Sparta Commercial Services 10QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended July 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ___________.
Commission file number: 0-9483
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SPARTA COMMERCIAL SERVICES, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 95-3502207
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
240 West 35th Street, Suite 402, New York, NY 10001
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(Address of principal executive offices)
(212) 239-2666
--------------
(Issuer's telephone number)
TOMAHAWK INDUSTRIES, INC.
-------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
As of September 13, 2004, we had 200,000,000 shares of common stock issued and
outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
SPARTA COMMERCIAL SERVICES, INC.
FORM 10-QSB
FOR THE QUARTER ENDED JULY 31, 2004
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements for the Quarter Ended July 31, 2004 3
Condensed Consolidated Balance Sheets
as of July 31, 2004 and April 30, 2004 3
Condensed Consolidated Statements of Losses
For the Three Months Ended July 31, 2004 and 2003 and For the
Period October 1, 2001 (Date of Inception)
Through July 31, 2004 4
Condensed Consolidated Statement of Deficiency in Stockholders'
Equity For the Period October 1, 2001 (Date of Inception)
Through July 31, 2004 5
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended July 31, 2004 and 2003
and For the Period October 1, 2001 (Date of Inception)
Through July 31, 2004 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 5. Other Information 20
Item 6. Exhibits 21
Signatures 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPARTA COMMERCIAL SERVICES, INC.
(A development stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, 2004
(Unaudited) April 30, 2004
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 99,195 $ 11,973
Marketable securities 20,367 13,379
Inventories (Note A) 59,741 --
3,000 --
----------- -----------
Total Current Assets 182,303 25,352
Property and Equipment, net of accumulated depreciation of $58 and $30,
at July 31, 2004 and April 30, 2004, respectively (Note C) 3,610 1,193
Total Assets $ 185,913 $ 26,545
=========== ===========
LIABILITIES AND (DEFICIENCY) IN STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 143,419 $ 81,721
Due to related party (Note D) -- 23,885
----------- -----------
Total Current Liabilities 143,419 105,606
(Deficiency) in Stockholders' Equity: (Note E)
Common Stock, $0.001 par value; 200,000,000 shares authorized;
56,637,228 shares issued and outstanding
at July 31, 2004 and April 30, 2004 56,637 56,637
Common stock - subscription payable 678,363 143,363
Additional paid-in-capital 1,579,870 1,579,870
Deficit accumulated during development stage (2,272,376) (1,858,931)
----------- -----------
Total (Deficiency) in Stockholders' Equity 42,494 (79,061)
----------- -----------
Liabilities and (Deficiency) in Stockholders' Equity $ 185,913 $ 26,545
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
3
SPARTA COMMERCIAL SERVICES, INC.
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF LOSSES
(UNAUDITED)
For the Period
October 1, 2001
(date of inception)
For the Three Months Ended through July 31,
July 31, 2004
2004 2003
------------- ------------- -------------
Operating Expenses:
General and administrative 413,417 595,301 2,281,029
Depreciation 28 -- 58
------------- ------------- -------------
Total Operating Expenses 413,445 595,301 2,281,087
Loss from Operations (413,445) (595,301) (2,281,087)
------------- ------------- -------------
Other Income (Expenses) -- -- 8,711
Income Taxes -- -- --
Net Loss $ (413,445) $ (595,301) $ (2,272,376)
============= ============= =============
Loss per common share (basic and assuming
dilution) $ (0.00) $ (0.00) $ n/a
============= ============= =============
Weighted average common shares outstanding
(basic and diluted) 200,000,000 121,639,548 n/a
See accompanying notes to unaudited condensed consolidated financial statements
4
SPARTA COMMERCIAL SERVICES, INC.
