||||||
Total other assets | 1,778,403 | 1,737,970 | ||||||
TOTAL ASSETS | $ | 3,081,219 | $ | 3,062,146 | ||||
CURRENT LIABILITIES | ||||||||
Loans payable to banks | $ | 284,548 | $ | 267,039 | ||||
Current portion of long term debt | 301,490 | 365,782 | ||||||
Bank Overdrafts | 330,983 | 301,282 | ||||||
Note payable to an individual | 404,566 | 292,262 | ||||||
Accounts Payable | 228,926 | 102,049 | ||||||
Loans payable to officer | 392,197 | 187,605 | ||||||
Accrued Expenses | 788,094 | 477,571 | ||||||
Accrued Municipal Service Taxes | 163,791 | 125,017 | ||||||
Accrued Payroll and related taxes | 1,292,666 | 984,358 | ||||||
Accrued Employee Benefits | 149,339 | 113,919 | ||||||
Total Current Liabilities | 4,336,600 | 3,216,884 | ||||||
LONG TERM LIABILITIES | ||||||||
Long term debt | 151,300 | 167,872 | ||||||
Total Long Term Liabilities | 151,300 | 167,872 | ||||||
TOTAL LIABILITIES | 4,487,900 | 3,384,756 | ||||||
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, 8,708,134 and 8,696,134 shares issued and outstanding at September 30, 2009 and December 31, 2008 respectively | 8,708 | 8,696 | ||||||
Paid in capital | 2,749,942 | 2,725,954 | ||||||
Accumulated other comprehensive loss | (667,152 | ) | (99,028 | ) | ||||
Accumulated deficit | (3,437,978 | ) | (2,958,232 | ) | ||||
Total Lexicon Stockholders' Deficit | (1,346,480 | ) | (322,610 | ) | ||||
Non-Controlling Interest | (60,201 | ) | - | |||||
Total Deficit | (1,406,681 | ) | (322,610 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 3,081,219 | $ | 3,062,146 |
See accompanying notes to financial statements.
3
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
REVENUES | ||||||||||||||||
Service revenue | $ | 1,219,799 | $ | 1,214,201 | $ | 2,882,204 | $ | 3,310,310 | ||||||||
Revenue from receivable portfolios | - | 52,347 | 78,215 | 52,347 | ||||||||||||
Total revenues | 1,219,799 | 1,266,548 | 2,960,419 | 3,362,657 | ||||||||||||
COST OF SERVICES | 624,837 | 756,360 | 1,688,649 | 2,031,296 | ||||||||||||
GROSS PROFIT | 594,962 | 510,188 | 1,271,770 | 1,331,361 | ||||||||||||
COSTS AND EXPENSES | ||||||||||||||||
Selling, general and administrative | 536,324 | 462,968 | 1,191,410 | 1,321,341 | ||||||||||||
Depreciation | 27,721 | 31,999 | 75,123 | 111,438 | ||||||||||||
Amortization | 18,347 | 18,347 | 55,041 | 55,041 | ||||||||||||
Total costs and expenses | 582,392 | 513,314 | 1,321,574 | 1,487,820 | ||||||||||||
OPERATING INCOME (LOSS) | 12,570 | (3,126 | ) | (49,804 | ) | (156,459 | ) | |||||||||
OTHER INCOME (LOSS) | ||||||||||||||||
Interest expense | (212,942 | ) | (172,250 | ) | (539,914 | ) | (433,847 | ) | ||||||||
Foreign exchange and other | 18,640 | (26,882 | ) | 58,877 | (25,998 | ) | ||||||||||
Total Other Income(loss) | (194,302 | ) | (199,132 | ) | (481,037 | ) | (459,845 | ) | ||||||||
NET LOSS BEFORE INCOME TAX | (181,732 | ) | (202,258 | ) | (530,841 | ) | (616,304 | ) | ||||||||
Provision for income taxes | - | 7,165 | 0 | 7,165 | ||||||||||||
NET LOSS | (181,732 | ) | (209,423 | ) | (530,841 | ) | (623,469 | ) | ||||||||
Less: Net loss attributable to the noncontrolling interest | (23,018 | ) | - | (51,095 | ) | 0 | ||||||||||
NET LOSS ATTRIBUTABLE TO LEXICON UNITED INCORPORATED | $ | (158,714 | ) | $ | (209,423 | ) | $ | (479,746 | ) | (623,469 | ) | |||||
NET LOSS PER COMMON SHARE | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.06 | ) | $ | (0.07 | ) | ||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | 8,708,134 | 8,691,134 | 8,707,211 | 8,558,866 |
See accompanying notes to financial statements.
