UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended January 31, 2018

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from ________ to ___________.

 

Commission file number: 0-9483

 

SPARTA COMMERCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   30-0298178
(State or other jurisdiction
of incorporation or organization)
  (IRS Employer
Identification No.)

 

555 Fifth Avenue, 14th Floor, New York, NY 10017

(Address of principal executive offices) (Zip Code)

 

(212) 239-2666

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading symbol(s)   Name of exchange on which registered
Common Stock, par value $0.001   SRCO   OTC:PINK

 

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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [  ] 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). [X] Yes [  ] No

 

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 of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer [  ] Accelerated filer [  ]
  Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]
    Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [  ] Yes [X] No

 

As of July 8, 2020, we had 627,092,904 shares of common stock issued and outstanding.

 

 

 

 
 

 

SPARTA COMMERCIAL SERVICES, INC.

 

FORM 10-Q

 

FOR THE QUARTER ENDED January 31, 2018

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
CONDENSED CONSOLIDATED BALANCE SHEETS 3
CONDENSED CONSOLIDATED STATEMENTS OF LOSSES FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 2018 AND 2017(UNAUDITED) 4
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN DEFICIT FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (UNAUDITED) 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JANUARY 31, 2018 AND 2017 (UNAUDITED) 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
ITEM 4. CONTROLS AND PROCEDURES 23
PART II. OTHER INFORMATION 24
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 1A. RISK FACTORS 24
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4. OTHER INFORMATION 25
ITEM 5. EXHIBITS 25
SIGNATURES 26

 

2
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

SPARTA COMMERCIAL SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    January 31, 2018     April 30, 2017  
    (Unaudited)        
ASSETS                
Current Assets                
Cash and cash equivalents   $ 120     $ 2,599  
Accounts receivable     7,001       4,066  
      200       -  
Total Current Assets     7,321       6,665  
Property and equipment, net of accumulated depreciation and amortization of $207,600 and $206,362, respectively     2,570       4, 425  
Other assets     9,628       9,628  
Deposits     12,167       79,776  
Total assets   $ 31,686     $ 100,494  
                 
LIABILITIES AND DEFICIT                
                 
Liabilities:                
Current Liabilities                
Bank overdraft   $ 1,532       1,693  
Accounts payable and accrued expenses     3,444,788     $ 2,965,193  
Current portion notes payable net of discount of $103,189 and $292,663, respectively     4,473,689       4,262,409  
Deferred revenue     20,555       21,734  
Derivative liabilities     2,719,529       2,533,934  
Total Current Liabilities     10,660,093       9,784,963  
Loans payable-related parties     430,853       418,853  
Total Long Term Liabilities     430,853       418,853  
Total liabilities from continuing operations     11,090,946       10,203,816  
LIABILITIES FROM DISCONTINUED OPERATIONS     12,080       12,080  
Total liabilities     11,103,026       10,215,896  
                 
Sparta Commercial Services, Inc. Stockholders’ Deficit:                
Preferred stock, $0.001 par value; 10,000,000 shares authorized of which 35,850 shares have been designated as Series A convertible preferred stock, with a stated value of $100 per share, 125 and 125 shares 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, 0 and 0 shares issued and outstanding, respectively     -       -  
 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,781 and 0 shares issued and outstanding, respectively     781       -  
Common stock, $0.001 par value; 750,000,000 shares authorized, 610,971,184 and 583,273,965 shares issued and outstanding, respectively     610,971       583,274  
Common stock to be issued 75,786,511 and 23,273,656, respectively     75,787       23,274  
Additional paid-in-capital     46,329,995       45,736,885  
Accumulated deficit     (59,036,549 )     (57,386,338 )
Total deficiency in Sparta Commercial Services, Inc. stockholders’ equity     (12,006,515 )     (11,030,405 )
Non-controlling interest     935,175       915,003  
Total Deficit     (11,071,340 )     (10,115,402 )
Total Liabilities and Deficit   $ 31,686     $ 100,494  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3
 

 

SPARTA COMMERCIAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF
LOSSES FOR THE THREE AND NINE MONTHS ENDED
JANUARY 31, 2018 AND 2017 (UNAUDITED)

 

    Three Months Ended     Nine Months Ended  
    January 31,     January 31,  
    2018     2017     2018     2017  
Revenue                                
Information technology   $ 104,478     $ 113,755     $ 335,392     $ 408,444  
Cost of goods sold     10,770       8,776       34,768       35,654  
Gross profit     93,708       104,989       300,624       372,790  
                                 
Operating expenses:                                
General and administrative     349,049       348,639       1,035,196       1,179,919  
Depreciation and amortization     618       619       1,855       1,855  
Total operating expenses     349,667       349,258       1,037,051       1,181,774  
                                 
Loss from operations     (255,959 )     (244,269 )     (736,427 )     (808,984 )
                                 
Other (income) expense:                                
Other income     (9,050 )     (3,121 )     (13,660 )     (7,720 )
Financing cost     502,838       225,259       1,093,559       1,065,913  
Amortization of debt discount     64,443       112,541       256,358       428,028  
Gain from changes in fair value of derivative liability     (134,112 )     1,556,598       (445,752 )     1,007,213  
Total other expense     424,119       1,891,277       890,505       2,493,434  
                                 
Loss from continuing operations   $ (680,078 )   $ (2,135,546 )   $ (1,626,932 )   $ (3,302,418 )
                                 
Loss from discontinued operations     (13,338 )     (7,963 )     (2,534 )     (26,765 )
                                 
Net Loss     (693,416 )     (2,143,509 )     (1,629,466 )     (3,329,183 )
                                 
Net gain attributed to non-controlling interest     (6,319 )     (3,286 )     (20,172 )     (16,323 )
                                 
Preferred dividend     (191 )     (191 )     (573 )     (573 )
                                 
Net loss attributed to common stockholders   $ (699,926 )   $ (2,146,986 )   $ (1,650,211 )   $ (3,346,079 )
                                 
Basic and diluted loss per share:                                
Loss from continuing operations attributable to Sparta Commercial Services, Inc. common stockholders   $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.01 )
Loss from discontinued operations attributable to Sparta Commercial Services, Inc. common stockholders     (0.00 )     (0.00 )     (0.00 )     (0.00 )
Net loss attributable to Sparta Commercial Services, Inc. common stockholders   $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.01 )
                                 
Weighted average shares outstanding     604,086,776       507,271,123       592,572,246       494,640,833  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4
 

 

SPARTA COMMERCIAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN DEFICIT FOR THE NINE MONTHS
ENDED JANUARY 31, 2018(UNAUDITED)

 