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY FOR
THE PERIOD OCTOBER 1, 2001 (Date of Inception) THROUGH
JULY 31, 2004
(UNAUDITED)
Sparta Sparta
Commercial Commercial Deficit
Services Services, Subscription Accumulated Total
LLC Inc. Payable- Additional During Stockholders'
Membership Common Common Subscription Paid-in Development Equity
Interest Shares Amount Shares Payable Capital Stage (Deficiency)
----------- ----------- ----------- ------------ --------- ---------- ----------- -----------
Balance at October 1, 2001 -- -- $ -- -- $ -- $ -- $ -- $ --
Issuance of shares of
membership interest to
the founders 5,100,000 -- 250 -- -- -- -- 250
Proceeds from capital
contributions 50,000 -- 50,000 -- -- -- -- 50,000
Net Loss -- -- -- -- -- -- (50,015) (50,015)
Balance at April 30, 2002 5,150,000 -- 50,250 -- -- -- (50,015) 235
Proceeds from capital
contributions 115,000 -- 115,000 -- -- -- -- 115,000
Net Loss -- -- -- -- -- -- (36,659) (36,659)
----------- ----------- ----------- ------------ --------- ---------- ----------- -----------
Balance at April 30, 2003 5,265,000 -- $ 165,250 -- $ -- $ -- $ (86,674) $ 78,576
Proceeds from capital
contributions 775,000 -- 775,000 -- -- -- -- 775,000
Membership interests
issued to consultants
in exchange for
services in June 2003
at $1 per unit 448,000 -- 448,000 -- -- -- -- 448,000
Membership interests
issued in exchange for
licensing fees in
December 2003 at $1
per unit 330,433 -- 330,433 -- -- -- -- 330,433
Tomahawk Shares retained
by Tomahawk stockholders
in connection with merger
with Sparta Commercial
Services LLC in
February 2004 -- 56,637,228 56,637 -- -- 4,550 -- 61,187
Shares deemed to be
issued to Sparta
members in relation to
merger with Sparta
Commercial Services
LLC in February 2004 (6,818,433) -- (1,718,683) 143,362,772 143,363 1,575,320 -- --
Net Loss -- -- -- -- -- -- (1,772,257) (1,772,257)
----------- ----------- ----------- ------------ --------- ---------- ----------- -----------
Balance at April 30, 2004 -- 56,637,228 $ 56,637 143,362,772 $ 143,363 $1,579,870 $(1,858,931) $ (79,061)
Proceeds from common
stock subscription
payable -- -- -- -- 535,000 -- -- 535,000
Net Loss -- -- -- -- -- -- (413,445) (413,445)
----------- ----------- ----------- ------------ --------- ---------- ----------- -----------
Balance at April 30, 2004 -- 56,637,228 $ 56,637 143,362,772 $ 678,363 $1,579,870 $ (2,272,376) $ 42,494
=========== =========== =========== ============ ========= ========== ============ ===========
See accompanying notes to unaudited condensed consolidated financial statements
5
SPARTA COMMERCIAL SERVICES, INC.
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Period October 1,
For the Three Months Ended 2001 (date of inception)
July 31, through July 31, 2004
2004 2003
----------- ----------- -----------
Cash Flows From Operating Activities:
Net Loss $ (413,445) $ (595,301) $(2,272,376)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 28 -- 58
Shares issued in exchange for licensing fees -- -- 330,433
Shares issued to founders -- -- 250
Shares issued to consultants for services -- 448,000 448,000
Acquisition costs -- -- 61,187
Gain on sale of investments -- -- (8,711)
Increase(decrease) in:
Inventories (59,741) -- (59,741)
Other current assets (3,000) -- (3,000)
Accounts payable 61,698 5,025 143,419
Due to related party (23,885) 57,114 --
----------- ----------- -----------
Net Cash used in Operating Activities (438,345) (85,162) (1,360,481)
Cash Flows From Investing Activities:
Net payments for property and equipment (2,445) -- (3,668)
Net payments for purchase of marketable securities (6,988) -- (11,656)
----------- ----------- -----------
Net Cash used in Investing Activities (9,433) -- (15,324)
Cash Flows From Financing Activities:
Proceeds form sale of equity interests , net 535,000 61,200 1,475,000
----------- ----------- -----------
Net Cash Provided by Financing Activities 535,000 61,200 1,475,000
Net increase (decrease) in cash and equivalents 87,222 (23,962) 99,195
Cash and equivalents at beginning of period 11,973 23,962 --
----------- ----------- -----------
Cash and equivalents at end of period $ 99,195 -- $ 99,195
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ -- $ -- $ --
----------- ----------- -----------
Cash paid during the period for taxes $ -- $ -- $ --
----------- ----------- -----------
See accompanying notes to unaudited condensed consolidated financial statements
6
SPARTA COMMERCIAL SERVICES, INC.
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Continued)
For the Period October 1,
For the Three Months Ended 2001 (date of inception)
July 31, through July 31, 2004
2004 2003
----------- ----------- -----------
Non Cash Investing and Financing Transactions:
Shares issued in exchange for licensing fees $ -- $ -- $ 330,433
Shares issued to founders in exchange for services -- -- 250
Shares issued in exchange for services -- 448,000 448,000
Merger with Sparta: (Note B)
Common stock retained -- -- 56,637
Liabilities assumed in excess of assets acquired -- -- 4,550
Shares issued in exchange for services -- -- 61,187
See accompanying notes to unaudited condensed consolidated financial statements
7
SPARTA COMMERCIAL SERVICES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2004
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
-------
The accompanying un-audited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Accordingly, the results from operations for the three months period ended July
31, 2004 are not necessarily indicative of the results that may be expected for
the year ended April 30, 2005. The un-audited consolidated financial statements
should be read in conjunction with the consolidated April 30, 2004 financial
statements and footnotes thereto included in the Company's SEC Form 10-KSB.
