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From
time
to time after this Registration Statement becomes effective.
If
any
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box. o
CALCULATION
OF REGISTRATION FEE
Proposed
maximum
Proposed
Number
of
offering
maximum
Title
of each class of
Shares
price
per
aggregate
Amount
of
securities
to be registered
to
be registered
share
offering
price
registration
fee
Common
stock, $0.001 par value
26,405,313
$
0.42
(1)
$
11,090,231.46
$
1,186.65
Common
stock, $0.001 par value issuable upon conversion of Series A Preferred
Stock
22,980,782
$
0.42
(1)
$
9,651,928.44
$
1,,032.76
Common
Stock, $0.001 par value issuable upon exercise of Warrants
11,792,874
$
0.195
(2)
$
2,299,610.43
$
246.06
Common
Stock, $0.001 par value issuable upon exercise of Warrants
1,755,537
$
0.2145
(2)
$
376,562.69
$
40.29
Total
62,934,506
$
2,505.76
(1)
Estimated solely for purposes of calculating the registration fee in accordance
with Rule 457(c) and Rule 457(g) under the Securities Act of 1933, using the
average of the high and low price as reported on the Over-The-Counter Bulletin
Board on April 25, 2006, which was $0.49 per share
(2)
Calculated in accordance with Rule 457(g)(1).
The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
2
The
information in this Prospectus is not complete and may be changed. The selling
stockholders may not sell these securities until the registration statement
is
filed with the Securities and Exchange Commission and becomes effective. This
Prospectus is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the sale is not permitted.
This
prospectus relates to the resale by the selling stockholders of up to 62,934,506
shares of our common stock, including up to 22,980,782 shares of common stock
issuable upon conversion of preferred stock and up to 13,548,411 issuable upon
the exercise of common stock purchase warrants. The selling stockholders may
sell common stock from time to time in the principal market on which the stock
is traded at the prevailing market price or in negotiated transactions. The
selling stockholders may be deemed underwriters of the shares of common stock,
which they are offering. We will pay the expenses of registering these shares.
We
are
not selling any shares of common stock in this offering and therefore will
not
receive any proceeds from the sale of common stock hereunder. We may receive
proceeds from any exercise of outstanding warrants.
Our
common stock listed on the Over-The-Counter Bulletin Board under the symbol
"SRCO." The last reported sales price per share of our common stock as reported
by the Over-The-Counter Bulletin Board on May 29, 2007, was $0.065.
Investing
in these securities involves significant risks. See "Risk Factors" beginning
on
page 6.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this Prospectus
is
truthful or complete. Any representation to the contrary is a criminal offense.
The
date
of this prospectus is ________, 2007.
The
information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by Sparta
Commercial Services, Inc. with the Securities and Exchange Commission. The
selling stockholders may not sell these securities until the registration
statement becomes effective. This Prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the sale is not permitted.
PROSPECTUS
SUMMARY
The
following summary highlights selected information contained in this prospectus.
This summary does not contain all the information you should consider before
investing in the securities. Before making an investment decision, you should
read the entire prospectus carefully, including the "risk factors" section,
the
financial statements and the notes to the financial statements.
SPARTA
COMMERCIAL SERVICES, INC.
We
were
incorporated under the laws of the State of Nevada on May 13, 1980 under the
name Tomahawk Oil and Minerals, Inc. and we changed our name to Tomahawk
Industries, Inc. on November 6, 1983. On February 27, 2004, pursuant to an
Agreement and Plan of Reorganization, Tomahawk Industries, Inc. acquired Sparta
Commercial Services, LLC, a Delaware limited liability company. Effective August25, 2004, we changed our name to Sparta Commercial Services, Inc., by filing
a
Certificate of Amendment to our Articles of Incorporation with the Secretary
of
State of the State of Nevada.
For
the
nine month period ended January 31, 2007, we generated $625,839 in revenue
and a
net loss of $3,079,741. In addition, for the year ended April 30, 2006, we
generated $169,106 in revenue and a net loss of $7,872,772. As a result of
recurring losses from operations our auditors, in their report dated July 15,2006, have expressed substantial doubt about out ability to continue as a going
concern.
Our
executive offices are located at 462 Seventh Ave, 20th Floor, New York, NY10018, and our telephone number is (212) 239-2666. We are a Nevada
corporation.
3
The
Offering
Common
stock offered by selling
stockholders
Up
to 62,934,506 shares, including the
following:
·
up
to 22,980,782
shares of common stock issuable upon the conversion of preferred
stock,
and
·
up
to 13,548,411
shares of common stock issuable upon the exercise of common stock
purchase
warrants.
This
number represents 51.07% of our current outstanding
stock.
Common
stock to be outstanding
after
the offering
Up
to186,150,663 shares.
Use
of proceeds
We
will not receive any proceeds from the sale of the common stock.
However,
we will receive the sale price of any common stock we sell to the
selling
stockholder upon the exercise of the warrants. We expect to use
the
proceeds received from the exercise of the warrants, if any, for
general
working capital purposes.
Over-The-Counter
Bulletin Board
Symbol
SRCO
The
above
information regarding common stock to be outstanding after the offering is
based
on 123,216,157 shares of common stock outstanding as of April 30, 2007 and
assumes the subsequent conversion of our Series A Preferred Stock and exercise
of warrants by our selling stockholders.
4
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain
statements in this prospectus contain or may contain forward-looking statements
that are subject to known and unknown risks, uncertainties and other factors
which may cause actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These forward-looking statements
were based on various factors and were derived utilizing numerous assumptions
and other factors that could cause our actual results to differ materially
from
those in the forward-looking statements. These factors include, but are not
limited to, our ability to increase our revenues, develop our brands, implement
our strategic initiatives, economic, political and market conditions and
fluctuations, government and industry regulation, U.S. and global competition,
and other factors. Most of these factors are difficult to predict accurately
and
are generally beyond our control. You should consider the areas of risk
described in connection with any forward-looking statements that may be made
in
this prospectus. Readers are cautioned not to place undue reliance on these
forward-looking statements and readers should carefully review this prospectus
in its entirety, including the risks described in "Risk Factors." Except for
our
ongoing obligations to disclose material information under the Federal
securities laws, we undertake no obligation to release publicly any revisions
to
any forward-looking statements, to report events or to report the occurrence
of
unanticipated events. For any forward-looking statements contained in any
document, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements speak only as of the date of this prospectus,
and you should not rely on these statements without also considering the risks
and uncertainties associated with these statements and our business.
5
RISK
FACTORS
This
investment has a high degree of risk. Before you invest you should carefully
consider the risks and uncertainties described below and the other information
in this prospectus. If any of the following risks actually occur, our business,
operating results and financial condition could be harmed and the value of
our
stock could go down. This means you could lose all or a part of your
investment.
Risks
Related to Our Financial Results
OUR
LACK OF OPERATING DATA MAKES PREDICTING OUR FUTURE PERFORMANCE
DIFFICULT.
We
have
only 2 years of operating history upon which an evaluation of our prospects
can
be based. We do not have any substantial historical financial data on which
to
base planned operating expenses or forecast revenues. As a result of these
factors, it is difficult to evaluate our prospects, and our future success
is
more uncertain than if we had a longer or more proven history of operations.
Our
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in the early stages of a business
enterprise, particularly companies in highly competitive markets.
WE
HAVE A LIMITED OPERATING HISTORY WITH NO HISTORY OF SIGNIFICANT
REVENUES.
The
year
ended April 30, 2006 saw our transition from a development stage company to
an
operating company. We are presently authorized to do business in 33 states.
We
will continue to obtain regulatory approval in additional states, where
required, prior to commencing active operations in those states. While we are
actively signing up dealers to participate in our financing programs, including
our private label financing programs, we have no significant operating history.
Through April 30, 2006, we have generated nominal sales revenues, have incurred
significant expenses, and have sustained significant losses; our sales revenue
for the 9 month period ended January 31, 2007 was $625,839. Our net loss
attributed to common stockholders for the year ended April 30, 2006 and nine
months ended January 31, 2007 was $7,872,772 (after giving effect to a
$1,755,000 charge for the beneficial conversion discount on our Convertible
Preferred shares, non-cash charge of $2,056,130 for equity based compensation
,
a $973,607 non-cash charge for stock based finance cost and a $141,255 charge
for Preferred dividends payable) and $3,079,741 (after giving effect to a
non-cash charge of $376,744 for equity based compensation and $89,810 for
Preferred dividends), respectively. As of April 30, 2006 our working capital
was
$345,246 and as of January 31, 2007, we had a working capital deficit
of$1,987,857. We may continue to incur losses for the near future. There can
be
no assurance that we will achieve or sustain profitability on a quarterly or
annual basis.
WE
HAVE ENTERED INTO A CREDIT LINE WITH AN INSTITUTIONAL LENDER, WHO HAS REQUIRED
PREFERENCES AND RIGHTS SENIOR TO THOSE OF OUR PREFERRED STOCK AND PLACED
RESTRICTIONS ON THE PAYMENT OF DIVIDENDS.
We
entered into a secured senior credit facility with a major third party lender,
for a revolving line of credit. The lender has received a security interest
in
substantially all of our assets with seniority over the rights of our preferred
stock and our common stock. Unless the security interests are released, assets
will not be available to us to secure future indebtedness, which may adversely
affect our ability to borrow in the future. If we are unable to repay our
outstanding indebtedness under the credit line, the lender could foreclose
on
all of our assets. If we do not have sufficient cash flow to repay the credit
line indebtedness or if we cannot refinance the obligation, we will not be
able
to implement our business plan, which would have a material adverse affect
on
our future viability. The lender, in granting the credit line, has also required
that we meet certain financial criteria in order to pay dividends on any of
our
preferred shares and common shares. We may not be able to repay our outstanding
indebtedness under the credit line.
Our
business requires capital and we will need to obtain additional financing in
the
near future. We estimate that we will need approximately $1,800,000 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.
Although we obtained a senior credit facility in July 2005, subsequently renewed
in July 2006, which allowed us to commence our initial active operations, this
facility does not allow us to finance individuals with lower FICO scores nor
does it provide financing for other markets we wish to enter. 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 our
operating flexibility. 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.
Our
business requires extensive amounts of capital for credit reserve purposes.
As
our business grows, we will be required to maintain higher levels of credit
reserves. To the extent that our revenues do not provide sufficient cash flow
to
cover such credit reserve levels, we may have to obtain additional financing
to
fund the credit reserve requirement existing at the time. There can be no
assurance that we will be able to secure a line of credit or have the requisite
capital reserve, or that we will be able to obtain additional financing for
such
purposes. The failure to obtain additional funds, when required, on satisfactory
terms and conditions, would have a material and adverse effect on our business,
operating results and financial condition.
The
independent auditors report on our April 30, 2006 financial statements state
that our historical losses and the lack of revenues raise substantial doubts
about our ability to continue as a going concern, due to our status as a
development stage company and our lack of significant operations. We cannot
assure you that we will be able to generate revenues or maintain any line of
business that might prove to be profitable. Accordingly, a purchase of our
common stock should be considered a high-risk investment because investors
will
be placing their funds at risk in a development stage company with the attendant
unforeseen costs, expenses and problems that a company in this phase of business
may encounter. Our ability to continue as a going concern is subject to our
ability to generate a profit or obtain necessary funding from outside sources,
including obtaining additional funding from the sale of our securities,
increasing sales or obtaining credit lines or loans from various financial
institutions where possible. If we are unable to develop our business, we may
have to discontinue operations or cease to exist, which would be detrimental
to
the value of our common stock. We can make no assurances that our business
operations will develop and provide us with significant cash to continue
operations.
WE
WILL BE REQUIRED TO RAISE ADDITIONAL CAPITAL TO FUND OUR
OPERATIONS.
To
the
extent we raise additional capital by issuing equity securities, our
stockholders may experience substantial dilution. Also, any new equity
securities may have greater rights, preferences or privileges than our existing
common stock. A material shortage of capital will require us to take drastic
steps such as reducing our level of operations, disposing of selected assets
or
seeking an acquisition partner. If cash is insufficient, we will not be able
to
continue operations.
Risks
Related To Our Business
A
SIGNIFICANT NUMBER OF CUSTOMERS MAY FAIL TO PERFORM UNDER THEIR
LOANS.
As
a
lender, one of the largest risks we face is the possibility that a significant
number of borrowers will fail to pay their loans when due. If borrowers'
defaults cause losses in excess of our allowance for loan losses, it could
have
an adverse effect on our business, profitability and financial condition. If
a
borrower enters into bankruptcy, we may have no means of recourse. We have
established an evaluation process designed to determine the adequacy of the
allowance for loan losses. While this evaluation process uses historical and
other objective information, the establishment of loan losses is dependent
to a
great extent on management's experience and judgment. We cannot assure you
that
our loan reserves will be sufficient to absorb future loan losses or prevent
a
material adverse effect on our business, profitability or financial
condition.
A
VARIETY OF FACTORS AND ECONOMIC FORCES MAY AFFECT OUR OPERATING
RESULTS.
Our
operating results may differ from current forecasts and projections
significantly in the future as a result of a variety of factors, many of which
are outside our control. These factors include, without limitation, the receipt
of revenues, which is difficult to forecast accurately, the rate of default
on
our loans, the amount and timing of capital expenditures and other costs
relating to the expansion of our operations, the introduction of new products
or
services by us or our competitors, borrowing costs, pricing changes in the
industry, technical difficulties, general economic conditions and economic
conditions specific to the motorcycle industry. The success of an investment
in
a retail loan based venture is dependent, at least in part, on extrinsic
economic forces, including the supply of and demand for such services and the
rate of default on the retail installment loans. No assurance can be given
that
we will be able to generate sufficient revenue to cover our cost of doing
business. Furthermore, our revenues and results of operations will be subject
to
fluctuations based upon general economic conditions. Economic factors like
unemployment, interest rates, the rate of inflation and consumer perceptions
of
the economy may affect the rate of prepayment and defaults on customer leases
and loans and the ability to sell or dispose of the related specified vehicles
for an amount at least equal to their residual values which will have a material
adverse effect on our business.
A
MATERIAL REDUCTION IN THE INTEREST RATE SPREAD COULD HAVE A NEGATIVE IMPACT
ON
OUR BUSINESS AND PROFITABILITY.
A
portion
of our net income is expected to come from an interest rate spread, which is
the
difference between the interest rates paid by us on interest-bearing
liabilities, and the interest rate we receive on interest-earning assets, such
as loans and leases extended to customers. Interest rates are highly sensitive
to many factors that are beyond our control, such as inflation, recession,
global economic disruptions and unemployment. There is no assurance that our
current level of interest rate spread will not decline in the future. Any
material decline would have a material adverse effect on our business and
profitability.
FAILURE
TO PERFECT A SECURITY INTEREST COULD HARM OUR BUSINESS.
An
ownership interest or security interest in a motor vehicle registered in most
states may be perfected against creditors and subsequent purchasers without
notice for valuable consideration only by one or more of the following:
depositing with the state's department of motor vehicles a properly endorsed
certificate of title for the vehicle showing the transferee or secured party
as
legal owner or lien holder thereon, filing a sworn notation of lien with the
state's department of motor vehicles and noticing such lien on the certificate
of title, or if the vehicle has not been previously registered, filing an
application for an original registration together with an application for
registration of the secured party as legal owner or lien holder, as the case
may
be, with the state's department of motor vehicles. We may not have a validly
perfected ownership interest and security interest, respectively, in some
vehicles during the period of the loan. As a result, our ownership or security
interest in these vehicles will not be perfected and our interest could be
inferior to interests of other creditors or purchasers who have taken the steps
described above. If such creditors or purchasers successfully did so, the
affected vehicles would not be available to generate their expected cash flow,
which would have a material adverse effect on our business.
7
RISKS
ASSOCIATED WITH LEASING.
Our
business is subject to the risks generally associated with the ownership and
leasing of equipment. A lessee may default in performance of its lease
obligations and we may be unable to enforce our remedies under a lease. As
a
result, certain of these customers may pose credit risks to us. Our inability
to
collect receivables due under a lease and its inability to sell or re-lease
off-lease motorcycles could have a material adverse effect on our business,
financial condition or results of operations.
ADVERSE
CHANGES IN USED VEHICLE PRICES MAY HARM OUR BUSINESS.
Significant
increases in the inventory of vehicles may depress the prices at which we can
sell or lease our inventory of repossessed or off-lease vehicles or may delay
sales or leases. Factors that may affect the level of used vehicles inventory
include consumer preferences, leasing programs offered by our competitors and
seasonality. In addition, average used powersports vehicle prices have
fluctuated in the past, and any softening in the used powersports vehicle market
could cause our recovery rates on repossessed or off-lease vehicles to decline
below current levels. Lower recovery rates increase our credit losses and reduce
the amount of cash flows we receive.
OUR
BUSINESS IS DEPENDENT ON INTELLECTUAL PROPERTY RIGHTS AND WE MAY NOT BE ABLE
TO
PROTECT SUCH RIGHTS SUCCESSFULLY.
Our
intellectual property, including our license agreements and other agreements,
which establish our rights to proprietary intellectual property, are of great
value to our business operations. Infringement or misappropriation of our
intellectual property or by us could materially harm our business. We rely
on a
combination of trade secret, copyright, trademark, patent and other proprietary
rights laws to protect our rights to this valuable intellectual property. Third
parties may try to challenge our intellectual property rights. In addition,
our
business is subject to the risk of third parties infringing or circumventing
our
intellectual property rights. We may need to resort to litigation in the future
to protect our intellectual property rights, which could result in substantial
costs and diversion of resources. Our failure to protect our intellectual
property rights could have a material adverse effect on our business and
competitive position.
WE
MAY NOT BE ABLE TO COMPETE IN THE INDUSTRY.
We
will
compete with commercial banks, savings and loans, industrial thrifts, credit
unions and consumer finance companies, including large consumer finance
companies such as HSBC/Household, General Electric and Transamerica. Many of
these competitors have well developed infrastructure systems in place as well
as
greater financial and marketing resources than we have. Additionally,
competitors may be able to provide financing on terms significantly more
favorable to motorcycle purchasers than we can offer. Providers of motorcycle
financing have traditionally competed on the basis of interest rates charged,
the quality of credit accepted, the flexibility of contract terms offered and
the quality of service provided to dealers and customers. We seek to compete
predominantly on the basis of our high level of dealer service, strong dealer
relationships and by offering flexible terms. Many of our competitors focus
their efforts on different segments of the credit quality spectrum. Our business
may be adversely affected if any of such competitors in any of our markets
choose to intensify their competition in the segment of the prime or sub-prime
credit spectrum on which we focus or if dealers become unwilling to forward
to
us applications of prospective customers. To the extent that we are not able
to
compete effectively within our credit spectrum and to the extent that the
intensity of competition causes the interest rates we charge to be lower, our
results of operations can be adversely affected.
OUR
BUSINESS IS SUBJECT TO VARIOUS GOVERNMENT REGULATIONS.
We
are
subject to numerous federal and state consumer protection laws and regulations
and licensing requirements, which, among other things, may affect: (i) the
interest rates, fees and other charges we impose; (ii) the terms and conditions
of the contracts; (iii) the disclosures we must make to obligors; and (iv)
the
collection, repossession and foreclosure rights with respect to delinquent
obligors. The extent and nature of such laws and regulations vary from state
to
state. Federal bankruptcy laws limit our ability to collect defaulted
receivables from obligors who seek bankruptcy protection. Prospective changes
in
any such laws or the enactment of new laws may have an adverse effect on our
business or the results of operations. Compliance with existing laws and
regulations has not had a material adverse affect on our operations to date.
We
will need to periodically review our office practices in an effort to ensure
such compliance, the failure of which may have a material adverse effect on
our
operations and our ability to conduct business activities.
WE
ARE CONTROLLED BY CURRENT OFFICERS, DIRECTORS AND PRINCIPAL
STOCKHOLDERS.
Our
directors, executive officers and principal stockholders beneficially own
approximately 36.02% of voting stock outstanding on a fully diluted basis.
Accordingly, these persons and their respective affiliates have the ability
to
exert substantial control over the election of our Board of Directors and the
outcome of issues submitted to our stockholders, including approval of mergers,
sales of assets or other corporate transactions. In addition, such control
could
preclude any unsolicited acquisition of us and could affect the price of our
Common Stock.
8
WE
ARE DEPENDENT ON OUR MANAGEMENT AND THE LOSS OF ANY OFFICER COULD HINDER THE
IMPLEMENTATION OF OUR BUSINESS PLAN.
We
are
heavily dependent upon management, the loss of any of whom could have a material
adverse affect on our ability to implement our business plan. While we have
entered into employment agreements with certain executive officers, including
our Chief Executive Officer and Chief Operating Officer, employment agreements
could be terminated for a variety of reasons. If, for some reason, the services
of management, or of any member of management, were no longer available to
us,
our operations and proposed businesses and endeavors may be materially adversely
affected. Mr. Havens, our Chief Executive Officer, has been primarily
responsible for setting up our business plan and our infrastructure and
developing the growth of our company. [Insert any other important officers]
Any
failure of management to implement and manage our business strategy and growth
may have a material adverse affect on us. There can be no assurance that our
operating and financial control systems will be adequate to support its future
operations and anticipated growth. Failure to manage our growth properly could
have a material adverse affect on our business, financial condition or result
of
operations. Furthermore, the inability to continue to upgrade the operating
and
financial control systems, the inability to recruit and hire necessary personnel
or the emergence of unexpected expansion difficulties could have a material
adverse affect on our business, financial condition or results of
operations.
Risks
Related to This Offering
THERE
IS NO ASSURANCE OF AN ESTABLISHED PUBLIC TRADING MARKET, WHICH WOULD ADVERSELY
AFFECT THE ABILITY OF INVESTORS IN OUR COMPANY TO SELL THEIR SECURITIES IN
THE
PUBLIC MARKETS.
Although
our common stock trades on the Over-the-Counter Bulletin Board (the "OTCBB"),
a
regular trading market for the securities may not be sustained in the future.
The NASD has enacted recent changes that limit quotations on the OTCBB to
securities of issuers that are current in their reports filed with the
Securities and Exchange Commission. The effect on the OTCBB of these rule
changes and other proposed changes cannot be determined at this time. The OTCBB
is an inter-dealer, Over-The-Counter market that provides significantly less
liquidity than the NASD's automated quotation system (the "NASDAQ Stock
Market"). Quotes for stocks included on the OTCBB are not listed in the
financial sections of newspapers as are those for The NASDAQ Stock Market.
Therefore, prices for securities traded solely on the OTCBB may be difficult
to
obtain and holders of common stock may be unable to resell their securities
at
or near their original offering price or at any price. Market prices for our
common stock will be influenced by a number of factors, including:
·
the
issuance of new equity securities;
·
changes
in interest rates;
·
competitive developments, including announcements by competitors of new products
or services or significant contracts, acquisitions, strategic partnerships,
joint ventures or capital commitments;
·
variations in quarterly operating results;
·
change
in financial estimates by securities analysts;
·
the
depth and liquidity of the market for our common stock;
·
investor
perceptions of our company and the technologies industries generally;
and
·
general
economic and other national conditions.
