Form 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 October 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
SPARTA COMMERCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
NEVADA 95-3502207
(State or other jurisdiction (IRS EmployerIdentification No.)
of incorporation or organization)
462 Seventh Ave, 20th Floor, New York, NY 10018
(Address of principal executive offices)
(212) 239-2666
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 30, 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 OCTOBER 31, 2004
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets as of October 31, 2004
and April 30, 2004 3
Condensed Consolidated Statements of Losses For the Three and
Six Months Ended October 31, 2004 and 2003 and For the Period
October 1, 2001 (Date of Inception) Through October 31, 2004 4
Condensed Consolidated Statement of Deficiency in Stockholders'
Equity For the Period October 1, 2001 (Date of Inception)
Through October 31, 2004 5
Condensed Consolidated Statements of Cash Flows For the
Six Months Ended October 31, 2004 and 2003 and For the Period
October 1, 2001 (Date of Inception) Through October 31, 2004 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis 17
Item 3. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 5. Other Information 25
Item 6. Exhibits 25
Signatures 26
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPARTA COMMERCIAL SERVICES, INC.
(A development stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31,
2004
(Unaudited) April 30, 2004
----------- -----------
ASSETS
------
Current Assets:
Cash and cash equivalents $ 32,901 $ 11,973
Accounts receivable, net 63,500 --
Marketable securities -- 13,379
Other current assets, net 10,695 --
----------- -----------
Total Current Assets 107,096 25,352
Motorcycles and other vehicles under operating leases, net of accumulated 35,123 --
depreciation of $1,372 and $0, at October 31, 2004 and April 30, 2004,
respectively (Note D)
Property and Equipment, net of accumulated depreciation of $389 and $30,
at October 31, 2004 and April 30, 2004, respectively (Note C) 10,232 1,193
Other Assets, net of accumulated amortization of $5,926 and $0,
respectively (Note E) 75,769 --
----------- -----------
Total Assets $ 228,220 $ 26,545
=========== ===========
LIABILITIES AND (DEFICIENCY) IN STOCKHOLDERS' EQUITY
----------------------------------------------------
Current Liabilities:
Accounts payable $ 332,063 $ 81,721
Deferred revenue (Note A) 86,033 --
Note payable (Note F) 75,000 --
Due to related party (Note G) -- 23,885
----------- -----------
Total Current Liabilities 493,096 105,606
(Deficiency) in Stockholders' Equity: (Note H)
Preferred stock, $0.001 par value: 10,000,000 shares authorized; -- --
none issued and outstanding
Common Stock, $0.001 par value; 690,000,000 shares authorized;
200,000,000 and 56,637,228 shares issued and outstanding at
October 31, 2004 and April 30, 2004, respectively 200,000 56,637
Common stock - subscription payable 585,000 143,363
Additional paid-in-capital 1,579,870 1,579,870
Deficit accumulated during development stage (2,629,746) (1,858,931)
----------- -----------
Total (Deficiency) in Stockholders' Equity (264,876) (79,061)
----------- -----------
Liabilities and (Deficiency) in Stockholders' Equity $ 228,220 $ 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)
through
For the Three Months Ended For the Six Months Ended October 31,
October 31, October 31, 2004
2004 2003 2004 2003
----------- ------------ ----------- ----------- -----------
Revenue $ 21,464 $ -- $ 21,464 $ -- $ --
Operating Expenses:
General and administrative 371,203 303,002 784,620 928,303 2,630,768
Depreciation and amortization 7,631 -- 7,659 -- 7,689
----------- ------------ ----------- ----------- -----------
Total Operating Expenses 378,834 303,002 792,279 928,303 2,638,457
Loss from Operations (357,370) (303,002) (770,815) (928,303) (2,638,457)
----------- ------------ ----------- ----------- -----------
Other Income (Expenses) -- -- -- -- 8,711
Income Taxes -- -- -- -- --
Net Loss $ (357,370) $ (303,002) $ (770,815) $ (928,303) $(2,629,746)
=========== =========== =========== =========== ===========
Loss per common share (basic and
assuming dilution) $ (0.002) $ (0.003) $ (0.004) $ (0.008) $ n/a
=========== =========== =========== =========== ===========
Weighted average common shares
outstanding (basic and diluted) 200,000,000 123,314,947 200,000,000 122,472,968 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 OCTOBER 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 -- -- -- -- 585,000 -- -- 585,000
Shares issued to
Sparta members in
relation to merger with
Sparta Commercial
Services LLC in
February 2004 -- 143,362,772 143,363 (143,362,772) (143,363) -- -- --
Net Loss -- -- -- -- -- -- (770,815) (770,815)
----------- ----------- ----------- ------------ --------- ---------- ----------- -----------
