RISK
FACTORS
You
should carefully consider the following factors, as well as other information
appearing elsewhere in this prospectus, before you decide whether to purchase
any of our common stock offered in this prospectus.
Risks
Related to Our Financial Results
We
have a history of operating losses.
Through
our fiscal year ended April 30, 2009, we have generated cumulative sales
revenues of $3,297,271, have incurred significant expenses, and have sustained
significant losses. Our net loss for the year ended April 30, 2009 was
$4,921,846 (after $1,794,610 in non-cash charges). As of April 30, 2009, we had
a deficit net worth of $6,126,410.
Through
our fiscal quarter ended July 31, 2009, we have generated cumulative sales
revenues of $3,514,075, have incurred significant expenses, and have sustained
significant losses. Our net loss for the quarter ended July 31, 2009 was
$994,456 (after $353,908 in non-cash charges). As of July 31, 2009, we had a
deficit net worth of $2,598,043.
We
have entered into credit lines with institutional lenders, which have acquired
preferences and rights senior to those of our capital stock and placed
restrictions on the payment of dividends.
In July
2005, we entered into a secured senior credit facility with New World Lease
Funding for a revolving line of credit. New World received a security interest
in substantially all of our assets with seniority over the rights of the holders
of our preferred stock and our common stock. Until the security interests are
released, those assets will not be available to us to secure future
indebtedness. Presently, New World is not extending new loans to us. As of July
31, 2009, we owed an aggregate of $3,022,218 (which is secured by $3,439,424 of
consumer Retail Installment Sales Contracts and Leases and $271,650 of
restricted cash) to New World. In granting the credit line, New World 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.
In
December 2008, our wholly owned special purpose subsidiary, Sparta Funding LLC,
entered into an agreement for a secured credit facility with DZ Bank. The DZ
Bank facility requires, among other things, that we have a minimum tangible net
worth of $2,000,000 (plus (i) 50% of the aggregate amount of our consolidated
net income since December 19, 2008 and (ii) 90% of the net proceeds (net capital
less expenses and distributions) of any new equity contributions we raise after
December 19, 2008, including any subordinated debt) before Sparta Funding can
draw upon that credit facility for the purchase of consumer retail installment
sales contracts from our authorized and private label dealers and the purchase
of vehicles for lease to customers of our authorized and private label dealers.
In addition to the tangible net worth, we must obtain commitments for $3,000,000
of additional capital (in the form of subordinated debt or other committed
capital satisfactory to DZ Bank) to access the DZ Bank facility. We are engaged
in discussions with potential investors regarding such commitments, but as of
July 31, 2009, with the exception of the agreement with Optimus Capital
Partners, no definitive agreements have been reached for such commitments, nor
have we reached any agreement on potential terms of any such commitments. Unless
and until we receive such commitments or DZ Bank waives such requirement, we
will not be able to access the DZ Bank facility. If Sparta Funding is able to
access the DZ Bank facility, all of the consumer retail and installment sales
contracts, consumer leases and the underlying vehicles obtained through the use
of the DZ Bank facility will be pledged as security therefor. If Sparta Funding
is unable to repay its outstanding indebtedness under the DZ Bank facility, DZ
Bank could foreclose on all of those pledged assets. If Sparta Funding is unable
to access the DZ Bank facility or does not have sufficient cash flow to repay
the DZ Bank facility, we will not be able to implement our business plan, which
would have a material adverse effect on our future viability.
There can
be no assurance that the funding available under the Purchase Agreement with
Optimus Capital Partners will be sufficient to fund our working capital
requirements or the requirements of DZ Bank.
Our
business requires extensive amounts of capital and we will need to obtain
additional financing in the near future.
Subject
to meeting certain financial covenants described above, we have a one year, $25
million secured, revolving credit facility with DZ Bank (expiring on December
18, 2009, and extendable for one additional year at the option of DZ Bank),
which allows us to borrow up to 80% of the value of a powersports vehicle, in
the case of leased vehicles, or up to 80% of the amount financed by the ultimate
purchaser in the case of vehicles which are financed, in each case subject to
over-concentration and eligibility criteria. As a result, in order to expand our
business, we need capital to support the portion of the value which is not
financed by the senior lender. We generally refer to this portion as the “equity
requirement” and the “sub-debt requirement”. Presently, we have very limited
operating capital to fund the equity requirements for new financing transactions
or to execute our business plan. In order to accomplish our business objectives,
we expect that we will require substantial additional financing within a
relatively short period. The lack of capital has made it difficult to offer the
full line of financing products contemplated by our business plan. While we
believe that if we obtain an additional $1 million financing and we obtain the
required DZ Bank capital commitments, we will have sufficient capital resources
to fund our working capital needs for the next twelve months, as our business
grows, we may need to seek additional financing to fund such growth. To the
extent that our revenues do not provide sufficient cash flow to cover such
equity requirements and any reserves required under any additional credit
facility, we may have to obtain additional financing to fund such requirements
as may exist at that time. There can be no assurance that we will have
sufficient capital or be able to secure additional credit facilities when
needed. 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, and ultimately could result in the
cessation of our business.
We are
required to have our common stock traded on the OTC Bulletin Board or one of
several other national markets for trading equity securities as a condition of
selling Optimus shares of our Series B Preferred Stock. Therefore, if we are
removed from the OTC Bulletin Board, we may not be able to require Optimus to
purchase shares of our Series B Preferred Stock. This may also negatively affect
our ability to access funds under the DZ Bank credit facility.
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.
Our
auditor’s opinion expresses doubt about our ability to continue as a “going
concern”.
The
independent auditor’s report on our April 30, 2009 financial statements state
that our historical losses raise substantial doubts about our ability to
continue as a going concern. We cannot assure you that we will be able to
generate revenues or maintain any line of business that might prove to be
profitable. 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.
Risks
Related to Our Business
A
significant number of customers may fail to perform under their loans or
leases.
As a
lender or lessor, one of the largest risks we face is the possibility that a
significant number of customers will fail to pay their payments when due. If
customers’ defaults cause losses in excess of our allowance for 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 losses. While this evaluation process uses historical and other
objective information, the establishment of losses is dependent to a great
extent on management’s experience and judgment. We cannot assure you that our
loss reserves will be sufficient to absorb future 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 and leases, 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 consumer financing 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 consumer retail installment contracts
and consumer leases. 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 availability of credit generally, municipal government budget constraints
affecting equipment purchases and leasing, 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
vehicles for an amount at least equal to their residual values which may 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
significant 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 complying with certain procedures
specific to the particular state. While we believe we have made all proper
filings, we may not have a perfected lien or ownership interest in all of the
vehicles we have financed. 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.
Risks
associated with leasing.
Our
business is subject to the risks generally associated with the ownership and
leasing of vehicles. A lessee may default in performance of its consumer 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 our inability to profitably sell or
re-lease off-lease vehicles 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 used vehicles composed of off-lease and
repossessed 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
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 developed in
connection with our credit decisioning and underwriting software system,
iPLUS
â
,
is of great value to our business operations. Infringement or misappropriation
of our intellectual property could materially harm our business. We rely on a
combination of trade secret, copyright, trademark, 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
face significant competition in the industry.
We
compete with commercial banks, savings and loans, industrial thrifts, credit
unions and consumer finance companies, including large consumer finance
companies such as GE Capital. 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 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 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 and strong dealer
relationships, by offering flexible terms, and by offering both lease and loan
options to customers with a broad range of credit profiles. Many of our
competitors focus their efforts on different segments of the credit quality
spectrum. While a number of our competitors have reduced their presence in the
powersports financing industry because of industry specific factors and the
current situation in the global credit markets, our business may be adversely
affected if any of such competitors in any of our markets chooses to intensify
its 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 22% of our common stock as of September 15, 2009. 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 our company and could affect the price of our
common stock and limit our ability to sell shares of our Series B Preferred
Stock to Optimus Capital Partners, LLC.
We
are subject to various securities-related requirements as a reporting
company.
We may
need to improve our reporting and internal controls and procedures. We have in
the past submitted reports with the SEC after the original due date of such
reports. If we fail to remain current on our reporting requirements, our common
stock could be removed from quotation from the OTC Bulletin Board, which would
limit the ability to sell our common stock.
We
are dependent on our management and the loss of any officer could hinder our
implementation of our business plan.
We are
heavily dependent upon management, the loss of any one of whom could have a
material adverse effect 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. We do not presently
carry key man insurance on the life of any employee. 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. Any failure of management to implement and manage our
business strategy 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 our future 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 effect on our business, financial condition or results
of operations.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are an
independent financial services provider, offering consumer retail installment
sales contracts and both consumer and commercial lease financing to the
powersports industry.
Our
principal business is to provide financing products, primarily to purchasers and
lessees of new and used motorcycles, scooters, and utility all-terrain vehicles
(ATVs) that meet our credit criteria and program parameters. Additionally, we
offer commercial fleet leasing to dealers and owners of motorcycle rental fleets
and provide, on both a direct and a pass through basis, commercial equipment
leasing to municipalities, including, but not limited to, police
motorcycles.
We have,
and continue to develop, relationships with powersports dealers and
manufacturers to provide our financing products to their customers. We also seek
to expand our “Private Label” versions of our financing products to motorcycle,
scooter, and all-terrain vehicle manufacturers and distributors to enable their
dealers to assist their customers in acquiring the powersports vehicle of their
choice.
Results
of Operations
Comparison
of the Three Months Ended July 31, 2009 to the Three Months Ended July 31,
2008
For the
three months ended July 31, 2009 and 2008, we have generated limited sales
revenues, have incurred significant, but declining expenses, and have sustained
significant, but declining losses. We believe we will continue to earn revenues
from operations during the remainder of our fiscal year ending April 30,
2010.
Revenues
Revenues
totaled $216,804 during the three months ended July 31, 2009 as compared to
$394,919 during the three months ended July 31, 2008. Current period revenue was
comprised primarily of $138,865 in interest income from RISC Loans, $53,068 in
lease revenue, and $24,870 in other income. For the three months ended July 31,
2008, revenues were comprised primarily of $89,694 in lease revenue, $204,044 in
interest income from RISC loans, $85,690 in recovery of prior year’s expenses,
$5,415 in other income, and $10,077 in gain on sale of vehicles.
Costs
and Expenses
General
and administrative expenses were $592,197 during the three months ended July 31,
2009, compared to $1,364,152 during the three months ended July 31, 2008, a
decrease of $771,955 or 56.6%. Expenses incurred during the current three month
period consisted primarily of the following expenses: compensation and related
costs of $308,531; legal and accounting fees of $58,764; consulting fees of
$38,866; rent and utilities of $88,467; and general office expenses of $97,569.
Expenses incurred during the comparative three month period in 2008 consisted
primarily of the following expenses: compensation and related costs, $403,037;
accounting, audit and professional fees, $46,187; consulting fees, $64,800; rent
and utilities, $93,893; general office expenses, $124,475; and loss reserve,
$22,919.
During
the three months ended July 31, 2009, we incurred the following non-cash, equity
based compensation charges: consulting, $30,000; employee stock and option
compensation, $43,660 and financing costs, $232,571. During the three months
ended July 31, 2008, we incurred the following non-cash, equity based
compensation charges: consulting, $520,000; employee stock and option
compensation, $67,249; beneficial conversion cost of $318,182; and financing
costs, $183,115.
Net
Loss
We
incurred a net loss before preferred dividends of $994,456 for our three months
ended July 31, 2009 as compared to a net loss of $1,709,042 for the
corresponding three month period in 2008. The $714,587 or 41.8% decrease in our
net loss before preferred dividends for our three month interim period ended
July 31, 2009 was attributable primarily to a $771,955 or 56.6% decrease in
general and administrative expenses, and a $182,356 or a 26.87% decrease in
interest expense and financing costs all partially off-set by a $178,116 or 45%
decrease in revenues.
Our net
loss attributable to common stockholders increased to $994,647 for our three
month period ended July 31, 2009 as compared to $1,710,304 for the corresponding
three month period in 2008.
Comparison
of the Year Ended April 30, 2009 to the Year Ended April 30, 2008
For the
year ended April 30, 2009, we have generated marginally increased revenues, have
incurred significant expenses, and have sustained significant losses. We believe
we will continue to generate increasing revenues from operations in fiscal
2010.
Revenues
Revenues
totaled $1,144,644 in fiscal 2009 compared to revenues of $1,129,691 in fiscal
2008. Fiscal 2009 revenues were primarily comprised of $759,801 in interest
income from Retail Installment Sales Contracts, $298,476 in income from
Operating and Finance Leases, $14,492 in Commissions on municipal lease
transactions, $28,737 from gain on disposition of vehicles, and $43,139 in other
fee income.
Costs
and Expenses
We
incurred employee compensation and benefit costs of $1,461,957 for the year
ended April 30, 2009 compared with $1,720,945 in fiscal 2008. The decrease is
related to the reduced costs we recognized in decreasing our employee base
during the year from 18 employees at fiscal year-end 2008 to 14 employees at
fiscal year-end 2009. In order for us to expand our business in the future and
to attract and retain quality personnel, management anticipates that we will
continue to offer competitive compensation, including awards of common stock or
stock options, to consultants and employees.
We paid
$290,639 and $322,020 to our Chief Executive Officer, in fiscal 2009 and 2008,
respectively. These payments were charged to operations, and are included in the
compensation costs described above.
In
connection with placement transactions, we expensed non-cash costs in the form
of shares of common stock or warrants of $605,389 and $449,926 for the years
ended April 30, 2009 and 2008, respectively. In connection with consulting
services, we expensed non-cash costs in the form of shares of common stock or
warrants of $633,629 and $206,850 for the years ended April 30, 2009 and 2008,
respectively. These amounts were charged to financing costs. Additionally,
during the fiscal year ended April 30, 3009, we expensed $222,409 as the value
of employee stock and option based compensation as compared to $261,850 in the
prior fiscal year. At April 30, 2009 and 2008, accrued preferred dividends of
$758 and $28,422, respectively, which were charged to retained
earnings.
We
incurred consulting costs of $166,800 for the year ended April 30, 2009, as
compared to $215,399 for the year ended April 30, 2008. This decrease was the
result of reduced reliance on outside consultants. We incurred legal and
accounting fees of $187,891 for the year ended April 30, 2009, as compared to
$226,933 for the year ended April 30, 2008.
We
incurred other operating expenses of $1,089,029 for the year ended April 30,
2009. Notable expenses in this category are: general office expenses of $78,067;
rent of $310,419; loss reserve expense of $445,288; travel and entertainment of
$52,423; utilities of $66,857; web development of $30,226; credit bureaus of
$39,714; lease booking fees of $13,250; marketing of $18,319; maintenance
contracts of $17,665; and taxes of $16,799. We incurred other operating expenses
of $1,043,238 for the year ended April 30, 2008. Notable expenses in this
category are: general office expenses of $290,621; rent of $225,953; loss
reserve expense of $125,252; travel and entertainment of $92,411; utilities of
$82,719; web development of $89,387; credit bureaus of $43,728; marketing of
$40,902; maintenance contracts of $18,039; and taxes of $23,208.
Interest
costs for the fiscal year ended April 30, 2009 were $963,890 as compared to
$702,233 for the fiscal year ended April 30, 2008. Depreciation and amortization
for the fiscal year ended April 30, 2009 was $310,601 as compared to $274,773
for the fiscal year ended April 30, 2008.
Net
Loss
Our net
loss attributable to common stockholders for the year ended April 30, 2009
increased $901,828 (22.4%) to $4,922,605 from a loss of $4,020,776 for the year
ended April 30, 2008. The increase in net loss attributable to common
stockholders was primarily due to a $200,841 (5.1%) increase in total operating
expenses from $3,969,988 to $4,170,829 and a $743,604 (64.5%) increase in
interest expense and financing costs from $1,152,259 to $1,895,661.
Our net
loss per common share (basic and diluted) attributable to common stockholders
was $0.03 for the year ended April 30, 2009 and $0.03 for the year ended April
30, 2008.
Liquidity
and Capital Resources
As of
July 31, 2009, we had a negative net worth of $2,598,043. We generated a deficit
cash flow from operations of $414,143 for the three months ended July 31, 2009.
Cash flow provided by investing activities for the three months ended July 31,
2009 was $669,935, primarily due to the pay offs of RISC Loans in the amount of
$566,223 and net pay-offs of leases of $103,713.
Cash
flows used in investing activities for the three months ended July 31, 2008 was
$150,843 primarily due to pay-offs of motorcycles and vehicles of $242,511 and
purchases of RISC Loans in the amount of $393,354.
Cash used
in financing activities during the three month period ended July 31, 2009, was
$217,706 primarily due to: the sale of $50,000 of common stock, the net sale of
notes payable in the amount of $298,399, and the net pay down of bank debt in
the amount of $566,105.
As of
April 30, 2009, we had a deficit net worth of $6,126,410. We generated a deficit
in cash flow from operations of $2,303,295 for the year ended April 30, 2009.
This deficit is primarily attributable to net loss from operations of
$4,922,605, adjusted for equity based compensation of $915,652, stock based
financing costs of $539,240, allowance for loss reserve of $156,432, beneficial
conversion discount of convertible securities of $325,000, issuance of shares
for debt and accrued interest of $226,941, and extinguishment of preferred
dividends payable of $117,437, and to changes in the balances of current assets,
consisting primarily of an increase in pre-paid expenses of $532,849 and a
decrease in other receivables of $9,223, and current liabilities, consisting
primarily of an increase in accounts payable of $562,407 and a decrease in
restricted cash of $96,039. Cash flows provided by investing activities for the
year ended April 30, 2009 were $1,239,432, being comprised of $449,002 for the
retirement of leased vehicles, liquidation of Retail Installment Sales Contracts
in the amount of $863,065, and the purchase of a portfolio of loans on leases of
$72,635. We met our cash requirements during the period through net proceeds
from the issuances of notes of $2,382,415, and we repaid senior loans of
$1,441,542 during the period.
We do not
anticipate incurring significant research and development expenditures, and we
do not anticipate the sale or acquisition of any significant property, plant or
equipment, during the next twelve months. At July 31, 2009, we had 11 full-time
employees. If we fully implement our business plan, we anticipate our employment
base may increase by approximately 100% 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.
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.