THE
LIMITED PRIOR PUBLIC MARKET AND TRADING MARKET MAY CAUSE VOLATILITY IN THE
MARKET PRICE OF OUR COMMON STOCK.
Our
common stock is currently traded on a limited basis on the OTCBB under the
symbol "SRCO." The quotation of our common stock on the OTCBB does not assure
that a meaningful, consistent and liquid trading market currently exists, and
in
recent years such market has experienced extreme price and volume fluctuations
that have particularly affected the market prices of many smaller companies
like
us. Our common stock is thus subject to volatility. In the absence of an active
trading market:
·
investors may have difficulty buying and selling or obtaining market
quotations;
·
market
visibility for our common stock may be limited; and
·
a lack
of visibility for our common stock may have a depressive effect on the
market
for our common stock.
OUR
COMMON STOCK COULD BE CONSIDERED A "PENNY STOCK."
Our
common stock is considered to be a "penny stock" because it meets one or more
of
the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g)
of
the Securities Exchange Act of 1934, as amended. These include but are not
limited to the following: (i) the stock trades at a price less than $5.00 per
share; (ii) it is NOT traded on a "recognized" national exchange; (iii) it
is
NOT quoted on The NASDAQ Stock Market, or even if so, has a price less than
$5.00 per share; or (iv) is issued by a company with net tangible assets less
than $2.0 million, if in business more than a continuous three years, or with
average revenues of less than $6.0 million for the past three years. The
principal result or effect of being designated a "penny stock" is that
securities broker-dealers cannot recommend the stock but must trade in it on
an
unsolicited basis.
BROKER-DEALER
REQUIREMENTS MAY AFFECT TRADING AND LIQUIDITY
Section
15(g) of the Securities and Exchange Act of 1934, as amended, and Rule 15g-2
promulgated thereunder by the SEC require broker-dealers dealing in penny stocks
to provide potential investors with a document disclosing the risks of penny
stocks and to obtain a manually signed and dated written receipt of the document
before effecting any transaction in a penny stock for the investor’s
account.
9
Potential
investors in our common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be "penny stock."
Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the
account of any investor for transactions in such stocks before selling any
penny
stock to that investor. This procedure requires the broker-dealer to (i) obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience
as to
be reasonably capable of evaluating the risks of penny stock transactions;
(iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that
it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise.
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of our restricted stock in
the
public marketplace could reduce the price of our common stock.
From
time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in
the
open market pursuant to Rule 144, promulgated under the Securities Act ("Rule
144"), subject to certain limitations. In general, pursuant to Rule 144, a
stockholder (or stockholders whose shares are aggregated) who has satisfied
a
one-year holding period may, under certain circumstances, sell within any
three-month period a number of securities which does not exceed the greater
of
1% of the then outstanding shares of common stock or the average weekly trading
volume of the class during the four calendar weeks prior to such sale. Rule
144
also permits, under certain circumstances, the sale of securities, without
any
limitations, by a non-affiliate of our company that has satisfied a two-year
holding period. Any substantial sale of common stock pursuant to Rule 144 or
pursuant to any resale prospectus may have an adverse effect on the market
price
of our securities.
USE
OF PROCEEDS
This
prospectus relates to shares of our common stock that may be offered and sold
from time to time by the selling stockholders. We will not receive any proceeds
from the sale of shares of common stock in this offering. However, we will
receive the sale price of any common stock we sell to the selling stockholder
upon exercise of the warrants. We expect to use the proceeds received from
the
exercise of the warrants, if any, for general working capital purposes.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
common stock is traded on the OTC Bulletin Board, referred to herein as the
OTCBB, under the symbol "SRCO." The following table sets forth, for the calendar
periods indicated, the range of the high and low last reported bid prices of
our
common stock, as reported by the OTCBB. The quotations represent inter-dealer
prices without retail mark-ups, mark-downs or commissions, and may not
necessarily represent actual transactions.
*
On
December 27, 2004, we effected a net effective 25:200 common stock split. Fiscal
year 2004 stock prices have not been adjusted to give effect for such 25:200
stock split effected.
As
of
April 30, 2007, there were approximately 3009 holders of record of our common
stock.
10
We
have
appointed Executive Registrar & Transfer Inc. 3615 South Huron Street, Suite
104, Englewood, CO80110, as transfer agent for our shares of common
stock.
Equity
Compensation Plan Information
In
July
2004, we adopted a stock incentive compensation plan. The plan authorized our
board of directors to grant securities, including stock options, to employees,
directors and others, in the aggregate amount of 8,500,000 shares of common
stock. Securities issued under the plan may be stock awards, non-qualified
options, incentive stock options, or any combination of the foregoing. In
general, stock options granted under the plan have a maximum duration of ten
years from the date of the grant and are not transferable. The per share
exercise price of any incentive stock option granted under the plan may not
be
less than the fair market value of the common stock on the date of grant.
Incentive stock options granted to persons who have voting control over ten
percent or more of our capital stock are granted at 110% of fair market value
of
the underlying common stock on the date of grant and expire five years after
the
date of grant. No options may be granted after July 1, 2014. During the year
ended April 30, 2006, no securities were granted under this plan.
On
April29, 2005, pursuant to an options agreement with Richard Trotter, our Chief
Operating Officer, we issued stock options to purchase up to 875,000 shares
of a
common stock. Subject to vesting, the stock options are exercisable for five
years from the vesting date at $0.605 per share. On November 1, 2006, stock
options to purchase 525,000 shares vested, and the remaining options are to
vest
in equal installments over the next two anniversary date of the
agreement.
In
April
2005, we issued options to purchase 200,000 shares of our common stock to
Jaffoni & Collins Incorporated pursuant to a consulting agreement for public
relations services. The options are exercisable for three years at $0.195 per
share. In March 2006 this contract was cancelled and we rescinded 100,000 of
such options.
The
following table summarizes our equity compensation plan information as of April30, 2006.
Number
of Shares
Remaining
Available
Number
of Shares to
for
Future Issuance
Be
Issued upon
Under
Equity
Exercise
of
Weighted-Average
Compensation
Plans
Outstanding
Exercise
Price of
(Excluding
Shares
Options,
Warrants
Outstanding
Options,
Reflected
in
Plan
Category(1)
and
Rights
Warrants
and Rights
Column
(a))
(a)
(b)
(c)
Equity
Compensation plans approved by stockholders
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATIONS
FORWARD-LOOKING
INFORMATION
The
information in this report contains forward-looking statements. All statements
other than statements of historical fact made in this report are forward
looking. In particular, the statements herein regarding industry prospects
and
future results of operations or financial position are forward-looking
statements. These forward-looking statements can be identified by the use of
words such as "believes,""estimates,""could,""possibly,""probably,"
anticipates," "projects,""expects,""may,""will," or "should" or other
variations or similar words. No assurances can be given that the future results
anticipated by the forward-looking statements will be achieved. Forward-looking
statements reflect management's current expectations and are inherently
uncertain. Our actual results may differ significantly from management's
expectations.
The
following discussion and analysis should be read in conjunction with our
financial statements, included herewith. This discussion should not be construed
to imply that the results discussed herein will necessarily continue into the
future, or that any conclusion reached herein will necessarily be indicative
of
actual operating results in the future. Such discussion represents only the
best
present assessment of our management.
MERGER
AND CORPORATE RESTRUCTURE
Prior
to
February 27, 2004, we did not conduct any substantive operations. On February27, 2004, pursuant to an Agreement and Plan of Reorganization, we acquired
Sparta Commercial Services, LLC, in a transaction viewed as a reverse
acquisition. The purpose of the transaction was to try to create some value
for
our shareholders. As an inactive publicly registered shell corporation with
no
significant assets or operations, our business plan was to seek an acquisition
candidate. Sparta sought access to financing, as a publicly-held company. As
a
result of the reverse acquisition, there was a change in control of our company.
In accordance with SFAS No. 141, Sparta Commercial Services LLC was the
acquiring entity. While the transaction is accounted for using the purchase
method of accounting, in substance the Agreement is a recapitalization of the
Company's capital structure and is recorded as a capital transaction rather
than
a business combination under SFAS 141.
11
For
accounting purposes, the Company has accounted for the transaction as a reverse
acquisition and Sparta Commercial Services, Inc. shall be the surviving entity.
The Company did not recognize goodwill or any intangible assets in connection
with the transaction and there were no adjustments to the Company’s historic
carrying values of the assets and liabilities.
Until
January 31, 2005, Sparta was a development stage company. Efforts had been
principally devoted to developing business as an originator and indirect lender
for retail installment loan and lease financing for the purchase or lease of
new
and used motorcycles (specifically 600cc and higher) and utility-oriented
4-stroke all terrain vehicles (ATVs).
To
date,
we have generated limited sales revenues, have incurred expenses and have
sustained losses. Consequently, our operations are subject to all the risks
inherent in the establishment of a new business enterprise. For the period
from
October 1, 2001 (date of Sparta's inception) through April 30, 2006, we have
accumulated losses of $14,150,429.
For
the
nine months ended January 31, 2007 and 2006, 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 2007 and in the upcoming
fiscal year.
REVENUES
Revenues
totaled $625,839 during the nine months ended January 31, 2007 as compared
to
$90,629 during the nine months ended January 31, 2006. Current period revenue
was comprised primarily of $530,400 in lease revenue, $61,317 in private label
fees and Preferred Provider Program and $28,126 in other income. Prior period
revenue was comprised primarily of $62,806 in lease revenue, $6,747 in dealer
fees and $9,900 in private label fees.
COSTS
AND
EXPENSES
General
and administrative expenses were $3,405,213 during the nine months ended January31, 2007, compared to $3,819,526 during the nine months ended January 31, 2006,
a decrease of $414,313, or 11%. Expenses incurred during the current nine month
period consisted primarily of the following expenses: Compensation and related
costs, $1,306,994; Accounting, audit and professional fees,$380,407; Consulting
fees, $231,421; Rent and utilities, $227,827, Travel and entertainment, $108,184
and stock based compensation $703,264. Expenses incurred during the comparative
nine month period in 2006 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.
During
nine months ending January 31, 2007, we recorded non-cash income of $299,663
related to the decrease in value of warrants issued with registration rights
and
other expenses. We incurred a non-cash charge of $831,658 during the nine months
ended January 31, 2007 related to options and shares of common stock issued
for
consulting fees, services and financing cost. For the nine months ended January31, 2006, we had expensed non-cash costs of $406,665 related to warrants granted
to a private placement agent. Additionally, we incurred a non-cash charge of
$605,442 during the nine months ended January 31, 2006 related to shares of
common stock issued in connection with debt financing and has recorded an
expense of $2,040,000 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.
NET
LOSS
We
incurred a net loss before preferred dividends of $2,989,931 for our nine months
ended January 31, 2007 as compared to $6,734,000 for the corresponding interim
period in 2005. The $3,744,069 or 56% decrease in our net loss before preferred
dividends for our nine month interim period ended January 31, 2007 was
attributable to an increase in revenue, a decrease in operating expenses and
non-cash financing costs, and a partial recovery, in the amount of $299,663,
of
prior years charges for warrant liability and other expense.
We
also
incurred non-cash preferred dividend expense of $89,810 for our nine month
period ended January 31, 2007 as compared with a non-cash expense of $1,886,683
in the corresponding interim period of 2006. The decrease in preferred dividend
expense was primarily attributable to the beneficial conversion feature expense
of $1,775,000 in the corresponding interim period in 2006 (related to warrants
issued with the convertible preferred stock and a beneficial conversion feature
associated with the preferred stock) with no such comparable expense in the
current period. Preferred dividends in the current period also decreased as
a
result of preferred stock conversions to common stock.
Our
net
loss attributable to common stock holders decreased to $3,079,741 for our nine
month period ended January 31, 2007 as compared to $8,620,683 for the
corresponding period in 2006. The $5,540,942 decrease is net loss attributable
to common stock holders for our nine month period ended January 31, 2007 was
due
to the decrease in net loss and decrease in preferred dividends.
For
the
year ended April 30, 2006, 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 fiscal 2007 as
we
have completed our transition to an operating company.
Revenues
Revenues
totaled $169,106 in fiscal 2006 compared to $65,833 revenues in fiscal 2005.
Fiscal 2006 revenue was comprised of 136,700 in income from Operating Leases
and
Retail Installment Sales Contracts, $13,200 in private label fees, $7,347 in
dealer fees, $506 in interest income and $11,353 in other fees and income.
A
portion of our net income is expected to come from an interest rate spread,
which is the difference between the interest rates paid by us on
interest-bearing liabilities, and the interest rate we receive on
interest-earning assets, such as loans and leases extended to customers.
Interest rates are highly sensitive to many factors that are beyond our control,
such as inflation, recession, global economic disruptions and unemployment.
Under the borrowing structure with our current lender, interest rate spreads
are
“locked-in” on each lease and loan. If the nature of this borrowing relationship
changes or if we enter into a financing relationship with another lender, there
is no assurance that the then level of interest rate spread will not decline
in
the future. Any material decline would have a material adverse effect on our
business and profitability. As interest rates rise, the demand for motorcycles
may decrease together with other consumer
expenditures
that are normally financed which would have the effect of lowering revenues.
In
addition, in order to offset the impact of rising interest
rates on our customers, we may narrow the spread we receive which would result
in lower revenues. One benefit to Sparta in periods of raising interest rates
is
our lease program. As interest rates raise, customers become increasingly
payment conscious. With the option of a lease with lower monthly payments than
an equivalent loan, we believe Sparta has product offering not offered by any
of
our major competitors.
Costs
and Expenses
The
Company incurred licensing fees of $67,000 for the year ended April 30, 2006
and
$150,663 for the year ended April 30, 2005, respectively. The costs incurred
were for the licensing of certain proprietary software, operating systems and
processes for use in connection with the extension of credit and underwriting
techniques for the purchase and lease of motor vehicles. The decrease from
fiscal 2005 to fiscal 2006 reflects the fact that this process is
completed.
The
Company incurred organization costs of $197,507 for the year ended April 30,2006, and $294,408 for the year ended April 30, 2005, respectively.
Organizational costs consist of establishing business procedures, filing to
do
business web site development and related activities. The year to year decrease
in organization costs is primarily attributed to the wind down of organizational
activity.
The
Company incurred compensation costs of $1,228,856 for the year ended April30,2006 compared with $828,298 in fiscal 2005. The increase is related to the
costs
of the Company increasing its employee base during the year from 8 employees
at
fiscal year end 2005 to 15 at fiscal year end 2006. Additionally, for the fiscal
year ended 2006 we incurred $93,436 in costs for temporary help versus $4,317
for fiscal year ended April 30, 2005. As the Company continues to expand, the
Company will incur additional costs for personnel. In order for the Company
to
attract and retain quality personnel, management anticipates it will continue
to
offer competitive salaries and issue common stock to consultants and
employees.
The
Company paid $337,221and $233,333 to its Chairman and Chief Executive Officer,
in fiscal 2006 and 2005, respectively. These payments were charged to
operations, and are included in the compensation costs shown above.
In
connection with placement transactions, the Company expensed non-cash costs
of
$406,665 for the year ended April 30, 2006 and $383,284 to issue warrants to
the
private placement agent for the year ended April 30, 2005 These amounts were
charged to financing costs. The Company has expensed non-cash costs of
$1,775,000 and $1,810,000 respectively for the fiscal years ended April 30,2006
and 2005. These charges were for the intrinsic value of the imbedded beneficial
conversion feature for the Preferred Stock holders. At April 30, 2006 and April30, 2005, accrued preferred dividends of $141,255 and $28,906 respectively
were
charged to retained earnings. Additionally, for the fiscal year ended April30,2006the Company charged $652,910 to financing costs representing the value
of
shares issued to settle debts and shares issuable for the Company’s failure to
timely file a registration statement in connection with a private placement.
.
The
Company incurred consulting costs of $2,552,304 for the year ended April 30,2006, as compared to $84,365 for the year ended April 30, 2005. Of the costs
incurred in fiscal 2006, $2,285,604 were non-cash charges representing the
market value of shares of the Company’s common stock issued to a private
placement agent and to consultants.
The
Company incurred legal and accounting fees of $335,938 for the year ended April30, 2006, as compared to $197,385 for the year ended April 30, 2005. The
increase in costs is related to legal and accounting expenses associated with
finalizing the private placement and complying with various federal and state
securities statutes, rules and regulations. The Company incurred other operating
expenses of $879,193 for the year ended April 30, 2006. Notable expenses in
this
category are rent of $142,584, depreciation and amortization of $112,904,
repairs, maintenance and equipment of $86,807, travel of $63,030, filing fees
of
$57,561, advertising of $36,594, loss reserve of 36,152, telephone of $33,023,
meals and entertainment of $29,084, utilities of $28,671, insurance of $23,067,
interest of $22,684, postage of $19,411, printing of $15,184 and other normal
operating costs totaling $172,437. In fiscal 2005, other operating costs totaled
$791,647. Notable expenses in this category are the cost of a purchase option
for a portfolio of equipment leases of $250,000, rent of $125,214, consulting
expenses of $84,365, travel of $79,547, advertising of $28,107,
telecommunications of $21,476 and depreciation of $22,626. The remainder is
comprised of expenses for postage, shipping, storage, repairs and other normal
operating costs
13
Net
Loss
Our
net
loss attributable to common shareholders for the year ended April 30, 2006
was
$7,872,772 in contrast to a loss attributable to common shareholders of
$4,418,727 for the year ended April 30, 2005. The increase in net loss
attributable to common shareholders was primarily due to increased compensation
costs associated with an almost 100% increase in the number of employees as
well
as temporary employees, the fact that the Company incurred expenses related
to
the private placement transaction, consisting of a non-cash expense of a
beneficial conversion discount of $1,775,000, non-cash expense of $2,285,604
for
shares issued to our placement agent and consultants and non-cash expense of
$406,665 for warrants issued to the placement agent in 2006 and to the fact
that
the Company has increased its resources and spending in 2006 as it completed
the
transition from a development stage to an operating entity.
Our
net
loss per common share (basic and diluted) attributable to common shareholders
was $0.08 for the year ended April 30, 2006 and $0.05 for the year ended April30, 2005.
As
of
January 31, 2007, we had a working capital deficit of $1,987,857. We generated
a
deficit in cash flow from operations of $2,530,412 for the nine months ended
January 31, 2007. This deficit is primarily attributable to our net loss from
operations of $2,989,931, an increase in lease receivables of $1,792,942 and
a
change in warrant liability of $299,663, partially offset by depreciation and
amortization of $250,303 and to changes in the balances of current assets and
liabilities. Accounts payable and accrued expenses increased by $684,645,
deferred revenue increased by $510,340, prepaid expenses decreased by $43,961
and loan proceeds receivable decreased by $389,998.
Cash
flows used in investing activities for the nine months ended January 31, 2007
was $862,324, primarily due to the purchase of property and equipment of $14,734
and payments for motorcycles and vehicles of $847,590.
We
met
our cash requirements during the nine month period through net proceeds for
equity of $125,000, proceeds of notes payable $800,259 and loans payable to
officers $157,260 and debt financing of $1,918,605, offset with payments of
$440,635. Additionally, we have received limited revenues from leasing and
financing motorcycles and other vehicles, our 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. There is no guarantee that we will be successful
in
raising the funds required.
We
estimate that we will need approximately $1,800,000 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. Although we obtained a senior
credit facility in July 2005, which allowed us to commence our initial active
operations, this facility does not allow us to finance individuals with lower
FICO scores nor does it provide financing for other markets we wish to enter.
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 our operating flexibility. 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, 2006 and 2005 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.
14
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:
·
seeking
additional credit lines from institutional lenders;
·
seeking
institutional investors for debt or equity investments in our company;
and
·
initiating negotiations to secure short term financing through promissory
notes
or other debt instruments on an as needed basis.
To
address these issues, we are negotiating the potential sale of securities with
investment banking companies to assist us in raising capital. 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 January 31, 2007, we have relied on the
services of outside consultants for services and currently have 21 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 salary base may increase by approximately
40%
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.
15
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
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 PRONOUNCEMENTS
In
May
2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No.
154,
"Accounting Changes and Error Corrections, a replacement of APB Opinion No.
20
and FASB Statement No. 3." SFAS 154 requires retrospective application to prior
periods' financial statements for changes in accounting principle, unless it
is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS 154 also requires that retrospective application
of a
change in accounting principle be limited to the direct effects of the change.
Indirect effects of a change in accounting principle, such as a change in
non-discretionary profit-sharing payments resulting from an accounting change,
should be recognized in the period of the accounting change. SFAS 154 also
requires that a change in depreciation, amortization, or depletion method for
long-lived, non-financial assets be accounted for as a change in accounting
estimate affected by a change in accounting principle. SFAS 154 is effective
for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes
and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The adoption of SFAS No. 154 did not have a material impact
on the Company's financial position and results of operations.
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.
In
March
2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of
Financial Assets - an amendment to FASB Statement No. 140. Statement 156
requires that an entity recognize a servicing asset or servicing liability
each
time it undertakes an obligation to service a financial asset by entering into
a
service contract under certain situations. The new standard is effective for
fiscal years beginning after September 15, 2006. The adoption of SFAS No. 156
did not have a material impact on the Company's financial position and results
of operations.
In
June
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of
FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold
and measurement attribute for financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return, and also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company does not expect that
the adoption of FIN 48 will have an impact on the Company’s financial position
and results of operations.
16
In
September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 was
issued in order to eliminate the diversity of practice in how public companies
quantify misstatements of financial statements, including misstatements that
were not material to prior years’ financial statements. We will initially apply
the provisions of SAB 108 in connection with the preparation of our annual
financial statements for the year ending April 30, 2007. We have evaluated
the
potential impact SAB 108 may have on our financial position and results of
operations and do not believe the impact of the application of this guidance
will be material.
In
September 2006, the FASB issued SFAS 157 `Fair Value Measurements'. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles ("GAAP"), and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this Statement does not require
any
new fair value measurements. However, for some entities, the application of
this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Adoption of SFAS 157 will not
have a significant impact on our results of operations or financial
condition.
In
September 2006, the FAS issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, which requires employers to
recognize the over-funded or under-funded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income
of a
business entity. The Company does not believe that the pronouncement will have
a
material affect on its financial statements as it does not participate in
defined benefit pension plans.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115,” which permits entities to measure many financial instruments
and certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility
in
reporting earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. This
Statement is expected to expand the use of fair value measurement, which is
consistent with the Board’s long-term measurement objectives for accounting for
financial instruments. This Statement is effective as of the beginning of the
Company’s first fiscal year that begins after November 15, 2007.
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
We
do not
maintain off-balance sheet arrangements nor do we participate in non-exchange
traded contracts requiring fair value accounting treatment.
17
BUSINESS
OUR
ORGANIZATION HISTORY
We
were
incorporated under the laws of the State of Nevada on May 13, 1980 under the
name Tomahawk Oil and Minerals, Inc. and engaged in oil and gas exploration
activities.
On
November 6, 1983, we changed our corporate name to Tomahawk Industries,
Inc.
In
1984,
Tomahawk entered the business of installing energy recovery and energy saving
devices.
In
July
1987, Tomahawk filed for protection under Chapter 11 of the U. S. Bankruptcy
Code and operated as a debtor-in-possession. The petition for bankruptcy
protection was denied. Tomahawk ceased all business operations, liquidated
its
former subsidiary and abandoned all net assets remaining by April 30, 1988.
