Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended April 30, 2010
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from __________ to __________.
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Commission
file number:
0-9483
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SPARTA
COMMERCIAL SERVICES, INC.
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(Exact
name of registrant as specified in its
charter)
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NEVADA
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30-0298178
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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462
Seventh Ave, 20th Floor, New York, NY
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10018
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: (212) 239-2666
Securities
registered pursuant to Section 12(b) of the Exchange
Act: None
Securities
registered pursuant to Section 12(g) of the Exchange Act:
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Common
Stock, par value $0.001
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(Title
of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. o Yes x No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceeding12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x Yes o No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every interactive Data File required to be
submitted and posted pursuant to Rule 504 of Regulation S-T (§229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to file such files). o Yes o No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions "large accelerated filer", "accelerated filer", and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o (Do
not check if a smaller reporting company)
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Smaller
reporting company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). o Yes x No
The
aggregate market value of voting and non-voting common equity of the issuer held
by non-affiliates, on October 31, 2009 was $3,751,413.
As of
August 11, 2010, we had 449,748,350 shares of common stock issued and
outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE: None.
SPARTA
COMMERCIAL SERVICES, INC.
TABLE
OF CONTENTS
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Page
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PART
I
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Item
1.
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Business
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3
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Item
1A.
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Risk
Factors
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12
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Item
1B.
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Unresolved
Staff Comments
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16
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Item
2.
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Properties
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16
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Item
3.
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Legal
Proceedings
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16
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Item
4.
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(Removed
and Reserved)
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16
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PART
II
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Item
5.
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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17
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Item
6.
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Selected
Financial Data
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19
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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20
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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25
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Item
8.
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Financial
Statements and Supplementary Data
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26
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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53
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Item
9A.
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Controls
and Procedures
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53
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Item
9B.
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Other
Information
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53
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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54
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Item
11.
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Executive
Compensation
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56
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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59
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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61
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Item
14.
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Principal
Accountant Fees and Services
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62
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Item
15.
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Exhibits,
Financial Statement Schedules
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62
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Signatures
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65
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PART
I
ITEM
1. BUSINESS
General
Overview
Sparta
Commercial Services, Inc. ("Sparta" "we," "us," or the "Company") 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, commercial equipment
leasing to municipalities, including, but not limited to, police
motorcycles.
Our
offices are located at 462 Seventh Avenue, 20th Floor, New York, NY 10018,
telephone number: (212) 239-2666. We maintain a website at www.spartacommercial.com.
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 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
Sparta's
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 coverage;
and
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Remarketing
of repossessed vehicles and off-lease
vehicles.
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Sparta's
management believes that by offering dealers, and their customers, the option of
either financing or leasing, Sparta will capture a greater share of the dealer's
business. Additionally, by offering both alternatives, once profitability is
achieved, Sparta believes that it will be in a position to achieve greater
cash-flow than it could by offering only one of these alternatives because
depreciation generated by Sparta's leasing activities will reduce income tax due
on income resulting from Sparta's retail installment sales
contracts.
Retail
Installment Sales Contracts and Leases
Retail Installment Sales Contracts
(RISC) – Sparta purchases 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. Sparta has developed policies and procedures for credit evaluation,
collections, insurance follow up, and asset recovery. Sparta imposes
strict credit criteria to determine which retail installment sales contract
applications to approve. This credit criterion has been developed to
be in compliance with the credit criterion required by our
lenders. The dealers understand that if they consummate a credit
transaction with a customer on whose application we have given them a
conditional approval that Sparta will purchase that contract if it is in full
compliance with all terms and conditions of that approval and contained in our
dealer agreement.
To insure
that Sparta's Credit Evaluation Process and Collateral Guidelines are
consistently applied and that the credit/underwriting decisioning process
provides rapid decisions to our Authorized Sparta Dealers and the Authorized
Private Label Dealers, Sparta has developed a point of sale credit application
and contract decisioning web based platform. This system is named
"iPLUSÒ"
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 Sparta's personnel
expense. Depending on Sparta's arrangement with its lending sources, in the case
of consumer finance contracts, Sparta may finance its purchase of the contracts
by borrowing from a lending source and pledging the retail 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 – Sparta purchases
qualified vehicles for lease to customers of its 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 Sparta 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 Sparta will allow the
customer to use (lease) the vehicle, which is owned by Sparta, and also contains
a vehicle purchase price option which provides the customer with the right to
purchase the vehicle at the lease-end. Depending on Sparta's arrangement with
its lending sources, in the case of leases, Sparta may finance its purchase of
leased vehicles by borrowing from a lending source and assigning or pledging the
lease and leased vehicle as collateral for the loan. Lease terms range from 24
to 60 months, although most lease terms are either 36 or 60
months. Leases generally have lower monthly payments than 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, Sparta can
and does charge acquisition fees for each of its leases. These fees range from
$290 to $490 per lease depending on the amount of the lease.
Municipal Leasing of Equipment,
including Police Motorcycles
In
February 2007, Sparta launched a new Municipal Leasing Product designed
expressly to meet the needs of law enforcement agencies throughout the U.S.
Sparta estimates that the annual municipal market for new law enforcement
motorcycles, 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. Sparta believes that most of these agencies have
historically been purchasing these vehicles with few, if any, financing
alternatives, therefore, we developed a leasing alternative for governmental
organizations to acquire the motorcycles they need, and 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, the Company originates for this subsidiary and negotiates the
leases on behalf of it and the municipality. The Company receives an upfront
origination fee and a structured commission for each closed lease.
Private Label Programs for
Manufacturers and Distributors
As of
April 30, 2010, we have 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.
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 Guaranteed Auto Protection
(“GAP”) plan for our dealers:
GAP Coverage – Sparta markets
its private label GAP coverage on a fee basis to customers through
dealers. This coverage protects the customer should the vehicle be
stolen or wrecked and the holder's primary insurance is not adequate to cover
their payoff to the creditor that holds the lien on or the lease of the
vehicle.
Sparta
intends to continue to evaluate additional ancillary products and services and
believes 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
Sparta or buying the vehicle at the buy-out option price established at the
beginning of the lease. Sparta's policy requires lessees who wish to
return their vehicles, return the vehicle to the originating dealer. If the
lessee has moved, then the vehicle should be returned to the Authorized Sparta
Dealer closest to the lessee. If this is impracticable, then Sparta 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 prepares 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. Thereafter,
Sparta plans to consign the vehicle to the originating dealer for sale or
re-lease to a new party. Should the dealer decline to take the vehicle on
consignment, it will be electronically marketed on the Classified Pages of the
Sparta web site. Sparta believes the market for used vehicles is
significant and the opportunity to remarket the same vehicle numerous times is a
key selling point with prospective dealerships. Sparta believes that
using its dealer network in such a manner will result in a better overall
economic return on its portfolio as well as strengthen dealer
relationships.
Repossessed Vehicles – All
repossessed vehicles are similarly returned to the originating Authorized Sparta
Dealer to be reconditioned, if needed, for consignment sale or re-lease in the
same manner as returned vehicles.
Second Chance Express – Sparta
allows its Authorized Sparta Dealers to offer its inventory of returned or
repossessed vehicles not only to customers with approved credit applications
but, also to customers with less than prime credit. Applicants with low credit
scores are evaluated under Sparta's Second Chance Express
Program. This unique finance/lease product is designed to offer a
financing program tailored to this non-prime customer. The program
allows Sparta to serve those customers who can offset their credit risk with
higher down payments. A key benefit of this program to Sparta is that the
minimum down-payment requirement is 20% in order to bring the amount financed in
line with the current wholesale value of the vehicle. Under the Second Chance
Express Program, Sparta pays its dealers a commission on any Sparta inventory
vehicle, held on consignment on their "floor" or offered on the Sparta
Classified Web Page, for which they arrange a sale or finance.
Credit
and Collections
Policies and Procedures
Based on
management's experience in vehicle financing and leasing, we have developed
policies and procedures for credit evaluation, collections, insurance follow up,
and asset recovery. We impose strict credit and demographic criteria
to determine which retail installment sales contracts and lease applications are
approved.
Credit Evaluation Process and
Collateral Guidelines
To insure
that Sparta's Credit Evaluation Process and Collateral Guidelines are
consistently applied and that the credit/underwriting decision process provides
rapid decisioning to our Authorized Sparta Dealers and our Authorized Private
Label Dealers, Sparta has worked closely with a leading provider of interactive
credit accessing and decisioning solutions, to develop our
iPLUSÒpoint
of sale credit application decisioning and contract generating web based
platform.
iPLUSÒ (internet Purchasing
Leasing Underwriting Servicing)
Sparta's
retail installment sales contract and leasing products are delivered through a
proprietary, web-based, credit application processing platform. This
system is named iPLUSÒ
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. Sparta believes iPLUSÒ provides
the Authorized Sparta Dealers and Authorized Private Label Dealers with a
competitive advantage and increases Sparta's ability to obtain a larger share of
the dealer's business.
Major
features of iPLUSÒ 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
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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
application is submitted; decisions in seconds/7 Days a Week /24 Hours a
Day
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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
Sparta's expenses.
Sparta
has established program guidelines that are an integral function of the iPLUSÒ
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. Sparta has developed its own credit criteria system by
using an empirical score card and then assigning its own rating based on
Sparta's experience. This rating is used as the basis to determine the terms and
conditions under which an applicant is approved or declined.
Sparta
conducts both applicant credit risk and asset evaluation before approving
financing. Should the customer seek financing above this threshold, Sparta asks
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 Sparta is just the first step. A principal factor in
the success of Sparta's business model is its ability to track contract and
lease performance.
A third
party provides the software Sparta uses to manage its assets, customer base,
collections, insurance, and accounting systems. Using a variety of
basic and customized reports generated by this software, Sparta monitors its
customers' compliance with their obligations under retail installment sales
contracts or lease agreements. These reports are accessed on a
real-time basis by employees of Sparta and are distributed to management
personnel for review. The reports include delinquency reports, collection
tickler (promises) reports, insurance status reports, termination reports,
inventory reports, maturing contract reports, and other
information.
Sparta
requires continuous physical damage insurance on all financed vehicles and
continuous liability and physical damage insurance coverage on all leased
vehicles. In addition, Sparta is required to be listed as Additional
Named Insured and Loss Payee. Continuous insurance is critical, and Sparta is
permitted to repossess a vehicle if coverage lapses. Any lapse in
insurance coverage for any reason will lead to reinstatement of insurance
coverage or repossession of 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 Sparta's list of motorcycle, ATV, and scooter
models that it will finance or lease.
Credit Tiers – Sparta expects
that it will maintain a portfolio dominated by A/B credit applicants over C
applicants in the ratio of at least 70/30. Management anticipates
that it will be able to rebalance its portfolio by training its sales force to
work closely with dealerships in their territories to help Sparta maintain its
conservative 70/30 target.
Sparta
will also be able to manage this ratio by revising the variables in its various
programs (terms and conditions under which Sparta will 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), and other
factors.
We are
presently evaluating the economics of and market for a sub-prime
program.
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, 3.70% at April 30, 2009,
and 7.51% at April 30, 2010. 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, .3.27% at April 30, 2009 and 5.24% at April 30,
2010. Additionally, as of April 30, 2010, the Company maintained a
cash reserve with its Senior Lender equal to 7.65% of the outstanding loan
balance with that lender. The Company’s portfolio of contracts and leases has
been in a run-off mode since the fall of 2008.
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
According
to the Motorcycle Industry Council’s 2009 Statistical Annual, from 1991 to their
peak in 2006, annual sales of new 651CC+ motorcycles increased 439% to 543,000
units or approximately $6.8 billion while over the same period annual sales of
all new motorcycles increased 325% to 1,190,000 units or approximately $11.9
billion. From 2007 through 2009, annual sales of new 651CC+ motorcycles declined
44% to 304,000 units or approximately $3.8 billion. There is no reliable data on
the change in used motorcycle sales during the period. Sparta
estimates that the 2009 retail market for new and used 599cc+ motorcycles was
approximately $7.1 billion.
According
to the Motorcycle Industry Council’s 2009 Statistical Annual. 2008 ATV unit
sales declined 28% from 2007 to 454,098 units and down from a peak of 812,970 in
2004. For the first half of 2009 ATV unit sales declined 32% to
166,424 units from the first half of 2008. Sparta estimates that 2009 ATV unit
sales declined approximately 30% from 2008 to 318,000 units and we estimate that
2010 sales will remain at 2009 levels.
Data for
the U.S. scooter market is inconsistent and unreliable as less than ½ of scooter
manufacturers report their data. Of the available data, the reported unit market
in 2008 was 76,748, but the Motorcycle Industry Council estimated market was
222,000 units. Early data for the first half of 2009, reported by Powersports
Business in their 2009 Market Data Book, suggested a 67% decline in reported
unit sales. Definitive data for all of 2009 is not available..
Sales
and Marketing
Normally,
vehicle financing products are sold primarily at the dealer level, rather than
the consumer level. Our strategy is to 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. 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 iPLUSÒ,
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. Sparta
plans 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 going through several changes due to current
economic conditions and past lending practices. Broadly speaking, Sparta
competes with commercial banks, savings & loans, industrial thrift and
credit unions, and a variety of local, regional and national consumer finance
companies. Additionally, some powersports manufacturers such as Harley-Davidson
and BMW have captive subsidiaries that provide financing.
Independent
consumer financial services companies and large commercial banks that
participated in this market as well as some Powersports manufacturers providing
factory financing programs have withdrawn substantially from the motorcycle
financing niche over the past two years or have tightened their underwriting
criteria. Sparta believes that those companies may have suffered as a result of
compromising their underwriting criteria for the sake of volume. In addition,
management believes that our competitors' practice of financing all makes and
models of a particular manufacturer results in lower overall portfolio
performance because of the poor demographics associated with some of those
product lines. The marketplace also includes small competitors such as local
credit unions, local banks, and a few regional entities.
A
significant competitor of Sparta is GE Capital. GE Capital markets directly to
dealers in the Powersports market and through Co Branded private label programs.
GE recently has co-branded with Yamaha, Suzuki, Kawasaki, Moto Guzzi, Aprilia
Brands and other national manufacturers and distributors of Powersports and
recreational products such as Coachmen Industries. GE also offers dealer and
distributor floor plan financing and private label credit cards. To
management’s knowledge, this firm does not offer leases for powersports
vehicles. Recently, this company has announced cut backs in its consumer vehicle
and other consumer financing programs.
Specialty
Reports, Inc.
In May
2010, our subsidiary, Specialty Reports, Inc., a Nevada corporation, purchased
substantially all of the assets of Cyclechex LLC, a Florida limited liability
company, in consideration of a 24% equity interest in Specialty
Reports. Additionally, the founder and sole owner of Cyclechex was
elected as a Director and to the position of Executive Vice President-Marketing
of Specialty Reports.
Cyclechex
LLC, formed in 2007, was in the business of providing basic motorcycle
information, obtained by inputting the vehicle’s vehicle identification number
(“VIN”) on the Cyclechex web-site, and receiving information as to the vehicle’s
year of manufacture, name of manufacturer and specific model. Without such
information, a used motorcycle purchaser could easily confuse one model year for
another which could amount to as much as a $1,000 mistake or more.
Specialty
Reports has expanded on the Cyclechex product offering to include accident,
crash, and title history information. All of this information is now offered on
the Cyclechex web site in the form of the copyrighted Cyclechex Motorcycle
History Report©.
In June
2010, Specialty Reports entered into an exclusive five year agreement with the
only U.S. government authorized distributor of on-line data from National Motor
Vehicle Title System (NMVTS) for NMVTIS data on motorcycles, scooters, ATVs and
recreational vehicles.
NMVTIS is
an information system that federal law requires the United States Department of
Justice to establish, to provide an electronic means to verify vehicle title,
brand, and theft data among motor vehicle administrators, law enforcement
officials, prospective purchasers and insurance carriers. Slated for
implementation on January 30, 2009, NMVTIS was initially authorized in the Anti
Car Theft Act of 1992 and reauthorized by the Anti Car Theft Improvements Act of
1996. After passage of the 1996 reauthorization, responsibility was transferred
from the U.S. Department of Transportation to the U.S. Department of Justice.
