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, 2005
[ ] 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 30-0298178
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
As of October 31, 2005, we had 87,834,921 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, 2005
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets as of October 31, 2005
and April 30, 2005 3
Condensed Consolidated Statements of Operations
for the Three and Six Months Ended October 31, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended October 31, 2005 and 2004 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition,
Results of Operations and Plan of Operation 12
Item 3. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 6. Exhibits 22
Signatures 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPARTA COMMERCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, April 30,
2005 2005
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 19,740 $ 108,365
Lease payments receivable, current portion 80,486 14,764
Prepaid expenses 90,000 --
Other current assets 6,034 6,700
------------ ------------
Total current assets 196,260 129,829
Motorcycles and other vehicles under operating leases, net of
accumulated depreciation of $28,364 and $13,392, respectively 259,112 99,886
Property and equipment, net of accumulated depreciation and
amortization of $33,665 and $15,378, respectively 119,631 106,809
Lease payments receivable, net of current portion 205,027 21,521
Deposits 155,479 48,967
------------ ------------
Total assets $ 935,509 $ 407,012
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 1,224,019 $ 509,936
Notes payable 17,605 300,000
Deferred revenue 78,548 23,100
Due to related party 25,000 25,000
------------ ------------
Total current liabilities 1,345,172 858,036
Notes payable, long term portion 86,686 --
------------ ------------
Total liabilities 1,431,858 858,036
------------ ------------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 10,000,000 shares
authorized of which 35,850 shares have been designated
as Series A convertible preferred stock, with a stated
value of $100 per share, 35,850 and 18,100 shares
issued and outstanding, respectively 3,585,000 1,810,000
Common stock, $0.001 par value; 340,000,000 shares
authorized, 87,834,921 and 86,005,415 shares issued
and outstanding, respectively 87,835 86,005
Common stock subscribed 180,000 --
Additional paid-in capital 7,216,915 3,930,629
Deferred compensation (355,500) --
Accumulated deficit (11,210,599) (6,277,658)
------------ ------------
Total stockholders' equity (deficit) (496,349) (451,024)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 935,509 $ 407,012
============ ============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
SPARTA COMMERCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2005 AND 2004
(UNAUDITED)
For The Three Months For The Six Months
ended October 31, ended October 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenue $ 30,295 $ 21,464 $ 47,621 $ 21,464
------------ ------------ ------------ ------------
Operating expenses:
General and administrative 910,737 371,203 1,497,469 784,620
Depreciation and amortization 23,654 7,631 35,887 7,659
------------ ------------ ------------ ------------
Total operating expenses 934,391 378,834 1,533,356 792,279
Loss from operations (904,096) (357,370) (1,485,735) (770,815)
Other expense:
Interest expense and financing cost, net (925,961) -- (1,583,214) --
Loss on sale of asset -- -- (6,500) --
------------ ------------ ------------ ------------
Net loss (1,830,057) (357,370) (3,075,449) (770,815)
Preferred dividend 54,217 -- 1,857,492 --
------------ ------------ ------------ ------------
Net loss attributed to common stockholders $ (1,884,274) $ (357,370) $ (4,932,941) $ (770,815)
============ ============ ============ ============
Basic and diluted loss per share $ (0.02) $ (0.02) $ (0.04) $ (0.04)
============ ============ ============ ============
Basic and diluted loss per share attributed to
common stockholders $ (0.02) $ (0.02) $ (0.06) $ (0.04)
============ ============ ============ ============
Weighted average shares outstanding 87,040,454 20,000,000 86,555,857 20,000,000
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
SPARTA COMMERCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2005 AND 2004
(UNAUDITED)
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,075,449) $ (770,815)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 35,887 7,659
Amortization of deferred revenue (6,600) --
Amortization of deferred compensation 118,500 --
Stock issued for services 85,228 --
Stock based finance cost 973,607 --
Loss on sale of assets 6,500 --
Changes in operating assets and liabilities:
(Increase) decrease in:
Lease payments receivable (41,167) (63,500)
Prepaid expenses (90,000) --
Other current assets 666 (10,695)
Deposits (106,512) --
Increase (decrease) in:
Accounts payable and accrued expenses 644,371 250,342
Deferred revenue 62,048 86,033
----------- -----------
Net cash used in operating activities (1,392,921) (500,976)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of asset 25,000 --
Cost of asset sold (31,500) --
Payments for motorcycles and other vehicles (176,826) (81,696)
Investment in leases (208,061) --
Purchases of property and equipment (31,109) (45,894)
Net proceeds from marketable securities -- 13,379
----------- -----------
Net cash used by investing activities (422,496) (114,211)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock, net 1,592,517 585,000
Repayment of affiliate advances -- (23,885)
Proceeds from notes 104,340 75,000
Payments on notes (150,049) --
Common stock subscription 180,000 --
Payments for fractional shares (16) --
----------- -----------
Net cash provided by financing activities 1,726,792 636,115
----------- -----------
Net (decrease) increase in cash (88,625) 20,928
Cash and cash equivalents, beginning of year $ 108,365 11,973
----------- -----------
Cash and cash equivalents, end of year $ 19,740 $ 32,901
=========== ===========
Cash paid for:
Interest $ 10,424 $ --
Income taxes -- --
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2005
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.