In
December 2008 we and Sparta Funding entered into a $25,000,000 secured credit
facility with DZ Bank AG Deutsche Zentral–Genossenschaftsbank, Frankfurt am
Main, New York Branch pursuant to a Revolving Credit Agreement which allows
Sparta Funding to borrow up to 80% of the value of a powersports vehicle in the
case of leased vehicles or up to 80% of the amount financed by the ultimate
purchaser in the case of vehicles, which are financed, in each case subject to
over-concentration and eligibility criteria, at a floating interest rate equal
to the commercial paper rate plus 275 basis points (assuming DZ Bank funds such
advances with commercial paper). The credit facility expires on December 18,
2009, and is extendable at the option of DZ Bank. We will serve as originator
and servicer of the leases and purchases financed by Sparta Funding through the
DZ Bank credit facility. We are required to satisfy certain tangible net worth
and committed capital thresholds as a condition of accessing funds under the DZ
Bank credit facility.
On July
29, 2009, we entered into a Preferred Stock Purchase Agreement with Optimus
Capital Partners, LLC, pursuant to which Optimus, upon the terms and subject to
the conditions of the agreement, is committed to purchase up to $5,000,000 of
our Series B Preferred Stock. From time to time until July 28, 2010, we may
require Optimus to purchase shares of our Series B Preferred Stock, subject to
satisfaction of certain closing conditions. On August 14, 2009, we closed the
$900,000 initial tranche of the commitment resulting in net proceeds to us of
$645,000 after deducting a 5% ($250,000) fee for the entire $5 million
commitment and $5,000 for closing costs. This tranche resulted in our sale to
Optimus of 90 Shares of our Series B Preferred Stock for $10,000 per share and
the issuance to Optimus of five-year warrants to purchase up to 13,500,000
shares of our common stock at $0.09 per share.
We
believe that we will satisfy the minimum thresholds to utilize the DZ Bank
credit facility, through the proceeds from the sale of preferred stock to
Optimus, as described above, when combined with the conversion of $3,761,859 in
notes and convertible notes plus $402,764 in accrued interest thereon in July
and August 2009 plus the conversion of additional loans in the amount of
$1,243,000 for which we have received verbal commitments for the future
conversion and an additional $573,512 of notes for which we have a written
agreement to convert upon activation of the DZ Bank line. However, there can be
no assurance that the note holders will actually convert.
We
continue seeking additional financing, which may be in the form of subordinated
debt, in order to provide support for the DZ Bank credit facility. Other than
described above, we currently have no commitments for financing. There is no
guarantee that we will be successful in raising the funds required.
We
estimate that we will need approximately $1,000,000 in addition to our normal
operating cash flow to conduct operations during the next twelve months. Based
on the above, on capital received from equity financing to date, and certain
indications of interest to purchase certain of our equity securities, we believe
that we have a reasonable chance to raise sufficient capital resources to meet
projected cash flow needs through the next twelve months. There can be no
assurance that additional private or public financing, including debt or equity
financing, will be available as needed, or, if available, on terms favorable to
us. Any additional equity financing may be dilutive to stockholders and such
additional equity securities may have rights, preferences or privileges that are
senior to those of our existing common or preferred stock. Furthermore, debt
financing, if available, will require payment of interest and may involve
restrictive covenants that could impose limitations on our operating
flexibility. However, if we are not successful in generating sufficient
liquidity from operations or in raising sufficient capital resources, on terms
acceptable to us, this could have a material adverse effect on our business,
results of operations, liquidity and financial condition, and we will have to
adjust our planned operations and development on a more limited
scale.
The
effect of inflation on our revenue and operating results was not significant.
Our operations are located in North America and there are no seasonal aspects
that would have a material effect on our financial condition or results of
operations.
Going
Concern Issues
The
independent auditor’s report on our April 30, 2009 and 2008 financial statements
included in this prospectus states that our historical losses and the lack of
revenues raise substantial doubts about our ability to continue as a going
concern, due to the losses incurred and lack of significant operations. 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.
In order
to improve our liquidity, our management is actively pursuing additional equity
financing through discussions with investment bankers and private investors.
There can be no assurance that we will be successful in our efforts to secure
additional equity financing.
We
continue to experience net operating losses. Our ability to continue as a going
concern is subject to our ability to develop profitable operations. We are
devoting substantially all of our efforts to developing our business and raising
capital. Our net operating losses 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:
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seeking
additional credit facilities from institutional
lenders;
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seeking
institutional investors for equity investments in our company;
and
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initiating
negotiations to secure short term financing through promissory notes or
other debt instruments on an as needed
basis.
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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.
Inflation
The
impact of inflation on our costs and the ability to pass on cost increases to
our customers over time is dependent upon market conditions. We are not aware of
any inflationary pressures that have had any significant impact on our
operations over the past year, and we do not anticipate that inflationary
factors will have a significant impact on future operations.
TRENDS,
RISKS AND UNCERTAINTIES
We have
sought to identify what we believe to be the most significant risks to our
business, but we cannot predict whether, or to what extent, any of such risks
may be realized nor can we guarantee that we have identified all possible risks
that might arise.
Our
annual operating results may fluctuate significantly in the future as a result
of a variety of factors, most of which are outside our control, including: the
demand for our products and services; seasonal trends in purchasing, the amount
and timing of capital expenditures and other costs relating to the commercial
and consumer financing; price competition or pricing changes in the market;
technical difficulties or system downtime; general economic conditions and
economic conditions specific to the consumer financing sector.
Our
annual results may also be significantly impacted by the impact of the
accounting treatment of acquisitions, financing transactions or other matters.
Particularly at our early stage of development, such accounting treatment can
have a material impact on the results for any quarter. Due to the foregoing
factors, among others, it is likely that our operating results may fall below
our expectations or those of investors in some future quarter.
Our
future performance and success is dependent upon the efforts and abilities of
our management. To a very significant degree, we are dependent upon the
continued services of Anthony L. Havens, our President and Chief Executive
Officer and member of our Board of Directors. If we lost the services of either
Mr. Havens, or other key employees before we could get qualified replacements,
that loss could materially adversely affect our business. We do not maintain key
man life insurance on any of our management.
Our
officers and directors are required to exercise good faith and high integrity in
our management affairs. Our bylaws provide, however, that our directors shall
have no liability to us or to our shareholders for monetary damages for breach
of fiduciary duty as a director except with respect to (1) a breach of the
director’s duty of loyalty to the corporation or its stockholders, (2) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (3) liability which may be specifically defined by law or (4)
a transaction from which the director derived an improper personal
benefit.
The
present officers and directors own approximately 22% of the outstanding shares
of common stock, without giving effect to shares underlying convertible
securities, and therefore are in a position to elect all of our directors and
otherwise control our company, including, without limitation, authorizing the
sale of our equity or debt securities, the appointment of officers, and the
determination of officers’ salaries. Shareholders have no cumulative voting
rights.
We may
experience growth, which will place a strain on our managerial, operational and
financial systems resources. To accommodate our current size and manage growth
if it occurs, we must devote management attention and resources to improve our
financial strength and our operational systems. Further, we will need to expand,
train and manage our sales and distribution base. There is no guarantee that we
will be able to effectively manage our existing operations or the growth of our
operations, or that our facilities, systems, procedures or controls will be
adequate to support any future growth. Our ability to manage our operations and
any future growth will have a material effect on our stockholders.
If we
fail to remain current on our reporting requirements, we could be removed from
the OTC Bulletin Board which would limit the ability of broker-dealers to sell
our securities and the ability of stockholders to sell their securities in the
secondary market. Companies trading on the OTC Bulletin Board, such as us, must
be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as
amended, and must be current in their reports under Section 13, in order to
maintain price quotation privileges on the OTC Bulletin Board. If we fail to
remain current on our reporting requirements, we could be removed from the OTC
Bulletin Board. As a result, the market liquidity for our securities could be
severely adversely affected by limiting the ability of broker-dealers to sell
our securities and the ability of stockholders to sell their securities in the
secondary market.
We are
required to have our common stock traded on the OTC Bulletin Board or one of
several other national markets for trading equity securities as a condition of
selling Optimus shares of our Series B Preferred Stock. Therefore, if we are
removed from the OTC Bulletin Board, we may not be able to require Optimus to
purchase shares of our Series B Preferred Stock. This may also negatively affect
our ability to access funds under the DZ Bank credit facility.
Critical
Accounting Policies
The
preparation of our 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 financial statements, we
believe the following critical accounting policies involve the most complex,
difficult and subjective estimates and judgments.
Revenue
Recognition
We
purchase Retail Installment Sales Contracts (“RISC”) from motorcycle dealers and
we originate leases on new and used motorcycles and other powersports vehicles
from motorcycle dealers throughout the United States.
The RISCs
are secured by liens on the related vehicles. The RISCs are accounted for as
loans. Upon purchase, the RISCs appear on our balance sheet as RISC loans
receivable current and long term. Interest income on these loans is recognized
when it is earned. When the RISC is entered into our accounting system, based on
the customer’s APR (interest rate), an amortization schedule for the loan on a
simple interest basis is created. Interest is computed by taking the principal
balance times the APR rate then divided by 365 days to get the daily interest
amount. The daily interest amount is multiplied by the number of days from the
last payment to get the interest income portion of the payment being applied.
The balance of the payment goes to reducing the loan principal
balance.
Our
leases are accounted for as either operating leases or direct financing leases.
At the inception of operating leases, no lease revenue is recognized and the
leased motorcycles, together with the initial direct costs of originating the
lease, which are capitalized, appear on the balance sheet as “motorcycles under
operating leases-net”. The capitalized cost of each motorcycle is depreciated
over the lease term, on a straight-line basis, down to the original estimate of
the projected value of the motorcycle at the end of the scheduled lease term
(the “Residual”). Monthly lease payments are recognized as rental income. An
acquisition fee classified as fee income on the financial statements is received
and recognized in income at the inception of the lease. Direct financing leases
are recorded at the gross amount of the lease receivable, and unearned income at
lease inception is amortized over the lease term.
We
realize gains and losses as the result of the termination of leases, both at and
prior to their scheduled termination, and the disposition of the related
motorcycle. The disposal of motorcycles, which reach scheduled termination of a
lease, results in a gain or loss equal to the difference between proceeds
received from the disposition of the motorcycle and its net book value. Net book
value represents the residual value at scheduled lease termination. Lease
terminations that occur prior to scheduled maturity as a result of the lessee’s
voluntary request to purchase the vehicle have resulted in net gains, equal to
the excess of the price received over the motorcycle’s net book
value.
Early
lease terminations also occur because of (i) a default by the lessee, (ii) the
physical loss of the vehicle, or (iii) the exercise of the lessee’s early
termination. In those instances, we receive the proceeds from either the resale
or release of the repossessed vehicle, 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 vehicle.
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.
We
evaluate our operating and retail installment sale leases on an ongoing basis,
and have established reserves for losses based on current and expected future
experience.
Stock-Based
Compensation
We
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. We are
recording the compensation expense on a straight-line basis, generally over the
explicit service period of three to five years.
SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in our Consolidated Statement of
Operations. We are using the Black-Scholes option-pricing model as its method of
valuation for share-based awards. Our determination of fair value of share-based
payment awards on the date of grant using an option-pricing model is affected by
our stock price as well as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not limited to our
expected stock price volatility over the term of the awards, and certain other
market variables such as the risk free interest rate.
Allowance
for Losses
We have
loss reserves for our portfolio of Leases and for our portfolio of Retail
Installment Sales Contracts (“RISC”). The allowance for Lease and RISC losses is
increased by charges against earnings and decreased by charge-offs (net of
recoveries). 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, additions to the reserve are reduced or discontinued until the loss
reserve is in line with our reserve ratio policy. Management’s periodic
evaluation of the adequacy of the allowance is based on our past lease and RISC
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. We periodically review
our Lease and RISC receivables in determining our allowance for doubtful
accounts.
We
charge-off receivables when an individual account has become more than 120 days
contractually delinquent. In the event of repossession, the asset is immediately
sent to auction or held for re-lease.
BUSINESS
General
Overview
Sparta
Commercial Services, Inc. is a Nevada corporation. We are an independent
financial services provider, offering consumer retail installment sales
contracts and both consumer and commercial lease financing to the powersports
industry.
Our
principal business is to provide financing products, primarily to purchasers and
lessees of new and used motorcycles, scooters, and utility all-terrain vehicles
(ATVs) that meet our credit criteria and program parameters. Additionally, we
offer commercial fleet leasing to dealers and owners of motorcycle rental fleets
and provide, on both a direct and a pass through basis, and commercial equipment
leasing to municipalities, including, but not limited to, police
motorcycles.
We have,
and continue to develop, relationships with powersports dealers and
manufacturers to provide our financing products to their customers. We also seek
to expand our “Private Label” versions of our financing products to motorcycle,
scooter, and all-terrain vehicle manufacturers and distributors to enable their
dealers to assist their customers in acquiring the powersports vehicle of their
choice.
Our
Business
We are a
specialized consumer finance company engaged primarily in the purchase of retail
installment sales contracts and the origination of leases to assist consumers in
acquiring new and used motorcycles (550cc and higher), scooters, and 4-stroke
ATVs. We believe that the market for consumer finance products for motorcycles
and ATVs is largely underserved by traditional lenders.
We have
and continue to develop additionally relationships with powersports vehicle
dealers and manufacturers to provide our financing products to their customers.
We also seek to provide powersport vehicle manufacturers and distributors a
private label version of our financing products to enable their dealers to
assist their customers in acquiring the powersports vehicle of their choice.
Additionally, we offer an equipment leasing product to municipalities,
including, but not limited to, the leasing of police motorcycles.
Business
Overview
Our
business model has been designed to generate revenue from several
sources:
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Retail
installment sales contracts and
leases;
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Municipal
leasing of equipment;
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Private
label programs for manufacturers and
distributors;
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Ancillary
products and services, such as private label gap insurance coverage;
and
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Remarketing
of repossessed vehicles and off-lease
vehicles.
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Our
management believes that by offering dealers (and their customers) the option of
either financing or leasing, we will capture a greater share of the dealer’s
business. Additionally, by offering both alternatives, once profitability is
achieved, we believe that it will be in a position to achieve greater cash-flow
than it could by offering only one of these alternatives because depreciation
generated by our leasing activities will reduce income tax due on income
resulting from our retail installment sales contracts.
Retail
Installment Sales Contracts and Leases
Retail
Installment Sales Contracts (RISC)
We
purchase retail installment sales contracts from both franchised and independent
powersports dealers who qualify as Authorized Sparta Dealers and/or as
Authorized Private Label Dealers under Sparta’s Private Label Programs. We have
developed policies and procedures for credit evaluation, collections, insurance
follow up, and asset recovery. We impose 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 customer on whose application we have given them a
conditional approval that we 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 our Credit Evaluation Process and Collateral Guidelines are consistently
applied and that the credit/underwriting decisioning process provides rapid
decisions to our Authorized Sparta Dealers and the Authorized Private Label
Dealers, we have developed a point of sale credit application and contract
decisioning web based platform. This system is named “
iPLUS
Ò
“
and is structured as an Application Service Provider (“ASP”) and has the
capability of providing the dealer with conditional approvals in less than sixty
seconds, 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 our personnel expense. Depending
on our arrangement with our lending sources, in the case of consumer finance
contracts, we may finance our purchase of the contracts by borrowing from a
lending source and pledging the retail installment sales contracts as collateral
for the loan.
All of
the retail installment sales contracts will be secured by qualified, titled
motorcycles with 550+cc and higher engines, 4-stroke all-terrain vehicles
(ATVs), or select scooters. Customer financing needs are projected to range from
approximately $5,000 to $40,000. Contract terms of 24 to 60 months are
offered.
Leases
We
purchase qualified vehicles for lease to customers of our Authorized Sparta
Dealers and/or Authorized Private Label Dealers. While the steps in the leasing
process are almost identical to those in the retail 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 we will
purchase a specific vehicle from the dealer and lease it to the applicant.
Unlike a retail installment sales contract which finances a customer’s purchase
of a vehicle owned by the customer, the lease agreement contains the payment
terms and conditions under which we will allow the customer to use (lease) the
vehicle, which is owned by us, 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 our arrangement(s) with our lending sources, in the case
of leases, we may finance the customers’ 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 similar retail installment sales contracts because a
sales contract finances only part of the vehicle cost with the balance being
financed by the lessor. Unlike with retail installment sales contracts, we can
and do charge acquisition fees for each lease. These fees range from $290 to
$490 per lease depending on the amount of the lease.
In July
2006, we announced an agreement for accepting and processing motorcycle credit
applications from a Fortune 500 global diversified financial provider. Under the
agreement, the company electronically transmits to us loan applications which
meet our lending/leasing criteria. In May 2008, this agreement was terminated as
said company decided to cease doing business in the powersports
industry.
In May
2006, we entered into a limited Marketing Agreement with netLoan Funding, LLC
(“netLoan”). eBay Motors is under an agreement with netLoan whereby eBay Motors
customers wishing to finance powersports vehicles are referred to the netLoan
web site. Under our agreement with netLoan, these customers are then redirected
from the netLoan web site electronically to a co-branded Sparta
iPLUS
Ò
web
site where their credit applications are processed. In April 2008, this
agreement was amended and expanded to include referrals from eLoan, a nationwide
financial services company, and NADA’s (National Automotive Dealers Association)
powersports web pages and to include credit applications from these three
sources for all motorcycles over 550cc. We pay netLoan a fee for each funded
contract or lease processed through this co-branded web site. This program is
inactive at the present time.
Municipal
Leasing of Equipment, including Police Motorcycles
In
February 2007, we launched a new Municipal Leasing Product designed expressly to
meet the needs of law enforcement agencies throughout the U.S. We estimate that
the annual municipal market for new law enforcement motorcycles, alone, exceeds
$300 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. We believe 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 remain
within their budgets at the same time. We have partnered with a wholly owned
subsidiary of a state chartered bank which specializes in municipal financing.
Under this relationship, we originate for this subsidiary and negotiate the
leases on behalf of it and the municipality. We receive an upfront origination
fee and a structured commission for each closed lease.
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 other financial
products and services to these dealers for their customers interested in
non-”private label” brand of vehicles.
These
four distributors have over 1,200 dealers who, in addition to becoming our
Private Label dealers, can sign up to become our Authorized Sparta Dealers,
which will enable them to use us as a source for financing their non-private
label brand of vehicles.
In May
2007, we announced the launch of a consumer leasing product for Moto Guzzi and
Aprilia, the two motorcycle brands distributed by Piaggio Group Americas, Inc.
This product will enable all Moto Guzzi and Aprilia dealers to offer our Flex
Lease program, which provides a range of payment options based on vehicle make,
model, age, and term of lease,
to their customers as
alternatives to traditional retail installment sales 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 its dealers that are costly to obtain on an individual dealer basis. Also, we
offer a private label GAP (Guaranteed Auto Protection) insurance plan for our
dealers:
Gap
Coverage
We
markets our 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 or the lease of the vehicle.