The NMVTIS system is a Department of Justice program currently operated by the
American Association of Motor Vehicle Administrators (AAMVA). The system also
will provide a means for states to share title information in order to prevent
fraud and other crime.
NMVTIS
was created to:
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prevent
the introduction or reintroduction of stolen motor vehicles into
interstate commerce;
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protect
states, consumers (both individual and commercial), and other entities
from fraud;
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reduce
the use of stolen vehicles for illicit purposes including funding of
criminal enterprises; and
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provide
consumer protection from unsafe
vehicles.
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NMVTIS
information is supplied by state motor vehicle agency records and entire sectors
(e.g., insurance, auto recyclers/junk/salvage, etc.) addressed by the Anti-Car
Theft Act. As opposed to purchasing information from specific businesses or
companies, entities are required to provide specific information to NMVTIS in a
specific format. NMVTIS is intended to serve as a reliable source of title and
brand history for automobiles, motorcycles and other vehicles. However, there
are certain pieces of vehicle history data that NMVTIS does not contain; for
example, a vehicle's repair history. Currently the data provided to NMVTIS by
states is provided in a variety of time frames; while some report and update
NVMTIS data in “real-time” (as title transactions occur) others send updates
less frequently, such as once every 24 hours or within a period of
days.
This
information is available to consumers and dealers on Specialty Reports’ website
located at wwwcyclechex.com. Cyclechex is similar to CARFAX® in that
it provides on-line vehicle history reports, for a fee, based on the vehicle’s
VIN. However, neither CARFAX® nor AutoChek® provides information on
motorcycles, scooters, ATVs or recreational vehicles.
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 Practices Act. The Fair Debt Collection
Practices 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 required
creditors to state the cost of borrowing in a common language 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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Dodd-Frank
Wall Street Reform and Consumer Protection Act. The Dodd-Frank
Wall Street Reform and Consumer Protection Act authorized the creation of
a Bureau of Consumer Financial Protection. The impact on the
Company of the newly-created agency is unknown at this time as the agency
is yet to be formed.
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Employees
As of
April 30, 2010, we had 10 full-time employees.
We are
subject to certain risks and uncertainties in our business operations which are
described below. The risks and uncertainties described below are not the only
risks we face. Additional risks and uncertainties not
presently known or that are currently deemed immaterial may also impair our
business operations.
We
have an operating history of losses.
Through
our fiscal year ended April 30, 2010, we have generated cumulative sales
revenues of $4,010,634, have incurred significant expenses, and have sustained
significant losses. Our net loss for the year ended April 30, 2010 was
$4,141,179 (after $1,558,078 in non-cash charges). As of April 30,
2010, we had a deficit net worth of $1,603,763
We
have an agreement for a credit line with an institutional lender, who has
acquired preferences and rights senior to those of our capital stock and placed
restrictions on the payment of dividends. As of April 30, 2010, this line
had been suspended.
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 or any of their borrowers, however, they have not formally
terminated the facility. As of April 30, 2010, we owed an aggregate
of $1,912,556 (which is secured by $2,214,604 of consumer Retail
Installment Sales Contracts and Leases and $146,333 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.
Our
business requires extensive amounts of capital and we will need to obtain
additional financing in the near future.
In order
to expand our business, we need raise additional senior debt as well as capital
to support the portion of the future leases and retail installment sales
contracts which are 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. Without a senior bank line of credit, it will be extremely
difficult to maintain and grow our business. We will have to raise
approximately $1.5 million over the next twelve months to support our
business. As our business grows, we will need to seek additional
financing to fund 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.
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, 2010 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.
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®, 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
do not intend to pay dividends on our common stock.
We have
never declared or paid any cash dividend on our common stock. We currently
intend to retain any future earnings and do not expect to pay any dividends on
our common stock in the foreseeable future. Future cash dividends on the common
stock, if any, will be at the discretion of our board, and will depend on our
future operations and earnings, capital requirements and surplus, general
financial condition, contractual restrictions imposed by lending or other
agreements, including agreements with holders of senior or preferential rights,
and other factors that the board may consider important.
We
have authorized a class of preferred stock which may alter the rights of common
stock holders by giving preferred stock holders greater dividend rights,
liquidation rights and voting rights than our common stockholders
have.
Our board
is empowered to issue, without stockholder approval, preferred stock, on one or
more series, with dividend, liquidation, conversion, voting or other rights that
could adversely affect the voting power or other rights of the holders of common
stock. From time to time, we have designated, and may in the future
designate, series of preferred stock carrying various preferences and rights
different from, and greater than, our common stock. As of April 30,
2010, we have two series of preferred stock outstanding. Preferred stock could
be utilized, under certain circumstances, as a method of discouraging, delaying
or preventing a change in control of the company.
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 controlled by current officers, directors and principal
stockholders.
Our
directors, executive officers and principal stockholders beneficially own
approximately 19% of our common stock as of April 30,
2010. 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.
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, Principal Financial
Officer and Chief Operating Officer, employment agreements could be terminated
for a variety of reasons. The employment agreements with our
Principal Financial Officer and Chief Operating Officer have expired and are
being renegotiated. 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.
ITEM
1B. UNRESOLVED
STAFF COMMENTS
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 was
$312,633. For the years ended April 30, 2011 and 2012, the rent is
$304,985 and $312,565, respectively, and for the seven months ending November
30, 2012, the rent 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
ITEM
3. LEGAL PROCEEDINGS
As at
April 30, 2010, 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.
ITEM
4. (REMOVED AND RESERVED)
PART
II
ITEM
5. MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Market
Information
Our
common stock is currently quoted on the OTC Bulletin Board under the symbol
"SRCO". The following table sets forth, for the calendar periods
indicated, the range of the high and low closing prices of our common stock, as
reported by the OTCBB. The quotations represent inter-dealer prices without
retail mark-ups, mark-downs or commissions, and may not necessarily represent
actual transactions.
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High
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Low
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Fiscal
Year 2010
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First
quarter (May 1, 2009 – July 31, 2009)
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$0.10
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$0.05
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Second
quarter (August 1, 2009 – October 31, 2009)
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$0.09
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$0.04
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Third
quarter (November 1, 2009 – January 31, 2010)
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$0.06
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$0.01
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Fourth
quarter (February 1, 2010 – April 30, 2010)
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$0.04
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$0.01
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Fiscal
Year 2009
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First
quarter (May 1, 2008 - July 31, 2008)
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$0.14
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$0.07
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Second
quarter (August 1, 2008 - October 31, 2008)
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$0.10
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$0.03
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Third
quarter (November 1, 2008 - January 31, 2009)
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$0.09
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$0.02
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Fourth
quarter (February 1, 2009 - April 30, 2009)
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$0.09
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$0.02
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Holders
The
approximate number of holders of record of our common stock as of April 30, 2010
was 3,014 excluding stockholders holding common stock under nominee security
position listings.
Dividends
We have
never declared any cash dividends on our common stock. Future cash dividends on
the common stock, if any, will be at the discretion of our Board of Directors
and will depend on our future operations and earnings, capital requirements and
surplus, general financial condition, contractual restrictions, including any
restrictions pursuant to the terms of senior securities outstanding, and other
factors that the Board of Directors may consider important. The Board of
Directors does not intend to declare or pay cash dividends in the foreseeable
future. It is the current policy to retain all earnings, if any, to support
future growth and expansion.
As of
April 30, 2010, we had outstanding 125 shares of Series A Convertible Preferred
Stock, $.001 par value. The Series A shares pay a 6% annual dividend which may
be paid in cash or shares of common stock at our option. We have not,
as of April 30, 2010, distributed any dividends on the Series A shares, in cash
or in shares of common stock. Upon conversion of the Series A shares, all
accrued and unpaid dividends are extinguished. As of April 30, 2010, there was
$758 of accrued Series A dividends payable.
As of
April 30, 2010, we had 157 shares of Series B preferred stock
outstanding. The Series B shares accrue dividends at an annual rate
of 10%. Accrued dividends are payable upon redemption of the Series B
shares. As of April 30, 2010, no dividends were payable on Series B
shares.
Recent
Sales of Unregistered Securities
Each of
the issuance and sale of securities described below was deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering. No
advertising or general solicitation was employed in offering the securities.
Each purchaser is a sophisticated investor (as described in Rule 506(b)(2)(ii)
of Regulation D) or an accredited investor (as defined in Rule 501 of Regulation
D), and each received adequate information about the Company or had access to
such information, through employment or other relationships, to such
information.
On July
29, 2009, the Company entered into a Preferred Stock Purchase Agreement with
Optimus Capital Partners, LLC pursuant to which Optimus was committed to
purchase up to $5,000,000 of the Company’s Series B Preferred Stock for a one
year period.
On August
14, 2009, pursuant to the terms of a notice delivered to Optimus under the
Purchase Agreement, we issued 90 shares of Series B Preferred Stock to Optimus at a price per share of $10,000
and we received proceeds of $645,000 (net of fees payable to Optimus, including
a one-time commitment fee of $250,000). In addition, we issued to Optimus a
five-year warrant to purchase up to 13,500,000 shares of our common stock at an
exercise price of $0.09 per share. On September 10, 2009, the warrant was
transferred to Optimus CG II, Ltd. On November 4, 2009, the warrant was
exercised for all 13,500,000 shares of common stock in consideration for a
secured recourse note in the amount of $1,215,000.
On
November 6, 2009, pursuant to the terms of the revised notice, we issued 67
shares of Series B Preferred Stock
to Optimus at a price per share of $10,000. Additionally, we purchased from
Optimus, 2,000,000 shares of our common stock at a price of $0.05 or $100,000.
Therefore, pursuant to the terms of the revised notice, we received net proceeds
of $565,000 after deducting $5,000 for closing costs. We also issued to Optimus
CG II, Ltd. a five-year warrant to purchase up to 18,066,176 shares of our
common stock at an exercise price of $0.05 per share. The shares of common stock
issuable upon exercise of the warrant have been registered for resale pursuant
to the registration statement of which this prospectus forms a
part.
On
December 17, 2009, Optimus exercised the warrant by delivering a secured
recourse note in the amount of $903,309.The Company has reclassified the Secured
Promissory Notes (the “Notes”) receivable to subscriptions receivable. As of the
date of this filing, the maker of the Notes has failed to provide the
information necessary for the Company to perfect its lien on the collateral
securing the Notes.
In
February 2010, the Company sold to one accredited investor $100,000 principal
amount of 8% four month notes which are convertible at the Company’s option into
shares of common stock at $0.021 per share.
In
February 2010, the Company sold to one accredited investor a $50,000, nine
month, 8% note convertible at the holder’s option into such number of shares of
the Company’s common stock as determined by a forty-four percent discount from
the average of the three lowest closing prices of the Company’s common stock for
the ten trading days immediately preceding the day the holder notices the
Company of its intent to convert. The conversion price is subject to
certain anti dilutive previsions. In the event the note is not paid
when due, the interest rate is increased to twenty-two percent until the note is
paid in full.
During
the three months ending April 30, 2010, pursuant to a consulting agreement, the
Company issued 500,000 shares of restricted common stock and accrued an
additional 1,000,000 shares of restricted common stock with a combined value of
$45,000.
In April
2010, the Company issued 3,333,333 shares of restricted common stock to an
officer of the Company in lieu of payment for unreimbursed expenses in the
amount of $30,461 and unpaid salary in the amount of $19,539
In April
2010, the Company issued 3,333,333 shares of restricted common stock to an
officer of the Company in lieu of payment for unreimbursed expenses in the
amount of $32,738, unpaid salary in the amount of $8,763 and repayment of a loan
to the Company in the amount of $8,500.
In March
and April 2010, the Company sold 9,116,288 shares of its restricted common stock
and three-year warrants to purchase 9,116,288 shares of common stock at an
exercise price of $0.07 per share. These securities were sold to seven
accredited investors for an aggregate purchase price of $105,000.
On May
12, 2010, the Company issued to stock options, exercisable at $0.025 per share
until May 12, 2015, subject to vesting at the rate of 20% on the grant date, 40%
on May 12, 2011, and 40% on May 12, 2011, to the following officers and
directors: Anthony Havens, 6,672,500 options; Kristian Srb, 2,465,000
options; Richard Trotter, 4,016,250 options; Jeffrey Bean, 956,250 options;
Anthony Adler, 3,995,000 options; and Sandra Ahman, 3,145,000
options.
In May
2010, the Company formed a new subsidiary, Specialty Reports, Inc., a Nevada
corporation, and in May 2010 a 24% equity interest in Specialty Reports was
issued in consideration of substantially all of the assets of Cyclechex, LLC, a
Florida limited liability company.
In May,
June and July 2010, the Company sold to one accredited investor an aggregate of
$150,000 in one year 8% notes convertible at the Company’s option into common
stock at $0.012 per share.
In June
2010, the Company sold to an accredited investor a convertible note in the
amount of $25,000. The note is convertible at the note holder’s option. The note
is convertible at the lower of (i) the price per share at which the Company
sells or issues any shares of common, subject to certain exceptions, or (ii) 58%
multiplied by the average of the lowest three lowest closing bid price for the
common stock during the ten trading day period ending one trading day prior to
the date of submission of the conversion notice.
In June
and July 2010, the Company sold 5,703,889 shares of its restricted common stock
and three-year warrants to purchase 5,703,889 shares of common stock at an
exercise price of $0.07 per share. These securities were sold to two accredited
investors for an aggregate purchase price of $90,000.
In June
2010, an investor purchased from one of our note holders a past due 6% $25,000
promissory note dated January 7, 2008 and paid that note holder the accrued
interest on the note. The Company agreed to exchange that purchased note for a
$25,000, 0% convertible note due June 1, 2011. In case of default, interest will
accrue at the rate of 18% from the issue date of the original
note. The note is convertible at any time at the holder’s option into
shares of the Company’s common stock at the lower of $0.06 or sixty percent of
the average of the three lowest closing prices of the Company’s common stock for
the twenty consecutive trading days prior to the date upon which the note holder
elects to convert part or all of the note.
In June
2010, an investor purchased from two of our note holders four past due 10%
bridge notes issued in January 2009, July 2009 and August 2008 with a combined
principal balance of $65,000, and paid the note holders the accrued interest of
$16,947.87 on the notes. The Company agreed to exchange the purchased notes for
four new convertible notes due June 18, 2011 in the principal amounts of
$37,156.05, $6,712.91, $13,425.81 and $24,653.17. The convertible
notes provide for interest at the rate of 8% commencing as of June 18,
2010. In case of default, the interest rate on the notes will
increase to 24%. The notes are convertible at any time at the holder’s option
into shares of the Company’s common stock at seventy percent of the of the three
lowest closing prices of the Company’s common stock for the three consecutive
trading days prior to the date upon which the note holder elects to convert part
or all of the note.
ITEM
6. SELECTED FINANCIAL DATA
Not
applicable.
ITEM
7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
"FORWARD-LOOKING"
INFORMATION
This
report on Form 10-K contains certain "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which
represent our expectations and beliefs, including, but not limited to,
statements concerning the Company's business and financial plans and prospects.
The words "believe," "expect," "anticipate," "estimate," "project," and similar
expressions identify forward-looking statements, which speak only as of the date
such statement was made. These statements by their nature involve substantial
risks and uncertainties, certain of which are beyond our control, and actual
results may differ materially depending on a variety of important
factors.
The
following discussion and analysis should be read in conjunction with the
information set forth in the audited financial statements
for the years ended April 30, 2010 and April 30, 2009 and footnotes found in the
Company's Annual Report on Form 10-K.
RESULTS
OF OPERATIONS
For the
year ended April 30, 2010, our revenues decreased. We have continued to incur
declining but significant expenses, and have sustained significant losses.
..
Revenues
Revenues
totaled $713,363 in fiscal 2010 compared to revenues of $1,144,644 in fiscal
2009. Fiscal 2010 revenues were primarily comprised of $443,026 in interest
income from Retail Installment Sales Contracts, $190,035 in income from
Operating and Finance Leases, $21,154 in Commissions on municipal lease
transactions, $6,081 from gain on disposition of vehicles, and $53,067 in other
fee income.