Basis of Presentation
The accompanying unaudited consolidated financial statements as of October 31,
2005 and for the six month periods ended October 31, 2005 and 2004 have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission, including Form 10-QSB and Regulation S-B. The
information furnished herein reflects all adjustments (consisting of normal
recurring accruals and adjustments), which are, in the opinion of management,
necessary to fairly present the operating results for the respective periods.
Certain information and footnote disclosures normally present in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted pursuant to such
rules and regulations. The company believes that the disclosures provided are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the audited financial statements
and explanatory notes for the year ended April 30, 2005 as disclosed in the
Company's 10-KSB for that year as filed with the SEC, as it may be amended.
The results of the six months ended October 31, 2005 are not necessarily
indicative of the results to be expected for the full year ending April 30,
2006.
The unaudited condensed consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, Sparta Commercial Services, LLC.
All significant intercompany transactions and balances have been eliminated in
the consolidated financial statements.
Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Revenue Recognition
The Company originates leases on new and used motorcycles and other powersports
vehicles from motorcycle dealers throughout the United States. The Company's
leases are accounted for as either operating leases or direct financing leases.
At the inception of operating leases, 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. Direct financing leases are recorded at the gross amount of the lease
receivable, and unearned income at lease inception is amortized over the lease
term.
6
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2005
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Revenue Recognition (continued)
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 are amortized and booked as income over
the length of the contract. At October 31, 2005, the Company had recorded
deferred revenue related to these contracts of $16,500.
Net Loss Per Share
The Company uses SFAS No. 128, "Earnings Per Share" for calculating the basic
and diluted loss per share. We compute basic loss per share by dividing net loss
and net loss attributable to common shareholders by the weighted average number
of common shares outstanding. Diluted loss per share is computed similar to
basic loss per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential shares had been issued and if the additional shares were dilutive.
Common equivalent shares are excluded from the computation of net loss per share
if their effect is anti-dilutive.
Per share basic and diluted net loss attributable to common stockholders
amounted to $0.02 and $0.02 for the three months ended October 31, 2005 and
2004, respectively, and $0.06 and $0.04 for the six months ended October 31,
2005 and 2004, respectively. For the six months ended October 31, 2005,
37,468,324 potential shares were excluded from the shares used to calculate
diluted earnings per share as their inclusion would reduce net loss per share.
There were no potentially dilutive securities at October 31, 2004.
Reclassifications
Certain reclassifications have been made to conform to prior periods' data to
the current presentation. These reclassifications had no effect on reported
losses.
7
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2005
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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 Warrants 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 had no awards
of stock-based employee compensation during the six month periods ended October
31, 2005 or 2004.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123R (revised 2004), "Share-Based Payment" which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Statement 123R supersedes APB opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in Statement 123R is similar to the approach described
in Statement 123. However, Statement 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro-forma disclosure is no longer
an alternative. On April 14, 2005, the SEC amended the effective date of the
provisions of this statement. The effect of this amendment by the SEC is that
the Company will have to comply with Statement 123R and use the Fair Value based
method of accounting no later than the third quarter of 2006. Management is
assessing the implications of this revised standard, which may materially impact
the Company's results of operations in the third quarter of fiscal year 2006 and
thereafter.
