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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
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(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended January 31, 2006
|_| 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 February 16, 2006, we had 106,944,653 shares of common stock issued and
outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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SPARTA COMMERCIAL SERVICES, INC.
FORM 10-QSB
FOR THE QUARTER ENDED JANUARY 31, 2006
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets as of January 31, 2006
and April 30, 2005 3
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended January 31, 2006 and 2005 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended January 31, 2006 and 2005 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition, 14
Results of Operations and Plan of Operation
Item 3. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 6. Exhibits 25
Signatures 26
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPARTA COMMERCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, April 30,
2006 2005
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 983,238 $ 108,365
Lease payments receivable, current portion 114,425 14,764
Prepaid expenses 74,090 --
Other current assets 6,034 6,700
------------ ------------
Total current assets 1,177,787 129,829
Motorcycles and other vehicles under operating leases, net of
accumulated depreciation of $38,742 and $13,392, respectively 270,203 99,886
Property and equipment, net of accumulated depreciation and
amortization of $43,215 and $15,378, respectively 111,361 106,809
Finance receivables, net of current portion 306,921 21,521
Deposits 159,552 48,967
------------ ------------
Total assets $ 2,025,824 $ 407,012
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 2,026,869 $ 509,936
Accrued equity penalties (Note C) 2,040,000 --
Notes payable 28,985 300,000
Deferred revenue 105,060 23,100
Due to related party -- 25,000
------------ ------------
Total current liabilities 4,200,914 858,036
Notes payable, long term portion 136,446 --
Warrant liability 451,752 --
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Total liabilities 4,789,112 858,036
------------ ------------
Stockholders' 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, 21,875 and 18,100 shares issued and outstanding,
respectively 2,187,500 1,810,000
Common stock, $0.001 par value; 340,000,000 shares
authorized, 106,944,654 and 86,005,415 shares issued
and outstanding, respectively 106,945 86,005
Common stock subscribed 330,000 --
Additional paid-in capital 9,820,151 3,930,629
Deferred compensation (309,543) --
Accumulated deficit (14,898,341) (6,277,658)
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Total stockholders' deficit (2,763,288) (451,024)
------------ ------------
Total liabilities and stockholders' deficit $ 2,025,824 $ 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 NINE MONTHS ENDED JANUARY 31, 2006 AND 2005
(UNAUDITED)
For The Three Months For The Nine Months
ended January 31, ended January 31,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Revenue $ 43,008 $ 26,416 $ 90,629 $ 47,879
------------ ------------ ------------ ------------
Operating expenses:
General and administrative 2,322,057 739,320 3,819,526 1,523,941
Depreciation and amortization 22,157 10,131 58,044 17,788
------------ ------------ ------------ ------------
Total operating expenses 2,344,214 749,451 3,877,570 1,541,729
Loss from operations (2,301,206) (723,035) (3,786,941) (1,493,850)
Other expense:
Interest expense and financing cost, net (1,483,522) -- (3,066,736) --
Change in value of warrant liability 126,177 -- 126,177 --
Loss on sale of asset -- -- (6,500) --
------------ ------------ ------------ ------------
Net loss (3,658,551) (723,035) (6,734,000) (1,493,850)
Preferred dividend 29,191 810,000 1,886,683 810,000
------------ ------------ ------------ ------------
Net loss attributed to common stockholders $ (3,687,742) $ (1,533,035) $ (8,620,683) $ (2,303,850)
============ ============ ============ ============
Basic and diluted loss per share $ (0.04) $ (0.01) $ (0.08) $ (0.02)
============ ============ ============ ============
Basic and diluted loss per share attributed to
common stockholders $ (0.04) $ (0.02) $ (0.10) $ (0.03)
============ ============ ============ ============
Weighted average shares outstanding 95,648,989 85,934,261 89,586,901 85,934,261
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 NINE MONTHS ENDED JANUARY 31, 2006 AND 2005
(UNAUDITED)
2006 2005
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,734,000) $(1,493,850)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 58,045 17,788
Valuation allowance on deposit -- 61,000
Amortization of deferred revenue (9,900) --
Amortization of deferred compensation 240,252 --
Stock issued for services 85,228 82,500
Stock based finance cost 973,607 105,303
Change in warrant liability (126,177) --
Loss on sale of assets 6,500 --
Changes in operating assets and liabilities:
(Increase) decrease in:
Lease payments receivable (31,499) --
Prepaid expenses (74,090) (101,800)
Other current assets 666 (13,187)
Deposits (110,585) --
Increase (decrease) in:
Accounts payable and accrued expenses 1,418,030 337,880