Balance at October 31, 2004 $ -- 200,000,000 $ 200,000 0 $ 585,000 $1,579,870 $(2,629,746) $ (264,876)
=========== =========== =========== ============ ========= ========== =========== ===========
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, 2001
(date of
inception)
through
For the Six Months Ended October
October 31, 31, 2004
2004 2003
----------- ----------- -----------
Cash Flows From Operating Activities:
Net Loss $ (770,815) $ (928,303) $(2,629,746)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 7,659 -- 7,687
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:
Accounts receivable (63,500) -- (63,500)
Other current assets (10,695) -- (10,695)
Accounts payable 250,342 (5,170) 332,063
Increase in deferred revenue 86,033 -- 86,033
Due to related party (23,885) 57,114 --
----------- ----------- -----------
Net Cash used in Operating Activities (524,861) (428,359) (1,446,999)
Cash Flows From Investing Activities:
Net payments for property and equipment (45,894) -- (47,115)
Payments for other assets (81,696) -- (81,696)
Net proceeds from purchase of marketable securities 13,379 (4,928) 8,711
----------- ----------- -----------
Net Cash used in Investing Activities (114,211) (4,928) (120,100)
Cash Flows From Financing Activities:
Proceeds from note payable 75,000 -- 75,000
Proceeds form sale of equity interests, net 585,000 516,200 1,525,000
----------- ----------- -----------
Net Cash Provided by Financing Activities 660,000 516,200 1,600,000
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, 2001
(date of
inception)
through
For the Six Months Ended October
October 31, 31, 2004
2004 2003
----------- ----------- -----------
Net increase (decrease) in cash and equivalents 20,928 82,913 32,901
Cash and equivalents at beginning of period 11,973 23,962 --
----------- ----------- -----------
Cash and equivalents at end of period $ 32,901 $ 106,875 $ 32,901
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ -- $ -- $ --
----------- ----------- -----------
Cash paid during the period for taxes $ -- $ -- $ --
----------- ----------- -----------
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
OCTOBER 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 six months period ended October
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 nominal 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 October 31, 2004, the
Company has accumulated losses of $2,629,746.
8
SPARTA COMMERCIAL SERVICES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 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 have resulted
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.
The Company charges fees to manufacturers and other customers related to
creating a private label version of the Company's financing program including
web access, processing credit applications, consumer contracts and other related
documents and processes. Fees received is amortized and booked as income over
the length of the contract. At October 31, 2004 and 2003, the Company had
recorded deferred revenue of $86,033 and $0, respectively.
Website Development Costs
-------------------------
The Company recognizes website development costs in accordance with Emerging
Issue Task Force ("EITF") No. 00-02, "Accounting for Website Development Costs."
As such, the Company expenses all costs incurred that relate to the planning and
post implementation phases of development of its website. Direct costs incurred
in the development phase are capitalized and recognized over the estimated
useful life. Costs associated with repair or maintenance for the website are
included in cost of net revenues in the current period expenses.
Inventories
-----------
The book value of motorcycles 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
motorcycles out of inventory. At October 31, 2004 and 2003, the Company did not
have any inventories.
9
SPARTA COMMERCIAL SERVICES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2004
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Amortization
------------
Initial direct costs incurred in connection with originating leases are
capitalized and amortized over the term of the lease. Amortization expense for
the six months ended October 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.
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 October 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
OCTOBER 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.
Tomahawk is obligated to issue an additional 486,511,854 shares of its common
stock to the Sparta's former members (see Note H).
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 October 31, 2004 and 2003 consist of
the followings:
2004 2003
-------- ----
Equipment $ 10,621 $--
Less: accumulated depreciation (389) --
-------- ----
Net property and equipment $ 10,232 $--
======== ====
Depreciation expense was $389 and $0 for the six months ended October 31, 2004
and 2003, respectively.