NOTE B - RELATED PARTY TRANSACTIONS
The Company entered into a purchase option agreement with American Motorcycle
Leasing Corp., an entity controlled by the Company's President and a significant
shareholder, on November 2, 2004 at a cost to Sparta Commercial Services of
$250,000. This agreement granted the Company the right, for a two year period,
to purchase portions of a certain portfolio of equipment leases that American
Motorcycle Leasing Corp. owns. The portfolio is secured by a first priority
security interest in favor of Citibank, N.A. or its assigns. The cost of
$250,000 has been charged to operations in fiscal 2005. Through October 31,
2005, payments of aggregating $104,500 have been made against this obligation.
In January 2005, the Company received a loan of $25,000 from an officer. This
loan is non-interest bearing and is payable on demand.
8
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2005
(UNAUDITED)
NOTE C - STOCKHOLDERS' EQUITY
On December 27, 2004, the Company effected a one-for-two hundred reverse stock
split followed by a forward split of twenty five-for-one of its authorized and
outstanding shares of common stock, $.001 par value. All references in the
financial statements and notes to financial statements, numbers of shares and
share amounts have been retroactively restated to reflect the reverse split.
Common Stock
During the six months ended October 31, 2005, the Company issued 464,745 shares
of common stock, valued at $243,270, as additional costs related to loans
received by the Company. This amount has been charged to financing cost during
the quarter.
During August 2005, the Company issued 651,124 shares of common stock in payment
of $150,000 of principal amount of notes payable and $12,781 of related accrued
interest. The shares were issued at a value below market price and the Company
has recorded a financing cost of $323,672 related to this discount.
During September and October 2005, the Company issued an aggregate of 600,000
shares of common stock, pursuant to a consulting agreement. The shares have been
valued at $474,000 and this amount is being amortized over twelve months,
commencing August 1, 2005. Additionally, the company will issue 600,000 during
the second year of the agreement.
During October 2005, the Company issued 113,637 shares of common stock, valued
at $85,228, for services.
During October 2005, the Company received $180,000 pursuant to a subscription
agreement for 300,000 units of the Company's securities. Each unit consists of
one share of common stock and a warrant to purchase one share of common stock
exercisable for three years at $0.80 per share. The price of the unit is $0.60.
The Company will issue 250,000 shares of common stock as payment of consulting
fees. These fees have been accrued in the financial statements at a value of
$85,000 as of October 31, 2005.
Preferred Stock Series A
During the three months ended July 31, 2005, the Company issued 17,750 preferred
shares at a stated value of $100 per share and warrants to purchase 5,689,108
shares of common stock, exercisable for three years at $0.195 per share, for
aggregate gross proceeds of $1,775,000 received from investors. Costs of
$182,484 were deducted from the proceeds. In connection with the private
placement, during the three months ended July 31, 2005, the Company issued as
compensation to the placement agent warrants to purchase 1,137,822 shares of
common stock, exercisable for five years at $0.172 per share. The warrants,
which were valued at $406,665 using the Black-Scholes option pricing model, were
recognized as an expense during the quarter. The assumptions used in the Black
Scholes model are as follows: (1) dividend yield of 0%; (2) expected volatility
of 188%, (3) weighted average risk-free interest rate of 3.65%, and (4) expected
life of 2 years.
9
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2005
(UNAUDITED)
NOTE C - STOCKHOLDERS' EQUITY (continued)
Preferred Stock Series A (continued)
In accordance with EITF 00-27, a portion of the proceeds were allocated to the
class 'C' warrants based on their relative fair value, which totaled $931,800
using the Black Scholes option pricing model. Further, the Company attributed a
beneficial conversion feature of $843,200 to the series 'A' preferred shares
based upon the difference between the conversion price of those shares and the
closing price of the Company's common shares on the date of issuance. The
assumptions used in the Black Scholes model are as follows: (1) dividend yield
of 0%; (2) expected volatility of 188%, (3) weighted average risk-free interest
rate of 3.65%, and (4) expected life of 2 years as the conversion feature and
warrants are immediately exercisable. Both the fair value of the class 'C'
warrants and the beneficial conversion feature were recorded as a dividend and
are included in the accompanying financial statements.