We intend
to continue to evaluate additional ancillary products and services and believe
that it can create additional 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
commences 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 us or buying the vehicle at the buy-out
option price established at the beginning of the lease. Our policy requires
lessees who wish to return their vehicles, to return the vehicle to the
originating dealer. If the lessee has moved, then the vehicle should be returned
to the Authorized Sparta Dealer closest to the lessee. If this is impracticable,
then we will arrange to have the vehicle transported at the lessee’s
expense.
Returned
Leased Vehicles
When a
vehicle is returned to an Authorized Sparta 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 Authorized Sparta Dealers and all Authorized 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 (i.e., vehicles
which are returned to the dealer at the end of the lease, or are repossessed).
Thereafter, we plan 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 our
web site. We believe 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. We believe that using our dealer network in such a
manner will result in a better overall economic return on our portfolio as well
as strengthen dealer relationships.
Repossessed
Vehicles
All
repossessed vehicles are similarly returned to the originating Authorized Sparta
Dealer to be reconditioned (if needed) for consignment sale or re-lease in the
same manner as returned vehicles.
Second
Chance Express
We allow
our Authorized Sparta Dealers to offer their 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 our 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 us to serve those customers who can offset their
credit risk with higher down payments. A key benefit of this program to us 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, we pay our 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 financing.
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 contracts and lease applications are
approved.
Credit
Evaluation Process and Collateral Guidelines
To insure
that our Credit Evaluation Process and Collateral Guidelines are consistently
applied and that the credit/underwriting decision process provides rapid
decisioning to our Authorized Sparta Dealers and our Authorized Private Label
Dealers, we have worked closely with a leading provider of interactive credit
accessing and decisioning solutions, to develop our
iPLUS
Ò
point
of sale credit application decisioning and contract generating web based
platform.
iPLUS
Ò
(internet Purchasing Leasing Underwriting Servicing)
Our
retail installment sales contract and leasing products are delivered through a
proprietary, web-based, credit application processing platform. This system is
named
iPLUS
Ò
and is structured as an Application Service Provider (“ASP”) and has the
capability of providing the dealer with conditional approvals 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. We believe
iPLUS
Ò
provides
the Authorized Sparta Dealers and Authorized Private Label Dealers with a
competitive advantage and increases our ability to obtain a larger share of the
dealer’s business.
Major
features of
iPLUS
Ò
include:
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100%
Web Browser Based (
www.spartacommercial.com)
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No
costly software required by the
users
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Operates
on any dial-up connection as slow as 28.8
kbits/s
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Requires
Internet Explorer 5.5 or above, Adobe Acrobat Reader 5.0 or above, both
available at no charge on the
Internet
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Integrated
scorecard and decision engine
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Integrated
credit bureau retrieval and review (can access any of the 3 major
bureaus)
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Once
an application is submitted, a decision is made in seconds, 24 hours a
day, 7 days a week
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Easy
to complete customer application
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Dealer
application management
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Contract
and lease calculator (assists dealer in structuring any approved
application.)
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Prints
approved customer contract and related
documents
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Captures
information in electronic format
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Complete
underwriting documentation and control
system
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Allows
the dealer to track the entire decisioning, underwriting, and funding
process in real time.
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Additionally,
this technology provides quick, consistent credit decisions for our dealer
network and reduces the number of credit analysts required, thereby, reducing
our personnel expense.
We have
established program guidelines that are an integral function of the
iPLUS
Ò
decisioning 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 agreements,
depending on the applicant’s credit rating and stability. We have developed our
own credit criteria system by using an empirical score card and then assigning
our own rating based on our experience. This rating is used as the basis to
determine the terms and conditions under which an applicant is approved or
declined.
We
conduct both applicant credit risk and asset evaluation before approving
financing. Should the customer seek financing above the applicable threshold, we
ask for a down payment from the borrower or lessee to close the gap between
selling price and 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 us is just the first step. A principal factor in the
success of our business model is its ability to track contract and lease
performance.
A third
party provides the software we use to manage our assets, customer base,
collections, insurance, and accounting systems. Using a variety of basic and
customized reports generated by this software, we monitor our customers’
compliance with their obligations under retail installment sales contracts or
lease agreements. These reports are accessed on a real-time basis by employees
of our company 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.
We
require continuous physical damage insurance on all financed vehicles and
continuous liability and physical damage insurance coverage on all leased
vehicles. In addition, we are required to be listed as Additional Named Insured
and Loss Payee. Continuous insurance is critical, and we are permitted to
repossess a vehicle if coverage lapses. Any lapse in insurance coverage for any
reason will lead to reinstatement of forced placed
insurance coverage or
repossession of the leased vehicle.
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 our list of motorcycle, ATV, and scooter
models that it will finance or lease.
Credit Tiers
– We expect that
we 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 us maintain our conservative 70/30
target.
We will
also be able to manage this ratio by revising the variables in our various
programs (terms and conditions under which we will purchase retail installment
sales contracts or lease vehicles), such as minimum income, debt ratios, payment
to income ratios, minimum down payment required, acquisition fees (paid by
dealer), discounts (paid by dealer), etc.
Portfolio Performance
–
Contracts and leases over 30 days delinquent were 1.88% of total portfolio
balances at April 30, 2007, 2.85% at April 30, 2008, and 3.70% at April 30,
2009. Cumulative net losses and charge-offs as a percent of cumulative portfolio
originations were 1.53% at April 30, 2007, 1.17% at April 30, 2008, and 3.27% at
April 30, 2009. Additionally, as of April 30, 2009, we maintained a cash reserve
with its Senior Lender equal to 9.72% of the outstanding loan balance with that
lender.
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 2008 Statistical Annual 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 were
479,939 in 2008, a 7% decline from 2007 at 516,100. We estimate that the 2008 US
retail market for new and used 600cc+ motorcycles was $8.5 billion.
U.S.
sales of new ATVs were estimated to be 432,000 units in 2008, a 29% decline from
2007 as reported in Powersports Business Magazine in the February 9, 2009 issue.
Sales of Utility ATVs in 2008 were essentially unchanged from 2007 at 130,000
units according to the same Powersports Business issue.
Estimated
U.S. scooter unit sales for calendar 2008 are estimated to be 76,700, up
approximately 41.5% from calendar year 2007, according to Powersports Business
Magazine in the February 9, 2009 issue.
Sales
and Marketing
Normally,
vehicle financing products are sold primarily at the dealer level, rather than
the consumer level. Our strategy is to, additionally, utilize a direct sales
force that promotes our products and services to qualified dealers, train them,
and provide them with point-of-sale marketing materials. Our powersports vehicle
direct financing products continue to gain market acceptance as evidenced by our
four Private Label Contracts. This direct sales force will be comprised of
Marketing Group and a Dealer Services Group.
The
Marketing Group will continue to work directly with the manufacturers and
distributors to obtain additional Private Label Contracts and to monitor our
competition. The Private Label partners will assist us directly in training the
Private Label Dealers. This will be 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 Sparta Dealers or Authorized Private Label
Dealers. They notify the approved dealers that they have been approved and
provide them with the required information to process applications and print
contracts using
iPLUS
Ò
,
including a Dealer Sign Up packet. The Dealer Services Group is available to
directly assist dealers by telephone and follow up with dealers on conditional
approvals to assist them in forwarding the funding packages to us for purchase.
This group also accepts all incoming calls from dealers, answering their
inquiries or directing them, if necessary, to the appropriate
department.
Authorized
Sparta 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 remarket its 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 Sparta Dealers who sell or lease either our inventory vehicle at
their dealership or one that is at another dealership in our
network.
With the
exception of the netLoan program and the program with the Fortune 500 company,
both described under the “Retail Installment Sales Contracts and Leases” section
above, we do not market or sell directly to consumers, but 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 the nearest Authorized Sparta Dealers
or Authorized 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 our nearest Authorized Sparta Dealer.
Competition
The
consumer finance industry is highly fragmented and highly competitive. Broadly
speaking, we compete 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
provide financing for powersports vehicles. Customers who approach these lending
sources to obtain financing for the purchase of a powersports vehicle are often
encouraged to pursue a personal unsecured loan instead.
There are
few companies that provide nationwide dealer-based leasing options in the
powersports 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
tightened their underwriting criteria. For instance, our closest competitors,
Capitol One, HSBC and GE Capital, have chosen to refocus their efforts toward
enterprises that are more in line with their traditional core business. We
believe 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.
We
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 to their own dealers.
While
some of our larger competitors have vast sources of capital and may be able to
offer lower interest rates due to lower borrowing costs and longer terms (up to
108 months) we believe that the combination of management’s experience,
expedient service, availability of the lease option and
iPLUS
Ò
give us an advantage over our 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 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 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:
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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.
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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.
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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.
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The
Consumer Credit Protection Act of 1968. The Act requires creditors to
state the cost of borrowing in plain English so that the consumer can
figure out what the charges are, compare costs, and shop for the best
credit deal.
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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.
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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.
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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.
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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, if requested to do
so.
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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.
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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.
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Bankruptcy.
Federal bankruptcy and related state laws may interfere with or affect our
ability to recover collateral or enforce a deficiency
judgment.
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Most
states have adopted a version of Article 2A of the Uniform Commercial
Code, which is applicable to “true leases” such as operating leases.
Article 2A may, among other things, limit enforceability of any
“unconscionable” lease or “unconscionable” provision in a lease, provide a
lessee with remedies, including the right to cancel the lease contract,
for any lessor breach or default, and may add to or modify the terms of
“consumer leases” and leases where the lessee is a “merchant lessee.”
However, Article 2A recognizes typical commercial lease “hell or high
water” rental payment clauses and validates reasonable liquidated damages
provisions in the event of lessor or lessee defaults. Article 2A also
recognizes the concept of freedom of contract and permits the parties in a
commercial context a wide latitude to vary provisions of the
law.
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Employees
As of
April 30, 2009, we had 14 full-time employees. 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.
Properties
Our
executive offices are located at 462 Seventh Avenue, 20th Floor, New York, NY
10018. We have an agreement for use of office space at this location under a
lease expiring on November 30, 2012. The office space contains approximately
7,000 square feet. The rent for the year ended April 30, 2010 is $297,590, for
the year ended April 30, 2011 is $304,985, for the year ended April 30, 2012 is
$312,565, and for the seven months ending November 30, 2012 is $184,947. 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
As at
July 31, 2009, we were not a party to any material pending legal proceeding.
From time to time, we may become involved in various lawsuits and legal
proceedings, which arise in the ordinary course of business.
WHERE
YOU CAN FIND MORE INFORMATION
We are
subject to the informational requirements of the Securities Exchange Act of 1934
and, therefore, we file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. Copies of
such periodic reports, proxy statements and other information are available for
inspection without charge at the public reference room maintained by the SEC,
located at 100 F Street, N.E., Washington, D.C. 20549, and copies of all or
any part of these filings may be obtained from such offices upon the payment of
the fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for
further information about the public reference room. The SEC also maintains an
Internet web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
The address of the site is http://www.sec.gov.
FINANCIAL
STATEMENTS
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Page
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Report
of Independent Registered Public Accounting Firm
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F-2
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Consolidated
Balance Sheets as of April 30, 2009 and 2008
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F-3
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Consolidated
Statements of Losses for the years ended April 30, 2009 and
2008
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F-4
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Consolidated
Statement of Deficiency in Stockholders’ Equity for the years ended April
30, 2009 and 2008
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F-5
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Consolidated
Statements of Cash Flows for the years ended April 30, 2009 and
2008
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F-6
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Notes
to Financial Statements
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F-7
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Condensed Consolidated Balance
Sheet as of July 31, 2009 (unaudited) and April 30,
2009
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F-29
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Condensed Consolidated Statement
of Losses for the three months ended July 31, 2009, and 2008
(unaudited)
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F-30
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Consolidated Statement of
(Deficiency in) Stockholders’ Equity for the three months ended July 31,
2009
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F-31
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Condensed Statement of Cash Flows
for the three months ended July 31, 2009, and 2008
(unaudited)
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F-32
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Notes to Condensed Consolidated
Financial Statements July 31, 2009 (unaudited)
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F-33
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REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
Sparta
Commercial Services, Inc.
New York,
New York
We have
audited the accompanying consolidated balance sheets of Sparta Commercial
Services, Inc., as of April 30, 2009 and 2008, 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, 2009. 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
conducted our audits in accordance with 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 misstatements. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly we express no such opinion. 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 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, 2009 and 2008, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
April 30, 2009, 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 P 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 P. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ R B S
M LLP
New York,
New York
August
13, 2009
SPARTA COMMERCIAL SERVICES,
INC.
CONSOLIDATED BALANCE
SHEETS
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April 30, 2009
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April 30, 2008
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ASSETS
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Cash
and cash equivalents
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$
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2,790
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$
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68,642
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RISC
loan receivables, net of reserve of $235,249 and $86,312, respectively
(NOTE D)
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3,248,001
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4,260,002
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Motorcycles
and other vehicles under operating leases net of accumulated depreciation
of $256,485 and $336,100, respectively, and loss reserve of $32,726 and
$25,231, respectively (NOTE B)
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621,797
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1,251,631
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Interest
receivable
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49,160
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58,382
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Purchased
portfolio (NOTE F)
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72,635
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-
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Accounts
receivable
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17,899
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37,024
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Inventory
(NOTE C)
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12,514
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79,069
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Property
and equipment, net of accumulated depreciation and amortization of
$147,905 and $129,986, respectively (NOTE E)
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43,342
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61,261
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Prepaid
expenses
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593,529
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-
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Restricted
cash
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348,863
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444,902
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Deposits
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48,967
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48,967
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Total
assets
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$
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5,059,497
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$
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6,309,879
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LIABILITIES
AND DEFICIENCY IN STOCKHOLDERS’ EQUITY
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Liabilities:
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Bank
overdraft
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$
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57,140
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$
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-
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Accounts
payable and accrued expenses
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1,851,876
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1,461,955
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Accrued
equity based penalties
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-
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2,178
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Senior
secured notes payable (NOTE F)
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3,694,838
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5,029,864
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Note
payable (NOTE G)
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5,102,458
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3,812,859
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Loans
payable-related parties (NOTE H)
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378,260
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244,760
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Other
liabilities
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88,285
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6,741
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Deferred
revenue
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13,050
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22,617
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Total
liabilities
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11,185,907
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10,580,974
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Deficiency
in Stockholders’ Equity:
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Preferred
stock, $.001 par value; 10,000,000 shares authorized of which 35,850
shares have been designated as Series A Redeemable Preferred Stock, with a
stated value of $100 per share, 125 and 825 shares issued and outstanding,
respectively
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12,500
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82,500
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Common
stock, $.001 par value; 340,000,000 shares authorized, 170,730,064 and
130,798,657 shares issued and outstanding, respectively
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170,730
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130,799
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Common
stock to be issued, 16,735,453 and 12,160,210 respectively
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16,735
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12,160
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Additional
paid-in-capital
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20,820,672
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17,727,889
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Accumulated
deficit
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(27,147,047
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)
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(22,224,442
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)
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Total
deficiency in stockholders’ equity
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(6,126,410
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(4,271,095
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)
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Total
Liabilities and deficiency in stockholders’ equity
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$
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5,059,497
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$
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6,309,879
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See
accompanying notes to consolidated financial statements.
SPARTA
COMMERCIAL SERVICES, INC.
CONSOLIDATED
STATEMENT OF LOSSES
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Year Ended
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April 30,
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2009
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2008
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Revenue
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Rental
income, Leases
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$
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298,476
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$
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391,029
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Interest
income, Loans
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759,801
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615,531
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Other
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86,367
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|
|
123,131
|
|
|
Total
revenue
|
|
|
1,144,644
|
|
|
|
1,129,691
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
3,860,228
|
|
|
|
3,695,215
|
|
|
Depreciation
and amortization
|
|
|
310,601
|
|
|
|
274,773
|
|
|
Total
operating expenses
|
|
|
4,170,829
|
|
|
|
3,969,988
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(3,026,186
|
)
|
|
|
(2,840,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense (income):
|
|
|
|
|
|
|
|
|
|
Interest
expense and financing cost, net
|
|
|
1,895,661
|
|
|
|
1,152,259
|
|
|
Change
in value of warrant liabilities
|
|
|
-
|
|
|
|
(202
|
)
|
|
|
|
|
1,895,661
|
|
|
|
1,152,057
|
|
|
Net
loss
|
|
|
(4,921,846
|
)
|
|
|
(3,992,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
dividend
|
|
|
758
|
|
|
|
28,422
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributed to common stockholders
|
|
$
|
(4,922,605
|
)
|
|
$
|
(4,020,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share attributed to common
stockholders
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
159,112,249
|
|
|
|
127,304,396
|
|
See
accompanying notes to consolidated financial statements.
SPARTA COMMERCIAL SERVICES,
INC.