Business and Basis of Presentation
----------------------------------
Sparta Commercial Services, Inc. (the "Company" or "Tomahawk") was formed on May
13, 1980 under the laws of the State of Nevada. On February 27, 2004, the
Company entered into an Agreement of Plan and Reorganization ("Agreement") with
Sparta Commercial Services, LLC ("Sparta") a limited liability company formed on
October 1, 2001 under the laws of the State of Delaware under the name of Sparta
Financial Services, LLC. The liabilities of the Company's members are limited.
In accordance with SFAS No. 141, the Company was the acquiring entity. While the
transaction is accounted for using the purchase method of accounting, in
substance the Agreement is a recapitalization of the Company's capital
structure. As a result of the Agreement, there was a change in control of the
Company. Also, subsequently, the Company's name was changed to Sparta Commercial
Services, Inc. From April 1988 until the date of the Agreement, the Company was
an inactive publicly registered shell corporation with no significant assets or
operations.
The Company is in the development stage, as defined by Statement of Financial
Accounting Standards No. 7 ("SFAS No. 7") and its efforts, through its
wholly-owned subsidiary, Sparta, have been principally devoted to developing
business as an originator and indirect lender for retail installment loan and
lease financing for the purchase or lease of new and used motorcycles
(specifically 500cc and higher) and utility-oriented 4-stroke all terrain
vehicles (ATVs).
To date, the Company has generated no sales revenues, has incurred expenses and
has sustained losses. Consequently, its operations are subject to all the risks
inherent in the establishment of a new business enterprise. For the period from
October 1, 2001 (date of Sparta's inception) through July 31, 2004, the Company
has accumulated losses of $2,272,376.
8
SPARTA COMMERCIAL SERVICES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2004
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)
Revenue Recognition
-------------------
The Company originates leases on new and used motorcycles from motorcycle
dealers throughout the United States. All of the Company's leases, which the
Company enters into, are accounted for as operating leases. At the inception of
the lease, no lease revenue is recognized and the leased motorcycles, together
with the initial direct costs of originating the lease, which are capitalized,
appear on the balance sheet as "motorcycles under operating leases-net". The
capitalized cost of each motorcycle is depreciated over the lease term, on a
straight-line, basis down to the Company's original estimate of the projected
value of the motorcycle at the end of the scheduled lease term (the "Residual").
Monthly lease payments are recognized as rental income. An acquisition fee
classified as fee income on the financial statements is received and recognized
in income at the inception of the lease.
The Company realizes gains and losses as the result of the termination of
leases, both at and prior to their scheduled termination, and the disposition of
the related motorcycle. The disposal of motorcycles, which reach scheduled
termination of a lease, results in a gain or loss equal to the difference
between proceeds received from the disposition of the motorcycle and its net
book value. Net book value represents the residual value at scheduled lease
termination. Lease terminations that occur prior to scheduled maturity as a
result of the lessee's voluntary request to purchase the vehicle should result
in net gains, equal to the excess of the price received over the motorcycle's
net book value.
Early lease terminations also occur because of (i) a default by the lessee, (ii)
the physical loss of the motorcycle, or (iii) the exercise of the lessee's early
termination. In those instances, the Company receives the proceeds from either
the resale or release of the repossessed motorcycle, or the payment by the
lessee's insurer. The company records a gain or loss for the difference between
the proceeds received and the net book value of the motorcycle.
Inventories
-----------
The book value of motor vehicles in inventories equals the original cost less
accumulated depreciation, on the specific identification method, which is not in
excess of market value. The Company provides for a reserve for decreases in
market value, if any, which may occur prior to the sale or release of
motor vehicles out of inventory.
Components of inventories at July 31, 2004 and 2003 are as follows:
2004 2003
------- -------
Motor vehicles $59,741 $ --
======= =======
Amortization
------------
Initial direct costs incurred in connection with the originating leases are
capitalized and amortized over the term of the lease. Amortization expense for
the three months ended July 31, 2004 and 2003 was $0.
Stock Based Compensation
------------------------
In December 2003, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation.