4
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (530,841 | ) | $ | (623,469 | ) | ||
Noncash items included in net loss: | ||||||||
Depreciation | 75,123 | 111,438 | ||||||
Amortization of intangibles | 55,041 | 55,041 | ||||||
Adjustment of fixed asset balances | - | 37,661 | ||||||
Accrued interest on loans to individual | 158,804 | - | ||||||
Stock based compensation | 24,000 | - | ||||||
Decrease (increase) in assets: | ||||||||
Accounts receivable | (113,299 | ) | (44,532 | ) | ||||
Other receivables | 222,694 | (80,899 | ) | |||||
Prepaid expenses | (1,963 | ) | (255 | ) | ||||
Security deposit | - | (1,350 | ) | |||||
Increase (decrease) in liabilities: | ||||||||
Accounts payable | 70,366 | 35,846 | ||||||
Accrued expenses | 172,862 | 199,797 | ||||||
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 132,787 | (310,722 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of fixed assets | (7,044 | ) | (24,246 | ) | ||||
Investment in receivable portfolio | 101,973 | (351,700 | ) | |||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | 94,929 | (375,946 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Loan from Keyano Invest, Inc | - | 1,000,000 | ||||||
Loan from related party | 299,388 | 88,788 | ||||||
Repayment of loans | (817,787 | ) | (503,315 | ) | ||||
Proceeds of new loans | 145,661 | 130,935 | ||||||
Issuance of common stock | - | 10,500 | ||||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | (372,738 | ) | 726,908 | |||||
EFFECT OF EXCHANGE RATE OF CASH | (12,690 | ) | (62,859 | ) | ||||
NET DECREASE IN CASH | (157,712 | ) | (22,619 | ) | ||||
CASH, BEGINNING OF PERIOD | 291,453 | 467,195 | ||||||
CASH, END OF PERIOD | $ | 133,741 | $ | 444,576 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
Interest paid | $ | 381,110 | $ | 423,935 | ||||
Non cash items | ||||||||
Purchase of furniture and equipment | $ | 43,095 | ||||||
Conversion of loan from Keyano Investment, Inc to common stock | $ | 800,000 | ||||||
Loans and accounts payable incurred for acquisition of receivable portfolio | $ | 327,117 | ||||||
Issuance of common stock for consulting services | $ | 24,000 |
See accompanying notes to financial statements
5
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
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, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. 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, 2008 filed April 15, 2009.
NOTE B – GOING CONCERN
As indicated in the accompanying financial statements, the Company has an accumulated deficit of $3,437,978 and negative working capital of $3,582,385 at September 30, 2009. Management’s plans include raising adequate capital through the equity markets to fund future operations and generating of revenue through its businesses. Failure to raise adequate capital and generate adequate sales revenues could result in the Company having to curtail or cease operations. Additionally, even if the Company does raise sufficient capital to support its operating expenses and generate adequate revenues, there can be no assurances that the revenue will be sufficient to enable it to develop business to a level where it will generate profits and cash flows from operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. However, 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 C– 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. Engepet and United Oil Services, Inc. were newly formed in 2008 and their transactions are not deemed to be significant.
NOTE D – NEW ACCOUNTING PRONOUNCEMENTS
Effective July 1, 2009, the Accounting Standards Codification became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles applicable to all public and non-public non-governmental agencies, superseding existing FASB, AICPA, EITF and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path through the content through the Topic, Subtopic, Section and Paragraph structure.
6
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
FASB ASC Topic 810, “Consolidation” New authoritative accounting guidance under ASC Topic 810, “Consolidation” amended prior guidance to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Under ASC topic 810, a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, ASC Topic 810 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. The new authoritative accounting guidance under ASC Topic 810 became effective on January 1, 2009 and the Company adopted it as of that date.
Further new authoritative accounting guidance under ASC Topic 810 amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its effect on the entity’s financial statements. This new authoritative accounting guidance under ASC Topic 810 will be effective January 1, 2010 and is not expected to have a significant impact on the Company’s financial statements.