CONSOLIDATED
STATEMENT OF (DEFICIENCY IN)
STOCKHOLDERS
’
EQUITY
FOR THE TWO YEARS ENDED APRIL 30,
2009
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
to be issued
|
|
|
Paid in
|
|
|
Deferred
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance,
April 30, 2007
|
|
|
19,795
|
|
|
$
|
1,979,500
|
|
|
|
123,216,157
|
|
|
$
|
123,215
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
14,595,827
|
|
|
$
|
(24,000
|
)
|
|
$
|
(18,203,666
|
)
|
|
$
|
(1,529,123
|
)
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Shares
issued upon conversion of preferred
|
|
|
(18,970
|
)
|
|
|
(1,897,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
12,160,210
|
|
|
|
12,160
|
|
|
|
1,884,840
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Shares
issued for financing cost
|
|
|
-
|
|
|
|
-
|
|
|
|
4,982,500
|
|
|
|
4,983
|
|
|
|
-
|
|
|
|
-
|
|
|
|
403,818
|
|
|
|
-
|
|
|
|
-
|
|
|
|
408,801
|
|
|
Deferred
compensation recorded
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,000
|
|
|
|
-
|
|
|
|
24,000
|
|
|
Stock
compensation recorded
|
|
|
-
|
|
|
|
-
|
|
|
|
2,600,000
|
|
|
|
2,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
174,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
177,000
|
|
|
Employee
stock compensation recorded
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,000
|
|
|
Employee
options expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
261,850
|
|
|
|
-
|
|
|
|
-
|
|
|
|
261,850
|
|
|
Warrant
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
189,503
|
|
|
|
-
|
|
|
|
-
|
|
|
|
189,503
|
|
|
Accrued
preferred dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(28,422
|
)
|
|
|
(28,422
|
)
|
|
Forgiveness
of preferred dividend payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
215,649
|
|
|
|
-
|
|
|
|
-
|
|
|
|
215,649
|
|
|
Adjusting
prior years accrued preferred dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(17,997
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(17,997
|
)
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,992,354
|
)
|
|
|
(3,992,354
|
)
|
|
Balance,
April 30, 2008
|
|
|
825
|
|
|
$
|
82,500
|
|
|
|
130,798,657
|
|
|
$
|
130,798
|
|
|
|
12,160,210
|
|
|
$
|
12,160
|
|
|
$
|
17,727,890
|
|
|
$
|
-
|
|
|
$
|
(22,224,442
|
)
|
|
$
|
(4,271,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued upon conversion of preferred
|
|
|
(700
|
)
|
|
|
(70,000
|
)
|
|
|
1,875,000
|
|
|
|
1,875
|
|
|
|
(1,426,280
|
)
|
|
|
(1,426
|
)
|
|
|
69,551
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Beneficial
conversion discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
100
|
|
|
|
324,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
325,000
|
|
|
Accrued
preferred dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
117,438
|
|
|
|
-
|
|
|
|
(758
|
)
|
|
|
116,680
|
|
|
Shares
issued for financing cost
|
|
|
-
|
|
|
|
-
|
|
|
|
7,272,000
|
|
|
|
7,272
|
|
|
|
586,000
|
|
|
|
586
|
|
|
|
531,382
|
|
|
|
-
|
|
|
|
-
|
|
|
|
539,240
|
|
|
Shares
issued for accrued interest
|
|
|
-
|
|
|
|
-
|
|
|
|
2,585,420
|
|
|
|
2,585
|
|
|
|
482,190
|
|
|
|
482
|
|
|
|
114,815
|
|
|
|
-
|
|
|
|
-
|
|
|
|
117,883
|
|
|
Shares
issued for conversion of notes
|
|
|
-
|
|
|
|
-
|
|
|
|
20,714,217
|
|
|
|
20,714
|
|
|
|
3,333,333
|
|
|
|
3,333
|
|
|
|
1,003,753
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,027,800
|
|
|
Stock
compensation recorded
|
|
|
-
|
|
|
|
-
|
|
|
|
7,484,769
|
|
|
|
7,485
|
|
|
|
1,500,000
|
|
|
|
1,500
|
|
|
|
624,644
|
|
|
|
-
|
|
|
|
-
|
|
|
|
633,629
|
|
|
Shares
issued upon debt conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Employee
stock compensation recorded
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,000
|
|
|
Employee
options expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
222,409
|
|
|
|
-
|
|
|
|
-
|
|
|
|
222,409
|
|
|
Warrant
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46,791
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46,791
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,881
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,881
|
|
|
Warrant
liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,217
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,217
|
|
|
Net
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
(4,921,846
|
)
|
|
|
(4,921,846
|
)
|
|
Balance,
April 30, 2009
|
|
|
125
|
|
|
$
|
12,500
|
|
|
|
170,730,064
|
|
|
$
|
170,730
|
|
|
|
16,735,453
|
|
|
$
|
16,735
|
|
|
$
|
20,820,672
|
|
|
$
|
-
|
|
|
$
|
(27,147,047
|
)
|
|
$
|
(6,126,410
|
)
|
See
accompanying notes to consolidated financial statements.
SPARTA COMMERCIAL SERVICES,
INC.
CONSOLIDATED
STATEMENT OF CASH
FLOWS
|
|
|
Year end
|
|
|
Year end
|
|
|
|
|
April 30, 2009
|
|
|
April 30, 2008
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(4,921,846
|
)
|
|
$
|
(3,992,354
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
191,256
|
|
|
|
274,773
|
|
|
Allowance
for loss reserves
|
|
|
156,432
|
|
|
|
26,147
|
|
|
Amortization
of deferred revenue
|
|
|
(9,567
|
)
|
|
|
(24,148
|
)
|
|
Amortization
of deferred compensation
|
|
|
-
|
|
|
|
24,000
|
|
|
Amortization
of beneficial conversion feature
|
|
|
325,000
|
|
|
|
-
|
|
|
Shares
issued for financing costs
|
|
|
226,941
|
|
|
|
-
|
|
|
Equity
based compensation
|
|
|
915,652
|
|
|
|
488,700
|
|
|
Stock
based finance cost
|
|
|
539,240
|
|
|
|
449,926
|
|
|
Extinguishment
of dividend payable
|
|
|
117,437
|
|
|
|
215,253
|
|
|
Change
in fair value of warrant liability
|
|
|
15,217
|
|
|
|
-
|
|
|
Changes
in operating assets and liabilities:
|
|
|
-
|
|
|
|
-
|
|
|
(Increase)
decrease in:
|
|
|
|
|
|
|
|
|
|
Other
Receivables
|
|
|
9,223
|
|
|
|
(32,550
|
)
|
|
Prepaid
expenses and other assets
|
|
|
(532,849
|
)
|
|
|
(9,887
|
)
|
|
Restricted
cash
|
|
|
96,039
|
|
|
|
(159,959
|
)
|
|
Deposits
and other
|
|
|
6,881
|
|
|
|
1,725
|
|
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
562,407
|
|
|
|
281,621
|
|
|
Net
cash used in operating activities
|
|
|
(2,303,295
|
)
|
|
|
(2,456,753
|
)
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net proceeds
from (payments for) motorcycles and other vehicles
|
|
|
449,002
|
|
|
|
(403,951
|
)
|
|
Net proceeds
from (payment for) RISC contracts
|
|
|
863,065
|
|
|
|
(1,852,442
|
)
|
|
Purchase
of portfolio
|
|
|
(72,635
|
)
|
|
|
-
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
1,239,431
|
|
|
|
(2,256,393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net
Proceeds from notes from senior lender
|
|
|
(1,441,542
|
)
|
|
|
2,044,657
|
|
|
Net
proceeds from notes
|
|
|
2,248,915
|
|
|
|
2,672,600
|
|
|
Net
Loan proceeds from other related parties
|
|
|
133,500
|
|
|
|
42,500
|
|
|
Net
cash provided by financing activities
|
|
|
940,873
|
|
|
|
4,759,757
|
|
|
|
|
|
|
|
|
|
|
|
|
Net(decrease)
increase in cash
|
|
$
|
(122,992
|
)
|
|
$
|
46,611
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted
cash and cash equivalents, beginning of period
|
|
$
|
68,642
|
|
|
|
22,032
|
|
|
Unrestricted
cash and cash equivalents , end of period
|
|
$
|
(54,350
|
)
|
|
$
|
68,643
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
570,618
|
|
|
$
|
400,868
|
|
|
Income
taxes
|
|
$
|
2,366
|
|
|
$
|
23,208
|
|
Non-Cash
Investing and Financing Activities (Note N)
See
accompanying notes to consolidated financial statements.
NOTE
A - SUMMARY OF ACCOUNTING POLICIES
A summary
of the significant accounting policies applied in the preparation of the
accompanying financial statements follows.
Business and Basis of
Presentation
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).
On
December 10, 2008, we formed Sparta Funding LLC (“Sparta Funding”), a Delaware
limited liability company, for which we are the sole member. Sparta Funding was
formed as a special purpose company to borrow funds from DZ Bank (see Note
M).
Estimates
The
preparation of the consolidated 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 purchases Retail Installment Sales Contracts (“RISC”) from motorcycle
dealers. The RISCs are secured by liens on the titles to the vehicles. The RISCs
are accounted for as loans. Upon purchase, the RISCs appear on the Company’s
balance sheet as RISC loan receivable current and long term. Interest income on
these loans is recognized when it is earned.
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)
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.
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, 2009 and 2008, the Company had recorded deferred
revenue related to these contracts of $13,050 and $22,617,
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.
Inventories
Inventories
are valued at the lower of cost or market, with cost determined using the
first-in, first-out method and with market defined as the lower of replacement
cost or realizable value.
Website Development
Costs
The
Company recognizes website development costs in accordance with Emerging Issue
Task Force (
“EITF”
) No.
00-02,
“Accounting for Website
Development Costs.”
As such, the Company expenses all costs incurred that
relate to the planning and post implementation phases of development of its
website. Direct costs incurred in the development phase are capitalized and
recognized over the estimated useful life. Costs associated with repair or
maintenance for the website are included in cost of net revenues in the current
period expenses.
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.
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 the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides
guidance on derecognition, classification, treatment of interest and penalties,
and disclosure of such positions. As a result of implementing FIN 48, there has
been no adjustment to the Company
’
s financial statements and the adoption
of FIN 48 did not have a material effect on the Company
’
s consolidated financial statements for
the year ending April 30, 2009.
NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
Fair Value
Measurements
Effective
May 1
, 200
9
, the
Company
adopted SFAS
No.
157,
Fair Value
Measurements
(SFAS
157). SFAS
157 establishes a three-level fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets the lowest priority to unobservable inputs to fair value
measurements
of certain
assets and Liabilities
. The
three levels of the fair value hierarchy under SFAS
157 are described
below:
|
|
·
|
Level 1 —
Quoted prices
for identical instruments in active markets. Level 1 assets and
liabilities include debt and equity securities and derivative contracts
that are traded in an active exchange market, as well as certain
securities that are highly liquid and are actively traded in
over-the-counter markets.
|
|
|
·
|
Level 2 —
Quoted prices
for similar instruments in active markets; quoted prices for identical or
similar instruments in markets that are not active; and model derived
valuations in which all significant inputs and significant value drivers
are observable in active markets.
|
|
|
·
|
Level 3 —
Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value measurements. Level 3 assets and
liabilities include financial instruments whose value is determined using
pricing models, discounted cash flow methodologies, or similar techniques
based on significant unobservable inputs, as well as management judgments
or estimates that are significant to
valuation.
|
This hierarchy requires the
Company
to use observable market data, when
available, and to minimize the use of unobservable inputs when determining fair
value. For some products or in certain market conditions, observable inputs may
not always be available.
Impairment of Long-Lived
Assets
In accordance with SFAS
144, long-lived assets, such as
property, equipment, motorcycles and other vehicles and purchased intangible
assets subject to amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. Recoverability of assets to be held and used is measured by
comparing the carrying amount of an asset to estimated undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows or quoted market prices in active
markets if available, an impairment charge is recognized by the amount by which
the carrying amount of the asset exceeds the fair value of the
asset.
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, 2009 and 2008, 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
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 is recording the compensation expense on a straight-line basis,
generally over the explicit service period of three to five years.
SFAS 123(R) requires companies to
estimate the fair value of share-based payment awards on the date of grant using
an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the requisite service
periods in the Company
’
s Consolidated Statement of Operations.
The Company is using the Black-Scholes option-pricing model as its method of
valuation for share-based awards. The Company
’
s determination of fair value of
share-based payment awards on the date of grant using an option-pricing model is
affected by the Company
’
s stock price as well as assumptions
regarding a number of highly complex and subjective variables. These variables
include, but are not limited to the Company
’
s expected stock price volatility over
the term of the awards, and certain other market variables such as the risk free
interest rate.
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
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.
Allowance for
Losses
The
Company has loss reserves for its portfolio of Leases and for its portfolio of
Retail Installment Sales Contracts (
“RISC”
). The allowance for
Lease and RISC losses is increased by charges against earnings and decreased by
charge-offs (net of recoveries). 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, additions to the reserve are reduced or discontinued
until the loss reserve is in line with the Company’s reserve ratio policy.
Management’s periodic evaluation of the adequacy of the allowance is based on
the Company’s past lease and RISC 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 periodically reviews its Lease and RISC receivables in
determining its allowance for doubtful accounts.
The
Company charges-off receivables when an individual account has become more than
120 days contractually delinquent. In the event of repossession, the asset
is immediately sent to auction or held for release.
NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
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:
|
Leasehold
improvements
|
|
|
3
years
|
|
|
Furniture
and fixtures
|
|
|
7
years
|
|
|
Website
costs
|
|
|
3
years
|
|
|
Computer
Equipment
|
|
|
5
years
|
|
Advertising
Costs
The
Company follows a policy of charging the costs of advertising to expenses
incurred. During the years ended April 30, 2009 and 2008, the Company incurred
advertising costs of $8,116 and $24,274, 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. Common equivalent
shares are excluded from the computation of net loss per share if their effect
is anti-dilutive.
Per share
basic and diluted net loss attributable to common stockholders amounted
to $0.03 and $0.03 for the years ended April 30, 2009 and 2008,
respectively. At April 30, 2009 and 2008, 37,948,231 and 87,421,173 potential
shares, respectively, were excluded from the shares used to calculate diluted
earnings per share as their inclusion would reduce net loss per
share.
Liquidity
As shown
in the accompanying consolidated financial statements, the Company has incurred
a net loss of $4,921,846 and $3,992,354 during the years ended April 30, 2009
and 2008, respectively. The Company’s liabilities exceed its assets by
$6,126,410 as of April 30, 2009.
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
December 2007, the FASB issued SFAS No. 141(R),
“Business Combinations”
(“SFAS No. 141(R)”), which establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination. SFAS No. 141R is effective as of the beginning of the
first fiscal year beginning on or after December 15, 2008.
The Company does not expect the adoption
of
SFAS No. 141(R)
will have significant effect on its results of operations and financial
condition.
NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
In
December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interest in
Financial Statements, an amendment of ARB No. 51”
(“SFAS
No. 160”), which will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests and
classified as a component of equity within the balance sheets. SFAS No. 160 is
effective as of the beginning of the first fiscal year beginning on or after
December 15, 2008. The Company does not expect the adoption of SFAS
No. 160 will have significant effect on its results of operations and
financial condition.
In March
2008, the FASB” issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment to FASB Statement No. 133” (“SFAS No.
161”). SFAS No. 161 is intended to improve financial standards for derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity’s financial position,
financial performance, and cash flows. Entities are required to provide enhanced
disclosures about: (a) how and why an entity uses derivative instruments; (b)
how derivative instruments and related hedged items are accounted for under SFAS
No. 133 and its related interpretations; and (c) how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance, and cash flows. It is effective for financial statements issued for
fiscal years beginning after November 15, 2008, with early adoption encouraged.
The Company does not expect the adoption of SFAS No. 161 will have
significant effect on its results of operations and financial
condition..
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). SFAS No. 162 will become effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.” The Company does not expect the adoption of
SFAS No. 162 will have a material effect on its financial position, results
of operations or cash flows.
In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement) “ (“FSP APB 14-1”). FSP APB 14-1
requires the issuer of certain convertible debt instruments that may be settled
in cash (or other assets) on conversion to separately account for the liability
(debt) and equity (conversion option) components of the instrument in a manner
that reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis. The Company is currently evaluating the potential impact, if any, of the
adoption of FSP APB 14-1 on its financial position, results of operations or
cash flows.
In June
2008, the FASB issued Emerging Issues Task Force No. 07-5 (EITF 07-5),
Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity
’
s Own Stock.
EITF 07-5
requires entities to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock by assessing the instrument’s
contingent exercise provisions and settlement provisions. Instruments not
indexed to their own stock fail to meet the scope exception of Statement of
Financial Accounting Standards No. 133,
Accounting for Derivative
Instruments and Hedging Activities
, paragraph 11(a), and should be
classified as a liability and marked-to-market. The statement is effective for
fiscal years beginning after December 15, 2008 and is to be applied to
outstanding instruments upon adoption with the cumulative effect of the change
in accounting principle recognized as an adjustment to the opening balance of
retained earnings. The Company is currently evaluating the provisions of EITF
07-5.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company’s present or future
financial statements.
NOTE
B - MOTORCYCLES AND OTHER VEHICLES UNDER OPERATING LEASES
Motorcycles
and other vehicles under operating leases at April 30, 2009 and 2008 consist of
the following:
|
|
|
2009
|
|
|
2008
|
|
|
Motorcycles
and other vehicles
|
|
$
|
911,008
|
|
|
$
|
1,612,962
|
|
|
Less:
accumulated depreciation
|
|
|
(256,485
|
)
|
|
|
(336,100
|
)
|
|
Motorcycles
and other vehicles, net of accumulated depreciation
|
|
|
654,523
|
|
|
|
1,276,862
|
|
|
Less:
estimated reserve for residual values
|
|
|
(32,726
|
)
|
|
|
(25,231
|
)
|
|
Motorcycles
and other vehicles under operating leases, net
|
|
$
|
621,797
|
|
|
$
|
1,251,630
|
|
At April
30, 2009, motorcycles and other vehicles are being depreciated to their
estimated residual values over the lives of their lease contracts. Depreciation
expense for vehicles for the years ended April 30, 2009 and 2008 was $173,337
and $241,834, respectively. All 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, 2009:
|
Year
ending April 30,
|
|
|
|
|
2010
|
|
$
|
80,313
|
|
|
2011
|
|
|
55,857
|
|
|
2012
|
|
|
29,127
|
|
|
2013
|
|
|
12,996
|
|
|
2014
|
|
|
118
|
|
|
Total
|
|
$
|
178,411
|
|
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 April 30, 2009, the
Company had repossessed vehicles of value $12,514 which will be
resold.
NOTE
D – RETAIL (RISC) LOAN RECEIVABLES
RISC loan
receivables, which are carried net of reserves, were $3,248,001 and $4,260,002
at April 30, 2009 and 2008, respectively. As of April 30, 2009 and 2008, the
Company had deficiency receivables of $122,554 and $30,697, respectively. At
April 30, 2009 and 2008, the reserve for doubtful RISC loan receivables was
$235,249 and $86,312, respectively.
The
following is a schedule by years of future payments related to these
receivables. Certain of the assets are pledged as collateral for the note
described in Note F.
|
Year
ending April 30,
|
|
|
|
|
2010
|
|
$
|
1,001,663
|
|
|
2011
|
|
|
1,020,347
|
|
|
2012
|
|
|
929,358
|
|
|
2013
|
|
|
498,460
|
|
|
2014
|
|
|
33,422
|
|
|
Total
Due
|
|
$
|
3,483,250
|
|
NOTE
E - PROPERTY AND EQUIPMENT
Major
classes of property and equipment at April 30, 2009 and 2008 consist of the
followings:
|
|
|
2009
|
|
|
2008
|
|
|
Computer
equipment, software and furniture
|
|
$
|
191,247
|
|
|
$
|
191,247
|
|
|
Less:
accumulated depreciation and amortization
|
|
|
(147,905
|
)
|
|
|
(129,986
|
)
|
|
Net
property and equipment
|
|
$
|
43,342
|
|
|
$
|
61,261
|
|
Depreciation
and amortization expense related to property and equipment was $17,919 and
$27,286 for the years ended April 30, 2009 and 2008, respectively.