In the event that a registration statement covering all of the securities issued
pursuant to the private placement of preferred shares is not declared effective
by the Securities and Exchange Commission by July 31, 2005, the number of shares
issuable upon conversion of the preferred stock and the exercise of the warrants
will be increased by 0.75% for each 30 day period during a six month term
following July 31, 2005 that a registration statement has not been declared
effective. There was not an effective registration statement as of July 31,
2005, nor is there one as of October 31, 2005. As a result, the Company has
accrued an expense of $600,000 during the three months ended October 31, 2005
related to this penalty provision. This amount will be settled through the
issuance of equity securities. Following this initial six month term, the number
of shares issuable upon conversion of the preferred stock and the exercise of
the warrants will be increased by 1.50% for each 30 day period during a six
month term following January 31, 2006 that a registration statement has not been
declared effective.
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.
Pursuant to the terms of the rights, as the Company conducted a closing to a
private placement transaction in 2004 utilizing a designated registered
broker-dealer as a placement agent, on January 1, 2005, the rights have
automatically converted into 5,850 preferred shares at a stated value of $100
per share and warrants to purchase 1,875,001 shares of common stock, exercisable
for three years at $0.195 per share.
NOTE D - GOING CONCERN MATTERS
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements the Company has realized minimal revenue from
operations and has incurred significant operating losses since inception. These
factors among others may indicate that the Company will be unable to continue as
a going concern for a reasonable period of time.
The Company's existence is dependent upon management's ability to develop
profitable operations. Management is devoting substantially all of its efforts
to developing its business and raising capital and there can be no assurance
that the Company's efforts will be successful. However, the planned principal
operations have not commenced and no assurance can be given that management's
actions will result in profitable operations or the resolution of its liquidity
problems. The accompanying statements do not include any adjustments that might
result should the Company be unable to continue as a going concern.
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.
10
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2005
(UNAUDITED)
NOTE E - NON-CASH FINANCIAL INFORMATION
During the six months ended October 31, 2005, the Company:
o Recorded a dividend on preferred stock of $1,775,000 related to the
fair value of the class 'C' warrants issued with preferred stock and
the related beneficial conversion feature.
o Incurred costs of $182,483 related to the sale of preferred stock.
These costs were deducted from the proceeds.
o Issued 464,745 shares of common stock, valued at $243,270, as
additional costs related to loans received by the Company.
o Issued 651,124 shares of common stock in payment of $150,000 of
principal amount of notes payable and $12,781 of related accrued
interest. The shares were issued at a value below market price and
the Company has recorded a financing cost of $323,672 related to
this discount.
o Issued an aggregate of 600,000 shares of common stock, pursuant to a
consulting agreement. The shares have been valued at $474,000 and
this amount is being amortized over twelve months, commencing August
1, 2005.
o Issued 113,637 shares of common stock, valued at $85,228, for
services.
NOTE F - SUBSEQUENT EVENTS
Subsequent to October 31, 2005, the Company:
o Received $20,000 pursuant to a subscription agreement for 33,334
units of the Company's securities. Each unit consists of one share
of common stock and a warrant to purchase one share of common stock
exercisable for three years at $0.80 per share. The price of the
unit is $0.60.
o Received bridge loans in the amount of $175,000. These bridge loans
are due to be repaid in March 2006, together with simple interest at
the rate of 10% per annum and an equity kicker of 70,000 shares of
the company's common stock. In the event of default on repayment, as
penalty, the simple interest rate on the unpaid principal shall be
increased to a rate of 20% per annum commencing from the date of
default, and the equity kicker shall be increased by 50% for each
month that such default has not been cured.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND PLAN OF OPERATION
GENERAL
The following discussion of our financial condition and results of operations
should be read in conjunction with (1) our interim unaudited financial
statements and their explanatory notes included as part of this quarterly
report, and (2) our annual audited financial statements and explanatory notes
for the year ended April 30, 2005 as disclosed in our annual report on Form
10-KSB for that year as filed with the SEC.
"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
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.
The year ended April 30, 2005 was a period of development, as we continued to
develop our products and market them to dealers and manufacturers. 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. The period from inception
through April 30, 2005 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 began 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 other manufacturers who
have indicated an interest in a private label program. Presently, we do not have
sufficient operating capital to fulfill our planned business operations for the
next twelve months for a credit line reserve and for our general operating
expenses. We estimate that we will need approximately $1,500,000 in additional
funds to fully implement our business plan during the next twelve months.
Although the Company obtained a senior credit facility in July 2005, which
allowed us to commence our initial active operations, we will need to obtain
additional credit facilities to fully implement our business plan. We need the
additional credit facilities so that we have the funding sources to originate
leases and finance contracts across all credit profiles. Our current credit
facility only allows for origination across three out of five credit profiles.