Costs and
Expenses
We
incurred employee compensation and benefit costs of $1,061,074 for the year
ended April 30, 2010 compared with $1,461,957 in fiscal 2009. The decrease is
related to the reduced costs we recognized in decreasing our employee base
during the year from 14 employees at fiscal year-end 2009 to 10 employees at
fiscal year-end 2010. 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
$280,000 and $290,639 to its Chief Executive Officer, in fiscal 2010 and 2009,
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 $593,629 and $605,389 for the years
ended April 30, 2010 and 2009, respectively. In connection with consulting
services, we expensed non-cash costs in the form of shares of common stock or
warrants of $260,000 and $633,629 for the years ended April 30, 2010 and 2009,
respectively. These amounts were charged to financing costs.
Additionally, during the fiscal year ended April 30, 2010, we expensed $76,289
as the value of employee stock and option based compensation as compared to
$222,409 in the prior fiscal year. During the year ended April 30, 2010, we
charged a $45,000 beneficial discount for convertible note conversion options to
financing costs as compared to $318,182 in fiscal 2009. At April 30, 2010 and
2009, accrued preferred dividends of $97,175 and $758, respectively, were
charged to retained earnings.
We
incurred consulting costs of $138,950 for the year ended April 30, 2010, as
compared to $166,800 for the year ended April 30, 2009. This decrease was the
result of reduced reliance on outside consultants. We incurred legal and
accounting fees of $365,561 for the year ended April 30, 2010, as compared to
$271,404 for the year ended April 30, 2009.
We
incurred other operating expenses of $617,717 for the year ended April 30,
2010. Notable expenses in this category are: general office expenses
of $99,159; rent of $312,633; loss reserve expense of $69,431; travel and
entertainment of $36,118; utilities of $60,427; web development of $13,839;
marketing of $10,654; maintenance contracts of $8,504; and taxes of
$6,953. 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.
Interest
costs for the fiscal year ended April 30, 2010 were $920,760 as compared to
$963,890 for the fiscal year ended April 30, 2009. Depreciation and amortization
for the fiscal year ended April 30, 2010 was $702,388 as compared to $310,601
for the fiscal year ended April 30, 2009. The $391,786 increase was due
primarily to the write-off in the current year of deferred costs
associated with the DZ Bank transaction.
Net Loss
Our net
loss attributable to common stockholders for the year ended April 30, 2010
decreased $684,251 (13.9%) to $4,238,353 from a loss of $4,922,604 for the year
ended April 30, 2009. The decrease in net loss attributable to common
stockholders was primarily due to: a $1,340,637 (34.7%) decrease in
total operating expenses from $3,860,228 to $2,519,591; a $431,281 (37.7%)
decrease in revenues from $1,144,644 to $713,363; a $263,099 (13.9%)
decrease in interest expense and financing costs from $1,632,562 to $1,849,933;
and a $391,787 (126.1%) increase in depreciation and amortization to $702,388
from $310,601.$4462,412 of the current year’s loss was due to the write off, at
year end, of deferred financing and start-up costs in connection with the DZ
facility which costs, had the facility been in place, would have been
written-off during fiscal year 2011.
Our net
loss per common share (basic and diluted) attributable to common stockholders
was $0.01 for the year ended April 30, 2010 and $0.03 for the year ended April
30, 2009.
LIQUIDITY
AND CAPITAL RESOURCES
As of
April 30, 2010, we had deficit net worth of $1,603,763. We generated a deficit
in cash flow from operations of $2,505,269 for the year ended April 30, 2010.
This deficit is primarily attributable to net loss from operations of
$4,141,179, adjusted for depreciation and amortization of $702,387, equity based
compensation of $336,288, stock based financing costs of $593,619, allowance for
loss reserve of $69,431, beneficial conversion discount of convertible
securities of $45,000, and to changes in the balances of current assets,
consisting primarily of a decrease in restricted cash of $202,530, a decrease in
interest receivable of $22,387 and an increase in accounts receivable of
$80,423, and current liabilities, consisting primarily of a decrease in accounts
payable of $307,576. Cash
flows provided by investing activities for the year ended April 30, 2010 were
$1,960,162, comprising of $370,386 from the retirement of leased vehicles, and
liquidation of Retail Installment Sales Contracts in the amount of $1,589,766.
We met our cash requirements during the period through net proceeds from the
issuances of notes of $750,300, we repaid senior loans of $1,683,849 during the
period, and we sold common and preferred stock for net proceeds of
$1,544,999.
Our
senior credit facility with New World Lease Funding was suspended by them in
August 2008 due to the global financial crisis at the time. While we are told
this lender hopes to resume lending, the line remained suspended as of April 30,
2010.
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
“RCA”). The DZ Bank facility required, 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 could 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 were required 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. On July 29, 2009, we entered into a Preferred Stock
Purchase Agreement with Optimus Capital Partners, LLC, an unaffiliated
investment fund. Under the agreement, Optimus was committed to
purchase up to $5,000,000 of our Series B Preferred Stock for a one year
period. In August and November 2009, Optimus purchased $1,570,000 of
Series B Preferred Stock and five year warrants to purchase 13,500,000 shares of
common stock at $0.09 per share and five year warrants to purchase
18,066,176 shares of common stock at $0.068 per share. On October 13, 2009, we
notified DZ Bank that we believed we had satisfied borrowing conditions and
requested that we be allowed to start utilizing the credit
facility. As we were approaching the one year anniversary of the
signing of the RCA at the urging of DZ’s representatives we formally requested
that the RCA be extended for one year as provided for in the RCA. In
November and December 2009, Optimus exercised their warrants by delivering to
the Company two fully secured, five year notes aggregating $2,118,309.
Subsequently, without permitting us to commence utilizing the credit facility,
in December 2009, the Company was verbally notified by representatives of DZ
Bank that the Company’s request to extend the term of its Revolving Credit
Agreement RCA for one year was denied due to DZ Bank’s German parent’s concern
over the United States general economic condition and, more specifically, the
weakness in the overall U.S. consumer market. The RCA terminated on
December 18, 2009 without any funds being advanced. The Company has
reclassified the Secured Promissory Notes (the “Notes”) receivable to
subscriptions receivable. As of the date of this filing, the maker of the Notes
has failed to provide the information necessary for the Company to perfect its
lien on the collateral securing the Notes
While we
have raised capital to meet our working capital and financing needs in the past,
additional financing is required in order to meet our current and projected cash
flow deficits from operations and development.
We
continue seeking additional financing which may be in the form of senior debt,
subordinated debt or equity. Other than described above, we currently
have no commitments for financing. However, we are in negotiations with two
senior lenders for senior secured financing and have signed an agreement with a
placement agent for both debt and equity. There is no guarantee that
we will be successful in raising the funds required.
We
estimate that we will need approximately $1,500,000 in 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 our equity, we believe
that we have a reasonable chance to raise sufficient capital resources to meet
projected cash flow deficits through the next twelve months. There
can be no assurance that additional private or public financing, including debt
or equity financing, will be available as needed, or, if available, on terms
favorable to 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.
AUDITOR'S
OPINION EXPRESSES DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A "GOING
CONCERN"
The
independent auditors report on our April 30, 2010 and 2009 financial statements
included in this Annual Report 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 the Company's common
stock. We can make no assurances that our business operations will develop and
provide us with significant cash to continue operations.
PLAN
OF OPERATIONS
Addressing
the Going Concern Issues
In order
to improve 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.
Product
Research and Development
We do not
anticipate incurring significant research and development expenditures during
the next twelve months.
Acquisition
or Disposition of Plant and Equipment
We do not
anticipate the acquisition or sale of any significant property, plant or
equipment during the next twelve months.
Number
of Employees
From our
inception through the period ended April 30, 2010, we have relied on the
services of outside consultants for services and currently have eleven full-time
employees. In order for us to attract and retain quality personnel,
we anticipate we will have to offer competitive salaries to future employees. If
we fully implement our business plan, we anticipate our employment base may
increase by approximately 50% during the next twelve months. As we continue to
expand, we will incur additional cost for personnel. This projected increase in
personnel is dependent upon our generating revenues and obtaining sources of
financing. There is no guarantee that we will be successful in raising the funds
required or generating revenues sufficient to fund the projected increase in the
number of employees.
Inflation
The
impact of inflation on 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.
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 policy involves 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 titles to the 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. 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 your 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 motorcycle, 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 motorcycle, or the payment by the lessee's
insurer. We record a gain or loss for the difference between the proceeds
received and the net book value of the motorcycle. We charge fees to
manufacturers and other customers related to creating a private label version of
our financing program including web access, processing credit applications,
consumer contracts and other related documents and processes. Fees received are
amortized and booked as income over the length of the contract.
Stock
Based Compensation
The
Company adopted ASC 718-10, which records compensation expense on a
straight-line basis, generally over the explicit service period of three to five
years.
ASC
718-10 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.
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.
RECENT
ACCOUNTING PRONOUNCEMENTS
For
information regarding recent accounting pronouncements and their effect on the
Company, see “Recent Accounting Pronouncements” in Note A of the Notes to
Consolidated Financial Statements contained herein.
Off-Balance
Sheet Arrangements
We do not
maintain off-balance sheet arrangements nor do we participate in non-exchange
traded contracts requiring fair value accounting treatment.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Page
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Report
of Independent Registered Public Accounting Firm
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26
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Balance
Sheets as of April 30, 2010 and 2009
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27
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Statements
of Losses for the years ended April 30, 2010 and 2009
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28
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Statement
of Deficiency in Stockholders’ Equity for the years ended April 30, 2010
and 2009
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29
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Statements
of Cash Flows for the years ended April 30, 2010 and 2009
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30
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Notes
to Financial Statements
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31
– 52
|
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. ("the Company"), as of April 30, 2010 and 2009, 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, 2010. 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 audits 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, 2010 and 2009, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
April 30, 2010, 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, 2010
SPARTA
COMMERCIAL SERVICES, INC.
CONSOLIDATED
BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
Year
end
|
|
|
Year
end
|
|
|
|
|
April
30, 2010
|
|
|
April
30, 2009
|
|
|
|
|
AUDITED
|
|
|
AUDITED
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
11,994 |
|
|
$ |
2,790 |
|
|
RISC
loan receivables, net of reserve of $132,000 and $235,249, respectively
(NOTE D)
|
|
|
1,761,474 |
|
|
|
3,248,001 |
|
|
Motorcycles
and other vehicles under operating leases net of accumulated depreciation
of $219,492 and $256,485 respectively, and loss reserve of $15,865 and
$32,726, respectively (NOTE B)
|
|
|
305,265 |
|
|
|
621,797 |
|
|
Interest
receivable
|
|
|
26,772 |
|
|
|
49,159 |
|
|
Purchased
Portfolio (NOTE G)
|
|
|
33,559 |
|
|
|
72,635 |
|
|
Accounts
receivable
|
|
|
98,322 |
|
|
|
17,899 |
|
|
Inventory
(NOTE C)
|
|
|
14,622 |
|
|
|
12,514 |
|
|
Property
and equipment, net of accumulated depreciation and amortization of
$163,824 and $147,905, respectively (NOTE E)
|
|
|
27,423 |
|
|
|
43,342 |
|
|
Prepaid
Expenses
|
|
|
- |
|
|
|
593,529 |
|
|
Restricted
cash
|
|
|
146,333 |
|
|
|
348,863 |
|
|
Other
Assets
|
|
|
3,628 |
|
|
|
- |
|
|
Deposits
|
|
|
48,967 |
|
|
|
48,967 |
|
|
Total
assets
|
|
$ |
2,478,358 |
|
|
$ |
5,059,497 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND DEFICIENCY IN STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
$ |
- |
|
|
$ |
57,140 |
|
|
Accounts
payable and accrued expenses
|
|
|
794,811 |
|
|
|
1,851,876 |
|
|
Senior
Secured Notes Payable (NOTE F)
|
|
|
2,010,989 |
|
|
|
3,694,838 |
|
|
Notes
Payable (NOTE G)
|
|
|
864,399 |
|
|
|
5,102,458 |
|
|
Loans
payable-related parties (NOTE H)
|
|
|
383,760 |
|
|
|
378,260 |
|
|
Other
liabilities
|
|
|
20,513 |
|
|
|
88,285 |
|
|
Deferred
revenue
|
|
|
7,650 |
|
|
|
13,050 |
|
|
Total
liabilities
|
|
|
4,082,121 |
|
|
|
11,185,907 |
|
|
|
|
|
|
|
|
|
|
|
|
Deficiency
in Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value; 10,000,000 shares authorized of which 35,850
shares have been designated as Series A convertible preferred stock, with
a stated value of $100 per share, 125and 825shares issued and outstanding,
respectively
|
|
|
12,500 |
|
|
|
12,500 |
|
|
Preferred
Stock B, 1,000 shares have been designated as Series B redeemable
preferred stock, $0.001 par value, with a liquidation and redemption value
of $10,000 per share, 157 and 0 shares issued and outstanding,
respectively
|
|
|
1 |
|
|
|
- |
|
|
Preferred
Stock C, 200,000 shares have been designated as Series C redeemable,
convertible preferred, $0.001 par value, with a liquidation and redemption
value of $10 per share, 42,000 and 0 shares issued and outstanding,
respectively
|
|
|
42 |
|
|
|
- |
|
|
Common
stock, $.001 par value; 740,000,000 shares authorized, 392,782,210 and
170,730,064 shares issued and outstanding, respectively
|
|
|
392,782 |
|
|
|
170,730 |
|
|
Common
stock to be issued, 23,967,965, and 16,735,453
respectively
|
|
|
23,967 |
|
|
|
16,735 |
|
|
Preferred
Stock B to be issued, 5.4 and 0 shares, respectively
|
|
|
- |
|
|
|
- |
|
|
Additional
paid-in-capital
|
|
|
31,470,653 |
|
|
|
20,820,672 |
|
|
Subscriptions
Receivable
|
|
|
(2,118,309 |
) |
|
|
|
|
|
Accumulated
deficit
|
|
|
(31,385,400 |
) |
|
|
(27,147,047 |
) |
|
Total
deficiency in stockholders' equity
|
|
|
(1,603,763 |
) |
|
|
(6,126,410 |
) |
|
Total
Liabilities and deficiency in stockholders’ equity
|
|
$ |
2,478,358 |
|
|
$ |
5,059,497 |
|
See
accompanying notes to consolidated financial statements.
SPARTA
COMMERCIAL SERVICES, INC.
CONSOLIDATED
STATEMENT OF LOSSES
|
|
|
For
the year ended
|
|
|
|
|
April
30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Revenue
|
|
|
|
|
|
|
|
Rental
Income, Leases
|
|
$ |
190,035 |
|
|
$ |
298,476 |
|
|
Interest
Income, Loans
|
|
|
443,026 |
|
|
|
759,801 |
|
|
Other
|
|
|
80,302 |
|
|
|
86,367 |
|
|
|
|
|
713,363 |
|
|
|
1,144,644 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
2,519,592 |
|
|
|
3,860,228 |
|
|
Depreciation
and amortization
|
|
|
702,388 |
|
|
|
310,601 |
|
|
Total
operating expenses
|
|
|
3,221,980 |
|
|
|
4,170,829 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(2,508,616 |
) |
|
|
(3,026,185 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other
expense:
|
|
|
|
|
|
|
|
|
|
Interest
expense and financing cost, net
|
|
|
1,632,562 |
|
|
|
1,895,661 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(4,141,179 |
) |
|
|
(4,921,846 |
) |
|
|
|
|
|
|
|
|
|
|
|
Preferred
dividend
|
|
|
97,175 |
|
|
|
758 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributed to common stockholders
|
|
$ |
(4,238,353 |
) |
|
$ |
(4,922,604 |
) |
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share attributed to
|
|
|
|
|
|
|
common
stockholders
|
|
$ |
(0.01 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic and dilutive
|
|
|
300,447,151 |
|
|
|
159,112,249 |
|
See
accompanying notes to consolidated financial statements.