NOTE
F - SENIOR SECURED NOTES PAYABLE
|
|
(a)
|
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
April 30, 2009 is 10.33%.
|
|
|
(b)
|
On
October 31, 2008, the Company purchased certain loans secured by a
portfolio of secured motorcycle leases (“Purchased Portfolio”) for a total
purchase price of $100,000. The Company paid $80,000 at closing and agreed
to pay the remaining $20,000 upon receipt of additional Purchase Portfolio
documentation. Proceeds from the Purchased Portfolio start accruing to the
Company beginning November 1, 2008.
|
To
finance the purchase, the Company issued a $150,000 Senior Secured Note dated
October 31, 2008 (“Senior Secured Note”) in exchange for $100,000 from the
Senior Secured Note holder. Terms of the Senior Secured Note require the Company
to make semi-monthly payments in amounts equal to all net proceeds from
Purchased Portfolio lease payments and motorcycle asset sales received until the
Company has paid $150,000 to the Senior Secured Note holder. The Company is
obligated to pay any remainder of the Senior Secured Note by November 1, 2009
and has granted the Senior Secured Note holder a security interest in the
Purchased Portfolio.
Once the
Company has paid $150,000 to the Senior Secured Note holder from Purchased
Portfolio proceeds, the Company is obligated to pay fifty percent of all net
proceeds from Purchased Portfolio lease payments and motorcycle asset sales
until the Company and the Senior Secured Note holder mutually agree the Purchase
Portfolio has no remaining proceeds.
As of
April 30, 2009, the Company carries the Purchased Portfolio at $72,635
representing its $100,000 cost, which is less than its estimated market value,
less collections through the period. The Company carries the liability for the
Senior Secured Note at $106,516, which is net of note reductions and is net of
$25,000 in deferred financing costs that will be amortized over the estimated
term of the Senior Secured Note.
NOTE
F - SENIOR SECURED NOTES PAYABLE (continued)
At April
30, 2009, the notes payable mature as follows:
|
Year
ended April 30,
|
|
Amount
|
|
|
2010
|
|
$
|
1,051,197
|
|
|
2011
|
|
|
1,103,373
|
|
|
2012
|
|
|
990,781
|
|
|
2013
|
|
|
525,831
|
|
|
2014
|
|
|
23,656
|
|
|
Total
Due
|
|
$
|
3,694,838
|
|
NOTE
G – NOTES PAYABLE
|
Notes Payable
|
|
April 30,
2009
|
|
|
April 30,
2008
|
|
|
Convertible
notes (a)
|
|
$
|
4,055,560
|
|
|
$
|
2,665,359
|
|
|
Notes
payable (b)
|
|
|
547,500
|
|
|
|
490,000
|
|
|
Bridge
loans (c)
|
|
|
176,000
|
|
|
|
275,000
|
|
|
Collateralized
note (d)
|
|
|
220,000
|
|
|
|
-
|
|
|
Convertible
note (e)
|
|
|
103,399
|
|
|
|
150,000
|
|
|
Total
|
|
$
|
5,102,458
|
|
|
$
|
3,812,859
|
|
|
(a)
|
As
of April 30, 2009, the Company had outstanding convertible unsecured and
convertible demand notes with an original aggregate principal amount of
$4,292,359, which accrues interest ranging from 6% to 10% per
annum. The majority of the notes are convertible into shares of
common stock, at the Company’s option, ranging from $0.013 to $0.08 per
share. The Company had outstanding notes that are convertible, at the
holder’s option, of $403,399 with a conversion price of $0.06 per
share.
|
As of
April 30, 2009, the aggregate outstanding balance due on the convertible notes
was $4,055,559. The majority of the notes were past due with the remaining notes
maturing by September 2009.
On July
28 and July 29, 2009, $3,727,559 of the outstanding convertible notes plus all
the accrued interest were converted into 120,842,934 shares of the Company’s
common stock. Holders of an additional $228,000 notes plus accrued interest will
be converted into approximately 8,000,000 shares of common stock. These are
demand notes.
Subsequent
to April 30, 2009, note holders with outstanding balances totaling $100,000,
which are current, have agreed to contingently convert their notes plus accrued
interest into approximately 3,500,000 shares of the Company’s common stock upon
the
Company’s
ability to meet all conditions precedent to begin drawing down on the DZ Bank’s
credit facility.
|
(b)
|
As
of April 30, 2009, the Company had outstanding unsecured notes with an
original principal amount of $547,500, which accrues interest ranging from
6% to 12% per annum of which the majority were past due with the remaining
notes maturing by September 2009 On July 28 and July 29, 2009, $27,500 of
these outstanding notes and the accrued interest thereon was converted
into 949,666 shares of the Company’s common stock. The holder of an
additional $30,000 in notes has agreed to convert their notes and the
accrued interest thereon into approximately 1,000,000 shares of the
Company’s common stock .Subsequent to April 30, 2009, note holders with
outstanding balances totaling $336,000, which are current, have agreed to
contingently convert their notes plus accrued interest into approximately
12,000,000 shares of the Company’s common stock upon the
Company’s
ability to meet all conditions precedent to begin drawing down on the DZ
Bank’s credit facility.
|
NOTE
G – NOTES PAYABLE (continued)
|
(c)
|
During
the year ended April 30, 2007, the Company sold to five accredited
investors bridge notes in the aggregate amount of $275,000. The bridge
notes were originally scheduled to expire on various dates through
November 30, 2006, together with simple interest at the rate of 10%. The
notes provided that 100,000 shares of the Company’s unregistered common
stock are to be issued as “Equity Kicker” for each $100,000 of notes
purchased, or any prorated portion thereof. The Company had the right to
extend the maturity date of notes for 30 to 45 days, in which event the
lenders were entitled for “additional equity” equal to 60% of the “Equity
Kicker” shares. In the event of default on repayment by the Company, the
notes provided for a 50% increase in the “Equity Kicker” and the
“Additional Equity” for each month, as penalty, that such default has not
been cured, and for a 20% interest rate during the default period. The
repayments, in the event of default, of the notes are to be collateralized
by certain security interest. 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 unregistered shares of common stock to
be issued. Thereafter, the Company was in default on repayment of these
notes. During the year ended April 30, 2009, $99,000 of these loans was
repaid. The holder of one remaining note for $100,000 plus the accrued
interest thereon has agreed to convert into approximately 3,500,000s hares
of the Company’s common stock. (See Subsequent Events). The holders of the
remaining $76,000 notes have agreed to contingently convert those notes
plus accrued interest into approximately 3,800,000 shares of the Company’s
common stock upon the
Company’s
ability to meet all conditions precedent to begin drawing down on the DZ
Bank credit facility.
|
|
(d)
|
During
the year ended April 30, 2009, the Company sold a secured note in the
amount of $220,000. The notes bore 12.46% simple interest. The note
matured on October 29, 2010 and was secured by a second lien on a pool of
motorcycles. In July 2009, the note holder agreed to convert the note and
all accrued interest thereon into 12,000,000 shares of the Company’s
common stock.
|
|
(e)
|
On
September 19, 2007, the Company sold to one accredited investor for the
purchase price of $150,000 securities consisting of a $150,000 convertible
debenture due December 19, 2007, 100,000 shares of unregistered common
stock, and 400,000 common stock purchase warrants. The debentures bear
interest at the rate of 12% per year compounded monthly and are
convertible into shares of the Company’s common stock at $0.0504 per
share. The warrants may be exercised on a cashless basis and are
exercisable until September 19, 2009 at $0.05 per share. In the
event the debentures are not timely repaid, the Company is to issue
100,000 shares of unregistered common stock for each thirty day period the
debentures remain outstanding. The Company has accrued interest and
penalties as per the terms of the note agreement. In May, 2008, the
Company repaid $1,474 of principal and $3,526 in accrued interest.
Additionally, from April 26, 2008 through April 30, 2009, a third party to
the note paid, on behalf of the Company, $41,728 of principal and $15,272
in accrued interest on the note, and the note holder converted $3,399 of
principal and $6,601 in accrued interest into 200,000 shares of our common
stock. As of April 30, 2009, the balance outstanding was past
due.
|
NOTE
H - LOANS PAYABLE TO RELATED PARTIES
During
the year ended April 30, 2009, the Company borrowed $136,000 from a Director of
the company on a demand basis without interest and repaid $2,500 to the one of
the officers.
During
the year ended April 30, 2008, the Company borrowed $249,760 from a Director and
three officers of the company on a demand basis without interest and repaid
$5,000 to the Director.
At April
30, 2008 and 2009, included in accounts receivable, are $169 and $2,354,
respectively, due from American Motorcycle Leasing Corp., a company controlled
by a director and formerly controlled by the Company’s Chief Executive Officer,
for the purchase of motorcycles.
NOTE I
- FAIR VALUE MEASUREMENTS
The
following table sets forth certain liabilities as of April 30,
2009 which are measured at fair value on a recurring basis by level within
the fair value hierarchy. As required by SFAS No. 157, these are
classified based on the lowest level of input that is significant to the fair
value measurement, (in thousands):
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
RISC
Loan receivables
|
|
$
|
|
|
|
$
|
3,248,001
|
|
|
$
|
|
|
|
Senior
secured notes payable
|
|
|
|
|
|
|
|
|
|
|
3,694,838
|
|
|
Loans
payable-related party
|
|
|
|
|
|
|
|
|
|
|
378,260
|
|
|
Notes
payable
|
|
|
|
|
|
|
|
|
|
$
|
5,102,458
|
|
NOTE
J - 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 35,850 shares have
been designated as Series A Redeemable Preferred Stock, and 340,000,000 shares
of common stock with $0.001 par value per share. As of April 30, 2009 and 2008,
the Company has issued and outstanding 125 and 825 shares of preferred stock
issued and outstanding, respectively. The Company has 170,730,064 and
130,798,657 shares of common stock issued and outstanding as of April 30, 2009
and 2008, respectively.
NOTE
J - EQUITY INSTRUMENTS (continued)
Common
Stock
In July
2007, the Company entered into a three month consulting agreement with a
consulting firm pursuant to which the Company issued five year warrants to
purchase 1,000,000 shares of unregistered common stock at $0.05 per share. The
agreement had called for the issuance of additional warrants on a performance
basis; however the agreement was cancelled with no further issuance of warrants
required. The unvested warrants have been valued at $48,122 using the
Black-Sholes option pricing model with the following assumptions: (1) dividend
yield of 0%; (2) expected volatility of 181%; (3) risk-free interest rate of
4.94%. The warrants are fully vested and expire if unexercised in five
years.
In August
2007, the Company amended an April, 2007 agreement with a consultant and entered
into a new three month consulting agreement with the consultant which agreement
calls for cash payments by the Company of $3,000, which has been paid, and
1,100,000 shares of unregistered common stock valued at $77,000 (which were
issued in May 2007 in conjunction with the April 2007 agreement) based upon the
consultants performance under the agreement.
In
September 2007, the Company, pursuant to a consulting agreement, issued to the
consultant 100,000 shares of its unregistered common stock valued at $7,000.00.
The Company, also, issued five year warrants to purchase 400,000 shares of
unregistered common stock at $0.05 per share. The warrants which are fully
vested have been valued at $27,107 using the Black-Scholes option pricing model
with the following assumptions: (1) dividend yield of 0%; (2) expected
volatility of 181%; (3) risk-free interest rate of 4.52%, and expire if
unexercised in five years.
In
October 2007, the Company entered into a consulting agreement for financial
advisory services with an individual pursuant to which the Company issued five
year warrants to purchase 375,000 shares of unregistered common stock at $0.05
per share. The warrants which are fully vested have been valued at $18,038 using
the Black-Scholes option pricing model with the following assumptions: (1)
dividend yield of 0%; (2) expected volatility of 181%; (3) risk-free interest
rate of 4.53%, and expire if unexercised in five years.
In
October 2007, pursuant to the terms and provisions of their loans, the company
issued to four individuals 2,690,000 shares of its unregistered common stock
valued at $209,350.
In
November 2007, the Company issued to an individual 10,000 shares of its
unregistered common stock valued at $600.00 as an inducement for a
loan.
In
January 2008, pursuant to the terms and provisions of their loans, the company
issued to four individuals 440,000 shares of its unregistered common stock
valued at $33,800.
In
January 2008, the Company, pursuant to a consulting agreement, issued to the
consultant 500,000 shares of its unregistered common stock valued at
$20,000.
On
January 31, 2008, the Company issued five year warrants to purchase 1,632,833
shares of its unregistered common stock at a price of $0.0438 per share to a
corporation pursuant to a placement agency agreement. The warrants which are
fully vested have been valued at $93,420 using the Black-Scholes option pricing
model with the following assumptions: (1) dividend yield of 0%; (2) expected
volatility of 178%; (3) risk-free interest rate of 2.8%, and expire if
unexercised in five years.
NOTE
J - EQUITY INSTRUMENTS (continued)
On
February 14, 2008, the Company, pursuant to a consulting agreement, issued to
the consultant 1,000,000 shares of unregistered common stock valued at $80,000.
The consulting agreement, unless cancelled, required the Company to issue up to
4,000,000 additional shares of unregistered common stock to the consultant, in
tranches of 1,000,000 shares each, on the three, six, nine and twelve month
anniversary dates of the agreement. The agreement was cancelled as of March 31,
2008 with no further issuance of shares required.
In
February 2008, pursuant to the terms and provisions of their loans, the Company
issued to five individuals 540,000 shares of its unregistered common stock
valued at $46,800.
In
February 2008, the Company issued to four individuals 262,500 shares of its
unregistered common stock valued at $13,250.00 as an inducement for
loans.
In March
2008, pursuant to the terms and provisions of their loans, the Company issued to
six individuals 520,000 shares of its unregistered common stock valued at
$59,600.
In April
2008, pursuant to the terms and provisions of their loans, the Company issued to
six individuals 420,000 shares of its unregistered common stock valued at
$38,400.
During
the fiscal year ended April 30, 2009, the Company issued an aggregate of
2,000,000 shares of unregistered common stock valued at $125,000 to the four
members of its Advisory Council.
During
the fiscal year ended April 30, 2009, the Company issued an aggregate of
5,882,000 shares of unregistered common stock valued at $407,520 to thirteen
note holders pursuant to the terms and provisions of their loans.
During
the fiscal year ended April 30, 2009, the Company issued an aggregate of
1,390,000 shares of unregistered common stock valued at $91,500 to ten
individuals as an inducement for loans.
During
the fiscal year ended April 30, 2009, pursuant to two consulting agreements, the
Company issued a net of 5,484,769 shares of unregistered common stock valued at
$463,629 to two consulting firms. One agreement was subsequently cancelled and
the consultant returned 1,015,231 shares of the 6,000,000 issued valued at
$91,371. The second agreement dated January 1, 2009 called for the payment of
$15,000 per month, the issuance of 500,000 shares of common stock and the
issuance of 1,500,000 five year common stock purchase warrants, issued at the
rate of 250,000 per month commencing January 2009 at various escalating exercise
prices. This agreement was suspended in February 2009 and remains suspended as
of August 1, 2009. As a result of this suspension, only 500,000 shares and
250,000 warrants, exercisable at $0.05, have been issued and one monthly payment
was made.
During
the fiscal year ended April 30, 2009, the Company issued an aggregate of
1,875,000 shares of common stock to five individuals who converted 292,500
shares of Series A Redeemable Preferred Stock, of which 222,500 were converted
in prior years..
During
the fiscal year ended April 30, 2009, the Company issued an aggregate of
23,299,637 shares of unregistered common stock to eighteen convertible note
holders who converted $827,800 principal amount of notes and $99,942 in accrued
interest thereon.
During
the years ended April 30, 2009 and 2008, the Company expensed $871,038 and
$488,700 respectively, in non-cash charges related to stock and option
compensation expense.
NOTE
J - EQUITY INSTRUMENTS (continued)
Series A
Redeemable
Preferred
Stock
On July
20, 2007, one shareholder holding 16,745 shares of preferred stock converted
those shares into 10,733,974 shares of common stock and forgave $215,253 in
accumulated but unpaid dividends on the preferred shares. On January 31, 2008,
three shareholders holding 2,225 shares of preferred stock converted those
shares into 1,426,230 shares of common stock. In February 2009, one shareholder
converted 20,000 shares of preferred stock into 128,210 shares of common stock.
In April 2009, one shareholder converted 50,000 shares of preferred stock into
320,510 shares of common stock. Of the shares of common stock issuable upon
conversion of the preferred shares 10,733,980 had not been physically issued as
of April 30, 2009. These unissued shares are not included in the outstanding
shares. The forgiven dividends were recognized as additional paid-in capital.
Pursuant to the Certificate of Designation of the Series A
Redeemable
Preferred Stock, all
accumulated but un-paid dividends thereon shall be extinguished. Therefore,
$117,437 of previously accrued dividends were recognized as additional
paid-in-capital.
NOTE
K - INCOME TAXES
At April
30, 2009 and 2008, the Company has available for federal income tax purposes a
net operating loss carry forward of approximately $24,500,000 and $19,846,000,
respectively, 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, 2009 and 2008 are as
follows:
|
|
|
April
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
Net
operating loss carry forward
|
|
$
|
6,860,000
|
|
|
$
|
5,739,200
|
|
|
Valuation
allowance
|
|
|
(6,860,000
|
)
|
|
|
(5,739,200
|
)
|
|
Net
deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
valuation allowance and increased by $1,120,800 and $1,224,000 during the years
ended April 30, 2009 and 2008, respectively.
NOTE
L - STOCK OPTIONS AND WARRANTS
On April
29, 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.
NOTE
L - STOCK OPTIONS AND WARRANTS (continued)
During
the year ended April 30, 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-Scholes 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 year ended April 30, 2008, the Company granted options to purchase an
aggregate of 1,170,000 shares of common stock to thirteen employees. However,
four employees left during the three months ended July 31, 2007 and two
employees left during the three months ended January 31, 2008. As a result of
these resignations, 530,000 unexercised options were cancelled. During the year
ended April 30, 2009, two employees left as a result, 150,000 unexercised
options were cancelled. The remaining vested and unvested options have been
valued at $40,285 using the Black-Scholes option pricing model with the
following assumptions: (1) dividend yield of 0%; (2) expected volatility of
143%; (3) risk-free interest rate of 4.76%, vest over a 48 month period and
expire if unexercised in ten years.
