ITEM 1. BUSINESS.
Background
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 Capital e Participacoes Ltd. ("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.
Acquisition of ATN Capital & Participações Ltda
On February 27, 2006, we completed an acquisition transaction with ATN whereby we acquired 400,000 shares of ATN common stock, constituting 80% of ATN’s issued and outstanding capital stock, from the two stockholders of ATN in exchange for 2,000,000 shares our common stock. Upon the consummation of such share exchange, the two stockholders of ATN became holders of approximately 23.72% of our outstanding common stock in the aggregate and ATN became our majority-owned subsidiary. When we refer in this report to business for periods prior to the consummation of the acquisition, we are referring to the business of ATN.
Our Business Generally
The Company and its subsidiary, ATN, are engaged in the business of purchasing, managing and collecting defaulted consumer receivables for its own account and managing, collecting and servicing portfolios of defaulted and charged-off account receivables for large financial institutions in Brazil. These receivables are acquired from consumer credit originators, primarily credit card issuers in Brazil.
ATN is was formed in 1997 and is a financial service company specialized in collection and credit recovery. ATN employs a staff of more than 300, who seek to locate and contact customers and arrange payment or resolution of their debt on a friendly basis.
The Company intends to continue to raise the necessary capital to facilitate its subsidiary to purchase “selected” defaulted and charged-off account receivable portfolios. The Company further intends to position ATN as one of the principal companies in the debt recovery market in Brazil with a proven operational platform. We believe that purchasing and servicing our “own” debt portfolios can result in a saving of costs and time over servicing third party collections.
We derive our revenues primarily from collection of distressed debt by either entering into non-binding agreements with financial institutions to collect their debt or acquiring portfolios of distressed debt for our own account. Where we are collecting debt for a third party, 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.
The types of receivables that we generally manage include charged-off receivables, which are accounts receivable that have been written-off by the originators and may have been previously serviced by collection agencies, and semi-performing receivables, which are accounts receivable where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators.
In addition, the Company also engages in the provision of oilfield services through its two subsidiaries, Engepet Energy Enterprises, Inc. and United Oil Services, Inc. As of this date, these subsidiaries are in a start-up phase and have produced only minimal revenues.
An Overview of Our Industry
The servicing and collection of charged-off and semi-performing consumer receivables in Brazil is a growing industry that is driven by:
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increasing levels of consumer debt;
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increasing defaults of the underlying receivables; and
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increasing utilization of third-party providers to collect such receivables.
The Company believes that consumer credit in Brazil has been increasing in the past several years and will continue growing in the future.
We believe that as a result of the difficulty in collecting these receivables and the desire of originating institutions to focus on their core businesses and to generate revenue from these receivables, originating institutions are increasingly electing to outsource the servicing of these receivables.
Strategy
Our primary objective is to utilize our management's experience and expertise to effectively grow our business by identifying, evaluating and servicing consumer receivable portfolios and maximizing collections of such receivables in a cost efficient manner.
Our strategy includes utilizing the systemization of our operations to reduce overhead costs and to provide intensive training to our call center representatives to increase our percentage of successful account receivable collections.
Our management team also includes statisticians that have developed models that guide our collection efforts and assist us in deciding the extent to which we believe we can successfully recover a charged-off or semi-performing receivable.
Our Services
Engagement Planning.
Our approach to accounts receivable management and collection for each client is determined by a number of factors, including account size and demographics, the client’s specific requirements and management’s estimate of the collectibility of the account. We have standard accounts receivable management and collection methods that we employ to collect accounts receivable. These methods were developed based on our 8 years of experience in this industry. In order to properly serve our customers we carefully study our customer’s account receivable needs and employ the proper collection method for each particular client. In most cases, our approach to accounts receivable collection changes over time as the relationship with the client develops and both parties evaluate the most effective means of recovering accounts receivable. Our standard approach, which may be tailored to the specialized requirements of each client, defines and controls the steps that will be undertaken by us on behalf of the client and the manner in which we will report data to the client. Through our systematic approach to accounts receivable management and collection, we remove most decision making from the recovery staff and ensure uniform, cost-effective performance.
Once the approach has been defined, we transfer pertinent client data into our information system. When the client’s records have been established in our system, we begin the recovery process.
Account Notification.
We initiate the recovery process by forwarding a preliminary letter that is designed to seek payment of the amount due or open a dialogue with client’s customers who cannot afford to pay at the current time. Telephone representatives remind the client’s customer of their obligation, inform them that their account has been placed for collection with us and begin a dialogue to develop a friendly payment program.
Determination of Obligor Contact Data.
In cases where the client’s customer’s contact information is unknown, we conduct research through the “CreditLink” system to determine a means of contacting the customer debtor. “CreditLink” is a third-party service that assists with investigations into customer contact information. Once we have located the client’s customer, the notification process can begin.
Payment Process.
After we receive payment from the client’s customer, depending on the terms of our contract with the client, we can either remit the amount received minus our fee to the client or remit the entire amount received to the client and subsequently bill the client for our collection services. Where we own the accounts, the proceeds of collection are retained by the Company.
Activity Reports.
Clients are provided with a system-generated set of customized reports that fully describe all account activity and current status. These reports are typically generated daily; however, the information included in the report and the frequency that the reports are generated can be modified to meet the needs of the client.
Quality Tracking.
We emphasize quality control throughout all phases of the accounts receivable management and collection process. Some clients may specify an enhanced level of supervisory review and others may request customized quality reports. Large financial services organizations will typically have exacting performance standards which require sophisticated capabilities, such as documented complaint tracking.
Collection Strategy
In connection with each collection matter, we perform a collectibility analysis utilizing information prepared by our statisticians. This analysis is the basis for our collection efforts and dictates our strategy for any particular receivable or group of receivables. We continuously refine this analysis to determine the most effective collection strategy to pursue for each account.
Our collection strategies consist of:
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Call Centers. We maintain an inbound and outbound collection call center at ATN’s executive offices in Rio De Janeiro in Brazil. Our collections department is divided into two client teams, each team consisting of a collection manager and six or seven collection supervisors, each assigned to an individual client. Each collection supervisor is in charge of anywhere from 4 to 15 collectors. Collectors are trained to use a friendly but firm approach to assess the willingness of the customer to pay. They attempt to work with customers to evaluate sources and means of repayment to achieve a full or negotiated lump sum settlement or develop payment programs customized to the individual's ability to pay. In cases where a payment plan is developed, collectors encourage debtors to pay through automatic payment arrangements, if available.
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Legal Action. We generally outsource those accounts where it appears the debtor is able but unwilling to pay. We utilize lawyers that are independent from us, but who are located on our premises. These lawyers specialize in collection matters and we pay them a contingency fee on amounts collected. The name of the firm that we use is Andrada & Negreiros Associates. Prior to sending accounts to the law firm, our collectors communicate to the debtor our intention to have a lawyer evaluate the suitability of the account for litigation if payment arrangements cannot be established.
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Direct Mail. We have an in-house marketing team that develops mail campaigns. The mail campaigns generally offer debtors targeted discounts on their balance owed to encourage settlement of their accounts and provide us with a low cost recovery method.
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Removal from Restricted Lists. There are two restrictions imposed upon debtors in Brazil that fail to pay their debts when they come due. The first is called “Serasa”, which is a restriction imposed by every Brazilian bank. Such debtor’s names are put on the Serasa restricted list and no Brazilian Bank will provide them credit. The second restricted list is called “SPC”, which is a restriction imposed by Brazilian merchants. Once a debtor’s name is put on the SPC list, merchants will no longer provide the debtor with credit. Once we agree with the debtor on a payment program and the debtor makes the first installment towards such program, we notify our client that a payment has been made. The client then causes such debtor’s name to be removed from such lists. The removal of a debtor’s name from such lists is very beneficial to the debtor, who may then be able to obtain limited credit and who no longer has to suffer the other negative social effects of being on such lists.
Call Center
We provide our services through the operation of our main call center, located in Rio de Janeiro, Brazil.
We maintain disaster recovery contingency plans and have implemented procedures to protect against the loss of data resulting from power outages, fire and other casualties. We believe fast recovery and continuous operation are ensured.
Quality Assurance and Client Service
In the accounts receivable management industry, a company’s reputation for quality service is of the utmost importance. We regularly measure the quality of our services by capturing and reviewing such information as the amount of time spent talking with clients’ customers, level of customer complaints and operating performance. In order to provide ongoing improvement to our telephone representatives’ performance and to ensure compliance with our policies and standards, quality assurance personnel supervise each telephone representative on a frequent basis and provide ongoing training to the representative based on this review.
We maintain a client service department to promptly address client issues and questions and alert senior executives of potential problems that require their attention. In addition to addressing specific issues, a team of client service representatives contacts clients on a regular basis in order to establish a close rapport, determine clients’ overall level of satisfaction, and identify practical methods of improving their satisfaction.
Major Customers
We receive the majority of our revenues and income from less than ten major clients. 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 customers were to significantly reduce their amount of service, fail to pay, or terminate their relationships with us altogether, our business could be harmed.