SPARTA
COMMERCIAL SERVICES, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
FOR
THE TWO YEARS ENDED APRIL 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock
|
|
|
Series
B Preferred Stock
|
|
|
Series
C Preferred Stock
|
|
|
Common
Stock
|
|
|
|
|
|
to
be issued
|
|
|
|
|
|
Paid
in
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
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 |
|
|
Employee
Stock Compensation recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000 |
|
|
|
. |
|
|
|
15,000 |
|
|
Employee
options expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222,409 |
|
|
|
|
|
|
|
222,409 |
|
|
Warrant
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,791 |
|
|
|
|
|
|
|
46,791 |
|
|
Adjustment
for prior years expense double entry
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,730,063 |
|
|
$ |
170,729 |
|
|
|
16,735,453 |
|
|
$ |
16,735 |
|
|
$ |
20,820,671 |
|
|
|
(27,147,046 |
) |
|
|
(6,126,409 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(400 |
) |
|
|
(0 |
) |
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
- |
|
|
correction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,927 |
|
|
|
|
|
|
|
18,927 |
|
|
Beneficial
conversion discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,000 |
|
|
|
|
|
|
|
45,000 |
|
|
Sale
of Pfd Stock B
|
|
|
|
|
|
|
|
|
|
|
157 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,320,000 |
|
|
|
|
|
|
|
1,320,000 |
|
|
Pfd
Stock C issued for A/P
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,000 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
419,958 |
|
|
|
|
|
|
|
420,000 |
|
|
Sale
of Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,301,908 |
|
|
|
7,301 |
|
|
|
3,596,067 |
|
|
|
3,596 |
|
|
|
214,102 |
|
|
|
|
|
|
|
224,999 |
|
|
Shares
issued upon warrant exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,566,176 |
|
|
|
31,566 |
|
|
|
|
|
|
|
|
|
|
|
2,086,743 |
|
|
|
|
|
|
|
2,118,309 |
|
|
Subscriptioms
Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,118,309 |
) |
|
Shares
issued upon conversion of preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,733,974 |
|
|
|
10,734 |
|
|
|
(10,733,980 |
) |
|
|
(10,733 |
) |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
Shares
issued for financing cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,320,000 |
|
|
|
4,320 |
|
|
|
409,265 |
|
|
|
409 |
|
|
|
221,651 |
|
|
|
|
|
|
|
226,380 |
|
|
Shares
issued for accrued interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000 |
|
|
|
200 |
|
|
|
(200,000 |
) |
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
- |
|
|
Shares
issued for conversion of notes & interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,948,452 |
|
|
|
152,950 |
|
|
|
14,660,160 |
|
|
|
14,660 |
|
|
|
5,371,384 |
|
|
|
|
|
|
|
5,538,994 |
|
|
Stock
Compensation recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,500,000 |
|
|
|
5,500 |
|
|
|
(500,000 |
) |
|
|
(500 |
) |
|
|
155,000 |
|
|
|
|
|
|
|
160,000 |
|
|
Shares
issued for accounts payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,815,371 |
|
|
|
2,815 |
|
|
|
|
|
|
|
|
|
|
|
163,939 |
|
|
|
|
|
|
|
166,754 |
|
|
Employee
options expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,289 |
|
|
|
|
|
|
|
76,289 |
|
|
Warrant
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
367,239 |
|
|
|
|
|
|
|
367,239 |
|
|
Shares
issued for accrued payroll
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,666,666 |
|
|
|
6,666 |
|
|
|
|
|
|
|
|
|
|
|
93,334 |
|
|
|
|
|
|
|
100,000 |
|
|
Pfd
Stock B issued for dividend payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,416 |
|
|
|
|
|
|
|
96,416 |
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,238,353 |
) |
|
|
(4,238,353 |
) |
|
Balance,
April 30, 2010
|
|
|
125 |
|
|
$ |
12,500 |
|
|
|
157 |
|
|
$ |
0 |
|
|
|
42,000 |
|
|
$ |
42 |
|
|
|
392,782,210 |
|
|
$ |
392,781 |
|
|
|
23,966,965 |
|
|
$ |
23,967 |
|
|
$ |
31,470,654 |
|
|
|
(31,385,399 |
) |
|
|
(1,603,764 |
) |
See
accompanying notes to consolidated financial statements.
SPARTA
COMMERCIAL SERVICES, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
|
Year
end
|
|
|
Year
end
|
|
|
|
|
April
30, 2010
|
|
|
April
30, 2009
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(4,141,179 |
) |
|
$ |
(4,921,846 |
) |
|
Adjustments
to reconcile net loss to net cash used in
|
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
702,387 |
|
|
|
191,256 |
|
|
Allowance
for loss reserves
|
|
|
69,431 |
|
|
|
156,432 |
|
|
Amortization
of deferred revenue
|
|
|
- |
|
|
|
(9,567 |
) |
|
Beneficial
Conversion Discount
|
|
|
45,000 |
|
|
|
325,000 |
|
|
Shares
issued for debt and accrued interest
|
|
|
|
|
|
|
226,941 |
|
|
Equity
based compensation
|
|
|
336,288 |
|
|
|
915,652 |
|
|
Stock
based finance cost
|
|
|
593,619 |
|
|
|
539,240 |
|
|
Extinguishment
of dividend payable
|
|
|
- |
|
|
|
117,437 |
|
|
Change
in fair value of warrant liability
|
|
|
- |
|
|
|
15,217 |
|
|
(Increase)
decrease in operating assets and liabilities:
|
|
|
- |
|
|
|
|
|
|
Inventory
|
|
|
(2,108 |
) |
|
|
- |
|
|
Interest
receivable
|
|
|
22,387 |
|
|
|
- |
|
|
Accounts
receivable
|
|
|
(80,423 |
) |
|
|
- |
|
|
Other
Receivables
|
|
|
- |
|
|
|
9,223 |
|
|
Prepaid
expenses and other assets
|
|
|
(3,628 |
) |
|
|
(532,849 |
) |
|
Restricted
cash
|
|
|
202,530 |
|
|
|
96,039 |
|
|
Deposits
and other
|
|
|
- |
|
|
|
6,881 |
|
|
Portfolio
|
|
|
39,076 |
|
|
|
|
|
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
(288,649 |
) |
|
|
561,649 |
|
|
Net
cash used in operating activities
|
|
|
(2,505,269 |
) |
|
|
(2,303,295 |
) |
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
liquidation of leased vehicles
|
|
|
370,386 |
|
|
|
449,001 |
|
|
Net Liquidation
of RISC contracts
|
|
|
1,589,776 |
|
|
|
863,065 |
|
|
Purchase
of portfolio
|
|
|
- |
|
|
|
(72,635 |
) |
|
Net
cash provided by investing activities
|
|
|
1,960,162 |
|
|
|
1,239,431 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net
proceeds from sale of common stock
|
|
|
224,999 |
|
|
|
- |
|
|
Net
proceeds from sale of preferred stock
|
|
|
1,320,000 |
|
|
|
- |
|
|
Net
Payments to senior lender
|
|
|
(1,683,849 |
) |
|
|
(1,441,542 |
) |
|
Net
Proceeds from convertible notes
|
|
|
744,800 |
|
|
|
1,638,399 |
|
|
Net
Proceeds from other notes
|
|
|
- |
|
|
|
479,000 |
|
|
Net
Loan proceeds from other related parties
|
|
|
5,500 |
|
|
|
133,500 |
|
|
Net
proceeds secured note
|
|
|
- |
|
|
|
131,516 |
|
|
Net
cash provided by financing activities
|
|
|
611,450 |
|
|
|
940,873 |
|
|
Net
Increase (decrease) in cash
|
|
$ |
66,343 |
|
|
$ |
(122,991 |
) |
|
|
|
|
|
|
|
|
|
|
|
Unrestricted
cash and cash equivalents, beginning of period
|
|
$ |
(54,349 |
) |
|
|
68,642 |
|
|
Unrestricted
cash and cash equivalents, end of period
|
|
$ |
11,994 |
|
|
$ |
(54,349 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
357,303 |
|
|
$ |
570,618 |
|
|
Income
taxes
|
|
$ |
4,897 |
|
|
$ |
2,366 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Investing and Funding Activities (Note N)
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
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 has
had no operations as of April 30, 2010.
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.
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.
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
Early
lease terminations also occur because of (i) a default by the lessee, (ii) the
physical loss of the motorcycle, or (iii) the exercise of the lessee’s early
termination. In those instances, the Company receives the proceeds from either
the resale or release of the repossessed motorcycle, or the payment by the
lessee’s insurer. The Company records a gain or loss for the difference between
the proceeds received and the net book value of the motorcycle.
The
Company charges fees to manufacturers and other customers related to creating a
private label version of the Company’s financing program including web access,
processing credit applications, consumer contracts and other related documents
and processes. Fees received are amortized and booked as income over the length
of the contract. At April 30, 2010 and 2009, the Company had recorded deferred
revenue related to these contracts of $7,650 and $13,050,
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 ASC 350-50,
"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 ASC 740-10, "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.
ASC
740-10, “Accounting for
Uncertainty in Income Taxes 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. ASC
740also provides guidance on derecognition, classification, treatment of
interest and penalties, and disclosure of such positions. As a result
of implementing ASC 740, there has been no adjustment to the Company’s financial
statements and the adoption of ASC 740 did not have a material effect on the
Company’s consolidated financial statements for the year ending April 30,
2010.
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
Fair Value
Measurements
The
Company adopted ASC 820,” Fair
Value Measurements”. ASC 820 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 ASC
820 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 ASC 360-10, “Impairment or Disposal of Long-Lived
Assets” 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
In
accordance with ASC 220-10, “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, ASC 220-10 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, 2010, the Company has no items of other comprehensive
income.
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
Segment
Information
The
Company does not have separate, reportable segments under ASC 280-10, “Disclosures about Segments of an
Enterprise and Related Information”. ASC 280-10 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. ASC
280-10 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 ASC 718-10, which records stock compensation expense on a
straight-line basis, generally over the explicit service period of three to five
years.
ASC
718-10 requires companies to estimate the fair value of share-based payment
awards to employees 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.
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
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, 2010 and 2009, the Company incurred
advertising costs of $4,170 and $8,116, respectively.
Net Loss Per
Share
The
Company uses ASC 260-10, “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.
Per share
basic and diluted net loss attributable to common stockholders amounted
to $0.01 and $0.03 for the years ended April 30, 2010 and 2009,
respectively. At April 30, 2010 and 2009, 54,987,623 and 37,948,231 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 $4,141,179 and $4,921,846 during the years ended April 30, 2010
and 2009, respectively. The Company’s deficit net worth as of April 30, 2010 was
$1,603,763.
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
January 2010, the FASB issued Accounting Standards Update 2010-06, “Fair Value
Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value
Measurements” (FASB ASU 2010-06). FASB ASU 2010-06 amends Subtopic 820-10, Fair
Value Measurements and Disclosures - Overall, and requires new disclosures
related to the transfers in and out of Level 1 and 2, as well as requiring that
a reporting entity present separately information about purchases, sales,
issuances, and settlements rather than as one net number. Additionally, FASB ASU
2010-06 amends Subtopic 820-10 by clarifying existing disclosures related to
level of disaggregation as well as disclosures about inputs and valuation
techniques. FASB ASU 2010-06 is effective for
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
reporting
periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measurements, these disclosures are effective for reporting
periods beginning after December 15, 2010. The Company does not expect
adoption of FASB ASU 2010-06 to have an impact on its financial condition or
results of operations.
In June
2009, the FASB issued Accounting Standards Update 2009-16 “Transfer and
Servicing,” which among other things, removes the concept of a
qualifying special-purpose entity, and changes the requirements for
derecognizing financial assets. Additionally, the
update requires additional disclosures about transfers of
financial assets, including securitization transactions and areas where
companies have continued exposure to the risks related to transferred financial
assets. The update is effective for annual reporting periods beginning
after November 15, 2009. The Company is currently evaluating the
impact that the update may have on future consolidated financial
statements.
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, 2010 and 2009 consist of
the following:
|
|
|
2010
|
|
|
2009
|
|
|
Motorcycles
and other vehicles
|
|
$ |
540,623 |
|
|
$ |
911,008 |
|
|
Less:
accumulated depreciation
|
|
|
(219,492 |
) |
|
|
(256,458 |
) |
|
Motorcycles
and other vehicles, net of accumulated depreciation
|
|
|
321,131 |
|
|
|
654,523 |
|
|
Less:
estimated reserve for residual values
|
|
|
(15,865 |
) |
|
|
(32,726 |
) |
|
Motorcycles
and other vehicles under operating leases, net
|
|
$ |
305,266 |
|
|
$ |
621,797 |
|
At April
30, 2010, 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, 2010 and 2009
was $90,940 and $173,337 respectively. All of the assets
are pledged as collateral for the note described in Note F.
The
following is a schedule by years of minimum future revenues on
non-cancelable operating leases as of April 30, 2010:
|
Year
ending April 30,
|
|
|
|
|
2011
|
|
$
|
44,068
|
|
|
2012
|
|
|
26,925
|
|
|
2013
|
|
|
13,292
|
|
|
2014
|
|
|
178
|
|
|
2015
|
|
|
|
|
|
Total
|
|
$
|
84,463
|
|
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, 2010 and 2009,
the Company had repossessed vehicles which are held for resale totaling $14,622
and $12,514 respectively.
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
NOTE
D – RETAIL (RISC) LOAN RECEIVABLES
RISC loan
receivables, which are carried net of reserves, were $1,761,474 and $3,248,001
at April 30, 2010 and 2009, respectively. As of April 30, 2010
and 2009, the Company had deficiency receivables of $34,250 and $122,554,
respectively. At April 30, 2010 and 2009, the reserve for doubtful RISC loan
receivables was $132,000 and $235,249, 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,
|
|
|
|
|
2011
|
|
$ |
779,737 |
|
|
2012
|
|
|
699,594 |
|
|
2013
|
|
|
384,026 |
|
|
2014
|
|
|
30,117 |
|
|
2015
|
|
|
- |
|
|
Total
Due
|
|
$ |
1,893,474 |
|
NOTE
E - PROPERTY AND EQUIPMENT
Major
classes of property and equipment at April 30, 2010 and 2009 consist of the
followings:
|
|
|
2010
|
|
|
2009
|
|
|
Computer
equipment, software and furniture
|
|
$ |
191,247 |
|
|
$ |
191,247 |
|
|
Less:
accumulated depreciation and amortization
|
|
|
(163,824 |
) |
|
|
(147,905 |
) |
|
Net
property and equipment
|
|
$ |
27,423 |
|
|
$ |
43,342 |
|
Depreciation
and amortization expense related to property and equipment was $17,919 and
$17,919 for the years ended April 30, 2010 and 2009, 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, 2010 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, $10,000 in April 2009 and agreed to pay the remaining $10,000
upon receipt of additional Purchase Portfolio
documentation. Proceeds from the Purchased Portfolio started
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
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 holder.
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
NOTE
F - SENIOR SECURED NOTES PAYABLE (continued)
Once the
Company has paid $150,000 to the 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
holder mutually agree the Purchase Portfolio has no remaining
proceeds.
The
Company was obligated to pay any remainder of the Senior Secured Note by
November 1, 2009 and has granted the note holder a security interest in the
Purchased Portfolio. The Company and the note holder have been in discussions
regarding the repayment of the outstanding balance of the Senior Secured Note
which was $98,432 at April 30, 2010.