Accrued equity penalties 2,040,000
Deferred revenue 91,860 33,971
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Net cash used in operating activities (2,172,063) (970,395)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of asset 25,000 --
Cost of asset sold (31,500) --
Payments for motorcycles and other vehicles (200,524) (81,634)
Investment in leases (353,562) --
Purchases of property and equipment (32,390) (137,063)
Net proceeds from marketable securities -- 13,379
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Net cash provided by investing activities (592,976) (205,318)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock, net 1,592,517 810,000
Proceeds from sale of common stock, net 1,726,980 --
Repayment of affiliate advances (25,000) (23,885)
Proceeds from notes 372,675 400,000
Payments on notes (357,244) --
Common stock subscription 330,000 --
Payments for fractional shares (16) --
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Net cash provided by financing activities 3,639,912 1,186,115
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Net increase in cash 874,873 10,402
Cash and cash equivalents, beginning of year 108,365 11,973
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Cash and cash equivalents, end of year $ 983,238 $ 22,375
=========== ===========
Cash paid for:
Interest $ 15,788 $ --
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
JANUARY 31, 2006
(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 January 31,
2006 and for the nine month periods ended January 31, 2006 and 2005 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 nine months ended January 31, 2006 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
JANUARY 31, 2006
(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 January 31, 2006, the Company had recorded
deferred revenue related to these contracts of $13,200.
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 $0.04 and $0.02 for the three months ended January 31, 2006 and
2005, respectively, and $0.10 and $0.03 for the nine months ended January 31,
2006 and 2005, respectively. For the nine months ended January 31, 2006 and
2005, 29,685,131 and 7,932,486 potential shares, respectively, were excluded
from the shares used to calculate diluted earnings per share as their inclusion
would reduce net loss per share.
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
JANUARY 31, 2006
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Stock Based Compensation
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 fourth quarter of 2006. Management has
elected to apply Statement 123R in the third quarter of fiscal year 2006.
Recent Accounting Pronouncement
In February 2006, the FASB issued SFAS 155, which applies to certain "hybrid
financial instruments," which are instruments that contain embedded derivatives.
The new standard establishes a requirement to evaluate beneficial interests in
securitized financial assets to determine if the interests represent
freestanding derivatives or are hybrid financial instruments containing embedded
derivatives requiring bifurcation. This new standard also permits an election
for fair value remeasurement of any hybrid financial instrument containing an
embedded derivative that otherwise would require bifurcation under SFAS 133. The
fair value election can be applied on an instrument-by-instrument basis to
existing instruments at the date of adoption and can be applied to new
instruments on a prospective basis. Management is assessing the implications of
this standard, which may materially impact the Company's results of operations
in the fourth quarter of fiscal year 2006 and thereafter.
In February 2006, the FASB issued FASB Staff Position ("FSP") No. FAS 123(R)-4,
"Classification of Options and Similar Instruments Issued as Employee
Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent
Event," which amends SFAS No. 123(R) to require that options issued with a cash
settlement feature that can be exercised upon the occurrence of a contingent
event that is outside the employee's control should not be classified as
liabilities until it becomes probable that the event will occur. For companies
that adopted SFAS No. 123(R) prior to the issuance of the FSP, application is
required in the first reporting period beginning after February 3, 2006.
Currently, the Company has no stock options outstanding with contingent cash
settlement features, and as a result, the FSP will not impact the Company's
consolidated financial statements.
8
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2006
(UNAUDITED)
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 Sparta Commercial Services 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. As of January 31,
2006 this amount has been paid in full.
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. The loan was repaid as of
January 31, 2006.
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 nine months ended January 31, 2006, 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.
Additionally, as consideration for loans received during the third quarter of
fiscal 2006, the Company will issue 70,000 shares of common stock. The value of
these shares has been recorded at $38,500 and this amount is included in accrued
expenses at January 31, 2006 and has been charged to financing cost.