Tomahawk effectively had no operations, assets or liabilities since its fiscal
year ended April 30, 1988 through February 27, 2004.
On
February 27, 2004, pursuant to an Agreement and Plan of Reorganization, we
acquired Sparta Commercial Services, LLC, in a transaction viewed as a reverse
acquisition. Under the terms of the agreement, we acquired all of the
outstanding membership interests in Sparta Commercial Services, LLC in exchange
for the agreement to issue such number of shares of our common stock as would
represent approximately 91.75% percent of our outstanding shares. Sparta
Commercial Services, LLC also entered into a consulting agreement for business
and financial services with Glenn A. Little, the former principal of Tomahawk.
The agreement was for a term of one year. Mr. Little received a fee of $100,000
pursuant to the consulting agreement.
As
a
result of the acquisition, a change in control occurred in the ownership and
management of Tomahawk. In connection with the acquisition, the managing member
of Sparta, Anthony Havens, was appointed President and Chairman of Tomahawk.
The
former directors and officers of Tomahawk resigned as of the acquisition
date.
On
August25, 2004, we changed our corporate name from "Tomahawk Industries, Inc." to
"Sparta Commercial Services, Inc."
On
September 13, 2004, we filed a Certificate of Amendment to the Articles of
Incorporation with the Secretary of State of the State of Nevada increasing
the
authorized capital from 200,000,000 to 700,000,000 shares, of which 690,000,000
shares are common stock, par value $0.001 and 10,000,000 shares are preferred
stock, par value $0.001.
Effective
December 27, 2004, pursuant to a Certificate of Amendment to the Articles of
Incorporation with the Secretary of State of the State of Nevada, our authorized
capital was reduced from 700,000,000 shares, of which 690,000,000 shares were
common stock and 10,000,000 shares are preferred stock, to 350,000,000 shares,
of which 340,000,000 shares are common stock and 10,000,000 shares are preferred
stock. In connection with the decrease in authorized capital, we effected a
1:200 reverse stock split, with fractional shares paid in cash, followed
immediately by a 25:1 forward stock split.
On
December 28, 2004, we filed a Certificate of Designation with the Secretary
of
State of the State of Nevada in connection with its 10,000,000 shares are
preferred stock, designating 35,850 shares as Series A Redeemable Preferred
Stock.
OUR
BUSINESS
We
seek
to become a specialized consumer finance company engaged primarily in the
origination of lease and retail installment sales contracts of new and used
motorcycles, scooters, and ATVs. We believe that the market for consumer finance
programs for motorcycles and ATVs is underserved by traditional
lenders.
We
are
developing relationships with vehicle dealers and manufacturers to provide
our
financing programs to their customers. We also seek to provide motorcycle,
scooter, and all-terrain vehicle manufacturers a private label version of our
financing programs for their customers.
BUSINESS
OVERVIEW
Sparta's
business model has been designed to generate revenue from several
sources:
Private
Label programs for manufacturers and
distributors;
·
Ancillary
products and services, such as private label gap coverage and private
label service contracts; and
·
Remarketing
of off-lease and repossessed
vehicles.
Sparta’s
management believes that by offering dealers (and their customers) the option
of
either financing or leasing, Sparta will be able to capture a greater share
of
the dealer’s business. Additionally, by offering both alternatives, once
profitability is achieved, Sparta believes that it will be in a position to
achieve greater cash-flow than it could by offering only the financing
alternative because depreciation generated by Sparta’s leasing activities will
reduce income tax due on income resulting from Sparta’s retail installment sales
contracts.
Retail
Installment Sales - Sparta intends to purchase retail installment sales
contracts from both franchised and independent powersports dealers who qualify
as Sparta Authorized Dealers and/or as Private Label Authorized Dealers under
Sparta's Private Label Programs. Sparta has developed policies and procedures
for credit evaluation, collections, insurance follow up, and asset recovery.
Sparta imposes strict credit criteria to determine which retail installment
sales contract applications to approve. This credit criterion has been developed
to be in compliance with the credit criterion required by our lenders. The
dealers understand that if they consummate a credit transaction with a buyer
on
whose application we have given them a conditional approval that Sparta will
purchase that contract if it is in full compliance with all terms and conditions
of that approval and contained in our dealer agreement.
To
insure
that Sparta's Credit Evaluation Process and Collateral Guidelines are
consistently applied and that the credit/underwriting decision process provides
rapid decisioning to Sparta Authorized Dealers and the Private Label Dealers,
Sparta has developed a point of sale credit application and contract decisioning
system. This system is named "iPLUS™"
and is
structured as an Application Service Provider ("ASP") and has the capability
of
providing the dealer with conditional approvals without human involvement seven
days a week, twenty-four hours a day. This technology provides quick, consistent
credit decisions for our dealer network and reduces the number of credit
analysts required, thereby, reducing Sparta's personnel expense. Depending
on
Sparta's arrangement with its lending sources, in the case of consumer finance
contracts, Sparta may finance its purchase of the contracts by borrowing from
a
lending source and pledging the retail finance contracts as collateral for
the
loan.
All
of
the installment sale contracts will be secured by qualified, titled motorcycles
with 600+cc and higher engines, 4-stroke all-terrain vehicles (ATVs), or select
scooters. Customer financing needs are projected to range from approximately
$2,000 to $35,000. Contract terms of 24 to 60 months will be
offered.
Leases
-
Sparta intends to purchase qualified vehicles for lease to customers of its
Sparta Authorized Dealers and/or Private Label Dealers. While the steps in
the
leasing process are almost identical to those in the installment sales contract
process, the major difference is that when a lease "approval" is transmitted
to
a dealer, the "approval" describes the terms and conditions under which Sparta
will purchase a specific vehicle from the dealer and lease it to the applicant.
Unlike an installment service contract which finances a customer's purchase
of a
vehicle owned by the customer, the lease contract contains the payment terms
and
conditions under which Sparta will allow the customer to use (lease) the
vehicle, which is owned by Sparta, and also contains a vehicle purchase price
option which provides the customer with the right to purchase the vehicle at
the
lease-end. Depending on Sparta's arrangement with its lending sources, in the
case of leases, Sparta may finance its purchase of leased vehicles by borrowing
from a lending source and assigning or pledging the lease and leased vehicle
as
collateral for the loan. Lease terms range from 24 to 60 months, although most
lease terms are either 36 or 60 months. Leases generally have lower monthly
payments than retail installment sales contracts because they finance only
part
of the vehicle with the balance being financed by the lessor.
In
July
2006, we announced an agreement for routing of motorcycle loan applications
with
a Fortune 500 global diversified financial provider. In October 2006, this
agreement was extended for a minimum of one year. Under the agreement the
company electronically transmits to Sparta loan applications which meet Sparta’s
lending/leasing criteria. Our iPLUS™
underwriting system will immediately approve or decline the application, and,
if
approved, notify the applicant through the internet within minutes. This
agreement will allow consumers to be pre-approved before they even start
shopping. We will pay that company a fee for each funded transaction. In January
2007, this application went “live” in 12 states with plans to roll out to 38
additional states over a mutually agreed schedule.
MUNICIPAL
LEASING OF POLICE MOTORCYCLES
In
February 2007, Sparta launched a new Municipal Leasing Program designed
expressly to meet the needs of law enforcement agencies throughout the U.S.
Sparta estimates that the annual municipal market for new law enforcement
motorcycles exceeds $200 million annually, based upon extensive discussions
that
the company conducted among Harley-Davidson, Honda, and BMW dealers, with those
brands being the most prominent in the municipal environment. Sparta believes
that most of these agencies have historically been purchasing these vehicles
with few, if any, financing alternatives, therefore, we developed a leasing
alternative for governmental organizations to acquire the motorcycles they
need,
and reduce their capital outlays at the same time.
PRIVATE
LABEL PROGRAMS FOR MANUFACTURERS AND DISTRIBUTORS
To
date,
we have entered into four "private label" 5-year financing agreements with
the
U.S. distributors of major manufacturers of scooters and ATVs. Under these
agreements, we allow the manufacturer to put its name on our finance and lease
products, and offer such financing facilities to its dealers for their
customers. We own the retail installment sales contracts and leases generated
under these "private label" programs, and derive revenues from sales of the
distributor's product line to the dealer's customers. The private label program
also expands our dealer base by the number of dealerships in the distributor's
chain, thereby generating additional opportunities to sell our own financial
services to these dealers for their customers interested in non-"private label"
vehicles. These agreements are with:
(1)
MALAGUTI USA - the North American Distributor for Malaguti SPA.
19
(2)
KYMCO
Motorsports - the exclusive importer and distributor of KYMCO brand scooters
for
the USA.
(3)
CMSI
(Classic Motorcycle and Sidecars, Inc.) - manufacturer and distributor of the
Flying Tiger Motorcycle and TN'G Scooters.
(4)
ETON
America, LLC. - the U.S. subsidiary of ETON Worldwide.
These
four distributors have over 1,200 dealers who, in addition to becoming our
Private Label dealers, can sign up to become our Authorized Dealers, which
will
enable them to use us as a source for financing their non-private label
vehicles.
In
May
2007, Sparta announced the launch of a consumer leasing program for Moto Guzzi
and Aprilia, the two motorcycle brands distributed by Piaggio Group Americas,
Inc. The program will enable all Moto Guzzi and Aprilia dealers to offer
Sparta's Flex Lease product to their customers as alternatives to traditional
installment loan financing. Piaggio Group's US dealer network currently numbers
approximately 400, including retailers of Vespa and Piaggio, the two well known
brands of scooters also distributed by the Piaggio Group. Among those dealers,
more than 180 carry the Moto Guzzi and/or Aprilia brands. Piaggio Group
Americas, Inc. is a subsidiary of Piaggio & C. S.p.A., based in Pontedera,
Italy.
REVENUE
FROM ANCILLARY PRODUCTS AND SERVICES
We
expect
to receive additional revenue related to servicing our portfolio, such as lease
acquisition fees, late payment fees, vehicle disposition fees at lease-end,
early termination fees, charges for excess wear-and-tear on leased vehicles,
and
from ancillary products and services.
We
are
being positioned as a full service organization providing products and services
to our dealers that are costly to obtain on an individual dealer basis. Also,
we
offer a private label GAP (Guaranteed Auto Protection) plan for our
dealers:
GAP
COVERAGE - Sparta markets its private label gap coverage on a fee basis to
customers through dealers. This coverage protects the customer should the
vehicle be stolen or wrecked and the holder's primary insurance is not adequate
to cover their payoff to the creditor that holds the lien on the
vehicle.
Sparta
intends to continue to evaluate additional ancillary products and services
and
believes that it can create products and services to meet dealers' needs,
creating company brand loyalty in the dealer community and generating other
revenue streams.
REVENUE
FROM REMARKETING OFF-LEASE AND REPOSSESSED VEHICLES
RE-LEASING
TO ORIGINAL LESSEES - Management intends to commence its re-leasing efforts
as
early as eleven months prior to the end of the scheduled lease term. Lessees'
options are expected to include: extending the lease, returning the vehicle
to
Sparta or buying the vehicle at the buy-out option price established at the
beginning of the lease. Sparta's policy requires lessees who wish to return
their vehicles, return the vehicle to the originating dealer. If the lessee
has
moved, then the vehicle should be returned to the Sparta Authorized Dealer
closest to the lessee. If this is impracticable, then Sparta will arrange to
have the vehicle transported at the lessee's expense
RETURNED
LEASE VEHICLES - When a vehicle is returned to a Sparta Authorized Dealer at
the
end of the scheduled lease term, the dealer will inspect it for excessive wear
and mileage over maximum levels specified under the lease agreement and prepare
it for resale/lease. All Sparta Authorized Dealers and all Sparta Private Label
Dealers are contractually bound to charge no more than cost plus ten-percent
for
repairs and to provide free storage for all consignment vehicles. Thereafter,
Sparta plans to consign the vehicle to the originating dealer for sale or
re-lease to a new party. Should the dealer decline to take the vehicle on
consignment, it will be electronically marketed on the Classified Pages of
the
Sparta web site. Sparta believes the market for used vehicles is significant,
and the opportunity to remarket the same vehicle numerous times is a key selling
point with prospective dealerships. Sparta believes that using its dealer
network in such a manner will result in a better overall economic return on
its
portfolio as well as strengthen dealer relationships.
REPOSSESSED
VEHICLES - All repossessed vehicles are similarly returned to the originating
Sparta Authorized Dealer to be reconditioned (if needed) for consignment sale
or
re-lease in the same manner and conditions as returned vehicles.
SECOND
CHANCE EXPRESS - Sparta allows its Authorized Dealers to offer its inventory
of
returned or repossessed vehicles not only to customers with approved credit
applications but, also to customers with less than prime credit. Applicants
with
low credit scores are evaluated under Sparta's Second Chance Express Program.
This unique finance/lease product is designed to offer a financing program
tailored to this non-prime customer. The program allows Sparta to serve those
customers who can offset their credit risk with higher down payments. A key
benefit of this program to Sparta is that the minimum down-payment requirement
is 20% in order to bring the amount financed in line with the current wholesale
value of the vehicle. Under the Second Chance Express Program, Sparta pays
its
dealers a commission on any Sparta inventory vehicle, held on consignment on
their "floor" or offered on the Sparta Classified Web Page, for which they
arrange a sale or finance.
CREDIT
AND COLLECTIONS
POLICIES
AND PROCEDURES
Based
on
management's experience in vehicle financing and leasing, we have developed
policies and procedures for credit evaluation, collections, insurance follow
up,
and asset recovery. We impose strict credit and demographic criteria to
determine which retail installment sales contract and lease applications are
approved.
20
CREDIT
EVALUATION PROCESS AND COLLATERAL GUIDELINES
To
insure
that Sparta's Credit Evaluation Process and Collateral Guidelines are
consistently applied and that the credit/underwriting decision process provides
rapid decisioning to Sparta Authorized Dealers and the Private Label Dealers,
Sparta has worked closely with a leading provider of interactive credit
accessing and decisioning solutions, to develop the iPLUS
point of
sale credit application and contract decisioning system.
Sparta's
retail installment sales contract and leasing programs are delivered through
a
proprietary, web-based, credit application processing system. This system is
named
iPLUS
and is
structured as an Application Service Provider ("ASP") and has the capability
of
providing the dealer with conditional approvals without human involvement seven
days a week, twenty-four hours a day. This system also provides the powersports
dealer with system capabilities comparable to those of new car franchises.
Sparta believes
iPLUS will
provide the Sparta Authorized Dealers and Private Label Dealers with a
competitive advantage and will increase Sparta's ability to garner a larger
share of the dealer's business.
Complete
underwriting documentation and control
system
·
Dealer
communication
·
Allows
the dealer to track the entire decisioning, underwriting, and funding
process in real time
Additionally,
this technology provides quick, consistent credit decisions for our dealer
network and reduces the number of credit analysts required, thereby, reducing
Sparta's personnel expense.
Sparta
has established program guidelines that are an integral function of the
iPLUS
decision
process. These program guidelines establish and clarify credit criteria such
as
credit tiers, maximum amount financed, term and rate, dealer rate participation,
deal structure, buyer profile, credit bureau parameters, budget parameters,
and
eligible collateral, including maximum loan-to-value ratios for each of its
retail installment sales contracts and lease contracts, depending on the
applicant's credit rating and stability. Sparta has developed its own credit
tier system by using an empirical score card and then assigning its own credit
tiers based on Sparta's experience. This credit tier is used as the basis to
determine the terms and conditions under which an applicant is approved or
declined.
Sparta
plans to conduct both applicant credit risk and asset evaluation before
approving financing. Sparta's policy is that it will not finance more than
100%
of a vehicle's retail value, but Sparta may lend an additional 10% above retail
value to cover add-ons, extended warranty and other costs. Should the customer
seek financing above this threshold, Sparta intends to ask for a down payment
from the borrower or lessee to close the gap between selling price and retail
value. The size of the down payment will be a function of the applicant's credit
rating, stability, budget, and the value of the underlying asset.
COLLECTION
PROCEDURES
Approving
retail installment sales contracts and leases that comply with the policies
and
procedures established by Sparta is just the first step. A principal factor
in
the success of Sparta's business model is its ability to track contract and
lease performance.
A
third
party provides the software Sparta uses to manage its assets, customer base,
collections, insurance, and accounting systems. Using a variety of basic and
customized reports generated by this software, Sparta monitors its customers'
compliance with their obligations under retail installment sales contracts
or
lease contracts. These reports are accessed on a real-time basis by employees
of
Sparta and are distributed to management personnel for review. The reports
include delinquency reports, collection tickler (promises) reports, insurance
status reports, termination reports, inventory reports, maturing contract
reports, etc.
21
Sparta
requires continuous physical damage insurance on all financed vehicles and
continuous liability and physical damage insurance coverage on all leased
vehicles. In addition, Sparta is required to be listed as Additional Named
Insured and Loss Payee. Continuous insurance is critical, and Sparta intends
to
quickly repossess a vehicle if coverage lapses. Lapsed or cancelled policies
will be covered by a "blanket" VSI insurance policy, which Sparta intends to
purchase. Any lapse in insurance coverage for any reason will lead to automatic
repossession of leased vehicles.
USING
DIVERSIFICATION TO REDUCE PORTFOLIO RISK
Management
will reduce portfolio risk not only by carefully screening applicants and
monitoring covenant compliance, but also by diversifying its financing
activities across credit tiers and Sparta's list of motorcycle, ATV and scooter
models that it will finance or lease.
CREDIT
TIERS - Sparta expects that it will maintain a portfolio dominated by A/B credit
applicants over C applicants in the ratio of at least 70/30. Management
anticipates that it will be able to rebalance its portfolio by training its
sales force to work closely with dealerships in their territories to help Sparta
maintain its conservative 70/30 target.
Sparta
will also be able to manage this ratio by revising the variables in its various
programs (terms and conditions under which Sparta will lease vehicles or
purchase retail installment contracts), such as minimum income, debt ratios,
payment to income ratios, minimum down payment required, acquisition fees (paid
by dealer), discounts (paid by dealer), etc.
SPARTA
APPROVED VEHICLE MODELS - Advance rates and other credit restrictions will
be in
effect for certain models and years based on the relevant facts and
circumstances.
MARKET
INFORMATION
As
reported in the 2006 Annual Statistical Report of the Motorcycle Industry
Council, retail sales of new motorcycles have grown steadily from 1991 through
2006. North American registrations of new 651cc and higher motorcycles reached
543,000 in 2006. This represents a 5% increase over 2004. Registrations have
increased for 15 consecutive years. Retail sales of new and used motorcycles
reached $10.7 billion in 2004.
U.S.
sales of new ATVs were estimated to be 747,581 units in 2006, a 4.2% decline
from 2005 as reported in Powersports Business Magazine in the February 12,2007
issue.
U.S.
scooter unit sales were approxinately115,000 in 2006 up significantly from
50,000 in 2001.
SALES
AND MARKETING
Normally,
vehicle finance programs are sold primarily at the dealer level, rather than
the
consumer level. Our strategy is to utilize an in-house direct sales force that
promotes our products and services to qualified dealers, train them, and provide
them with point-of-sale marketing materials. Our vehicle financing programs
are
already gaining market acceptance as evidenced by the four Private Label
Contracts. This in-house direct sales force is comprised of a Marketing Group
and a Dealer Support Group.
The
Marketing Group continues to work directly with the manufacturers and
distributors to obtain additional Private Label affiliations and to monitor
our
competition. The Private Label partners will assist us directly in training
the
Private Label Dealers. This is done at the manufacturers/distributors place
of
business, at industry shows, or with a group of dealers in a common geographic
area.
The
Dealer Support Group accepts dealer application packages from dealers that
want
to be either or both our Authorized Dealers or Private Label Dealers. They
then
notify the approved dealers that they have been approved and provide them with
the required information to process applications and print contracts through
iPLUS,
including a Dealer Sign Up packet. The Dealer Support Group is available to
directly assist dealers by telephone and follow up with dealers on conditional
approvals to assist dealers in forwarding the funding packages to us for
purchase. This group will also accept all incoming calls from dealers, answering
their inquiries or directing them, if necessary, to the appropriate
department.
Authorized
dealers are able to advertise both new and used vehicles in the Classified
Section of our website, at no cost to the dealer. We plan to use this feature
of
the website to re-market our own inventory (both repossessed and returned
end-of-term vehicles) throughout the country. Our exclusive "Second-Chance
Express" program for customers with a poor or limited credit history was created
to help re-market our inventory. Incentives are in place for authorized dealers
who sell or lease either our inventory vehicle at their dealership or one that
is at another dealership in our network.
While
we
do not market or sell directly to consumers, we expect consumers to visit our
website. We have provided a consumer oriented PowerPoint presentation for their
review.
Additionally,
visiting consumers will be able to view our advertising, news, and find general
information about vehicle makes and models, road rallies, and other areas of
powersports interest. They will also be able to utilize our Dealer Locator
to
find our nearest Authorized dealer or Private Label Dealer in their area.
Consumers will be able to view the Classified Section of the website and any
consumer inquiring about the program will be directed to their nearest
authorized dealer.
22
COMPETITION
The
consumer finance industry is highly fragmented and highly competitive. Broadly
speaking, Sparta competes with commercial banks, savings & loans, industrial
thrift and credit unions, and a variety of local, regional and national consumer
finance companies. While there are numerous financial service companies that
provide consumer credit in the automobile markets, including banks, other
consumer finance companies, and finance companies owned by automobile
manufacturers and retailers, most financial service companies are reluctant
to
lend to motorcyclists. Customers who approach these lending sources to take
out
installment loans are often encouraged to pursue personal loans
instead.
There
are
few companies that provide nationwide dealer-based leasing options in the
motorcycle industry segment, and these tend to be private label factory programs
supporting their own brands. Because of their narrow focus (such as requiring
that the equipment be covered by the brand's warranty), these companies have
met
with limited success.
Independent
consumer financial services companies and large commercial banks that
participated in this market have withdrawn substantially from the motorcycle
loan niche over the past two years or have toughened their underwriting
criteria. Sparta believes that those companies may have suffered as a result
of
compromising their underwriting criteria for the sake of volume. In addition,
management believes that our competitors' practice of financing all makes and
models of a particular manufacturer results in lower overall portfolio
performance because of the poor demographics associated with some of those
product lines. The marketplace also includes small competitors such as local
credit unions, local banks and a few regional players.
Sparta
will compete for customers with commercial banks, savings and loans, credit
unions, consumer financing companies, and manufacturers' finance subsidiaries.
Additionally, some powersports manufacturers such as Harley-Davidson and BMW
have subsidiaries that provide financing.
The
more
significant competitors of Sparta include: GE Retail Services, Capital One,
HSBC/Household Bank, and Sheffield Financial/BB&T To management's knowledge,
none of these firms offer leases for powersports vehicles.
The
largest of these firms, GE Retail Services, markets both directly to dealers
in
Powersports market and through co-branded private label programs. GE recently
has co-branded with Yamaha, Moto Guzzi, Aprillia Brands and other national
manufacturers and distributors of Powersports and recreational products such
as
Coachmen Industries. GE also offers dealer and distributor floor plan financing
and private label credit cards.