9
SPARTA COMMERCIAL SERVICES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2004
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Stock Based Compensation (continued)
------------------------------------
In addition, this statement amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in APB Opinion No. 25 and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the fair market value of the Company's stock at the date of the grant
over the exercise price of the related option. The Company has adopted the
annual disclosure provisions of SFAS No. 148 in its financial reports from
January 1, 2003. The Company does not have stock based awards of compensation to
employees granted or outstanding during the period from October 1, 2001 (date of
inception) through July 31, 2004.
New Accounting Pronouncements
-----------------------------
In December 2003, the FASB issued SFAS No. 132 (revised), EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS - AN AMENDMENT OF FASB
STATEMENTS NO. 87, 88 AND 106. This statement retains the disclosure
requirements contained in FASB statement no. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, which it replaces. It requires
additional disclosures to those in the original statement 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. The required
information should be provided separately for pension plans and for other
postretirement benefit plans. The revision applies for the first fiscal or
annual interim period ending after December 15, 2003 for domestic pension plans
and June 15, 2004 for foreign pension plans and requires certain new disclosures
related to such plans. The adoption of this statement will not have a material
impact on the Company's results of operations or financial position.
10
SPARTA COMMERCIAL SERVICES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2004
(UNAUDITED)
NOTE B - BUSINESS COMBINATION AND CORPORATE RESTRUCTURE
On February 27, 2004, the Company entered into an Agreement of Plan and
Reorganization ("Agreement") with Sparta Commercial Services LLC ("Sparta"). In
accordance with SFAS No. 141, Sparta was the acquiring entity. While the
transaction is accounted for using the purchase method of accounting, in
substance the Agreement is a recapitalization of the Sparta's capital structure.
For accounting purposes, the Company accounted for the transaction as a reverse
acquisition and Sparta is the surviving entity. The total purchase price and
carrying value of net assets acquired was $61,187. The Company did not recognize
goodwill or any intangible assets in connection with the transaction. From April
1988 until the date of the Agreement, Tomahawk was an inactive corporation with
no significant assets and liabilities.
Effective with the Agreement, all previously outstanding membership interests
owned by the Sparta's members were exchanged for an aggregate of 143,362,772
shares of the Company's common stock. The value of the stock that was issued was
the historical cost of the Tomahawk's net tangible assets, which did not differ
materially from their fair value.
Subject to shareholder approval, Tomahawk is obligated to issue an additional
486,511,854 shares of its common stock to the Sparta's former members (see Note
E).
The total consideration paid was $61,187 and the significant components of the
transaction are as follows:
Common stock retained $ 56,637
Assets acquired (594)
Liabilities assumed 5,144
Cash paid --
Total consideration paid/organization cost $ 61,187
========
In accordance with SOP 98-5, the Company expensed $61,187 as organization costs.
NOTE C - PROPERTY AND EQUIPMENT
Major classes of property and equipment at July 31, 2004 and 2003 consist of the
followings:
2004 2003
------- -------
Computer equipment $ 3,668 $ 1,223
Less: accumulated depreciation (58) (30)
------- -------
Net property and equipment $ 3,610 $ 1,193
======= =======
Depreciation expense was $28 and $0 for the three months ended July 31, 2004 and
2003, respectively.
11
SPARTA COMMERCIAL SERVICES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2004
(UNAUDITED)
NOTE D - RELATED PARTY TRANSACTIONS
The Company entered in to a licensing agreement relating to the use of a
proprietary operating system, with an entity controlled by the Company's
President and Chief Executive Officer. During the three months ended July 31,
2004 and 2003, the Company charged to operations $100,000 and $0, respectively,
in connection with the licensing agreement. Also, during the three months ended
July 31, 2004 and 2003, the Company paid $59,741 and $0, for purchase of
inventory of motorcycles from the related party. At July 31, 2004 and 2003, the
balance outstanding on account of licensing agreement payable to related party
was $0.
During the three months ended July 31, 2004 and 2003, the Company paid $20,000
and $0, in exchange for services to Company's President and Chief Executive
Officer. These amounts were charged to operations.
The Company leases office space from an entity controlled by the Company's
President and Chief Executive Officer.
NOTE E - EQUITY INSTRUMENTS
The Company is authorized to issue 200,000,000 shares of common stock with
$0.001 par value per share. As of July 31, 2004, the Company has issued and
outstanding 56,637,228 shares of common stock.
In 2002, Sparta issued 5,100,000 shares to the founder members in exchange for
services relating to formation of the Sparta. The Company charged $250 to
expenses in relation to the issuance. The units of membership interest issued
was valued at approximately $0.00005 per share, which represents the fair value
of the units issued, which did not differ materially from the value of the
services rendered.
In March 2002, Sparta issued 50,000 shares of membership interest for cash
consideration of $50,000.