During
the year ended April 30, 2009, the Company issued warrants to purchase an
aggregate of 250,000 shares of common stock to a consultant. The warrants have
been valued at $17,423 using the Black-Sholes option pricing model with the
following assumptions: (1) dividend yield of 0%; (2) expected
volatility of 248%, (3) risk-free interest rate of 1.72%, and
(4) expected life of 5 years. The warrants have an exercise price of
$0.05 and are fully vested.
During
the year ended April 30, 2009, the Company issued warrants to purchase an
aggregate of 694,444 shares of common stock to one accredited investor in
connection with the sale of a convertible note. The warrants have been valued at
$40,811 using the Black-Sholes option pricing model with the following
assumptions: (1) dividend yield of 0%; (2) expected volatility of 285%, (3)
risk-free interest rate of 1.27%, and (4) expected life of 3 years. The warrants
have an exercise price of $0.15 and are fully vested.
During
the year ended April 30, 2009, the Company issued warrants to purchase an
aggregate of 200,000 shares of common stock to two individuals in connection
with their services to the Company. The warrants have been valued at $5,979
using the Black-Sholes option pricing model with the following assumptions: (1)
dividend yield of 0%; (2) expected volatility of 268%, (3) risk-free interest
rate of 1.41%, and (4) expected life of 5 years. The warrants have an
exercise price of $0.15 and are fully vested.
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.
NOTE
L - STOCK OPTIONS AND WARRANTS (continued)
The
following table summarizes common stock options issued to officers, directors
and employees outstanding and the related exercise price.
|
Options
Outstanding
|
|
|
|
|
|
Options
Exercisable
|
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
6,025,000
|
|
|
5.05
|
|
|
$
|
0.25
|
|
|
|
4,515,000
|
|
|
$
|
0.27
|
|
Transactions
involving stock options issued to employees are summarized as
follows:
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Price
Per Share
|
|
|
Outstanding
at April 30, 2007
|
|
|
5,535,000
|
|
|
$
|
0.26
|
|
|
Granted
|
|
|
1,170,000
|
|
|
|
0.10
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Canceled
or expired
|
|
|
(530,000
|
)
|
|
|
0.10
|
|
|
Outstanding
at April 30, 2008
|
|
|
6,175,000
|
|
|
$
|
0.24
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Canceled
or expired
|
|
|
(150,000
|
)
|
|
|
0.10
|
|
|
Outstanding
at April 30, 2009
|
|
|
6,025,000
|
|
|
$
|
0.24
|
|
The
weighted-average fair value of stock options granted during the years ended
April 30, 2009 and 2008 was $0.00 and $0.09, respectively, and the
weighted-average significant assumptions used to determine those fair values,
using a Black-Scholes option pricing model are as follows:
|
Significant
Assumptions (weighted average):
|
|
2009
|
|
|
2008
|
|
|
Risk
free interest rate at grant date:
|
|
|
-
|
|
|
|
2.49
|
%
|
|
Expected
stock price volatility
|
|
|
-
|
|
|
|
164
|
%
|
|
Expected
dividend payout
|
|
|
-
|
|
|
|
0
|
|
|
Expected
options life in years
(a)
|
|
|
-
|
|
|
|
3
|
|
|
(a)
|
The
expected option/warrant life is based on vested
dates.
|
There
were no options granted during the year ended April 30, 2009. The options
granted in the year ended April 30, 2008 had an intrinsic value of
$21,346.
NOTE
L - STOCK OPTIONS AND WARRANTS (continued)
|
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
|
|
|
Exercise
Prices
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
$
|
0.215
|
|
|
|
1,755,537
|
|
|
|
1.78
|
|
|
$
|
0.215
|
|
|
|
1,755,537
|
|
|
$
|
0.215
|
|
|
$
|
0.15
|
|
|
|
694,444
|
|
|
|
2.96
|
|
|
$
|
0.15
|
|
|
|
694,444
|
|
|
$
|
0.15
|
|
|
$
|
0.05
|
|
|
|
2,225,000
|
|
|
|
3.24
|
|
|
$
|
0.05
|
|
|
|
2,225,000
|
|
|
$
|
0.05
|
|
|
$
|
0.0438
|
|
|
|
1,632,833
|
|
|
|
3.29
|
|
|
$
|
0.0438
|
|
|
|
1,632,833
|
|
|
$
|
0.0438
|
|
|
$
|
0.088
|
|
|
|
100,000
|
|
|
|
.63
|
|
|
$
|
0.088
|
|
|
|
100,000
|
|
|
$
|
0.088
|
|
|
|
|
|
|
|
6,407,814
|
|
|
|
2.78
|
|
|
$
|
0.10
|
|
|
|
6,407,814
|
|
|
$
|
0.10
|
|
Transactions
involving stock warrants issued to non-employees are summarized as
follows:
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Price
Per
Share
|
|
|
Outstanding
at April 30, 2007
|
|
|
12,804,454
|
|
|
$
|
0.197
|
|
|
Granted
|
|
|
3,407,833
|
|
|
$
|
0.050
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
Canceled
or expired
|
|
|
(6,261,414
|
)
|
|
$
|
0.195
|
|
|
Outstanding
at April 30, 2008
|
|
|
9,950,873
|
|
|
$
|
0.147
|
|
|
Granted
|
|
|
1,144,444
|
|
|
$
|
0.111
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
Canceled
or expired
|
|
|
(4,687,503
|
)
|
|
$
|
0.195
|
|
|
Outstanding
at April 30, 2009
|
|
|
6,407,814
|
|
|
$
|
0.108
|
|
The
weighted-average fair value of stock warrants granted to non-employees during
the years ended April 30, 2009 and 2008 was $0.05 and $0.05 respectively, and
the weighted-average significant assumptions used to determine those fair
values, using a Black-Scholes option pricing model are as follows:
|
|
|
2009
|
|
|
2008
|
|
|
Significant
assumptions (weighted-average):
|
|
|
|
|
|
|
|
Risk-free
interest rate at grant date
|
|
|
1.39
|
%
|
|
|
2.82
|
%
|
|
Expected
stock price volatility
|
|
|
277
|
%
|
|
|
178
|
%
|
|
Expected
dividend payout
|
|
|
-
|
|
|
|
-
|
|
|
Expected
option life-years
|
|
yrs
|
|
|
4
yrs
|
|
The
amount of the expense charged to operations for compensatory warrants granted in
exchange for services was $59,831 and $247,160 and for the years ended April 30,
2009 and 2008, respectively.
NOTE
M - 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. This lease was renewed on October 24, 2007 for an additional 5 years.
Total lease rental expense for the years ended April 30, 2009 and 2008, was
$310,419 and $225,953, respectively.
Commitments
for minimum rentals under non-cancelable leases Including Contractual charge for
water and sprinkler are:
|
April
30, 2010
|
|
$
|
297,590
|
|
|
April
30, 2011
|
|
$
|
304,985
|
|
|
April
30, 2012
|
|
$
|
312,565
|
|
|
November
30, 2012
|
|
$
|
184,947
|
|
Secured Senior Credit
Facility
In
December 2008 the Company, along with our wholly-owned subsidiary, Sparta
Funding LLC, a Delaware limited liability company, entered into a $25,000,000
committed (through December 18, 2009), extendable (with the consent of the
lender), secured credit facility with DZ Bank AG Deutsche
Zentral–Genossenschaftsbank, Frankfurt am Main, New York Branch pursuant to a
Revolving Credit Agreement which allows Sparta Funding to borrow up to 80% of
the value of a powersports vehicle in the case of leased vehicles or up to 80%
of the amount financed by the ultimate purchaser in the case of vehicles, which
are financed, in each case subject to over-concentration and eligibility
criteria, at a floating interest rate equal to the commercial paper rate plus
275 basis points (assuming DZ Bank funds such advances with commercial paper).
The Company will serve as originator and servicer of the leases and purchases
financed by Sparta Funding through the DZ Bank credit facility. The Company is
required to satisfy certain tangible net worth and committed capital thresholds
as a condition of accessing funds under the DZ Bank credit facility. As of April
30, 2009, the Company had not met the net worth or committed capital in order to
utilize the credit facility.
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.
The
Company 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.
NOTE
M - COMMITMENTS AND CONTINGENCIES (continued)
On
November 1, 2004, the Company entered into an employment agreement with Richard
P. Trotter. The term of employment is one year, and 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. Under the agreement, 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. At
April 30, 2007, 75,000 shares vested, of which 50,000 shares are yet to be
issued. On November 1, 2008 and 2007, 12,500 shares and 25,000 shares,
respectively, vested and are yet to be issued. The remainder of the shares are
subject to vesting on November 1, 2009. During the years ended April 30, 2009
and 2008, the Company has recorded $10,000 and $20,000, respectively, as expense
as per this employment agreement.
The
Company 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. He was granted 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, 2007, and 2008, options for 800,000 shares, 800,000 shares,
and 1,200,000 shares, respectively, vested, and the remaining options to
purchase 1,200,000 shares are to vest on September 22, 2009. 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 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.
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.
NOTE
N - NON-CASH FINANCIAL INFORMATION
During
the year ended April 30, 2009, the Company:
|
|
·
|
Issued
2,000,000 shares of unregistered common stock, valued at $125,000, to four
individuals for their services as members of our Advisory
Council.
|
|
|
·
|
Issued
5,882,000 shares of unregistered common stock, valued at $407,520, to
thirteen individuals pursuant to the terms and provisions of their
loans.
|
|
|
·
|
Issued
1,390,000 shares of unregistered common stock valued at $91,500 to ten
individuals as an inducement for
loans.
|
|
|
·
|
Issued
a net of 5,484,769 shares of unregistered common stock valued at $463,629
to two consulting firms.
|
During
the year ended April 30, 2008, the Company:
|
|
·
|
Issued
2,700,000 shares of unregistered common stock, valued at $184,000, to two
individuals and two corporations for consulting
services.
|
|
|
·
|
Issued
272,500 shares of unregistered common stock, valued at $13,850, to five
individuals as inducements to make loans to the
Company.
|
|
|
·
|
Issued
4,610,000 shares of unregistered common stock, valued at $378,350, to six
individuals as penalty shares pursuant to note
agreements.
|
NOTE
O – SUBSEQUENT EVENTS
During
the three months ended July 31, 2009, the Company sold to five accredited
investors four month unsecured notes and warrants in the aggregate amount of
$165,000. The warrants are for a term of three years and entitle the holder to
purchase a total of 4,853,153 shares of our common stock at $0.15 per share The
notes bore 8% simple interest, payable in cash or shares, at the Company’s
option, with principal and accrued interest payable at maturity. At the
Company’s option, the notes were convertible into shares of common stock ranging
from $0.02 to $0.048 per share. The notes were to mature on various dates
through November 8, 2009. These notes plus accrued interest thereon were
converted into shares of common stock in July 2009.
During
the three months ended July 31, 2009, the Company sold to one accredited
investor a four month unsecured 10% note due November 8, 2009 in the amount of
$20,000. As an inducement for the loan, the Company issued to the investor
40,000 shares of the Company’s unregistered common stock.
During
the three months ended July 31, 2009, the Company sold to one accredited
investor unsecured 8% demand notes in the aggregate amount of $149,000. At the
Company’s option, the notes are convertible into shares of common stock ranging
from $0.02 to $0.048 per share.
During
the three months ended July 31, 2009, the Company sold to one accredited
investor unsecured 10% note in the amount of $20,000. At the investor’s option,
the notes are convertible into shares of common stock at $0.02 per
share.
NOTE
O – SUBSEQUENT EVENTS (continued)
During
the three months ended July 31, 2009, pursuant to the terms of a March, 2009
consulting agreement, the Company issued 2,500,000 shares of its unregistered
common stock valued at $75,000. The agreement requires the Company to issue an
additional 3,500,000 shares, payable 500,000 per month in arrears.
During
the three months ended July 31, 2009, the Company issued 388,086 shares of its
common stock to two individuals, Pursuant to its 2009 Consultant Stock Plan, in
payment of $15,747 for services.
During
the three months ended July 31, 2009, pursuant to the terms of his note, the
Company issued 200,000 shares of its unregistered common stock to one note
holder in payment of $6,600.99 in accrued interest and $3,399.01 for principal
reduction of the note.
In July
2009, pursuant to the terms of their note agreements, note holders converted
$3,727,755 amount of notes and accrued interest thereon into 118,632,122 shares
of the Company’s common stock.
Note
holders of an additional $938,000 notes have agreed to convert their notes plus
accrued interest thereon into shares of the Company’s common stock upon the
agreement of
the Company’s Senior Secured Lender that the Company has met all conditions
precedent to begin drawing down on the Company’s credit facility with
them.
On May 1,
2009, the Company adopted its 2009 Consultant Stock Plan. The plan provides for
the issuance of up to 10,000,000 shares of the Company’s common stock, pursuant
to stock awards, to eligible consultants. The plan is effective for ten
years.
Preferred Stock Purchase
Agreement
On July
24, 2009, we designated 1,000 shares as Series B Preferred Stock. The Series B
shares, with respect to dividend rights and rights upon liquidation, winding-up
or dissolution, rank senior to our common stock and any other class or series of
preferred stock, and junior to all of our existing and future indebtedness. The
Series B shares accrue dividends at an annual rate of 10%. Accrued dividends are
payable upon redemption of the Series B shares. Our common stock may not be
redeemed while Series B shares are outstanding. The Series B certificate of
designations provides that, without the approval of a majority of the Series B
shares, we cannot authorize or create any class of stock ranking as to
distribution of assets upon a liquidation senior to or otherwise pari passu with
the Series B shares, liquidate, dissolve or wind-up our business and affairs, or
effect certain fundamental corporate transactions, or otherwise alter or change
adversely the powers, preferences or rights given to the Series B shares. The
Series B shares have a liquidation preference per share equal to the original
price per share thereof plus all accrued dividends thereon upon liquidation,
including upon consummation of certain fundamental corporate transactions,
dissolution, or winding up of our company. The Series B shares are redeemable at
our option on or after the fifth anniversary of the date of its
issuance.
On July
29, 2009, we entered into a Preferred Stock Purchase Agreement with Optimus
Capital Partners, LLC (“Optimus”), an unaffiliated investment fund. Under the
agreement, Optimus is committed to purchase up to $5,000,000 of our Series B
Preferred Stock for a one year period. From time to time, we may send a notice
requiring Optimus to purchase shares of our Series B Preferred Stock, subject to
satisfaction of certain closing conditions. Optimus will not be obligated to
purchase the Series B Preferred Stock (i) in the event the closing price of our
common stock during the nine trading days following delivery of a purchase
notice falls below 75% of the closing price on the trading day prior to the date
such notice is delivered to Optimus, or (ii) to the extent such purchase would
result in Optimus and its affiliates beneficially owning more than 9.99% of our
common stock.
We
agreed, to file after each drawn down, and to seek and maintain effectiveness
of, a registration statement covering the shares underlying the issued warrants.
On the earlier of the first draw down or 6 months from the date of the
agreement, we are to pay a non-refundable commitment fee of $250,000.00 to
Optimus. Pursuant to a concurrent transaction between Optimus may borrow up to
33,990,000 shares of our common stock from several of our non-affiliated
stockholders. On July 31, 2009, pursuant to the agreement, we requested Optimus
to purchase 90 shares of our Series B Preferred Stock valued at $900,000 and
issued 13,500,000 five year warrants to purchase 13,500,000 shares of common
stock at $0.09 per share.
NOTE
O – SUBSEQUENT EVENTS (continued)
On the
date of delivery of each purchase notice under the agreement, we will also issue
to Optimus five-year warrants to purchase our common stock at an exercise price
equal to the closing price of our common stock on the trading day prior to the
delivery date of the notice. The number of shares issuable upon exercise of the
warrant will be equal in value to 135% of the purchase price of the Series B
Preferred Stock to be issued in respect of the related notice. Each warrant will
be exercisable on the earlier of (i) the date on which a registration statement
registering for resale the shares of common stock issuable upon exercise of such
warrant becomes effective and (ii) the date that is six months after the
issuance date of such warrant.
On May 1,
2009, the Company adopted its 2009 Consultant Stock Plan. The plan provides for
the issuance of up to 10,000,000 shares of the Company’s common stock, pursuant
to stock awards, to eligible consultants. The plan is effective for ten
years.
NOTE
P - 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 consolidated
financial statements during the period October 1, 2001 (date of inception)
through April 30, 2009, the Company incurred losses of $27,147,047. 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. 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
pursuing 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.
The
Company believes that the agreement with Optimus will allow us to negate the
going concern issue.