Personnel and Training
All of our call center personnel receive comprehensive training that instructs in each of the following topics:
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how to use the system;
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how to communicate with the client;
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scripts; and
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role playing.
These programs are conducted through a combination of classroom and role-playing sessions. New employees receive training on how to use our operating systems and on how to approach clients. Special orientations are also given out to employees on the respect of customer’s codes and how to respect creditors’ rights. Various upgrades and incentives are closely monitored by our human resource supervisor, including an upscale gradual commission that is awarded to each employee reaches at least 70% of the targeted performance.
Sales and Marketing
Our sales force is comprised of ATN’s senior management team, which markets our accounts receivable services to potential clients.
Competition
The accounts receivable management and collection industry in Brazil is highly competitive. We compete with a large number account receivable management providers, including Sincred, Mastercob and Easycob. Some of our competitors may offer more diversified services and/or operate in broader geographic areas than we do. In addition, many companies perform accounts receivable management services through their own in-house staff. Moreover, many larger clients retain multiple outsourcing providers, which exposes us to continuous competition in order to remain a preferred vendor. We believe that the primary competitive factors in obtaining and retaining clients are the ability to provide customized solutions to a client’s requirements, personalized quality service, sophisticated call and information systems, and price.
Regulation
The accounts receivable management industry in Brazil is regulated by Brazil Consumer Defense Code (Law 8078 of September 11, 1990). The Consumer Defense Code is a regulatory entity designed to maintain a standard procedure to protect the privacy and rights of the debtors. It is intended to limit and outline the collection procedure so that such procedure remains within acceptable commercial practice. No pressure or harassment is permitted. We believe that we are in compliance in all material respects with all applicable regulations.
Employees
As of December 31, 2009, we had a total of approximately 300 full-time employees. Our employees are not represented by a labor union. We believe that our relations with our employees are satisfactory.
ITEM 1A.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below before you purchase any of our common stock. If any of these risks or uncertainties actually occurs, our business, financial condition or results of operations could be materially adversely affected. In this event you could lose all or part of your investment.
Financial Risks
We only have approximately $136,308 in cash and if we are unable to raise more money we will be required to delay, scale back or eliminate our marketing and development programs.
As of December 31, 2009, we had approximately $136,308 in cash available to fund our operations, which includes cash held by both Lexicon and ATN on a consolidated basis. The amounts and timing of our expenditures will depend primarily on our ability to raise additional capital. We may seek to satisfy our future funding requirements through new offerings of securities or from other sources, including loans from our controlling stockholders. Additional financing may not be available when needed or on terms acceptable to us. We have no current commitment for additional financing. Unavailability of financing may require us to delay, scale back or eliminate some or all of our marketing and development programs. To the extent we raise additional capital by issuing equity securities, your ownership interest would be diluted.
Risks Relating To Our Business
The company has a history of losses and may need additional financing to continue its operations, and such financing may not be available upon favorable terms, if at all.
We have incurred net losses of $73,996 in 2009 and $760,747 in 2008 and an accumulated deficit of $2,958,232 and have a negative working capital of $2,112,263 at December 31, 2009. There can be no assurances that we will be able to operate profitably in the future. In the event that we are not successful in implementing its business plan, we will require additional financing in order to succeed. There can be no assurance that additional financing will be available now or in the future on terms that are acceptable to us. If adequate funds are not available or are not available on acceptable terms, we may be unable to develop or enhance our services, take advantage of future opportunities or respond to competitive pressures, all of which could have a material adverse effect on our business, financial condition or operating results.
There is substantial doubt about our ability to continue as a going concern due to significant recurring losses from our operations and our accumulated deficit.
There is substantial doubt about our ability to continue as a going concern due to significant recurring losses from our operations and our accumulated deficit, all of which means that we may not be able to continue operations unless we obtain additional funding. Management’s plans include raising capital through the equity markets to fund future operations and generating of revenue through its business. Failure to raise adequate capital and generate adequate sales revenues could result in our having to curtail or cease operations. Additionally, even if we do 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 us to develop business to a level where we will generate profits and cash flows from operations.
Our business is dependent on our ability to grow internally and if we cannot achieve internal growth our business, results of operations and financial results will suffer.
Our business is dependent on our ability to grow internally, which is dependent upon:
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Our ability to retain existing clients and expand our existing client relationships; and
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Our ability to attract new clients.
Our ability to retain existing clients and expand those relationships is subject to a number of risks, including the risk that:
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We fail to maintain the quality of services we provide to our clients;
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We fail to maintain the level of attention expected by our clients;
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We fail to successfully leverage our existing client relationships to sell additional services; and
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We fail to provide competitively priced services to our clients.
Our ability to attract new clients is subject to a number of risks, including:
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The market acceptance of our service offerings;
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The quality and effectiveness of our sales personnel; and
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The competitive factors within the accounts receivable management industry in Brazil.
If our efforts to retain and expand our client relationships and to attract new clients do not prove effective, it could have a materially adverse effect on our business, results of operations and financial condition.
If we are not able to respond to technological changes in telecommunications and computer systems in a timely manner, we may not be able to remain competitive.
Our success depends in large part on our sophisticated telecommunications and computer systems. We use these systems to identify and contact large numbers of debtors and record the results of our collection efforts. If we are not able to respond to technological changes in telecommunications and computer systems in a timely manner, we may not be able to remain competitive. We anticipate that it will be necessary to invest in technology in the future to remain competitive. Telecommunications and computer technologies are changing rapidly and are characterized by short product life cycles, so we must anticipate technological developments. If we are not successful in anticipating, managing, or adopting technological changes on a timely basis or if we do not have the capital resources available to invest in new technologies, our business could be materially adversely affected.
We are highly dependent on our telecommunications and computer systems.
As noted above, our business is highly dependent on our telecommunications and computer systems. These systems could be interrupted by terrorist acts, natural disasters, power losses, or similar events. Our business is also materially dependent on services provided by various local telephone companies. If our equipment or systems cease to work or become unavailable, or if there is any significant interruption in telephone services, we may be prevented from providing services. Because we generally recognize revenue only as accounts receivables are collected, any failure or interruption of services would mean that we would continue to incur payroll and other expenses without any corresponding income.
An increase in communication rates or a significant interruption in communication service could harm our business.
Our ability to offer services at competitive rates is highly dependent upon the cost of communication services provided by various local telephone companies. Any change in the telecommunications market that would affect our ability to obtain favorable rates on communication services could harm our business. Moreover, any significant interruption in communication service or developments that could limit the ability of telephone companies to provide us with increased capacity in the future could harm existing operations and prospects for future growth.
We compete with a large number of providers in the accounts receivable and collection industry in Brazil. We may be forced to lower our rates to compete effectively, which will result in lower profit margins.
In the accounts receivable management and service industry in Brazil, we compete with sizable corporations, as well as many regional and local firms. We may lose business to competitors that offer more diversified services and/or operate in broader geographic areas than we do. We may also lose business to regional or local firms who are able to use their proximity to or contacts with local clients as a marketing advantage. In addition, many companies perform the accounts receivable management services offered by us in-house. Many larger clients retain multiple accounts receivable service providers, which exposes us to continuous competition in order to remain a preferred provider. Because of this competition, in the future we may have to reduce our fees to remain competitive and this competition could have a materially adverse effect on our future financial results.
All of our clients are concentrated in the financial services sector. If this sector performs poorly or if there are any adverse trends in this sector, we will have fewer customers, which will result in lower revenues.
We derive virtually all of our revenues from clients in the financial services sector. If this sector performs poorly, clients in this sector may do less business with us, or they may elect to perform the services provided by us in-house. If there are any trends in this sector to reduce or eliminate the use of third-party accounts receivable service providers, it could harm our business.
Our success depends on our senior management team and the senior management team of our operating subsidiary, ATN, and if we are not able to retain them, we will have significant operating problems.
We are highly dependent upon the continued services and experience of our senior management team. We depend on the services of our senior management team to, among other things, continue the development and implementation of our growth strategies, and maintain and develop our client relationships.
We are dependent on our employees and a higher turnover rate would result in higher costs to train new personnel and could lead to poor service, which would negatively affect our financial condition and operations.
We are dependent on our ability to attract, hire and retain qualified employees. The Brazilian accounts receivable service and management industry, by its nature, is labor intensive and experiences a high employee turnover rate. Many of our employees receive modest hourly wages and some of these employees are employed on a part-time basis. A higher turnover rate among our employees would increase our recruiting and training costs and could materially adversely impact the quality of services we provide to our clients. If we were unable to recruit and retain a sufficient number of employees, we would be forced to limit our growth or possibly curtail our operations. Growth in our business will require us to recruit and train qualified personnel at an accelerated rate from time to time. We cannot assure you that we will be able to continue to hire, train and retain a sufficient number of qualified employees to meet the needs of our business or to support our growth. If we are unable to do so, our results of operations could be harmed. Any increase in hourly wages, costs of employee benefits or employment taxes in Brazil could also have a materially adverse affect.
We may experience variations from quarter to quarter in operating results and net income that could adversely affect the price of our common stock.
Factors that could cause quarterly fluctuations include, among other things, the following:
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The timing of our clients’ accounts receivable collection programs and the commencement of new contracts and termination of existing contracts;
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Customer contracts that require us to incur costs in periods prior to recognizing revenue under those contracts;
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The effects of a change of business mix on profit margins;
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The timing of additional selling, general and administrative expenses to support new business;
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Fluctuations in foreign currency exchange rates;
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The amount and timing of new business; and
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That our business tends to be slower during summer and holiday seasons.
Most of our accounts receivable management contracts do not require clients to place accounts with us, may be terminated on 30 or 60 days notice and are on a contingent fee basis. We cannot guarantee that existing clients will continue to use our services at historical levels, if at all.
Under the terms of most of our accounts receivable management contracts, clients are not required to give accounts to us for collection and usually have the right to terminate our services on 30 or 60 days notice. Accordingly, we cannot guarantee that existing clients will continue to use our services at historical levels, if at all. In addition, most of these contracts provide that we are entitled to be paid only when we collect accounts. Therefore, under applicable accounting principles, we can recognize revenues only upon the collection of funds on behalf of clients.
We rely on a small number of major clients for a significant portion of our revenues. The loss of these customers as our clients or their failure to pay us could reduce revenues and adversely affect the results of our operations.
We receive the majority of our revenues and income from less than ten major clients. 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 customers were to significantly reduce their amount of service, fail to pay, or terminate their relationships with us altogether, our business could be harmed.
We have engaged in transactions with members of our Board of Directors, significant stockholders, and entities affiliated with them; future transactions with related parties could pose conflicts of interest.
In the past, we have engaged in transactions with members of our Board of Directors, significant stockholders, and entities affiliated with them, which inherently give rise to conflicts of interest. For example, certain of these parties have previously provided debt financing to us and have received additional equity interests, such as shares of our stock upon the conversion of such debt financing. Transactions with related parties such as these pose a risk that such transactions are on terms that are not as beneficial to us as those that may be arranged with third parties.
Risks of Doing Business in Brazil
The executive offices of our subsidiary and all of our operations are based in Brazil. Accordingly, we are subject to all of the risks inherent in doing business in a foreign jurisdiction.
The executive offices of our subsidiary and all of our material operations are in Brazil and we expect to make further investments in Brazil in the future. Therefore, our business, financial condition and results of operations are to a significant degree subject to economic, political and social events in Brazil, including the material risks outlined below.
Political or economic instability in Brazil could have an adverse impact on our results of operations due to diminished revenues.
All of our revenues are derived from Brazil. Political or economic instability in Brazil could have an adverse impact on our results of operations due to diminished revenues. Our future revenue, costs of operations and profit results could also be affected by a number of other factors related to our Brazilian operations, including changes in economic conditions in Brazil, changes in a country’s political condition, trade protection measures, licensing and other legal requirements, and local tax issues.
Fluctuations in currency exchange rates could negatively affect our performance
Unanticipated currency fluctuations in the Brazilian Real could lead to lower reported consolidated results of operations due to the translation of these currencies into U.S. dollars when we consolidate our financial results. We provide accounts receivable collection and management services to our Brazilian clients utilizing Brazilian labor sources. A decrease in the value of the U.S. dollar in relation to the Brazilian Real could increase our cost of doing business in Brazil.
Governmental policies in Brazil could impact our business.
Changes in Brazil’s governmental policies which could have a substantial impact on our business include:
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new laws and regulations or new interpretations of those laws and regulations;
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the introduction of measures to control inflation or stimulate growth;
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changes in the rate or method of taxation;
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the imposition of additional restrictions on currency conversion and remittances abroad; and
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any actions which limit our ability to finance and operate our business in Brazil.
Fluctuations in exchange controls could negatively affect our performance.
Exchange transactions are generally controlled by the Central Bank of Brazil which authorizes a series of banks to act in the foreign exchange market, selling and buying currencies. There is a commercial rate of exchange published daily by the Central Bank based upon market results on said day. A free market, and quotation system exists, mainly dealing with tourist activities. Both rates have been extremely close since the inception of the stabilization plan ("Plano Real") several years ago. Subject to certain registration requirements with the Central Bank of Brazil and compliance with certain regulations, we may repatriate U.S. Dollars earned from our Brazilian operations through the repayment of loans and the payment of dividends. On occasions in the past, Brazil has imposed temporary restrictions on the conversion and remittance of foreign capital, for example when there was a serious imbalance in Brazil's balance of payments. In such circumstances, we could be adversely affected, if the exchange control rules were changed to delay or deny remittances abroad from us.
Your ability to bring an action against us, ATN and those of our officers and directors that are based in Brazil, or to enforce a judgment against us and such officers and directors or to recover assets in the possession of us, ATN or such officers and directors, will be difficult since any such action or recovery of assets would be an international matter, involving Brazilian laws and geographic and temporal disparities.
We conduct all of our operations in Brazil through our subsidiary, ATN. All but one of our management personnel reside in Brazil and all of the assets of ATN and those Brazilian residents are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us, ATN or these individuals in the United States in the event that you believe that your rights have been violated under applicable law or otherwise. Even if an action of this type is successfully brought, the laws of the United States and of Brazil may render a judgment unenforceable.
Concentrated Control Risk
The management team collectively has the power to make all major decisions regarding the company without the need to get consent from any stockholder or other person. This discretion could lead to decisions that are not necessarily in the best interests of minority shareholders.
Our management team, including the management of our subsidiary, ATN, collectively owns approximately 95% of the outstanding common stock. Management, therefore, has the power to make all major decisions regarding our affairs, including decisions regarding whether or not to issue stock and for what consideration, whether or not to sell all or substantially all of our assets and for what consideration and whether or not to authorize more stock for issuance or otherwise amend our charter or bylaws. The management team is in a position to elect all of our directors and to dictate all of our policies.
Market Risks
There has been no established public trading market for our common stock. If a market in our stock is ever developed, our stock price may become highly volatile.
Since we are relatively thinly capitalized and our stock is a penny stock, if a market in our stock is ever developed, our stock price may become highly volatile. There has been no established public trading market for our common stock and, none of our shares are currently eligible for sale in a public trading market. The likely market for our stock would be the Over-the-Counter Bulletin Board or the Pink Sheets. As a result, investors may find it difficult to dispose of our securities, or to obtain accurate quotations of the price of our securities This lack of information limits the liquidity of our common stock, and likely will have an adverse effect on the market price of our common stock and on our ability to raise additional capital.
If an active trading market does develop, the market price of our common stock is likely to be highly volatile due to, among other things, the relatively low revenue nature of our business and because we are a thinly capitalized company. Further, even if a public market develops, the volume of trading in our common stock will presumably be limited and likely be dominated by a few individual stockholders. The limited volume, if any, will make the price of our common stock subject to manipulation by one or more stockholders and will significantly limit the number of shares that one can purchase or sell in a short period of time.
The equity markets have, on occasion, experienced significant price and volume fluctuations that have affected the market prices for many companies’ securities that have often been unrelated to the operating performance of these companies. Any such fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance. As a result, stockholders may be unable to sell their shares, or may be forced to sell them at a loss.
We do not intend to pay dividends to our stockholders, so you will not receive any return on your investment in our company prior to selling your interest in us.
We have never paid any dividends to our stockholders. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any dividends in the foreseeable future. If we determine that we will pay dividends to the holders of our common stock, we cannot assure that such dividends will be paid on a timely basis. As a result, you will not receive any return on your investment prior to selling your shares in our company and, for the other reasons discussed in this “Risk Factors” section, you may not receive any return on your investment even when you sell your shares in our company and your shares may become worthless.
A significant number of our shares will be eligible for sale and their sale or potential sale may depress the market price of our common stock.
Sales of a significant number of shares of our common stock in the public market could harm the market price of our common stock. We have authorized 40,000,000 shares of common stock. As of May 15, 2010, we had outstanding 8,828,134 shares of common stock. Accordingly, we have 31,171,866 shares of common stock available for future sale.
Because our stock is considered a penny stock, any investment in our stock is considered to be a high-risk investment and is subject to restrictions on marketability.
Our common stock is a "penny stock" within the meaning of Rule 15g-9 to the Securities Exchange Act of 1934, which is generally an equity security with a price of less than $5.00. Our common stock is subject to rules that impose sales practice and disclosure requirements on certain broker-dealers who engage in certain transactions involving a penny stock. Under the penny stock regulations, a broker-dealer selling penny stock to anyone other than an established customer or "accredited investor" must make a special suitability determination for the purchaser and must receive the purchaser's written consent to the transaction prior to the sale, unless the broker-dealer is otherwise exempt. Generally, an individual with a net worth in excess of $1,000,000 or annual income exceeding $200,000 individually or $300,000 together with his or her spouse is considered an accredited investor.
In addition, the penny stock regulations require the broker-dealer to:
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deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the Securities and Exchange Commission relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt;
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disclose commissions payable to the broker-dealer and the Registered Representative and current bid and offer quotations for the securities; and
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send monthly statements disclosing recent price information with respect to the penny stock held in a customer's account, the account's value and information regarding the limited market in penny stocks.