    Series A     Series C                 Common Stock     Additional           Non-        
    Preferred Stock     Preferred Stock     Common Stock     to be issued     Paid in     Accumulated     controlling        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Capital     Deficit     Interest     Total  
Balance April 30, 2017     125     $ 12,500       -     $ -       583,273,965     $ 583,274       23,273,656     $ 23,274     $ 45,736,885     $ (57,386,338 )   $    915,003     $ (10,115,402 )
Sale of common stock                                                     31,296,980       31,297       48,703                       80,000  
Sale of preferred stock                     700       700                                       349,300                       350,000  
Shares issued                                     7,194,220       7,194       (7,255,862 )     (7,256 )     62                       -  
Shares issued for financing cost                                     20,502,999       20,503       5,176,700       5,176       85,314                       110,993  
Shares issued for conversion of notes and interest                     81       81                       23,295,037       23,296       109,731                       133,108  
Preferred dividend                                                                             (573 )             (573 )
Net loss                                                                             (1,649,638 )     20,172       (1,629,466 )
Balance January 31, 2018     125     $  12,500       781     $   781        610,971,184     $  610,971        75,786,511     $  75,787     $  46,329,995        (59,039,549 )   $ 935,175        (11,071,340 )

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5
 

 

SPARTA COMMERCIAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 AND 2017(UNAUDITED)

 

    Nine Months Ended  
    January 31,  
    2018     2017  
CASH FLOWS FROM OPERATING ACTIVITIES                
Net loss   $ (1,629,466 )   $ (3,329,183 )

Adjustments to reconcile net loss to net cash used in operating activities:

               
Depreciation and amortization     1,855       1,855  
(Loss) gain from change in fair value of derivative liabilities     (445,752 )     1,007,213  
Amortization of debt discount     256,358       428,028  
Non-cash financing cost     719,144       691,194  
Equity based compensation     -       1,800  
Changes in operating assets and liabilities                
Accounts receivable     (2,935 )     (193 )
Other assets     67,409       -  
Accounts payable and accrued expenses     487,219       640,847  
Deferred revenue     (1,179 )     170  
Net cash used in operating activities     (547,347 )     (558,269 )
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of equipment     -       -  
Net cash (used in) investing activities     -       -  
CASH FLOWS FROM FINANCING ACTIVITIES                
Bank overdraft     1,532       997  
Proceeds from sale of common stock     430,000       -  
Proceeds from sale of subsidiary preferred stock     -       50,000  
Proceeds from notes payable     174,500       495,865  
Payments on notes payable     (73,164 )     (42,426 )
Proceeds from related party notes     (2,000 )     23,000  
Net cash provided by financing activities     544,868       527,436  
                 
Cash flows from discontinued operations:                
Cash used in operating activities of discontinued operations     -       (2,590 )
Net cash flow from discontinued operation     -       (2,590 )
                 
Net decrease increase in cash   $ (2,479 )   $ (33,423 )
                 
Cash and cash equivalents, beginning of period   $ 2,599     $ 33,697  
Cash and cash equivalents , end of period   $ 120 )   $ 274  
                 
Cash paid for:                
Interest   $ 5,136     $ 11,123  
Income taxes   $ -       -  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

6
 

 

SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31, 2018

(Unaudited)

 

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE A - SUMMARY OF ACCOUNTING POLICIES

 

A summary of the significant accounting policies applied in the preparation of the accompanying unaudited, condensed, consolidated financial statements follows.

 

Business

 

Sparta Commercial Services, Inc. (“Sparta,” “we,” “us,” or the “Company”) is a Nevada corporation serving three markets. Sparta is a technology company that develops, markets and manages business websites and mobile application (mobile apps) for smartphones and tablets. The Company also owns and manages websites which sell on-demand motorcycle, recreational vehicle, and truck title history reports for consumers, retail dealers, auction houses, insurance companies and banks/finance companies. Notwithstanding our discontinuance of consumer financing, we continue to offer, on a pass through basis, an equipment-leasing product nationwide for local and state agencies throughout the country seeking an alternative and economical way to finance their essential equipment needs, including police motorcycles and cruisers, buses, fire trucks, and EMS equipment.

 

Our roots are in the Powersports industry and our original focus was providing consumer and municipal financing to the powersports, recreational vehicle, and automobile industries (see Discontinued Operations). Presently, through our subsidiary, iMobile Solutions, Inc. (“IMS”), we offer mobile application development, website development and hosting, text messaging services, marketing and support, and Vehicle Title History Reports.

 

Our mobile application (mobile app) offerings have broadened our base beyond vehicle dealers to a wide range of businesses including, but not limited to, agriculture dealerships, racetracks, private clubs, country clubs, restaurants and grocery stores. We also offer a private label version of our mobile app framework to enable other businesses to offer custom apps to their customers.

 

The Company also designs, launches, maintains, and hosts websites for businesses. We provide specific, tailored action plans for our clients’ websites that include services such as eCommerce, CRM (Customer Relationship Management) development and integration, ordering system creation and integration, SEO (search engine optimization), social media marketing, and online reviews to improve their presence online. In addition, we offer text messaging services which are vital for businesses’ marketing, retention and loyalty strategies. Our text messaging platform allows our clients to easily manage, schedule, and analyze text message performance.

 

Our vehicle history reports include Cyclechex (Motorcycle History Reports at www.cyclechex.com); RVchecks (Recreational Vehicle History Reports at www.rvchecks.com); CarVINreport (Automobile at www.carvinreport.com) and Truckchex (Heavy Duty Truck History Reports at www.truckchex.com). Our Vehicle History Reports are designed for consumers, retail dealers, auction houses, insurance companies and banks/finance companies.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements as of January 31, 2018 and for the three and nine month periods ended January 31, 2018 and 2017 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission, including Form 10-Q and Regulation S-K. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. The Company believes that the disclosures provided are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited financial statements and explanatory notes for the year ended April 30, 2017 as disclosed in the Company’s Form 10-K for that year as filed with the Securities and Exchange Commission. The results of operations for the nine months ended January 31, 2018 are not necessarily indicative of the results to be expected for any other interim period or the full year ending April 30, 2018.

 

The condensed consolidated balance sheet as of April 30, 2017 contained herein has been derived from the audited consolidated financial statements as of April 30, 2017, but do not include all disclosures required by the U.S. GAAP.

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Specialty Reports, Inc. All significant inter-company transactions and balances have been eliminated in consolidation.

 

7
 

 

SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31, 2018

(Unaudited)

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its majority owned subsidiary. All material intercompany transactions and balances have been eliminated in consolidation. The third party ownership of the Company’s subsidiary is accounted for as noncontrolling interest in the consolidated financial statements. Changes in the noncontrolling interest are reported in the statement of changes in deficit.

 

Estimates

 

These financial statements have been prepared in accordance with accounting principles generally accepted in United States of America which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosures of revenues and expenses for the reported period. Accordingly, actual results could differ from those estimates. Included in these estimates are assumptions about collection of accounts receivable, useful life of property and equipment, beneficial conversion feature of convertible notes payable, deferred income tax asset valuation allowances, and valuation of derivative liabilities.

 

Discontinued Operations

 

As discussed in Note C, in the second quarter of fiscal 2013, the Company’s Board of Directors approved management’s recommendation to discontinue the Company’s consumer lease and loan lines of business and the sale of all of the Company’s portfolio of performing RISCs, and a portion of its portfolio of leases. The sale was consummated in that quarter. The assets and liabilities have been accounted for as discontinued operations in the Company’s consolidated balance sheets for all periods presented. The operating results related to these lines of business have been included in discontinued operations in the Company’s consolidated statements of operations for all periods presented.