We are presently in discussions with several institutions about obtaining
additional credit facilities, however, our lack of working capital could
negatively impact our ability to secure these facilities.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED OCTOBER 31, 2005 TO THE THREE MONTHS ENDED
OCTOBER 31, 2004
For the three months ended October 31, 2005 and 2004, we have generated limited
sales revenues, have incurred significant expenses, and have sustained
significant losses. We believe we will begin to earn increasing revenues from
operations in the current fiscal year.
12
Revenues
Revenues totaled $30,295 during the three months ended October 31, 2005 as
compared to $21,464 during the three months ended July 31, 2004. Current period
revenue was comprised primarily of $24,223 in lease revenue, $2,772 in dealer
fees, and $3,300 in private label fees. Prior period revenue was comprised
primarily of $16,497 in lease revenue and $4,967 in private label fees.
Costs and Expenses
General and administrative expenses were $910,737 during the three months ended
October 31, 2005, compared to $371,203 during the three months ended October 31,
2004, an increase of $539,534, or 145%. Expenses incurred during the current
three month period consisted primarily of the following expenses: Compensation
and related costs, $400,925; Accounting, audit and professional fees, $114,008;
Consulting fees, $215,529; Rent, $44,857; and Travel and entertainment, $17,905.
Expenses incurred during the comparative three month period consisted primarily
of the following expenses: Compensation and related costs, $178,769; Accounting,
audit and professional fees, $26,803; and Consulting fees, $20,113.
We incurred a non-cash charge of $323,672 during the three months ended October
31, 2005 related to shares of common stock issued in connection with debt
financing. Additionally, we recorded an expense of $600,000 related to the
failure to have an effective registration statement covering the underlying
shares of common stock issuable upon conversion of it preferred stock and the
related warrants. This expense will be settled through the issuance of shares
and warrants. There were no comparable expenses during the six months ended
October 31, 2004.
Net Loss
We incurred a net loss before preferred dividends of $1,830,057 for our three
months ended October 31, 2005 as compared to $357,370 for the corresponding
interim period in 2004. The $1,472,687 or 412% increase in our net loss before
preferred dividends for our three month interim period ended October 31, 2005
was attributable primarily to a $539,534 increase in general and administrative
expense and an increase of $923,672 in non-cash financing costs.
We also incurred preferred dividend expense of $54,217 for our three month
period ended October 31, 2005 with no comparable expense for the corresponding
interim period in 2004. The increase in preferred dividend expense was
attributable to the sale of convertible preferred stock that commenced in
December, 2004 and concluded in July 2005.
Our net loss attributable to common stockholders increased to $1,884,274 for our
three month period ended October 31, 2005 as compared to $357,370 for the
corresponding period in 2004. The $1,526,904 increase in net loss attributable
to common stockholders for our three month period ended October 31, 2005 was due
to the $1,472,687 increase in our net loss before preferred dividends, increased
by the aforesaid $54,217 increase in preferred dividend expense.
COMPARISON OF THE SIX MONTHS ENDED OCTOBER 31, 2005 TO THE SIX MONTHS ENDED
OCTOBER 31, 2004
For the six months ended October 31, 2005 and 2004, we have generated limited
sales revenues, have incurred significant expenses, and have sustained
significant losses. We believe we will begin to earn increasing revenues from
operations in the current fiscal year.
13
Revenues
Revenues totaled $47,621 during the six months ended October 31, 2005 as
compared to $21,464 during the six months ended October 31, 2004. Current period
revenue was comprised primarily of $34,974 in lease revenue, $6,047 in dealer
fees, and $6,600 in private label fees. Prior period revenue was comprised
primarily of $16,497 in lease revenue and $4,967 in private label fees.
Costs and Expenses
General and administrative expenses were $1,497,469 during the six months ended
October 31, 2005, compared to $784,620 during the six months ended October 31,
2004, an increase of $712,849, or 91%. Expenses incurred during the current six
month period consisted primarily of the following expenses: Compensation and
related costs, $656,294; Accounting, audit and professional fees, $173,149;
Consulting fees, $361,587; Rent, $72,814; and Travel and entertainment, $35,331.
Expenses incurred during the comparative six month period consisted primarily of
the following expenses: Compensation and related costs, $322,362; Accounting,
audit and professional fees, $59,657; Consulting fees, $59,438; and License
fees, $150,633.