Capital
One markets a product for Capital One Bank, offering consumer direct and dealer
indirect consumer contracts to the powersports industry. They offer smaller
dealers the ability to have customers apply via the web site affiliate program
and larger dealers can go direct to Capital One finance. Capital One recently
announced the purchase of Onyx Finance and truly entered the vehicle financing
arena with the purchase of Peoples First Finance. Typical terms range from
30 to
60 months with a minimum of individuals approved for a product named "The Blank
Check". Capital One Auto Finance, America's largest online vehicle lender,
provides vehicle loans to customers directly via the Internet, as well as
through a nationwide dealership network.
While
some of Sparta's larger competitors have vast sources of capital and may be
able
to offer lower interest rates due to lower borrowing costs, Sparta believes
that
the combination of management's experience, expedient service, availability
of
the lease option and
iPLUS
give
Sparta an advantage over its competitors.
REGULATION
Our
planned financing operations are subject to regulation, supervision and
licensing under various federal, state and local statutes and ordinances.
Additionally, the procedures that we must follow in connection with the
repossession of vehicles securing contracts are regulated by each of the states
in which we plan to do business. Accordingly, the laws of such states, as well
as applicable federal law, govern our operations. Compliance with existing
laws
and regulations has not had a material adverse affect on our operations to
date.
Our management believes that we maintain all requisite licenses and permits
and
are in material compliance with all applicable local, state and federal laws
and
regulations. We will periodically review our office practices in an effort
to
ensure such compliance.
The
following constitute certain of the federal, state and local statutes and
ordinances with which we must comply:
·
Fair
Debt Collection Act. The Fair Debt Collection Act and applicable state
law
counterparts prohibit us from contacting customers during certain times
and at
certain places, from using certain threatening practices and from making
false
implications when attempting to collect a debt.
·
Truth in
Lending Act. The Truth in Lending Act requires us and the dealers we do
business
with to make certain disclosures to customers, including the terms of repayment,
the total finance charge and the annual percentage rate charged on each
Contract
or direct loan.
23
·
Consumer
Leasing Act. The Consumer Leasing Act applies to any lease of consumer goods
for
more than four months. The law requires the seller to disclose information
such
as the amount of initial payment, number of monthly payments, total amount
for
fees, penalties for default, and other information before a lease is
signed.
·
The
Consumer Credit Protection Act of 1968. The Act required creditors to state
the
cost of borrowing in a common language so that the consumer could figure
out
what the charges are, compare costs, and shop for the best credit
deal.
·
Equal
Credit Opportunity Act. The Equal Credit Opportunity Act prohibits creditors
from discriminating against loan applicants on the basis of race, color,
sex,
age or marital status. Pursuant to Regulation B promulgated under the Equal
Credit Opportunity Act, creditors are required to make certain disclosures
regarding consumer rights and advise consumers whose credit applications
are not
approved of the reasons for the rejection.
·
Fair
Credit Reporting Act. The Fair Credit Reporting Act requires us to provide
certain information to consumers whose credit applications are not approved
on
the basis of a report obtained from a consumer reporting agency.
·
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act requires us to maintain
privacy with respect to certain consumer data in our possession and to
periodically communicate with consumers on privacy matters.
·
Soldiers' and Sailors' Civil Relief Act. The Soldiers' and Sailor's Civil
Relief
Act requires us to reduce the interest rate charged on each loan to customers
who have subsequently joined, enlisted, been inducted or called to active
military duty.
·
Electronic Funds Transfer Act. The Electronic Funds Transfer Act prohibits
us
from requiring our customers to repay a loan or other credit by electronic
funds
transfer ("EFT"), except in limited situations that do not apply to us. We
are
also required to provide certain documentation to our customers when an EFT
is
initiated and to provide certain notifications to our customers with regard
to
preauthorized payments.
·
Telephone Consumer Protection Act. The Telephone Consumer Protection Act
prohibits telephone solicitation calls to a customer’s home before 8 a.m. or
after 9 p.m. In addition, if we make a telephone solicitation call to a
customer's home, the representative making the call must provide his or her
name, our name, and a telephone number or address at which our representative
may be contacted. The Telephone Consumer Protection Act also requires that
we
maintain a record of any requests by customers not to receive future telephone
solicitations, which must be maintained for five years.
·
Bankruptcy. Federal bankruptcy and related state laws may interfere with or
affect our ability to recover collateral or enforce a deficiency
judgment
None
of
our employees are covered by a collective bargaining agreement. We have never
experienced a work stoppage and we believe that we have satisfactory working
relations with our employees.
FACILITIES
Our
executive offices are located at 462 Seventh Avenue, 20th Floor, New York,
NY10018. We have an agreement for use of office space at this location under
a
lease expiring on November 30, 2007. The office space contains approximately
7,000 square feet. The annual rate is $167,280 (annualized) for the first six
months of calendar year 2006, $174,080 (annualized) for the second six months
of
calendar year 2006, and $178,432 for the calendar year 2007.
We
believe that our existing facilities will be adequate to meet our needs for
the
foreseeable future. Should we need additional space, management believes it
will
be able to secure additional space at commercially reasonable rates.
LEGAL
PROCEEDINGS
From
time
to time, we may become involved in various lawsuits and legal proceedings,
which
arise in the ordinary course of business. We are not currently aware of any
such
legal proceedings or claims.
24
MANAGEMENT
DIRECTORS
AND EXECUTIVE OFFICERS
Our
executive officers and directors and their respective ages and positions as
of
May 12, 2006 are as follows:
Name
Age
Position
Anthony
L. Havens
52
Chief
Executive Officer, President, Acting Chief Financial Officer and
Chairman
Kristian
Srb
51
Director
Jeffrey
Bean
52
Director
Anthony
W. Adler
67
Executive
Vice President
Richard
P. Trotter
63
Chief
Operating Officer
Sandra
L. Ahman
42
Vice
President, Secretary and Director
ANTHONY
L. HAVENS, CHIEF EXECUTIVE OFFICER, PRESIDENT, ACTING CHIEF FINANCIAL OFFICER
AND CHAIRMAN. On February 27, 2004, Mr. Havens became our Chief Executive
Officer, President and Chairman of the Board. Mr. Havens has been the Managing
Member and Chief Executive Officer of Sparta Commercial Services, LLC since
its
inception in 2001 and the acting Chief Financial Officer since July 2005. He
is
involved in all aspects of Sparta's operations, including providing strategic
direction, and developing sales and marketing strategies. From 1994 to 2004,
Mr.
Havens has been Chief Executive Officer and a director of American Motorcycle
Leasing Corp. He co-founded American Motorcycle Leasing Corp. in 1994, and
developed its operating platform and leasing program to include a portfolio
which includes both prime and sub-prime customers. Mr. Havens has over 20 years
of experience in finance and investment banking.
KRISTIAN
SRB, DIRECTOR. Mr. Srb joined our board of directors in December 2004. Mr.
Srb
has been a director of American Motorcycle Leasing Corp. from 1994 to the
present. Mr. Srb was President of American Motorcycle Leasing Corp. from 1994
to
1999. Since 1999, Mr. Srb has engaged in private investment activities. He
has
over 16 years experience in international brand development and management,
including for 13 years with Escada A.G.
JEFFREY
BEAN, DIRECTOR. Mr. Bean joined our Board of Directors in December 2004. Mr.
Bean is the founding partner of GoMotorcycle.com. Formed in January 1999,
GoMotorcycle.com is currently engaged in the sale of motorcycle parts and
accessories over the Internet. Prior to founding GoMotorcycle.com, Mr. Bean
was
an institutional broker and trader at Refco, Inc. from 1985 to 1997. From 1977
to 1985, Mr. Bean was President of Thomaston Press, Ltd., a sales printing
concern. He received a B.A. degree from the University of Virginia.
ANTHONY
W. ADLER, Executive Vice President and interim Chief Financial
Officer.From
March 2004 to August 2006 Mr. Adler was a full time consultant to the Company.
From 1995 to March 2004, he was Chief Financial Officer of American Motorcycle
Leasing Corp. From 1993 to 1994 Mr. Adler was Chief Executive Officer of
Innotek, Inc., a public company engaged in the development and distribution
of
skin-care products. Prior to 1993, Mr. Adler served in numerous executive
capacities including Director of Research and Vice President, Corporate Finance
for two New York Stock Exchange Member Firms. Mr. Adler holds an MBA from New
York University and a BA from Columbia College.
RICHARD
P. TROTTER, CHIEF OPERATING OFFICER. Mr. Trotter has been our Chief Operating
Officer since November 2004. From 2001 to 2004, Mr. Trotter was President,
Chief
Credit Officer, of American Finance Company, Inc., purchasing retail automobile
installment contracts from independent automobile dealers nationwide. From
1996
to 2001, he was Senior Vice President of Originations for Consumer Portfolio
Services, Inc., one of the nation's leading purchasers of non-prime retail
automobile installment contracts. From 1994 to 1996, he was Senior Vice
President of Marketing for Consumer Portfolio Services, Inc. His experience
also
includes positions as Chief Operating Officer, Executive Director and President,
and Chief Credit Officer for banks and financial institutions in California.
Mr.
Trotter has over 30 years experience in financial institutions and over 20
years
experience specializing in the automobile lending, servicing, and collecting
industry.
SANDRA
L.
AHMAN, VICE PRESIDENT, SECRETARY AND DIRECTOR. On March 1, 2004, Sandra Ahman
became Vice President of Operations and Secretary of Sparta, and a Director
on
June 1, 2004. She has been a Vice President of Sparta Commercial Services,
LLC
since formation. From 1994 to 2004, she was Vice President of Operations of
American Motorcycle Leasing Corp. Prior to joining American Motorcycle Leasing
Corp., Ms. Ahman was with Chatham Capital Partners, Ltd. Before joining Chatham
in 1993, she was Manager, Human Resources for Comart and Aniforms, a sales
promotion and marketing agency in New York, where she worked from 1986 to 1993.
For the past 10 years, Ms. Ahman has been an active volunteer with The
Children's Aid Society in New York City. She is the Chairperson of its
Associates Council, a membership of 500 committed volunteers.
There
are
no family relationships between any of our directors or executive
officers.
25
Board
Committees
Our
Board
does not maintain a separate audit, nominating or compensation committee.
Functions customarily performed by such committees are performed by our Board
as
a whole. We are not required to maintain such committees under the applicable
rules of the Over-the-Counter Bulletin Board. None of our independent directors
qualify as an "audit committee financial expert."
The
Board
of Directors has not adopted a specific process with respect to security holder
communications, but security holders wishing to communicate with the Board
of
Directors may do so by mailing such communications to the Board of Directors
at
our offices.
Code
of Ethics
We
have
not yet adopted a "code of ethics", as defined by the SEC, that applies to
our
Chief Executive Officer, Chief Financial Officer, principal accounting officer
or controller and persons performing similar functions. We are in the process
of
drafting and adopting a Code of Ethics.
Director
Compensation
Directors
are reimbursed for reasonable out-of-pocket expenses incurred in connection
with
attendance at Board meetings.
26
EXECUTIVE
COMPENSATION
The
following table sets forth the annual and long-term compensation paid to our
Chief Executive Officer and the other executive officers. We refer to all of
these officers collectively as our "named executive officers."
Summary
Compensation Table
Prior
to
February 27, 2004, management spent less than five hours per month on company
matters. Accordingly, no officer or director received any compensation other
than reimbursement for out-of-pocket expenses incurred on our behalf, and no
cash compensation, deferred compensation, employee stock options, or long-term
incentive plan awards were issued or granted to our management through February27, 2004.
Annual
Compensation
Long
Term Compensation Awards
Name
and Principal Position
Year
Salary
Bonus
Other
Annual Compensation
Restricted
Stock Awards
Securities
Underlying Options/SARS
All
Other Compensation
Anthony
L.
2006
$
280,000
$
57,221
Havens
(1)
2005
$
233,333
$
0
$
0
0
0
$
0
Chief
Executive Officer, President, and Director
2004
$
46,667
$
0
$
0
0
0
$
0
Anthony
W.
2006
$
77,083.30
$
85,463.00
4,000,000
(10)
Adler
(9)
2005
$
107,279.36
Executive
Vice President Interim Chief Financial Officer
(3)
Refers to restricted stock, subject to vesting, granted. Pursuant to an
employment agreement, Mr. Trotter is entitled to up to 125,000 shares of common
stock. The grant of shares is subject to vesting and subject to continued
employment. On November 1, 2004, 25,000 shares vested. An additional 100,000
shares are subject to vesting at a future date, subject to proportionate
adjustment in the event of employment termination for any incomplete vesting
period, as follows: 25,000 shares on November 1, 2005; 25,000 shares on November1, 2006; 25,000 shares on November 1, 2007; 12,500 shares on November 1, 2008;
and 12,500 on November 1, 2009.
(4)
Refers to stock options, subject to vesting, granted. Pursuant to option
agreement dated April 29, 2005, Mr. Trotter is entitled to up to 875,000 stock
options, subject to vesting. The stock options are exercisable for five years
from the vesting date at $0.605 per share. On April 29, 2005, stock options
to
purchase 175,000 shares vested, and the remaining options are to vest in equal
installments over the next four anniversary date of the agreement.
(5)
Mr.
Mele became an officer on April 29, 2005. His reported fiscal year 2005
compensation covers the period from April 29, 2005. Mr. Mele resigned as our
Chief Financial Officer on July 29, 2005.
(7)
Refers to shares vested. Pursuant to an employment agreement, Mr. Lanjewar
was
entitled to up to 568,175 shares of common stock. The grant of shares was
subject to vesting and subject to continued employment. On January 1, 2005,
113,635 shares vested, and the reminder of the shares were to vest in equal
portions on July 1, 2005, July 1, 2006, July 1, 2007, and July 1, 2008, subject
to proportionate adjustment in the event of employment termination for any
incomplete vesting period. In April 2005, Mr. Lanjewar resigned as our Chief
Financial Officer, and was vested with an additional 113,637 shares of common
stock.
(10)
Refers to stock options, subject to vesting. Pursuant to an option agreement
dated September 22, 2006, Mr. Adler is entitled to up to 4,000,000 options
subject to vesting. The options are exercisable for a period of five years
from
the vesting date at $0.1914 per share. On September 22, 2006 stock options
to
purchase 800,000 shares vested, with 800,000 options to vest on September 22,2007 and 1,200,000 options each to vest on September 22, 2008 and September22,2009.
OPTION/SAR
GRANTS IN LAST FISCAL YEAR
INDIVIDUAL
GRANTS
Number
of
Securities
%
of Total Options/SARs
Underlying
Options/SARs
Granted
to
Employees
in
Exercise
or
base price
Expiration
Name
Granted(#)
Fiscal
Year
($/Sh)
Date
Richard
P. Trotter
875,000
(a)
100
%
$
0.605
4-29-10
(b)
(a)
Refers to stock options, subject to vesting, granted. Pursuant to option
agreement dated April 29, 2005, Mr. Trotter is entitled to up to 875,000 stock
options, subject to vesting. The stock options are exercisable for five years
from the vesting date at $0.605 per share. On April 29, 2005, stock options
to
purchase 175,000 shares vested, and the remaining options are to vest in equal
installments over the next four anniversary date of the agreement.
(b)
Refers to expiration date of vested options.
AGGREGATED
OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND
FY-END OPTION/SAR VALUES
Shares
Acquired on Exercise
Value
Realized
Number
of securities underlying unexercised Options/SARs at
FY-end
(#)
Value
of unexercised in-the-money options/SARs at FY-end ($)(a)
Name
(#)
($)
Exercisable
Unexercisable
Exercisable
Unexercisable
Richard
P. Trotter
—
—
175,000
700,000
$
0
$
0
(a)
The
dollar values were calculated by determining the difference between the fair
market value at fiscal year-end of the common stock underlying the options
and
the exercise price of the options. The last sale price of a share of Sparta's
common stock on April 30, 2007as reported by the OTC Bulletin Board was
$0.09.
Employment
Agreement with Executive Officers
We
have
an employment agreement with Anthony L. Havens, Anthony W. Adler and Richard
P.
Trotter. The remaining officers serve at the discretion of our board of
directors and hold office until their successor is elected and qualified or
until their earlier resignation or removal.
Employment
Agreement with CEO
We
entered into an employment agreement, dated as of February 27, 2004, with
Anthony L. Havens who serves as our Chief Executive Officer. The employment
is
for a term of five years. The employment term is to be automatically extended
for one five-year period, and additional one-year periods, unless written notice
is given three months prior to the expiration of any such term that the term
will not be extended. His base salary is at an annual rate of $280,000. He
is
entitled to defer a portion of his base salary each year. He is entitled to
annual increases in his base salary and other compensation as may be determined
by the Board of Directors. He is entitled to a $1,000,000 term insurance policy.
He is entitled to six weeks of paid vacation per year, and health insurance,
short term and long term disability insurance, retirement benefits, fringe
benefits, and other employee benefits on the same basis as is generally made
available to other senior executives. He is entitled to reimbursement of
reasonable business expenses incurred by him in accordance with company
policies. If terminated, he is entitled to three months of severance for up
to
six months of service for each year of employment, plus full participation
in
all standard employee benefits during the period of severance payments. The
employment agreement provides for termination for cause. If he resigns for
good
reason or is terminated without cause within twelve months after a change in
control, he is entitled to receive an additional lump sum payment equal to
the
greater of the severance payment or the balance of his base salary for the
remaining employment term, continued coverage under any welfare benefits plans
for two years, and full vesting of any account balance under a 401(k) plan.
For
purposes of the employment agreement, a change in control refers
to:
·
a
change in voting power, due to a person becoming the beneficial owner of 50%
or
more of the voting power of our securities and our largest
shareholder;
28
·
during
any period of two consecutive years, individuals who at the beginning of
such
period constitute the Board of Directors, including later approved directors,
ceasing to consisted a majority of the Board of Directors;
·
a merger
or consolidation of our company with a third party, after which our shareholders
do not own more than 50% of the voting power; or
·
a sale
of all or substantially all of our assets to a third party.
If
we
elect not to renew the employment agreement, he shall be entitled to receive
severance equal to thirty months of his base salary plus standard employment
benefits. If we fail to fully perform all or any portion of our post-termination
obligations, we are be obligated to pay to him an amount equal to five times
the
value of the unperformed obligation.
Employment
Agreement with EVP
We
entered into an employment agreement, effective September 22, 2006, with Anthony
W. Adler, to serve as our Executive Vice President and interim Chief Financial
Officer. The term of employment is three years. The employment term may be
extended for one year upon written agreement by the Company and Mr. Adler,
His
initial base salary is at an annual rate of $185,000. He is entitled to annual
increases in his base salary and other compensation as may be determined by
the
Board of Directors. He is entitled to a grant of options for 4,000,000 shares
of
our common stock. The grant of options is subject to vesting and subject to
continued employment. On September 22, 2006, options for 800,000 shares vested,
on September 22, 2007 options for an additional 800,000 shares will vest and
on
September 22, 2009 and 2010 respectively options for an additional 1,200,000
shares will vest. subject to proportionate adjustment in the event of employment
termination for any incomplete vesting period, He is entitled to four weeks
of
paid vacation during the first year of employment, and five weeks per year
thereafter. He is entitled to health insurance, short term and long term
disability insurance, retirement benefits, fringe benefits, and other employee
benefits on the same basis as is made generally available to other employees.
He
is entitled to reimbursement of reasonable business expenses incurred by him
in
accordance with company policies. The employment agreement provides for
termination for cause. If terminated without cause, he is entitled to severance.
As severance, he shall be receive his full base salary through the end of the
then current employment term.
Employment
Agreement with COO
We
entered into an employment agreement, effective November 1, 2004, with Richard
P. Trotter, to serve as our Chief Operating Officer. The term of employment
is
one year. The employment term is to be automatically extended for one two-year
period, and an additional two-year period, unless written notice is given three
months prior to the expiration of any such term that the term will not be
extended. His initial base salary is at an annual rate of $160,000. On May1,2005, his base salary increases to $200,000. He is entitled to annual increases
in his base salary and other compensation as may be determined by the Board
of
Directors. He is entitled to a grant of 1,000,000 shares of our common stock.
The grant of shares is subject to vesting and subject to continued employment.
On November 1, 2004, 25,000 shares vested and on November 1, 2005, an additional
25,000 shares vested. An additional 75,000 shares are subject to vesting at
a
future date, subject to proportionate adjustment in the event of employment
termination for any incomplete vesting period, as follows: 25,000 shares on
November 1, 2006; 25,000 shares on November 1, 2007; 12,500 shares on November1, 2008; and 12,500 on November 1, 2009. He is entitled to three weeks of paid
vacation during the first year of employment, and four weeks per year
thereafter. He is entitled to health insurance, short term and long term
disability insurance, retirement benefits, fringe benefits, and other employee
benefits on the same basis as is made generally available to other employees.
He
is entitled to reimbursement of reasonable business expenses incurred by him
in
accordance with company policies. The employment agreement provides for
termination for cause. If terminated without cause, he is entitled to severance.
As severance, he shall be entitled to one week's base salary as of the date
of
termination for the first full year of service, and thereafter, two weeks'
base
salary for each succeeding year of service, up to an aggregate of four months
of
such base salary.
29
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
On
February 27, 2004, pursuant to an Agreement and Plan of Reorganization with
Sparta Commercial Services, LLC and its members, we acquired all of the
membership interests of Sparta in exchange for the agreement for the issuance
of
such number of shares of our common stock as would represent approximately
91.75% of our outstanding shares. At February 26, 2004, we had an authorized
capital of 200,000,000 shares and 56,637,228 shares issued and outstanding,
and
we issued the remaining balance of authorized capital of 143,362,772 shares
(pre-split) to Sparta members. The remaining unissued balance of 486,511,854
shares (pre-split) due to the Sparta members were subsequently issued upon
completion of an increase in our authorized capital. Pursuant to the
acquisition, all of our former directors and officers resigned, and nominated
Anthony Havens, the designee of Sparta, as the officer and director. Present
officers of the company, Anthony Havens and Sandra Ahman, acquired their
respective ownership interest in our common stock pursuant to their exchange
of
membership interests of Sparta. Glenn A. Little, the former principal
stockholder of the company, prior to the completion of acquisition owned
40,000,000 shares, or 71%, of our then issued and outstanding shares of common
stock. Sparta also entered into a consulting agreement for business and
financial services with Glenn A. Little. The agreement was for a term of one
year. Mr. Little received a fee of $100,000 pursuant to the consulting
agreement.
We
entered into a license agreement, dated as of June 1, 2002, and as amended
on
December 3, 2003, with American Motorcycle Leasing Corp., an entity controlled
by our president and a significant shareholder. Under the agreement, we have
a
non-exclusive, perpetual right to use American Motorcycle Leasing Corp.'s
proprietary operating systems related to consumer credit underwriting
procedures, vehicle and vehicle lease value evaluation methods, rental stream
collection and insurance tracking policies and procedures. The license fee
consisted of $300,000 and 330,433 membership interests of Sparta Commercial
Services, LLC, which will be exchanged for 34,256,941 shares of Tomahawk upon
an
increase in our authorized capital.