SPARTA
COMMERCIAL SERVICES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
July
31,
2009
(Unaudited)
|
|
|
April
30,
2009
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,713
|
|
|
$
|
2,790
|
|
|
RISC
loan receivable, current, net of reserve of $200,943 and $235,249 as of
July 31, 2009 and April 30, 2009, respectively (NOTE D)
|
|
|
2,716,084
|
|
|
|
3,248,001
|
|
|
Motorcycles
and other vehicles under operating leases, net of accumulated depreciation
of $238,490 and $256,485, as of July 31,2009 and April 30, 2009,
respectively and loss reserve of $28,040 and $32,726, as of July 31, 2009
and April 30, 2009, respectively (NOTE B)
|
|
|
540,766
|
|
|
|
621,797
|
|
|
Interest
receivables
|
|
|
40,789
|
|
|
|
49,160,
|
|
|
Purchased
Portfolio (NOTE F)
|
|
|
54,695
|
|
|
|
72,635
|
|
|
Accounts
receivable
|
|
|
48,018
|
|
|
|
17,899
|
|
|
Inventory
(NOTE C)
|
|
|
15,116
|
|
|
|
12,514
|
|
|
Property
and equipment, net of accumulated depreciation and amortization of
$152,385 and $147,905, respectively (NOTE E)
|
|
|
38,862
|
|
|
|
43,342
|
|
|
Prepaid
expenses
|
|
|
504,500
|
|
|
|
593,529
|
|
|
Restricted
cash
|
|
|
271,650
|
|
|
|
348,863
|
|
|
Deposits
|
|
|
48,967
|
|
|
|
48,967
|
|
|
Total
assets
|
|
$
|
4,283,159
|
|
|
$
|
5,059,497
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
$
|
19,975
|
|
|
$
|
57,140
|
|
|
Accounts
payable and accrued expenses
|
|
|
1,620,137
|
|
|
|
1,851,876
|
|
|
Notes
payable - Senior Lender (NOTE F)
|
|
|
3,127,230
|
|
|
|
3,694,838
|
|
|
Notes
payable (NOTE G)
|
|
|
1,723,899
|
|
|
|
5,102,458
|
|
|
Loans
payable related parties (NOTE H)
|
|
|
378,260
|
|
|
|
378,260
|
|
|
Other
liabilities
|
|
|
-
|
|
|
|
88,285
|
|
|
Deferred
revenue
|
|
|
11,700
|
|
|
|
13,050
|
|
|
Total
liabilities
|
|
|
6,881,202
|
|
|
|
11,185,907
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficit:
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 10,000,000 shares authorized of which 35,850
shares have been designated as Series A
Redeemable
Preferred
Stock, with a stated value of $100 per share, 125 and 125 shares issued
and outstanding, as of July 31, 2009 and April 30, 2009,
respectively
|
|
$
|
12,500
|
|
|
$
|
12,500
|
|
|
Common
stock, $0.001 par value; 340,000,000 shares authorized, 308,656,684 and
170,730,064 shares issued and outstanding, as of July 31, 2009 and April
30, 2009, respectively
|
|
|
308,657
|
|
|
|
170,730
|
|
|
Common
stock to be issued, 1,540,950 and 16,735,453 shares, as of July 31, 2009
and April 30, 2009, respectively
|
|
|
1,541
|
|
|
|
16,735
|
|
|
Additional
paid-in capital
|
|
|
25,220,953
|
|
|
|
20,820,672
|
|
|
Accumulated
deficit
|
|
|
(28,141,694
|
)
|
|
|
(27,147,047
|
)
|
|
Total
stockholders’ deficit
|
|
|
(2,598,043
|
)
|
|
|
(6,126,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ deficit
|
|
$
|
4,283,159
|
|
|
$
|
5,059,497
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
SPARTA
COMMERCIAL SERVICES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF LOSSES
FOR
THE THREE MONTHS ENDED JULY 31, 2009 AND 2008
(UNAUDITED)
|
|
|
Three
Months Ended
|
|
|
|
|
July
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
Rental
Income, Leases
|
|
$
|
53,068
|
|
|
$
|
89,694
|
|
|
Interest
Income, Loans
|
|
|
138,865
|
|
|
|
204,044
|
|
|
Other
|
|
|
24,870
|
|
|
|
101,182
|
|
|
Total
Revenues
|
|
|
216,804
|
|
|
|
394,919
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
592,197
|
|
|
|
1,364,152
|
|
|
Depreciation
and amortization
|
|
|
122,692
|
|
|
|
61,083
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
714,889
|
|
|
|
1,425,235
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(498,085
|
)
|
|
|
(1,030,316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense:
|
|
|
|
|
|
|
|
|
|
Interest
expense and financing cost, net
|
|
|
(496,371
|
)
|
|
|
(678,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(994,456
|
)
|
|
|
(1,709,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
dividend payable
|
|
|
191
|
|
|
|
1,261
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributed to common stockholders
|
|
$
|
(994,647
|
)
|
|
$
|
(1,710,304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share attributed to common
stockholders
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
178,702,244
|
|
|
|
146,924,245
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
SPARTA
COMMERCIAL SERVICES, INC.
CONSOLIDATED
STATEMENT OF (DEFICIENCY IN) STOCKHOLDERS’ EQUITY
FOR
THE THREE MONTHS ENDED JULY 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
April 30, 2009
|
|
|
125
|
|
|
$
|
12,500
|
|
|
|
170,730,064
|
|
|
$
|
170,730
|
|
|
|
16,735,453
|
|
|
$
|
16,735
|
|
|
$
|
20,820,672
|
|
|
$
|
-
|
|
|
$
|
(27,147,047
|
)
|
|
$
|
(6,126,410
|
)
|
|
Cancellation
of shares
|
|
|
-
|
|
|
|
-
|
|
|
|
(400
|
)
|
|
|
(0.40
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
0.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Sale
of Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,007,049
|
|
|
|
1,007
|
|
|
|
48,993
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
|
Shares
issued for Preferred Stock Conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
10,733,974
|
|
|
|
10,733
|
|
|
|
(10,733,980
|
)
|
|
|
(10,733
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
Accrued
Preferred Div.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(191
|
)
|
|
|
(191
|
)
|
|
Shares
issued for financing cost
|
|
|
-
|
|
|
|
-
|
|
|
|
1,458,000
|
|
|
|
1,458
|
|
|
|
348,000
|
|
|
|
348
|
|
|
|
99,754
|
|
|
|
-
|
|
|
|
-
|
|
|
|
101,560
|
|
|
Shares
issued for Accrued interest
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
200
|
|
|
|
(200,000
|
)
|
|
|
(200
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Shares
issued for conversion of notes & int.
|
|
|
-
|
|
|
|
-
|
|
|
|
122,286,961
|
|
|
|
122,289
|
|
|
|
(3,615,520
|
)
|
|
|
(3,615
|
)
|
|
|
4,003,564
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,122,237
|
|
|
Stock
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
2,500,000
|
|
|
|
2,500
|
|
|
|
(2,000,000
|
)
|
|
|
(2,000
|
)
|
|
|
29,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,500
|
|
|
Shares
issued for payables
|
|
|
-
|
|
|
|
-
|
|
|
|
748,086
|
|
|
|
748
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43,799
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,547
|
|
|
Employee
Option Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43,660
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43,660
|
|
|
Warrant
Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
131,511
|
|
|
|
-
|
|
|
|
-
|
|
|
|
131,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
—
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(994,456
|
)
|
|
|
(994,456
|
)
|
|
Balance,
July 31, 2009
|
|
|
125
|
|
|
$
|
12,500
|
|
|
|
308,656,684
|
|
|
$
|
308,657
|
|
|
|
1,541,002
|
|
|
$
|
1,541
|
|
|
$
|
25,220,953
|
|
|
$
|
-
|
|
|
$
|
(28,141,694
|
)
|
|
$
|
(2,598,043
|
)
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
SPARTA
COMMERCIAL SERVICES, INC.
CONDENSED
STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED JULY 31, 2009 AND 2008
(UNAUDITED)
|
|
|
Three
Months Ended
|
|
|
|
|
July
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(994,456
|
)
|
|
$
|
(1,709,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
31,663
|
|
|
|
61,083
|
|
|
Allowance
for loss reserve
|
|
|
(38,992
|
)
|
|
|
(1,330
|
)
|
|
Amortization
of deferred revenue
|
|
|
(1,350
|
)
|
|
|
(3,850
|
)
|
|
Amortization
of beneficial conversion features
|
|
|
-
|
|
|
|
318,182
|
|
|
Equity
based compensation
|
|
|
204,671
|
|
|
|
770,364
|
|
|
Stock
based financing cost
|
|
|
101,560
|
|
|
|
-
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in:
|
|
|
|
|
|
|
|
|
|
Interest
receivable
|
|
|
(10,149
|
)
|
|
|
(6,256
|
)
|
|
Prepaid
expenses and other assets
|
|
|
(41,442
|
)
|
|
|
(26,927
|
)
|
|
Restricted
cash
|
|
|
77,214
|
|
|
|
(9,598
|
)
|
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
257,138
|
|
|
|
(119,086
|
)
|
|
Net
cash provided by (used) in operating activities
|
|
|
(414,143
|
)
|
|
|
(726,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
Proceeds from (Payments for) motorcycles and other
vehicles
|
|
|
103,713
|
|
|
|
242,511
|
|
|
Net
Purchases from (payments for) of RISC contracts
|
|
|
566,223
|
|
|
|
(393,354
|
)
|
|
Net
cash provided by (used in) investing activities
|
|
|
669,935
|
|
|
|
(150,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Sale
of common stock
|
|
|
50,000
|
|
|
|
-
|
|
|
Proceeds
from (payments to) notes from senior lender
|
|
|
(566,105
|
)
|
|
|
107,147
|
|
|
Net
Proceeds from (payments on) convertible notes
|
|
|
-
|
|
|
|
842,500
|
|
|
Net
Proceeds from (payments on) other notes
|
|
|
298,399
|
|
|
|
(84,000
|
)
|
|
Net
Loan proceeds from other related parties
|
|
|
-
|
|
|
|
7,500
|
|
|
Net
cash provided by (used in )financing activities
|
|
|
(217,706
|
)
|
|
|
873,147
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (
decrease)
in cash
|
|
|
38,086
|
|
|
|
(4,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
$
|
(54,349
|
)
|
|
$
|
68,642
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
(16,261
|
)
|
|
$
|
64,488
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
118,077
|
|
|
$
|
103,142
|
|
|
Income
taxes
|
|
$
|
-
|
|
|
$
|
993
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Transactions:
|
|
|
|
|
|
|
|
|
|
Common
stock issued in exchange for previously incurred debt and
others
|
|
$
|
4,170,400
|
|
|
|
700,000
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2009
(UNAUDITED)
NOTE
A - SUMMARY OF ACCOUNTING POLICIES
A summary
of the significant accounting policies applied in the preparation of the
accompanying financial statements follows.
Basis of
Presentation
The
accompanying unaudited condensed consolidated financial statements as of July
31, 2009 and for the three month periods ended July 31, 2009 and 2008 have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission, including Form 10-Q and Regulation S-K and 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,
2009 as disclosed in the Company’s 10-K for that year as filed with the SEC, as
it may be amended.
On
December 10, 2008, the Company formed Sparta Funding, LLC (“Sparta Funding”), a
Delaware limited liability company, for which the Company is the sole member.
Sparta Funding was formed as a special purpose company to borrow funds from DZ
Bank (see Part II, Item 1A).
The
results of the three months ended July 31, 2009 are not necessarily indicative
of the results to be expected for the full year ending April 30,
2010.
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 (principal amount of the contract plus the calculated earned income
over the life of the contract), and the unearned income at lease inception is
amortized over the lease term.
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2009
(UNAUDITED)
NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
The
Company purchases Retail Installment Sales Contracts (“RISC”) from motorcycle
dealers. The RISCs are secured by liens on the titles to the vehicles. The RISCs
are accounted for as loans. Upon purchase, the RISCs appear on the Company’s
balance sheet as RISC loan receivable current and long term. Interest income on
these loans is recognized when it is earned.
The
Company realizes gains and losses as the result of the termination of leases,
both at and prior to their scheduled termination, and the disposition of the
related motorcycle. The disposal of motorcycles, which reach scheduled
termination of a lease, results in a gain or loss equal to the difference
between proceeds received from the disposition of the motorcycle and its net
book value. Net book value represents the residual value at scheduled lease
termination. Lease terminations that occur prior to scheduled maturity as a
result of the lessee’s voluntary request to purchase the vehicle have resulted
in net gains, equal to the excess of the price received over the motorcycle’s
net book value.
Early
lease terminations also occur because of (i) a default by the lessee, (ii) the
physical loss of the motorcycle, or (iii) the exercise of the lessee’s early
termination. In those instances, the Company receives the proceeds from either
the resale or release of the repossessed motorcycle, or the payment by the
lessee’s insurer. The Company records a gain or loss for the difference between
the proceeds received and the net book value of the motorcycle.
The
Company charges fees to manufacturers and other customers related to creating a
private label version of the Company’s financing program including web access,
processing credit applications, consumer contracts and other related documents
and processes.
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.
Inventories
Inventories
are valued at the lower of cost or market, with cost determined using the
first-in, first-out method and with market defined as the lower of replacement
cost or realizable value.
Website Development
Costs
The
Company recognizes website development costs in accordance with Emerging Issue
Task Force (
"EITF"
) No.
00-02,
"Accounting for Website
Development Costs."
As such, the Company expenses all costs incurred that
relate to the planning and post implementation phases of development of its
website. Direct costs incurred in the development phase are capitalized and
recognized over the estimated useful life. Costs associated with repair or
maintenance for the website are included in cost of net revenues in the current
period expenses.
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.
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2009
(UNAUDITED)
NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
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.
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 the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, treatment of interest and penalties, and
disclosure of such positions. As a result of implementing FIN 48, there has been
no adjustment to the Company’s financial statements and the adoption of FIN 48
did not have a material effect on the Company’s consolidated financial
statements for the year ending April 30, 2009 or the three months ended July 31,
2009.
Fair Value
Measurements
Effective
May 1, 2009, the Company adopted SFAS No. 157,
Fair Value Measurements
(SFAS 157). SFAS 157 establishes a three-level fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets the lowest priority to unobservable inputs to fair value measurements of
certain assets and Liabilities. The three levels of the fair value hierarchy
under SFAS 157 are described below:
|
|
·
|
Level 1 —
Quoted prices
for identical instruments in active markets. Level 1 assets and
liabilities include debt and equity securities and derivative contracts
that are traded in an active exchange market, as well as certain
securities that are highly liquid and are actively traded in
over-the-counter markets.
|
|
|
·
|
Level 2 —
Quoted prices
for similar instruments in active markets; quoted prices for identical or
similar instruments in markets that are not active; and model derived
valuations in which all significant inputs and significant value drivers
are observable in active markets.
|
|
|
·
|
Level 3 —
Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value measurements. Level 3 assets and liabilities
include financial instruments whose value is determined using pricing
models, discounted cash flow methodologies, or similar techniques based on
significant unobservable inputs, as well as management judgments or
estimates that are significant to
valuation.
|
This
hierarchy requires the Company to use observable market data, when available,
and to minimize the use of unobservable inputs when determining fair value. For
some products or in certain market conditions, observable inputs may not always
be available.
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2009
(UNAUDITED)
NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
Impairment of Long-Lived
Assets
In
accordance with SFAS 144, long-lived assets, such as property, equipment,
motorcycles and other vehicles and purchased intangible assets subject to
amortization are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparing the carrying amount of an asset to estimated undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows or quoted market prices in active
markets if available, an impairment charge is recognized by the amount by which
the carrying amount of the asset exceeds the fair value of the
asset.
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 July 31, 2009 and April 30, 2009, the Company has no
items of other comprehensive income.
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
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 is recording the compensation expense on a straight-line basis,
generally over the explicit service period of three to five years.
SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company’s Consolidated
Statement of Operations. The Company is using the Black-Scholes option-pricing
model as its method of valuation for share-based awards. The Company’s
determination of fair value of share-based payment awards on the date of grant
using an option-pricing model is affected by the Company’s stock price as well
as assumptions regarding a number of highly complex and subjective variables.
These variables include, but are not limited to the Company’s expected stock
price volatility over the term of the awards, and certain other market variables
such as the risk free interest rate.
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2009
(UNAUDITED)
NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
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
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.
Allowance for
Losses
The
Company has loss reserves for its portfolio of Leases and for its portfolio of
Retail Installment Sales Contracts (
“RISC”
). The allowance for
Lease and RISC losses is increased by charges against earnings and decreased by
charge-offs (net of recoveries). 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, additions to the reserve are reduced or discontinued
until the loss reserve is in line with the Company’s reserve ratio policy.
Management’s periodic evaluation of the adequacy of the allowance is based on
the Company’s past lease and RISC 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 periodically reviews its Lease and RISC receivables in
determining its allowance for doubtful accounts.
The
Company charges-off receivables when an individual account has become more than
120 days contractually delinquent. In the event of repossession, the asset
is immediately sent to auction or held for release.
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:
|
Leasehold
improvements
|
3
years
|
|
Furniture
and fixtures
|
7
years
|
|
Website
costs
|
3
years
|
|
Computer
Equipment
|
5
years
|
Advertising
Costs
The
Company follows a policy of charging the costs of advertising to expenses
incurred. During the three months ended July 31, 2009 and the year ended April
30, 2009, the Company incurred no advertising costs.
Net Loss Per
Share
The
Company uses 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. Common
equivalent shares are excluded from the computation of net loss per share if
their effect is anti-dilutive.
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2009
(UNAUDITED)
NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
Per share
basic and diluted net loss attributable to common stockholders amounted to $0.01
and $0.01 for the quarters ended July 31, 2009 and 2008, respectively. At July
31, 2009 and 2008, 35,672,510 and 30,302,766 potential shares, respectively,
were excluded from the shares used to calculate diluted earnings per share as
their inclusion would reduce net loss per share.
Liquidity
As shown
in the accompanying consolidated financial statements, the Company has incurred
a net loss of $994,456 and $4,921,846 during the three months ended July 31,
2009 and the year ended April 30, 2009, respectively. The Company’s liabilities
exceed its assets by $2,598,044 as of July 31, 2009.
Reclassifications
Certain
reclassifications have been made to conform to prior periods' data to the
current presentation. These reclassifications had no effect on reported
losses.
Recent Accounting
Pronouncements
In May of
2008, the FASB issued SFAS No. 162,
“The Hierarchy of Generally Accepted
Accounting Principles.”
This statement identifies literature established
by the FASB as the source for accounting principles to be applied by entities
which prepare financial statements presented in conformity with generally
accepted accounting principles (GAAP) in the United States. This statement is
effective 60 days following approval by the SEC of the Public Company Accounting
Oversight Board amendments to AU Section 411,
“The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.”
This statement
will require no changes in the Company’s financial reporting
practices.
In May
2009, the FASB issued SFAS No. 165,
Subsequent Events
(“SFAS
165”). This Statement is intended to establish general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. This disclosure
should alert all users of financial statements that an entity has not evaluated
subsequent events after that date in the set of financial statements being
presented. SFAS 165 is effective for interim and annual periods ending after
June 15, 2009. We adopted SFAS No. 165 in the first quarter of fiscal 2010 and
it did not result in significant changes to reporting of subsequent events
either through recognition or disclosure.
In June
2009, the FASB issued SFAS No. 168,
"The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles—a
replacement of FASB Statement No. 162"
("SFAS 168"). SFAS 168 establishes
the FASB Accounting Standards Codification ("ASC") as the source of
authoritative accounting principles recognized by the FASB. Following this
statement, the FASB will issue new standards in the form of Accounting Standards
Updates ("ASUs"). SFAS 168 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009 and therefore is
effective in the second quarter of fiscal 2010. The issuance of SFAS 168 will
not change GAAP and therefore the adoption of SFAS 168 will only affect the
specific references to GAAP literature in the notes to the consolidated
financial statements.
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2009
(UNAUDITED)
NOTE
B - MOTORCYCLES UNDER OPERATING LEASE
Motorcycles
and other vehicles under operating leases at July 31, 2009 and April 30, 2009
consist of the following:
|
|
|
July
31,
|
|
|
April
30,
|
|
|
|
|
2009
|
|
|
2009
|
|
|
Motorcycles
and other vehicles
|
|
$
|
807,296
|
|
|
$
|
911,008
|
|
|
Less:
accumulated depreciation
|
|
|
(238,490
|
)
|
|
|
(256,485
|
)
|
|
Motorcycles
and other vehicles, net of accumulated depreciation
|
|
|
568,806
|
|
|
|
654,523
|
|
|
Less:
estimated reserve for residual values
|
|
|
(28,040
|
)
|
|
|
(32,726
|
)
|
|
Motorcycles
and other vehicles under operating leases, net
|
|
$
|
540,766
|
|
|
$
|
621,797
|
|
Depreciation
expense was $27,183 and $173,337 for the quarter ended July 31, 2009 and the
year ended April 30, 2009, respectively. Depreciation expense for the quarter
ended July 31, 2008 was $56,603.