 

Revenue Recognition

 

The Company recognizes revenue when the following criteria have been met: persuasive evidence of an arrangement exists, no significant Company obligations remain, collection of the related receivable is reasonably assured, and the fees are fixed or determinable. The Company acts as a principal in its revenue transactions as the Company is the primary obligor in the transactions.

 

Revenues from mobile app products are generally recognized upon delivery. Revenues from History Reports are generally recognized upon delivery / download. Prepayments received from customers before delivery (if any) are recognized as deferred revenue and recognized upon delivery.

 

Cash Equivalents

 

For the purpose of the accompanying unaudited, condensed, consolidated financial statements, all highly liquid investments with a maturity of three months or less are considered to be cash equivalents.

 

Fair Value Measurements

 

The Company adopted ASC 820, “Fair Value Measurements (“ASC 820”).” 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.

 

8
 

 

SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31, 2018

(Unaudited)

 

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.

 

Income Taxes

 

We utilize ASC 740 “Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at year-end based on enacted laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.

 

The Company recognizes the impact of a tax position in the financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense.

 

Stock Based Compensation

 

We account for our stock based compensation under ASC 718 “Compensation – Stock Compensation” using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.

 

We use the fair value method for equity instruments granted to non-employees and use the Black-Scholes model for measuring the fair value of options. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.

 

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.

 

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.

 

At January 31, 2018 and 2017, 763,996,773 and 1,510,968 potential shares, respectively, were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.

 

Derivative Liabilities

 

The Company assessed the classification of its derivative financial instruments as of January 31, 2018 and April 30, 2017, which consist of convertible instruments and rights to shares of the Company’s common stock, and determined that such derivatives meet the criteria for liability classification under ASC 815.

 

ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional, as described.

 

9
 

 

SPARTA COMMERCIAL SERVICES, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31, 2018

(Unaudited)

 

Convertible Instruments

 

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with professional standards for “Accounting for Derivative Instruments and Hedging Activities”.

 

The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability.

 

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

 

The FASB issued the following accounting standard updates related to Topic 606, Revenue Contracts with Customers:

 

ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) in May 2014. ASU 2014-09 requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations.
ASU No. 2018-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2018-08”) in March 2018. ASU 2018-08 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on principal versus agent considerations.
ASU No. 2018-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2018-10”) in April 2018. ASU 2018-10 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas.
ASU No. 2018-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2018 EITF Meeting (SEC Update) (“ASU 2018-11”) in May 2018. ASU 2018-11 rescinds SEC paragraphs pursuant to two SEC Staff Announcements at the March 3, 2018 EITF meeting. The SEC Staff is rescinding SEC Staff Observer comments that are codified in Topic 605 and Topic 932, effective upon adoption of Topic 606.
ASU No. 2018-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients in May 2018. ASU 2018-12 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on a few narrow areas and adds some practical expedients to the guidance.

 

These ASUs will become effective for the Company beginning interim period beginning May 1, 2018. Adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

10
 

 

SPARTA COMMERCIAL SERVICES, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31, 2018

(Unaudited)

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (Topic 842) “Leases.” Topic 842 supersedes the lease requirements in Accounting Standards Codification (ASC) Topic 840, “Leases.” Under Topic 842, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. Leases will continue to be classified as either finance or operating. The Company will adopt Topic 842 effective May 1, 2019 using a modified retrospective method and will not restate comparative periods. The Company is assessing the impact of this ASU on its consolidated financial statements. A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, we have not determined whether implementation of such proposed standards would be material to our unaudited condensed consolidated financial statements.

 

NOTE B - GOING CONCERN MATTERS

 

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying unaudited condensed consolidated financial statements, the Company has incurred recurring losses and generated negative cash flows from operating activities since inception. As of January 31, 2018, the Company had an accumulated deficit of $59,036,549 and a working capital deficit (total current liabilities exceeded total current assets) of $10,652,772. The Company’s cash balance and revenues generated are not currently sufficient and cannot be projected to cover its operating expenses for the next twelve months from the filing date of this report. These factors among others raise substantial doubt about the Company’s ability 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. No assurance can be given that management’s actions will result in profitable operations or the resolution of its liquidity problems. The accompanying unaudited condensed consolidated financial 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 that the Company will be successful in its effort to secure additional equity financing.

 

NOTE C - DISCONTINUED OPERATIONS

 

In the second quarter of fiscal 2013, the Company’s Board of Directors approved management’s recommendation to discontinue the Company’s consumer lease and loan lines of business and the sale of all of the Company’s portfolio of performing RISCs and a portion of its portfolio of leases. The sale was consummated in that quarter. The assets and liabilities have been accounted for as discontinued operations in the Company’s consolidated balance sheets for all periods presented.

 

The operating results related to these lines of business have been included in discontinued operations in the Company’s consolidated statements of loss for all periods presented. The following table presents summarized operating results for the discontinued operations.

 

    Three Months Ended
January 31,
    Nine Months Ended
January 31,
 
    2018     2017     2018     2017  
                         
Revenues   $ -     $ 2,339     $ 33,693     $ 11,947  
Net loss     (13,338 )     (7,963 )     (2,534 )     (26,765 )

 

11
 

 

SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31, 2018

(Unaudited)

 

LIABILITIES INCLUDED IN DISCONTINUED OPERATIONS

 

Included in liabilities from discontinued operations are the following:

 

SECURED NOTES PAYABLE

 

    January 31,     April 30,  
    2018     2017  
             
Secured, subordinated individual lender   $ -     $ 18,328  
Secured, subordinated individual lender     12,080       12,080  
Total   $ 12,080     $ 30,408  

 

At January 31, 2018, the notes have maturities due within one year.

 

NOTE D - NOTES PAYABLE AND DERIVATIVES

 

The Company has outstanding numerous notes payable to various parties. The notes bear interest at rates of 5% - 20% per year and are summarized as follows:

 

Notes Payable  

January 31,

2018

   

April 30,

2017

 
Notes convertible at holder’s option   $ 2,384,716     $ 2,464,216  
Notes convertible at Company’s option     76,000       76,000  
Non-convertible notes payable     2,116,162       2,014,826  
Subtotal     4,576,878       4,555,042  
Less, Debt discount     (103,189 )     (292,633 )
Total   $ 4,473,689     $ 4,262,409  

 

Certain of the notes payable contain variable conversion rates and the conversion features are classified as derivative liabilities. The conversion prices are based on the market price of the Company’s common stock, at discounts of 30% - 48% to market value.

 

Amortization of debt discount for the nine months ended January 31, 2018 and 2017 was $256,358 and $428,028, respectively. At January 31, 2018, the Company has reserved 238,630,500 shares of its common stock for issuance upon the conversion of debentures.