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 the one year term of
the agreement, commencing August 1, 2005.
During October 2005, the Company issued 113,637 shares of common stock, valued
at $85,228, for services.
During October and November 2005, the Company received $330,000 pursuant to
subscription agreements for units, at $0.60 per unit, of the Company's
securities, with each unit consisting of one share of common stock and one
warrant.
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 January 31, 2006.
During December 2005, the Company entered into an agreement pursuant to which it
agreed to issue 2,650,000 shares of common stock for consulting and advisory
services rendered and to be rendered. The shares have been valued at $1,590,000,
based on the fair value of the Company's common stock on the date of the
agreement. This amount has been charged to expense in the third quarter and,
since the shares have not been issued as of January 31, 2006, this amount is
included in accrued expenses in the financial statements.
9
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2006
(UNAUDITED)
NOTE C - STOCKHOLDERS' EQUITY (continued)
Common Stock (continued)
During December 2005 and January 2006, the Company sold 10,151,400 shares of
common stock through a private placement. The Company received net proceeds of
$1,726,980 from the sale. Costs of $212,952 were deducted from the gross
proceeds and additional costs of $39,590 were paid by the Company.
In connection with the private placement described above, the Company granted
1,015,140 common stock purchase warrants to the placement agent. The warrants
are exercisable immediately, have an exercise price of $0.215 per share and
expire in five years. The warrants were valued at $577,929 using the
Black-Sholes pricing model. The assumptions used in the Black-Scholes model are
as follows: (1) dividend yield of 0%; (2) expected volatility of 177%, (3)
risk-free interest rate of 3.65%, and (4) expected life of 2 years.
Since the warrants contain registration rights for the underlying shares and
since the delivery of such registered shares was not deemed controllable by the
Company, we recorded the net value of the warrants at the date of issuance as a
warrant liability on the balance sheet ($577,929) and included the change in
fair value from the date of issuance to January 31, 2006 in other income
(expense), in accordance with EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock". The
fair value of the warrants was $451,752 at January 31, 2006.
During December 2005, the Company granted options to purchase an aggregate of
160,000 shares of common stock to two employees. The options have been valued at
$75,795 using the Black-Sholes option pricing model with the following
assumptions: (1) dividend yield of 0%; (2) expected volatility of 177%, (3)
risk-free interest rate of 4.38%, and (4) expected life of 3 years. The options
have an exercise price of $0.59, vest over a 38 month period and expire if
unexercised in ten years.
During January 2006, the Company issued 8,958,333 shares of common stock upon
conversion of 13,975 shares of preferred stock.
Preferred Stock Series A
In December 2004, the Company commenced a private placement to raise up to
$3,000,000 through the sale of up to 30 units of our securities at $100,000 per
unit. Each unit consists of (i) 1,000 shares of series A convertible, redeemable
preferred stock and (ii) warrants to purchase 320,513 shares of common stock,
exercisable for three years at $0.195 per share. The preferred stock has a
stated value of $100 per share, carries a 6% annual cumulative dividend, payable
semi-annually in arrears, and is convertible into shares of common stock at the
rate of one preferred share into 641 shares of common stock.
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.
10
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2006
(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. 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.
There was not an effective registration statement as of July 31, 2005, nor is
there one as of January 31, 2006. Additionally, if a registration statement has
not been filed as of October 27, 2005, the number of shares issuable upon
conversion of the preferred stock and the exercise of the warrants will be
increased by 1% for each 30 day period until a registration statement is filed.
A registration statement was not filed as of October 27, 2005, and one has not
been filed as of January 31, 2006. As a result, the Company has accrued an
expense of $1,440,000 and $2,040,000 during the three and nine months ended
January 31, 2006, respectively, related to these penalty provisions. This amount
will be settled through the issuance of equity securities. As of January 31,
2006, an aggregate of 1,953,290 penalty shares and 1,140,146 penalty warrants
has accrued. As of March 16, 2006, the Company has obtained waivers covering
approximately 775,000 penalty shares and 388,000 penalty warrants. These waivers
aggregate approximately $761,000 of the accrued expense. The waivers are
contingent upon the company filing a registration statement covering the
original shares and warrants within 30 days of the final closing of the
Company's current private placement offering.