In connection with its private placement transactions, the Company has expensed
non-cash costs of $406,665 during the six months ended October 31, 2005 related
to warrants granted to the private placement agent, with no related expense
during the comparative period. The Company also incurred a non-cash charge of
$599,642 during the six months ended October 31, 2005 related to shares of
common stock issued in connection with debt financing and has recorded an
expense of $600,000 related to the failure to have an effective registration
statement covering the underlying shares of common stock issuable upon
conversion of it preferred stock and the related warrants. This expense will be
settled through the issuance of shares and warrants. . There were no comparable
expenses during the six months ended October 31, 2004.
Net Loss
We incurred a net loss before preferred dividends of $3,075,449 for our six
months ended October 31, 2005 as compared to $770,815 for the corresponding
interim period in 2004. The $2,304,634 or 299% increase in our net loss before
preferred dividends for our six month interim period ended October 31, 2005 was
attributable primarily to a $712,849 increase in general and administrative
expense and an increase of $1,573,607 in non-cash financing costs.
We also incurred preferred dividend expense of $1,857,492 for our six month
period ended October 31, 2005 with no comparable expense for the corresponding
interim period in 2004. The increase in preferred dividend expense was
attributable to the sale of convertible preferred stock that commenced in
December, 2004 and concluded in July 2005. In addition to dividends payable on
the outstanding preferred stock, preferred dividend expense includes an
aggregate charge of $1,775,000 related to warrants issued with the convertible
preferred stock and a beneficial conversion feature associated with the
preferred stock.
Our net loss attributable to common stockholders increased to $4,932,941 for our
six month period ended October 31, 2005 as compared to $770,815 for the
corresponding period in 2004. The $4,162,126 increase in net loss attributable
to common stockholders for our six month period ended October 31, 2005 was due
to the $2,304,634 increase in our net loss before preferred dividends, increased
by the aforesaid $1,857,492 increase in preferred dividend expense.
14
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2005, the Company had a working capital deficit of $1,148,912.
The Company generated a deficit in cash flow from operations of $1,392,921 for
the six months ended October 31, 2005. This deficit is primarily attributable to
the Company's net loss from operations of $3,075,449, partially offset by
depreciation and amortization of $35,887 and the fair value attributed to stock
and warrants issued of $1,177,335, and to changes in the balances of current
assets and liabilities. Accounts payable and accrued expenses increased by
$644,371, deferred revenue increased by 62,048 and prepaid expenses and deposits
increased by $196,512.
Cash flows used in investing activities for the six months ended October 31,
2005 was $422,496, primarily due to the purchase of property and equipment of
$31,109, payments for motorcycles and vehicles of $176,826 and investments in
leases of $208,061.
The Company met its cash requirements during the period through net proceeds
from the issuance of equity of $1,592,517, debt financing of $104,340 and a
subscription for 300,000 units of our securities, consisting of one share of
common stock and a warrant to purchase one share of common stock exercisable for
three years at $0.80 per share, for $180,000, all partially offset by payments
on bridge loans of $150,000. In November 2005, we sold 33,334 additional units
of our securities, at $0.60 per unit, consisting of one share of common stock
and a warrant to purchase one share of common stock exercisable for three years
at $0.80 per share, for gross proceeds of $20,000. During December 2005, we have
received a bridge loan in the amount of $50,000. This bridge loan is due to be
repaid on March 14, 2006, together with simple interest at the rate of 10% per
annum and an equity kicker of 20,000 shares of the Company's common stock. In
the event of default on repayment, as penalty, the simple interest rate on the
unpaid principal shall be increased to a rate of 20% per annum commencing from
the date of default, and the equity kicker shall be increased by 50% for each
month that such default has not been cured. Additionally, the Company has
received limited revenues from leasing and financing 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, which may take the form of debt, convertible debt or equity, in order
to provide the necessary working capital. We have entered into negotiations with
an investment bank to help us raise equity capital, but 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 $1,500,000 in additional funds to
fully implement our business plan during the next twelve months for a credit
line reserve and for our general operating expenses. 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.
AUDITOR'S OPINION EXPRESSES DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A
"GOING CONCERN"
The independent auditors report on our April 30, 2005 and 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 losses incurred 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.