FASB ASC Topic 820, “Fair Value Measurements and Disclosures.” New authoritative accounting guidance under ASC Topic 820, “Fair Value Measurements and Disclosures,” affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. ASC Topic 820 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. The new accounting guidance amended prior guidance to expand certain disclosure requirements. The new authoritative accounting guidance under ASC Topic 810 became effective on January 1, 2009 and did not have a material effect on the Company’s consolidated financial statements.
Further new authoritative accounting guidance (Accounting Standards Update No. 2009-5) under ASC Topic 820 provides guidance for measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. In such instances, a reporting entity is required to measure fair value utilizing a valuation technique that uses (i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when traded as assets, or (iii) another valuation technique that is consistent with the existing principles of ASC Topic 820, such as an income approach or market approach. The new authoritative accounting guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The forgoing new authoritative accounting guidance under ASC Topic 820 will be effective for the Company’s statements beginning October 1, 2009 and is not expected to have a significant impact on the Company’s financial statements.
7
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
FASB ASC Topic 855 “Subsequent Events”, formerly SFAS No. 165, “Subsequent Events” issued in May 2009, provides guidance which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. The Company evaluated events between the end of the most recent quarter, September 30, 2009 and November 13, 2009, the date the consolidated financial statements were issued and no additional disclosures were deemed necessary.
NOTE E – FAIR VALUE MEASUREMENTS
On January 1, 2008, The Company adopted the provisions of ASC Topic 820 “Fair Value Measurements and Disclosures” (prior authoritative literature: Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”), for financial assets and liabilities. On January 1, 2009, the Company adopted the provisions of Topic 820 for non-financial assets and non-financial liabilities that are recognized and disclosed at fair value on a nonrecurring basis. Topic 820 defines fair-value, provides guidance for measuring fair value and requires certain disclosures. It does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.
Topic 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
The Company’s financial instruments measured at fair value on a recurring basis are summarized below:
Financial Instruments | Fair Value Hierarchy | Fair Value at September 30, 2009 | Fair Value at December 31, 2008 | ||||
Cash and cash equivalents | Level 1 | $133,741 | $291,453 |
The Company does not have any non-financial assets or liabilities that are measured at fair value on a non-recurring basis.
NOTE F– INVESTMENT IN RECEIVABLE PORTFOLIO
The Company’s subsidiary ATN Capital e Participacoes Limitada (“ATN”) has extensive experience in the field of distressed credit card and consumer loan receivable collections. It had previously only collected distressed debt for large credit card companies and financial institutions in Brazil, on a commission basis. In 2008, in addition to working for the large institutions, it decided to purchase its own portfolio of distressed debt. The portfolio was purchased for R$1,299,458 (approximately US$816,294) on June 2, 2008. The portfolio includes past due and unpaid debt from more than 41,000 Brazilian consumers and has a face value of approximately R$500,000,000 (or US$305 million as of the purchase date).
8
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
The Company has adopted FASB ASC Subtopic 310-30 (“Subtopic 310-30”) “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (prior authoritative literature: AICPA Statement of Position 03-3 (“SOP 03-3”), “Accounting for Loans or Certain Securities Acquired in a Transfer”). In accordance with Subtopic 310-30, The Company can account for its investments in receivable portfolios using either the interest method or the cost recovery method. The interest method applies an effective interest rate to the cost basis of the pool. 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 Company used the interest method through June 30, 2009 and has determined that the amount and timing of future cash collections on the receivable portfolios are not reasonably predictable, and therefore, beginning July 1, 2009, will be using the cost recovery method. Under the cost recovery method of accounting, no income is recognized until the purchase price of the portfolio has been fully recognized.
During the six months ended December 31, 2008, the Company actually collected $169,936 which was $79,914 in excess of the amount provided in its original projections. During the six months ended June 30, 2009, the Company actually collected $78,215 which was $35,245 less than the amount provided in its original projections on a quarterly basis. The excess cash collections from 2008 combined with the decreased cash collections for the six months ended June 30, 2009 and the changes in exchange rates provided a reduction to the projected ended carrying amount of $14,729.