During the three months ended January 31, 2005, the Company issued 2,250
preferred shares at a stated value of $100 per share and warrants to purchase
721,154 shares of common stock, exercisable for three years at $0.195 per share,
for aggregate gross proceeds of $225,000 received from investors. In connection
with the private placement, during the nine months ended January 31, 2005, the
Company issued as compensation to the placement agent warrants to 144,231 shares
of common stock, exercisable for five years at $0.172 per share. The warrants,
which were valued at approximately $105,303 using the Black-Scholes option
pricing model, were recognized as a cost of issuance of the Series A Preferred
shares.
In accordance with EITF 98-5, the Company recognized an imbedded beneficial
conversion feature present in the Preferred Stock. The Company recognized and
measured an aggregate of $810,000, which equals to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid-in capital and a
return to the Preferred Stock holders. Since the preferred shares were
convertible at the date of issuance, the return to the preferred shareholders
attributed to the beneficial conversion feature has been recognized in full at
the date the Preferred Stock was issued.
11
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2006
(UNAUDITED)
NOTE C - STOCKHOLDERS' EQUITY (continued)
Preferred Stock Series A (continued)
During the nine months ended January 31, 2005, 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.
12
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2006
(UNAUDITED)
NOTE E - NON-CASH FINANCIAL INFORMATION
During the nine months ended January 31, 2006 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.
o Issued 8,958,333 shares of common stock upon conversion of 13,975
shares of preferred stock.
o Incurred costs of $212,952 related to the sale of common stock.
These costs were deducted from the proceeds.
o Granted an aggregate of 160,000 stock options to employees. These
options have been valued at $75,795.
During the nine months ended January 31, 2005 the Company:
o Recorded a dividend on preferred stock of $810,000 related to the
fair value of the class 'C' warrants issued with preferred stock and
the related beneficial conversion feature.
NOTE F - NOTES PAYABLE
The company finances certain of its leases through a third party. The repayment
terms are generally three to five years and the notes are secured by the
underlying vehicles. The weighted average interest rate at January 31, 2006 is
9.2%.
NOTE G - SUBSEQUENT EVENT
In February 2006, the Company completed a private placement offering of
1,565,667 shares of common stock, par value $0.001 per share, to accredited
investors for net proceeds of $258,768.
In March 2006, the Company completed a private placement offering of 4,039,200
shares common stock, par value $0.001 per share, to accredited investors for net
proceeds of $691,127.
13
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 period from inception through April 30, 2005 was a developmental 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. Consequently, our
operations are subject to all the risks inherent in the establishment of a new
business enterprise. In fiscal year 2005, we began to obtain regulatory approval
in several states, where required, prior to commencing active operations. In
February 2006, we attended our first national motorcycle industry dealer only
trade show "Dealer EXPO 2006" and over 200 dealers visited our booth during the
show. We are actively signing up dealers to participate in our financing
programs, including our private label financing programs. As of March 15, 2006,
1,016 (compared to 478 at March 15, 2005) dealers have logged onto our web site
and downloaded dealer applications and of that number, 254 have been approved as
Sparta or private label authorized dealers. We believe this trend will continue
over the foreseeable future. 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. Additionally, we have signed
three third party marketing arrangements with industry recognized consulting
firms who will introduce our programs to their dealer clients and train them how
to effectively use them. We have increased our marketing staff from 1 at January
31, 2005 to 2 at January 31, 2006 and to 4 at March 15, 2006. As of the date of
this filing, we have more than 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. 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 as this current credit facility only allows for
origination across three out of five credit profiles. We need the additional
credit facilities so that we have the funding sources to originate leases and
finance contracts across all credit profiles of our business model. We are
presently seeking additional credit facilities and long term debt.
14
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JANUARY 31, 2006 TO THE THREE MONTHS ENDED
JANUARY 31, 2005
For the three months ended January 31, 2006 and 2005, we have generated limited,
but increasing, sales revenues, have incurred significant expenses, and have
sustained significant losses. We believe we will continue to earn increasing
revenues from operations during the remainder of fiscal 2006 and in the upcoming
fiscal year.