11
SPARTA COMMERCIAL SERVICES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2004
(UNAUDITED)
NOTE D - MOTORCYCLES AND OTHER VEHICLES UNDER OPERATING LEASES
Motorcycles and other vehicles under operating leases at October 31, 2004 and
2003 consist of the following:
2004 2003
-------- ------
Motorcycles and other vehicles $ 36,494 $ --
Less: accumulated depreciation (1,372) --
-------- ------
Motorcycles and other vehicles, net of accumulated 35,123 --
depreciation
Add: Unamortized commissions and origination costs -- --
Less: estimated reserve for residual values -- --
-------- ------
Motorcycles and other vehicles under operating leases, net $ 35,123 $ --
======== ======
At October 31, 2004, motorcycles and other vehicles are depreciated to the
estimated residual values of $20,031 over the lives of their lease contracts.
The following is a schedule by years of minimum future rentals on non cancelable
operating leases as of October 31, 2004:
Year ending April 30,
2005 $ 5,500
2006 6,000
2007 6,000
2008 6,000
2009 6,000
---------
$ 29,500
NOTE E - OTHER ASSETS
At October 31, 2004 and 2003, other assets consist of the followings:
2004 2003
-------- ------
Capitalized expenses $ 23,284 $ --
Less: accumulated amortization (668) --
-------- ------
Net capitalized expenses 22,616 --
Secured assets 58,411 --
Less: accumulated depreciation (5,258) --
-------- ------
Net secured assets 53,153 --
Total other assets $ 75,769 $ --
======== ======
Amortization expense was $668 and $0, for the six months ended October 31, 2004
and 2003, respectively. Depreciation expense was $5,258 and $0, for the six
months ended October 31, 2004 and 2003, respectively.
Secured assets consist of assets that are leased to third parties that the
Company has a security interest in (the Company is named lienholder).
12
SPARTA COMMERCIAL SERVICES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2004
(UNAUDITED)
NOTE F - NOTES PAYABLES
2004 2003
--------- ---------
Two notes payables; 10% interest, unsecured, expiring on April
30, 2005, lender shall be entitled to an "Equity Kicker" the note
holders are entitled to an Equity Kicker equal to such number of
shares of the Borrower's common stock as equals 20% of the loan
amount based on the pre-money valuation of the Borrower (initial
pre-money valuation of $20 million, which initial valuation is
subject to adjustment by the placement agent for the Private
Placement), on a fully diluted basis subject to private placement
related and other terms as per the agreement, in the event of
default, as penalty, the repayment after default of promissory
note shall be collateralized by certain security interest as per
the terms of the agreement. $ 75,000 $ --
--------- ---------
Less: current portion (75,000) --
--------- ---------
Notes payable - long term $ -- $ --
========= =========
NOTE G - 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 six months ended October 31,
2004 and 2003, the Company charged to operations $150,633 and $200,000,
respectively, in connection with the licensing agreement. Also, during the six
months ended October 31, 2004 and 2003, the Company acquired a security interest
of $58,412 and $0, for leasing motor vehicles that are owned by the related
party to third party lessors. At October 31, 2004 and 2003, the balance
outstanding on account of licensing agreement payable to related party was $0.
Up to November 30, 2004, the Company leased office space from an entity
controlled by the Company's President and Chief Executive Officer. From December
1, 2004, the Company has entered into a lease agreement for office premises with
an unrelated party. (Note J)
NOTE H - EQUITY INSTRUMENTS
The Company is authorized to issue 10,000,000 shares of preferred stock with
$0.001 par value per share and 690,000,000 shares of common stock with $0.001
par value per share. As of October 31, 2004, the Company has issued and
outstanding no shares of preferred stock and 200,000,000 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.
13
SPARTA COMMERCIAL SERVICES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2004
(UNAUDITED)
NOTE H - EQUITY INSTRUMENTS (continued)
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.
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. In September 2004, the Company issued 143,362,772 shares of 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 the six months ended October 31, 2004, the Company sold rights to acquire
securities of the Company to investors for aggregate gross proceeds of $585,000.
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 approximately 40,068,493
shares. At October 31, 2004, the Company has recorded $585,000 as subscription
payable.
14
SPARTA COMMERCIAL SERVICES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2004
(UNAUDITED)
NOTE I - SEGMENT INFORMATION
The Company's two reportable segments are managed separately based on
fundamental differences in their operations. During the six months ended October
31, 2004 and 2003, the Company operated in the following two reportable
segments:
- Creating a private label version of the Company's financing program
including web access, processing credit applications, consumer
contracts and other related documents and processes ("Private Label
").