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 July 31, 2009 the Company
had repossessed vehicles valued at market of $15,116. At April 30, 2009, the
Company had repossessed vehicles of value $12,514.
NOTE
D - RETAIL (RISC) LOAN RECEIVABLES
RISC loan
receivables, which are carried at cost, were $2,917,027 and $3,483,250 at July
31, 2009 and April 30, 2009, respectively, including deficiency receivables of
$46,409 and $122,554, respectively. The following is a schedule by years of
future principal payments related to these receivables. Certain of the assets
are pledged as collateral for the note described in Note F.
|
Year
ending July 31,
|
|
|
|
|
2010
|
|
$
|
881,215
|
|
|
2011
|
|
|
932,295
|
|
|
2012
|
|
|
768,746
|
|
|
2013
|
|
|
333,875
|
|
|
2014
|
|
|
896
|
|
|
|
|
$
|
2,917,027
|
|
NOTE
E - PROPERTY AND EQUIPMENT
Property
and equipment at July 31, 2009 and April 30, 2009 consist of the
followings:
|
|
|
July
31,
2009
|
|
|
April
30,
2009
|
|
|
Computer
equipment, software and furniture
|
|
$
|
191,247
|
|
|
$
|
191,247
|
|
|
Less:
accumulated depreciation and amortization
|
|
|
(152,385
|
)
|
|
|
(147,905
|
)
|
|
Net
property and equipment
|
|
$
|
38,862
|
|
|
$
|
43,342
|
|
Depreciation
expense was $4,480 and $17,919 for the quarter ended July 31, 2009 and the year
ended April 30, 2009, respectively. Depreciation and amortization expense
for the quarter ended July 31, 2008 was $4,480.
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2009
(UNAUDITED)
NOTE
F - NOTES PAYABLE - SENIOR LENDER
|
|
(c)
|
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
July 31, 2009 is 10.47%.
|
|
|
(d)
|
On
October 31, 2008, the Company purchased certain loans secured by a
portfolio of secured motorcycle leases (“Purchased Portfolio”) for a total
purchase price of $100,000. The Company paid $80,000 at closing
and agreed to pay the remaining $20,000 upon receipt of additional
Purchase Portfolio documentation. Proceeds from the Purchased
Portfolio start accruing to the Company beginning November 1,
2008.
|
To
finance the purchase, the Company issued a $150,000 Senior Secured Note dated
October 31, 2008 (“Senior Secured Note”) in exchange for $100,000 from the
Senior Secured Note holder. Terms of the Senior Secured Note require
the Company to make semi-monthly payments in amounts equal to all net proceeds
from Purchased Portfolio lease payments and motorcycle asset sales received
until the Company has paid $150,000 to the Senior Secured Note
holder. The Company is obligated to pay any remainder of the Senior
Secured Note by November 1, 2009 and has granted the Senior Secured Note holder
a security interest in the Purchased Portfolio.
Once the
Company has paid $150,000 to the Senior Secured Note holder from Purchased
Portfolio proceeds, the Company is obligated to pay fifty percent of all net
proceeds from Purchased Portfolio lease payments and motorcycle asset sales
until the Company and the Senior Secured Note holder mutually agree the Purchase
Portfolio has no remaining proceeds.
As of
July 31, 2009, the Company carries the Purchased Portfolio at $54,695
representing its $100,000 cost, which is less than its estimated market value,
less collections through the period. The Company carries the liability for the
Senior Secured Note at $105,012, which is net of note reductions and is net of
$12,500 in deferred financing costs that will be amortized over the estimated
term of the Senior Secured Note.
At July
31, 2009, the notes payable mature as follows:
|
12
months ended July 31,
|
|
Amount
|
|
|
2010
|
|
$
|
1,112,267
|
|
|
2011
|
|
|
942,019
|
|
|
2012
|
|
|
767,474
|
|
|
2013
|
|
|
305,318
|
|
|
2014
|
|
|
152
|
|
|
Total
|
|
$
|
3,127,230
|
|
Notes
payable to Senior Lenders at April 30, 2009 were $3,694,838.
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2009
(UNAUDITED)
NOTE
G – NOTES PAYABLE
|
Notes
Payable
|
|
July
31,
2009
|
|
|
April
30,
2009
|
|
|
Convertible
notes (a)
|
|
$
|
689,500
|
|
|
$
|
4,055,560
|
|
|
Notes
payable (b)
|
|
|
535,000
|
|
|
|
547,500
|
|
|
Bridge
loans (c)
|
|
|
176,000
|
|
|
|
176,000
|
|
|
Collateralized
note (d)
|
|
|
220,000
|
|
|
|
220,000
|
|
|
Convertible
note (e)
|
|
|
103,399
|
|
|
|
103,399
|
|
|
Total
|
|
$
|
1,723,899
|
|
|
$
|
5,102,458
|
|
NOTE
G – NOTES PAYABLE (continued)
|
(a)
|
As
of July 31, 2009, the Company had outstanding convertible unsecured and
convertible demand notes with an original aggregate principal amount of
$649,500, which accrue interest ranging from 6% to 10% per
annum. All of the notes are current. The majority of the notes
are convertible into shares of common stock, at the Company’s option,
ranging from $0.013 to $0.08 per share. The Company had
outstanding notes that are convertible, at the holder’s option, of
$223,399 with a conversion prices ranging from $0.02 to $0.06 per share.
The holders of these later notes have agreed to contingently convert their
notes plus accrued interest into shares of the Company’s common stock upon
the
Company’s
ability to meet all conditions precedent to begin drawing down on the DZ
Bank’s credit facility. The balance of the notes are
convertible at the Company’s
option.
|
|
(b)
|
As
of July 31, 2009, the Company had outstanding unsecured notes with an
original principal amount of $535,500, which accrues interest ranging from
6% to 12% per annum of which $100,000 was past due with the remaining
notes maturing by September 2009. In August 2009, $17,500 of the notes
plus accrued interest were converted into shares of the Company’s common
stock. The holder of an additional $25,000 in notes has agreed
to convert his note and the accrued interest thereon into shares of the
Company’s common stock. Note holders with outstanding balances
totaling $235,000, which are current, have agreed to contingently convert
their notes plus accrued interest into shares of the Company’s common
stock upon the
Company’s
ability to meet all conditions precedent to begin drawing down on the DZ
Bank’s credit facility.
|
|
(c)
|
During
the year ended April 30, 2007, the Company sold to five accredited
investors bridge notes in the aggregate amount of $275,000. The bridge
notes were originally scheduled to expire on various dates through
November 30, 2006, together with simple interest at the rate of 10%. The
notes provided that 100,000 shares of the Company's unregistered common
stock are to be issued as “Equity Kicker” for each $100,000 of notes
purchased, or any prorated portion thereof. The Company had the right to
extend the maturity date of notes for 30 to 45 days, in which event the
lenders were entitled for “additional equity” equal to 60% of the “Equity
Kicker” shares. In the event of default on repayment by the Company, the
notes provided for a 50% increase in the “Equity Kicker” and the
“Additional Equity” for each month, as penalty, that such default has not
been cured, and for a 20% interest rate during the default
period. The repayments, in the event of default, of the notes
are to be collateralized by certain security interest. 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
unregistered shares of common stock to be issued. Thereafter, the Company
was in default on repayment of these notes. During the year
ended April 30, 2009, $99,000 of these loans was repaid. The holder of one
remaining note for $100,000 plus the accrued interest thereon has agreed
to convert into shares of the Company’s common stock. The
holders of the remaining $76,000 notes have agreed to contingently convert
those notes plus accrued interest into shares of the Company’s common
stock upon
the
Company’s
ability to meet all conditions precedent to begin drawing down on the DZ
Bank credit facility.
|
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2009
(UNAUDITED)
NOTE
G – NOTES PAYABLE (continued)
|
(d)
|
During
the year ended April 30, 2009, the Company sold a secured note in the
amount of $220,000. The notes bore 12.46% simple interest. The note
matures on October 29, 2010 and was secured by a second lien on a pool of
motorcycles. In July 2009, the note holder agreed to convert
the note and all accrued interest thereon into shares of the Company’s
common stock.
|
|
(e)
|
On
September 19, 2007, the Company sold to one accredited investor for the
purchase price of $150,000 securities consisting of a $150,000 convertible
debenture due December 19, 2007, 100,000 shares of unregistered common
stock, and 400,000 common stock purchase warrants. The debentures bear
interest at the rate of 12% per year compounded monthly and are
convertible into shares of the Company's common stock at $0.0504 per
share. The warrants may be exercised on a cashless basis and are
exercisable until September 19, 2007 at $0.05 per share. In the event the
debentures are not timely repaid, the Company is to issue 100,000 shares
of unregistered common stock for each thirty day period the debentures
remain outstanding. The Company has accrued interest and penalties as per
the terms of the note agreement. In May, 2008, the Company
repaid $1,474 of principal and $3,526 in accrued interest. Additionally,
from April 26, 2008 through April 30, 2009, a third party to the note
paid, on behalf of the Company, $41,728 of principal and $15,272 in
accrued interest on the note, and the note holder converted $3,399 of
principal and $6,601 in accrued interest into 200,000 shares of the
Company’s common stock. As of July 31, 2009, the balance
outstanding was past due.
|
NOTE
H - LOANS PAYABLE TO RELATED PARTIES
At July
31, 2009 and April 30, 2009, included in accounts receivable, are $169 and $169,
respectively, due from American Motorcycle Leasing Corp., a company controlled
by a director and formerly controlled by the Company's Chief Executive Officer,
for the purchase of motorcycles.
NOTE
I - FAIR VALUE MEASUREMENTS
The
following table sets forth certain liabilities as of July 31, 2009 which are
measured at fair value on a recurring basis by level within the fair value
hierarchy. As required by SFAS No. 157, these are classified based on
the lowest level of input that is significant to the fair value measurement, (in
thousands):
|
(in
thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
RISC
Loan receivables
|
|
$
|
|
|
|
$
|
2,716,084
|
|
|
$
|
-
|
|
|
Senior
secured notes payable
|
|
|
|
|
|
|
|
|
|
$
|
3,127,230
|
|
|
Loans
payable-related party
|
|
|
|
|
|
|
|
|
|
$
|
378,260
|
|
|
Notes
payable
|
|
|
|
|
|
|
|
|
|
$
|
1,723,899
|
|
NOTE
J - EQUITY TRANSACTIONS
The
Company is authorized to issue 10,000,000 shares of preferred stock with $0.001
par value per share, of which 35,850 shares have been designated as Series A
Redeemable
Preferred Stock
with a $100 stated value per share, and 1,000 shares have been designated as
Series B Preferred Stock with a $10,000 stated value per share, and 340,000,000
shares of common stock with $0.001 par value per share. The Company had 125 and
125 shares of Series A
Redeemable
Preferred Stock issued and outstanding as of July 31, 2009, and April 30,
2009, respectively. No shares of Series B Preferred stock had been
issued as of July 31, 2009. The Company has 308,656,684 and 170,730,064 shares
of common stock issued and outstanding as of July 31, 2009, and April 30, 2009,
respectively.
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2009
(UNAUDITED)
NOTE
J - EQUITY TRANSACTIONS (continued)
Series A
Redeemable
Preferred
Stock
During
the quarter ended July 31, 2009, 10,733,974 common shares previously recorded as
shares to be issued for conversion of preferred were issued.
Series B Preferred
Stock
On July
24, 2009, the Company designated 1,000 shares as Series B Preferred
Stock. The Series B shares, with respect to dividend rights and
rights upon liquidation, winding-up or dissolution, rank senior to the Company’s
common stock and any other class or series of preferred stock, and junior to all
of the Company’s existing and future indebtedness. The Series B
shares accrue dividends at an annual rate of 10%. Accrued dividends
are payable upon redemption of the Series B shares. The Company’s
common stock may not be redeemed while Series B shares are
outstanding. The Series B certificate of designations provides that,
without the approval of a majority of the Series B shares, the Company cannot
authorize or create any class of stock ranking as to distribution of assets upon
a liquidation senior to or otherwise pari passu with the Series B shares,
liquidate, dissolve or wind-up the Company’s business and affairs, or effect
certain fundamental corporate transactions, or otherwise alter or change
adversely the powers, preferences or rights given to the Series B
shares. The Series B shares have a liquidation preference per share
equal to the original price per share thereof plus all accrued and unpaid
dividends thereon upon liquidation, including upon consummation of certain
fundamental corporate transactions, dissolution, or winding up of the Company’s
company. The Series B shares are redeemable at the Company’s option
on or after the fifth anniversary of the date of its issuance.
On July
29, 2009, the Company entered into a Preferred Stock Purchase Agreement with
Optimus Capital Partners, LLC, an unaffiliated investment fund. Under
the agreement, Optimus is committed to purchase up to $5,000,000 of the
Company’s Series B Preferred Stock for a one year period. From time
to time, the Company may send a notice requiring Optimus to purchase shares of
the Company’s Series B Preferred Stock, subject to satisfaction of certain
closing conditions. Optimus will not be obligated to purchase the
Series B Preferred Stock (i) in the event the closing price of the Company’s
common stock during the nine trading days following delivery of a purchase
notice falls below 75% of the closing price on the trading day prior to the date
such notice is delivered to Optimus, or (ii) to the extent such purchase would
result in Optimus and its affiliates beneficially owning more than 9.99% of the
Company’s common stock.
The
Company agreed to file after each drawn down, and to seek and maintain
effectiveness of, a registration statement covering the shares underlying the
issued warrants. On the earlier of the first draw down or 6 months from the date
of the agreement, the Company are to pay a non-refundable commitment fee of
$250,000.00 to Optimus. Pursuant to a concurrent transaction, Optimus may borrow
up to 33,990,000 shares of the Company’s common stock from several of the
Company’s non-affiliated stockholders. On July 31, 2009, pursuant to
the agreement, the Company requested Optimus to purchase 90 shares of the
Company’s Series B Preferred Stock valued at $900,000 and issued 13,500,000 five
year warrants to purchase 13,500,000 shares of common stock at $0.09 per
share. On August 14, 2009, the Company sold to Optimus 90 shares of
Series B Preferred Stock for gross proceeds of $900,000.
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2009
(UNAUDITED)
NOTE
J - EQUITY TRANSACTIONS (continued)
On the
date of delivery of each purchase notice under the agreement, the Company will
also issue to Optimus five-year warrants to purchase the Company’s common stock
at an exercise price equal to the closing price of the Company’s common stock on
the trading day prior to the delivery date of the notice. The number of shares
issuable upon exercise of the warrant will be equal in value to 135% of the
purchase price of the Series B Preferred Stock to be issued in respect of the
related notice. Each warrant will be exercisable on the earlier of
(i) the date on which a registration statement registering for resale the shares
of common stock issuable upon exercise of such warrant becomes effective and
(ii) the date that is six months after the issuance date of such
warrant.
Common
Stock
During
the quarter ended July 31, 2009 and the quarter ended July 31, 2008, the Company
expensed $43,660 and $67,249, respectively, for non-cash charges related to
stock and option compensation expense.
During
the quarter ended July 31, 2009:
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the
Company sold 1,007,049 shares of its common stock for $50,000, the shares
were classified as to be issued as of July 31, 2009 and issued three year
warrants to purchase 1,007,049 shares of its common stock exercisable at
$0.15 per share;
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the
Company issued, pursuant to penalty provisions of notes, 1,458,000 shares
of unregistered common stock, valued at $101,560 ;the Company issued,
pursuant to the terms of a note, 200,000 shares of its common stock in
payment of $6,600 in accrued interest and $3,400 for principal reduction
of the note;
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the
Company issued 122,286,961 shares of unregistered common stock, (of which
3,615,520 had been classified as shares to be
is
sued as of April 30,
2009) valued at $4,122,237, upon conversion of $3,708,058 in convertible
notes and accrued interest resulting in an increase in
additional-paid-in capital of
$4,003,564;
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the
Company issued, pursuant to a consulting agreement, 2,500,000 shares of
its common stock valued at $29,500 (2,000,000 of these shares has been
carried as shares to be issued as of April 30, 2009);
and
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the
Company issued 748,086 shares of common stock under its 2009 Consultant
Stock Plan in satisfaction of accounts payable of
$44,547.
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On August
14, 2009, the Company filed a Schedule 14C with the Securities and Exchange
Commission, and at the same time notified the Company’s shareholders via an
Information Statement, that in April, 2009, the holders of a majority of votes
represented by the issued and outstanding shares of the Company common stock, at
that time, by means of a written consent in lieu of a special meeting of the
stockholders, voted in favor of amending the Company’s Articles of Incorporation
to increase the authorized number of shares of the Common Stock from 340,000,000
to 750,000,000. This increase in authorized shares of common stock will become
effective on such date as the Company files a related Certificate of Amendment
to Articles of Incorporation with the Secretary of State of Nevada.
On May 1,
2009, the Company adopted its 2009 Consultant Stock Plan. The plan
provides for the issuance of up to 10,000,000 shares of the Company’s common
stock, pursuant to stock awards, to eligible consultants. The plan is
effective for ten years from its adoption.
SPARTA
COMMERCIAL SERVICES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2009
(UNAUDITED)
NOTE
K - SUBSEQUENT EVENTS
In
accordance with SFAS No. 165, the Company has evaluated subsequent events
through the date of this filing.
In August
2009, the Company issued 100,000 shares of common stock pursuant to a 10% bridge
note issued in December 2008.
In August
2009, the Company issued 660,000 shares of common stock pursuant to penalty
provisions of certain of the Company’s outstanding notes.
In August
and September 2009, $237,500 of the Company’s notes and accrued interest thereon
were converted into 7,365,753 shares of common stock
In
September 2009, pursuant to a March 2009 consulting agreement, the Company
issued 500,000 shares of its common stock.
NOTE L
-
GOING CONCERN
MATTERS
The
accompanying unaudited consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
accompanying financial statements during the period October 1, 2001 (date of
inception) through July 31, 2009, the Company incurred loss of $28,141,694. Of
these losses, $994,456 was incurred in the quarter ending July 31, 2009 and
$1,709,042 in the quarter ending July 31, 2008. 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, there can be 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.