At April
30, 2010, the notes payable mature as follows:
|
Year
ended April 30,
|
|
Amount
|
|
|
2011
|
|
$ |
923,500 |
|
|
2012
|
|
|
702,977 |
|
|
2013
|
|
|
367,995 |
|
|
2014
|
|
|
16,516 |
|
|
2015
|
|
|
- |
|
|
Total
Due
|
|
$ |
2,010,989 |
|
NOTE
G – NOTES PAYABLE
|
Notes
Payable
|
|
April
30,
2010
|
|
|
April
30,
2009
|
|
|
Convertible
notes (a)
|
|
$ |
280,000 |
|
|
$ |
4,055,559 |
|
|
Notes
payable (b)
|
|
|
100,000 |
|
|
|
547,500 |
|
|
Bridge
loans (c)
|
|
|
161,000 |
|
|
|
176,000 |
|
|
Collateralized
note (d)
|
|
|
220,000 |
|
|
|
220,000 |
|
|
Convertible
note (e)
|
|
|
103,399 |
|
|
|
103,399 |
|
|
Total
|
|
$ |
864,399 |
|
|
$ |
5,102,458 |
|
|
(a)
|
As
of April 30, 2010, the Company had outstanding convertible unsecured notes
with an original aggregate principal amount of $280,000, which accrue
interest at rates ranging from 8% to 15% per annum. The
majority of the notes are convertible into shares of common stock, at the
Company’s option, ranging from $0.012 to $0.021 per share. All
but one of the convertible notes are current. One of the notes in the
amount $50,000 is convertible at the note holder’s option at a variable
conversion price such that during the period during which the notes are
outstanding, the note is convertible at the lower of (i) the price per
share at which the Company sells or issues any shares of common
stock (except for shares of common stock issued directly to vendors or
suppliers of the Company in satisfaction of amounts owed to them,
provided, however, that such vendors or suppliers shall not have an
arrangement to transfer, sell or assign such shares of common stock prior
to the issuance of such shares, shares issued pursuant to the Company's
Employee Stock Option Plan, or any shares of common stock issued for no
consideration or for a consideration per share before deduction of
reasonable expenses or commissions or underwriting discounts or allowances
in connection therewith, or (ii) 58% multiplied by the average
of the lowest three lowest closing bid prices for the common stock during
the ten trading day period ending one trading day prior to the
submission date of the conversion notice by the note holder to
the Company. The Company recorded a beneficial conversion discount of
$45,000 for this note as of April 30, 2010. Another note in the amount of
$10,000 due August 15, 2010 is convertible at $0.012 per
share.
|
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
NOTE
G - NOTES PAYABLE (continued)
|
|
During
the twelve months ended April 30, 2010, the Company issued $748,000 new
convertible notes with three year warrants to purchase 4,953,264 shares of
the Company’s common stock at $0.15 per share, repaid $3,200 of
convertible notes and converted $4,520,359 of convertible notes and
accrued interest thereon into approximately 139,600,000 shares of the
Company’s common stock.
|
|
(b)
|
As
of April 30, 2010, the Company had outstanding unsecured notes with an
original principal amount of $100,000, which accrue interest ranging from
6% to 15% per annum, all of which were past due. In July 2010,
$80,000 of these notes were purchased by a third party who exchanged the
notes with the Company for new convertible notes all of which are
current. The remaining $20,000 note was due August 8, 2009 and
is accruing interest at a default rate of 15% and is also accruing penalty
shares at the rate of 20,000 shares per month. The Company is in
discussions with this note holder to recast the note. During the twelve
months ended April 30, 2010, $447,500 of notes payable and accrued
interest thereon were converted into approximately 13,800,000 shares of
the Company’s common stock
|
|
(c)
|
During
the year ended April 30, 2007, the Company sold to five accredited
investor’s 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 September 30, 2009, 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 and during 2010,
$15,000 of these notes and accrued interest thereon was converted into
approximately 463,000 shares of the Company’s common stock. The
holders of the remaining notes have agreed to contingently convert those
notes plus accrued interest into approximately 8,000,000 shares of the
Company’s common stock upon the Company’s
ability to meet all conditions precedent to begin drawing down on a senior
credit facility.
|
|
(d)
|
During
the year ended April 30, 2009, the Company sold a secured note in the
amount of $220,000. The note bore 12.46% simple interest. The note matured
on January 29, 2010 and has been extended to September 1, 2010 and is
secured by a second lien on a pool of motorcycles. In July 2010, the note
holder agreed to convert the note and all accrued interest thereon into
approximately 12,000,000 shares of the Company’s common stock upon
the Company
demonstrating that it can meet all conditions precedent to begin drawing
down on a senior credit facility.
|
|
(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 our common
stock. As of April 30, 2010, the balance outstanding was past
due.
|
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
NOTE
H - LOANS PAYABLE TO RELATED PARTIES
During
the year ended April 30, 2010, the Company borrowed $31,320 from a Director of
the Company on a demand basis without interest and repaid $17,320 leaving a
balance outstanding of $370,000 to that Director. Additionally, during the
fiscal year ending April 30, 2008, the Company borrowed $13,760 from an officer
which remains outstanding. During the year ended April 30, 2010, one officer
converted a loan to the Company in the amount of $8,500 into 566,667 shares of
the Company’s common stock.
At April
30, 2009 and 2010, included in accounts receivable, are $10,189 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
Our
short-term financial instruments, including cash and convertible notes payable,
consist primarily of instruments without extended maturities, the fair value of
which, based on management’s estimates, reasonably approximate their book value.
The fair value of our notes is based on management estimates and reasonably
approximates their book value based on their current maturity.
NOTE
J- EQUITY INSTRUMENTS
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
convertible preferred stock with a $100 stated value per share, 1,000 shares
have been designated as Series B Preferred Stock with a $10,000 stated value per
share, and 200,000 shares have been designated as Series C Preferred Stock with
a $10 per share liquidation value, and 750,000,000 shares of common stock with
$0.001 par value per share. The Company had 125 and 125 shares of
Series A preferred stock issued and outstanding as of April 30, 2010 and April
30, 2009, respectively. The Company had 157 and no shares of Series B
preferred stock issued and outstanding as of April 30, 2010 and April 30, 2009,
respectively. The Company had 42,000 and no shares of Series C
preferred stock issued and outstanding as of April 30, 2010 and April 30, 2009,
respectively. The Company had 392,782,210 and 170,730,064 shares of
common stock issued and outstanding as of April 30, 2010 and April 30, 2009,
respectively.
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
NOTE
J- EQUITY INSTRUMENTS (continued)
Preferred Stock Series
A.
The
Series A preferred stock has a stated value of $100 per share, carries a 6%
annual cumulative dividend, payable semi-annually in arrears, and is convertible
into shares of common stock at the rate of one preferred share into 641 shares
of common stock. There were no transactions of the Series A Preferred
Stock during the year ended April 30, 2010.
Preferred Stock Series
B
On July
24, 2009, the Company designated 1,000 shares as Series B Preferred
Stock. The Series B Preferred Stock, 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 Preferred Stock accrues dividends at an annual rate of
10%. Accrued dividends are payable upon redemption of the Series B
Preferred Stock. The Company’s common stock may not be redeemed while
shares of Series B Preferred Stock are outstanding. The Series B
Preferred Stock certificate of designations provides that, without the approval
of a majority of the shares of Series B Preferred Stock, 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 Preferred
Stock, 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 Preferred
Stock. The Series B Preferred Stock 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 the Company’s
business. The shares of Series B Preferred Stock 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.
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.
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 six months
from the date of the agreement, the Company agreed to pay a non-refundable
commitment fee of $250,000 to Optimus. Pursuant to a concurrent
transaction between Optimus and several of the Company’s non-affiliated
stockholders, Optimus may borrow up to 33,990,000 shares of the Company’s common
stock from such 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 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. On October 21, 2009, pursuant
to the agreement, the Company requested Optimus to purchase 67 shares of the
Company’s Series B Preferred Stock valued at $670,000 and issued five year
warrants to purchase 18,066,176 shares of common stock at $0.068 per
share. On November 6, 2009, the Company sold to Optimus 67 shares of
Series B Preferred Stock for gross proceeds of $670,000, and purchased from
Optimus 2,000,000 shares of the Company’s common stock at a price of $0.05 or
$100,000. In November and December 2009, Optimus exercised their warrants by
delivering to the Company two fully secured, five year promissory notes
aggregating $2,118,309. The Company has reclassified the Secured Promissory
Notes (the “Notes”) receivable to subscriptions receivable. As of the date of
this filing, Optimus has failed to provide the information necessary for the
Company to perfect its lien on the collateral securing the Notes
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
NOTE
J - EQUITY INSTRUMENTS-(continued)
Preferred Stock Series
C
In
November 2009, the Company authorized a new series of 200,000 shares of
preferred stock designated as Series C Convertible Preferred Stock, each share
having a par value of $0.001 per share. The Series C Preferred Stock
shall, upon liquidation, winding-up or dissolution, rank: (a) senior to the
Company's common stock and any other class or series of preferred stock of the
Company which by their terms are junior to the Series C Preferred Stock
(collectively, together with any warrants, rights, calls or options exercisable
for or convertible into such Preferred Stock, the “Junior Shares”); (b)
junior to all existing and future indebtedness of the Company; and (c) junior to
the Company's Series A and Series B Preferred Stock. The Series C
Preferred Stock is not entitled to receive any dividends, has a liquidation
value of $10.00 per share, redeemable at the Company’s option at $10.00 per
share, and is convertible at the option of the holder into shares of common
stock as follows: the number of such shares of common stock to be received for
each share of Series C Preferred Stock so converted shall be determined by (A)
dividing the number of shares of Series C Preferred Stock to be converted by the
weighted average closing price per share of the Company's common stock for the
ten (10) trading days immediately preceding the date on which the Company agrees
to issue shares of Series C Preferred Stock to such holder multiplied by (B) the
Series C liquidation value.
Pursuant
to an agreement reached on October 31, 2009 to convert certain accounts payable
to Series C Preferred Stock, the Company recorded the conversion of $125,000 of
accounts payable, as of October 31, 2009, into 12,500 shares of Series C
Preferred Stock. On November 2, 2009, the Company issued 30,000
shares of Series C Preferred Stock for services for a total of 42,500 issued
Series C Preferred Stock. On November 18, 2009, the Company redeemed 500 shares
of Series C Preferred Stock by paying the holder $5,000.
Common
Stock
During
the fiscal years ended April 30, 2010 and 2009, respectively, the Company
expensed $306,289 and $871,039, respectively, for non-cash charges related to
stock and option compensation expense.
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.
|
|
·
|
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.
|
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
NOTE
J - EQUITY INSTRUMENTS-(continued)
|
·
|
issued
an aggregate of 1,390,000 shares of unregistered common stock valued at
$91,500 to ten individuals as an inducement for
loans.
|
|
|
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
renegotiated in fiscal year 2010 and then terminated. The Company issued a
total of 2,500,000 shares to this
consultant.
|
|
·
|
issued
an aggregate of 1,875,000 shares of common stock to five individuals who
converted 292,500 shares of Series A Convertible Preferred Stock, of which
222,500 were converted in prior
years.
|
|
·
|
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 fiscal year ended April 30, 2010, the Company:
|
·
|
sold
11,533,203 shares of its common stock for $225,000. 3,596,067 of the
shares were classified as to be issued as of April 30, 2010 and issued
three year warrants to purchase
1,409,869,
|
|
·
|
shares
of its common stock exercisable at $0.15 per share and three year warrants
to purchase 10,200,734 shares of its common stock at $0.07 per
share,
|
|
·
|
issued,
pursuant to penalty provisions of notes,
4,400,000 shares of unregistered common stock, valued at $243,220 of which
180,000 shares were classified as stock to be
issued,
|
|
|
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,
|
|
·
|
issued
171,424,140 shares of unregistered common stock (of which 18,275,680 had
been classified as shares to be issued at April 30, 2009), valued at
$5,542,808, upon conversion of $4,982,859 in notes and convertible
notes and $559,949 of accrued interest resulting in an increase
in additional-paid-in capital of
$5,402,973,
|
|
·
|
issued,
pursuant to two consulting agreements, 5,500,000 shares of its common
stock valued at $230,000, 1,500,000 ($45,000) of the shares had been
accrued in the prior year and 1,000,000 shares valued at $30,000 have been
accrued in the current year, which shares were subsequently issued in June
2010,
|
|
·
|
issued
2,815,371 shares of common stock under its 2009 Consultant Stock Plan in
satisfaction of accounts payable of
$166,755,
|
|
·
|
issued
31,566,176 shares of common stock, upon the exercise of common stock
purchase warrants, for five year, 2%, secured, full recourse notes in the
amount of $2,118,309 (see Note J),
|
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
NOTE J- EQUITY INSTRUMENTS
(continued)
|
·
|
issued
to a consultant three year warrants to purchase 500,000 shares of common
stock at an exercise price of $0.066 per
share,
|
|
|
sold
$185,000 of 8% four month convertible notes with three year
warrants to purchase 4,953,264 shares of common stock at $0.15 per share.
All of the notes were converted at prices ranging from $0.02 to $0.05 per
share during the year as described
above,
|
|
·
|
sold
$134,000 of 8% convertible demand notes all of which were converted during
the year at prices ranging from $0.035 to $0.046 as described
above,
|
|
·
|
sold
$314,000 of 8% four month convertible notes convertible at
prices ranging from $0.012 to $0.021 per share. During the year, $94,000
of the notes were converted at prices ranging from $0.018 to $0.021 as
described above,
|
|
·
|
sold
a $50,000, 8%, 9 month note convertible at a variable price as
described in Note G(a) above,
|
|
·
|
sold
a $10,000, 15%, 3 month note convertible at $0.012 per
share,
|
|
·
|
sold
a $20,000, 10%, 3 month bridge note and agreed to issue 100,000
shares valued at $0.06 per share as inducement for the loan these shares
were classified as to be issued at April 30, 2010,
and
|
|
·
|
sold
a $20,000, 10%, 4 month note and agreed to issue 80,000
shares valued at $0.08 per share as inducement for the loan
these shares were classified as to be issued at April 30,
2010.
|
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
became effective on September 21, 2009.
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 CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
NOTE
K - INCOME TAXES
At April
30, 2010 and 2009, the Company has available for federal income tax purposes a
net operating loss carry forward of approximately $24,313,564 and $24,500,000,
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, 2010 and 2009 are as
follows:
|
|
|
April
30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
Net
operating loss carry forward
|
|
$ |
6,807,978 |
|
|
$ |
6,860,000 |
|
|
Valuation
allowance
|
|
|
(6,807,978 |
) |
|
|
(6,860,000 |
) |
|
Net
deferred tax asset
|
|
$ |
- |
|
|
$ |
- |
|
The
valuation allowance and increased by $52,022 and $1,120,800 during the years
ended April 30, 2010 and 2009, 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, subject to
vesting conditions, at an exercise price of $0.605 per share. The options have a
five year life from vesting.
During
December 2005, the Company granted options to purchase an aggregate of 160,000
shares of common stock to two employees. The options have been valued at $75,795
using the Black-Sholes option pricing model with the following assumptions:
(1) dividend yield of 0%; (2) expected volatility of 177%,
(3) risk-free interest rate of 4.38%, and (4) expected life
of 3 years. The options have an exercise price of $0.59, vest over a 38
month period and expire if unexercised in ten years.
During
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, 2009. As a result of
these resignations, 530,000 unexercised options were cancelled. During the year
ended April 30, 2010, 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.
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
NOTE
L - STOCK OPTIONS AND WARRANTS (continued)
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.
During
the year ended April 30, 2010, the Company issued warrants to purchase an
aggregate of 500,000 shares of common stock to a consultant. The warrants have
been valued at $24,339 using the Black-Sholes option pricing model with the
following assumptions: (1) dividend yield of 0%; (2) expected
volatility of 261%, (3) risk-free interest rate of 1.44%, and
(4) expected life of 3 years. The warrants have an exercise price of
$0.05 and are fully vested.
During
the year ended April 30, 2010, in connection with the sale of short term notes,
the Company issued three year warrants to purchase 4,849,097 shares of its
common stock at $0.15 per share. The warrants have been valued at $346,726 using
the Black-Sholes option pricing model with the following assumptions:
(1) dividend yield of 0%; (2) expected volatility of 281%,
(3) risk-free interest rate of 1.42%, and (4) expected life
of 3 years.
During
the year ended April 30, 2010, in connection with the sale of common stock, the
Company issued three year warrants to purchase 3,219,866 shares of its common
stock at $0.15 per share and three year warrants to purchase 10,123,334 shares
of its common stock at $0.07 per share.