We
entered into a services agreement, dated as of March 1, 2004, with American
Motorcycle Leasing Corp. For a period of three years, American Motorcycle
Leasing Corp. is to provide personnel, computer equipment and software, and
facilities, in connection with our credit and underwriting activities and our
use of the operating systems that we had licensed from American Motorcycle
Leasing Corp. In return for such services, we agreed to pay $100,000 by March1,2005, and for the time of the personnel utilized at their salary rate at
American Motorcycle Leasing Corp.
On
August2, 2004, pursuant to an employment agreement with Daniel J. Lanjewar, our former
Chief Financial Officer, we agreed to issue 568,175 shares of our common stock
in a transaction deemed exempt from registration pursuant to Section 4(2) of
the
Securities Act. The grant of shares was subject to vesting and subject to
continued employment. On January 1, 2005, 113,635 shares vested, and the
reminder of the shares were to vest in equal portions on July 1, 2005, July1,2006, July 1, 2007, and July 1, 2008, subject to proportionate adjustment in
the
event of employment termination for any incomplete vesting period. In April
2005, Mr. Lanjewar resigned as our Chief Financial Officer, and was vested
with
an additional 113,637 shares of common stock.
We
entered into a purchase option agreement with American Motorcycle Leasing Corp.
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 April 30, 2005,
payments against this obligation of $81,000 were made. In June, 2005, an
additional $20,000 was paid.
In
January 2005, we received a loan of $25,000 from Kristian Srb, one of our
directors. This loan was non-interest bearing and was payable on demand and
has
subsequently been repaid.
On
April29, 2005, pursuant to an option agreement with Richard Trotter, our Chief
Operating Officer, we agreed to issue options to purchase up to 875,000 shares
of our common stock. Subject to vesting, the stock options are exercisable
for
five years from the vesting date at $0.605 per share. Twenty percent of the
options vested on April 29, 2005, and the remaining options are to vest in
equal
installments over the next four anniversary date of the agreement.
In
June
2005, Kristian Srb, one of our directors, purchased on various dates, an
aggregate of 10,800 shares of our common stock at prices of $0.45 to $0.55
per
share in the open market, as follows: on 6/13/2005, purchased 3,062 shares
at
$0.51 per share; on 6/13/2005, purchased 1,938 shares at $0.55 per share; on
6/14/2005, purchased 800 shares at $0.55 per share; and on 6/20/2005, purchased
5,000 shares at $0.45 per share.
During
nine months ended January 31, 2007, the Company borrowed from a Kristian Srb
and
officer $135,000 and $8,500, respectively on a demand basis without interest.
The Company also owes $13,760 to another Director and Officer an interest free
demand loan received on August 24, 2006. As of January 31, 2007, aggregated
loans payable to officers were $157,260. These loans are classified as current
on the Company’s balance sheet. [Please indicate which director this
is]
At
January 31, 2007, included in accounts payable, is $9,460 due to American
motorcycle Leasing Corp., a company controlled by the Company's Chief Executive
Officer and a director, for the purchase of motorcycles.
We
believe that the terms of all of the above transactions are commercially
reasonable and no less favorable to us than we could have obtained from an
unaffiliated third party on an arm's length basis. Our policy requires that
all
related parties recuse themselves from negotiating and voting on behalf of
our
company in connection with related party transactions.
30
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information regarding the beneficial ownership of
our
common stock as of May 12, 2007 by:
·
each person known by us to be the beneficial owner of more than 5% of our
Common
Stock;
·
each of our
directors;
·
each of our executive officers; and
·
our executive officers and directors as a group.
Beneficial
ownership is determined in accordance with the rules of the SEC and includes
voting and investment power. Under SEC rules, a person is deemed to be the
beneficial owner of securities which may be acquired by such person upon the
exercise of options and warrants or the conversion of convertible securities
within 60 days from the date on which beneficial ownership is to be determined.
Each beneficial owner's percentage ownership is determined by dividing the
number of shares beneficially owned by that person by the base number of
outstanding shares, increased to reflect the beneficially-owned shares
underlying options, warrants or other convertible securities included in that
person's holdings, but not those underlying shares held by any other
person.
Unless
indicated otherwise, the address for each person named is c/o Sparta Commercial
Services, Inc., 462 Seventh Ave, 20th Floor, New York, NY10018.
Name
Number
of Shares Beneficially Owned Prior to Offering
Percentage
of Class Beneficially Owned Prior to Offering
Number
of Shares Offered
Number
of Shares Beneficially Owned After the Offering
Percentage
of Class Beneficially Owned After the Offering
All
current directors and named officers as a group (5 in all)
66,820,689
(5)
58.6
%(5)
66,820,689
(5)
*
Represents less than 1%
(1)
Mr.
Havens' minor son owns 500,000 shares of common stock in a trust account. Mr.
Havens is not the trustee for his son's trust account, and does not have direct
voting control of such shares. Mr. Havens does not have the sole or shared
power
to vote or direct the vote of such shares, and, as a result, Mr. Havens
disclaims beneficial ownership of such shares held in his son's trust account.
(2)
Includes 62,500 shares of common stock held by Mr. Srb’s minor daughter, for
which Mr. Srb may be deemed to have beneficial ownership of such shares.
(3)
Includes 75,000 vested shares, pursuant to an employment agreement, Mr. Trotter
is entitled to up to 125,000 shares of common stock. The grant of shares is
subject to vesting and subject to continued employment. On November 1, 2004,
25,000 shares vested. An additional 25,000 shares vested on each of November1,2005 and 2006. An additional 50,000 shares are subject to vesting at a future
date, subject to proportionate adjustment in the event of employment termination
for any incomplete vesting period, as follows: 25,000 shares on November 1,2007; 12,500 shares on November 1, 2008; and 12,500 on November 1, 2009. Also
includes 525,000 vested stock options, pursuant to an option agreement, Mr.
Trotter is entitled to up to 875,000 stock options to purchase shares of our
common stock, subject to vesting. The
stock
options are exercisable for five years from the vesting date at
$0.605
per share. On November 1, 2004, 2005 and 2006 , stock options to purchase
175,000 shares vested each date, and the remaining options are to vest in equal
installments over the next four anniversary dates of the agreement.
(4)
Includes (i) 641,026 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 368,590 shares issuable upon exercise of warrants.
(5)
Does
not include 1,205,000 shares of common stock and 800,000 vested stock options,
pursuant to an option agreement owned by Mr. Adler. Mr. Adler is entitled to
up
to 4,000,000 stock options to purchase shares of our common stock, subject
to
vesting. The stock options are exercisable for five years from the vesting
date
at $0.1914 per share.
31
DESCRIPTION
OF SECURITIES TO BE REGISTERED
COMMON
STOCK
We
are
authorized to issue up to 340,000,000 shares of common stock, par value $0.001.
As of April 30, 2007 , there were 123,216,157 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share
on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefore. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities
and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Section
78.7502 of the Nevada Revised Statutes allows a corporation to indemnify any
officer, director, employee or agent who is a party or is threatened to be
made
a party to a litigation by reason of the fact that he or she is or was an
officer, director, employee or agent of the corporation, or is or was serving
at
the request of the corporation as an officer, director, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by such director or officer
if:
·
there was no breach by the officer, director, employee or agent of his or
her
fiduciary duties to the corporation involving intentional misconduct, fraud
or
knowing violation of law; or
·
the officer, director, employee or agent acted in good faith and in a manner
which he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was
unlawful.
Our
bylaws further provide that our Board of Directors has sole discretion to
indemnify our officers and other employees. We may limit the extent of such
indemnification by individual contracts with our directors and executive
officers, but have not done so. We are required to advance, prior to the final
disposition of any proceeding, promptly on request, all expenses incurred by
any
director or executive officer in connection with that proceeding on receipt
of
an undertaking by or on behalf of that director or executive officer to repay
those amounts if it should be determined ultimately that he or she is not
entitled to be indemnified under our bylaws or otherwise. We are not, however,
required to advance any expenses in connection with any proceeding if a
determination is reasonably and promptly made by our Board of Directors by
a
majority vote of a quorum of disinterested Board members that (a) the party
seeking an advance acted in bad faith or deliberately breached his or her duty
to us or our stockholders and (b) as a result of such actions by the party
seeking an advance, it is more likely than not that it will ultimately be
determined that such party is not entitled to indemnification pursuant to the
applicable sections of our bylaws.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
(the
"Act" or "Securities Act") may be permitted to directors, officers or persons
controlling us pursuant to the foregoing provisions, or otherwise, we have
been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
PLAN
OF DISTRIBUTION
The
selling stockholders and any of their respective pledgees, donees, assignees
and
other successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be
at
fixed or negotiated prices. The selling stockholders may use any one or more
of
the following methods when selling shares:
·
ordinary
brokerage transactions and transactions in which the broker-dealer solicits
the
purchaser;
·
block
trades in which the broker-dealer will attempt to sell the shares as agent
but
may position and resell a portion of the block as principal to facilitate
the
transaction;
·
purchases by a broker-dealer as principal and resale by the broker-dealer
for
its account;
·
an
exchange distribution in accordance with the rules of the applicable
exchange;
·
privately-negotiated transactions;
·
short sales that are not violations of the
laws and regulations of any state or the United States;
·
broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;
·
through
the writing of options on the shares;
·
a
combination of any such methods of sale; and
·
any
other method permitted pursuant to applicable law.
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus. The selling stockholders
shall have the sole and absolute discretion not to accept any purchase offer
or
make any sale of shares if they deem the purchase price to be unsatisfactory
at
any particular time.
32
The
selling stockholders may also engage in short sales against the box, puts and
calls and other transactions in our securities or derivatives of our securities
and may sell or deliver shares in connection with these trades.
The
selling stockholders or their respective pledgees, donees, transferees or other
successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves
or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or
the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and
at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in
this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of
any
of the shares offered in this prospectus, may be deemed to be "underwriters"
as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities
Act.
We
are
required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling stockholders,
but excluding brokerage commissions or underwriter discounts.
The
selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The
selling stockholders may pledge their shares to their brokers under the margin
provisions of customer agreements. If a selling stockholder defaults on a margin
loan, the broker may, from time to time, offer and sell the pledged shares.
The
selling stockholders and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales
of
any of the shares by, the selling stockholders or any other such person. In
the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions
or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion.
In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We
have
agreed to indemnify the selling stock holders, on their transferees or
assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such
liabilities.
Pursuant
to a requirement by the National Association of Securities Dealers, Inc., or
NASD, the maximum commission or discount to be received by any NASD member
or
independent broker/dealer may not be greater than 8.0% of the gross proceeds
received by us for the sale of any securities being registered pursuant to
SEC
Rule 415.
Until
March 2008, we have granted Maxim the right of first refusal to act as lead
underwriter or minimally as a co-manager, for certain types of equity and debt
offerings.
If
the
selling stockholders notify us that they have a material arrangement with a
broker-dealer for the resale of the common stock, then we would be required
to
amend the registration statement of which this prospectus is a part, and file
a
prospectus supplement to describe the agreements between the selling
stockholders and the broker-dealer.
33
PENNY
STOCK
The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the
definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions.
For
any transaction involving a penny stock, unless exempt, the rules
require:
·
that a
broker or dealer approve a person's account for transactions in penny stocks;
and
·
the
broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be
purchased.
In
order
to approve a person's account for transactions in penny stocks, the broker
or
dealer must
·
obtain
financial information and investment experience objectives of the person;
and
·
make a
reasonable determination that the transactions in penny stocks are suitable
for
that person and the person has sufficient knowledge and experience in financial
matters to be capable of evaluating the risks of transactions in penny
stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock,
a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form:
·
sets
forth the basis on which the broker or dealer made the suitability
determination; and
·
that the
broker or dealer received a signed, written agreement from the investor prior
to
the transaction.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both
the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account
and
information on the limited market in penny stocks.
34
SELLING
STOCK HOLDERS
The
following table sets forth the common stock ownership of the selling
stockholders as of May 12, 2006. The selling stockholders acquired their
securities through a loan financing which closed in November 2004 and December
2004, a private placement of Series A Convertible Preferred Stock with warrants
which placement had its final closing on July 27, 2005, a loan financing which
closed in November 2005 and December 2005, and a private placement of common
stock which had its final closing on March 29, 2006.
We
will
not receive any proceeds from the resale of the common stock by the selling
stockholders. Assuming all the shares registered below are sold by the selling
stockholders, none of the selling stockholders will continue to own any shares
of our common stock. Other than as set forth in the following table, the selling
stockholders have not held any position or office or had any other material
relationship with us or any of our predecessors or affiliates within the past
three years. In addition, except as set forth below, the selling stockholders
are not registered broker-dealers.
Total
Shares Owned and Issuable Upon Exercise of Warrants and Conversion
of
Preferred Stock Before Offering
Percentage
of Common Stock,Assuming Full Conversion and Exercise
Number
of Shares Offered for Sale
Number
of Shares Owned After Completion of Offering (1)
Percentage
of Common Stock Owned After Completion of Offering (2)
Robert
G. Dello-Russo (3)
3,511,540
3.1
%
3,511,540
0
*
Arthur
O. Silver Trust (4)
2,021,411
1.8
%
2,021,411
0
*
Ronald
K. Marks (5)
500,385
*
500,385
0
*
Lee
A. Pearlmutter Trust (6)
740,770
*
740,770
0
*
SA
Properties Co LP (7)
1,986,154
1.7
%
1,986,154
0
*
Neil
Ellman
1,027,821
*
1,027,821
0
*
Raymond
J. Brown (8)
98,077
*
98,077
0
*
Morrco
Properties Co LP (9)
461,538
*
461,538
0
*
Richard
E. Kent IRA
260,000
*
260,000
0
*
The
Russell Family Investments LP (10)
1,002,564
*
1,002,564
0
*
Thomas
Blatner (11)
368,590
*
368,590
0
*
Michael
Friedman
130,000
*
130,000
*
Family
Trust under Natalie L. Kuhr Revocable Trust (12)
260,000
*
260,000
0
*
Allen
Coburn
62,000
*
62,000
0
*
John
O'Neal Johnston Trust (13)
320,385
*
320,385
0
*
Emeric
Holderith
90,000
*
90,000
0
*
Roy
G. Shaw, Jr. (14)
585,770
*
585,770
0
*
Andrew
Morris Roth IRA
130,000
*
130,000
0
*
Robert
A. & Susan DeLuca
317,000
*
317,000
0
*
35
Name
Total
Shares Owned and Issuable Upon Exercise of Warrants and Conversion
of
Preferred Stock Before Offering
Percentage
of Common Stock,Assuming Full Conversion and Exercise
Number
of Shares Offered for Sale
Number
of Shares Owned After Completion of Offering (1)
Percentage
of Common Stock Owned After Completion of Offering (2)
Lee
Westerheide
260,000
*
260,000
0
*
John
C. Moss
78,477
*
78,477
0
*
Leo
Long (15)
16,880,971
14.8
%
16,880,971
0
*
Neil
Prete
550,000
*
550,000
0
*
Albert
Carocci
260,000
*
260,000
0
*
Bill
McCurtain
105,000
*
105,000
0
*
Rodolfo
Beeck (16)
192,308
*
192,308
0
*
Elizabeth
K. Millan (17)
151,154
*
151,154
0
*
JoAnn
Stock
154,000
*
154,000
0
*
Reed
Kean
390,000
*
390,000
0
*
Edward
Wilson
120,000
*
120,000
0
*
WNSJ
Properties LLC (18)
130,000
*
130,000
0
*
Nite
Capital LP (19)
512,821
*
512,821
0
*
Larry
Warner
515,000
*
515,000
0
*
Larry
& Rebecca Warner
153,846
*
153,846
0
*
Crestview
Capital Master, LLC (20)
2,564,200
2.2
%
2,564,200
0
*
RTK
Partners (21)
130,000
*
130,000
0
*
Saul
Kaminsky
260,000
*
260,000
0
*
United
Empire Capital Mgt. Inc. (22)
200,000
*
200,000
0
*
Joseph
Bianco 130,000
130,000
*
130,000
0
*
Emilile
J. Corsiglia IRA
130,000
*
130,000
0
*
Leon
Bialik 179,487
179,487
*
179,487
0
*
Paul
Lodi (23)
567,308
567,308
*
567,308
0
*
Jacobs
Pond LLC (24)
391,026
*
391,026
0
*
Robert
J. Corsiglia Trust (25)
2,115,386
1.9
%
2,115,386
0
*
Robert
J. Corsiglia IRAR (26)
1,490,385
1.3
%
1,490,385
0
*
Robert
J. Corsiglia ROL IRA (27)
480,770
*
480,770
0
*
Emilie
J. Corsiglia (28)
240,385
*
240,385
0
*
36
Name
Total
Shares Owned and Issuable Upon Exercise of Warrants and Conversion
of
Preferred Stock Before Offering
Percentage
of Common Stock,Assuming Full Conversion and Exercise
Number
of Shares Offered for Sale
Number
of Shares Owned After Completion of Offering (1)
Percentage
of Common Stock Owned After Completion of Offering (2)
Juliet
Lodi (29)
144,231
*
144,231
0
*
Paul
& Edith Lodi (30)
192,308
*
192,308
0
*
Christopher
J. Kennan (31)
1,099,907
*
1,099,907
0
*
Alfonse
M. D'Amato (32)
961,539
*
961,539
0
*
Steven
E. Erickson and Dean Erickson Trust (33)
240,385
*
240,385
0
*
B.
Jerry L. Huff and Judith T. Huff Revocable Living Trust
(34)
120,192
*
120,192
0
*
William
N. & Deborah L. Hicks (35)
182,192
*
182,192
0
*
Bankhaus
B Metzler seel Sohn & Co. (36)
1,028,526
*
961,539
66,987
*
Helmut
Janssen (37)
348,077
*
348,077
0
*
RF
JM Partners LLC (38)
552,886
*
552,886
0
*
Richard
E. and Laura T. Kent (39)
480,770
*
480,770
0
*
Marcos
Aszelowicz (40)
138,221
*
138,221
0
*
Corinne
Lozach (41)
961,539
*
961,539
0
*
Leonard
Herzfeld (42)
192,308
*
192,308
0
*
W.R.
Sauey (43)
961,539
*
961,539
0
*
Glenn
A. Little (44)
1,520,321
1.3
%
1,520,321
0
*
The
Sherman Family Partners (45)
961,539
*
961,539
0
*
John
Barlow
33,334
*
33,334
0
*
Ludwig
von Hanstein
444,167
*
216,667
227,500
*
Maxim
Group LLC (46)
5,255,155
4.5
%
5,255,155
0
*
Suan
Investments, Inc. (47)
128,205
*
128,205
0
*
Joshua
Lifshitz
84,103
*
84,103
0
*
Steve
Schnipper (48)
244,359
*
224,359
0
*
Robert
Stranczek (49)
480,770
*
480,770
0
*
*
Less
than 1%.
(1)
Assumes that all securities registered will be sold.
(2)
Applicable percentage ownership is based on 114,100,173 shares of common stock
outstanding as of April 25, 2006, together with securities exercisable or
convertible into shares of common stock within 60 days of April 25, 2006 for
each stockholder. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes voting
or
investment power with respect to securities. Shares of common stock that are
currently exercisable or exercisable within 60 days of April 25, 2006 are deemed
to be beneficially owned by the person holding such securities for the purpose
of computing the percentage of ownership of such person, but are not treated
as
outstanding for the purpose of computing the percentage ownership of any other
person.
(3)
Includes (i) 1,282,052 issuable upon conversion of the Series A Convertible
Preferred Stock, (ii) 737,180 shares issuable upon exercise of warrants, and
(iii) 1,492,308 shares of common stock.
(4)
Includes (i) 320,513 shares issuable upon conversion of the Series A Convertible
Preferred Stock, (ii) 160,257 shares issuable upon exercise of warrants and
(iii) 1,540,641 shares of common stock. Arthur O. Silver has the voting and
dispositive rights over the shares held by Arthur O. Silver Trust.
37
(5)
Includes (i) 160,257 shares issuable upon conversion of the Series A Convertible
Preferred Stock, (ii) 80,128 shares issuable upon exercise of warrants, and
(iii) 260,000 shares of common stock.
(6)
Includes (i) 320,514 shares issuable upon conversion of the Series A Convertible
Preferred Stock, (ii) 160,256 shares issuable upon exercise of warrants and
(iii) 260,000 shares of common stock. Lee A. Pearlmutter has the voting and
dispositive rights over the shares held by Lee A. Pearlmutter
Trust.
(7)
John
W. Russell has the voting and dispositive rights over the shares held by SA
Properties Co LP.
(8)
Includes (i) 32,051 shares issuable upon conversion of the Series A Convertible
Preferred Stock, (ii) 16,026 shares issuable upon exercise of warrants, and
(iii) 50,000 shares of common stock.
(9)
John
W. Russell has the voting and dispositive rights over the shares held by Morrco
Properties Co LP.
(10)
John
W. Russell has the voting and dispositive rights over the shares held by The
Russell Family Investments LP.
(11)
Includes (i) 160,257 shares issuable upon conversion of the Series A Convertible
Preferred Stock, (ii) 80,128 shares issuable upon exercise of warrants, and
(iii) 128,205 shares of common stock.
(12)
Adam
Kuhr has the voting and dispositive rights over the shares held by Family Trust
under Natalie L. Kuhr Revocable Trust.
(13)
Includes (i) 160,256 shares issuable upon conversion of the Series A Convertible
Preferred Stock, (ii) 80,128 shares issuable upon exercise of warrants, and
(iii) 80,000 shares of common stock. John O'Neal Johnston has the voting and
dispositive rights over the shares held by John O'Neal Johnston
Trust.
(14)
Includes (i) 320,513 shares issuable upon conversion of the Series A Convertible
Preferred Stock, (ii) 160,257 shares issuable upon exercise of warrants, and
(iii) 105,000 shares of common stock.
(15)
Includes (i) 10,733,980 shares issuable upon conversion of the Series A
Convertible Preferred Stock, (ii) 5,366,991 shares issuable upon exercise of
warrants, and (iii) 780,000 shares of common stock. The actual number of shares
of common stock offered in this prospectus, and included in the registration
statement of which this prospectus is a part, includes (i) 10,733,974 shares
issuable upon conversion of the Series A Convertible Preferred Stock, (ii)
5,366,991 shares issuable upon exercise of warrants, and (iii) 780,000 shares
of
common stock. However Mr. Long has contractually agreed to restrict his ability
to convert the Series A Convertible Preferred Stock or exercise his warrants
and
receive shares of our common stock such that the number of shares of common
stock beneficially held by him in the aggregate after such exercise does not
exceed 4.9% of the then issued and outstanding shares of common stock as
determined in accordance with Section 13(d) of the Exchange Act. Accordingly,
the number of shares of common stock set forth in the table for the selling
stockholder exceeds the number of shares of common stock that the selling
stockholders could own beneficially at any given time through their ownership
of
the warrants. In that regard, the beneficial ownership of the common stock
by
the selling stockholder set forth in the table is not determined in accordance
with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended
(16)
Includes (i) 96,154 shares issuable upon exercise of warrants, and (iii) 96,154
shares of common stock.