 

The Company’s derivative financial instruments consist of embedded derivatives related to the outstanding short term Convertible Notes Payable. These embedded derivatives include certain conversion features indexed to the Company’s common stock. The accounting treatment of derivative financial instruments requires that the Company record the derivatives and related items at their fair values as of the inception date of the Convertible Notes Payable and at fair value as of each subsequent balance sheet date. In addition, under the provisions of Accounting Standards Codification subtopic 815-40, Derivatives and Hedging; Contracts in Entity’s Own Equity (“ASC 815-40”), as a result of entering into the Convertible Notes Payable, the Company is required to classify all other non-employee stock options and warrants as derivative liabilities and mark them to market at each reporting date. Any change in fair value inclusive of modifications of terms will be recorded as non-operating, non-cash income or expense at each reporting date. If the fair value of the derivatives is higher at the subsequent balance sheet date, the Company will record a non-operating, non-cash charge. If the fair value of the derivatives is lower at the subsequent balance sheet date, the Company will record non-operating, non-cash income.

 

The change in fair value of the derivative liabilities at January 31, 2018 was calculated with the following average assumptions, using a Black-Scholes option pricing model are as follows:

 

Significant Assumptions:        
         
Risk free interest rate   Ranging from   1.78% to 2.03%
Expected stock price volatility   Ranging from   117 to 291.5%
Expected dividend payout       0
Expected life in years   Ranging from   0.24 year to 2 years

 

During the nine months ended January 31, 2018 and 2017, the Company recorded a gain of $430,902 and an expense of $1,007,214, respectively, related to the change in value of the derivative liabilities.

 

12
 

 

SPARTA COMMERCIAL SERVICES, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31, 2018

(Unaudited)

 

Changes in derivative liability during the nine months ended January 31, 2018 and 2017 were:

 

    January 31,  
    2018     2017  
Balance, beginning of year   $ 2,533,934     $ 2,170,976  
Derivative liability extinguished     (45,592 )     (502,914 )
Derivative financial liability arising on the issuance of convertible notes and warrants     601,375       881,963  
Fair value adjustments     (370,188 )     1,091,352  
Balance, end of period   $ 2,719,529     $ 3,641,377  

 

NOTE E - LOANS PAYABLE TO RELATED PARTIES

 

As of January 31, 2018 and April 30, 2017, aggregated loans payable, without demand and with no interest, to officers and directors were $430,853 and $418,853, respectively.

 

NBOTE F - EQUITY TRANSACTIONS

 

The Company is authorized to issue 10,000,000 shares of preferred stock with $0.001 par value per share, of which 35,850 shares have been designated as Series A 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 per share liquidation value, 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 shares of Series A preferred stock issued and outstanding as of January 31, 2018 and April 30, 2017. The Company had no shares of Series B preferred stock issued and outstanding as of January 31, 2018 and April 30, 2017. The Company had 781 and no shares of Series C preferred stock issued and outstanding as of January 31, 2018 and April 30, 2017. The Company had 610,971,184 and 583,273,965 shares of common stock issued and outstanding as of January 31, 2018 and April 30, 2017, respectively.

 

Preferred Stock, Series A

 

Accrued dividends payable on the Series A Preferred were $8,135 and $7,562 at January 31, 2018 and April 30, 2017, respectively. At the Company’s option, these dividends may be paid in shares of the Company’s Common Stock.

 

Preferred Stock, Series C

 

During the nine months ended January 31, 2018, the Company:

 

sold 700 Units of Series C Convertible preferred stock to accredited investors for $350,000. Each unit consists of one share of Series C Convertible Preferred stock, convertible at any time into 300 shares of the Company’s common stock (subject to certain percentage ownership provisions), and 150 two year warrants to purchase one share each of the Company’s common stock $0.005 per share,

     
issued 80.54 shares of Series C Convertible preferred stock upon the conversion of $40,000 of notes payable and accrued interest thereon.

 

During the nine months ended January 31, 2017, The Company’s subsidiary sold 10 shares of Series C Convertible Preferred stock for $50,000. These amounts have been credited to the noncontrolling interest.

 

Convertible Notes

 

During the nine months ended January 31, 2018, entered into new convertible notes payable aggregating $30,000. The notes were only convertible during the two months immediately after issue into shares of the Company’s Series C convertible preferred stock on a dollar for dollar basis.

 

13
 

 

SPARTA COMMERCIAL SERVICES, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31, 2018

(Unaudited)

 

Common Stock

 

During the nine months ended January 31, 2018, the Company:

 

  pursuant to terms of agreements, accrued as to be issued 5,176,700 shares of restricted common stock, valued at $21,055,
  accrued as to be issued, 31,296,960 shares of restricted common stock which had been sold for $80,000,
  accrued as to be issued, 23,295,037 shares of restricted common stock as a result of conversion of $57,000 of notes payable and accrued interest thereon,
  pursuant to terms of agreements, issued 20,502,999 shares of restricted common stock, valued at $89,938,
  issued 7,194,222 shares of restricted common stock which had been classified as to be issued in prior periods.

 

During the nine months ended January 31, 2017, the Company:

 

  issued 162,361,514 shares of common stock, valued at $396,799, upon the conversion of $119,662 of note principal and accrued interest valued at $414,334,
  issued 1,000,000 shares of common stock, valued at $1,800, for services,
  notes payable of $80,000 and related accrued interest of $8,096 was converted into 29,366 shares of subsidiary common stock. The subsidiary sold 10 shares of series C Convertible Preferred stock for $50,000. These amounts have been credited to the noncontrolling interest.

 

NOTE G - FAIR VALUE MEASUREMENTS

 

The Company follows the guidance established pursuant to ASC 820 which established a framework for measuring fair value and expands disclosure about fair value measurements. ASC 820 defines fair value as the amount that would be received for an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes the following three levels of inputs that may be used:

 

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

 

Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.

 

Level 3: Unobservable inputs when there is little or no market data available, thereby requiring an entity to develop its own assumptions. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

The table below summarizes the fair values of financial liabilities as of January 31, 2018:

 

          Fair Value Measurement Using  
   

Fair Value at

January 31,

2018

    Level 1     Level 2     Level 3  
Derivative liabilities   $ 2,719,529       -       -     $ 2,719,529  

 

The following is a description of the valuation methodologies used for these items:

 

Derivative liability — these instruments consist of certain variable conversion features related to notes payable obligations and certain outstanding warrants. These instruments were valued using pricing models which incorporate the Company’s stock price, volatility, U.S. risk free rate, dividend rate and estimated life.

 

The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the balance sheets at fair value in accordance with ASC Topic 825 “The Fair Value Option for Financial Issuances”.

 

14
 

 

SPARTA COMMERCIAL SERVICES, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31, 2018

(Unaudited)

 

NOTE H - NON-CASH FINANCIAL INFORMATION

 

During the nine months ended January 31, 2018, the Company:

 

  pursuant to terms of agreements, accrued as to be issued 5,176,700 shares of restricted common stock, valued at $21,055,
  accrued as to be issued, 23,295,037 shares of restricted common stock as a result of conversion of $57,000 of notes payable and accrued interest thereon,
  pursuant to terms of agreements, issued 20,502,999 shares of restricted common stock, valued at $89,938,
  issued 7,194,222 shares of restricted common stock which had been classified as to be issued in prior periods.

 

During the nine months ended January 31, 2017, the Company:

 

  issued 162,361,514 shares of common stock, valued at $396,799, upon the conversion of $119,662 of note principal and accrued interest valued at $414,334,
  issued 1,842,504 shares of common stock which had been classified as to be issued,
  notes payable of $80,000 and related accrued interest of $8,096 was converted into 29,366 shares of subsidiary common stock. This amount has been credited to the noncontrolling interest.

 

NOTE I - COMMITMENTS AND CONTINGENCIES

 

Operating Lease Commitments

 

Our executive offices are located in New York, NY. We have an agreement for use of office space at this location under a lease expiring on July 31, 2018. The monthly base rent is $4,500.

 

Rent expense was $13,500 and $43,750 for the three month periods ended January 31, 2018 and 2017, respectively. Rent expense was $35,750 and $112,484 for the nine month periods ended January 31, 2018 and 2017, respectively.

 

Litigation

 

The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. Sparta can make no representations about the potential outcome of such proceedings.

 

As of January 31, 2018, we were not a party to any material pending legal proceeding except as stated below. From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business.

 

The Company has received notices dated April 1, 2016, May 13, 2016 and July 22, 2016 from two lenders claiming defaults relating to conversion requests of $8,365 principal and $643 interest and $5,000 principal, with regard to notes in the total amounts of $55,125 and $27,500, respectively, which the Company has refused to process and believes it has defenses in that regard. The Company believes these claims are contingent, unliquidated and disputed. There can be no assurance that the Company would prevail should litigation with regard to any of these requests occur. These liabilities have been recorded in the unaudited condensed consolidated financial statements.

 

On September 22, 2016, a motion for summary judgment in lieu of complaint was filed in the Supreme Court of The State of New York County of Kings, against the Company by a lender for the amount of $102,170.82 in principal and interest; accrued and unpaid interest thereupon in the amount from the date of filing to entry of judgment herein; lender’s reasonable attorney’s fees, costs, and expenses; and any such other relief as the Court deems just and proper. Plaintiff ’s motion for summary judgment in lieu of complaint  was denied on May 5, 2017. The Company believes the claim is contingent, unliquidated and disputed.

 

NOTE J - SUBSEQUENT EVENTS

 

Subsequent to January 31, 2018 the Company:

 

Sold 115 Units of Series C Convertible Preferred stock for $115,000. Each Unit consists of 1 share of Series C Preferred stock convertible at any time into 300 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.005 per share.

 

Issued 219.95 Units of Series C Convertible Preferred stock upon the conversion of $74,282 notes payable and accrued interest thereon.

 

Pursuant to terms of agreements, issued 9,891,503 shares of restricted common stock, valued at $45,000.

 

15
 

 

SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31, 2018

(Unaudited)

 

Subsequent to April 30, 2018 the Company:

 

Sold 429 Units C Convertible Preferred stock for $212,500. Each Unit consists of 1 share of Series C Preferred stock convertible at any time into 300 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.005 per share.

 

Pursuant to terms of agreements, issued 6,230,217 shares of restricted common stock, valued at $27,628.

 

Subsequent to July 31, 2018 the Company:

 

Sold 327 Units of Series C Convertible Preferred stock for $163,173. Each Unit consists of 1 share of Series C Preferred stock convertible at any time into 300 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.005 per share.

 

Issued 220 Units of the Company’s Series C Convertible Preferred stock upon conversion of $143,144 of notes payable and accrued interest thereon. Each Unit consists of 1 share of Series C Preferred stock convertible at any time into 400 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.005 per share.

 

Pursuant to terms of agreements, accrued as to be issued 3,000,000 shares of restricted common stock, valued at $13,303.

 

Issued 40 Units of the Company’s Series D Convertible Preferred stock upon conversion of $40,000 of accounts payable. Each Unit consists of 1 share of Series D Preferred stock convertible at any time into 400 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

Issued 30 Units of the Company’s Series D Convertible Preferred stock in exchange for of $30,000 of the Company’s subsidiary’s Convertible preferred stock. Each Unit consists of 1 share of Series D Preferred stock convertible at any time into 400 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

Issued 142.83 Units of the Company’s Series D Convertible Preferred stock upon conversion of $142,825 of notes payable and accrued interest thereon. Each Unit consists of 1 share of Series D Preferred stock (convertible at any time into 400 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

Subsequent to October 31, 2018 the Company:

 

Sold 444.1 Units of Series C Convertible Preferred stock for $223,050. Each Unit consists of 1 share of Series C Preferred stock convertible at any time into 300 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.005 per share.

 

Issued 117.51 Units of the Company’s Series D Convertible Preferred stock upon conversion of $117,510 of notes payable and accrued interest thereon. Each Unit consists of 1 share of Series D Preferred stock convertible at any time into 400 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

Issued 82.75 Units of the Company’s Series D Convertible Preferred stock upon conversion of $83,750 of accounts payable. Each Unit consists of 1 share of Series D Preferred stock convertible at any time into 400 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

Subsequent to January 31, 2019 the Company:

 

Issued 194 Units of Series C Convertible Preferred stock upon conversion of $97,000 of notes payable and accrued interest thereon. Each Unit consists of 1 share of Series C Preferred stock convertible at any time into 300 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.005 per share.

 

Issued 20 Units of the Company’s Series C Convertible Preferred stock in exchange for $20,000 of the Company’s subsidiary’s Series C Convertible Preferred stock. Each Unit consists of 1 share of Series C Preferred stock convertible at any time into 300 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.005 per share.

 

Issued 165.12 Units of the Company’s Series C Convertible Preferred stock upon conversion of $111,130 of notes payable and accrued interest thereon. Each Unit consists of 1 share of Series C Preferred stock convertible at any time into 300 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.005 per share.

 

Issued 145.79 Units of the Company’s Series D Convertible Preferred stock upon conversion of $146,040 of notes payable and accrued interest thereon. Each Unit consists of 1 share of Series D Preferred stock convertible at any time into 400 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

16
 

 

SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31, 2018

(Unaudited)

 

Issued 20 Units of the Company’s Series D Convertible Preferred stock in exchange for $20,000 of the Company’s subsidiary’s Convertible Preferred stock. Each Unit consists of 1 share of Series D Preferred stock convertible at any time into 400 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

Pursuant to terms of agreements, accrued as to be issued 2,000,000 shares of restricted common stock, valued at $8,869.

 

Subsequent to April 30, 2019 the Company:

 

Accrued 1,000,000 shares of restricted common stock to be issued in cancellation of $311,127 in accounts payable.

 

Sold 298 Units of Series C Convertible Preferred stock for $103,000 in cash and conversion of $45,829 of notes payable and accrued interest thereon. Each Unit consists of 1 share of Series C Preferred stock convertible at any time into 300 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.005 per share.

 

Issued 125 Units of the Company’s Series D Convertible Preferred stock in exchange for $125,000 of the Company’s subsidiary’s Convertible Preferred stock. Each Unit consists of 1 share of Series D Preferred stock convertible at any time into 400 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

Subsequent to July 31, 2019 the Company:

 

Sold 392 Units of Series C Convertible Preferred stock for $196,000. Each Unit consists of 1 share of Series C Preferred stock convertible at any time into 300 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.005 per share.

 

Issued 15 Units of the Company’s Series D Convertible Preferred stock in exchange for $15,000 of the Company’s subsidiary’s Convertible Preferred stock. Each Unit consists of 1 share of Series D Preferred stock convertible at any time into 400 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

Subsequent to October 31, 2019 the Company:

 

Sold 250 Units of Series C Convertible Preferred stock for $125,000. Each Unit consists of 1 share of Series C Preferred stock convertible at any time into 300 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.005 per share.

 

Issued 50 Units of the Company’s Series D Convertible Preferred stock in exchange for $50,000 of the Company’s subsidiary’s Convertible Preferred stock. Each Unit consists of 1 share of Series D Preferred stock convertible at any time into 400 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

Subsequent to January 31, 2020 the Company:

 

Sold 105 Units of Series C Convertible Preferred stock for $52,500. Each Unit consists of 1 share of Series C Preferred stock convertible at any time into 300 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.005 per share.

 

Issued 145 Units of the Company’s Series D Convertible Preferred stock in exchange for $145,000 of the Company’s subsidiary’s Convertible Preferred stock. Each Unit consists of 1 share of Series D Preferred stock convertible at any time into 400 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

Issued 222.22 Units of the Company’s Series D Convertible Preferred stock upon conversion of $222,250 of accounts payable. Each Unit consists of 1 share of Series D Preferred stock convertible at any time into 400 shares of the Company’s common stock (subject to certain percentage ownership provisions) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

17
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

General

 

The following discussion of our financial condition and results of operations should be read in conjunction with (1) our interim unaudited financial statements and their explanatory notes included as part of this quarterly report, and (2) our annual audited financial statements and explanatory notes for the year ended April 30, 2017 as disclosed in our annual report on Form 10-K for that year as filed with the SEC.

 

“Forward-Looking” Information

 

This report on Form 10-Q contains various statements that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Rule 175 promulgated thereunder, Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder which represent our expectations and beliefs, including, but not limited to statements concerning the Company’s business and financial plans and prospects and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” and other similar expressions can, but not always, identify forward-looking statements, which speak only as of the date such statement was made. We base these forward-looking statements on our current expectations and projections about future events, our assumptions regarding these events and our knowledge of facts at the time the statements are 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. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission (“SEC”), including Item 1A of the Company’s Annual Report of Form 10-K for the year ended April 30, 2017. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. You should consider any forward-looking statements in light of this explanation, and we caution you about relying on forward-looking statements.

 

General Overview

 

Sparta Commercial Services, Inc. (“Sparta,” “we,” “us,” or the “Company”) is a Nevada corporation serving three markets. Sparta is a technology company that develops, markets and manages business websites and mobile applications (mobile apps) for smartphones and tablets. The Company also owns and manages websites which sell on-demand motorcycle, recreational vehicle, and truck title history reports for consumers, retail dealers, auction houses, insurance companies and banks/finance companies. Lastly, since 2007, Sparta has administered leasing programs nationwide for local and/or state agencies seeking an alternative and economical way to finance essential municipal vehicles and equipment.

 

In 2016, the Company changed the name of its majority-owned subsidiary Specialty Reports, Inc., to iMobile Solutions, Inc. The new name reflects the Company’s strategic evolution and focus on the growing mobile application market domestically.

 

Sparta’s mobile application (mobile app) offerings have broadened our base beyond our original base of vehicle dealers to include a wide range of businesses including, but not limited to, agriculture dealerships, racetracks, private clubs, country clubs, restaurants and grocery stores. We also offer a private label version of our mobile app framework to enable other businesses to offer custom apps to their customers.

 

The Company also designs, launches, maintains, and hosts websites for businesses. We provide specific, tailored action plans for our clients’ websites that include services such as eCommerce, CRM development and integration, ordering system creation and integration, SEO (search engine optimization), social media marketing, and online reviews to improve their presence online. In addition, we offer text messaging services which are vital for businesses’ marketing, retention and loyalty strategies. Our text messaging platform allows our clients to easily manage, schedule, and analyze text message performance.

 

The Company’s vehicle history reports include Cyclechex (Motorcycle History Reports at www.cyclechex.com); RVchecks (Recreational Vehicle History Reports at www.rvchecks.com); CarVINreport (Automobile Reports at www.carvinreport.com) and Truckchex (Heavy Duty Truck History Reports at www.truckchex.com). Our Vehicle History Reports are designed for consumers, retail dealers, auction houses, insurance companies and banks/finance companies.

 

Sparta also administers a Municipal Leasing Program for local and/or state agencies throughout the country who are seeking a better and more economical way to finance their essential equipment needs, including police motorcycles, cruisers, buses, fire trucks, and EMS equipment. We are continuing to expand our roster of equipment manufacturers and the types of equipment we lease.

 

RESULTS OF OPERATIONS

 

Comparison of the Three Months Ended January 31, 2018 to the Three Months Ended January 31, 2017

 

For the three months ended January 31, 2018 and 2017, we have generated limited sales revenues, have incurred significant expenses, and have sustained significant losses.

 

Revenues

 

Revenues totaled $104,478 during the three months ended January 31, 2018 as compared to $113,755 during the three months ended January 31, 2017. This $9,277 or 8.2% decrease was due to the reduction of marketing expenditures and decline in the motorcycle industry effecting utilization of our motorcycle apps.

 

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Cost of Revenue

 

Cost of revenue consists of costs and fees incurred to third parties to construct and maintain mobile apps, as well as fees for subscription services related to vehicle history reports. Cost of revenue was $10,770 during the three months ended January 31, 2018 as compared to $8,766 during the three months ended January 31, 2017. This $2,004 or 22.9% increase was due to an increase in third party costs incurred.

 

Operating Expenses

 

General and administrative expenses were $349,049 during the three months ended January 31, 2018, compared to $348,639 during the three months ended January 31, 2017, an increase of $410 or 0.12%. Expenses incurred during the current three month period consisted primarily of the following expenses: Compensation and related costs, $258,402; Accounting, audit and professional fees, $4,194; Consulting fees, $29,534; Rent, utilities and telecommunication expenses $16,011. Expenses incurred during the three month period ended January 31, 2017 consisted primarily of the following expenses: Compensation and related costs, $231,707; Accounting, audit and professional fees, $20,599; Consulting fees, $33,459; Rent, utilities and telecommunication expenses $40,044.

 

Total Other (income) expense

 

Other (income) expense is comprised primarily of interest and financing costs and expense related to the change in fair value of our derivative liabilities. Net other expense was $424,119 for the three months ended January 31, 2018, compared to $1,891,277 for the three months ended January 31, 2017, a decrease of $1,467,158 or 77.6%. The decrease results from our borrowing activities and the related costs. The change in the fair value of our derivative liabilities resulted primarily from the changes in our stock price and the volatility of our common stock during the reported periods.

 

Discontinued Operations

 

As discussed in Note C to the consolidated financial statements, in August 2012, the Company’s Board of Directors approved management’s recommendation to discontinue the Company’s consumer lease and loan lines of business and the sale of the Company’s entire portfolio of performing RISCs, and a portion of its portfolio of leases. The sale was consummated in that quarter. The assets and liabilities have been accounted for as discontinued operations in the Company’s consolidated balance sheets for all periods presented.

 

The operating results related to these lines of business have been included in discontinued operations in the Company’s consolidated statements of loss for all periods presented. The following table presents summarized operating results for those discontinued operations.

 

    Quarter Ended  
    January 31,     January 31,  
    2018     2017  
             
Revenues   $ -     $ 2,313  
Net loss   $ (13,338 )   $ (7,963 )

 

Net Loss

 

We incurred a loss from continuing operations, before preferred dividends and non-controlling interest of $680,078 for the three months ended January 31, 2018 as compared to $2,135,546 for the corresponding interim period in 2017, a $1,455,468 or 68.2% decrease. This decrease was attributable primarily to a $1,690,710, 108.6% decrease in the change in the fair value of our derivative liabilities. Our net loss attributable to common stockholders decreased to $699,926 for the three month period ended January 31, 2018 as compared to a net loss of $2,146,986 for the corresponding period in 2017. The $1,447,060 or 67.4% decrease in net loss attributable to common stockholders for the three month period ended January 31, 2018 was due primarily to the factors described above.

 

Comparison of the Nine Months Ended January 31, 2018 to the Nine Months Ended January 31, 2017

 

For the nine months ended January 31, 2018 and 2017, we have generated limited sales revenues, have incurred significant expenses, and have sustained significant losses.

 

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RESULTS OF CONTINUING OPERATIONS

 

Revenues

 

Revenues totaled $335,392 during the nine months ended January 31, 2018 as compared to $408,444 during the nine months ended January 31, 2017. This $73,052 or 17.93% decrease was primarily due to a downturn in nationwide motorcycle sales, which effected the utilization of our motorcycle apps and history report purchases, as well as insufficient funds to support an adequate level of sales, marketing and advertising.

 

Costs and Expenses

 

General and administrative expenses were $1,035,196 during the nine months ended January 31, 2018, compared to $1,179,919 during the nine months ended January 31, 2017, a decrease of $144,723, or 12.3% primarily due to overall reductions in expense due to management’s efforts to reduce overhead, including, but not limited to, unpaid net payroll. Expenses incurred during the current nine month period consisted primarily of the following expenses: Compensation and related costs, $508,631; Accounting, audit and professional fees, $164,191; Consulting fees, $174,594; Rent, utilities and telecommunication expenses $56,480; Travel and entertainment, $39,160; advertising, marketing and web expenses, $12,103. Expenses incurred during the comparative nine month period in 2017 consisted primarily of the following expenses: Compensation and related costs, $652,344; Accounting, audit and professional fees, $111,858; Consulting fees, $155,373; Rent, utilities and telecommunication expenses $133,027; Travel and entertainment, $37,015; Advertising, marketing and web expenses, $9,593.

 

Total Other (income) expense

 

Other (income) expense is comprised primarily of fees from our Municipal Leasing business. Net other expense was $890,505 for the nine months ended January 31, 2018, compared to $2,493,434 for the nine months ended January 31, 2017, a decrease of $1,602,929 or 64.3%. The decrease results from our borrowing activities and the related costs. The $1,452,965 or 144.3% change in the fair value of our derivative liabilities resulted primarily from the changes in our stock price and the volatility of our common stock during the reported periods.

 

Discontinued Operations

 

As discussed in Note C to the consolidated financial statements, in August 2013, the Company’s Board of Directors approved management’s recommendation to discontinue the Company’s consumer lease and loan lines of business and the sale of the Company’s entire portfolio of performing RISCs, and a portion of its portfolio of leases. The sale was consummated in that quarter. The assets and liabilities have been accounted for as discontinued operations in the Company’s consolidated balance sheets for all periods presented.

 

The operating results related to these lines of business have been included in discontinued operations in the Company’s consolidated statements of loss for all periods presented. The following table presents summarized operating results for those discontinued operations.

 

    Nine Months Ended  
    January 31,     January 31,  
    2018     2017  
             
Revenues   $ 33,693     $ 11,947  
Net loss   $ (2,534 )   $ (26,765 )

 

Net Loss

 

We incurred a loss from continuing operations before preferred dividends and non-controlling interest of $1,629,466 for our nine months ended January 31, 2018 as compared to $3,329,183 for the corresponding interim period in 2017, a decrease of $1,699,717or 51.1%. This decrease was attributable primarily to a decrease in the change of fair value of derivative liability of $1,452,965 and the change in amortization of debt discount of $171,670.

 

Our net loss attributable to common stockholders decreased to $1,650,211 for the nine month period ended January 31, 2018 as compared to $3,346,079 for the corresponding period in 2017. The $1,695,868 or 50.7% decrease in net loss attributable to common stockholders for the nine month period ended January 31, 2018 was due primarily to the factors described above.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of January 31, 2018, we had a deficit of $11,071,340. We generated a deficit in cash flow from operations of $545,384 for the nine months ended January 31, 2018. This deficit results primarily from our net loss of $1,629,466, partially offset by noncash expense of $531,605, an increase of accounts payable of $489,182 and an increase in other assets of $67,402. We met our cash requirements during the nine month period as follows: through revenues generated: net proceeds of notes and convertible notes payable of $174,500; proceeds from the $430,000 sale of common stock and net proceeds from related party notes in the amount of $12,000. We made net payments on notes payable in the amount of $73,164.

 

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We do not anticipate incurring significant research and development expenditures, and we do not anticipate the sale or acquisition of any significant property, plant or equipment, during the next twelve months. At January 31, 2018, we had 8 full time employees. If we fully implement our business plan, we anticipate our employment base may increase by approximately 100% during the next twelve months. As we continue to expand, we will incur additional cost for personnel. This projected increase in personnel is dependent upon our generating revenues and obtaining sources of financing. There is no guarantee that we will be successful in raising the funds required or generating revenues sufficient to fund the projected increase in the number of employees. Our employees are not represented by a union.

 

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. We currently have no commitments for financing that are not at the investor’s election. There is no guarantee that we will be successful in raising the funds required to support our operations.

 

We estimate that we will need approximately $1,000,000 in addition to our normal operating cash flow to conduct operations during the next twelve months. However, there can be no assurance that additional private or public financing, including debt or equity financing, will be available as needed, or, if available, on terms favorable to us. Any additional equity financing may be dilutive to stockholders and such additional equity securities may have rights, preferences or privileges that are senior to those of our existing common or preferred stock. Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on our operating flexibility. However, if we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition, and we will have to adjust our planned operations and development on a more limited scale.

 

The effect of inflation on our revenue and operating results was not significant. Our operations are located in North America and there are no seasonal aspects that would have a material effect on our financial condition or results of operations.

 

GOING CONCERN ISSUES

 

The independent auditors report on our April 30, 2017 and 2016 financial statements included in the Company’s Annual Report states that the Company’s historical losses and the lack of revenues raise substantial doubts about the Company’s ability to continue as a going concern, due to the losses incurred and its lack of significant operations. If we are unable to develop our business, we have to discontinue operations or cease to exist, which would be detrimental to the value of the Company’s common stock. We can make no assurances that our business operations will develop and provide us with significant cash to continue operations.