- Financing and leasing of motorcycles and other vehicles ("Equipment
Leasing and Financing").
Segment operating income is total segment revenue reduced by operating expenses
identifiable with the business segment. Corporate includes general corporate
administrative costs.
The Company evaluates performance and allocates resources based upon operating
income. The accounting policies of the reportable segments are the same as those
described in the summary of accounting policies. There are no inter-segment
sales. The following table summarizes segment asset and operating balances by
reportable segment:
2004 2003
-------- --------
Net Sales to External Customers:
Private Labeling ($91,000 of which $86,033 is deferred) $ 4,967 $ --
Equipment Leasing and Financing 16,497 --
-------- --------
Total Sales to External Customers $ 21,464 $ --
======== ========
Depreciation and Amortization:
Private Labeling $ -- $ --
Equipment Leasing and Financing 7,328 --
Corporate 331 --
-------- --------
Total Depreciation and Amortization $ 7,659 $ --
======== ========
General and Administrative Expense:
Private Labeling $ -- $ --
Equipment Leasing and Financing -- --
Corporate 784,620 928,303
-------- --------
Total General and Administrative Expense $784,620 $928,303
======== ========
Capital Expenditures:
Private Labeling $ 3,696 $ --
Equipment Leasing and Financing 114,494 --
Corporate 9,400 --
-------- --------
Total Capital Expenditures $127,590 $ --
======== ========
15
SPARTA COMMERCIAL SERVICES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2004
(UNAUDITED)
NOTE I - SEGMENT INFORMATION (continued)
Operating Income (Loss):
Private Labeling $ 4,967 $ --
Equipment Leasing and Financing 9,169 --
Corporate (784,951) (928,303)
--------- ---------
Total Operating Income (Loss) $(770,815) $(928,303)
========= =========
Segment Assets:
Private Labeling $ 3,573 $ --
Equipment Leasing and Financing 107,319 --
Corporate 117,328 111,803
--------- ---------
Total Segment Assets $ 228,220 $ 111,803
========= =========
NOTE J - COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
---------------------------
In October 2004, the Company entered into a lease agreement with an unrelated
party for office space in New York City from December 1, 2004 through November
30, 2007. Total lease rental expenses for the six months ended October 31, 2004
and 2003, was $22,268 and $0, respectively.
Commitments for minimum rentals under non-cancelable leases at October 31, 2004
are as follows:
Year ended April 30, Amount
2005 $ 54,400
2006 164,560
2007 174,397
2008 104,085
--------
$ 497,442
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
"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 six months ended October 31, 2004 and the consolidated April 30, 2004
financial statements and footnotes found in the Company's Annual Report on Form
10-KSB.
Unless otherwise stated, the discussion and analysis refers to the business of
Sparta Commercial Services, Inc. and does not refer to the operations for our
former business which was essentially a non-operating shell company.
COMPANY OVERVIEW
The three and six months ended October 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.
Sparta has been a development stage company. Sparta has 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 October 31, 2004, we have
accumulated losses of $2,629,746.
The three and six months ended October 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
have begun 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 four 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 $900,000 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.
17
RESULTS OF OPERATIONS
COMPARISON OF SECOND QUARTER AND THE SIX MONTHS ENDED OCTOBER 31, 2004 TO THE
SECOND QUARTER AND SIX MONTHS ENDED OCTOBER 31, 2003
For the three and six months ended October 31, 2004, we have generated limited
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 and early 2005 as we are transitioning from a
development stage company to an operating company.
Revenues
--------
Limited revenues have been generated from both segments of the Company's
business. Private Labeling generated sales of $4,967 for each of the second
quarter and the six months ended October 31, 2004 and $0 in the respective 2003
periods. Equipment leasing and financing generated revenues of $16,497 for each
of the second quarter and the six months ended October 31, 2004 and $0 in the
respective 2003 periods. These revenues increased over 2003 as the company is
transitioning from a development stage company to an operating company.
Costs and Expenses
------------------
The Company incurred licensing fees of $0 and $150,633 for the second quarter
and six months ended October 31, 2004, respectively and $200,000 and $257,115
for the second quarter and six months ended October 31, 2003, respectively. 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 $79,946 and $91,505 for the second
quarter and six months ended October 31, 2004, respectively and $65,493 and
$562,024 for the second quarter and six months ended October 31, 2003,
respectively. This decrease in organization costs 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 $178,769 and $322,362 for the second
quarter and six months ended October 31, 2004 as compared with $50,950 and
$51,950 in respective 2003 periods. 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 $26,803 and $59,657 for the
second quarter and six months ended October 31, 2004, respectively as compared
to $8,460 and $46,519 for the second quarter and six months ended October 31,
2003, respectively. The increase in costs is related to legal and accounting
expenses associated with complying with various federal and state securities
statutes, rules and regulations.