During the year ended April 30, 2003, Sparta issued for cash 115,000 shares of
membership interest for $115,000.
In June 2003, Sparta issued 448,000 shares of membership interest to various
consultants in exchange for services valued at $1 per share. The units of
membership interest issued was valued at approximately $1 per share, which
represents the fair value of the units issued, which did not differ materially
from the value of the services rendered.
During the year ended April 30, 2004, Sparta issued for cash 775,000 shares of
membership interest for $775,000.
In December 2003, Sparta issued 330,433 shares of membership interest for
licensing fees payable to a company controlled by principal members of Sparta.
The units of membership interest issued was valued at approximately $1 per
share, which represents the fair value of the units issued, which did not differ
materially from the value of the services rendered.
12
SPARTA COMMERCIAL SERVICES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2004
(UNAUDITED)
NOTE E -EQUITY INSTRUMENTS (Continued)
In February 2004, as per agreement of Plan and Reorganization ("Agreement") with
Sparta, all previously outstanding membership interests owned by the Sparta's
members were exchanged for an aggregate of 143,362,772 shares of the Tomahawk's
common stock. The value of the stock that was issued was the historical cost of
the Company's net tangible assets, which did not differ materially from their
fair value. Subject to shareholder approval regarding an increase in authorized
capital and/or a reverse split, the Company is obligated to issue an additional
486,511,854 shares of its common stock to the Sparta's former members. Also, as
per the Agreement, 56,637,617 shares of common stock were retained by the
stockholders of Tomahawk.
During three months ended July 31, 2004, the Company sold rights to acquire
securities of the Company to investors for aggregate gross proceeds of $535,000.
In the event that the Company conducts a private placement transaction in 2004
utilizing a designated registered broker-dealer as a placement agent, the rights
will automatically convert into the securities sold in such private placement at
the private placement sale price. In the event that the Company does not
complete any of the aforementioned financing by the end of calendar 2004, the
rights will automatically convert into common stock at a purchase price of
$0.0146 per share, or the purchase of an aggregate of 28,082,192 shares. At July
31, 2004, the Company has recorded $535,000 as subscription payable.
NOTE F - SUBSEQUENT EVENT
In August 2004, the Company received $50,000 cash as subscription for common
shares.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"FORWARD-LOOKING" INFORMATION
This report on Form 10-QSB contains certain "forward-looking statements" within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
which represent our expectations and beliefs, including, but not limited to
statements concerning the Company's expected growth. The words "believe,"
"expect," "anticipate," "estimate," "project," and similar expressions identify
forward-looking statements, which speak only as of the date such statement was
made. These statements by their nature involve substantial risks and
uncertainties, certain of which are beyond our control, and actual results may
differ materially depending on a variety of important factors.
INTRODUCTORY STATEMENT
The following discussion and analysis should be read in conjunction with the
information set forth in the un-audited consolidated financial statements for
the quarter ended July 31, 2004 and the consolidated April 30, 2004 financial
statements and footnotes found in the Company's SEC Form 10-KSB.
Unless otherwise stated, the discussion and analysis refers to the business of
Sparta Commercial Services, LLC, which we acquired on February 27, 2004 in a
transaction viewed as a reverse acquisition, and does not refer to the
operations for our former business which was essentially a non-operating shell
company. Under applicable accounting principles, the historical financial
statements of Sparta Commercial Services, LLC became those of our company.
COMPANY OVERVIEW
The quarter ended July 31, 2004 was a period of development, as we continue to
develop our products and market them to dealers and manufacturers.
Prior to February 27, 2004, we did not conduct any substantive operations. On
February 27, 2004, pursuant to an Agreement and Plan of Reorganization, we
acquired Sparta Commercial Services, LLC, in a transaction viewed as a reverse
acquisition. The purpose of the transaction was to try to create some value for
our shareholders. As an inactive publicly registered shell corporation with no
significant assets or operations, our business plan was to seek an acquisition
candidate. Sparta sought access to financing, as a publicly-held company. As a
result of the reverse acquisition, there was a change in control of our company.
We are a holding company that conducts our business activities through our
wholly-owned subsidiary, Sparta Commercial Services, LLC. Sparta has been a
development stage company. Sparta, have been principally devoted to developing
business as an originator and indirect lender for retail installment loan and
lease financing for the purchase or lease of new and used motorcycles
(specifically 500cc and higher) and utility-oriented 4-stroke all terrain
vehicles (ATVs).
To date, we have generated limited sales revenues, have incurred expenses and
have sustained losses. Consequently, our operations are subject to all the risks
inherent in the establishment of a new business enterprise. For the period from
October 1, 2001 (date of Sparta's inception) through July 31, 2004, we have
accumulated losses of $2,272,376.