REVENUES
Revenues totaled $43,008 during the three months ended January 31, 2006 as
compared to $26,416 during the three months ended January 31, 2005. Current
period revenue was comprised primarily of $38,460 in lease revenue and $3,300 in
private label fees. Prior period revenue was comprised primarily of $21,865 in
lease revenue and $4,550 in private label fees.
COSTS AND EXPENSES
General and administrative expenses were $2,322,057 during the three months
ended January 31, 2006, compared to $739,320 during the three months ended
January 31, 2005, an increase of $1,582,737, or 214%. Expenses incurred during
the current three month period consisted primarily of the following expenses:
Compensation and related costs, $291,147; Accounting, audit and professional
fees, $46,636; Consulting fees, $1,780,890; Rent, $41,590 and Travel and
entertainment, $23,126. Expenses incurred during the comparative three month
period in 2005 consisted primarily of the following expenses: Compensation and
related costs, $301,038; Accounting, audit and professional fees, $78,861;
Consulting fees, $71,030; and the value of warrants issued to the private
placement agent of $105,303. Of the current quarter consulting expense,
$1,590,000 will be paid through the issuance of 2,650,000 shares of common
stock.
We incurred a non-cash charge of $38,500 during the three months ended January
31, 2006 related to shares of common stock to be issued in connection with debt
financing. Additionally, we recorded an expense of $1,440,000 related to the
failure to file a registration statement or have an effective registration
statement covering the underlying shares of common stock issuable upon
conversion of our preferred stock and the related warrants. This expense will be
settled through the issuance of shares and warrants or the cancellation of the
obligation through negotiation with shareholders. There were no comparable
expenses during the nine months ended January 31, 2005. We have also recorded
non-cash income of $126,177 related to the decrease in value of warrants issued
with registration rights. The fair value of these warrants is classified as a
liability on the balance sheet.
NET LOSS
We incurred a net loss before preferred dividends of $3,658,551 for our three
months ended January 31, 2006 as compared to $723,035 for the corresponding
interim period in 2005. The $2,935,516 or 406% increase in our net loss before
preferred dividends for our three month interim period ended January 31, 2006
was attributable primarily to a $1,351,981 net increase in non-cash financing
costs, and an increase of $1,582,737 in general and administrative expense.
We also incurred non-cash preferred dividend expense of $29,191 for our three
month period ended January 31, 2006 with an expense of $810,000 in the
corresponding interim period of 2005. The decrease in preferred dividend expense
was attributable to the sale of convertible preferred stock that commenced in
December, 2004 for which we incurred a non cash charge of $810,000 which equals
the intrinsic value of the imbedded beneficial conversion feature for the
Preferred Stock holders for the three months ended January 31, 2005.
Our net loss attributable to common stockholders increased to $3,687,742 for our
three month period ended January 31, 2006 as compared to $1,533,035 for the
corresponding period in 2005. The $2,154,707 increase in net loss attributable
to common stockholders for our three month period ended January 31, 2006 was due
to the $2,935,516 increase in our net loss before preferred dividends, offset by
the aforesaid $780,809 decrease in preferred dividend expense.
15
COMPARISON OF THE NINE MONTHS ENDED JANUARY 31, 2006 TO THE NINE MONTHS ENDED
JANUARY 31, 2005
For the nine months ended January 31, 2006 and 2005, we have generated limited,
but increasing sales revenues, have incurred significant expenses, and have
sustained significant losses. We believe we will begin to earn increasing
revenues from operations during the remainder of fiscal 2006 and in the upcoming
fiscal year.
REVENUES
Revenues totaled $90,629 during the nine months ended January 31, 2006 as
compared to $47,879 during the nine months ended January 31, 2005. Current
period revenue was comprised primarily of $62,806 in lease revenue, $6,747 in
dealer fees, and $9,900 in private label fees. Prior period revenue was
comprised primarily of $16,607 in lease revenue, $20,300 in dealer fees and
$9,517 in private label fees.