The Company incurred consulting fees of $20,113 and $59,438 for the second
quarter and six months ended October 31, 2004, respectively as compared to $0
for the respective 2003 periods. This increase is due to the Company using
various consultants to complete the development of the website, establish
programs, procedures and policies, and establishing credit lines.
Net Loss
--------
Our net loss for the second quarter and six months ended October 31, 2004 was
$357,370 and $770,815, respectively in contrast to a loss of $303,002 and
$928,303 for the second quarter and six months ended October 31, 2003,
respectively. The 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 2003.
Our net loss per common share (basic and diluted) was $0 for the second quarter
and six months ended October 31, 2004 and $0 for the second quarter and six
months ended October 31, 2003.
18
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2004, the Company had a working capital deficit of $386,000.
The Company generated a deficit in cash flow from operations of $524,861 for the
six months ended October 31, 2004. The deficit in cash flow from operating
activities for the six months ended October 31, 2004 is primarily attributable
to the Company's net loss from operations of $770,815, adjusted for depreciation
and amortization of $7,659, an increase in accounts receivable of $63,500,
purchase of other current assets of $10,695, payments to a related party of
$23,885, and an increase in payables of $250,342 and an increase in deferred
revenues of $86,033.
Cash flows used in investing activities for the six months ended October 31,
2004 was $114,211.
The Company met its cash requirements during the period through proceeds from
the issuance of equity of $585,000 and obtaining bridge loans of $75,000.
Subsequent to this period, the Company has received additional proceeds from
bridge loans of $300,000. Additionally, the Company has received limited
revenues from leasing motorcycles and other vehicles, 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 $900,000 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 adjust 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 the Company's 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.
19
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.
The primary issues management will focus on in the immediate future to address
this matter include:
- seeking a credit line from institutional lenders;
- seeking institutional investors for equity investments in our company;
and
- 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 anticipate 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 October 31, 2004, we have relied on
the services of outside consultants for services and currently have eight
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.
Inflation
---------
The impact of inflation on the costs of the Company, and the ability to pass on
cost increases to its customers over time is dependent upon market conditions.
The Company is not aware of any inflationary pressures that have had any
significant impact on the Company's operations over the past quarter, and the
Company does not anticipate that inflationary factors will have a significant
impact on future operations.
20
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.
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
October 31, 2004.
Website Development Costs
-------------------------
The has incurred costs to develop a proprietary web-based private label
financing program for processing including web access, processing credit
applications, consumer contracts and other related documents and processes. The
Company has elected to recognize the costs of developing its website and related
intellectual property the website development costs in accordance with Emerging
Issue Task Force ("EITF") No. 00-02, "Accounting for Website Development
Costs."" As such, the Company expenses all costs incurred that relate to the
planning and post implementation phases of development of its website. Direct
costs incurred in the development phase are capitalized and recognized over the
estimated useful life. Costs associated with repair or maintenance for the
website are included in cost of net revenues in the current period expenses.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150
("SFAS No. 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS No. 150
requires that an issuer classify a financial instrument that is within the scope
of SFAS No. 150 as a liability. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective for the Company beginning October 1, 2003. The adoption of SFAS No.
150 did not have a material impact on the Company's financial position or
results of operations.
21
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation explains how to
identify variable interest entities and how an enterprise assesses its interest
in a variable interest entity to decide whether to consolidate that entity. This
interpretation requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. Variable interest entities that
effectively disperse risks will not be consolidated unless a single party holds
an interest or combination of interest that effectively recombines risks that
were previously dispersed. FIN 46 was revised in December 2003 and is effective
for the first financial reporting period after March 15, 2004. The Company
adopted the provisions of FIN 46 beginning with the quarter ended May 31, 2004,
which did not have a material impact on the financial statements.
Off-Balance Sheet Arrangements
------------------------------
The Company does not maintain off-balance sheet arrangements nor does it
participate in non-exchange traded contracts requiring fair value accounting
treatment.