The following summarizes the Company’s portfolio activity using the cost recovery method:
Balance beginning on July 1, 2009 | $ | 604,856 | ||
Collections of portfolio receivables | (41,191 | ) | ||
Change in foreign exchange rate | 61,551 | |||
Balance, September 30, 2009 | $ | 625,216 |
The Company financed the purchase of the portfolio with two Notes Payable totaling R$626,200. The notes are due December 31, 2009 and bear interest at the rate of 2.0% per month. The notes are included in the captions 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, 2009, the balance of the loan including accrued interest, from officer is $92,646 and the loan from an individual is $386,026.
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, 2, 2008 to $730,813 at September 30, 2009. The difference of $85,481 is included in accumulated other comprehensive loss.
9
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
NOTE G – 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 H– 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 FASB ASC Subtopic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” using the cost recovery method commencing July 1, 2009 and the interest method prior to July 1, 2009. (See Note F).
NOTE I – FIXED ASSETS
During the quarters ended June 30, 2009 and September 30, 2009, the Company purchased new equipment valued at approximately $5,444 and $1,600, respectively.
NOTE J – RELATED PARTY
On January 7, 2009, June 1, 2009, and September 14, 2009 the Company borrowed funds totaling approximately $30,200, $5,000, and $22,500, respectively, from a shareholder. The interest rate is 2% per month. There is no maturity date, however, if either party decides to end the agreement, the loan must be repaid within 30 days. The balance of the loans at September 30, 2009 is $61,864.
During the quarter ended September 30, 2008, the Company borrowed approximately $352,000 from two related parties to finance the purchase of a receivable portfolio. The notes are due December 2009 and bear interest at the rate of 2.0% per month. The notes are included in the caption loans from officer and loan from an individual on the balance sheet. The loan from this individual is deemed to be a related party because of his affiliation with the Company. At September 30, 2009, the balance of the loan from officer is $92,646 and the loan from this individual is $386,026.
On a periodic basis the Company borrows funds from shareholders for working capital. At September 30, 2009 these borrowings total $239,795. Amounts due to the shareholder at September 30, 2009 is $2,108.
10
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2009
NOTE K – LOAN FROM AN INDIVIDUAL
In July, 2008, the Company borrowed approximately $65,000 from an individual for working capital. The loan is due January 12, 2010 and bears interest at the rate of 21.6% per year. The balance of the loan at September 30, 2009 is $18,540.
NOTE L - STOCKHOLDERS’ EQUITY
As of January 1, 2008, the Company has included 5,000 of its common shares as issued and outstanding for professional fees incurred. The shares were valued at $2.50 per share. Consulting expense charged to operations as of December 31, 2008 was $12,500. These shares are included as outstanding but have not yet been issued.
On January 22, 2009, the Company has included 12,000 of its common shares as issued and outstanding for consulting fees incurred. The shares were valued at $2.00 per share. Consulting expense charged to operations as of September 30, 2009 was $24,000. These shares are included as outstanding but have not yet been issued.
11
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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 annual 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:
· | “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$” are to the legal currency of the United States; |
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· | “Real,” “R$,” 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 FASB ASC Subtopic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” using the cost recovery method commencing July 1, 2009 and the interest method prior to July 1, 2009. Under the cost recovery method, revenues are only recognized after the initial investment has been recovered.
Goodwill and Intangible Impairment
The company accounts for goodwill in accordance with FASB ASC Topic 350 “Intangibles-Goodwill and Other” (formerly SFAS No. 142, Goodwill and Other Intangible Assets). As required by FASB ASC Topic 350, the Company tests for impairment of goodwill annually (at year-end) or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The required two-step approach uses accounting judgments and estimates of future operating results. Changes in estimates or the application of alternative assumptions could produce significantly different results. Impairment testing is done at a reporting unit level. The company performs this testing for its Brazilian operating segment which is considered a reporting unit under FASB ASC Topic 350. An impairment loss generally is recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The fair value of the company’s reporting unit was estimated using the expected present value of future cash flows using estimates, judgments, and assumptions that management believes were appropriate in the circumstances. The estimates and judgments that most significantly affect the fair value calculation are assumptions related to revenue growth, collection processes, and the discount rate.
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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 eighteen clients, but we currently rely on six 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 increased from fiscal years 2007 to 2008. During fiscal year 2008, 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 2008, 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.
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.