The quarter ended July 31, 2004 was a developmental stage period for us, setting
up credit procedures, setting our arrangements with vehicle distributors,
obtaining personnel, seeking financing to support our developmental efforts, and
seeking credit facilities. In fiscal year 2005, we will seek to obtain
regulatory approval in several states, where required, prior to commencing
active operations. We are actively signing up dealers to participate in our
financing programs, including our private label financing programs. We have
signed up two manufacturers to our private label programs, and are in
negotiations with several other manufacturers who have indicated an interest in
a private label program. Presently, we have very little operating capital to
fulfill our planned business plans. We estimate that we will need approximately
$700,000 to conduct limited operations during the next twelve months. The lack
of capital has made it difficult to obtain a credit line with a lending
institution which we will need before commencing full active operations. We are
presently in discussions with several institutions about obtaining a credit
line, which would permit us to more quickly implement our business plan.
14
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTER ENDED JULY 31, 2004 TO THE QUARTER ENDED JULY 31, 2004
For the quarter ended July 31, 2004, we have generated no sales revenues, have
incurred significant expenses, and have sustained significant losses. We believe
we will begin earning revenues from operations in late calendar year 2004 as we
transition from a development stage company to an operating company.
Costs and Expenses
------------------
The Company incurred licensing fees of $150,633 for the quarter ended July 31,
2004 and $57,115 for the quarter ended July 31, 2003. The increase in fees
represent costs incurred for the licensing of certain proprietary software,
operating systems and processes for use in connection with the extension of
credit and underwriting techniques for the purchase and lease of motor vehicles.
The Company incurred organization costs of $11,560 for the quarter ended July
31, 2004 and $496,532 for the quarter ended July 31, 2003. This decrease of
$484,972 is primarily attributed to the Company issuing 448,000 shares of
membership interest to various consultants in exchange for services valued at $1
per share in June 2003.
The Company incurred compensation costs of $141,749 for the quarter ended July
31, 2004 and $1,000 for the quarter ended July 31, 2003. The increase is related
to the costs of the Company increasing its employment base during 2004. As the
Company continues to expand, the Company will incur additional costs for
personnel. In order for the Company to attract and retain quality personnel,
management anticipates it will continue to offer competitive salaries and issue
common stock to consultants and employees.
The Company incurred legal and accounting fees of $32,854 for the quarter ended
July 31, 2004 as compared to $38,059 for the quarter ended July 31, 2003, a
decrease of $5,205. The decrease is related to certain legal costs that were
incurred last year with regards to completing the reverse acquisition with
Sparta Commercial Services in February 2004. As a result of the Company's
recapitalization as a public company, the Company will continue to incur legal
and accounting expenses associated with complying with various federal and state
securities statutes, rules and regulations.
The Company incurred consulting fees of $39,325 for the quarter ended July 31,
2004 and $0 for the quarter ended July 31, 2003. This increase is due to the
Company using various consultants to complete the development of the website and
establish programs, procedures and policies.
Net Loss
--------
Our net loss for the quarter ended July 31, 2004 was $413,445 in contrast to a
loss of $595,301 for the quarter ended July 31, 2003. The $181,856 decrease in
net loss was due primarily to the fact that the Company is nearing the
completion of the development stage and therefore is incurring less development
costs as compared to the quarter ended July 31, 2003.
Our net loss per common share (basic and diluted) was $0 for the quarter ended
July 31, 2004 and $0 for the quarter ended July 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 2004, the Company had working capital of $38,884. The Company
generated a deficit in cash flow from operations of $438,345 for the year ended
April 30, 2004. The deficit in cash flow from operating activities for the
quarter ended July 31, 2004 is primarily attributable to the Company's net loss
from operations of $413,445, adjusted for depreciation and amortization of $28,
purchase of inventories and other current assets of $62,741, payments to a
related party of $23,885, and an increase in payables of $61,698.
15
Cash flows used in investing activities for the quarter ended July 31, 2004 was
$9,433.
The Company met its cash requirements during the period through proceeds from
the issuance of equity of $535,000. Subsequent to this period, the Company has
received proceeds from the issuance of equity of $50,000. Additionally, the
Company has received limited revenues from its recently launched private label
programs and from dealer sign-up fees.
While we have raised capital to meet our working capital and financing needs in
the past, additional financing is required in order to meet our current and
projected cash flow deficits from operations and development. We are seeking
financing in the form of equity in order to provide the necessary working
capital. We currently have no commitments for financing. There is no guarantee
that we will be successful in raising the funds required.