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
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
|
|
5,500,000
|
|
4
|
|
$0.23
|
|
5,500,000
|
|
$0.23
|
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 |
|
|
Granted
|
|
|
- |
|
|
|
- |
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
Canceled
or expired
|
|
|
(525,000 |
) |
|
|
0.27 |
|
|
Outstanding
at April 30, 2010
|
|
|
5,500,000 |
|
|
$ |
0.23 |
|
There
were no options granted during the years ended April 30, 2010 or
2009
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
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 |
|
|
|
.80 |
|
|
$ |
0.215 |
|
|
|
1,755,537 |
|
|
$ |
0.215 |
|
| $ |
0.15 |
|
|
|
7,057,574 |
|
|
|
2.18 |
|
|
$ |
0.15 |
|
|
|
7,057,574 |
|
|
$ |
0.15 |
|
| $ |
0.11 |
|
|
|
250,000 |
|
|
|
3.06 |
|
|
$ |
0.11 |
|
|
|
250,000 |
|
|
$ |
0.11 |
|
| $ |
0.07 |
|
|
|
10,123,334 |
|
|
|
2.88 |
|
|
$ |
0.07 |
|
|
|
10,123,334 |
|
|
$ |
0.07 |
|
| $ |
0.066 |
|
|
|
500,000 |
|
|
|
2.51 |
|
|
$ |
0.066 |
|
|
|
250,000 |
|
|
$ |
0.066 |
|
| $ |
0.05 |
|
|
|
1,975,000 |
|
|
|
2.61 |
|
|
$ |
0.05 |
|
|
|
1,975,000 |
|
|
$ |
0.05 |
|
| $ |
0.0438 |
|
|
|
1,632,833 |
|
|
|
2.76 |
|
|
$ |
0.0438 |
|
|
|
1,632,833 |
|
|
$ |
0.0438 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
23,294,258 |
|
|
|
2.97 |
|
|
$ |
0.10 |
|
|
|
23,294,258 |
|
|
$ |
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, 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 |
|
|
Granted
|
|
|
17,236,444 |
|
|
$ |
0.102 |
|
|
Exercised
|
|
|
- |
|
|
$ |
- |
|
|
Canceled
or expired
|
|
|
(350,000 |
) |
|
$ |
0.061 |
|
|
Outstanding
at April 30, 2010
|
|
|
23,294,278 |
|
|
$ |
0.10 |
|
The
weighted-average fair value of stock warrants granted to non-employees during
the years ended April 30, 2010 and 2009 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:
|
|
|
2010
|
|
|
2009
|
|
|
Significant
assumptions (weighted-average):
|
|
|
|
|
|
|
|
Risk-free
interest rate at grant date
|
|
1.42%
|
|
|
1.39
|
|
|
Expected
stock price volatility
|
|
281%
|
|
|
277
|
|
|
Expected
dividend payout
|
|
-
|
|
|
-
|
|
|
Expected
option life-years
|
|
3
yrs
|
|
|
3
yrs
|
|
The
amount of the expense charged to operations for compensatory warrants granted in
exchange for services was $260,000 and $633,630 for the years ended April 30,
2010 and 2009, respectively.
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
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 or an additional 5 years. Total
lease rental expense for the years ended April 30, 2010 and 2009, was $312,633
and $310,419, respectively. The Company has determined not to record deferred
rent in order to recognize rent expense over the term of the lease on a straight
line basis, as the amount has been determined to be immaterial to the overall
consolidated financial statements.
Commitment
for minimum rentals under non-cancelable leases Including Contractual charge for
water and sprinkler are:
|
April
30, 2011
|
|
$ |
304,985 |
|
|
April
30, 2012
|
|
$ |
312,565 |
|
|
To
November 1, 2012
|
|
$ |
184,947 |
|
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. The agreement was automatically extended for five years on July
12, 2009. He is entitled to six weeks of paid vacation per year, and
health insurance, short term and long term disability insurance, retirement
benefits, fringe benefits, and other employee benefits on the same basis as is
generally made available to other senior executives. He did not receive any
equity compensation as part of this agreement.
On
November 1, 2004, the Company entered into an employment agreement with Richard
P. Trotter. 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. The agreement
expired in November 2009. The Company and the executive have agreed
to negotiate a new 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 Principal
Financial Officer. The term of employment is three years. The agreement expired
in September 2009. The Company and the executive have agreed to negotiate a new
employment agreement
Litigation
The
Company is subject to legal proceedings and claims which arise in the ordinary
course of its business. Although occasional adverse decisions or settlements may
occur, the Company believes that the final disposition of such matters should
not have a material adverse effect on its financial position, results of
operations or liquidity.
In July
2009, the Company entered into a Preferred Stock Purchase Agreement with Optimus
Capital Partners, LLC, d/b/a Optimus Special Situations Capital Partners, LLC
(“Optimus CP”). In connection therewith, on November 4, 2009 and December 17,
2009, the Company received two full recourse Secured Promissory Notes from
Optimus CG II, Ltd. (“Optimus CG”), the sole shareholder of Optimus CP, in the
principal amounts of $1,215,000 and $903,308.80 respectively (“the Secured
Notes”). Pursuant to the terms of the Secured Notes, Optimus CG is obligated to
maintain a basket of publicly traded securities in an amount at least equal to
the principal amounts due as security. Despite written demand, Optimus CG has
refused to disclose the specific securities in the basket, or to issue a
requested comfort letter to the Company’s auditors. The Company has therefore
declared the Secured Notes in default.
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
NOTE
N - NON-CASH FINANCIAL INFORMATION
During
the year ended April 30, 2010, the Company:
|
·
|
Issued
4,000,000 shares of unregistered common stock valued at $230,000 and
2,000,000 shares of registered stock valued at $100,000 to two consulting
firms.
|
|
·
|
Issued
4,220,000 shares of unregistered common stock valued at $234,820 and
accrued 180,000 shares of unregistered common stock valued at $8,400 to
five individuals pursuant to the terms and provisions of their
loans.
|
|
·
|
Accrued
180,000 shares of unregistered common stock valued at $12,400 to two
individuals as an inducement for
loans.
|
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.
|
NOTE
O - SUBSEQUENT EVENTS
In May
2010, the company sold to an accredited investor a convertible note in the
amount of $25,000. The note is convertible at the note holder’s
option at a variable conversion price such that during the period during which
the notes are outstanding, the notes are convertible at the lowest of (i) the
price per share at which the Company sells or issues any shares of
Common (except for shares of Common Stock issued directly to vendors or
suppliers of the Company in satisfaction of amounts owed to such vendors or
suppliers, provided, however, that such vendors or suppliers shall not have an
arrangement to transfer, sell or assign such shares of Common Stock prior to the
issuance of such shares, and except for shares issued pursuant to the Company's
Employee Stock Option Plan, any shares of Common Stock for no consideration or
for a consideration per share before deduction of reasonable expenses or
commissions or underwriting discounts or allowances in connection
therewith, or (ii) 58% multiplied by the average of the lowest three
(3) lowest closing bid price for the Common Stock during the ten (10) Trading
Day period ending one Trading Day prior to the date the Conversion Notice is
sent by the note holder to the Company.
In June
and July 2010, the Company sold 5,703,889 shares of its restricted common stock
and three-year warrants to purchase 5,703,889 shares of common stock at an
exercise price of $0.07 per share. These securities were sold to two accredited
investors for an aggregate purchase price of $90,000.
In May,
June and July 2010, the Company sold to one accredited investor an aggregate of
$175,000 in one year 8% notes which are convertible at the Company’s option into
common stock at $0.012 per share.
On May
12, 2010, the Company issued to stock options, exercisable at $0.025 per share
until May 12, 2015, subject to vesting at the rate of 20% on the grant date, 40%
on May 12, 2011, and 40% on May 12, 2011, to the following officers and
directors: Anthony Havens, 6,672,500 options; Kristian Srb, 2,465,000
options; Richard Trotter, 4,016,250 options; Jeffrey Bean, 956,000 options;
Anthony Adler, 3,995,000 options; and Sandra Ahman, 3,145,000
options.
In August
2010, the Company sold to five accredited investors, $42,000 principal amount of
12%, sixty day notes, and agreed to issue a total of 420,000 shares of the
Company’s restricted common stock, valued at $8,400, as inducement for the
loans. In case of default, the interest rate on the loans is increased to 22%
and the number if inducement shares doubles.
SPARTA COMMERCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2010 AND 2009
NOTE
O - SUBSEQUENT EVENTS (continued)
In June
2010, an investor purchased from one of our note holders a past due 6% $25,000
promissory note dated January 7, 2008 and paid that note holder the accrued
interest on the note. The Company agreed to exchange that purchased note for a
$25,000, 0% convertible note due June 1, 2011. In case of default, interest will
accrue at the rate of 18% from the issue date of the original
note. The note is convertible at any time at the holder’s option into
shares of the Company’s common stock at the lower of $0.06 or sixty percent of
the average of the three lowest closing prices of the Company’s common stock for
the twenty consecutive trading days prior to the date upon which the note holder
elects to convert part or all of the note.
In June
2010, an investor purchased from two of our note holders four past due 10%
bridge notes issued in January 2009, July 2009 and August 2008 with a combined
principal balance of $55,000, and paid the note holders the accrued interest of
$26,947.87 on the notes. The Company agreed to exchange the purchased notes for
four new convertible notes due June 18, 2011 in the principal amounts of
$37,156.05, $6,712.91, $13,425.81 and $24,653.17. The convertible
notes provide for interest at the rate of 8% commencing as of June 18,
2010. In case of default, the interest rate on the notes will
increase to 24%. The notes are convertible at any time at the holder’s option
into shares of the Company’s common stock at seventy percent of the of the three
lowest closing prices of the Company’s common stock for the three consecutive
trading days prior to the date upon which the note holder elects to convert part
or all of the note.
In May
2010, the Company formed a new subsidiary, Specialty Reports, Inc., a Nevada
corporation, and in May 2010 a 24% equity interest in Specialty Reports was
issued in consideration of substantially all of the assets of Cyclechex, LLC, a
Florida limited liability company.
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, 2010, the Company incurred a cumulative
loss of $31,385,400 Approximately 50% of these losses were non-cash.
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.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not
applicable.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and Principal
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of the end of the period ended April 30, 2010. Based upon
such evaluation, our Chief Executive Officer and Principal Financial Officer
have concluded that, as of such date, our disclosure controls and procedures are
effective in providing reasonable assurance that the information required to be
disclosed in this report has been recorded, processed, summarized and reported,
on a timely basis, as of the end of the period covered by this report, and that
our disclosure controls and procedures are also effective to ensure that
information required to be disclosed in the reports we file under the Exchange
Act is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, to allow timely decisions
regarding required disclosure.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rule 13a-15(f) of the Exchange
Act. Our management, with the participation of our Chief Executive
Officer and Principal Financial Officer, has conducted an evaluation of the
effectiveness of our internal control over financial reporting as of April 30,
2010. In its evaluation, management used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on this evaluation,
management has concluded that our internal control over financial reporting was
effective as of April 30, 2010. This annual report does not include
an attestation report of our independent registered public accounting firm
regarding internal control over financial reporting. We were not required to
have, nor have we engaged our independent registered public accounting firm to
perform, an audit on our internal control over financial reporting.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting during the
quarter ended April 30, 2010 to which this report relates that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Limitations
on Controls
Management
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent or detect all error and fraud. Any
control system, no matter how well designed and operated, is based upon certain
assumptions and can provide only reasonable, not absolute, assurance that its
objectives will be met. Further, no evaluation of controls can provide absolute
assurance that misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the Company have been
detected.
ITEM
9B. OTHER INFORMATION
In May
2010, the Company formed a new subsidiary, Specialty Reports, Inc., a Nevada
corporation, and in May 2010 a 24% equity interest in Specialty Reports was
issued in consideration of substantially all of the assets of Cyclechex, LLC, a
Florida limited liability company.
PART
III
ITEM
10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATION GOVERNANCE
Our
Management
The
following table sets forth our executive officers and directors and their
respective ages and positions as of August 1, 2010.
|
Name
|
|
Age
|
|
Position
|
|
Anthony
L. Havens
|
|
56
|
|
Chief
Executive Officer, President, and Chairman
|
|
Kristian
Srb
|
|
55
|
|
Director
|
|
Jeffrey
Bean
|
|
57
|
|
Director
|
|
Anthony
W. Adler
|
|
70
|
|
Executive
Vice President and Principal Financial Officer
|
|
Richard
P. Trotter
|
|
67
|
|
Chief
Operating Officer
|
|
Sandra
L. Ahman
|
|
47
|
|
Vice
President, Secretary and Director
|
Management
Profiles
Anthony L. Havens, Chief Executive
Officer, President, and Chairman. On February 27, 2004, Mr. Havens became
our Chief Executive Officer, President and Chairman of the Board. Mr. Havens
served as acting Chief Financial Officer from July 2005 to September 2006. Mr.
Havens served as the Managing Member and Chief Executive Officer of our
predecessor entity, Sparta Commercial Services, LLC, since its inception in 2001
until its dissolution in February 2006. He is involved in all aspects of
Sparta's operations, including providing strategic direction, and developing
sales and marketing strategies. From 1994 to 2004, Mr. Havens has been Chief
Executive Officer and a director of American Motorcycle Leasing Corp. He
co-founded American Motorcycle Leasing Corp. in 1994, and developed its
operating platform and leasing program to include a portfolio which includes
both prime and sub-prime customers. Mr. Havens has over 20 years of experience
in finance and investment banking.
Kristian Srb, Director. Mr.
Srb joined our board of directors in December 2004. Mr. Srb has been a director
of American Motorcycle Leasing Corp. from 1994 to the present. Mr. Srb was
President of American Motorcycle Leasing Corp. from 1994 to 1999. Since 1999,
Mr. Srb has engaged in private investment activities. He has over 16 years
experience in international brand development and management, including for 13
years with Escada A.G.
Jeffrey Bean, Director. Mr.
Bean joined our Board of Directors in December 2004. Mr. Bean is the founder and
President of Bean Foods, LLC. Formed in July 2006 the company develops, owns and
operates quick serve restaurants in Georgia. Prior to founding Bean Foods, Mr.
Bean was the founding partner for GoMotorcycle.com, a business that engaged in
the sale of motorcycle parts and accessories over the Internet. Mr.
Bean was an institutional broker and trader at a major commodities trading firm
from 1985 to 1997. From 1977 to 1985, Mr. Bean was President of Thomaston Press,
Ltd., a printing concern. He received a B.A. degree from the University of
Virginia.
Anthony W. Adler, Executive Vice
President and Principal Financial Officer. From March 2004 to August
2006, Mr. Adler was a full time consultant to the Company, and in September
2006, joined Sparta as Executive Vice President and also as principal financial
officer. From 1995 to March 2004, he was Chief Financial Officer of American
Motorcycle Leasing Corp. From 1993 to 1994 Mr. Adler was Chief
Executive Officer of Innotek, Inc., a public company engaged in the development
and distribution of skin-care products. Prior to 1993, Mr. Adler served in
numerous executive capacities including Director of Research and Vice President,
Corporate Finance for two New York Stock Exchange Member Firms. Mr. Adler holds
an MBA from New York University and a BA from Columbia College.
Richard P. Trotter, Chief Operating
Officer. Mr. Trotter has been our Chief Operating Officer since November
2004. From 2001 to 2004, Mr. Trotter was President, Chief Credit Officer, of
American Finance Company, Inc., purchasing retail automobile installment
contracts from independent automobile dealers nationwide. From 1996 to 2001, he
was Senior Vice President of Originations for Consumer Portfolio Services, Inc.,
one of the nation's leading purchasers of non-prime retail automobile
installment contracts. From 1994 to 1996, he was Senior Vice
President
of Marketing for Consumer Portfolio Services, Inc. His experience also includes
positions as Chief Operating Officer, Executive Director and President, and
Chief Credit Officer for banks and financial institutions in California. Mr.
Trotter has over 30 years experience in financial institutions and over 20 years
experience specializing in the automobile lending, servicing, and collecting
industry.
Sandra L. Ahman, Vice President,
Secretary and Director. On March 1, 2004, Sandra Ahman became Vice
President of Operations and Secretary of Sparta, and a Director on June 1, 2004.
She served as a Vice President of our predecessor entity, Sparta Commercial
Services, LLC since its inception in 2001 until its dissolution in February
2006. From 1994 to 2004, she was Vice President of Operations of American
Motorcycle Leasing Corp. Prior to joining American Motorcycle Leasing Corp., Ms.
Ahman was with Chatham Capital Partners, Ltd. Before joining Chatham in 1993,
she was Manager, Human Resources for Comart and Aniforms, a sales promotion and
marketing agency in New York, where she worked from 1986 to 1993. For the past
15 years, Ms. Ahman has been a volunteer with The Children's Aid Society in New
York City, a membership of 500 committed volunteers, serving from 2000 to 2002
as President of its Associates Council, from 2002 to 2005 as Chairman of the
Associates Council, and since 2002 as a member of the Advisory Council of their
Board of Trustees.