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Investment in Receivable Portfolio
The Company’s subsidiary ATN Capital e Participacoes Limitada (“ATN”) has extensive experience in the field of distressed credit card and consumer loan receivable collections. It had previously only collected distressed debt for large credit card companies and financial institutions in Brazil, on a commission basis. In 2008, in addition to working for the large institutions, it decided to purchase its own portfolio of distressed debt. The portfolio was purchased for R$1,299,458 (approximately US$816,294) on June 2, 2008. The portfolio includes past due and unpaid debt from more than 41,000 Brazilian consumers and has a face value of approximately R$500,000,000 (or US$305 million as of the purchase date).
The Company has adopted FASB ASC Subtopic 310-30 (“Subtopic 310-30”) “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (prior authoritative literature: AICPA Statement of Position 03-3 (“SOP 03-3”), “Accounting for Loans or Certain Securities Acquired in a Transfer”). In accordance with Subtopic 310-30, The Company can account for its investments in receivable portfolios using either the interest method or the cost recovery method. The interest method applies an effective interest rate to the cost basis of the pool. 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 Company used the interest method through June 30, 2009 and has determined that the amount and timing of future cash collections on the receivable portfolios are not reasonably predictable, and therefore, beginning July 1, 2009, will be using the cost recovery method. Under the cost recovery method of accounting, no income is recognized until the purchase price of the portfolio has been fully recognized.
During the six months ended December 31, 2008, the Company actually collected $169,936 which was $79,914 in excess of the amount provided in its original projections. During the six months ended June 30, 2009, the Company actually collected $78,215 which was $35,245 less than the amount provided in its original projections on a quarterly basis. The excess cash collections from 2008 combined with the decreased cash collections for the six months ended June 30, 2009 and the changes in exchange rates provided a reduction to the projected ended carrying amount of $14,729.
The following summarizes the Company’s portfolio activity using the cost recovery method:
Balance beginning on July 1, 2009 | $ | 604,856 | ||
Collections of portfolio receivables | (41,191 | ) | ||
Change in foreign exchange rate | 61,551 | |||
Balance, September 30, 2009 | $ | 625,216 |
The Company financed the purchase of the portfolio with two Notes Payable totaling R$626,200. The notes are due December 31, 2009 and bear interest at the rate of 2.0% per month. The notes are included in the captions 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, 2009, the balance of the loan including accrued interest, from officer is $92,646 and the loan from an individual is $386,026.
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, 2, 2008 to $730,813 at September 30, 2009. The difference of $85,481 is included in accumulated other comprehensive loss.
Results of Operations
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008.
The following table summarizes the results of our operations during the three month period ended September 30, 2009, and 2008 and provides information regarding the dollar and percentage increase or (decrease) from the three month period ended September 30, 2009 to the same period of 2008.
9/30/09 | 9/30/08 | Increase (Decrease) | Percentage Increase (Decrease) | |||||||||||||
Revenues | 1,219,799 | 1,266,548 | (46,749 | ) | (3.69 | ) | ||||||||||
Cost of Services | 624,837 | 756,360 | (131,523 | ) | (17.39 | ) | ||||||||||
Selling, General and Administrative Expense | 536,324 | 462,968 | 73,356 | 15.84 | ||||||||||||
Interest expense | 212,942 | 172,250 | 40,692 | 23.62 | ||||||||||||
Depreciation & amortization | 46,068 | 50,346 | (4,278 | ) | (8.5 | ) | ||||||||||
Foreign Exchange & other | 18,640 | (26,882 | ) | 45,522 | 169.34 | |||||||||||
Net income (loss) –Lexicon United | (158,714 | ) | (209,423 | ) | 50,709 | 24.21 | ||||||||||
Earnings (Loss) per common share | (.02 | ) | (.02 | ) | 0 | 0 |
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We had revenues of $1,219,799 for the three month period ended September 30, 2009, compared to revenues of $1,266,548 during the same period in 2008. Our revenues decreased 3.69% in the three month period ended September 30, 2009 primarily due to change in recognizing revenue from our distressed debt portfolio from the interest method to the cost recovery method during the quarter ended September 31, 2009..
Our cost of services for the three month period ended September 30, 2009 was $624,837 as compared to $756,360 during the same period in 2008. This decrease of $131,523 is primarily the result of increases in postal/mail expenses and employee benefits, offset by decreases in expenses in internship programs and changes in the foreign exchange rate.
Selling, general and administrative expenses increased by $73,356 or 15.84%, to $536,324 in the three month period ended September 30, 2009 compared to $462,968 in the same period in 2008. The change is the result of increased telephone expense offset by the changes in the foreign exchange rate.
Interest expense for the three month period ended September 30, 2009 was $212,942 and interest expense in the same period of 2008 was $172,250. Interest expense increased 23.62% in the three month period ended September 30, 2009 due to the increase of new borrowings over the past year and was offset by the changes in the foreign exchange rate.
During the three month period ended September 30, 2009 we incurred a net loss of $(158,714) compared with $(209,423) for the same period in the prior year. The decrease in our loss is primarily due to the change in foreign exchange rates offset by increased expenses and decreased revenues as described above in addition to the adoption of FASB ASC Topic 810, which allocated ($23,018) loss to the non-controlling interest.
Loss per common share for the three month period ended September 30, 2009 was $(.02) as compared to a loss of $(.02) during the same period of 2008.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008.
The following table summarizes the results of our operations during the nine month period ended September 30, 2009, and 2008 and provides information regarding the dollar and percentage increase or (decrease) from the nine month period ended September 30, 2009 to the same period of 2008.
9/30/09 | 9/30/08 | Increase (Decrease) | Percentage Increase (Decrease) | |||||||||||||
Revenues | 2,960,419 | 3,362,657 | (402,238 | ) | (11.96 | ) | ||||||||||
Cost of Services | 1,688,649 | 2,031,296 | (342,647 | ) | (16.87 | ) | ||||||||||
Selling, General and Administrative Expense | 1,191,410 | 1,321,341 | (129,931 | ) | (9.83 | ) | ||||||||||
Interest expense | 539,914 | 433,847 | 106,067 | 24.45 | ||||||||||||
Depreciation & amortization | 130,164 | 166,479 | (36,315 | ) | (21.81 | ) | ||||||||||
Foreign Exchange & other | 58,877 | (25,998 | ) | 84,875 | 326.47 | |||||||||||
Net income (loss) –Lexicon United | (479,746 | ) | (623,469 | ) | 143,723 | 23.05 | ||||||||||
Earnings (Loss) per common share | (.06 | ) | (.07 | ) | .01 | 14.29 |
We had revenues of $2,960,419 for the nine month period ended September 30, 2009, compared to revenues of $3,362,657 during the same period in 2008. Our revenues decreased 11.96% in the nine month period ended September 30, 2009 primarily due to inactivity of Engepet Energy Enterprises and an increase in collections of receivables offset by the effect of changes in the foreign exchange rate.
Our cost of services for the nine month period ended September 30, 2009 was $1,688,649 as compared to $2,031,296 during the same period in 2008. This decrease of $342,647 is primarily the result of increased postal and mail services, increase in employee related expenses offset by a decrease in internship program expenses, inactivity of Engepet Energy Enterprises and the effect of changes in the foreign exchange rate.
Selling, general and administrative expenses decreased by $129,931 or 9.83 %, to $1,191,410 in the nine month period ended September 30, 2009 compared to $1,321,341 in the same period in 2008. The change is the result of decreases in consultant, and bank fees, offset by increases in telephone expenses and agreement losses and the effect of changes in the foreign exchange rate.
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Interest expense for the nine month period ended September 30, 2009 was $539,914 and interest expense in the same period of 2008 was $433,847. Interest expense increased 24.45% in the nine month period ended September 30, 2009 due to an increase of new borrowings over the past year and was offset by the changes in the foreign exchange rate.
During the nine month period ended September 30, 2009 we incurred a net loss of $(479,746) compared with $(623,469) for the same period in the prior year. The decrease in our loss is primarily due to the changes in expenses and revenues as described above, the effect of the change in the foreign exchange rate in addition to the adoption of FASB ASC Topic 810, which allocated ($51,095) loss to the non-controlling interest.
Loss per common share for the nine month period ended September 30, 2009 was $(.06) as compared to a loss of $(.07) during the same period of 2008.
Cash Flow Items
The following table provides the statements of net cash flows for the nine month period ended September 30, 2009.
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
Net Cash Provided By (Used in) Operating Activities | 132,787 | (310,722 | ) | |||||
Net Cash Provided By (Used in) Investing Activities | 94,929 | (375,946 | ) | |||||
Net Cash Provided By (Used In) Financing Activities | (372,738 | ) | 726,908 | |||||
Net Decrease in Cash and Cash Equivalents | (157,712 | ) | (22,619 | ) | ||||
Cash and Cash Equivalents - Beginning of Period | 291,453 | 467,195 | ||||||
Cash and Cash Equivalents - End of Period | 133,741 | 444,576 |
We provided $132,787 of cash from our operating activities during the nine month period ended September 30, 2009 as compared to $310,722 cash used during the nine month period ended September 30, 2008. The difference of $443,509 is mainly attributable to a decrease in net loss of $92,628 and to changes in other receivables of $303,593.
We provided $94,929 in cash from our investing activities during the nine month period ended September 30, 2009, as compared to $375,946 used in the prior period ending September 30, 2008. These funds were used for the purchase of fixed assets and the investment in the receivable portfolio.
We used a net of $372,738 from financing activities during the nine month period ended September 30, 2009 as compared to providing funds of $726,908 during the nine month period ended September 30, 2008. The change is primarily due to a decrease in related party borrowings for the nine months ended September 30, 2009.
Balance Sheet Items
As of September 30, 2009, we had total current assets of $754,215, as compared to $1,026,377 as of September 30, 2008. Our total assets as of September 30, 2009 were $3,081,219 as compared to $3,703,639 as of September 30, 2008. We had total current liabilities of $4,336,600 as of September 30, 2009 as compared to $3,884,873 as of September 30, 2008, and we had total liabilities of $4,487,900 as of September 30, 2009 as compared to $4,120,638 as of September 30, 2008.
The decrease in total assets is primarily due to a decrease in cash of $310,835, a decrease in the investment in receivable portfolio of $53,601, a decrease in customer lists and tradenames of $73,389 and a decrease in fixed assets of $63,268. The increase in total liabilities is due to an increase in borrowings, accounts payable, and accrued expenses offset by the effects of the change of the foreign exchange rates.
As of September 30, 2009, our total Stockholders’ Equity (deficit) was $(1,406,681) as compared to $(416,999) at September 30, 2008. This change was due to an increase in capital stock and paid in capital of $36,500 offset by operating losses and gains due to foreign exchange rates.
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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 and payroll tax liabilities 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 $133,741 as of September 30, 2009 and we had short-term liabilities in the amount of $4,336,600, as well as long-term liabilities in the amount of $151,300 as of September 30, 2009. 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 and related payroll tax lia-bilities 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, 2009, we had cash assets of $133,741 and total assets of $3,081,219 as compared to cash assets of $444,576 and total assets of $3,703,639 as of September 30, 2008. The decrease in total assets is primarily due to a decrease in cash of $310,835, a decrease in the investment in receivable portfolio of $53,601, a decrease in customer lists and tradenames of $73,389 and a decrease in fixed assets of $63,268. We have a $(3,582,385) negative working capital at September 30, 2009, of which $1,605,796 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 26% to 42% per year. The balance of the loans at September 30, 2009 was $284,548.
Long-Term Debt
On April 17, 2006, the Company closed on a Real Estate transaction to purchase the 8th floor of an executive office building for ATN Capital E Participacoes, Ltda.’s executive offices. The purchase price of approximately $176,489 was funded with a 20% down payment payable over four months and an 8 year adjustable rate mortgage currently at 13.29%.
In August 2006, the Company purchased new computer equipment from DELL Brazio. The equipment valued at approximately $38,395 is financed over a three year period at 14.4% per year. The loan has been paid in full.
In September 2006, the Company purchased new furniture. The furniture valued at approximately $112,161 is financed over a five year period at 5.69% per year plus the inflation index. The loan is payable in 48 monthly installments commencing October 8, 2007. The loan is secured by the furniture.
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 plus interest of 2.73% per month, commencing July, 2007. The loans are personally guaranteed by ATN’s directors. The loans have been paid in full.
In June, 2007, the Company borrowed a working capital loan from Banco Bradesco. The loan is valued at approximately $207,400 and is payable in 24 monthly installments plus interest of 2.60% per month, commencing July, 2007. The loan is personally guaranteed by ATN’s directors. The loan has been paid in full.
During the year ended December 31, 2007, the Company purchased new computer equipment from DELL Brazio. The equipment valued at approximately $189,500 is financed over a three year period plus interest at rates ranging from 12% to 12.84% per year. The loan is secured by the computer equipment..
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In January 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.
In July, 2008, the Company borrowed approximately $77,000 from Banco ITAU. The loan is payable in 18 monthly installments plus interest of 2.28% per month, commencing August, 2008. The loan is personally guaranteed by ATN’s directors..
In July, 2008, the Company borrowed approximately $3,500 from Officer Distrib. The loan is payable in 36 monthly installments plus interest of 1.15% per month, commencing August, 2008. The loan is personally guaranteed by ATN’s directors.
In October, 2008, the Company borrowed approximately $60,000 from Banco ITAU. The loan is payable in 9 monthly installments plus interest of 2.88% per month, commencing August, 2009. The loan is personally guaranteed by ATN’s directors..The loan has been paid in full.
In November, 2008, the Company borrowed approximately $43,000 from Banco Bradesco. The loan is payable in 12 monthly installments plus interest of 3.3% per month, commencing November, 2008. The loan is personally guaranteed by ATN’s directors.
In November, 2008, the Company borrowed approximately $52,000 from Unibanco-Capital De Giro. The loan is payable in 12 monthly installments plus interest of 3.3% per month, commencing November, 2008. The loan is personally guaranteed by ATN’s directors..
During the year ended December 31, 2008, the Company purchased new computer equipment from DELL Brazio. The equipment valued at approximately $15,500 is financed over a three year period plus interest at rates ranging from 11.4% to 13.8% per year. The loan is secured by the computer equipment..
In December, 2008, the Company borrowed approximately $30,000 from Banco Real. The loan is payable in 12 monthly installments plus interest of 3.2% per month, commencing December, 2008. The loan is personally guaranteed by ATN’s directors..
In June, 2009, the Company borrowed approximately $16,000 from Banco Real. The loan is payable in 12 monthly installments plus interest of 2.8% per month, commencing July, 2009. The loan is personally guaranteed by ATN’s directors.
In June, 2009, the Company borrowed approximately $25,000 from Banco Mercantile do Brasil. The loan is payable in 12 monthly installments plus interest of 3.2% per month, commencing July, 2009. The loan is personally guaranteed by ATN’s directors.
In June, 2009, the Company borrowed approximately $51,000 from Banco Bradesco. The loan is payable in 12 monthly installments plus interest of 2.05% per month, commencing July, 2009. The loan is personally guaranteed by ATN’s directors.
In July, 2009, the Company borrowed approximately $42,500 from Banco Santander. The loan is payable in 18 monthly installments plus interest of 2.53% per month, commencing August, 2009. The loan is personally guaranteed by ATN’s directors.
An analysis of the current and long-term portion of the debt at September 30, 2009 is as follows:
Total loans outstanding | $ | 452,790 | ||
Less: current portion | $ | 301,490 | ||
Long-term portion | $ | 151,300 |
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.
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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.
Seasonality
Our operating results are not affected by seasonality.
Inflation
Our business and operating results are not affected in any material way by inflation.
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.
Item 4A(T). CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
· | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; |
· | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
As of September 30, 2009, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
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The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures and (2) inadequate segregation of duties consistent with control objectives. The aforementioned material weaknesses were identified by our Chief Executive Officer in connection with the review of our financial statements as of September 30, 2009.
Management believes that the material weakness set forth in item (2) above did not have an effect on our financial results. However, management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.
Management’s Remediation Initiatives
In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:
We will create a position to segregate duties consistent with control objectives and will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us. And, we plan to appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available to us.
Management believes that the appointment of one or more outside directors, who shall be appointed to a fully functioning audit committee, will remedy the lack of a functioning audit committee and a lack of a majority of outside directors on our Board.
We anticipate that these initiatives will be at least partially, if not fully, implemented by December 31, 2010. Additionally, we plan to test our updated controls and remediate our deficiencies by December 31, 2010.
Internal Controls Over Financial Reporting
During the quarter ended September 30, 2009, 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 1A.
RISK FACTORS.
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.
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, 2009 that were not previously disclosed in a report that was filed during that period.
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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 2009 to a vote of security holders, through the solicitation of proxies or otherwise.
ITEM 5.
OTHER INFORMATION.
Effective September 1, 2009, Jeffrey Nunez was elected a Vice President of the Company
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.
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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 16, 2009
LEXICON UNITED INCORPORATED | |
By: | /s/ Elie Saltoun |
Elie Saltoun | |
Chief Executive Officer, |
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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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