We estimate that we will need approximately $700,000 to conduct limited
operations during the next twelve months. Based on capital received from equity
financing after our fiscal year ended 2004, and certain indications of interest
to purchase our equity, we believe that we have, or will have, sufficient
capital resources to meet projected cash flow deficits through the next twelve
months. There can be no assurance that additional private or public financing,
including debt or equity financing, will be available as needed, or, if
available, on terms favorable to the Company. Any additional equity financing
may be dilutive to shareholders and such additional equity securities may have
rights, preferences or privileges that are senior to those of the Company's
existing common or preferred stock. Furthermore, debt financing, if available,
will require payment of interest and may involve restrictive covenants that
could impose limitations on the operating flexibility of the Company. However,
if we are not successful in generating sufficient liquidity from operations or
in raising sufficient capital resources, on terms acceptable to us, this could
have a material adverse effect on our business, results of operations ,
liquidity and financial condition, and we will have to adust our planned
operations and development on a more limited scale.
The effect of inflation on the Company's revenue and operating results was not
significant. The Company's operations are located in North America and there are
no seasonal aspects that would have a material effect on the Company's financial
condition or results of operations.
AUDITOR'S OPINION EXPRESSES DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A
"GOING CONCERN"
The independent auditors report on our April 30, 2004 financial statements
included in this Annual Report states that the Company's historical losses and
the lack of revenues raise substantial doubts about the Company's ability to
continue as a going concern, due to the Company's status as a development stage
company and its lack of significant operations. If we are unable to develop our
business, we have to discontinue operations or cease to exist, which would be
detrimental to the value of the Company's common stock. We can make no
assurances that our business operations will develop and provide us with
significant cash to continue operations.
PLAN OF OPERATIONS
Addressing the Going Concern Issues
-----------------------------------
In order to improve the Company's liquidity, the Company's management is
actively pursing additional equity financing through discussions with investment
bankers and private investors. There can be no assurance the Company will be
successful in its effort to secure additional equity financing.
We continue to experience net operating losses. Our ability to continue as a
going concern is subject to our ability to develop profitable operations. We are
devoting substantially all of our efforts to developing our business and raising
capital. Our net operating losses increases the difficulty in meeting such goals
and there can be no assurances that such methods will prove successful.
16
The primary issues management will focus on in the immediate future to address
this matter include:
o seeking a credit line from institutional lenders;
o seeking institutional investors for equity investments in our company;
and
o initiating negotiations to secure short term financing through
promissory notes or other debt instruments on an as needed basis.
To address these issues, we are negotiating the potential sale of securities
with investment banking companies to assist us in raising capital.
Product Research and Development
--------------------------------
We do not anticapte incurring significant research and development expenditures
during the next twelve months
Acquisition or Disposition of Plant and Equipment
-------------------------------------------------
We do not anticipate the sale of any significant property, plant or equipment
during the next twelve months. We do not anticipate the acquisition of any
significant property, plant or equipment during the next 12 months.
Number of Employees
-------------------
From our inception through the period ended July 31, 2004, we have relied on the
services of outside consultants for services and currently have six employees.
In order for us to attract and retain quality personnel, we anticipate we will
have to offer competitive salaries to future employees. We do not anticipate our
employment base will significantly change during the next twelve months. As we
continue to expand, we will incur additional cost for personnel. This projected
increase in personnel is dependent upon our generating revenues and obtaining
sources of financing. There is no guarantee that we will be successful in
raising the funds required or generating revenues sufficient to fund the
projected increase in the number of employees.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect our reported assets, liabilities,
revenues, and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates and judgments on historical experience and on various
other assumptions we believe to be reasonable under the circumstances. Future
events, however, may differ markedly from our current expectations and
assumptions. While there are a number of significant accounting policies
affecting our consolidated financial statements; we believe the following
critical accounting policy involves the most complex, difficult and subjective
estimates and judgments:
Stock-Based Compensation
------------------------
In December 2003, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation.
17
In addition, this statement amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in APB Opinion No. 25 and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the fair market value of the Company's stock at the date of the grant
over the exercise price of the related option. The Company has adopted the
annual disclosure provisions of SFAS No. 148 in its financial reports for the
period from January 1, 2003 through April 30, 2003 and will adopt the interim
disclosure provisions for its financial reports for the subsequent periods. The
Company does not have stock based awards of compensation to employees granted or
outstanding during the period from October 1, 2001 (date of inception) through
July 31, 2004.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued SFAS No. 132 (revised), EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS - AN AMENDMENT OF FASB
STATEMENTS NO. 87, 88 AND 106. This statement retains the disclosure
requirements contained in FASB statement no. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, which it replaces. It requires
additional disclosures to those in the original statement 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. The required
information should be provided separately for pension plans and for other
postretirement benefit plans. The revision applies for the first fiscal or
annual interim period ending after December 15, 2003 for domestic pension plans
and June 15, 2004 for foreign pension plans and requires certain new disclosures
related to such plans. The adoption of this statement will not have a material
impact on the Company's results of operations or financial position.