Board
of Directors Information and Corporate Governance
There are
no family relationships among our executive officers or
directors. None of our directors or officers serves or has served
during the past five years as a director of another reporting company or a
registered investment company. Based solely in reliance on
representations made by our officers and directors, during the past ten years,
none of the following occurred with respect to such persons: no
petition under the Federal bankruptcy laws or any state insolvency law was filed
by or against, or a receiver, fiscal agent or similar officer was appointed by a
court for the business or property of such persons, or any partnership in which
he or she was a general partner or any corporation or business association of
which he or she was an executive officer at or within two years before the time
of such filing; no such persons were convicted in a criminal proceeding or are a
named subject of a pending criminal proceeding (excluding traffic violations and
other minor offenses); no such persons were the subject of any order, judgment
or decree, not subsequently reversed, suspended or vacated, of any court of any
competent jurisdiction, permanently or temporarily enjoining, or of any federal
or state authority barring, suspending or otherwise limiting, their involvement
in any type of business practice, or in securities or banking or other financial
institution activities; and no such persons were found by a court of competent
jurisdiction in a civil action or by the Securities and Exchange Commission or
by the Commodity Futures Trading Commission to have violated any federal or
state securities or commodities law, and the judgment has not been reversed,
suspended or vacated.
Our
directors are elected annually to serve for one year and hold office until the
next annual meeting of the stockholders and until their successors are elected
and qualified. Our Board of Directors may increase the size of the Board of
Directors. Any director who fills a position created by the Board of Directors
serves until the next annual meeting of the stockholders. Our officers are
elected by the Board of Directors at the first meeting after each annual meeting
of our stockholders, and hold office until their death, resignation or removal
from office. In seeking candidates for directors, our Board may use
their business, professional and personal contacts, accept the recommendations
from other Board members, stockholders or management. Candidates recommended by
security holders are considered. Current members of the Board are considered for
re-election. The process for evaluating candidates and the manner of
evaluation is the same regardless of the category of person recommending the
proposed candidate. The Board considers business experience, mix of
skills and other criteria and qualities appropriate for Board membership,
including: intelligence, high personal and professional ethics, values,
integrity and sound judgment; education; business and professional skills and
experience; familiarity with our business and the industry in general;
independence from management; ability to devote sufficient time to Board
business; commitment to regularly attend and participate in meetings of our
Board and its committees; and concern for the long-term interests of the
stockholders. While such factors important in evaluating candidates, we do not
impose any specific, minimum qualifications for director nominees.
Our Board
of Directors does not currently maintain a separately-designated standing audit,
nominating, or compensation committee, or other similar committee, of the Board
of Directors, and we do not have audit, nominating, or compensation committee,
or other similar charter. Functions customarily performed by such
committees are performed by our Board as a whole as our operations have been
limited and we have had a small
number of
officers and a small number of directors since inception. We are not required to
maintain such committees under the applicable rules of the OTC Bulletin Board.
None of our directors qualify as an "audit committee financial expert." As all
of our Board members are officers or nominees of a substantial stockholder who
may not be deemed independent, we have not established separate Board
committees.
The Board
of Directors has not adopted a specific process with respect to security holder
communications, but security holders wishing to communicate with the Board of
Directors may do so by mailing such communications to the Board of Directors at
our offices.
Code
of Ethics
We have
not yet adopted a "code of ethics", as defined by the SEC, which applies to our
Chief Executive Officer, Chief Financial Officer, principal accounting officer
or controller and persons performing similar functions. We have not previously
adopted a code of ethics as our operations have been limited and we have had a
small number of employees since inception. We expect to adopt a code
of ethics during our present fiscal year.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires Sparta's
executive officers, directors, and persons who beneficially own more than ten
percent of Sparta's common stock to file with the Securities and Exchange
Commission initial reports of beneficial ownership and reports of changes in
beneficial ownership of Sparta's common stock. Such persons are also
required by Securities and Exchange Commission regulations to furnish Sparta
with copies of all such Section 16(a) forms filed by such
person. Based solely on a review of the copies of such reports
furnished to Sparta in connection with the fiscal year ended April 30, 2010,
Sparta is not aware of any material delinquencies in the filing of such reports,
except as follows: Mr. Srb filed a Form 4 on November 5, 2009
reporting the purchase of 25,000 shares on August 25, 2007; and Mr. Bean filed a
Form 4 on March 5, 2010 reporting the purchases of 100 shares on April 23, 2009,
and a Form 4 on March 5, 2010 reporting the purchase of 20,000 shares on March
2, 2010.
ITEM
11. EXECUTIVE COMPENSATION
Summary
Compensation
The table
below sets forth information concerning the compensation we paid to our Chief
Executive Officer and our next two most highly compensated executive officers
who served during our fiscal year ended April 30, 2010 ("Named Executive
Officers").
|
Name
and Principal Position
|
Year
|
|
Salary
($)(a)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)(b)(c)
|
|
|
Option
Awards
($)(b)(d)
|
|
|
All
Other
Compensation
($)(e)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony
L. Havens
|
2010
|
|
|
280,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
280,000 |
|
|
Chief
Executive Officer
|
2009
|
|
|
280,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
10,639 |
|
|
|
290,639 |
|
|
Anthony
W. Adler
|
2010
|
|
|
185,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
141,280 |
|
|
|
0 |
|
|
|
326,280 |
|
|
Executive
Vice President and
Principal
Financial Officer
|
2009
|
|
|
185,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
141,280 |
|
|
|
0 |
|
|
|
326,280 |
|
|
Richard
P. Trotter
|
2010
|
|
|
200,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
200,000 |
|
|
Chief
Operating Officer
|
2009
|
|
|
200,000 |
|
|
|
0 |
|
|
|
20,000 |
|
|
|
49,420 |
|
|
|
0 |
|
|
|
269,420 |
|
|
(a)
|
For
Mr. Adler, includes accrued; unpaid net salary of $80,627 and $19,539 in
salary foregone in exchange of 1,302,600 shares of common stock in fiscal
2010. For Mr. Trotter, includes accrued; unpaid net salary of $116,419 and
$8,763 in salary foregone in exchange of 578,179 shares of common stock in
fiscal 2010.
|
|
(b)
|
Represents
the stock-based compensation recognized in accordance with ASC 718.
Stock-based awards are valued at the fair value on the grant date using a
Black-Scholes model. Assumptions made in the valuation of stock-based
awards are discussed in Note N to the consolidated financial
statements
|
|
(c)
|
For
Mr. Trotter, refers to the value of 12,500 shares of common stock, granted
pursuant to an employment agreement dated November 1, 2004, that vested in
each of the reported fiscal years.
|
|
(d)
|
For
Mr. Adler, refers to the value of 1,200,000 stock options, granted
pursuant to an option agreement dated September 22, 2006, that vested in
each of the reported fiscal years. The options are exercisable
at $0.1914 per share until September 21,
2011.
|
For Mr.
Trotter, refers to the value of 175,000 stock options, granted pursuant to an
option agreement dated April 29, 2005, that vested in fiscal
2009. The options are exercisable at $0.605 per share until April29,
2014.
|
(e)
|
This
column reports the total amount of perquisites and other benefits
provided, if such total amount exceed $10,000. In fiscal 2009, for Mr.
Havens, this includes $10,639 for garage
rental.
|
In
general, compensation payable to a Named Executive Officer consists of a base
salary, and in cases of persons other than our CEO, a stock or stock option
award. During our 2010 fiscal year, we had in effect written
employment agreements with the Named Executive Officers. Our
compensation system has generally not been tied to performance based conditions
other than the passage of time.
Employment Agreement with
CEO
We
entered into an employment agreement, dated as of July 12, 2004, with Anthony L.
Havens who serves as our Chief Executive Officer. The agreement was
for an initial term of five years, and provided for automatic extensions for one
five-year period and for 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. The agreement was automatically extended for five
years in July 2009. His base salary is at an annual rate of
$280,000. He is entitled to defer a portion of his base salary each
year. He is entitled to annual increases in his base salary and other
compensation as may be determined by the Board of Directors. He is
entitled to a $1,000,000 term insurance policy. He is entitled to six
weeks of paid vacation per year, health insurance, short term and long term
disability insurance, retirement benefits, fringe benefits, and other employee
benefits on the same basis as is generally made available to other senior
executives. He is entitled to reimbursement of reasonable business
expenses incurred by him in accordance with company policies. If
terminated, he is entitled to three months of severance for up to six months of
service for each year of employment, plus full participation in all standard
employee benefits during the period of severance payments. The
employment agreement provides for termination for cause. If he
resigns for good reason or is terminated without cause within twelve months
after a change in control, he is entitled to receive an additional lump sum
payment equal to the greater of the severance payment or the balance of his base
salary for the remaining employment term, continued coverage under any welfare
benefits plans for two years, and full vesting of any account balance under a
401(k) plan. For purposes of the employment agreement, a change in
control refers to:
|
·
|
a
change in voting power, due to a person becoming the beneficial owner of
50% or more of the voting power of our securities and our largest
stockholder;
|
|
·
|
during
any period of two consecutive years, individuals who at the beginning of
such period constitute the Board of Directors, including later approved
directors, ceasing to constitute a majority of the
board;
|
|
·
|
a
merger or consolidation of our company with a third party, after which our
stockholders do not own more than 50% of the voting power;
or
|
|
·
|
a
sale of all or substantially all of our assets to a third
party.
|
If we
elect not to renew the employment agreement, he shall be entitled to receive
severance equal to thirty months of his base salary plus standard employment
benefits. If we fail to fully perform all or any portion of our
post-termination obligations, we are be obligated to pay to him an amount equal
to five times the value of the unperformed obligation.
Employment Agreement with
EVP
We
entered into an employment agreement, effective September 22, 2006, with Anthony
W. Adler, to serve as our Executive Vice President and interim Principal
Financial Officer for a term of three years. The agreement expired in
September 2009, and the Company and the executive have agreed to negotiate a new
employment agreement. Under the employment agreement, Mr. Adler’s
base salary was at the annual rate of $185,000.
Employment Agreement with
COO
We
entered into an employment agreement, effective November 1, 2004, with Richard
P. Trotter, to serve as our Chief Operating Officer for an initial term of one
year. Pursuant to its terms, the employment term was automatically extended for
subsequent periods, and expired in November 2009. The Company and the executive
have agreed to negotiate a new employment agreement. Under the
employment agreement, Mr. Trotter’s base salary was at the annual of
$200,000.
Outstanding
Equity Awards at Fiscal Year End
The
following table sets forth information concerning outstanding equity awards held
by the Name Executive Officers as at April 30, 2010.
|
|
|
Option
Awards
|
|
Stock
Awards
|
|
|
Name
|
|
Number
of
securities
underlying
unexercised
options
(#)
Exercisable
|
|
|
Number
of
securities
underlying
unexercised
options
(#)
Unexercisable
|
|
|
Option
exercise
price
($)
|
|
Option
expiration
date
|
|
Number
of
shares
or units
of
stock that
have
not vested
(#)
|
|
|
Market
value
of
shares or
units
of stock
that
have
not
vested
($)
|
|
|
Anthony
W. Adler (1)
|
|
|
4,000,000 |
|
|
|
- |
|
|
|
0.1914 |
|
9/21/2011
|
|
|
- |
|
|
|
- |
|
|
Richard
P. Trotter (2)
|
|
|
175,000 |
|
|
|
- |
|
|
|
0.605 |
|
4/29/2011
|
|
|
- |
|
|
|
- |
|
|
Richard
P. Trotter (2)
|
|
|
175,000 |
|
|
|
- |
|
|
|
0.605 |
|
4/29/2012
|
|
|
- |
|
|
|
- |
|
|
Richard
P. Trotter (2)
|
|
|
175,000 |
|
|
|
- |
|
|
|
0.605 |
|
4/29/2013
|
|
|
- |
|
|
|
- |
|
|
Richard
P. Trotter (2)
|
|
|
175,000 |
|
|
|
- |
|
|
|
0.605 |
|
4/29/2014
|
|
|
- |
|
|
|
- |
|
|
(1)
|
Granted
pursuant to an option agreement dated September 22, 2006. The
options are exercisable for a period of five years from the vesting date
at $0.1914 per share.
|
|
(2)
|
Granted
pursuant to an option agreement dated April 29,
2005.
|
Compensation
of Directors
No
compensation was paid to non-employee directors in fiscal year
2010.
ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table summarizes our equity compensation plan information as of April
30, 2010.
|
Plan
category
|
|
Number
of securities to be
issued
upon exercise of
outstanding
options,
warrants
and rights (a)
|
|
|
Weighted-average
exercise
price
of outstanding options,
warrants
and rights (b)
|
|
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation plan
|
|
|
Equity
compensation plans
approved
by securities holders
|
|
|
300,000 |
|
|
$ |
0.10 |
|
|
|
8,200,000 |
|
|
Equity
compensation plans not
approved
by security holders
|
|
|
11,463,370 |
|
|
$ |
0.16 |
|
|
|
0 |
|
|
Total
|
|
|
11,763,370 |
|
|
$ |
0.16 |
|
|
|
8,200,000 |
|
|
(a)
|
Includes
100,000 vested shares, pursuant to a restricted stock grant, which have
not yet been issued. There is no exercise price associated with
the restricted stock grant.
|
|
(b)
|
Calculation
excludes shares subject to restricted stock
grants.
|
Plans
in the Shareholder Approved Category
In July
2004, we adopted our 2005 Stock Incentive Compensation Plan. The plan
authorizes our Board of Directors to grant securities, including stock options,
to employees, directors and others, in the aggregate amount of 8,500,000 shares
of common stock. Securities issued under the plan may be stock awards,
non-qualified options, incentive stock options, or any combination of the
foregoing. In general, stock options granted under the plan have a
maximum duration of ten years from the date of the grant and are not
transferable. The per share exercise price of any incentive stock option granted
under the plan may not be less than the fair market value of the common stock on
the date of grant. Incentive stock options granted to persons who have voting
control over ten percent or more of our capital stock are granted at 110% of
fair market value of the underlying common stock on the date of grant and expire
five years after the date of grant. No options may be granted after July 1,
2014. During the year ended April 30, 2010, no options were granted
or exercised, and 350,000 unexercised options were cancelled. As of
April 30, 2010, options to purchase 300,000 shares of common stock were
outstanding under the plan.
Plans
Not in the Shareholder Approved Category
On
November 1, 2004, pursuant to an employment agreement with Richard P. Trotter,
our Chief Operating Officer, we granted an award of 125,000 shares of our common
stock, subject to vesting and subject to continued employment. As of
April 30, 2010, Mr. Trotter was vested with 125,000 shares, of which only 25,000
shares have been issued to date.
On April
29, 2005, pursuant to an option agreement with Richard Trotter, our Chief
Operating Officer, we issued stock options to purchase up to 875,000 shares of
our common stock. The stock options are exercisable for five years from the
vesting date at $0.605 per share. Options to purchase 175,000 shares
vested on April 29, 2005 and expired on April 29, 2010. Additional
options to purchase 175,000 shares vested on each of April 29, 2006, 2007, 2008
and 2009.
In
connection with the private placement during the year ended April 30, 2006, we
granted 1,755,537 common stock purchase warrants to the placement agent,
exercisable for five years at $0.215 per share.
On
September 22, 2006, pursuant to an option agreement with Anthony W. Adler, our
Executive Vice President, we issued stock options to purchase up to 4,000,000
shares of a common stock, exercisable at $0.1914 per share until September 22,
2011.
On
October 23, 2006, pursuant to an option agreement with Jeffrey Bean, one of our
directors, we issued stock options to purchase up to 500,000 shares of common
stock, exercisable at $0.12 per share until October 23, 2011.
In July
2007, we entered into a three month consulting agreement with a consulting firm
pursuant to which we issued five year warrants to purchase 1,000,000 shares of
common stock exercisable at $0.05 per share.
In
September 2007, we issued, pursuant to a consulting agreement, five year
warrants to purchase 400,000 shares of common stock exercisable at $0.05 per
share.
In
October 2007, we entered into a consulting agreement for financial advisory
services with an individual pursuant to which we issued five year warrants to
purchase 375,000 shares of common stock exercisable at $0.05 per
share.
On
January 31, 2008, we issued to a consultant pursuant to a placement agency
agreement five year warrants to purchase 1,632,833 shares of common stock
exercisable at $0.0438 per share.
On May
20, 2008, we entered into a consulting agreement for financial advisory services
with a firm pursuant to which we issued five year warrants to purchase 250,000
shares of common stock exercisable at $0.011 per share.
On
February 27, 2009, we issued to two consultants five year warrants to purchase
an aggregate of 200,000 shares of common stock at $0.05 per share.
On
November 20, 2009, we entered into a consulting agreement for financial advisory
services with a firm pursuant to which we issued three year warrants to purchase
500,000 shares of common stock exercisable at $0.066 per share.
Common
Stock Ownership
The table
below sets forth information regarding the beneficial ownership of our common
stock as of April 30, 2010 by: each of our directors; each of our executive
officers; all of our executive officers and directors as a group; and each
person known by us to be the beneficial owner of more than 5% of our common
stock.
Beneficial
ownership is determined in accordance with the rules of the SEC and includes
voting and investment power. Under SEC rules, a person is deemed to be the
beneficial owner of securities which may be acquired by such person upon the
exercise of options and warrants or the conversion of convertible securities
within 60 days from the date on which beneficial ownership is to be determined.
Each beneficial owner's percentage ownership is determined by dividing the
number of shares beneficially owned by that person by the base number of
outstanding shares, increased to reflect the beneficially-owned shares
underlying options, warrants or other convertible securities included in that
person's holdings, but not those underlying shares held by any other
person.
|
Name
(a)
|
|
Number
of Shares
Beneficially
Owned
|
|
|
Percentage
of Class
Beneficially
Owned
|
|
|
Anthony
L. Havens (1)
|
|
|
30,933,250 |
|
|
|
7.8 |
|
|
Kristian
Srb (2)
|
|
|
33,983,250 |
|
|
|
8.3 |
|
|
Jeffrey
Bean (3)
|
|
|
546,100 |
|
|
|
* |
|
|
Anthony
W. Adler (4)
|
|
|
8,403,333 |
|
|
|
2.1 |
|
|
Richard
P. Trotter (5)
|
|
|
4,158,333 |
|
|
|
1.0 |
|
|
Sandra
L. Ahman
|
|
|
580,865 |
|
|
|
* |
|
|
Glenn
Little (6)
|
|
|
38,710,963 |
|
|
|
9.7 |
|
|
All
current directors and named officers as a group (6 in all)
|
|
|
77,893,431 |
|
|
|
19.3 |
|
|
*
|
Represents
less than 1%
|
|
(a)
|
Unless
indicated otherwise, the address for each person named in the table is c/o
Sparta Commercial Services, Inc., 462 Seventh Ave, 20th Floor, New York,
NY 10018.
|
|
(1)
|
Mr.
Havens' minor son owns approximately 500,000 shares of common stock in a
trust account. Mr. Havens is not the trustee for his son's trust account,
and does not have the sole or shared power to vote or direct the vote of
such shares. Mr. Havens disclaims beneficial ownership of such
shares held in his son's trust
account.
|
|
(2)
|
Includes
62,500 shares of common stock held by Mr. Srb's minor daughter, for which
Mr. Srb may be deemed to have beneficial ownership of such
shares.
|
|
(3)
|
Includes
500,000 vested stock options, exercisable at $0.12 per share until October
23, 2011.
|
|
(4)
|
Includes
4,000,000 vested stock options, exercisable at 0.1914 per share until
September 22, 2011, and 3,333,333 shares held by The Anthony W. Adler
Irrevocable Trust, dated October 1,
2008.
|
|
(5)
|
Includes
125,000 vested shares, of which only 25,000 of such vested shares have
been issued to date, 700,000 vested stock options, exercisable at $0.605
per share and expiring at the rate of 175,000 on each of April 29, 2011,
2012, 2013, and 2014, and 3,333,333 shares held by The Richard and Kay
Trotter Trust Established March 18,
2008.
|
|
(6)
|
His
address is 211 West Wall Street, Midland, Texas
79701.
|
Changes
in Control
We do not
have any arrangements that may result in a change in control.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
During
the fiscal years ended April 30, 2010 and 2009, we received non-interest bearing
demand loans in the aggregate amount of $31,320, of which $17,320 was repaid,
and $136,000, respectively from Kristian Srb, one of our directors. As of April
30, 2010, we owed Mr. Srb $370,000.
On
October 31, 2008, the Company purchased certain loans secured by a portfolio of
all American Motorcycle Leasing Corp's motorcycle leases for a total purchase
price of $100,000. At April 30, 2009 and 2010, included in accounts receivable,
are $10,169 and $169 respectively, due from American Motorcycle Leasing
Corp. From time to time, we have engaged in certain
transactions with American Motorcycle Leasing Corp. A director of the Company
serves on American Motorcycle Leasing Corp.’s board of directors. The
Company’s Chief Executive Officer was formerly a control person of American
Motorcycle Leasing Corp. Certain of our officers, directors, and
employees have worked for American Motorcycle Leasing Corp. and may continue to
do so on a limited basis for the near future, and have had equity interests in
American Motorcycle Leasing Corp. While our business plans differ
from those of American Motorcycle Leasing Corp., we operate in the same industry
as American Motorcycle Leasing Corp. and issues could arise with respect to the
taking of corporate opportunities of each other. Any competition with
American Motorcycle Leasing Corp. could adversely affect our business, operating
results and financial condition. Accordingly, we may be subject to
legal proceedings and claims, including claims of alleged infringement of the
intellectual property, competition, conflict of interest, and other business
governance related claims. Such claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources.
We
believe that the terms of all of the above transactions are commercially
reasonable and no less favorable to us than we could have obtained from an
unaffiliated third party on an arm's length basis. Our policy requires that all
related parties recuse themselves from negotiating and voting on behalf of our
company in connection with related party transactions.
Director
Independence
None of
our directors, other than Kristian Srb and Jeffrey Bean, is deemed an
independent director. For purposes of determining independence, we
are applying the independence standards of the NASDAQ Stock Market
LLC.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit
Fees
Fees for
audit services provided by RBSM LLP, our principal independent registered public
accounting firm, during the fiscal years ended April 30, 2010 and 2009 were
$126,810 and $139,832, respectively. Audit fees consist of the aggregate fees
billed for the audits of our annual financial statements, the reviews of our
quarterly financial statements, and services that are normally provided in
connection with statutory and regulatory filings or engagements for those fiscal
years.
Audit-Related
Fees
Fees for
audit-related services provided by our principal independent registered public
accounting firm during the fiscal years ended April 30, 2010 and 2009 were
$0. Audit-related fees consist of fees billed for assurance and
related services that are reasonably related to the performance of the audit or
review of our financial statements outside of those fees disclosed above under
the caption Audit Fees.
Tax
Fees
Fees for
tax services provided by our principal independent registered public accounting
firm during the fiscal years ended April 30, 2010 and 2009 were $0. Tax fees
consist of fees billed for tax compliance, tax advice, and tax
planning.
All
Other Fees
There
were no other fees billed for services our principal independent registered
public accounting firm for the fiscal years ended April 30, 2010 and
2009.
Pre-Approval
Policies and Procedures
Our Board
of Directors has a policy that requires pre-approval of all audit,
audit-related, tax services, and other services, including non-audit services,
performed by our independent registered public accounting firm. All
services performed by our principal independent registered public accounting
firm, and all fees paid, in our fiscal years ended April 30, 2010 and 2009 were
pre-approved. The Board of Directors is responsible for matters
typically performed by an audit committee. We do not presently have a separate
audit committee of the Board of Directors. The Board of Directors considered
whether, and determined that, the auditor's provision of audit and non-audit
services was compatible with maintaining the auditor's
independence.
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
(a)
|
List
of documents filed as a part of this
report:
|
|
|
(1)
|
Index
to Consolidated Financial
Statements
|
Report of
Registered Independent Certified Public Accounting Firm
Balance
Sheets as of April 30, 2010 and 2009
Statements
of Losses for the years ended April 30, 2010 and 2009
Statement
of Deficiency in Stockholders' Equity for the years ended April 30, 2010 and
2009
Statements
of Cash Flows for the years ended April 30, 2010 and 2009
Notes to
Financial Statements
|
|
(2)
|
Index
to Financial Statement Schedules
|
Not
required.
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
3(i)(1)
|
|
Articles
of Incorporation of Tomahawk Oil and Minerals, Inc. (Incorporated by
reference to Exhibit 3(i) (1) of Form 10-KSB filed on August 13,
2004)
|
|
3(i)(2)
|
|
Certificate
of Amendment of Articles of Incorporation, November 1983 (Incorporated by
reference to Exhibit 3(i) (2) of Form 10-KSB filed on August 13,
2004)
|
|
3(i)(3)
|
|
Certificate
of Amendment of Articles of Incorporation for name change, August 2004
(Incorporated by reference to Exhibit 3(i) of Form 8-K filed on August 27,
2004)
|
|
3(i)(4)
|
|
Certificate
of Amendment of Articles of Incorporation for increase in authorized
capital, September 2004 (Incorporated by reference to Exhibit 3(i) of Form
8-K filed on September 17, 2004)
|
|
3(i)(5)
|
|
Certificate
of Amendment of Articles of Incorporation for decrease in authorized
capital, December 2004 (Incorporated by reference to Exhibit 3(i) of Form
8-K filed on December 23, 2004)
|
|
3(i)(6)
|
|
Certificate
of Designation for Series A Redeemable Preferred Stock, December 2004
(Incorporated by reference to Exhibit 3(i) of Form 8-K filed on January 4,
2005)
|
|
3(i)(7)
|
|
Certificate
of Designation for Series B Preferred Stock (Incorporated by reference to
Exhibit B to Preferred Stock Purchase Agreement, dated as of July 29, 2009
(see Exhibit 10.21 below)
|
|
3(i)(8)
|
|
Certificate
of Amendment of Articles of Incorporation for increase in authorized
capital, September 21, 2009 (Incorporated by reference to Exhibit 3(i)(8)
of Form S-1 filed on October 2, 2009)
|
|
3(i)(9)
|
|
Certificate
of Designations of Series C Convertible Preferred Stock (Incorporated by
reference to Exhibit 5.03(i) of Form 8-K filed on November 19,
2009)
|
|
3(ii)(1)
|
|
By-laws
(Incorporated by reference to Exhibit 3(ii) (1) of Form 10-KSB filed on
August 13, 2004)
|
|
3(ii)(2)
|
|
By-laws
Resolution (Incorporated by reference to Exhibit 3(ii) (2) of Form 10-KSB
filed on August 13, 2004)
|
|
3(ii)(3)
|
|
Board
of Directors Resolutions amending By-laws (Incorporated by reference to
Exhibit 3(ii) of Form 10-QSB filed on December 15,
2004)
|
|
10.1
|
|
Service
Agreement with American Motorcycle Leasing Corp. (Incorporated by
reference to Exhibit 10.1 of Form 10KSB filed on August 13,
2004)
|
|
10.2
|
|
License
Agreement with American Motorcycle Leasing Corp. (Incorporated by
reference to Exhibit 10.1 of Form 10KSB filed on August 13,
2004)
|
|
10.3
|
|
Amended
License Agreement with American Motorcycle Leasing Corp. (Incorporated by
reference to Exhibit 10.1 of Form 10KSB filed on August 13,
2004)
|
|
10.4
|
|
Lease
for office facilities (Incorporated by reference to Exhibit 10 of Form
10-QSB filed on December 15, 2004)
|
|
10.5+
|
|
Form
of Employment Agreement with Anthony Havens (Incorporated by reference to
Exhibit 10.4 of Form 10-KSB filed on August 13, 2004)
|
|
10.6+
|
|
Employment
Agreement with Richard Trotter (Incorporated by reference to Exhibit 10 of
Form 8-K filed on October 29, 2004)
|
|
10.7+
|
|
Option
Agreement with Richard Trotter (Incorporated by reference to Exhibit 10.1
of Form 8-K filed on May 5, 2005)
|
|
10.8+
|
|
Employment
Agreement with Anthony W. Adler (Incorporated by reference to Exhibit 10.1
of Form 8-K filed on October 2, 2006)
|
|
10.9+
|
|
Stock
Option Agreement with Jeffrey Bean, dated October 23, 2006 (Incorporated
by reference to Exhibit 10.1 of Form 8-K filed on October 24,
2006)
|
|
10.10+
|
|
2005
Stock Incentive Compensation Plan (Incorporated by reference to Exhibit 4
of Form 10-KSB filed on August 13, 2004)
|
|
10.11
|
|
2009
Consultant Stock Plan (Incorporated by reference to Exhibit 99.1 of Form
S-8 filed on May 12, 2009)
|
|
10.12
|
|
Master
Loan and Security Agreement - Motor Vehicles (Incorporated by reference to
Exhibit 10.1 of Form 8-K filed on July 28,
2005)
|
|
10.13
|
|
Master
Loan and Security Agreement (Installment Sale Contract) (Incorporated by
reference to Exhibit 10.2 of Form 8-K filed on July 28,
2005
|
|
10.14
|
|
Form
of Loan Agreement, December 2005 (Incorporated by reference to Exhibit
10.1 of Form 10-QSB filed on March 22, 2006)
|
|
10.15
|
|
Form
of Promissory Note (Incorporated by reference to Exhibit 10.3 of Form
10-QSB filed on December 18, 2006)
|
|
10.16
|
|
Form
of Promissory Note (Incorporated by reference to Exhibit 10.4 of Form
10-QSB filed on December 18, 2006)
|
|
10.17
|
|
Form
of Convertible Debenture (Incorporated by reference to Exhibit 10.1 of
Form 10-QSB filed on December 21, 2007)
|
|
10.18
|
|
Revolving
Credit Agreement dated December 19, 2008 (Incorporated by reference to
Exhibit 10.1 of Form 8-K filed on March 23, 2009)
|
|
10.19
|
|
Preferred
Stock Purchase Agreement, dated as of July 29, 2009, by and among Sparta
Commercial Services, Inc. and Optimus Capital Partners, LLC (Incorporated
by reference to Exhibit 10.1 of Form 8-K filed on July 30,
2009)
|
|
11
|
|
Statement
re: computation of per share earnings is hereby incorporated by reference
to Part II, Item 8 of this report
|
|
31.1*
|
|
Certification
of Chief Executive Officer pursuant to Securities Exchange Act Rule
13a-14(a)/15d-14(a)
|
|
31.2*
|
|
Certification
of Principal Financial Officer pursuant to Securities Exchange Act Rule
13a-14(a)/15d-14(a)
|
|
32.1*
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section
1350
|
|
32.2*
|
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section
1350
|
___
* Filed
herewith.
+
Represents executive compensation plan or agreement
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
| |
SPARTA
COMMERCIAL SERVICES, INC. |
|
| |
|
|
|
|
|
By:
|
/s/ Anthony
L. Havens |
|
| |
|
Anthony
L. Havens |
|
| |
|
Chief
Executive Officer |
|
| |
|
|
|
| |
Date: August
13, 2010
|
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
| |
Company Name |
|
| |
|
|
|
|
|
By:
|
/s/ Anthony
L. Havens |
|
| |
|
Anthony
L. Havens |
|
| |
|
Chief
Executive Officer, President |
|
| |
|
and
Chairman of the Board |
|
| |
|
|
|
| |
Date: August
13, 2010 |
|
| |
|
|
|
|
|
By: |
/s/ Anthony W. Adler |
|
| |
|
Anthony
W. Adler |
|
| |
|
Executive
Vice President, and |
|
| |
|
Interim
Principal Financial Officer |
|
| |
|
|
|
| |
Date: August
13, 2010 |
|
| |
|
|
|
| |
By: |
/s/
Sandra L. Ahman |
|
| |
|
Sandra
L. Ahman |
|
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Vice
President and Director |
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Date: August
13, 2010 |
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By: |
/s/
Kristian Srb |
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Kristian
Srb |
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Director |
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Date: August
13, 2010 |
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By: |
/s/
Jeffrey Bean |
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Jeffrey
Bean |
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Director |
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Date: August
13, 2010 |
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