COSTS AND EXPENSES
General and administrative expenses were $3,819,526 during the nine months ended
January 31, 2006, compared to $1,523,941 during the nine months ended January
31, 2005, an increase of $2,295,585, or 151%. Expenses incurred during the
current nine month period consisted primarily of the following expenses:
Compensation and related costs, $947,440; Accounting, audit and professional
fees, $219,785; Consulting fees, $2,142,477; Rent, $114,404; and Travel and
entertainment, $58,457. Expenses incurred during the comparative nine month
period consisted primarily of the following expenses: Compensation and related
costs, $623,400; Accounting, audit and professional fees, $143,038; Consulting
fees, $164,068; Rent, $50,364; Travel and entertainment, $58,480 License fees,
$150,633, and the value of warrants issued to the private placement agent of
$105,303. Of the current nine months consulting expense, $1,590,000 will be paid
through the issuance of 2,650,000 shares of common stock.
In connection with its private placement transactions, the Company has expensed
non-cash costs of $406,665 during the nine months ended January 31, 2006 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
$605,442 during the nine months ended January 31, 2006 related to shares of
common stock issued or to be issued in connection with debt financing and has
recorded an expense of $2,040,000 related to the failure to file a registration
statement or 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 nine months ended
January 31, 2005. We have also recorded non-cash income of $126,177 related to
the decrease in value of warrants issued with registration rights. The fair
value of these warrants is classified as a liability on the balance sheet.
NET LOSS
We incurred a net loss before preferred dividends of $6,734,000 for our nine
months ended January 31, 2006 as compared to $1,493,850 for the corresponding
interim period in 2005. The $5,240,150 or 351% increase in our net loss before
preferred dividends for our nine month interim period ended January 31, 2006 was
attributable primarily to a $2,295,585 increase in general and administrative
expense and a net increase of $2,924,771 in non-cash financing costs.
We also incurred preferred dividend expense of $1,886,683 for our nine month
period ended January 31, 2006 with an expense of $810,000 in the corresponding
interim period of 2005. 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 for 2006 and 2005
includes an aggregate charge of $1,775,000 and $810,000, respectively, 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 $8,620,683 for our
nine month period ended January 31, 2006 as compared to $2,303,850 for the
corresponding period in 2005. The $6,316,833 increase in net loss attributable
to common stockholders for our nine month period ended January 31, 2006 was due
to the $5,240,150 increase in our net loss before preferred dividends, increased
by the aforesaid $1,076,683 increase in preferred dividend expense.
16
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2006, the Company had a working capital deficit of $3,023,127.
The Company generated a deficit in cash flow from operations of $2,172,063 for
the nine months ended January 31, 2006. This deficit is primarily attributable
to the Company's net loss from operations of $6,734,000, partially offset by
depreciation and amortization of $58,045 and the fair value attributed to stock
and warrants issued of $1,172,910, and to changes in the balances of current
assets and liabilities. Accounts payable and accrued expenses increased by
$3,458,030, deferred revenue increased by 91,860 and prepaid expenses and
deposits increased by $184,675. Included in accounts payable and accrued
expenses at January 31, 2006 are accrued penalties of $2,040,000 related to the
failure to file a registration statement or 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 or the cancellation of the
obligation through negotiation with shareholders. Also included in accounts
payable and accrued expenses at January 31, 2006 are accrued consulting and
advisory fees of $1,590,000, which will be paid through the issuance of
2,650,000 shares of common stock.
The Company, pursuant to the terms of the private placement of Series A
Convertible Preferred Stock with Warrants (the "Units"), which placement had its
final closing on July 27, 2005, is required to issue to the holders of such
Units and the Placement Agent penalty shares such that the number of shares of
Common Stock issuable upon conversion of the Series A Preferred Stock and the
exercise of the Warrants and the Placement Agent Warrants shall be increased
each month until the Company files with the Securities and Exchange Commission
(the "SEC"),a registration statement registering the common shares underlying
the Units. As of January 31, 2006, the aggregate number of penalty shares
accrued for the shares issuable upon conversion of the Series A Convertible
Preferred Stock is 1,953,290 and the fair value expensed for these shares at
January 31, 2006 is $1,332,000. The aggregate number of penalty shares accrued
upon exercise of the Warrants and Placement Agent Warrants is 1,140,146 and the
fair value expense for these shares at January 31, 2006 is $708,000.