(17)
Includes (i) 64,103 shares issuable upon conversion of the Series A Convertible
Preferred Stock, (ii) 32,051 shares issuable upon exercise of warrants, and
(iii) 55,000 shares of common.
(18)
Walter N. Rothschild III has the voting and dispositive rights over the shares
held by WNSJ Properties LLC.
(19)
Keith A. Goodman has the voting and dispositive rights over the shares held
by
Nite Capital LP.
(20)
Stewart R. Flink has the voting and dispositive rights over the shares held
by
Crestview Capital Master, LLC.
(21)
John
W. Russell has the voting and dispositive rights over the shares held by RTK
Partners.
(22)
Shay
Kostner has the voting and dispositive rights over the shares held by United
Empire Capital Mgt. Inc.
(23)
Includes (i) 224,359 shares issuable upon conversion of the Series A Convertible
Preferred Stock, (ii) 112,180 shares issuable upon exercise of warrants and
(iii) 230,769 shares of common.
(24)
Includes (i) 243,590 issuable upon conversion of the Series A Convertible
Preferred Stock, (ii) 121,795 shares issuable upon exercise of warrants, and
(iii) 25,641 shares of common stock. Paul Lodi has the voting and dispositive
rights over the shares held by Jacobs Pond LLC.
(25)
Includes (i) 1,410,257 shares issuable upon conversion of the Series A
Convertible Preferred Stock, and (ii) 705,129 shares issuable upon exercise
of
warrants.
38
(26)
Includes (i) 993,590 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 496,795 shares issuable upon exercise of
warrants.
(27)
Includes (i) 320,513 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 160,257 shares issuable upon exercise of
warrants.
(28)
Includes (i) 160,256 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 80,128 shares issuable upon exercise of
warrants.
(29)
Includes (i) 96,154 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 48,077 shares issuable upon exercise of
warrants.
(30)
Includes (i) 128,205 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 64,103 shares issuable upon exercise of
warrants.
(31)
Includes (i) 480,769 shares issuable upon conversion of the Series A Convertible
Preferred Stock, (ii) 272,436 shares issuable upon exercise of warrants and
(iii) 346,702 shares of common stock.
(32)
Includes (i) 641,026 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 320,513 shares issuable upon exercise of
warrants.
(33)
Includes (i) 160,257 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 80,128 shares issuable upon exercise of
warrants.
(34)
Includes (i) 80,128 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 40,064 shares issuable upon exercise of
warrants.
(35)
Includes (i) 80,128 shares issuable upon conversion of the Series A Convertible
Preferred Stock, (ii) 40,064 shares issuable upon exercise of warrants and
(iii)
62,000 shares of common stock.
(36)
Includes (i) 641,026 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 320,513 shares issuable upon exercise of
warrants.
(37)
Includes (i) 32,051 shares issuable upon conversion of the Series A Convertible
Preferred Stock, (ii) 16,026 shares issuable upon exercise of warrants, and
(iii) 300,000 shares of common stock
(38)
Includes (i) 368,590 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 184,295 shares issuable upon exercise of
warrants.
(39)
Includes (i) 320,513 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 160,257 shares issuable upon exercise of
warrants.
(40)
Includes (i) 92,147 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 46,074 shares issuable upon exercise of
warrants.
(41)
Includes (i) 641,026 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 320,513 shares issuable upon exercise of
warrants.
(42)
Includes (i) 128,205 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 64,103 shares issuable upon exercise of
warrants.
(43)
Includes (i) 641,026 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 320,513 shares issuable upon exercise of
warrants.
(44)
Includes (i) 641,026 shares issuable upon conversion of the Series A Convertible
Preferred Stock, (ii) 320,513 shares issuable upon exercise of warrants and
(iii) 558,782 shares of common stock.
(45)
Includes (i) 641,026 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 320,513 shares issuable upon exercise of
warrants.
(46)
Maxim Partners LLC owns 94% of Maxim Group LLC, a registered broker dealer.
MJR
Holdings LLC owns 73.5% of Maxim Partners LLC. Mike Rabinowitz is the principal
manager of MJR Holdings and has principal voting and dispositive power with
respect to the securities owned by Maxim Partners LLC. The number of share
beneficially owned include: (i) 3,500,018 shares of common stock and (ii)
warrants to acquire 1,755,537 shares of common stock, which were issued to
Maxim
Partners, as nominee of Maxim Group, for services provided to the company in
its
recent private placement offering that began in December 2005.
39
(47)
Ernest Gottdiener has the voting and dispositive rights over the shares held
by
Suan Investments, Inc. Includes (i) 32,051 shares issuable upon exercise of
warrants, and (ii) 96,154 shares of common stock.
(48)
Includes (i) 16,025 shares issuable upon exercise of warrants, and (ii) 228,334
shares of common stock.
(49)
Includes (i) 320,513 shares issuable upon conversion of the Series A Convertible
Preferred Stock, and (ii) 160,257 shares issuable upon exercise of
warrants.
40
LEGAL
MATTERS
Sichenzia
Ross Friedman Ference LLP, New York, New York will issue an opinion with respect
to the validity of the shares of common stock being offered hereby.
EXPERTS
Our
financial statements as of April 30, 2006, and for each of the years in the
two
year period then ended, have been included herein in reliance upon the report
of
Russell Bedford Stefanou Mirchandani LLP, independent registered public
accounting firm, appearing elsewhere herein, and upon authority of said firm
as
experts in accounting and auditing.
AVAILABLE
INFORMATION
We
have
filed with the SEC a registration statement on Form SB-2 to register the
securities offered by this prospectus. For future information about us and
the
securities offered under this prospectus, you may refer to the registration
statement and to the exhibits filed as a part of the registration
statement.
In
addition, after the effective date of this prospectus, we will be required
to
file annual, quarterly, and current reports, or other information with the
SEC
as provided by the Securities Exchange Act. You may read and copy any reports,
statements or other information we file at the SEC's public reference facility
maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on
the
operation of the public reference room. Our SEC filings are also available
to
the public through the SEC Internet site at http\\www.sec.gov.
reserve
of $18,042 and $5,090, respectively. (Note D)
588,231
206,986
Loan
proceeds receivable
-
389,998
Prepaid
expenses and other current assets
12,228
56,189
Inventory
(Note C)
71,819
-
Total
current assets
696,413
1,509,555
Motorcycles
and other vehicles under operating leases, net of
accumulated
depreciation of $292,146 and $75,873, respectively and
loss
reserve of $46,963 and $16,409, respectively. (Note B)
1,266,221
667,286
Property
and equipment, net of accumulated depreciation and
amortization
of $85,837 and $53,249, respectively
103,690
121,544
Lease
and Retail installment sale contract receivables, net of current
portion
and
loss reserve of $57,623 and 14,653, respectively. (Note D)
1,879,852
595,895
Restricted
cash
235,377
112,503
Deposits
50,817
48,967
Total
assets
$
4,232,370
$
3,055,750
LIABILITIES
AND (DEFICIENCY IN) STOCKHOLDERS' EQUITY
Current
liabilities:
Accounts
payable and accrued expenses
$
1,037,343
$
424,692
Accrued
equity based compensation
25,020
333,600
Accrued
equity based penalties
2,375
47,468
Notes
payable - Senior lender (Note E)
661,280
358,549
Notes
payable - Other (Note F)
800,259
-
Loans
payable - related parties (Note G)
157,260
-
Deferred
revenue
733
-
Total
current liabilities
2,684,270
1,164,309
Deferred
revenue
686,685
186,245
Notes
payable - Senior lender (Note E)
1,506,038
330,799
Warrant
liability
-
834,924
Total
liabilities
4,876,993
2,516,277
(Deficiency
in) Stockholders' equity: (Note H)
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, 19,795 and 19,795 shares issued
and
outstanding as of January 31, 2007 and April 30, 2006,
respectively
1,979,500
1,979,500
Common
stock, $0.001 par value; 340,000,000 shares authorized, 123,216,157
and
A
summary
of the significant accounting policies applied in the preparation of the
accompanying financial statements follows.
Basis
of
Presentation
The
accompanying unaudited condensed consolidated financial statements as of
January31, 2007 and for the three and nine month periods ended January 31, 2007
and
2006 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, 2006 as disclosed in the
Company's 10-KSB for that year as filed with the SEC.
The
results of the nine months ended January 31, 2007 are not necessarily indicative
of the results to be expected for the full year ending April 30,2007.
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.
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 elated documents
and processes. Fees received are amortized and booked as income over the
length
of the contract. At January 31, 2007, the Company had recorded deferred revenue
related to these contracts of $733.
The
Company evaluates its operating and retail installment sales leases on an
ongoing basis and has established reserves for losses, based on current and
expected future experience.
F-4
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Prior
to
the adoption of FASB No. 123R, during the third quarter of Fiscal 2006, the
Company recorded employee stock based compensation pursuant to APB No. 25.
Had
compensation costs for the Company's stock options been determined based
on the
fair value at the grant dates for the awards, the Company's net loss and
losses
per share for the period prior to the adoption of FAS 123R would have been
as
follows.
Add:
Total
stock based employee compensation expense as reported under intrinsic
value method (APB No. 25)
—
—
Deduct:
Total
stock based employee compensation expense as reported under fair
value
based method (SFAS No. 123)
—
(24,710
)
$
(3,658,551
)
$
(6,758,710
)
Net
loss attributable to common stockholders- Pro forma
$
(3,687,742
)
$
(8,620,683
)
Basic(and
assuming dilution) loss per share-as reported
$
(0.04
)
$
(0.08
)
Basic(and
assuming dilution) loss per share - Pro forma
$
(0.04
)
$
(0.08
)
The
fair
value for stock awards was estimated at the date of grant using the
Black-Scholes option valuation model with the following weighted average
assumptions for the nine months ended January 31, 2006:
2006
Significant
assumptions (weighted-average):
Risk-free
interest rate at grant date
3
%
Expected
stock price volatility
60
%
Expected
dividend payout
-
Expected
option life (in years)
5
The
expected term of the options represents the estimated period of time until
exercise and is based on historical experience of similar awards, giving
consideration to the contractual terms, vesting schedules and expectations
of
future employee behavior. For 2006 and prior years, expected stock price
volatility is based on the historical volatility of the Company’s stock for the
related vesting periods. Prior to the adoption of SFAS 123R, expected stock
price volatility was estimated using only historical volatility. The risk-free
interest rate is based on the implied yield available on U.S. Treasury constant
maturity securities with an equivalent remaining term. The Company has not
paid
dividends in the past and does not plan to pay any dividends in the near
future.
The
Black-Scholes option valuation model was developed for use in estimating
the
fair value of traded options, which have no vesting restrictions and are
fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, particularly for the expected term and expected stock
price volatility. The Company’s employee stock options have characteristics
significantly different from those of traded options, and changes in the
subjective input assumptions can materially affect the fair value estimate.
Because Company stock options do not trade on a secondary exchange, employees
do
not derive a benefit from holding stock options unless there is an increase,
above the grant price, in the market price of the Company’s stock. Such an
increase in stock price would benefit all shareholders commensurately.
Net
Loss
Per Share
The
Company uses Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share" for calculating the basic and diluted loss per share.
The
Company computes 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.
F-5
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Per
share
basic and diluted net loss attributable to common stockholders amounted to
$0.01
and $0.04 for the three months ended January 31, 2007 and 2006, respectively,
and $0.03 and $0.10 for the nine months ended January 31, 2007 and 2006,
respectively. At January 31, 2007 and 2006, 31,028,051 and 29,685,131 potential
shares, respectively, were excluded from the shares used to calculate diluted
earnings per share as their inclusion would reduce net loss per
share.
New
Accounting Pronouncements
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115,” which permits entities to measure many financial instruments
and certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility
in
reporting earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions.
This
Statement is expected to expand the use of fair value measurement, which
is
consistent with the Board’s long-term measurement objectives for accounting for
financial instruments. This Statement is effective as of the beginning of
the
Company’s first fiscal year that begins after November 15, 2007.
In
September 2006, the FAS issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, which requires employers
to
recognize the over-funded or under-funded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income
of a
business entity. The Company does not believe that the pronouncement will
have a
material affect on its financial statements as it does not participate in
defined benefit pension plans.
In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
157
`Fair Value Measurements'. This Statement defines fair value, establishes
a
framework for measuring fair value in generally accepted accounting principles
("GAAP"), and expands disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or permit fair
value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
However, for some entities, the application of this Statement will change
current practice. This Statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. Adoption of SFAS 157 will not have a significant impact
on
our results of operations or financial condition.
In
March
2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of
Financial Assets - an amendment to FASB Statement No. 140. Statement 156
requires that an entity recognize a servicing asset or servicing liability
each
time it undertakes an obligation to service a financial asset by entering
into a
service contract under certain situations. The new standard is effective
for
fiscal years beginning after September 15, 2006. The adoption of SFAS No.
156
did not have a material impact on the Company's financial position and results
of operations.
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. The adoption of SFAS No. 155 did not
have a
material impact on the Company's financial position and results of
operations.
In
May
2005 the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections,
a
replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS 154 requires
retrospective application to prior periods' financial statements for changes
in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154
also
requires that retrospective application of a change in accounting principle
be
limited to the direct effects of the change. Indirect effects of a change
in
accounting principle, such as a change in non-discretionary profit-sharing
payments resulting from an accounting change, should be recognized in the
period
of the accounting change. SFAS 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived, non-financial assets be
accounted for as a change in accounting estimate affected by a change in
accounting principle. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
Early adoption is permitted for accounting changes and corrections of errors
made in fiscal years beginning after the date this Statement is issued. The
adoption of SFAS No. 154 did not have a material impact on the Company's
financial position and results of operations.
F-6
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”
(FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute
for financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return, and also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company does not expect that the
adoption of FIN 48 will have an impact on the Company’s financial position and
results of operations.
In
September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) No.
108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 was
issued in order to eliminate the diversity of practice in how public companies
quantify misstatements of financial statements, including misstatements that
were not material to prior years’ financial statements. The Company will
initially apply the provisions of SAB 108 in connection with the preparation
of
its annual financial statements for the year ending April 30, 2007. The Company
has evaluated the potential impact SAB 108 may have on our financial position
and results of operations and do not believe the impact of the application
of
this guidance will be material.
On
December 21, 2006, the Financial Accounting Standards Board ("FASB") issued
FASB
Staff Position (FSP) Emerging Issues Task Force ("EITF") 00-19-2, "Accounting
for Registration Payment Arrangements," which requires an issuer to account
for
a contingent obligation to transfer consideration under a registration payment
arrangement in accordance with FASB Statement No. 5, Accounting for
Contingencies and FASB Interpretation 14, Reasonable Estimation of the Amount
of
Loss. Registration payment arrangements are frequently entered into in
connection with issuance of unregistered financial instruments, such as equity
shares or warrants. A registration payment arrangement contingently obligates
the issuer to make future payments or otherwise transfer consideration to
another party if the issuer fails to file a registration statement with the
SEC
for the resale of specified financial instruments or fails to have the
registration statement declared effective within a specific period. The FSP
requires issuers to make certain disclosures for each registration payment
arrangement or group of similar arrangements. The FSP is effective immediately
for registration payment arrangements and financial instruments entered into
or
modified after the FSP's issuance date. For previously issued registration
payment arrangements and financial instruments subject to those arrangements,
the FSP is effective for financial statements issued for fiscal years beginning
after December 15, 2006. We do not expect the adoption of this FSP to have
a
significant impact on our financial condition or results of
operations.
NOTE
B -
MOTORCYCLES AND OTHER VEHICLES UNDER OPERATING LEASES
Motorcycles
and other vehicles under operating leases at January 31, 2007 and April 30,2006
consist of the following:
Motorcycles
and other vehicles, net of accumulated depreciation
1,313,184
683,695
Less:
estimated reserve for residual values
(46,963
)
(16,409
)
Motorcycles
and other vehicles under operating leases, net
$
1,266,221
$
667,286
Depreciation
expense for vehicles for the three and nine months ended January 31, 2007
was
$82,693 and $217,715, respectively, depreciation expense for property and
equipment for the three and nine months ended January 31, 2007 was $10,999
and
32,588, respectively. Depreciation expense for vehicles for the three and
nine
months ended January 31, 2006 was $14,836 and $32,436, respectively,
depreciation expense for property and equipment for the three and nine months
ended January 31, 2006 was $9,550 and $25,608, respectively.
NOTE
C -
INVENTORY
Inventory
is comprised of repossessed vehicles and vehicles which have been returned
at
the end of their lease. Inventory is carried at the lower of depreciated
cost or
market, applied on a specific identification basis. At January 31, 2007,
the
Company had repossessed Vehicles of value $71,819, which will be
resold.
F-7
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Retail
installment sale receivables, which are carried at cost, were $2,468,083
and
$802,881 at January 31, 2007 and April30,2006,
respectively.
The following is a schedule by years of future payments related to these
receivables. Future payments include amortization of cost as well as a profit
margin. Certain of the assets are pledged as collateral for the note described
in Note E.
The
Company finances certain of its leases through a third party. The repayment
terms are generally one year to five years and the notes are secured by the
underlying assets. The weighted average interest rate at January 31, 2007
is
10.293%.
In
September and October 2006, the Company sold to four accredited
investors’
bridge notes in the aggregate amount of $275,000. Three 45-day
bridge
notes aggregating $175,000 and one 90-day note in the amount
of $100,000
were originally scheduled to expire on various dates through
November 30,2006, together with simple interest at the rate of 10%. The notes
provide
that 100,000 shares of the Company's restricted common stock
are to be
issued as “Equity Kicker” for each $100,000 of notes purchased, or any pro
rated portion thereof. The Company had the right to extend the
maturity
date of notes for 30 to 45 days. The notes provided that in the
event of
extension, the lenders will be entitled for “additional equity” equal to
60% of the “Equity Kicker” shares. In the event of default on repayment by
the Company, the “Equity Kicker” and the “Additional Equity” to be issued
to the lender shall be increased by 50% for each month or portion
thereof,
as penalty, that such default has not been cured. During default
period
interest will be at the rate of 20%. The repayments, in the event
of
default, of the notes are to be collateralized by certain security
interest as per the terms of the agreement.
The
maturity dates of the notes were subsequently extended to various dates between
December 5, 2006 to December 30, 2006, with simple interest rate of 10%,
and
Additional Equity in the aggregate amount of 165,000 restricted shares of
common
stock to be issued. Thereafter, the Company is in default on repayment of
these
notes and is now subject to 20% interest rate and the “Additional Equity” equal
to 50% increased shares for each month or portion thereof, as penalty, until
such default has not been cured. As of January 31, 2007, the Company is obliged
to issue 517,742 kicker, additional kicker and default shares valued at $73,446
to such creditors.
F-8
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During
three months ended January 31, 2007, the Company sold to eight
accredited
investors six months unsecured notes in the aggregate amount
of $525,259.
All notes bears 6% simple interest, payable in cash or shares,
at the
Company’s option, with principal and accrued interest payable at maturity.
Should the Company opt to convert these notes at maturity, these
notes
will be convertible into shares of common stock at a price equal
to a 40%
discount from the lowest closing price of the Company’s common stock for
the five trading days immediately preceding the receipt of funds
by the
Company from the purchaser of note. All notes will mature in
six months on
various dates through July 30,2007.
NOTE
G -
LOANS PAYABLE TO RELATED PARTIES
During
nine months ended January 31, 2007, the Company borrowed from a Director
and
officer $135,000 and $8,500, respectively on a demand basis without interest.
The Company also owes $13,760 to another Director and Officer an interest
free
demand loan received on August 24, 2006. As of January 31, 2007, aggregated
loans payable to officers were $157,260. These loans are classified as current
on the Company’s balance sheet.
At
January 31, 2007, included in accounts payable, is $9,460 due to American
motorcycle Leasing Corp., a company controlled by the Company's Chief Executive
Officer and a director, for the purchase of motorcycles.
NOTE
H -
EQUITY TRANSACTIONS
The
Company is authorized to issue 10,000,000 shares of preferred stock with
$0.001
par value per share and $100 stated value per share, of which 35,850 shares
have
been designated as Series A convertible preferred stock, and 340,000,000
shares
of common stock with $0.001 par value per share. As of January 31, 2007 and
April 30, 2006, the Company has 19,795 shares of preferred stock issued and
outstanding for each period. The Company has 123,216,157 and 114,180,301
shares
of common stock issued and outstanding as of January 31, 2007 and April 30,2006, respectively.
Common
Stock
During
May 2006, the Company issued 550,000 shares of common stock, valued at $286,000,
for accrued expenses recorded during the year end April 30, 2006.
During
July 2006, the Company issued 320,000 shares of common stock, valued at
$132,600, for accrued expenses recorded during the year end April 30,2006.
During
June and July 2006, the Company issued an aggregate of 208,500 shares of
common
stock, pursuant to a consulting agreement. The shares have been valued at
$74,365.
During
July 2006, the Company issued 70,000 shares of common stock, valued at $38,500,
for accrued costs related to loans received by the Company during the year
end
April 30, 2006.
During
July 2006, the Company issued 48,077 shares of common stock, valued at $13,285,
related to penalty provision accrued during the year end April 30,2006.
During
July 2006, the Company issued 5,838,302 shares of common stock for shares
subscribed for in March 2006.
During
July 2006, the Company received $62,500 upon the exercise of 320,513 warrants.
The shares were issued September, 2006.
During
the nine months ended January 31, 2007, the Company issued 250,000 shares
of
common stock, valued at $48,500, as additional costs related to loans received
by the Company. This amount was charged to financing cost during the nine
months
ended January 31, 2007.
During
August 2006, the Company issued an aggregate of 139,000 shares of common
stock,
pursuant to a consulting agreement. The shares have been valued at
$26,410.
During
September 2006, the Company issued 350,000 shares of common stock, pursuant
to a
consulting agreement. The shares have been valued at $56,000.
F-9
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During
October 2006, the Company issued 550,001 shares of common stock for shares
subscribed for in November 2005.
During
October 2006, the Company issued 320,963 shares of common stock for warrants
exercised for $62,500.
During
November 2006, the Company issued 69,500 shares of common stock, pursuant
to a
consulting agreement. The shares have been valued at $6,745.
During
December 2006, the Company granted 100,000 common stock purchase warrants
to a
placement agent for future investments services. The warrants were exercisable
immediately, have an exercise price per share equal to 110% per share of
the
closing bid price of the closing bid price of a share of the Company’s common
stock on the date of this warrant and expire in three years. The warrants
were
valued at $6,448 using the Black-Sholes pricing model and expensed. The
assumption ranges used in the Black-Scholes model are as
follows: (1) dividend yield of 0%; (2) expected volatility
of 149%, (3) risk-free interest rate of 4.62%, and
(4) expected life of 3 years.
During
nine months ended January 31, 2007, the Company granted options to purchase
an
aggregate of 4,500,000 shares of common stock to one employee and one Director.
At grant date, 1,000,000 options vested immediately. The vested and unvested
options have been valued at $636,433 using the Black-Sholes option pricing
model
with the following assumptions: (1) dividend yield of 0%; (2) expected
volatility of 131%; (3) risk-free interest rate of 5.04% and 5.24%, vest
over a
36 month period and expire if unexercised in five years.