Because of these regulations, broker-dealers may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of holders of our capital stock to sell their shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional sales practice and disclosure requirements could impede the sale of our securities. In addition, the liquidity of our securities may be decreased, with a corresponding decrease in the price of our securities. Our common stock in all probability will be subject to such penny stock rules and our stockholders will, in all likelihood, find it difficult to sell their securities.
Certain provisions of our Certificate of Incorporation and Delaware law may make it more difficult for a third party to effect a change- in-control.
Our Certificate of Incorporation authorizes the Board of Directors to issue up to 10,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors without further action by the stockholders. These terms may include voting rights including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of the Board of Directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control.In addition, we are also subject to Section 203 of the Delaware General Corporation Law that, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder. The preceding provisions of our Certificate of Incorporation, as well as Section 203 of the Delaware General Corporation Law, could discourage potential acquisition proposals, delay or prevent a change-in-control and prevent changes in our management, even if such things would be in the best interests of our stockholders
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES.
Our executive offices in the U.S.A. are located at 4500 Steiner Ranch Boulevard, Suite 1708, Austin, Texas 78732. This space is the residence of our Secretary and we utilize the space on a rent-free basis pursuant to a verbal understanding with our Secretary.
ATN’s executive offices are located on the 8th Floor of a modern 11-storey executive office building located at Largo de São Francisco de Paula 42, Centro Historico Rio de Janeiro, CEP 20.051-070. ATN’s office space consists of 500 square meters: of which 300 square meters is used as a call center; 50 square meters is used for administrative offices; 20 square meters is used for our conference room; and 60 square meters is used for a training room with a 30-person capacity. The Company also owns 16 parking spaces in the building which is an added benefit to conducting business in the middle of Rio de Janeiro’s downtown historical center. On December 30, 2009, the Brazilian shareholders contributed the ninth floor office space to the Company which was currently leased to the Brazilian subsidiary. The office space was contributed at fair value net of any indebtedness on the office space. As a result, fixed assets increased $551,133, shareholder loans increased $166,481 and total stockholders’ deficit decreased $384,652.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2009, the Company was not a party to any pending or threatened legal proceedings. ATN is a party to several employment-based lawsuits which the Company does not consider material.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote or for the written consent of security shareholders, through the solicitation of proxies or otherwise, during the fiscal year ended December 31, 2009, and no meeting of shareholders was held.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY; RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Market Price
Our common stock is quoted on OTC Bulletin Board, under the trading symbol “LXUN.OB”. The market for our stock is highly volatile. We cannot assure you that there will be a market in the future for our common stock. The OTC Bulletin Board securities are not listed and traded on the floor of an organized national or regional stock exchange. Instead, OTC Bulletin Board securities transactions are conducted through a telephone and computer network connecting dealers in stocks. OTC Bulletin Board stocks are traditionally smaller companies that do not meet the financial and other listing requirements of a regional or national stock exchange.
The following table shows the high and low prices of our common shares on the OTC Bulletin Board for each quarter since our common stock began to trade on the OTC Bulletin Board. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions:
Options and Warrants
None of the shares of our common stock are subject to outstanding options or warrants.
Status of Outstanding Common Stock
As of December 31, 2009, we had a total of 8,828,134 shares of our common stock outstanding. Of these shares, 8,300,634 are held by “affiliates” of the Company and the remaining shares are either registered or may be transferred subject to the requirements of Rule 144. We have not agreed to register any additional outstanding shares of our common stock under the Securities Act.
Holders
We have issued an aggregate of 8,828,134 shares of our common stock to approximately 100 record holders.
Dividends
We have not paid any dividends to date, and have no plans to do so in the immediate future.
Recent Sales of Unregistered Securities
On March 23, 2010, the Company issued 120,000 shares of its common stock to Wakabayashi Fund, Ltd. As consideration for investor relations services.
Purchases of Equity Securities
The Company has never purchased nor does it own any equity securities of any other issuer.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. 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$” are to the legal currency of the United States;
·
“Real,” “R$,” 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.
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”. As required, 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. There was no impairment of assets at December 31, 2009.
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.
Uncertainties that Affect our Financial Condition
We receive the majority of our revenues and income from less than ten major clients. 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 customers were to significantly reduce their amount of service, fail to pay, or terminate their relationships with us altogether, our business could be harmed.
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 2009, 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.
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 financed the purchase of the portfolio with cash and the execution of two notes aggregating R$626,200 from two principal shareholders, one of which is the President of the Company. The notes bear interest at the rate of 2% per month and are due on December 31, 2009. The notes at December 31, 2008 were included under the caption loan from an officer and loan from an individual. The loans from an individual are deemed to be a related party because of his affiliation with the Company. At December 31, 2008, the balance of the including accrued interest from the officer was $58,982 and the loan from an individual was $249,434.
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, commenced 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 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 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 $14,729 reduction in the carrying value of the portfolio as at June 30, 2009. The carrying value at June 30, 2009 was $604,856.
An analysis of the portfolio activity under the cost recovery method at December 31, 2009 is as follows:
On December 30, 2009, the Company entered into agreements with two principal shareholders’ one of which is the President of the Company, the other an individual who is a major shareholder and deemed an affiliate. On December 30, 2009, the Company had loans outstanding with these individuals relating to the original purchase of the portfolio on June, 2008. It was agreed that they would purchase a portion of the portfolio in consideration for the liquidation of their indebtedness. The fair value of this portfolio transferred approximated the liquidation of indebtedness which was (R$ 894,367) $513,650.
Results of Operations
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008.
The following table summarizes the results of our operations during the year ended December 31, 2009, and 2008 and provides information regarding the dollar and percentage increase or (decrease) from the year ended December 31, 2009 to the same period of 2008.
We had revenues of $4,268,938 for the year ended December 31, 2009, compared to revenues of $4,331,355 during the same period in 2008. Our revenues decreased 1.45% in the year ended December 31, 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 year ended December 31, 2009 was $2,364,253 as compared to $2,558,467 during the same period in 2008. This decrease of $194,214 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 $588,151 or 35.23 %, to $1,081,598 in the year ended December 31, 2009 compared to $1,669,749 in the same period in 2008. The change is the result of the reversal of $712,958 of municipal service and related taxes and 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.
Interest expense for the year ended December 31, 2009 was $726,802 and interest expense in the same period of 2008 was $594,547. Interest expense increased 22.25% in the year ended December 31, 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 year ended December 31, 2009 we incurred a net loss of $(73,996) compared with $(760,747) 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 $62,208 gain to the non-controlling interest.
Loss per common share for the year ended December 31, 2009 was $(.01) as compared to a loss of $(.09) during the same period of 2008.
Cash Flow Items
The following table provides the statements of net cash flows for the year ended December 31, 2009.
We used $316,147 of cash from our operating activities during the year ended December 31, 2009 as compared to $660,213 cash used during the year ended December 31, 2008. The difference of $344,066 is mainly attributable to the reversal of $712,958 of municipal service and payroll taxes and to changes in other receivables of $249,491.
We provided $46,367 in cash from our investing activities during the year ended December 31, 2009, as compared to $302,481 used in the prior year ending December 31, 2008. These funds were used for the purchase of fixed assets offset by the collection of the receivable portfolio.
We used a net of $372,633 from financing activities during the year ended December 31, 2009 as compared to providing funds of $871,100 during the year ended December 31, 2008. The change is primarily due to an increase in the repayment of loans.
Balance Sheet Items
As of December 31, 2009, we had total current assets of $812,975, as compared to $845,280 as of December 31, 2008. Our total assets as of December 31, 2009 were $3,303,867 as compared to $3,062,146 as of December 31, 2008. We had total current liabilities of $2,925,238 as of December 31, 2009 as compared to $3,216,884 as of December 31, 2008, and we had total liabilities of $3,351,560 as of December 31, 2009 as compared to $3,384,756 as of December 31, 2008.
The decrease in total assets is primarily due to a decrease in cash of $155,145, a decrease in the investment in receivable portfolio of $437,870, a decrease in customer lists and tradenames of $73,389 and an increase in fixed assets of $785,284. The decrease in total liabilities is due to an increase in borrowings, accounts payable, and accrued expenses offset by a decrease in accrued municipal service and payroll taxes and by the effects of the change of the foreign exchange rates.
As of December 31, 2009, our total Stockholders’ Equity (deficit) was $(47,693) as compared to $(322,610) at December 31, 2008. This change was due to an increase in capital stock and paid in capital of $408,652 for the acquisition of the 9th floor and share-based compensation 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 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 $136,308 as of December 31, 2009 and we had short-term liabilities in the amount of $2,925,238, as well as long-term liabilities in the amount of $426,322 as of December 31, 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 2009, the Company evaluated their payroll tax and related accruals and reduced amounts previously recorded by approximately $712,958. The reduction in 2009 is the result of recalculating the employee withholding taxes under Brazilian guidelines.
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 December 31, 2009, we had cash assets of $136,308 and total assets of $3,303,867 as compared to cash assets of $291,453 and total assets of $3,062,146 as of December 31, 2008. The decrease in total assets is primarily due to a decrease in cash of $155,145, a decrease in the investment in receivable portfolio of $437,870, a decrease in customer lists and tradenames of $73,389 and an increase in fixed assets of $785,284. We have a $(2,112,263) negative working capital at December 31, 2009, of which $510,335 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 December 31, 2009 was $82.319.
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%. The loan is secured by the company’s facility. At December 31, 2009 and 2008, the balance of the loan is $143,205 and $123,676 respectively.
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 is secured by the computer equipment. At December 31, 2009 and 2008, the balance of the loan is $-0- and $10,678 respectively.
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. At December 31, 2009 and 2008, the balance of the loan is $60,253 and $70,544 respectively.
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. At December 31, 2009 and 2008, the balance is $-0- and $26,255 respectively.
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. At December 31, 2009 and 2008, the balance is $-0- and $18,043, respectively.
In September, 2007, the Company borrowed $51,000 from Santander. The loan is payable in 16 monthly installments plus interest of 3.9% per month, commencing October, 2007. The loan is personally guaranteed by ATN’s directors. At December 31, 2009 and 2008, the balance is $-0- and $11,302, respectively.
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. The balance of the loan at December 31, 2009 and 2008 is $3,392 and $19,642, respectively.
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. The balance of the loan at December 31, 2009 and 2008 is $9,694 and $14,445, respectively.
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. At December 31, 2009 and 2008, the balance is $ 6,927 and $58,743, respectively.
In July, 2008, the Company borrowed approximately $3,500 from Officer Distribution Production. 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. At December 31, 2009 and 2008, the balance is $1,012 and $1,231, respectively.
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. At December 31, 2009 and 2008, the balance is $-0- and $54,278 respectively.
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. At December 31, 2009 and 2008, the balance is $-0- and $39,224, respectively.
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. At December 31, 2009 and 2008, the balance is $-0- and $48,584, respectively.
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. At December 31, 2009 and 2008, the balance is $-0- and $29,952, respectively.
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. The balance of the loan at December 31, 2009 and 2008 is $ 2,145 and $7,087, respectively.
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. The balance of the loan at December 31, 2009 is $11,006.
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. The balance of the loan at December 31, 2009 is $26,426.
In October, 2009, the Company borrowed approximately $432,000 from BNP Banco Brasil. The loan is payable in 46 monthly installments plus interest of 2.00% per month, commencing December, 2009. The loan is personally guaranteed by ATN’s directors. The balance of the loan at December 31, 2009 is $307,926.
In October, 2009, the Company borrowed approximately $81,000 from Banco Bradesco. The loan is payable in 12 monthly installments plus interest of 2.30% per month, commencing December, 2009. The loan is personally guaranteed by ATN’s directors. The balance of the loan at December 31, 2009 is $64,048.
In December, 2009, the Company borrowed approximately $87,450 from Banco Real. The loan is payable in 24 monthly installments plus interest of 2.00% per month, commencing January, 2010. The loan is personally guaranteed by ATN’s directors. The balance of the loan at December 31, 2009 is $68,918.
In December, 2009, the Company borrowed approximately $33,000 from HSBC Capital. The loan is payable in 12 monthly installments plus interest of 2.00% per month, commencing January, 2010. The loan is personally guaranteed by ATN’s directors. The balance of the loan at December 31, 2009 is $26,426.
In December, 2009 the Company assumed the note payable related to the contribution of the 9th floor office space by the minority shareholders. The loan is payable at $4,129 per month which includes interest which is adjustable annually. The balance of the loan at December 31, 2009 is $ 166,481.
An analysis of the current and long-term portion at December 31, is as follows:
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.
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 7A.
ITEM 7A. 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 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Set forth below are the audited financial statements for the Company as of and for the fiscal years ended December 31, 2009 and 2008 and the reports thereon of Meyler & Company, LLC.
CONTENTS
MEYLER & COMPANY, LLC
CERTIFIED PUBLIC ACCOUNTANTS
ONE ARIN PARK
1715 HIGHWAY 35
MIDDLETOWN, NJ 07748
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Stockholders of Lexicon United Incorporated and Subsidiaries
Austin, Texas
We have audited the accompanying consolidated balance sheets of Lexicon United Incorporated and Subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2009 and 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lexicon United Incorporated and Subsidiaries as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the consolidated financial statements, the Company continues to have negative cash flows from operations, recurring losses from operations, and has a stockholders’ deficit. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note A. The consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.
/s/ Meyler & Company, LLC
Middletown, NJ
May 17,
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to financial statements.
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to financial statements.
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the Years Ended December 31, 2009 and 2008
See accompanying notes to financial statements.
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to financial statements.
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE A - NATURE OF BUSINESS AND GOING CONCERN
Organization
Lexicon United Incorporated (“the Company”) was incorporated on July 17, 2001 under the laws of the State of Delaware and had been a blank check company until February 27, 2006, when it acquired ATN Capital E Participacoes, Ltda., a Brazilian Company (“ATN”). ATN was incorporated in April 1997 and its focus is on the recovery of delinquent accounts (generally, accounts that are 60 days or more past due) for large Brazilian financial institutions. The Company is paid a commission on the settlement of delinquent accounts. The Company formed two new subsidiaries in 2008, currently inactive, Engepet Energy Enterprises, Inc. and United Oil Services, Inc, to work with companies in Trinidad and Tobago to recover additional oil from oil wells whose production had diminished.
Going Concern
As indicated in the accompanying financial statements, the Company has an accumulated deficit of $3,032,228 and negative working capital of $2,112,263 at December 31, 2009. Management’s plans include raising adequate capital through the equity markets to fund future operations and generating 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 B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly-liquid investments with a maturity of three months or less as cash equivalents. There were cash equivalents of $4,725 and $53,781 in 2009 and 2008, respectively.
Equipment and Depreciation
Equipment is stated at cost and is depreciated using the straight line method over the estimated useful lives of the respective assets. Routine maintenance, repairs and replacement costs are expensed as incurred and improvements that extend the useful life of the assets are capitalized.
When equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is recognized in operations.
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company derives its revenue primarily 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.
Consolidated Financial Statements
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. (“Engepet”) and United Oil Services, Inc. (“United”). All material intercompany transactions have been eliminated in consolidation. Engepet and United were newly formed in 2008 and their transactions in 2008 were not deemed to be significant. In 2009, Engepet and United were inactive. At December 30, 2009, the minority shareholders transferred the second floor office facilities to the Company at current fair market value in the amount of $ 531,133. This amount is reflected on the balance sheet at December 31, 2009. The Company was also to infuse additional working capital to keep the ownership ratio intact. As of the date of this report, such infusion has not occurred. Accordingly, the Company’s ownership percentage has been reduced to 74% commencing January 1, 2010.
Intangible Assets
Intangible assets of customer lists and trade names are amortized over a ten year life. The amortization recorded is $293,555 and $220,166 at December 31, 2009 and 2008 respectively.
Fair Values of Financial Instruments
The Company uses financial instruments in the normal course of business. The carrying values of cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities approximate their fair value due to the short-term maturities of these assets and liabilities.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income Taxes” which requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax bases of assets and liabilities, and using estimated tax rates in effect for the year in which the differences are expected to reverse. The measurement of a deferred tax asset is adjusted by a valuation allowance, if necessary, to recognize tax benefits only to the extent that, based on available evidence, it is more likely than not that they will be realized. In determining the valuation allowance, the Company considers factors such as the reversal of deferred income tax liabilities, projected taxable income and the character of income tax assets and tax planning strategies. A change to these factors could impact the estimated valuation allowance and income tax expense.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the tax
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes (Continued)
position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
Net Loss Per Common Share
The Company computes per share amounts in accordance with FASB ASC Topic 260, “Earnings Per Share” which requires presentation of basic and diluted EPS. Basic EPS is computed by dividing the income (loss) available to Common Stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares of common stock and common stock equivalents outstanding during the periods, however, no potential common shares are included in the computation of any diluted per share amounts when a loss from continuing operations exists.
Foreign Currency Translation
The Company considers the Brazilian currency (Reais) to be the functional currency of ATN. Assets and liabilities were translated into U.S. dollars at the period end exchange rates. The equity accounts were translated at historical rates. Statement of Operations amounts were translated using the average rate during the year. Gains and losses resulting from translating foreign currency financial statements are accumulated in other comprehensive income (loss), a separate component of stockholder’s deficit.
Goodwill and Intangible Impairment
The company accounts for goodwill in accordance with FASB ASC Topic 350, “Intangibles-Goodwill and Other”. As required, 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. 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. There was no impairment of assets at December 31, 2009.
Equity-Based Compensation
The Company accounts for equity- based compensation transactions with employees under the provisions of FASB ASC Topic 718, “Compensation, Stock Compensation”. Topic 718 requires the recognition of the fair value of equity-based compensation in net income. The fair value of the Company’s equity instruments are estimated using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions and elections including expected stock price volatility and the estimated life of each award. In addition, the calculation of equity-based compensation costs requires that the Company estimate the number of awards that will be forfeited during the vesting period. The fair value of equity-based awards granted to employees is amortized over the vesting period of the award and the Company elected to use the straight-line method for awards granted after the adoption of Topic 718.
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Equity-Based Compensation (Continued)
The Company accounts for equity- based transactions with non-employees under the provisions of ASC Topic 505-50, “Equity-Based Payments to Non-Employees”. Topic 505-50 establishes that equity-based payment transactions with non-employees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. When the equity instrument is utilized for measurement the fair value of the equity instrument is estimated using the Black-Scholes option valuation model. In general, the Company recognizes an asset or expense in the same manner as if it was to receive cash for the goods or services instead of paying with or using the equity instrument.
Fair Value Measurements
On January 1, 2008, The Company adopted the provisions of ASC Topic 820 “Fair Value Measurements and Disclosures” 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:
The Company does not have any non-financial assets or liabilities that are measured at fair value on a non-recurring basis.
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE C - RECENT 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. Amendments to the codification are made by issuing “Accounting Standards Updates” Accordingly, the Company has removed references to legacy GAAP in these financial statements and has incorporated the current codification in its December 31, 2009 Annual Report on Form 10-K.
FASB ASC Topic 260, “Earnings Per Share.” On January 1, 2009, the Company adopted new authoritative accounting guidance under FASB ASC Topic 260, “Earnings Per Share,” which provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.
FASB ASC Topic 320, “Investments - Debt and Equity Securities.” New authoritative accounting guidance under ASC Topic 320, “Investments - Debt and Equity Securities,” (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under ASC Topic 320, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. The Company adopted the provisions of the new authoritative accounting guidance under ASC Topic 320 during the first quarter of 2009. Adoption of the new guidance did not significantly impact the Company’s financial statements.
FASB ASC Topic 805, “Business Combinations.” On January 1, 2009, new authoritative accounting guidance under ASC Topic 805, “Business Combinations,” became applicable to the Company’s accounting for business combinations closing on or after January 1, 2009. ASC Topic 805 applies to all transactions and other events in which one entity obtains control over one or more other businesses. ASC Topic 805 requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under previous accounting guidance whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. ASC Topic 805 requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under prior accounting guidance. Assets acquired and liabilities assumed in a business combination that arise from contingencies are to be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with ASC Topic 450, “Contingencies.” Under ASC Topic 805, the requirements of ASC Topic 420, “Exit or Disposal Cost Obligations,” would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of ASC Topic 450, “Contingencies.”
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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.
The Company adopted the provisions of ASC Topic No. 855, “Subsequent Events” (“ASC 855”), on a prospective basis. The provisions of ASC 855 provide guidance related to the accounting for the disclosure of events that occur after the balance sheet date but before the consolidated financial statements are issued or are available to be issued. Effective February 24, 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements” which revised
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
certain disclosure requirements. ASU No. 2010-09 did not have a significant impact on the Company’s consolidated financial statements. The Company evaluated subsequent events, which are events or transactions that occurred after December 31, 2009 through the issuance of the accompanying consolidated financial statements
NOTE D - 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 (“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 financed the purchase of the portfolio with cash and the execution of two notes aggregating R$626,200 from two principal shareholders, one of which is the President of the Company. The notes bear interest at the rate of 2% per month and are due on December 31, 2009. The notes at December 31, 2008 were included under the caption loan from an officer and loan from an individual. The loans from an individual are deemed to be a related party because of his affiliation with the Company. At December 31, 2008, the balance of the loans including accrued interest from the officer was $58,982 and the loan from the individual was $249,434.
The Company has adopted FASB ASC Subtopic 310-30 (“Subtopic 310-30”) “Loans and Debt Securities Acquired with Deteriorated Credit Quality”. In accordance with Subtopic 310-30, The Company can account for its investments in Portfolios using either the interest method (preferred) 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 then determined that the amount and timing of future cash collections on the Portfolios are not reasonably predictable, and therefore, beginning July 1, 2009, commenced 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 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 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 $14,729 reduction in the carrying value of the portfolio as at June 30, 2009. The carrying value at June 30, 2009 was $604,856.
An analysis of the portfolio activity under the cost recovery method at December 31, 2009 is as follows:
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE D - INVESTMENT IN RECEIVABLE PORTFOLIO (CONTINUED)
On December 30, 2009, the Company entered into agreements with two principal shareholders’ one of whom is the President of the Company, the other an individual who is a major shareholder and deemed an affiliate. On December 30, 2009, the Company had loans outstanding with these individuals relating to the original purchase of the portfolio on June, 2008. It was agreed that they would purchase a portion of the portfolio in consideration for the liquidation of their indebtedness. The fair value of this portfolio transfer approximated the liquidation of indebtedness plus accrued interest at 2% per month which was (R$ 894,367) $513,650.
NOTE E- FIXED ASSETS
Fixed Assets are comprised of the following at December 31,
On December 30, 2009, the minority shareholders contributed the 9th floor of an executive office facility to the Company at appraised value which was $551,133.
See also Notes B, Consolidated Financial Statements and Note O, Stockholders’ Deficit as to the second floor office facilities transferred to the Company on December 30, 2009.
NOTE F- 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 and bear interest at rates ranging from 26% to 42%. Two loans from Unibanco totaling $200,000 were borrowed in US dollars resulting in foreign currency transaction losses. These loans were repaid in the fourth quarter of 2009. Approximately $69,374 of transaction gains were recorded for year ended December 31, 2009. The balance of the loans at December 31, 2009 and 2008 was $82,319 and $267,039, respectively.
NOTE G- 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%. The loan is secured by the company’s facility. At December 31, 2009 and 2008, the balance of the loan is $143,205 and $123,676 respectively.
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 is secured by the computer equipment. At December 31, 2009 and 2008, the balance of the loan is $-0- and $10,648 respectively.
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE G - LONG TERM DEBT (CONTINUED)
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. At December 31, 2009 and 2008, the balance of the loan is $60,253 and $70,544 respectively.
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. At December 31, 2009 and 2008, the balance is $-0- and $26,255 respectively.
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. At December 31, 2009 and 2008, the balance is $0 and $18,043, respectively.
In September, 2007, the Company borrowed $51,000 from Santander. The loan is payable in 16 monthly installments plus interest of 3.9% per month, commencing October, 2007. The loan is personally guaranteed by ATN’s directors. At December 31, 2009 and 2008, the balance is $-0- and $11,302, respectively.
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. The balance of the loan at December 31, 2009 and 2008 is $3,392 and $19,642, respectively.
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. The balance of the loan at December 31, 2009 and 2008 is $9,694 and $14,445, respectively.
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. At December 31, 2009 and 2008, the balance is $ 6,927 and $58,743, respectively.
In July, 2008, the Company borrowed approximately $3,500 from Officer Distribution Production. 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. At December 31, 2009 and 2008, the balance is $1,012 and $1,231, respectively.
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. At December 31, 2009 and 2008, the balance is $-0- and $54,278 respectively.
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. At December 31, 2009 and 2008, the balance is $-0- and $39,224, respectively.
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE G - LONG TERM DEBT (CONTINUED)
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. At December 31, 2009 and 2008, the balance is $0 and $48,584, respectively.
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. At December 31, 2009 and 2008, the balance is $-0- and $29,952, respectively.
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. The balance of the loan at December 31, 2009 and 2008 is $ 2,145 and $7,087, respectively.
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. The balance of the loan at December 31, 2009 is $11,006.
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. The balance of the loan at December 31, 2009 is $26,426.
In October, 2009, the Company borrowed approximately $432,000 from BNP Banco Brasil. The loan is payable in 46 monthly installments plus interest of 2.00% per month, commencing December, 2009. The loan is personally guaranteed by ATN’s directors. The balance of the loan at December 31, 2009 is $307,926.
In October, 2009, the Company borrowed approximately $81,000 from Banco Bradesco. The loan is payable in 12 monthly installments plus interest of 2.30% per month, commencing December, 2009. The loan is personally guaranteed by ATN’s directors. The balance of the loan at December 31, 2009 is $64,048.
In December, 2009, the Company borrowed approximately $87,450 from Banco Real. The loan is payable in 24 monthly installments plus interest of 2.00% per month, commencing January, 2010. The loan is personally guaranteed by ATN’s directors. The balance of the loan at December 31, 2009 is $68,918.
In December, 2009, the Company borrowed approximately $33,000 from HSBC Capital. The loan is payable in 12 monthly installments plus interest of 2.00% per month, commencing January, 2010. The loan is personally guaranteed by ATN’s directors. The balance of the loan at December 31, 2009 is $28,717.
In December, 2009 the Company assumed the note payable related to the contribution of the 9th floor office space by the minority shareholders. The loan is payable at $4,129 per month which includes interest and is adjustable annually by the official Brazilian INPC index. The loan is secured by the building. The balance of the loan at December 31, 2009 is $ 166,481.
An analysis of the current and long-term portion at December 31 is as follows:
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE G - LONG TERM DEBT (CONTINUED)
At December 31, 2009, maturities of long term debt are as follows:
NOTE H- ACCRUED MUNICIPAL SERVICE AND PAYROLL ACCRUALS
The Company is responsible to the Brazilian taxing authorities for a municipal service tax at the rate of 5% based upon salaries by location. The Company has evaluated their payroll tax and related accruals and reduced amounts previously recorded by approximately $712,958 and $141,023 for years ended December 31, 2009 and 2008, respectively. The reduction in 2009 is the result of recalculating the employee withholding taxes under Brazilian guidelines. These reductions are reflected in the 2009 and 2008 financial statements as a reduction in selling, general and administrative expenses. Accruals for such Municipal tax and related payroll tax accruals at December 31, 2009 and 2008 are $510,335 and $1,211,054 respectively.
NOTE I- INCOME TAXES
The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income Taxes”. Under this method, the Company recognizes a deferred tax liability or asset for temporary differences between the tax basis of an asset or liability and the related amount reported on the financial statements.
The principal types of differences, which are measured at current tax rates, are net operating loss carryforwards. At December 31, 2009, these differences resulted in a deferred tax asset of $552,000. FASB ASC Topic 740 requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Since realization is not assured, the Company has recorded a valuation allowance for the entire deferred tax asset and accordingly, the accompanying financial statements do not reflect any net asset for deferred taxes at December 31, 2009.
The Company has a US net operating carry forward loss of approximately $1,200,000 which expires commencing in 2029 and a $1,315,600 carryforward loss in Brazil with an unlimited carryforward period.
NOTE J- RELATED PARTY
At various times during the year 2009, two shareholders have advanced funds to the Company for working capital. The advances are unsecured and bear interest at the rate of 2% per month. The loans have no stated maturity date and should either party terminate the loans, the loans are repayable within 30 days. At December 31, 2009, the balance outstanding on the loans was $249,963. At December 31, 2008, the balance was $187,605, which included an additional shareholder with a balance of $58, 982 which was repaid during 2009.
NOTE K - LOAN FROM AN INDIVIDUAL
In July, 2008, the Company borrowed $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 December 31, 2008 was $42,828.
LEXICON UNITED INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
NOTE K - LOAN FROM AN INDIVIDUAL (CONTINUED)
In December 2009, the Company borrowed an additional $29,000. The loan is due on June 22, 2010 and bears interest at the rate of 18% per year. The balance of the loan at December 31, 2009 is $42,828.
In June, 2008, the Company borrowed to purchase the receivable portfolio. The loan bears interest at the rate of 2% per month and is unsecured. The balance of the loan at December 31, 2008 was $249,434. The individual making the loan is deemed to be an affiliate of the Company. On December 30, 2009, the balance was liquidated. See Note D, Investment In Receivable Portfolio.
NOTE L - RENT EXPENSE
The Company during 2009 was leasing one floor of its office facilities from the minority shareholders of the Brazilian subsidiary. The lease commenced on May 26, 2006 and is renewable annually. The annual rent is $27,500 per year. The Company during 2009 was also sub-leasing space in New York City. The lease commenced March 1, 2008 and cancelable upon 90 days notice. The annual rent is $16,200. The Company cancelled the lease in September, 2009. On December 30, 2009, the minority shareholders contributed the floor to the Company at appraised value net of outstanding indebtedness on the facility. Rent expense for the years ended December 31, 2009 and 2008 was $44,117 and $49,097, respectively.
NOTE M- REVENUE CONCENTRATIONS
For the year ended December 31, 2009, revenues from six major customers exceeded 10% individually and represented 83.22% of total revenues. During 2008, three major customers exceeded 10% individually and represented 36.62% of total revenues.
NOTE O - STOCKHOLDERS’ DEFICIT
As of January 1, 2008, the Company included 5,000 of its common shares as issued and outstanding for professional fees incurred. The shares were valued at $2.50 per share. Share-based compensation for 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 May 13, 2008, the Company issued 3,000 shares of its common stock for $10,500.
On June 4, 2008, the Company issued 231,884 shares of its common stock in conversion of an $800,000 debenture from Keyano, Invest, Inc., a related party. The shares were valued at $3.45.
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. Share-based compensation for consulting expense charged to operations as of December 31, 2009 was $24,000. These shares are included as outstanding but have not yet been issued.
On December 30, 2009, the Brazilian shareholders contributed the ninth floor office space to the Company which was currently leased to the Brazilian subsidiary. The office space was contributed at fair value net of any indebtedness on the office space. As a result, fixed assets increased $551,133, shareholder loans increased $166,481 and total stockholders’ deficit decreased $384,652.
NOTE P- SUBSEQUENT EVENTS
On March 11, 2010, the Company entered into an agreement with Wakabayashi Fund LLC to provide institutional market awareness and public relation services. In consideration for the services, the Company issued 120,000 shares of its common stock which will be valued at $1.25 per share.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), Elie Saltoun, and Vice President and Secretary, Jeffrey Nunez, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Report (December 31, 2009). Based on such evaluation, our CEO, CFO and Vice President have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are not effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are not effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s CEO, CFO and Vice President, as appropriate to allow timely decisions regarding required disclosure. The material weakness identified by the Company is its inability to produce financial statements in a timely manner in order to facilitate a timely filing of its required reports to the U.S. Securities and Exchange Commission. Additionally, the Company has only two directors; no outside directors and no audit committee. The Company is undertaking to resolve these issues in a manner which will permit timely disclosure and filing of required reports iin the future.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal controls over financial reporting during the fiscal year ended December 31, 2009 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None
PART III.
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors, Executive Officers and Significant Employees
Set forth below are the names of our directors, officers and significant employees, their ages, all positions and offices that they hold with us, the period during which they have served as such, and their business experience during at least the last five years.
Name
Age
Positions Held
Experience
Elie Saltoun
Chief Executive Officer, President and Treasurer since November
Elie Saltoun has served as our Chief Executive Officer, President and Treasurer, and as the Chairman of our board of directors since November 2004. Mr. Saltoun also served as our Secretary from July 2001 until he resigned to assume his current role with our Company. Since May 2005, Mr. Saltoun has also acted as a principal of Keyano Invest Inc., a corporate consulting firm based in Brazil. Mr. Saltoun is an expert at structuring complex foreign debt recoveries and debt to equity transactions. He has successfully coordinated the use and conversion of past due unpaid sovereign debt into equity in privatized Brazilian State-owned companies, and has supervised the purchase and swap of unpaid obligations from a State-owned reinsurance organization.
Jeffrey Nunez
Vice President since 2009 and
Secretary since November 2004
During the period from our inception until November 4, 2004, Mr. Nunez was our director, Chief Executive Officer, President and Treasurer. He resigned from all of those positions (except he remained a director) on November 4, 2004 and on such date he was appointed as our Secretary. From October 2003 to present Mr. Nunez has been self employed acting as a consultant to public companies under the name Broad Street Capital.
Omar Malheiro Silva Araújo
President, Chief Executive Officer and director of ATN since April
Mr. Araújo has been the President, Chief Executive Officer and director of our subsidiary ATN since April 1997. Mr. Araújo is the co-founder of ATN. From 1991 to 1997, Mr. Araújo served as the Chief Financial Officer and director of Cartao Unibanco Visa where he supervised the cash flow of the credit card division. Mr. Araújo has a MBA in Finance.
Manuel da Costa Fraguas
General Manager and director of ATN since April 1997
Mr. Fraguas has been the General Manager and director of our subsidiary ATN since its inception on April 1997. Mr. Fraguas is the co-founder of ATN. Mr. Fraguas has a master in Production Engineering.
There are no agreements or understandings for any of our executive officers or directors to resign at the request of another person and no officer or director is acting on behalf of nor will any of them act at the direction of any other person.
Mr. Saltoun devotes approximately 80% of his business time to our affairs with the remaining time being spent on the affairs of Keyano Invest Inc. Mr. Nunez devotes approximately 70% of his time to our affairs with the remaining time being spent on the affairs of Broad Street Capital. Each of Mr. Araújo and Fraguas devotes 100% of his business time to the operation and business of our subsidiary ATN.
Family Relationships
There are no family relationships among our directors or officers.
Involvement in Certain Legal Proceedings
To the best of our knowledge, except as set forth herein, none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC. Except as described below, none of the directors, director designees or executive officers to our knowledge has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement.
On July 28, 2005, the SEC issued an order in connection with the settlement of an administrative proceeding against our Secretary, Jeffrey G. Nunez. The order indicates that Mr. Nunez, who at the time was a registered representative (broker) at the brokerage firm of Providential Securities, Inc., played an active role in the distribution of hundreds of thousands of unregistered shares of stock of Morgan Cooper, Inc. in violation of Section 5 of the Securities Act. Morgan Cooper, Inc., formerly Gong Hei Investment Co., Ltd., is the successor company in a reverse merger transaction that occurred on November 18, 1999 when Morgan Cooper, Inc., then a private company engaged in the garment business, effected a business combination with Gong Hei Investment Co., Ltd., then a public reporting shell company. Mr. Nunez acted as a broker in connection with the sale of the shares by James Caprio and James Morse, who were principals of the shell company prior to the reverse merger, to the brokerage clients of Providential Securities. The Commission permanently enjoined Nunez from future violations of Section 5(a) and 5(c) of the Securities Act, ordered Nunez to pay a $55,000 civil penalty, suspended Mr. Nunez from association with any broker-dealer for a period of six months, and required Mr. Nunez to provide an accounting and to disgorge any profits made as a result of the sales. To date, Mr. Nunez has not paid the $55,000 civil penalty.
Code of Ethics
Our board of directors has adopted a code of ethics that our principal financial officer, principal accounting officer or controller and any person who may perform similar functions are subject to. Currently Elie Saltoun, our Chief Executive Officer, President and Treasurer, Jeffrey G. Nunez, our Secretary, Omar Malheiro Silva Araújo, the Chief Executive Officer and President of ATN, and Manuel da Costa Fraguas, the General Manager of ATN, are our and ATN’s only officers and directors, therefore, they are the only persons subject to the Code of Ethics. If we retain additional officers in the future to act as our principal financial officer, principal accounting officer, controller or persons serving similar functions, they would become subject to the Code of Ethics. The Code of Ethics does not indicate the consequences of a breach of the code. If there is a breach, our board of directors would review the facts and circumstances surrounding the breach and take action that it deems appropriate, which action may include dismissal of the employee who breached the code. Currently, since Messrs Saltoun and Nunez serve as directors and are also our officers, they are largely responsible for reviewing their own conduct under the Code of Ethics and determining what action to take in the event of their own breach of the Code of Ethics.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Exchange Act required our executive officers and directors, and person who beneficially own more than ten percent of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based on our review of the copies of such forms received by us, we believe that during the year ended December 31, 2009, Elie Saltoun and Jeffrey Nunez each failed to make the required filings under Section 16(a). These officers have indicated that they intend to promptly make the required filings.
Board Composition and Committees
Our Board of Directors is composed of 2 members, Mr. Saltoun and Mr. Nunez. Directors are elected until their successors are duly elected and qualified.
Audit Committee and Audit Committee Financial Expert
We do not currently have an audit committee financial expert, nor do we have an audit committee. Our entire board of directors, which currently consists of Messrs. Saltoun and Nunez, handle the functions that would otherwise be handled by an audit committee. We do not currently have the capital resources to pay director fees to a qualified independent expert who would be willing to serve on our board and who would be willing to act as an audit committee financial expert. As our business expands and as we appoint others to our board of directors we expect that we will seek a qualified independent expert to become a member of our board of directors. Before retaining any such expert our board would make a determination as to whether such person is independent.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities Act of 1934 requires the Company's officers and directors, and greater than 10% stockholders, to file reports of ownership and changes in ownership of its securities with the Securities and Exchange Commission. Copies of the reports are required by SEC regulation to be furnished to the Company. Based on management's review of these reports during the fiscal year ended December 31, 2009, the reports required to be filed were not filed on a timely basis.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to our Chief Executive Officer, for services during the last three fiscal years in all capacities to us, our subsidiaries and predecessors. No executive officer received compensation of $100,000 or more in any of the last three fiscal years.
Summary Compensation Table
Outstanding Equity Awards at Fiscal Year End
None of our executive officers received any equity awards, including, options, restricted stock or other equity incentives, during the fiscal year ended December 31, 2009.
Additional Narrative Disclosures
All of our employees, including our executive officers, are employed at will and none of our employees has entered into an employment agreement with us. We do not have any bonus, deferred compensation or retirement plan.
Director Compensation
We have no standard arrangements in place to compensate our directors for their service as directors or as members of any committee of directors. In the future, if we retain non-employee directors, we may decide to compensate them for their service to us as directors and members of committees.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding beneficial ownership of our common stock as of January 1, 2010 (i) by each person who is known by us to beneficially own more than five percent of our common stock; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group:
(1)
Beneficial Ownership is determined in accordance with Rule 13d-3 of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares of our common stock. For each Beneficial Owner above, any options exercisable within 60 days have been included in the denominator.
(2)
Based on 8,708,134 shares of our Common Stock outstanding as of January 1, 2010.
(3)
Our president, CEO, Treasurer and director, Elie Saltoun, owns fifty percent of Keyano Invest Inc. Accordingly, Mr. Saltoun and Keyano are deemed to be affiliates. Mr. Saltoun is deemed to be the beneficial owner of any securities owned by Keyano, and vice versa. Therefore, the 5,882,034 shares of our common stock owned by Keyano include the 500,000 shares of common stock held by Mr. Saltoun. Conversely, the 5,882,034 shares of our common stock owned by Mr. Saltoun include the 5,382,034 shares held by Keyano.
Changes in Control
We do not currently have any arrangements which if consummated may result in a change of control of our Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Certain Relationships and Transactions with Related Persons
On November 22, 2005, we entered into a Debt Conversion Agreement with Keyano, the holder of our convertible promissory note having a principal amount plus accrued interest of $1,063,750. Under the Debt Conversion Agreement, we converted Keyano’s note and any accrued interest into our common stock at a rate of $0.20 per share. 5,318,750 shares of our common stock were delivered to Keyano and the note was cancelled. Keyano is an affiliate of our director and current Chief Executive Officer, President and Treasurer, Elie Saltoun, who is the owner of a 50% interest in Keyano.
On February 27, 2006, we consummated the transactions contemplated by a share exchange agreement among us, ATN, Omar Malheiro Silva Araújo and Manuel da Costa Fraguas, both directors and officers of ATN. Pursuant to the share exchange agreement, we acquired 80% of the outstanding capital stock of ATN in exchange for 2,000,000 shares of our common stock, in the aggregate. The purchase price was subsequently adjusted to an aggregate of 1,200,000 shares of our common stock. As a result of this transaction, Messrs. Araújo and Fraguas became the owners of 13.8% of our outstanding capital stock.
During the quarter ended March 31, 2008, Keyano Invest Inc., a related party, loaned the Company $1,000,000 for working capital purposes. 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 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.
Director Independence
The Board of Directors is currently composed of 2 members, Mr. Saltoun and Mr. Nunez. None of our directors are “independent” directors, as that term is defined under the Nasdaq listing standards.
Elie Saltoun
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The aggregate fees billed for each of the fiscal year ended December 31, 2009 and 2008 for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements and review of the financial statements included in the registrant’s Form 10-K or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $60,000 and $63,279, respectively.
Audit Related Fees
The aggregate fees billed in the fiscal year ended December 31, 2009 and 2008 for assurance and related services by the principal accountant that are reasonably related to the performance of the audit or review of the registrant’s financial statements and are not reported under the paragraph captioned “Audit Fees” above are $29,920 and $25,000, respectively.
Tax Fees
The aggregate fees billed in the fiscal years ended December 31, 2009 and 2008 for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning were $1,500 and $1,500, respectively.
All Other Fees
The aggregate fees billed in the fiscal years ended December 31, 2009 and 2008 for products and services provided by the principal accountant, other than the services reported above under other captions of this Item 14 are $0 and $0, respectively.
Pre-Approval Policies and Procedures
Our board of directors adopted resolutions in accordance with the Sarbanes-Oxley Act of 2002 requiring pre-approval of all auditing services and all audit related, tax or other services not prohibited under Section 10A(g) of the Securities Exchange Act of 1934, as amended to be performed for us by our independent auditors, subject to the de minimus exception described in Section 10A(i)(1)(B) of the Exchange Act. These resolutions authorized our independent auditor to perform audit services required in connection with the annual audit relating to the fiscal year ended December 31, 2009 and the quarterly reviews for the subsequent fiscal quarters of 2010 through the review for the quarter ended September 30, 2010 at which time additional pre-approvals for any additional services to be performed by our auditor would be sought from the Board. Our board of directors also appointed and authorized Elie Saltoun to grant pre-approvals of other audit, audit-related, tax and other services requiring board approval to be performed for us by our independent auditor, provided that the designee, following any such pre-approvals, thereafter reports the pre-approvals of such services at the next following regular meeting of the Board.
The percentage of audit-related, tax and other services that were approved by the board of directors is 100%.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this 10-K:
1. FINANCIAL STATEMENTS
The following documents are filed in Part II, Item 8 of this annual report on Form 10-K:
·
Report of Meyler & Company, LLC, Independent Registered Certified Public Accounting Firm
·
Balance Sheets as of December 31, 2009 and 2008 (audited)
·
Statements of Operations for the years ended December 31, 2009 and 2008 (audited)
·
Statements of Stockholders’ Deficit from 2006 through December 31, 2009 (audited)
·
Statements of Cash Flows for the years ended December 31, 2009 and 2008 (audited)
·
Notes to Financial Statements (audited)
2. FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted as they are not required, not applicable, or the required information is otherwise included.
3. EXHIBITS
The exhibits listed below are filed as part of or incorporated by reference in this report.
Exhibit
Number
Description
31.1.
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
31.2.
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
32.1
Certification of Chief Executive Officer and Chief Financial Officer 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 section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report on Form 10-KSB to be signed on its behalf by the undersigned, thereto duly authorized individual.
Date: May 17, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacity and on the date indicated.
EXHIBIT LIST
31.1.
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2.
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.