Additionally, for each month, or fraction thereof, subsequent to January 2006
and until such registration statement is filed, the Company will be required to
issue an additional 574,498 penalty shares for the shares issuable upon
conversion of the Series A Convertible Preferred Stock and 335,537 penalty
shares upon exercise of the Warrants and Placement Agent Warrants. Pursuant to
the terms of the $3 million private placement of the Company's common stock
which commenced in December 2005 (the "PPM"), the Company is required to file
with the SEC a registration statement registering the common shares sold
pursuant to the PPM. If such registration statement is not filed within thirty
days of the final closing of the PPM, and for each month or fraction thereof
until such registration is filed, the Company will be required to issue up to
179,487 additional penalty shares to the purchasers of the PPM and the Placement
Agent. The Company intends to file, within 30 days of the final closing of the
PPM, a registration statement with the SEC registering all required shares
pursuant to the Unit and PPM offerings. As of March 16, 2006, the Company has
obtained, from Unit holders, conditional waivers which cancel the Companies
obligation to issue a total of approximately 775,000 penalty shares representing
valuation expense of approximately $524,000 at January 31, 2006. Assuming the
condition is met the $524,000 will be recognized as a reduction of non-cash
financing cost with a like reduction in accrued accounts payable. Such waivers
are conditioned upon the Company filing with the SEC a registration statement
registering the common shares underlying the Units within 30 days of the final
closing of the Company's current private placement offering. The Company is
seeking to obtain penalty waivers from the remaining Unit holders and Placement
Agent. There is no assurance that such additional waivers can or will be
obtained.
Cash flows used in investing activities for the nine months ended January 31,
2006 was $592,976, primarily due to the purchase of property and equipment of
$32,390, payments for motorcycles and vehicles of $200,524 and investments in
leases of $353,562.
The Company met its cash requirements during the nine month period through net
proceeds from the issuance of equity of $3,319,497, debt financing of $372,675
and subscriptions for 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, of $330,000, all partially offset by payments on
bridge loans and other financing of $357,244. 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.
17
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. There is no guarantee that we will be
successful in raising the funds required.
We estimate that we will need approximately $1,750,000 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. As of the date of this
filing, we have more than sufficient operating capital to continue our planned
business operations for the next twelve months and for our general operating
expenses. Although the Company obtained a senior credit facility in July 2005,
which allowed us to commence our initial active operations, this facility
finances only three of our five credit tiers, thus we will need to obtain
additional credit facilities to fully implement our business plan. We are
presently seeking those additional credit facilities and long term debt. This
additional, 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. If we are not successful in generating sufficient
liquidity from operations or in raising sufficient capital resources to finance
our growth, 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.
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 increase 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.
18
ACQUISITION OR DISPOSITION OF PLANT AND EQUIPMENT
We do not anticipate the sale or acquisition of any significant property, plant
or equipment during the next twelve months.
NUMBER OF EMPLOYEES
From our inception through the period ended January 31, 2006, 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.
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.
19
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
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 fourth quarter of 2006. Management has
elected to apply Statement 123R in the third quarter of fiscal year 2006.
RECENT ACCOUNTING PRONOUNCEMENT
In February 2006, the FASB issued SFAS 155, which applies to certain "hybrid
financial instruments," which are instruments that contain embedded derivatives.
The new standard establishes a requirement to evaluate beneficial interests in
securitized financial assets to determine if the interests represent
freestanding derivatives or are hybrid financial instruments containing embedded
derivatives requiring bifurcation. This new standard also permits an election
for fair value remeasurement of any hybrid financial instrument containing an
embedded derivative that otherwise would require bifurcation under SFAS 133. The
fair value election can be applied on an instrument-by-instrument basis to
existing instruments at the date of adoption and can be applied to new
instruments on a prospective basis. Management is assessing the implications of
this standard, which may materially impact the Company's results of operations
in the fourth quarter of fiscal year 2006 and thereafter.
In February 2006, the FASB issued FASB Staff Position ("FSP") No. FAS 123(R)-4,
"Classification of Options and Similar Instruments Issued as Employee
Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent
Event," which amends SFAS No. 123(R) to require that options issued with a cash
settlement feature that can be exercised upon the occurrence of a contingent
event that is outside the employee's control should not be classified as
liabilities until it becomes probable that the event will occur. For companies
that adopted SFAS No. 123(R) prior to the issuance of the FSP, application is
required in the first reporting period beginning after February 3, 2006.