During
the three and nine months periods ended January 31, 2007, the Company expensed
$176,814 and $703,264, respectively, in non-cash charges related to stock
and
option compensation expense.
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. 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.
In
accordance with EITF 00-27, a portion of the proceeds were allocated to the
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
our 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 were included in the
financial statements of that period.
In
connection with the private placement described above, the Company granted
1,755,537 common stock purchase warrants to the placement agent. The warrants
were exercisable immediately, have an exercise price of $0.215 per share
and
expire in five years. The warrants were valued at $1,033,100 using the
Black-Sholes pricing model. The assumption ranges used in the Black-Scholes
model are as follows: (1) dividend yield of 0%;
(2) expected volatility of 174% - 177%, (3) risk-free interest
rate of 3.65% - 4.7%, 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 at April 30, 2006 of $834,924. A Registration
Statement under Form SB-2, including the shares underlying the warrants,
was
declared effective by the Securities and Exchange Commission on May 31, 2006.
Therefore, the change in the fair value from April 30, 2006 to May 31, 2006
was
included in other income (expense) for three months ended January 31, 2007,
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 $567,069 and $834,924 at May 31, 2006 and
April 30, 2006, respectively. Additionally, as the Registration Statement
covering the underlying shares was declared effective, the accrued warrant
liability at May 31, 2006 was credited to additional-paid in capital. The
amount
credited to additional-paid-in capital was $567,069.
F-10
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Issued
870,000 shares of common stock for expense accrued during the year
ended
April 30, 2006. The shares have been valued at $418,600.
·
Issued
70,000 shares of common stock, valued at $38,500, for accrued additional
costs related to loans received by the Company during the year
end April30, 2006.
·
Issued
48,077 shares of common stock, valued at $13,285, related to penalty
provision accrued during the year end April 30,2006.
·
Issued
550,001 shares of common stock for subscription $330,000 received
during
the year end April 30, 2006.
NOTE
J -
STOCK OPTIONS AND WARRANTS
Share-Based
Compensation
The
Company adopted SFAS No. 123(R) during third quarter of Fiscal year 2006,
which
no longer permits the use of the intrinsic value method under APB No. 25.
The
Company uses the modified prospective method to adopt SFAS No. 123(R), which
requires compensation expense to be recorded for all stock-based compensation
granted on or after January 1, 2006, as well the unvested portion of previously
granted options. The Company is recording the compensation expense on a
straight-line basis, generally over the explicit service period of three
years.
The Company made no stock-based compensation grants prior to the adoption
of
Statement 123(R) and therefore has no unrecognized stock compensation related
liabilities or expense unvested or vested prior to 2006.
The
following tables illustrates the effect that adoption of SFAS No. 123(R)
had on
the Company's nine months ending January 31, 2007 results and cash flows
as well
as the parameters used in the valuation of options granted in the first nine
months of 2007.
In
February 2007, the Company received from two accredited investors’ subscriptions
totaling $40,000 for six month convertible notes of the Company bearing interest
at the rate of 6% per year and maturing on August 22 and August 27,2007.
NOTE
L -
GOING CONCERN MATTERS
The
accompanying 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 financial
statements during the period October 1, 2001 (date of inception) through
January31, 2007, the Company incurred losses of $17,230,171. Of these losses,
$2,989,931 was incurred during the nine months ending January 31, 2007 and
$6,734,000 in the nine months ending January 31, 2006. As of January 31,2007,
the Company also had a working capital deficit of $1,987,857. These factors
among others may indicate that the Company will be unable to continue as
a going
concern for a reasonable period of time.
F-11
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. While, the
planned principal operations have commenced, 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.
F-12
RUSSELL
BEDFORD STEFANOU MIRCHANDANI LLP
CERTIFIED
PUBLIC ACCOUNTANTS
REPORT
OF
REGISTERED INDEPENDENT CERTIFIED PUBLIC ACCOUNTING FIRM
Board
of
Directors
Sparta
Commercial Services, Inc.
New
York,
New York
We
have
audited the accompanying consolidated balance sheet of Sparta Commercial
Services, Inc., as of April 30, 2006 and 2005, and the related consolidated
statements of losses, deficiency in stockholders' equity and cash flows for
each
of the two years in the period ended April 30, 2006. These financial statements
are the responsibility of the company's management. Our responsibility is
to
express an opinion on the financial statements based upon our
audits.
We
have
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Sparta Commercial
Services, Inc. at April 30, 2006 and 2005, and the results of its operations
and
its cash flows for each of the two years in the period ended April 30, 2006,
in
conformity with accounting principles generally accepted in the United States
of
America.
The
accompanying financial statements have been prepared assuming the company
will
continue as a going concern. As discussed in the Note M to the accompanying
financial statements, the company has suffered recurring losses from operations
that raises substantial doubt about the company's ability to continue as
a going
concern. Management's plans in regard to these matters are also described
in
Note M. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Motorcycles
and other vehicles under operating leases, net of accumulated depreciation
of $75,873 and $13,392 at April 30, 2006 and April 30, 2005, respectively
(Note B) and loss reserve of $16,409 and $0 at April 30,2006 and
April 30, 2005, respectively
667,286
99,886
Property
and equipment, net of accumulated depreciation and
amortization of
$53,249 and $15,378 at April 30, 2006 and 2005, respectively (Note
D)
121,544
106,809
Lease
and Retail installment sale contract receivables, net of current
portion
and
loss reserve of $14,653 and $0 at April 30, 2006 and April 30,2005,
respectively (Note C)
595,895
21,521
Restricted
cash
112,503
-
Deposits
48,967
48,967
Total
assets
$
3,055,750
$
407,012
LIABILITIES
AND (DEFICIENCY IN) STOCKHOLDERS’ EQUITY
Current
Liabilities:
Accounts
payable and accrued expenses
$
424,692
$
509,936
Accrued
equity based compensation
333,600
Accrued
equity bases penalties
47,468
Note
payable, current (Note E)
358,549
300,000
Due
to related party (Note F)
-
25,000
Total
current liabilities
1,164,309
834,936
Deferred
revenue (Note A)
186,245
23,100
Notes
payable, long term
330,799
-
Warrant
liability
834,924
-
Total
liabilities
2,516,277
858,036
(Deficiency
in) Stockholders' Equity: (Note G)
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. 19,795 and 18,100 shares of convertible preferred stock are
issued
and outstanding
at April 30, 2006 and 2005, respectively.
1,979,500
1,810,000
Common
Stock, $0.001 par value; 340,000,000 shares authorized, 114,180,301
and
86,005,415
shares issued and outstanding at April 30, 2006 and 2005,
respectively
114,180
86,005
Common
stock to be issued, 5,838,302
5,838
-
Common
stock - subscribed
330,000
-
Additional
paid-in-capital
12,553,884
3,930,629
Deferred
compensation
(293,500
)
-
Accumulated
deficit
(14,150,429
)
(6,277,658
)
Total
(deficiency in) stockholders’ equity
539,473
(451,024
)
Total
liabilities and (deficiency in) stockholders’ equity
$
3,055,750
$
407,012
See
accompanying notes to consolidated financial statements
A
summary
of the significant accounting policies applied in the preparation of the
accompanying financial statements follows.
Business
and Basis of Presentation
Sparta
Commercial Services, Inc., formerly known as Tomahawk Industries, Inc. (the
"Company" or "Tomahawk") was formed on May 13, 1980 under the laws of the
State
of Nevada. On February 27, 2004, the Company entered into an Agreement of
Plan
and Reorganization ("Agreement") with Sparta Commercial Services, LLC
("Sparta"), a limited liability company formed on October 1, 2001 under the
laws
of the State of Delaware under the name of Sparta Financial Services, LLC.
.In
accordance with SFAS No. 141, Sparta was the acquiring entity. While the
transaction is accounted for using the purchase method of accounting, in
substance the Agreement is a recapitalization of the Company's capital
structure. As a result of the Agreement, there was a change in control of
the
Company. Also, subsequently, the Company's name was changed from Tomahawk
Industries, Inc. to Sparta Commercial Services, Inc. From April 1988 until
the
date of the Agreement, the Company was an inactive publicly registered shell
corporation with no significant assets or operations (see Note B).
The
Company is in the business as an originator and indirect lender for retail
installment loan and lease financing for the purchase or lease of new and
used
motorcycles (specifically 550cc and higher) and utility-oriented 4-stroke
all
terrain vehicles (ATVs). The Company was in the development stage till January31, 2005, as defined by Statement of Financial Accounting Standards No. 7
("SFAS
No. 7").
The
consolidated financial statements include the accounts of the Company and
its
wholly owned subsidiary, Sparta Commercial Services, LLC. Sparta Commercial
Services, LLC was inactive during the periods presented. 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.
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.
NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
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 April 30, 2006 and 2005, the Company had recorded deferred
revenue related to these contracts of $9,900 and $23,100,
respectively.
The
Company evaluates its operating and retail installment sales leases on an
ongoing basis and has established reserves for losses, based on current and
expected future experience.
The
Company recognizes website development costs in accordance with Emerging
Issue
Task Force ("EITF") No. 00-02, "Accounting for Website Development Costs."
As
such, the Company expenses all costs incurred that relate to the planning
and
post implementation phases of development of its website. Direct costs incurred
in the development phase are capitalized and recognized over the estimated
useful life. Costs associated with repair or maintenance for the website
are
included in cost of net revenues in the current period expenses.
Cash
Equivalents
For
the
purpose of the accompanying financial statements, all highly liquid investments
with a maturity of three months or less are considered to be cash
equivalents.
Income
Taxes
Deferred
income taxes are provided using the asset and liability method for financial
reporting purposes in accordance with the provisions of Statements of Financial
Standards No. 109, "Accounting for Income Taxes". Under this method, deferred
tax assets and liabilities are recognized for temporary differences between
the
tax bases of assets and liabilities and their carrying values for financial
reporting purposes and for operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be removed or settled. The effect on deferred
tax
assets and liabilities of a change in tax rates is recognized in the statements
of operations in the period that includes the enactment date. Temporary
differences between taxable income reported for financial reporting purposes
and
income tax purposes are insignificant.
Impairment
of Long-Lived Assets
The
Company has adopted Statement of Financial Accounting Standards No. 121 (SFAS
121). The Statement requires that long-lived assets and certain identifiable
intangibles held and used by the Company be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset
may not be recoverable. SFAS No. 121 also requires assets to be disposed
of be
reported at the lower of the carrying amount or the fair value less costs
to
sell.
Comprehensive
Income
Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income," establishes standards for reporting and displaying of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined
to include all changes in equity except those resulting from investments
by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. At April 30, 2006 and 2005, the Company has no items of other
comprehensive income.
NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
Segment
Information
The
Company does not have separate, reportable segments under Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise
and
Related Information ("SFAS 131"). SFAS establishes standards for reporting
information regarding operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS 131 also establishes standards
for related disclosures about products and services and geographic areas.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the
chief
operating decision maker, or decision making group, in making decisions how
to
allocate resources and assess performance. The information disclosed herein,
materially represents all of the financial information related to the Company's
principal operating segment.
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.
During
the year ended April 30, 2006, the Company had no employee stock options
for the
period prior to the adoption of Statement 123R.
Had
compensation costs for the Company's stock options been determined based
on the
fair value at the grant dates for the awards, the Company's net loss and
losses
per share would have been as follows (transactions involving stock options
issued to employees and Black-Scholes model assumptions are presented in
Note
G):
2006
2005
Net
loss - as reported
$
(5,956,517
)
$
(2,579,821
)
Add:
Total stock based employee
compensation
expense as reported under
intrinsic
value method (APB. No. 25)
-
82,500
Deduct:
Total stock based employee
compensation
expense as reported under fair value based
method
(SFAS No. 123)
(24,710
)
(49,420
)
Net
loss - Pro Forma
$
(5,981,227
)
$
(2,546,741
)
Net
loss attributable to common stockholders - Pro forma
$
(7,897,482
)
$
(4,385,647
)
Basic
(and assuming dilution) loss per share - as reported
$
(0.08
)
$
(0.05
)
Basic
(and assuming dilution) loss per share - Pro forma
$
(0.08
)
$
(0.05
)
Concentrations
of Credit Risk
Financial
instruments and related items, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash, cash equivalents
and
trade receivables. The Company places its cash and temporary cash investments
with high credit quality institutions. At times, such investments may be
in
excess of the FDIC insurance limit. The Company periodically reviews its
trade
receivables in determining its allowance for doubtful accounts. At April30,2006 and 2005, allowance for doubtful accounts receivables was $19,743 and
$0
respectively.
NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
Allowance
for Loan Losses
The
allowance for loan losses is increased by charges against earnings and decreased
by charge-offs (net of recoveries). In addition to the allowance for loan
losses, a reserve for credit losses has been established using unearned interest
and dealer discounts to absorb potential credit losses. To the extent actual
credit losses exceed these reserves, a bad debt provision is recorded; and
to
the extent credit losses are less than the reserve, the reserve is accreted
into
income over the remaining estimated life of the pool. Management’s periodic
evaluation of the adequacy of the allowance is based on the Company’s past loan
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower’s ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
The
Company charges-off receivables when an individual account has become more
than
120 days contractually delinquent. In the event of a repossession, the
charge-off will occur in the month in which the vehicle was repossessed.
Derivative
Financial Instruments
In
connection with the private placement described above, the Company granted
1,755,537 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 $1,033,100 using the
Black-Sholes pricing model. The assumption ranges used in the Black-Scholes
model are as follows: (1) dividend yield of 0%;
(2) expected volatility of 174% - 177%, (3) risk-free interest
rate of 3.65% - 4.7%, 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 ($1,033,100) and included the change in fair
value from the date of issuance to April 30, 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 $834,924 at April 30, 2006.
Property
and Equipment
Property
and equipment are recorded at cost. Minor additions and renewals are expensed
in
the year incurred. Major additions and renewals are capitalized and depreciated
over their estimated useful lives. Depreciation is calculated using the
straight-line method over the estimated useful lives. Estimated useful lives
of
major depreciable assets are as follows:
The
Company follows a policy of charging the costs of advertising to expenses
incurred. During the years ended April 30, 2006 and 2005, the Company incurred
advertising costs of $36,594 and $28,107, respectively.
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.
NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
Per
share
basic and diluted net loss attributable to common stockholders amounted
to $0.08 and $0.05 for the years ended April 30, 2006 and 2005,
respectively. At April 30, 2006 and 2005, 27,069,527 and 19,263,642 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.
New
Accounting Pronouncements
In
March
2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of
Financial Assets - an amendment to FASB Statement No. 140. Statement 156
requires that an entity recognize a servicing asset or servicing liability
each
time it undertakes an obligation to service a financial asset by entering into
a
service contract under certain situations. The new standard is effective for
fiscal years beginning after September 15, 2006. The Company does not
expect its adoption of this new standard to have a material impact on its
financial position, results of operations or cash flows.
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
May
2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No.
154,
“Accounting Changes and Error Corrections, a replacement of APB Opinion No.
20
and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior
periods’
financial statements for changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS 154 also requires that retrospective application
of a
change in accounting principle be limited to the direct effects of the change.
Indirect effects of a change in accounting principle, such as a change in
non-discretionary profit-sharing payments resulting from an accounting change,
should be recognized in the period of the accounting change. SFAS 154 also
requires that a change in depreciation, amortization, or depletion method for
long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS 154 is effective
for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes
and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Company does not expect the adoption of this SFAS
to
have a material impact on its consolidated financial position, results of
operations or cash flows.
NOTE
B - MOTORCYCLES AND OTHER VEHICLES UNDER OPERATING LEASES
Motorcycles
and other vehicles under operating leases at April 30, 2006 and 2005 consist
of
the following:
2006
2005
Motorcycles
and other vehicles
$
759,568
$
113,278
Less:
accumulated depreciation
(75,873
)
(13,392
)
Motorcycles
and other vehicles, net of accumulated depreciation
683,695
99,886
Less:
estimated reserve for residual values
(16,409
)
--
Motorcycles
and other vehicles under operating leases, net
$
667,286
$
99,886
At
April30, 2006, motorcycles and other vehicles are being depreciated to the estimated
residual values of $395,869 over the lives of their lease contracts.
Depreciation expense for the years ended April 30, 2006 and 2005 was $75,033
and
$13,392, respectively. Certain of the assets are pledged as collateral for
the
note described in Note E.
The
following is a schedule by years of minimum future rentals on non cancelable
operating leases as of April 30, 2006:
Retail
installment sale receivables, which are carried at cost, were $822,624 and
$36,285 at April 30, 2006 and 2005, respectively. The following is a schedule
by
years of future payments related to these receivables. Future payments include
amortization of cost as well as a profit margin. Certain of the assets are
pledged as collateral for the note described in Note E.
Depreciation
and amortization expense was $37,871 and $15,348 for the years ended April30,2006 and 2005, respectively.
NOTE
E - 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 assets. The assets securing the notes have an aggregate book value
of
$674,064 at April 30, 2006. The weighted average interest rate at April 30,2006
is 8.879%.
At
April30, 2006, the notes payable mature as follows:
Year
ended April 30
Amount
2007
$
358,549
2008
-
2009
18,685
2010
12,529
2011
299,585
$
689,348
Notes
payable at April 30, 2005 consisted of the following:
Notes
payables; 10% interest, unsecured, originally scheduled to expire
on
April
30,2005, the note holders are entitled to an "Equity Kicker" equal
to
128,206
restricted
shares of common stock for each $100,000 loaned, in the event
of
default,
as penalty, the repayment after default of promissory note shall
be
collateralized
by certain security interest as per the terms of the
agreement
Notes
were subsequently extended until August 31, 2005 and beyond, with
interest
increased
to 20% in certain instances, and the Equity Kicker equal
to
192,308
restricted shares of common stock for each $100,000 loaned in certain
instances
$
300,000
Note
payable to officer of the Company, unsecured, non-interest bearing,
payable on demand (Note F)
25,000
325,000
Less:
current portion
(325,000
)
Notes
payable - long term
$
—
During
the year ended April 30, 2006, the Company repaid $175,000 of the loans in
cash.
Additionally, 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.
The
Company entered in to a licensing agreement relating to the use of a proprietary
operating system, with an entity controlled by the Company's President and
Chief
Executive Officer. During the years ended April 30, 2006 and 2005, the Company
charged to operations $67,000 and $150,633, respectively, in connection with
the
licensing agreement.
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 April 30,2005,
payments against this obligation of $81,000 were made. The balance of $169,000
was paid during the year ended April 30, 2006.
During
the year ended April 30, 2006, the Company purchased certain of its vehicles
from American Motorcycle Leasing Corp. These purchases aggregated $105,748.
At
April 30, 2006, the Company had a payable to American Motorcycle Leasing Corp.
in the amount of $20,224 related to such purchases.
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 during
the
year ended April 30, 2006.
NOTE
G - EQUITY INSTRUMENTS
The
Company is authorized to issue 10,000,000 shares of preferred stock with $0.001
par value per share and $100 stated value per share, of which 35,840 shares
have
been designated as Series A convertible preferred stock, and 340,000,000 shares
of common stock with $0.001 par value per share. As of April 30, 2006 and 2005,
the Company has issued and outstanding 19,795 and 18,100 shares of preferred
stock issued and outstanding, respectively. The Company has 114,180,301 and
86,005,415 shares of common stock issued and outstanding as of April 30, 2006
and 2005, respectively.
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 year ended April 30, 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
April 30, 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
the year ended April 30, 2006, the Company issued an aggregate of 850,000 shares
of common stock, pursuant to a consulting agreement. The shares have been valued
at $649,000 and this amount is being amortized over the term of the agreement,
commencing August 1, 2005. During the year ended April 30, 2006the Company
has
charged $355,500 to expense.
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 April 30, 2006 and the shares were issued in July 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. The
shares were issued during the fourth quarter.
During
the year ended April 30, 2006, the Company sold 17,555,369 shares of common
stock through a private placement. The Company received net proceeds of
$2,977,946 from the sale. Costs of $405,760 were deducted from the gross
proceeds and additional costs of $39,591 were paid by the Company.
In
connection with the private placement described above, the Company granted
1,755,537 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 $1,033,100 using the
Black-Sholes pricing model. The assumption ranges used in the Black-Scholes
model are as follows: (1) dividend yield of 0%;
(2) expected volatility of 174% - 177%, (3) risk-free interest
rate of 3.65% - 4.7%, 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 ($1,033,100) and included the change in fair
value from the date of issuance to April 30, 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 $834,924 at April 30, 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 and February 2006, the Company issued 10,291,666 shares of common stock
upon conversion of 16,055 shares of preferred stock.
During
February 2006, the Company issued 1,436,647 shares of common stock upon the
cashless exercise of 1,923,079 warrants.
During
March 2006, the Company entered into an agreement pursuant to which it agreed
to
issue 70,000 shares of common stock for consulting and advisory services. The
shares have been valued at $47,600, based on the fair value of the Company’s
common stock on the date of the agreement. The shares were issued in July 2006
and are recorded as an accrued expense at April 30, 2006.
During
April 2006, the Company entered into an agreement pursuant to which it agreed
to
issue a total of 3,050,000 shares of common stock for consulting and advisory
services. Of these shares, 550,000 were due upon execution of the agreement,
with the remainder payable over a twelve month period. The vested shares have
been valued at $286,000, based on the fair value of the Company’s common stock
on the date of the agreement. The shares were issued in May 2006 and are
recorded as an accrued expense at April 30, 2006.
In
January, 2005, 113,635 shares of restricted stock issued to the former Chief
Financial Officer, Daniel Lanjewar, were vested and issued.
In
April,
2005, 96,155 shares were issued pursuant to an agreement with two individuals
who provided short term note payable financing to the Company.
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.
In
December 2004, the Company began a private placement transaction utilizing
a
designated registered broker-dealer as a placement agent. During the year ended
April 30, 2005, the Company issued 12,250 preferred shares at a stated value
of
$100 per share and warrants to purchase 3,926,286 shares of common stock,
exercisable for three years at $0.195 per share, for aggregate gross proceeds
of
$1,225,000 received from investors. In connection with the private placement,
during the year ended April 30, 2005, the Company issued as compensation to
the
placement agent warrants to 785,257 shares of common stock, exercisable for
five
years at $0.172 per share. The warrants, which were valued at approximately
$383,284 using the Black-Scholes option pricing model, were recognized as a
cost
of issuance of the Series A Preferred shares.
During
the year ended April 30, 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.
In
accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Preferred Stock. The Company
recognized and measured an aggregate of $1,810,000, 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.
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.
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 April 30, 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 was filed
on
April 28, 2006. On May 31, 2006 the Securities and Exchange Commission declared
the Registration Statement effective. The Company has obtained waivers covering
a substantial amount of the potential penalty shares and warrants. The Company
has accrued an expense of $47,468 during the year ended April 30, 2006 relative
to the penalty provisions for which it did not obtain waivers. This amount
will
be settled through the issuance of equity securities. As of April 30, 2006,
an
aggregate of 60,086 penalty shares and 30,048 penalty warrants has been accrued.
During
January and February 2006, the Company issued 10,291,666 shares of common stock
upon conversion of 16,055 shares of preferred stock.