15
PLAN OF OPERATIONS
Addressing the Going Concern Issues
In order to improve the Company's liquidity, the Company's management is
actively pursing additional financing through discussions with investment
bankers, financial institutions and private investors. There can be no assurance
the Company will be successful in its effort to secure additional 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:
o seeking additional credit lines from institutional lenders;
o seeking institutional investors for debt or 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. We are also
presently in discussions with several institutions about obtaining additional
credit facilities.
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 twelve months.
Number of Employees
From our inception through the period ended October 31, 2005, we have relied on
the services of outside consultants for services and currently have nine
employees. In order for us to attract and retain quality personnel, we
anticipate we will have to offer competitive salaries to future employees. If we
fully implement our business plan, we anticipate our employment base may
increase by approximately 50% 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.
16
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:
Revenue Recognition
We originate leases on new and used motorcycles and other powersports vehicles
from motorcycle dealers throughout the United States. Our leases are accounted
for as either operating leases or direct financing leases. At the inception of
operating leases, 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 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. Direct financing leases
are recorded at the gross amount of the lease receivable, and unearned income at
lease inception is amortized over the lease term.
We realize 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. We record a gain or loss for the difference between the
proceeds received and the net book value of the motorcycle.
We charge fees to manufacturers and other customers related to creating a
private label version of our financing program including web access, processing
credit applications, consumer contracts and other related documents and
processes. Fees received are amortized and booked as income over the length of
the contract.
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 warrants 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 has stock based awards
of compensation to employees of $82,500 granted and outstanding during the
period from October 1, 2001 (date of inception) through April 30, 2005, with
none granted during the current interim period.
17
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123R (revised 2004), "Share-Based Payment" which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Statement 123R supersedes APB opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in Statement 123R is similar to the approach described
in Statement 123. However, Statement 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro-forma disclosure is no longer
an alternative. On April 14, 2005, the SEC amended the effective date of the
provisions of this statement. The effect of this amendment by the SEC is that
the Company will have to comply with Statement 123R and use the Fair Value based
method of accounting no later than the third quarter of 2006. Management is
assessing the implications of this revised standard, which may materially impact
the Company's results of operations in the third quarter of fiscal year 2006 and
thereafter.
Website Development Costs
We have 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.
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.
TRENDS, RISKS AND UNCERTAINTIES
We have sought to identify what we believe to be the most significant risks to
our business, but we cannot predict whether, or to what extent, any of such
risks may be realized nor can we guarantee that we have identified all possible
risks that might arise. Investors should carefully consider all of such risk
factors before making an investment decision with respect to our Common Stock.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
We have sought to identify what we believe are significant risks to our
business, but we cannot predict whether, or to what extent, any of such risks
may be realized nor can we guarantee that we have identified all possible risks
that might arise.
Potential Fluctuations in Annual Operating Results
Our annual operating results may fluctuate significantly in the future as a
result of a variety of factors, most of which are outside our control,
including: the demand for our products and services; seasonal trends in
purchasing, the amount and timing of capital expenditures and other costs
relating to the commercial and consumer financing; price competition or pricing
changes in the market; technical difficulties or system downtime; general
economic conditions and economic conditions specific to the consumer financing
sector.
Our annual results may also be significantly impacted by the impact of the
accounting treatment of acquisitions, financing transactions or other matters.
Particularly at our early stage of development, such accounting treatment can
have a material impact on the results for any quarter. Due to the foregoing
factors, among others, it is likely that our operating results may fall below
our expectations or those of investors in some future quarter.
18
Dependence Upon Management
Our future performance and success is dependant upon the efforts and abilities
of our Management. To a very significant degree, we are dependent upon the
continued services of Anthony L. Havens, our President and Chief Executive
Officer and member of our Board of Directors. If we lost the services of either
Mr. Havens, or other key employees before we could get qualified replacements,
that loss could materially adversely affect our business. We do not maintain key
man life insurance on any of our Management.
Our officers and directors are required to exercise good faith and high
integrity in our Management affairs. Our Articles of Incorporation provide,
however, that our officers and directors shall have no liability to our
shareholders for losses sustained or liabilities incurred which arise from any
transaction in their respective managerial capacities unless they violated their
duty of loyalty, did not act in good faith, engaged in intentional misconduct or
knowingly violated the law, approved an improper dividend or stock repurchase,
or derived an improper benefit from the transaction. Our Articles and By-Laws
also provide for the indemnification by us of the officers and directors against
any losses or liabilities they may incur as a result of the manner in which they
operate our business or conduct the internal affairs, provided that in
connection with these activities they act in good faith and in a manner that
they reasonably believe to be in, or not opposed to, the best interests of
Sparta, and their conduct does not constitute gross negligence, misconduct or
breach of fiduciary obligations. To further implement the permitted
indemnification, we have entered into Indemnity Agreements with our officers and
directors.