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ITEM 3. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) or Rule 15a-15(e) of the Exchange Act)
as of the end of the period covered by this report. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures as of the end of the period covered by this
report were effective in ensuring that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
There was no change in our internal control over financial reporting (as defined
in Rule 13a-15(f) of the Exchange Act) that occurred during the fiscal quarter
to which this report relates that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Between May and July 2004, we sold rights to seven accredited investors for
aggregate gross proceeds of $535,000 in transactions deemed exempt from
registration pursuant to Section 4(2) of the Securities Act. In September 2004,
we sold additional rights for gross proceeds of $50,000. In the event that we
conduct a private placement transaction in 2004 utilizing a designated
registered broker-dealer as a placement agent, the rights will automatically
convert into the securities sold in such private placement at the private
placement sale price. In the event that we do not complete any of the
aforementioned financing by the end of calendar 2004, the rights will
automatically convert into common stock at a purchase price of $0.0146 per
share, or the purchase of an aggregate of 40,068,493 shares, subject to
adjustment for stock split(s). We used the proceeds for working capital
purposes.
On August 2, 2004, we agreed to grant Daniel J. Lanjewar, our Chief Financial
Officer, pursuant to an employment agreement, 4,545,455 shares of our common
stock in a transaction deemed exempt from registration pursuant to Section 4(2)
of the Securities Act. The grant of shares is subject to vesting and subject to
continued employment. Twenty percent of the shares shall vest on January 1,
2005, and the reminder of the shares are to vest in equal portions on July 1,
2005, July 1, 2006, July 1, 2007, and July 1, 2008, subject to proportionate
adjustment in the event of employment termination for any incomplete vesting
period.
ITEM 5. OTHER INFORMATION.
In August 2004, the Company filed a Certificate of Amendment to the Articles of
Incorporation with the Secretary of State of the State of Nevada changing the
Company's name from "Tomahawk Industries, Inc." to "Sparta Commercial Services,
Inc." The Certificate of Amendment is effective as of August 25, 2004.
In connection with the Company's name change, effective August 30, 2004, the
trading symbol of the Company's common stock on the OTC Bulletin Board changed
from "TMHK" to "SRTA."
On July 1, 2004, holders of a majority of our outstanding common stock, owning
approximately 61% of the outstanding shares of our common stock, have executed
written consents in favor of the certain corporate actions, which as of
September 7, 2004, have not yet been effected:
1. Amend our Articles of Incorporation to increase our authorized number
of shares from 200,000,000 shares to 700,000,000 shares, par value
$0.001, and to designate 10,000,000 shares as preferred stock.
2. Effect a 1-for-200 reverse stock split of the outstanding shares of
the Company's common stock, which will be promptly followed by a
forward stock split of between 10-for-1 to 40-for-1.
3. Amend our Articles of Incorporation to reduce our authorized number of
shares from 700,000,000 shares to 350,000,000 shares, subject to
completion of the proposed stock split(s).
20
ITEM 6. EXHIBITS
The following exhibits are filed with this report:
Exhibit Number Description of Exhibit
-------------- ----------------------
Exhibit 3(i) Certificate of Amendment (Incorporated by reference to
Exhibit 3(i) of Report on Form 8-K filed on August 27, 2004)
Exhibit 11 Statement re: computation of per share earnings is hereby
incorporated by reference to "Financial Statements" of
Part I - Financial Information, Item 1 - Financial Statements,
contained in this Form 10-QSB.
Exhibit 31.1* Certification of Chief Executive Officer Pursuant to
Securities Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 31.2* Certification of Chief Financial Officer Pursuant to
Securities Exchange Act Rule 13a-14(a)/15d-14(a)
Exhibit 32.1* Certification of Chief Executive Officer Pursuant to
Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section
1350
Exhibit 32.2* Certification of Chief Financial Officer Pursuant to
Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section
1350
---
* Filed herewith.
21
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SPARTA COMMERCIAL SERVICES, INC.
Date: September 14, 2004 By: /s/ Anthony L. Havens
---------------------
Anthony L. Havens
Chief Executive Officer
Date: September 14, 2004 By: /s/ Daniel J. Lanjewar
----------------------
Daniel J. Lanjewar
Chief Financial Officer
22