Currently, the Company has no stock options outstanding with contingent cash
settlement features, and as a result, the FSP will not impact the Company's
consolidated financial statements.
20
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.
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 bylaws provide, however, that our
directors shall have no liability to us or to our shareholders for monetary
damages for breach of fiduciary duty as a director except with respect to (1) a
breach of the director's duty of loyalty to the corporation or its stockholders,
(2) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (3) liability which may be specifically defined
by law or (4) a transaction from which the director derived an improper personal
benefit.
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CONTINUED CONTROL OF CURRENT OFFICERS AND DIRECTORS
The present officers and directors own approximately 62% 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.
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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 15d-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.
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PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
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 January 31, 2006.
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.
We issued 250,000 shares in March 2006, in advance for the second year of the
agreement.
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. 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. These shares have not yet been issued as of January
31, 2006. We used the proceeds for working capital purposes.
In November 2005, in transactions deemed to be exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act, we sold to
two accredited investors an aggregate of 250,001 units for gross proceeds of
$150,000. 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. These shares have not yet been issued as of January 31, 2006. 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 with three accredited investors for bridge loans in the
aggregate amount of $175,000. The bridge loans were to mature on March 31, 2006,
together with simple interest at the rate of 10% per annum. As part of the loan,
we agreed to issue the lenders as an equity kicker an aggregate of 70,000 shares
of our common stock. These shares have not yet been issued as of January 31,
2006. 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.
The loans were repaid in January 2006.
On December 21, 2005, in a transaction deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, the
Company granted stock options to purchase an aggregate of 160,000 shares of the
Company's common stock, exercisable for a period of up to ten years from the
date of grant at $0.59 per share, subject to vesting criteria through March
2009, to two employees.
On December 22, 2005, in a transaction deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, the
Company entered into an agreement with Maxim Group, a placement agent, pursuant
to which Maxim was granted 2,650,000 shares of the Company's common stock as
payment for services rendered and to be rendered.. These shares have not yet
been issued as of January 31, 2006.
In December 2005 and January 2006, we sold 10,151,399 shares of our common stock
in a private placement to accredited investors for an aggregate purchase price
of $1,979,523. The aforementioned securities were sold in reliance upon the
exemption afforded by the provisions of Regulation D, as promulgated by the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
We granted the investors registration rights with respect to the shares of
common stock purchased. In connection with the private placement, the Company
granted 1,015,140 common stock purchase warrants, exercisable for five years at
$0.2145 per price, to the placement agent.
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In February 2006, we sold 1,565,667 shares of our common stock in a private
placement to accredited investors for an aggregate purchase price of $305,305.
The aforementioned securities were sold in reliance upon the exemption afforded
by the provisions of Regulation D, as promulgated by the Securities and Exchange
Commission under the Securities Act of 1933, as amended. We granted the
investors registration rights with respect to the shares of common stock
purchased. In connection with the private placement, the Company granted 156,567
common stock purchase warrants, exercisable for five years at $0.2145 per price,
to the placement agent.
In March 2006, we sold 4,039,200 shares of our common stock in a private
placement to accredited investors for an aggregate purchase price of $787,644.
The aforementioned securities were sold in reliance upon the exemption afforded
by the provisions of Regulation D, as promulgated by the Securities and Exchange
Commission under the Securities Act of 1933, as amended. We granted the
investors registration rights with respect to the shares of common stock
purchased. In connection with the private placement, the Company granted 156,567
common stock purchase warrants, exercisable for five years at $0.2145 per price,
to the placement agent.
ITEM 6. EXHIBITS
The following exhibits are filed with this report:
Exhibit Number Description of Exhibit
-------------- ----------------------------------------------------------------
Exhibit 10.1* Form of Warrant included in Units
Exhibit 10.2* Form of Loan Agreement, December 2005
Exhibit 10.3 Form of Subscription Agreement (Incorporated by reference to
Exhibit 10.1 of Form 8-K filed on January 4, 2006)
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.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SPARTA COMMERCIAL SERVICES, INC.
Date: March 22, 2006 By: /s/ Anthony L. Havens
----------------------------
Anthony L. Havens
Chief Executive Officer and
Principal Financial Officer
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