Continued Control of Current Officers and Directors
The present officers and directors own approximately 76% of the outstanding
shares of common stock, without giving effect to shares underlying convertible
securities, and therefore are in a position to elect all of our Directors and
otherwise control the Company, including, without limitation, authorizing the
sale of equity or debt securities of Sparta, the appointment of officers, and
the determination of officers' salaries. Shareholders have no cumulative voting
rights.
Management of Growth
We may experience growth, which will place a strain on our managerial,
operational and financial systems resources. To accommodate our current size and
manage growth if it occurs, we must devote management attention and resources to
improve our financial strength and our operational systems. Further, we will
need to expand, train and manage our sales and distribution base. There is no
guarantee that we will be able to effectively manage our existing operations or
the growth of our operations, or that our facilities, systems, procedures or
controls will be adequate to support any future growth. Our ability to manage
our operations and any future growth will have a material effect on our
stockholders.
If we fail to remain current on our reporting requirements, we could be removed
from the OTC Bulletin Board which would limit the ability of broker-dealers to
sell our securities and the ability of stockholders to sell their securities in
the secondary market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
19
ITEM 3. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer, who is
also presently serving as our Principal 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 Principal Financial Officer concluded that our disclosure controls and
procedures as of the end of the period covered by this report were effective.
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.
20
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the year ended April 30, 2005, we sold promissory notes with rights to
acquire common stock to accredited investors in transaction deemed exempt from
registration pursuant to Section 4(2) of the Securities Act. During the quarter
ended July 31, 2005, we issued 288,464 shares of common stock pursuant to the
terms of the notes. In August 2005 and October 2005, we issued an aggregate of
827,406 shares of common stock pursuant to the terms of the notes.
In July 2005, in a transaction deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, we entered
into an agreement with an individual for business consulting services for a term
of one year pursuant to which we agreed to issue 250,000 shares of common stock
as compensation. These shares have not yet been issued as of October 31, 2005.
In July 2005, in a transaction deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, we entered
into an agreement with an individual for investor relations consulting services
for a term of two years, with services beginning in August 2005, pursuant to
which we agreed to issue 600,000 shares of common stock per year as
compensation. We issued 300,000 shares in September 2005 and 300,000 shares in
October 2005 to the consultant as compensation for the first year of services.
In October 2005, in a transaction deemed to be exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act, we sold to
an accredited investor 300,000 units of our securities at $0.60 per unit, for
gross proceeds of $180,000. In November 2005, we sold to one accredited investor
an additional 33,334 units for gross proceeds of $20,000. Each unit consists of
(i) one share of common stock and (ii) a warrant to purchase one share of common
stock, exercisable for three years at $0.80 per share. We used the proceeds for
working capital purposes.
In December 2005, in transactions deemed to be exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act, we entered
into agreements for bridge loans in the amount of $175,000. These bridge loans
mature in March 2006, together with simple interest at the rate of 10% per
annum. As part of the loans, we agreed to issue the lenders, as an equity
kicker, 70,000 shares of our common stock. In the event of default on repayment,
as penalty, the simple interest rate on the unpaid principal shall be increased
to a rate of 20% per annum commencing from the date of default, and the number
of shares issuable as an equity kicker shall be increased by 50% for each month
that such default has not been cured.
21
ITEM 6. EXHIBITS
The following exhibits are filed with this report:
Exhibit Number Description of Exhibit
-------------- ----------------------
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 and Principal
Financial Officer Pursuant to Securities Exchange Act Rule
13a-14(a)/15d-14(a)
Exhibit 32.1* Certification of Chief Executive Officer and Principal
Financial Officer Pursuant to Securities Exchange Act Rule
13a-14(b) and 18 U.S.C. Section 1350
---
* Filed herewith.
22
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 19, 2005 By: /s/ Anthony L. Havens
---------------------
Anthony L. Havens
Chief Executive Officer and
Principal Financial Officer
23