NOTE
H - INCOME TAXES
Financial
Accounting Standard No. 109 requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statement or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between
financial statements and tax bases of assets and liabilities using enacted
tax
rates in effect for the year in which the differences are expected to reverse.
Temporary differences between taxable income reported for financial reporting
purposes and income tax purposes are insignificant.
At
April30, 2006, the Company has available for federal income tax purposes a net
operating loss carry forward of approximately $9,650,000, expiring in the year
2026, that may be used to offset future taxable income. The Company has provided
a valuation reserve against the full amount of the net operating loss benefit,
since in the opinion of management based upon the earnings history of the
Company; it is more likely than not that the benefits will not be realized.
Also, due to change in the control after reverse acquisition of Sparta
Commercial Services, Inc., the Company's past accumulated losses to be carried
forward may be limited.
Components
of deferred tax assets as of April 30, 2006 are as follows:
Non
current:
Net
operating loss carry forward
$
3,281,000
Valuation
allowance
(3,281,000
)
Net
deferred tax asset
$
—
The
valuation allowance increased by $1,751,000 during the year ended April 30,2006.
The
following table presents the computation of basic and diluted loss per
share:
2006
2005
Net
loss available for common shareholders
$
(7,872,772
)
$
(4,418,727
)
Basic
and diluted loss per share
$
(0.08
)
$
(0.05
)
Weighted
average common shares outstanding-basic
Diluted
95,479,102
85,812,006
NOTE
J - STOCK OPTIONS AND WARRANTS
On
April29, 2005, the Company issued to the Chief Operating Officer non qualified stock
options to purchase 875,000 shares of the company's common stock at an exercise
price of $0.605 per share. The options have a five year life.
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.
a)
The
following table summarizes the stock options issued to officers and employees
outstanding and the related price.
Stock
Options Outstanding
Stock
Options Exercisable
Weighted
Average
Weighted
Weighted
Remaining
Average
Average
Number
Contractual
Exercise
Number
Exercise
Outstanding
Life
(Years)
Price
Exercisable
Price
1,035,000
4.9
$
0.60
350,000
$
0.60
Transactions
involving stock options issued to employees are summarized as follows:
The
weighted-average fair value of stock options granted during the years ended
April 30, 2006 and 2005 was $0.47 and $0.28, respectively, and the
weighted-average significant assumptions used to determine those fair values,
using a Black-Scholes option pricing model are as follows:
There
was
no intrinsic value to vested or nonvested options at April 30,2006.
At
April30, 2006, total compensation expense related to nonvested awards not yet
recognized was $214,960. This amount will be recognized over a weighted-average
period of 3 years. Compensation for fixed award with graded vesting is
recognized on a straight line basis.
b)
The
following table summarizes the changes in warrants outstanding and the related
prices for the shares of the Company's common stock issued to non-employees
of
the Company.
Warrants
Outstanding
Warrants
Exercisable
Weighted
Average
Remaining
Weighted
Average
Weighted
Average
Exercise
Number
Contractual
Life
Exercise
Number
Exercise
Prices
Outstanding
(Years)
Price
Exercisable
Price
$
0.195
11,590,395
2.00
$
0.195
11,590,395
$
0.195
$
0.215
1,755,537
4.75
$
0.215
1,755,537
$
0.215
$
0.195
13,345,932
2.35
$
0.198
13,3445,932
$
0.198
Transactions
involving stock warrants issued to non-employees are summarized as
follows:
The
weighted-average fair value of stock warrants granted to non-employees during
the years ended April 30, 2006 and 2005 was $0.50 and $0.49, respectively,
and
the weighted-average significant assumptions used to determine those fair
values, using a Black-Scholes option pricing model are as follows:
The
amount of the expense charged to operations for compensatory warrants granted
in
exchange for services was $406,665 and $473,264 for the years ended April 30,2006 and 2005, respectively.
NOTE
K - COMMITMENTS AND CONTINGENCIES
Operating
Lease Commitments
In
October 2004, the Company entered into a lease agreement with an unrelated
party
for office space in New York City from December 1, 2004 through November 30,2007. Total lease rental expense for the years ended April 30, 2006 and 2005,
was $142,584 and $125,214, respectively.
Commitments
for minimum rentals under non-cancelable leases at April 30, 2006 are as
follows:
Year
ended April 30,
Amount
2007
$
177,061
2008
104,973
$
282,034
Employment
and Consulting Agreements
The
Company does not have employment agreements with any of its non-executive
employees.
The
Company has consulting agreements with outside contractors to provide marketing
and financial advisory services. The Agreements are generally for a term of
12
months from inception and renewable automatically from year to year unless
either the Company or Consultant terminates such engagement by written
notice.
We
entered into an employment agreement, dated as of July 12, 2004, with Anthony
L.
Havens, our Chief Executive Officer. The employment is for a term of five years.
The employment term is to be automatically extended for one five-year period,
and additional one-year periods, unless written notice is given three months
prior to the expiration of any such term that the term will not be extended.
He
is entitled to six weeks of paid vacation per year, and health insurance, short
term and long term disability insurance, retirement benefits, fringe benefits,
and other employee benefits on the same basis as is generally made available
to
other senior executives. He did not receive any equity compensation as part
of
this agreement.
On
November 1, 2004, the Company entered into an employment agreement with Richard
P. Trotter, pursuant to which the Company agreed to issue 125,000 shares of
common stock during the course of the agreement. The grant of shares is subject
to vesting and subject to continued employment. On November 1, 2004, 25,000
shares vested and are yet to be issued, and the remainder of the shares are
to
vest, subject to proportionate adjustment in the event of employment termination
for any incomplete vesting period, as follows: 25,000 shares on November 1,2005; 25,000 shares on November 1, 2006; 25,000 shares on November 1, 2007;
12,500 shares on November 1, 2008; and 12,500 on November 1, 2009. During the
years ended April 30, 2006 and 2005, the Company has recorded $20,000 as expense
for each year as per this employment agreement.
Litigation
The
Company is subject to legal proceedings and claims which arise in the ordinary
course of its business. Although occasional adverse decisions or settlements
may
occur, the Company believes that the final disposition of such matters should
not have a material adverse effect on its financial position, results of
operations
or
liquidity.
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.
·
Incurred
costs of $182,483 related to the sale of preferred stock. These costs
were
deducted from the proceeds.
·
Issued
464,745 shares of common stock, valued at $243,270, as additional
costs
related to loans received by 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.
·
Issued
an aggregate of 850,000 shares of common stock, pursuant to a consulting
agreement. The shares have been valued at $649,000 and this amount
is
being amortized over the term of the agreement, commencing August1,2005.
·
Issued
113,637 shares of common stock, valued at $85,228, for
services.
·
Issued
10,291,666 shares of common stock upon conversion of 16,055 shares
of
preferred stock.
·
Incurred
costs of $405,761 related to the sale of common stock. These costs
were
deducted from the proceeds.
·
Granted
an aggregate of 160,000 stock options to employees.
Recorded
a dividend on preferred stock of $1,810,000 related to the fair value
of
the class 'C' warrants issued with preferred stock and the related
beneficial conversion feature.
NOTE
M - GOING CONCERN MATTERS
The
accompanying 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 financial
statements during the period October 1, 2001 (date of inception) through April30, 2006, the Company incurred loss of $14,150,429. 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.
F-32
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
24.
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under
the
Nevada Revised Statutes and our Amended Articles of Incorporation, our directors
and officers will have no individual liability to us or our stockholders or
creditors for any damages resulting from the officer's or director's act or
failure to act in his or her capacity as an officer or director unless it is
proven that (i) the officer's or director's act or failure to act constituted
a
breach of his or her fiduciary duties as an officer or director; and (ii) the
officer's or director's breach of those duties involved intentional
misconduct, fraud or a knowing violation of law. The effect of this statute
and
our Amended Articles of Incorporation is to eliminate the individual liability
of our officers and directors to the corporation or its stockholders or
creditors, unless any act or failure to act of an officer or director
meets
both
situations listed in (i) and (ii) above.
Our
Amended Articles of Incorporation provide for the indemnification of our
officers and directors to the maximum extent permitted by Nevada law. The Nevada
Revised Statutes also provide that a corporation may indemnify any officer
or
director who is a party or is threatened to be made a party to a litigation
by reason of the fact that he or she is or was an officer or director of the
corporation, or is or was serving at the request of the corporation as an
officer or director of another corporation, partnership, joint venture, trust
or
other enterprise, against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by such officer
or director if (i) there was no breach by the officer or director of his or
her
fiduciary duties to the corporation involving intentional misconduct, fraud
or
knowing violation of law; or (ii) the officer or director acted in good faith
and in a manner which he or she reasonably believed to be in or not opposed
to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful.
ITEM
25.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, if any, payable by the Registrant relating to the
sale of common stock being registered. All amounts are estimates except the
SEC
registration fee.
SEC
registration fee
$
2,505.76
Printing
and engraving expenses
5,000.00
Legal
fees and expenses
30,000.00
Accounting
fees and expenses
20,000.00
Transfer
agent and registrar's fees and expenses
10,000.00
Miscellaneous
expenses
10,000.00
Total
$
77,505.76
The
Registrant has agreed to bear expenses incurred by the selling stockholders
that
relate to the registration of the shares of common stock being offered and
sold
by the selling stockholders.
ITEM
26.
RECENT SALES OF UNREGISTERED SECURITIES.
From
November 2006 through May 25, 2007, the Company sold to fifteen accredited
investors six months unsecured notes in the aggregate amount of $880,259. All
notes bears 6% simple interest, payable in cash or shares, at the Company’s
option, with principal and accrued interest payable at maturity. Should the
Company opt to convert these notes at maturity, these notes will be convertible
into shares of common stock at a price equal to a 40% discount from the lowest
closing price of the Company’s common stock for the five trading days
immediately preceding the receipt of funds by the Company from the purchaser
of
note. All notes will mature in six months on various dates through November25,2007.
During
the nine months ended January 31, 2007, the Company issued 250,000 shares of
common stock, valued at $48,500, as additional costs related to loans received
by the Company. This amount was charged to financing cost during the nine months
ended January 31, 2007.
During
nine months ended January 31, 2007, the Company granted options to purchase
an
aggregate of 4,500,000 shares of common stock to one employee and one Director.
At grant date, 1,000,000 options vested immediately. The vested and unvested
options have been valued at $636,433 using the Black-Sholes option pricing
model
with the following
assumptions: (1) dividend yield of 0%; (2) expected volatility of 131%; (3)
risk-free interest rate of 5.04% and 5.24%, vest over a 36 month period and
expire if unexercised in five years.
II-1
During
December 2006, the Company granted 100,000 common stock purchase warrants to
a
placement agent for future investments services. The warrants were exercisable
immediately, have an exercise price per share equal to 110% per share of the
closing bid price of the closing bid price of a share of the Company’s common
stock on the date of this warrant and expire in three years. The warrants were
valued at $6,448 using the Black-Sholes pricing model and expensed. The
assumption ranges used in the Black-Scholes model are as
follows: (1) dividend yield of 0%; (2) expected volatility
of 149%, (3) risk-free interest rate of 4.62%, and
(4) expected life of 3 years.
During
November 2006, the Company issued 69,500 shares of common stock, pursuant to
a
consulting agreement. The shares have been valued at $6,745.
During
October 2006, the Company issued 550,001 shares of common stock for shares
subscribed for in November 2005.
During
October 2006, the Company issued 320,963 shares of common stock for warrants
exercised for $62,500.
In
September and October 2006, the Company sold to four accredited investors’
bridge notes in the aggregate amount of $275,000. Three 45-day bridge notes
aggregating $175,000 and one 90-day note in the amount of $100,000 were
originally scheduled to expire on various dates through November 30, 2006,
together with simple interest at the rate of 10%. The notes provide that 100,000
shares of the Company's restricted common stock are to be issued as “Equity
Kicker” for each $100,000 of notes purchased, or any pro rated portion thereof.
The Company had the right to extend the maturity date of notes for 30 to 45
days. The notes provided that in the event of extension, the lenders will be
entitled for “additional equity” equal to 60% of the “Equity Kicker” shares. In
the event of default on repayment by the Company, the “Equity Kicker” and the
“Additional Equity” to be issued to the lender shall be increased by 50% for
each month or portion thereof, as penalty, that such default has not been cured.
During default period interest will be at the rate of 20%. The repayments,
in
the event of default, of the notes are to be collateralized by certain security
interest as per the terms of the agreement.
The
maturity dates of the notes were subsequently extended to various dates between
December 5, 2006 to December 30, 2006, with simple interest rate of 10%, and
Additional Equity in the aggregate amount of 165,000 restricted shares of common
stock to be issued. Thereafter, the Company is in default on repayment of these
notes and is now subject to 20% interest rate and the “Additional Equity” equal
to 50% increased shares for each month or portion thereof, as penalty, until
such default has not been cured. As of January 31, 2007, the Company is obliged
to issue 517,742 kicker, additional kicker and default shares valued at $73,446
to such creditors.
During
September 2006, the Company issued 350,000 shares of common stock, pursuant
to a
consulting agreement. The shares have been valued at $56,000.
During
August 2006, the Company issued an aggregate of 139,000 shares of common stock,
pursuant to a consulting agreement. The shares have been valued at
$26,410.
During
July 2006, the Company issued 70,000 shares of common stock, valued at $38,500,
for accrued costs related to loans received by the Company during the year
end
April 30, 2006.
During
July 2006, the Company issued 48,077 shares of common stock, valued at $13,285,
related to penalty provision accrued during the year end April 30,2006.
During
July 2006, the Company issued 5,838,302 shares of common stock for shares
subscribed for in March 2006.
During
July 2006, the Company received $62,500 upon the exercise of 320,513 warrants.
The shares were issued September, 2006.
During
June and July 2006, the Company issued an aggregate of 208,500 shares of common
stock, pursuant to a consulting agreement. The shares have been valued at
$74,365.
During
July 2006, the Company issued 320,000 shares of common stock, valued at
$132,600, for accrued expenses recorded during the year end April 30,2006.
During
May 2006, the Company issued 550,000 shares of common stock, valued at $286,000,
for accrued expenses recorded during the year end April 30, 2006.
II-2
On
March29, 2006, we concluded a private placement, commenced in December 2005, to
raise
up to $3,500,000 through the sale of our common stock in which sold at a price
of $0.195 per share. In transactions with accredited investors exempt from
registration pursuant to Section 4(2) of the Securities Act we sold an aggregate
of 17,555,369 shares for proceeds of $3,423,297. The private placement was
conducted by a placement agent on a best efforts basis. The units were being
offered solely to accredited investors. The placement agent is entitled to
10%
of the cash proceeds from the private placement and reimbursement for expenses,
and warrants to purchase such number of shares of common stock, exercisable
for
five years at $0.2145 per share from the date of issuance, as equals 10% of
the
number of shares of common stock underlying the preferred stock
sold.
In
December 2005, three individuals loaned the Company $175,000 at 10% for 90
days.
These individuals were issued a total of 70,000 shares of common stock in
connection with the loans. The loans were repaid in January 2006.
On
July20, 2005, we concluded a private placement, commenced in December 2004, to
raise
up to $3,000,000 through the sale of up to 30 units of our securities at
$100,000 per unit. In transactions with accredited investors exempt from
registration pursuant to Section 4(2) of the Securities Act we sold an aggregate
of 29.95 units for proceeds of $2,995,000. Each unit consisted 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. The private placement was conducted by a placement
agent on a best efforts basis. The units were being offered solely to
accredited
investors. The placement agent is entitled to 10% of the cash proceeds from
the
private placement and reimbursement for expenses, and warrants to purchase
such
number of shares of common stock, exercisable for five years at $0.172 per share
from the date of issuance, as equals 10% of the number of shares of common
stock
underlying the preferred stock sold.
In
July
2005, we sold an accredited investor in a transaction exempt from registration
pursuant to Section 4(2) of the Securities Act, for the sum of $5,000, 50 shares
of series A convertible, redeemable preferred stock and warrants to purchase
6,026 shares of common stock, exercisable for three years
at
$0.195
per share.
Between
May and July 2004, we sold certain rights to seven accredited investors for
aggregate gross proceeds of $585,000 in transactions deemed exempt from
registration pursuant to Section 4(2) of the Securities Act. Pursuant to the
terms of the rights, in the event that we conduct a private placement
transaction in 2004 utilizing a designated registered broker-dealer as a
placement agent, the rights automatically convert into the securities sold
in
such private placement at the private placement sale price. On January 1, 2005,
these rights were automatically converted into 5.85 units. 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.
In
October and November 2004, pursuant to loan agreements, we issued promissory
notes for the aggregate principal amount of $375,000. Pursuant to the loan
agreements, the notes carried interest at the rate of 10% per year, and we
agreed to grant 128,206 restricted shares of common stock to the note holders
for each $100,000 loaned. The notes were to mature in April 2005. In the event
of default on repayment of the promissory notes, as penalty, (i) the interest
rate on the unpaid principal shall be increased to a rate of 20% per annum
commencing from the date of default, (ii) the equity kicker shall be increases
to a rate of 192,308 restricted shares of common stock for each $100,000 loaned,
and (iii) the repayment after default of the promissory notes shall be
collateralized by a subordinated security interest in our assets. The security
interest shall be subordinate to the rights of any lending institution, any
asset-based lending agreement, and any rights and preferences of any subscribers
in the private placement of units that commenced in December 2004. Through
April29, 2005, we repaid notes with an aggregate principal amount of $150,000 and
accrued interest thereon, and issued 192,309 shares of common stock to the
note
holders. In April 2005, the four note holders of the remaining principal amount
of $225,000 agreed to extend the maturity date of the loans from April 30,2005
to May 31, 2005. In consideration of the extension, the interest rate on three
notes were increased to the rate of 20% per year and the shares of common stock
issuable to certain of those note holders will be based on 192,308 restricted
shares of common stock for each $100,000 loaned. On or about May 25, 2005 and
May 27, 2005, the four note holders further agreed to extend the maturity date
of the loans, so that one note in the principal amount of $50,000 was due June15, 2005, and the three other notes in the aggregate principal amount of
$175,000 were due June 30, 2005. In June 2005, we repaid two notes with the
principal amount of $75,000 and issued 96,155 shares of common stock to the
note
holders with 48076 shares yet to be issued. In June 2005, a holder of a $50,000
note due June 30, 2005 agreed to extend the maturity date to August 15, 2005,
and another holder of a $100,000 note due June 30, 2005 agreed to extend the
maturity date to September 1, 2005. In November, 2005 the holders of the
$150,000 remaining notes agreed to convert their notes plus $12,780.83 in
accrued interest thereon into 651,124 shares of common stock at the conversion
rate of $.25 per share.
In
April
2005, in a transaction deemed exempt from registration pursuant to Section
4(2)
of the Securities Act, we issued options to purchase 200,000 shares of our
common stock to Jaffoni & Collins Incorporated pursuant to a consulting
agreement for public relations services. The options are exercisable for three
years at $0.195 per share. In March 2006 this contract was cancelled and we
rescinded 100,000 of such options.
II-3
On
August2, 2004, pursuant to an employment agreement with Daniel J. Lanjewar, our former
Chief Financial Officer, we agreed to issue 568,175 shares of our common stock
in a transaction deemed exempt from registration pursuant to Section 4(2) of
the
Securities Act. The grant of shares was subject to vesting and subject to
continued employment. On January 1, 2005, 113,635 shares vested, and the
reminder of the shares were to vest in equal portions on July 1, 2005, July1,2006, July 1, 2007, and July 1, 2008, subject to proportionate adjustment in
the
event of employment termination for any incomplete vesting period. In April
2005, Mr. Lanjewar resigned as our Chief Financial Officer, and was vested
with
an additional 113,637 shares of common stock, which is yet to be
issued.
On
April29, 2005, pursuant to an option agreement with Richard Trotter, our Chief
Operating Officer, we agreed to issue options to purchase up to 875,000 shares
of our common stock in a transaction deemed exempt from registration pursuant
to
Section 4(2) of the Securities Act. Subject to vesting, the stock options are
exercisable for five years from the vesting date at $0.605 per share. Twenty
percent of the options vested on April 29, 2005, and the remaining options
are
to vest in equal installments over the next four anniversary dates of the
agreement.
In
July,
2005, we sold one accredited investor in a transaction deemed exempt from
registration pursuant to Section 4(2) of the Securities Act, for the sum of
$5,000, 50 shares of Series A convertible, redeemable preferred stock and
warrants to purchase 6,026 shares of common stock, exercisable for three years
at $.0195 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 a rate of one preferred share
into
641 shares of common stock. We used the proceeds for working capital purchases.
*
All of
the above offerings and sales were deemed to be exempt under Section 4(2) of
the
Securities Act of 1933, as amended. No advertising or general solicitation
was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors, business
associates of our company or executive officers of our company, and transfer
was
restricted by our company in accordance with the requirements of the Securities
Act of 1933. In addition to representations by the above-referenced persons,
we
have made independent determinations that all of the above-referenced persons
were accredited or sophisticated investors, and that they were capable of
analyzing the merits and risks of their investment, and that they understood
the
speculative nature of their investment. Furthermore, all of the above-referenced
persons were provided with access to our Securities and Exchange Commission
filings.
Except
as
expressly set forth above, the individuals and entities to whom we issued
securities as indicated in this section of the registration statement are
unaffiliated with us.
Certificate
of Designation for Series A Redeemable Preferred Stock, December
2004
(Incorporated by reference to Exhibit 3(i) of Form 8-K filed on January4,2005)
Consent
of Russell Bedford Stefanou Mirchandani LLP
Exhibit
23.2*
Consent
of Sinchenzia Ross Friedman Ference LLP (see Exhibit
5.1)
*
Filed
herewithin
II-5
ITEM
28.
UNDERTAKINGS.
The
undersigned Company hereby undertakes to:
(1)
File,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement to:
(i)
Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii)
Reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of the securities offered would not exceed
that which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) under the Securities Act
if,
in the aggregate, the changes in volume and price represent no more than a
20%
change in the maximum aggregate offering price set forth in the "Calculation
of
Registration Fee" table in the effective registration statement,
and
(iii)
Include any additional or changed material information on the plan of
distribution.
(2)
For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide
offering.
(3)
File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(4)
For
purposes of determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5)
For
determining any liability under the Securities Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement
for
the securities offered in the registration statement, and that offering of
the
securities at that time as the initial bona fide offering of those
securities.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that
in
the opinion of the Securities and Exchange Commission such indemnification
is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In
the
event that a claim for indemnification against such liabilities (other than
the
payment by the Company of expenses incurred or paid by a director, officer
or
controlling person of the Company in the successful defense of any action,
suit
or proceeding) is asserted by such director, officer or controlling person
in
connection with the securities being registered, the Company will, unless in
the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such
issue.
II-6
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorizes this registration statement
to be signed on its behalf by the undersigned, in the City of New York, State
of
New York, on June 4, 2007.
KNOW
ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Anthony L. Havens his or her true and lawful
attorneys-in-fact, with full power of substitution and resubstitution, for
him
or her and in his or her name, place and stead, in any and all capacities to
sign any and all amendments (including post-effective amendments) to this
registration statement and to sign a registration statement pursuant to Section
462(b) of the Securities Act of 1933, and to file the same with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes
as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on
the
dates indicated:
