UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
Commission File Number 0-29057
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________TO __________________
AMERICAN RACING CAPITAL, INC.
(Exact name of registrant as specified in charter)
NEVADA 87-0631750
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
920 Bollen Circle
Gardnerville, NV 89460 89448
(Address of principal executive offices) (Zip)
Issuer's telephone number, including area code (800) 914-3177
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the past twelve
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |_| No |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to
be filed by Sections 12, 13 or 15(d)of the Exchange Act subsequent to the
distribution of securities under a plan confirmed by a court. |_| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: AS OF OCTOBER 4, 2006 -
27,791,398 SHARES OF THE ISSUER'S COMMON STOCK, $0.001 PAR VALUE PER SHARE.
----------
Transitional Small Business Disclosure Format: Yes |_] No |X|
PART I
FINANCIAL INFORMATION
INTRODUCTORY NOTE
FORWARD-LOOKING STATEMENTS
This Form 10-QSB contains "forward-looking statements" relating to
American Racing Capital, Inc. ("ARC" or the "Company") which represent ARC's
current expectations or beliefs including, but not limited to, statements
concerning ARC's operations, performance, financial condition and growth. For
this purpose, any statements contained in this Form 10-QSB that are not
statements of historical fact are forward-looking statements. Without limiting
the generality of the foregoing, words such as "may", "anticipation", "intend",
"could", "estimate", or "continue" or the negative or other comparable
terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, such as
losses, dependence on management, variability of quarterly results, and the
ability of ARC to continue its growth strategy, certain of which are beyond
ARC's control. Should one or more of these risks or uncertainties materialize or
should the underlying assumptions prove incorrect, actual outcomes and results
could differ materially from those indicated in the forward-looking statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time and it is not
possible for management to predict all of such factors, nor can it assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
1
ITEM 1. FINANCIAL STATEMENTS
AMERICAN RACING CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2006
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 380,181
Deposits 202,000
-----------
Total Current Assets 582,181
===========
PROPERTY AND EQUIPMENT, net --
-----------
TOTAL ASSETS $ 582,181
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - related parties $ 56,664
Notes payable 26,000
Accounts payable and accrued expenses 59,212
-----------
Total Current Liabilities 141,876
-----------
CONVERTIBLE NOTES PAYABLE, net 69,444
-----------
TOTAL LIABILITIES 211,320
-----------
STOCKHOLDERS' EQUITY
Preferred stock 10,000,000 shares authorized at
$0.001 par value; 2,000,000 shares issued and outstanding 2,000
Common stock 500,000,000 shares authorized at
$0.001 par value; 27,791,398 shares issued and outstanding 27,791
Additional paid in capital 6,721,221
Accumulated deficit (6,380,151)
-----------
Total Stockholders' Equity 370,861
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 582,181
===========
The accompanying notes are an integral part of these financial statements.
2
AMERICAN RACING CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(Unaudited)
September 30, September 30,
2006 2005
------------- -------------
SALES $ 5,375 $ 24,647
COST OF SALES -- --
----------- --------
Gross Profit 5,375 24,647
----------- --------
EXPENSES
Consulting and professional fees 5,997,869 25,000
Administrative 86,779 35,317
----------- --------
TOTAL EXPENSES 6,084,648 60,317
----------- --------
Loss from operations (6,079,273) (35,670)
OTHER INCOME (EXPENSE)
Interest expense (81,944) --
Other income -- --
----------- --------
TOTAL OTHER (EXPENSE) (81,944) --
----------- --------
Loss - before provision for income taxes (6,161,217) (35,670)
----------- --------
Provision for income taxes -- --
----------- --------
Net loss $(6,161,217) $(35,670)
=========== ========
NET LOSS PER COMMON SHARE
Basic and diluted $ (0.38) $ (0.00)
----------- --------
WEIGHTED AVERAGE OUTSTANDING SHARES
Basic and diluted 16,391,398 491,398
----------- --------
The accompanying notes are an integral part of these financial statements.
3
AMERICAN RACING CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(Unaudited)
September 30, September 30,
2006 2005
------------- -------------
SALES $ 21,622 $ 71,028
COST OF SALES -- --
----------- --------
Gross Profit 21,622 71,028
----------- --------
EXPENSES
Consulting and professional fees 5,999,632 52,333
Administrative 144,757 63,839
----------- --------
TOTAL EXPENSES 6,144,389 116,172
----------- --------
Loss from operations (6,122,767) (45,144)
OTHER INCOME (EXPENSE)
Interest expense (81,944) --
Other income -- --
----------- --------
TOTAL OTHER INCOME (EXPENSE) (81,944) --
----------- --------
----------- --------
Loss - before provision for income taxes (6,204,711) (45,144)
----------- --------
Provision for income taxes -- --
----------- --------
Net loss $(6,204,711) $(45,144)
=========== ========
NET LOSS PER COMMON SHARE
Basic and diluted $ (0.49) $ (0.09)
----------- --------
WEIGHTED AVERAGE OUTSTANDING SHARES
Basic and diluted 12,591,398 491,398
----------- --------
The accompanying notes are an integral part of these financial statements.
4
AMERICAN RACING CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(Unaudited)
September 30, September 30,
2006 2005
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(6,204,711) $(45,144)
Adjustments to reconcile net loss to net cash
provided by operating activities Depreciation 788 2,274
Amortization of discount on convertible debt 69,444
Common stock and warrants issued for services 5,688,081
Changes in operating assets and liabilities -- --
Deposits (202,000) --
Accounts payable 57,500 43,966
----------- --------
Net cash used in operating activities (590,898) 1,096
----------- --------
CASH FLOWS FROM INVESTING ACTIVITIES -- --
----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible debt 975,300 --
Payments on notes payable (1,500) --
Proceeds from notes payable-related parties 750 7,000
Proceeds from notes payable 1,000 1,500
Payments on notes payable-related parties (4,850) --
----------- --------
Net cash provided by financing activities 970,700 8,500
----------- --------
Net Increase (Decrease) in Cash 379,802 9,596
Cash at Beginning of Period 379 551
----------- --------
Cash at End of Period $ 380,181 $ 10,147
=========== ========
Supplemental disclosure of cash flow information
Common stock issued for accrued expenses $ 84,489 $ --
Cash paid for interest $ -- $ --
----------- --------
Cash paid for income taxes $ -- $ --
----------- --------
The accompanying notes are an integral part of these financial statements.
5
AMERICAN RACING CAPITAL, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Securities and Exchange Commission requirements for
interim financial statements. Therefore, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. The financial statements
should be read in conjunction with the Form 10-KSB for the year ended December
31, 2005 of American Racing Capital, Inc. and subsidiaries (the "Company" or
"ARC").
The interim financial statements present the condensed balance sheet, statements
of operations and cash flows of the Company. The financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States.
The interim financial information is unaudited. In the opinion of management,
all adjustments necessary to present fairly the financial position of the
Company as of September 30, 2006 and the results of operations and cash flows
presented herein have been included in the financial statements. Interim results
are not necessarily indicative of results of operations for the full year.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. GOING CONCERN
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The Company has generated significant losses from operations.
In order to continue as a going concern and achieve a profitable level of
operations, the Company will need, among other things, additional capital
resources and developing a consistent source of revenues. Management's plans
include raising additional operating funds from private placements of shares of
its common stock.
The ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the plan described in the preceding paragraph
and eventually attain profitable operations. The accompanying financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Employee stock based compensation - In December 2004, the Financial Accounting
Standards Board issued SFAS No. 153, "Accounting for Stock-Based Compensation".
SFAS No. 153 amends the transition and disclosure provisions of SFAS No. 123.
This statement supersedes APB Opinion No.25, Accounting for Stock Issued to
employees, and its related implementation guidance. This Statement establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. This Statement requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award--the
requisite service period (usually the vesting period). For stock options and
warrants issued to non-employees, the Company applies Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation,
which requires the recognition of compensation cost based upon the fair value of
stock options at the grant date using the Black-Scholes Option Pricing Model.
The Company issued no stock and granted no warrants or options to employees for
compensation for the nine months ended September 30, 2006.
6
4. RELATED PARTY TRANSACTIONS
Accounts payable - related parties - As of September 30, 2006, the Company had
notes payable totaling $56,664 to affiliate entities for funds advanced.
5. SIGNIFICANT EVENTS
On August 25, 2005, the Company filed a Certificate of Amendment to the Articles
of Incorporation of the Company with the Secretary of State of the State of
Nevada to increase the authorized number of shares of capital from 50,000,000 to
500,000,000. On October 3, 2005, the Company filed a Certificate of Amendment to
the Articles of Incorporation of the Company with the Secretary of State of the
State of Nevada to change the corporate name from 'Creative Holdings & Marketing
Corporation' to 'American Racing Capital, Inc.'
The Company entered into a Share Exchange Agreement, dated October 17, 2005, by
and among the Company, American Racing Capital, Inc., a Nevada corporation
("ARCI") and the shareholders of ARCI (the "ARCI Shareholders"). Pursuant the
Share Exchange Agreement, the ARCI Shareholders exchanged with, and delivered to
the Company all of the issued and outstanding common stock of ARCI in exchange
for 150,000,000 shares of the Company's common stock, par value $0.001 (the
"Common Stock") and 1,000,000 shares of Series A Convertible Preferred Stock,
par value $0.001 per share (the "Series A Preferred Stock"). The 1,000,000
shares of Series A Preferred Stock can be converted at any time into three
hundred (300) fully paid, nonassessable shares of the Company's Common Stock. As
a result of the Share Exchange Agreement, on October 19, 2005, ARCI became a
wholly-owned subsidiary of the Company.
On October 18, 2005, the Company entered into a Share Exchange Agreement, by and
among the Company, ARC Development Corporation, a Nevada corporation ("ARCD")
and the shareholders of ARCD (the "ARCD Shareholders"). Pursuant to the Share
Exchange Agreement, the ARCD Shareholders exchanged with, and delivered to, ARC
the issued and outstanding Common Stock of ARCD in exchange for 235,000,000
shares of the Company's Common Stock, and 1,000,000 shares of Series A Preferred
Stock, which can be converted at any time into three hundred (300) fully paid,
nonassessable shares of the Company's Common Stock. As a result of the Share
Exchange Agreement, on October 19, 2005, ARCD became a wholly-owned subsidiary
of the Company.
On November 18, 2005, the Company's Board of Directors appointed D. Davy Jones
as President and Chief Executive Officer and Director and Robert Koveleski as
Secretary and Director. On November 18, 2005, John W. Gandy resigned as
President and Chief Executive Officer and Director of the Company. Also on
November 18, 2005, Ron E. Hendrix resigned as Secretary and Director and John F.
Smith, III resigned as Director of the Company.
On March 20, 2006, the Board of Directors of the Company, in lieu of a special
meeting and pursuant to unanimous written consent, approved a one for one
hundred (1-for-100) reverse stock split (the "Reverse Stock Split") of the
Company's issued and outstanding, which became effective on March 30, 2006 (the
"Effective Date"). On the Effective Date, the Company's issued and outstanding
Common Stock was reduced based on the 1-for-100 ratio and the new symbol for the
Company was changed to 'ANRC'.
On July 24, 2006, the Company and LJ&J Enterprises of Tennessee, Inc. ("LJ&J")
entered into an agreement whereby the parties agreed to enter into a stock
acquisition of eighty-percent of LJ&J's common stock. As of September 30, 2006,
the parties have not closed the transaction, but contemplate to do so by the end
of fiscal year 2006.
For additional significant events which occurred after September 30, 2006,
please refer to NOTE 8. SUBSEQUENT EVENTS.
6. FUNDING
On July 25, 2006, the Company entered into a Securities Purchase Agreement with
New Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd. and AJW Partners, LLC (collectively, the "Investors"). Under the
terms of the Securities Purchase Agreement, the Investors purchased an aggregate
of (i) $2,000,000 in callable convertible secured notes (the "Notes") and (ii)
warrants to purchase 10,000,000 shares of the Company's Common Stock (the
"Warrants"). The Notes carry an interest rate of 6% per annum and a maturity
date of July 25, 2009. Subject to the Securities Purchase Agreement, the Company
filed a registration statement (the "Registration Statement") with the U.S.
Securities and Exchange Commission on September 11, 2006. The Company registered
20,576,133 shares of common stock underlying the Notes. The Company did not
register any shares in connection with the Warrants as the Warrants were not
subject to registration rights. The Notes are convertible into the Company's
Common Stock at the Applicable Percentage of the average of the lowest three (3)
trading prices for our shares of Common Stock during the twenty (20) trading day
period prior to conversion. The "Applicable Percentage" means 50%; provided,
however, that the Applicable Percentage shall be increased to (i) 55% in the
event that a registration statement is filed within thirty days of the closing
and (ii) 60% in the event that the registration statement becomes effective
within one hundred and twenty days from the Closing. In addition, the Company
has granted the Investors a security interest in substantially all of its
assets, as well as intellectual property and registration rights. In connection
with the Securities Purchase Agreement, the Company issued to the Investors
seven year warrants to purchase 10,000,000 shares of the Company's Common Stock
at an exercise price of $0.30. The Company recorded an expense of $72,571 for
the issuance of the warrants. The beneficial conversion feature attached to the
convertible debt results in a discount of $1,000,000 which is being amortized
over the 36 month term of the debt. The Company recorded amortization expense of
$69,444 during the period ended September 30, 2006.
7
The Company received an initial funding of $700,000 in gross proceeds (which
accounted for $640,000 in net proceeds) on July 26, 2006. The following
Investors invested these amounts: AJW Capital Partners, LLC invested $67,900;
AJW Offshore, Ltd. invested $413,000; AJW Qualified Partners, LLC invested
$210,000; and New Millennium Capital Partners II, LLC invested $9,100.
The Company received the second tranche of funding on September 12, 2006, after
the filing of the Registration Statement, via the purchase of Notes in the
aggregate amount of $600,000 by the Investors.
7. COMMON STOCK
During the nine months ended September 30, 2006, the Company issued a total of
21,200,000 shares of restricted common to various entities as compensation for
consulting services. All the shares issued were valued at market prices on the
date of issuance.
8. SUBSEQUENT EVENTS
On October 27, 2006, the Company and D. Davy Jones ("Jones") entered into a
Settlement Agreement with General Release (the "Settlement Agreement"), whereby
the parties agreed to terminate that certain Employment Agreement with Jones.
Pursuant to the Settlement Agreement, the Company shall pay Jones the sum of
$240,000.00 as follows: (i) an initial lump sum payment of $20,000, which was
paid upon execution of the Settlement Agreement; and (ii) the remainder of the
Settlement Sum, in monthly increments of $10,000.00 during a period of
twenty-two months to commence on November 15, 2006, and otherwise in accordance
with the current normal payroll practices of ARC. The parties also agreed, inter
alia, that the Company shall transfer to Jones 100 shares of common stock of
FastOne, Inc. (the "FastOne Common Stock"), a Nevada corporation and
wholly-owned subsidiary of the Company, and 100 shares of common stock of Davy
Jones Motorsports, Inc. (the "DJM Common Stock"), a Nevada corporation and
wholly-owned subsidiary of the Company, to Jones in exchange of 1,500,000 shares
of common stock (which represent the number of shares adjusted post-stock split
effectuated by ARC in March 2006), par value $0.001 per share, of ARC (the "ARC
Common Stock"), and One Million (1,000,000) shares of Series A Convertible
Preferred Stock, par value $0.001 per share (the "ARC Preferred Stock"). Upon
the execution of the Settlement Agreement and the transfer of the shares
described above, the Company shall have no rights to, interests and liabilities
in the FastOne Common Stock and the DJM Common Stock, and Jones shall have no
rights to, interests and liabilities in the ARC Common Stock and the ARC
Preferred Stock.
8
Item 2. Management's Discussion and Analysis Or Plan Of Operation
Forward-Looking Statements and Associated Risks. This Report contains
forward-looking statements. Such forward-looking statements include statements
regarding, among other things, (a)) our growth strategies, (b) anticipated
trends in our industry, (c) our future financing plans, (d) our anticipated
needs for working capital, (e) our lack of operational experience, and (f) the
benefits related to ownership of our common stock. Forward-looking statements,
which involve assumptions and describe our future plans, strategies, and
expectations, are generally identifiable by use of the words "may," "should,"
"expect," "anticipate," "estimate," "believe," "intend," or "project" or the
negative of these words or other variations on these words or comparable
terminology. These forward-looking statements are based largely on the Company's
expectations and are subject to a number of risks and uncertainties, including
those described in "Business Risk Factors" of the Company's Form 10-KSB for the
year ended December 31, 2005. Actual results could differ materially from these
forward-looking statements as a result of changes in trends in the economy and
the industry, demand for the Company's services,, competition, reductions in the
availability of financing and availability of raw materials, and other factors.
In light of these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this Report will in fact occur as
projected. Any forward-looking statement speaks only as of the date on which
such statement is made, and the Company undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time and it is not
possible for management to predict all of such factors, nor can it assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
Overview
On October 17, 2005, American Racing Capital, Inc. (the "Company") entered
into a Share Exchange Agreement, by and among the Company, American Racing
Capital, Inc., a Nevada company ("ARCI") and the shareholders of ARCI, pursuant
to which, the ARCI Shareholders exchanged with, and delivered to the Company all
of the issued and outstanding common stock of ARCI in exchange for 150,000,000
shares of the Company's Common Stock and 1,000,000 shares of Series A Preferred
Stock, which can be converted at any time into three hundred (300) fully paid,
nonassessable shares of the Company's Common Stock. On October 18, 2005, the
Company entered into a Share Exchange Agreement, by and among the Company, ARC
Development Corporation, a Nevada corporation ("ARCD") and the shareholders of
ARCD. Pursuant to the Share Exchange Agreement, the ARCD Shareholders exchanged
with, and delivered to, ARC the issued and outstanding common stock of ARCD in
exchange for 235,000,000 shares of the Company's Common Stock, and 1,000,000
shares of Series A Preferred Stock, which can be converted at any time into
three hundred (300) fully paid, nonassessable shares of the Company's Common
Stock. As a result of these share exchange transactions, ARCI and ARCD became
wholly-owned subsidiaries of the Company. The Company then adopted a new
strategy focused on the integration of race track design and development
operations with a professional racing team and a national driving school network
to leverage the popularity and growth of the motor sports industry.
On March 20, 2006, the Board of Directors of the Company, in lieu of a
special meeting and pursuant to unanimous written consent, approved a one for
one hundred (1-for-100) reverse stock split (the "Reverse Stock Split") of the
Company's issued and outstanding, which became effective on March 30, 2006 (the
"Effective Date"). On the Effective Date, the Company's issued and outstanding
Common Stock was reduced based on the 1-for-100 ratio and the new symbol for the
Company was changed to 'ANRC'.
On July 24, 2006, the Company and LJ&J Enterprises of Tennessee, Inc.
("LJ&J") entered into an agreement whereby the parties agreed to enter into a
stock acquisition of eighty-percent of LJ&J's common stock. As of September 30,
2006, the parties have not closed the transaction, but contemplate to do so by
the end of fiscal year 2006.
On October 27, 2006, the Company and D. Davy Jones ("Jones") entered into
a Settlement Agreement with General Release (the "Settlement Agreement"),
whereby the parties agreed to terminate the Employment Agreement with Jones.
Pursuant to the Settlement Agreement, the Company shall pay Jones the sum of
$240,000.00 (the "Settlement Sum") as follows: (i) an initial lump sum payment
of $20,000, which was paid upon execution of the Settlement Agreement; and (ii),
the remainder of the Settlement Sum, in monthly increments of $10,000.00 during
a period of twenty-two months to commence on November 15, 2006, and otherwise in
accordance with the current normal payroll practices of ARC. The parties also
agreed, inter alia, that the Company shall transfer to Jones 100 shares of
common stock of FastOne, Inc. (the "FastOne Common Stock"), a Nevada corporation
and wholly-owned subsidiary of the Company, and 100 shares of common stock of
Davy Jones Motorsports, Inc. (the "DJM Common Stock"), a Nevada corporation and
wholly-owned subsidiary of the Company, to Jones in exchange of 1,500,000 shares
of common stock (which represent the number of shares adjusted post-stock split
effectuated by ARC in March 2006), par value $0.001 per share, of ARC (the "ARC
Common Stock"), and One Million (1,000,000) shares of Series A Convertible
Preferred Stock, par value $0.001 per share (the "ARC Preferred Stock"). Upon
the execution of the Settlement Agreement and the transfer of the shares
described above, the Company shall have no rights to, interests and liabilities
in the FastOne Common Stock and the DJM Common Stock, and Jones shall have no
rights to, interests and liabilities in the ARC Common Stock and the ARC
Preferred Stock.
9
Critical Accounting Policies And Estimates
Management's discussion and analysis of the Company's financial condition
and results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires that we make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses. At each
balance sheet date, management evaluates its estimates. The Company based its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. The estimates
and critical accounting policies that are most important in fully understanding
and evaluating our financial condition and results of operations include those
listed below.
Revenue Recognition
The Company recognizes revenue when services have been provided and
collection is reasonably assured.
Principles Of Consolidation
On October 17, 2005, the Company entered into a Share Exchange Agreement,
by and among the Company, ARCI and the shareholders of ARCI, pursuant to which,
the ARCI Shareholders exchanged with, and delivered to the Company all of the
issued and outstanding common stock of ARCI in exchange for 150,000,000 shares
of the Company's Common Stock and 1,000,000 shares of Series A Preferred Stock,
which can be converted at any time into three hundred (300) fully paid,
nonassessable shares of the Company's Common Stock. As a result of the Share
Exchange Agreement, on October 19, 2005, ARCI became a wholly-owned subsidiary
of the Company. The shareholders of Fast One, Inc., DJ Motorsports, Inc. and
ARCI became the controlling shareholders of the Company. Accordingly, the
financial statements of Fast One, Inc., DJ Motorsports, Inc. and ARCI are
presented as the historical financial statements of the Company. The
consolidated financial statements shown in this report include the historical
operating information of the Fast One, Inc., DJ Motorsports, Inc. and ARCI.
All intercompany transactions have been eliminated.
Results Of Operations
For The Three Months Ended September 30, 2006 Compared To The Three Months
Period Ended September 30, 2005
Revenues. Revenue for the three months ended September 30, 2006, was
$5,375, a decrease of $ 19,272, from $24,647 in revenues for the same period
ended September 30, 2005. The decrease of 78% in revenues in 2006 was
attributable to management spending most of its efforts on acquisitions rather
than consulting.
Operating expenses. Operating expenses for the three months ended
September 30, 2006 were $6,084,648, as compared to $60,317, for the three months
ended September 30, 2005, or a 1008% increase. Operating expenses in 2006
consisted of $5,997,869 in consulting and professional fees paid in connection
with acquisitions being considered and arranging financing for these
acquisitions and $86,779 in general and administrative expenses.
Net loss. The Company had a net loss of $6,161,217 for the three months
ended September 30, 2006, as compared to a net loss of $35,670 for the three
months ended September 30, 2005. The increased loss of $6,125,547 was mostly
attributable to the value of the shares of common stock and warrants issued to
consultants valued at $5,615,510 and cash paid to the consultants of $230,000.
10
For The Nine Months Ended September 30, 2006, Compared To The Nine Months
Ended September 30, 2005
Revenues
Revenue for the nine months ended September 30, 2006, was $21,622, a
decrease of $49,406, from $71,028 in revenues for the same period ended
September 30, 2005. The decrease of 70% in revenues in 2006 was attributable to
management spending most of its efforts on fund raising rather than consulting.
Operating expenses. Operating expenses for the nine months ended September
30, 2006, were $6,122,767, as compared to $116,172, for the nine months ended
September 30, 2005, or a 5,270% increase. Operating expenses in 2006 consisted
of $5,999,632 in consulting and professional fees paid in connection with
acquisitions being considered and arranging financing for those acquisitions and
$144,757 in general and administrative expenses.
Net loss. The Company had a net loss of $6,204,711 for the nine months
ended September 30, 2006, as compared to a net loss of $45,144 for the nine
months ended September 30, 2005. The increased loss of $6,159,567 was mostly
attributable to the value of the shares of common stock and warrants issued to
consultants valued at $5,615,510 and cash paid to the consultants of $230,000.
Liquidity And Capital Resources
Our financial statements have been prepared on a going concern basis that
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. We have incurred losses since
inception. We incurred a net loss of $6,204,711 and a net loss of $45,144 for
the nine months ended September 30, 2006 and 2005, respectively, and have an
accumulated deficit of $6,380,151 at September 30, 2006. As of September 30,
2006, we had current assets of $582,181 and current liabilities of $141,876
resulting in positive working capital of $440,305. As of September 30, 2006, the
Company has approximately $380,181 in cash and cash equivalents. On July 24,
2006, the Company paid $200,000, as partial payment of a purchase price in
connection with an acquisition of ownership interest in LJ&J Enterprises of
Tennessee, Inc.
Included in our liabilities are $59,212 of accounts payable and accrued
expenses. Notes payable to related parties of $56,664 are also included in our
liabilities.
For the nine months ended September 30, 2006, the Company used net cash in
its operations of $590,898, no cash was used in investing activities and
$970,700 in cash was provided by financing activities of which $975,300 came in
the net proceeds of convertible notes payable.
In the third quarter of 2006, the Company secured funding through the
issuance of notes and warrants. On July 25, 2006, the Company entered into a
Securities Purchase Agreement with New Millennium Capital Partners II, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC (collectively,
the "Investors"). Under the terms of the Securities Purchase Agreement, the
Investors purchased an aggregate of (i) $2,000,000 in callable convertible
secured notes (the "Notes") and (ii) warrants to purchase 10,000,0000 shares of
our common stock (the "Warrants"). The Notes carry an interest rate of 6% per
annum and a maturity date of July 25, 2009. The notes are convertible into the
Company's common shares at fifty percent (50%) (the "Applicable Percentage") of
the average of the lowest three (3) trading prices for our shares of common
stock during the twenty (20) trading day period prior to conversion. However,
the Applicable Percentage shall be increased to (i) 55% in the event that a
Registration Statement is filed within thirty days of the closing and (ii) 60%
in the event that the Registration Statement becomes effective within one
hundred and twenty days from the Closing. In addition, the Company has granted
the Investors a security interest in substantially all of its assets and
intellectual property as well as registration rights. In connection with the
Securities Purchase Agreement, the Company issued to the Investors seven year
warrants to purchase 10,000,000 shares of our common stock at an exercise price
of $0.30. The Company received an initial funding of $700,000 in gross proceeds
(which accounted for $640,000 in net proceeds) on July 26, 2006. The following
Investors invested these amounts: AJW Capital Partners, LLC invested $67,900;
AJW Offshore, Ltd. invested $413,000; AJW Qualified Partners, LLC invested
$210,000; and New Millennium Capital Partners II, LLC invested $9,100. The
Company received the second tranche of funding on September 12, 2006, after the
filing of the Registration Statement, via the purchase of Notes in the aggregate
amount of $600,000 by the Investors.
11
Plan Of Operation
The Company's plan of operations which seeks to integrate race track
design and development operations with a professional racing team and a national
driving school network to leverage the popularity and growth of the motor sports
industry.
For the next 12 months, the Company anticipates that it will need
$2,500,000 to fund event and administrative operations and provide working
capital, in addition to funding necessary to acquire and develop race track
projects. The Company will seek debt financing to launch any new race track
projects and will seek equity funding or a combination of debt/equity financing
for operations.
ITEM 3. CONTROLS AND PROCEDURES
(A) Evaluation Of Disclosure Controls And Procedures
As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's Interim Principal Executive Officer/Interim Principal Accounting
Officer (one person) of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. The Company's disclosure controls
and procedures are designed to provide a reasonable level of assurance of
achieving the Company's disclosure control objectives. The Company's Interim
Principal Executive Officer/Interim Principal Accounting Officer have concluded
that the Company's disclosure controls and procedures are, in fact, adequate and
effective to ensure that material information relating to the Company that is
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in Commission rules
and accumulated and communicated to the Company's management, including its
Interim Principal Executive Officer/Interim Principal Accounting Officer, to
allow timely decisions regarding required disclosure
(B) Changes In Internal Controls Over Financial Reporting
In connection with the evaluation of the Company's internal controls
during the Company's fiscal quarter ended September 30, 2006, the Company's
Interim Principal Executive Officer/Interim Principal Accounting Officer have
determined that there are no changes to the Company's internal controls over
financial reporting that has materially affected, or is reasonably likely to
materially effect, the Company's internal controls over financial reporting.
12
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the nine months ended September 30, 2006, the Company issued a
total of 21,200,000 shares of restricted common to various entities as
compensation for consulting services. All the shares issued were valued at
market prices on the date of issuance.
On July 25, 2006, the Company entered into a Securities Purchase Agreement
with the Investors. Under the terms of the Securities Purchase Agreement, the
Investors purchased an aggregate of (i) $2,000,000 in Notes and (ii) 10,000,0000
Warrants. The Notes carry an interest rate of 6% per annum and a maturity date
of July 25, 2009. The notes are convertible into the Company's common shares at
the Applicable Percentage of the average of the lowest three (3) trading prices
for our shares of common stock during the twenty (20) trading day period prior
to conversion. However, the Applicable Percentage shall be increased to (i) 55%
in the event that a Registration Statement is filed within thirty days of the
closing and (ii) 60% in the event that the Registration Statement becomes
effective within one hundred and twenty days from the Closing. In addition, the
Company has granted the Investors a security interest in substantially all of
its assets and intellectual property as well as registration rights. In
connection with the Securities Purchase Agreement, the Company issued to the
Investors seven year warrants to purchase 10,000,000 shares of our common stock
at an exercise price of $0.30. The Company received an initial funding of
$700,000 in gross proceeds (which accounted for $640,000 in net proceeds) on
July 26, 2006. The following Investors invested these amounts: AJW Capital
Partners, LLC invested $67,900; AJW Offshore, Ltd. invested $413,000; AJW
Qualified Partners, LLC invested $210,000; and New Millennium Capital Partners
II, LLC invested $9,100. The Company received the second tranche of funding on
September 12, 2006, after the filing of the Registration Statement, via the
purchase of Notes in the aggregate amount of $600,000 by the Investors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO BE A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number Title of Document Location
-------------- ------------------------------------ ------------------------
3.2 Certificate of Designation of the Incorporated by
Series A Convertible Preferred Stock reference as Exhibit 3.2
of American Racing Capital, Inc. to Form 8-K filed on
December 5, 2005
10.1 Share Exchange Agreement, dated Incorporated by
October 17, 2005, by and among the reference as Exhibit
Company, American Racing Capital, 99.1 to Form 8-K filed
Inc., and the shareholders of on October 17, 2005
American Racing Capital, Inc.
13
Exhibit Number Title of Document Location
-------------- ------------------------------------ ------------------------
10.2 Share Exchange Agreement, dated Incorporated by
October 18, 2005, by and among the reference as Exhibit
Company, ARC Development 99.1 to Form 8-K filed
Corporation, and the shareholders of on October 19, 2005
ARC Development Corporation
10.3 Securities Purchase Agreement dated Incorporated by
July 25, 2006, by and among the reference as Exhibit 4.1
Company and New Millennium Capital to Form 8-K filed on
Partners II, LLC, AJW Qualified August 4, 2006
Partners, LLC, AJW Offshore, Ltd.
and AJW Partners, LLC
10.4 Form of Callable Convertible Secured Incorporated by
Note by and among New Millennium reference as Exhibit 4.2
Capital Partners II, LLC, AJW to Form 8-K filed on
Qualified Partners, LLC, AJW August 4, 2006
Offshore, Ltd. and AJW Partners, LLC
10.5 Form of Stock Purchase Warrant Incorporated by
issued to New Millennium Capital reference as Exhibit 4.3
Partners II, LLC, AJW Qualified to Form 8-K filed on
Partners, LLC, AJW Offshore, Ltd. August 4, 2006
and AJW Partners, LLC
10.6 Registration Rights Agreement dated Incorporated by
July 25, 2006 by and among New reference as Exhibit 4.4
Millennium Capital Partners II, LLC, to Form 8-K filed on
AJW Qualified Partners, LLC, AJW August 4, 2006
Offshore, Ltd. and AJW Partners, LLC
10.7 Security Agreement dated July 25, Incorporated by
2006 by and among the Company and reference as Exhibit 4.5
New Millennium Capital Partners II, to Form 8-K filed on
LLC, AJW Qualified Partners, LLC, August 4, 2006
AJW Offshore, Ltd. and AJW Partners,
LLC
10.8 Intellectual Property Security Incorporated by
Agreement dated July 25, 2006 by and reference as Exhibit 4.6
among the Company and New Millennium to Form 8-K filed on
Capital Partners II, LLC, AJW August 4, 2006
Qualified Partners, LLC, AJW
Offshore, Ltd. and AJW Partners, LLC
10.9 Employment Agreement, dated as of Incorporated by
September 8, 2006, by and between reference as Exhibit
the Company and D. Davy Jones 10.2 to the Registration
Statement on Form SB-2
filed on September 11,
2006
10.10 Employment Agreement, dated as of Incorporated by
September 8, 2006, by and between reference as Exhibit
the Company and A. Robert Koveleski 10.3 to the Registration
Statement on Form SB-2
filed on September 11,
2006
10.11 Consulting Agreement, dated as of Provided herewith
May 15, 2006, by and between the
Company and Earl Ingarfield
10.12 Agreement, dated July 24, 2006, by Provided herewith
and between the Company and LJ&J
Enterprises of Tennessee, Inc.
31.1 Certification by Interim President Provided herewith
and Chief Executive Officer/Interim
Principal Accounting Officer
pursuant to 15 U.S.C. Section 7241,
as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
14
Exhibit Number Title of Document Location
-------------- ------------------------------------ ------------------------
32.1 Certification by Interim President Provided herewith
and Chief Executive Officer/ Interim
Principal Accounting Officer
pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
November 14, 2006 AMERICAN RACING CAPITAL, INC.
By: /s/ A. Robert Koveleski
----------------------------------------------
A. Robert Koveleski
Interim President and Chief Executive Officer,
Interim Principal Accounting Officer and
Secretary
16