22
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.
23
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Between May and September 2004, we sold rights to eight accredited investors for
aggregate gross proceeds of $585,000 in transactions deemed exempt from
registration pursuant to Section 4(2) of the Securities Act. 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.
On November 1, 2004, we agreed to grant Richard P. Trotter, our Chief Operating
Officer, pursuant to an employment agreement, 1,000,000 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 vested on November 1, 2004,
and the reminder of the shares are to vest, subject to proportionate adjustment
in the event of employment termination for any incomplete vesting period, as
follows: 20% on November 1, 2005; 20% on November 1, 2006; 20% on November 1,
2007; 10% on November 1, 2008; and 10% on November 1, 2009.
In October and November 2004, we sold promissory notes to six accredited
investors for the aggregate principal amount of $375,000 in promissory notes.
The promissory notes bear interest at an annual rate of 10%. The promissory
notes mature on the earlier of April 2005 or, in the event that we raise at
least $700,000 in a contemplated private placement offering conducted by a
designated placement agent, on the fifth business day following the closing and
clearance of funds received pursuant to such private placement. The promissory
note holders are entitled to an equity kicker consisting of unregistered shares
of our common stock. If at least $700,000 pursuant to the contemplated private
placement is closed upon prior to the maturity date, the equity kicker will be
such number of unregistered shares of common stock as equals 20% of the loan
amount based on the pre-money valuation of such private placement. If the
private placement is not effected prior to the maturity date, the equity kicker
will be such number of unregistered shares of common stock as equals 20% of the
loan amount based on a pre-money valuation of the Company at $10 million. In the
event of default on repayment of the promissory notes, as penalty, (i) the
interest rate on the unpaid principal shall be increased to a rate of 20% per
annum commencing from the date of default, (ii) the equity kicker shall be
increases to a rate of 30%, and (iii) the repayment after default of the
promissory notes shall be collateralized by a subordinated security interest in
the Company's assets. The security interest shall be subordinate to the rights
of any lending institution, any asset-based lending agreement, and any rights
and preferences of any subscribers in the contemplated private placement.
24
ITEM 5. OTHER INFORMATION.
On October 24, 2004, the Company entered into a lease agreement, commencing
December 1, 2004 and expiring on November 30, 2007, for office facilities
located at 462 Seventh Avenue, 20th Floor, New York, NY 10018. The premises
contain approximately 7,000 square feet. The Company anticipates that it will
commence using the premises in late December 2004 or January 2005 as its
corporate headquarters. The Company entered into the lease to obtain larger
facilities to accommodate its expected business growth, and believes that the
new premises will be suitable and adequate for such uses for the foreseeable
future. The annual rate is $163,200 for calendar year 2005, $167,280 for the
first six months of calendar year 2006, $174,080 for the second six months of
calendar year 2006, and $178,432 for the calendar year 2007.
On December 13, 2004, the Board of Directors adopted resolutions amending
Section 1 of Article III of the Company's By-laws to increase the size of the
Board of Directors to up to ten persons. The Board of Directors presently
consists of four persons, two of which were newly appointed. The two new
directors are Jeffrey Bean and Kristian Srb.
Jeffrey Bean is the founding partner of GoMotorcycle.com. Formed in January
1999, GoMotorcycle.com is currently engaged in the sale of motorcycle parts and
accessories over the Internet. Prior to founding GoMotorcycle.com, Mr. Bean was
an institutional broker and trader at Refco, Inc. from 1985 to 1997. From 1977
to 1985, Mr. Bean was President of Thomaston Press, Ltd., a large sales printing
concern. Mr. Bean received a B.A. degree from the University of Virginia.
Kristian Srb was President of American Motorcycle Leasing Corp. from 1994 to
1999. Mr. Srb has over 16 years experience in international brand development
and management, most recently with his own consulting group and for 13 years
with Escada A.G.
ITEM 6. EXHIBITS
The following exhibits are filed with this report:
Exhibit Number Description of Exhibit
-------------- ----------------------
Exhibit 3(ii) Board of Directors Resolutions amending By-laws
Exhibit 10 Lease for office facilities
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.
25
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: December 15, 2004 By: /s/ Anthony L. Havens
---------------------
Anthony L. Havens
Chief Executive Officer
Date: December 15, 2004 By: /s/ Daniel J. Lanjewar
----------------------
Daniel J. Lanjewar
Chief Financial Officer