 

In order to improve the Company’s liquidity, the Company’s management is actively pursuing additional financing through discussions with investment bankers, financial institutions and private investors. There can be no assurance the Company will be successful in its effort to secure additional financing.

 

We continue to experience net operating losses. Our ability to continue as a going concern is subject to our ability to develop profitable operations. We are devoting substantially all of our efforts to developing our business and raising capital. Our net operating losses increase the difficulty in meeting such goals and there can be no assurances that such methods will prove successful.

 

The primary issues management will focus on in the immediate future to address this matter include: seeking additional credit facilities from institutional lenders; seeking institutional investors for debt or equity investments in our Company; short term interim debt financing: and private placements of debt and equity securities with accredited investors.

 

To address these issues, we have engaged a financial advisory firm to advise and assist us in negotiating and raising capital.

 

INFLATION

 

The impact of inflation on the costs of the Company, and the ability to pass on cost increases to its customers over time is dependent upon market conditions. The Company is not aware of any inflationary pressures that have had any significant impact on the Company’s operations over the past quarter, and the Company does not anticipate that inflationary factors will have a significant impact on future operations.

 

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OFF-BALANCE SHEET ARRANGEMENTS

 

The Company does not maintain off-balance sheet arrangements nor does it participate in non-exchange traded contracts requiring fair value accounting treatment.

 

CRITICAL ACCOUNTING POLICIES

 

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our financial statements, we believe the following critical accounting policies involves the most complex, difficult and subjective estimates and judgments.

 

Revenue Recognition

 

The Company recognizes revenue when the following criteria have been met: persuasive evidence of an arrangement exists, no significant Company obligations remain, collection of the related receivable is reasonably assured, and the fees are fixed or determinable. The Company acts as a principal in its revenue transactions as the Company is the primary obligor in the transactions.

 

Information Technology:

 

Revenues from mobile app products are generally recognized upon delivery. Revenues from History Reports are generally recognized upon delivery / download. Prepayments received from customers before delivery (if any) are recognized as deferred revenue and recognized upon delivery. There were no deferred revenues at January 31, 2018 and April 30, 2017.

 

Stock-Based Compensation

 

The Company adopted ASC 718-10, “Stock Compensation Overall” (“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.

 

Convertible Instruments

 

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with professional standards for “Accounting for Derivative Instruments and Hedging Activities” (“ASC 815-40”).

 

The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability.

 

Derivative Liabilities

 

The Company assessed the classification of its derivative financial instruments as of January 31, 2018 and April 30, 2017, which consist of convertible instruments and rights to shares of the Company’s common stock, and determined that such derivatives meet the criteria for liability classification under ASC 815.

 

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ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional, as described.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

See Note A to the Unaudited Condensed Consolidated Financial Statements for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on our consolidated financial statements, which is incorporated herein by reference.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer, of 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 January 31, 2018. Based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls, the Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective.

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting. In our assessment of the effectiveness of internal control over financial reporting as of January 31, 2018, we determined that control deficiencies existed that constituted material weaknesses, as described below:

 

lack of documented policies and procedures;
we have no audit committee;
there is a risk of management override given that our officers have a high degree of involvement in our day-to-day operations;
there is no effective separation of duties, which includes monitoring controls, between the members of management.

 

Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. As a result, we have not been able to take steps to improve our internal controls over financial. However, to the extent possible, we will implement procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals. Management is currently evaluating what steps can be taken in order to address these material weaknesses.

 

Accordingly, we concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by our internal controls.

 

As a result of the material weaknesses described above, management has concluded that we did not maintain effective internal control over financial reporting as of January 31, 2018 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

In light of these significant deficiencies, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the nine months ended January 31, 2018 included in this Quarterly Report on Form 10-Q were fairly stated in accordance with U.S. GAAP. Accordingly, management believes that despite our significant deficiency, our consolidated financial statements for the nine months ended January 31, 2018 are fairly stated, in all material respects, in accordance with U.S. GAAP.

 

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There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

As of January 31, 2018, we were not a party to any material pending legal proceeding except as stated below. From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business.

 

The Company has received notices dated April 1, 2016, May 13, 2016 and July 22, 2016 from two lenders claiming defaults relating to conversion requests of $8,365 principal and $643 interest and $5,000 principal, with regard to notes in the total amounts of $55,125 and $27,500, respectively, which the Company has refused to process and believes it has defenses in that regard. The Company believes these claims are contingent, unliquidated and disputed. There can be no assurance that the Company would prevail should litigation with regard to any of these requests occur. These liabilities have been recorded in the unaudited condensed consolidated financial statements.

 

On September 22, 2016, a motion for summary judgment in lieu of complaint was filed in the Supreme Court of The State of New York County of Kings, against the Company by a lender for the amount of $102,170.82 in principal and interest; accrued and unpaid interest thereupon in the amount from the date of filing to entry of judgment herein; lender’s reasonable attorney’s fees, costs, and expenses; and any such other relief as the Court deems just and proper. Plaintiff ’s motion for summary judgment in lieu of complaint  was denied on May 5, 2017. The Company believes the claim is contingent, unliquidated and disputed.

 

ITEM 1A. RISK FACTORS

 

We are subject to certain risks and uncertainties in our business operations including those 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 which are currently deemed immaterial may also impair our business operations. A description of factors that could materially affect our business, financial condition or operating results were included in Item 1A “Risk Factors” of our Form 10-K for the year ended April 30, 2017, is incorporated herein by reference.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

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(a)(2) of the Securities Act of 1933, as amended, 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. The Company applied proceeds from financing activities described below to working capital.

 

Issuance of shares upon:

 

During the three months ended January 31, 2018 the Company:

 

Sold 370 Units of Series C Convertible Preferred stock for $185,000. Each Unit consists of 1 share of Series C Preferred stock (convertible at any time into 300 shares of the Company’s common stock) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.005 per share.

 

Issued 20 shares of Series C Convertible Preferred stock upon conversion of $40,000 of notes payable and accrued interest thereon.

 

Accrued as to be issued, 13,579,320 shares of common stock upon the conversion of $27,000 of notes payable and accrued interest thereon.

 

Pursuant to terms of agreements, issued 11,085,565 shares of restricted common stock, valued at $44,398.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

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ITEM 4. OTHER INFORMATION

 

Not applicable.

 

ITEM 5. EXHIBITS

 

The following exhibits are filed with this report:

 

Exhibit No.   Description
     
11   Statement re: computation of per share earnings is hereby incorporated by reference to “Financial Statements” of Part I - Financial Information, Item 1 - Financial Statements, contained in this Form 10-Q.
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 and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase
101.DEF*   XBRL Taxonomy Extension Definition Linkbase
101.LAB*   XBRL Taxonomy Extension Label Linkbase
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase
     
* Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  SPARTA COMMERCIAL SERVICES, INC.
   
Date: July 9, 2020 By: /s/ Anthony L. Havens
    Anthony L. Havens, Chief Executive Officer,
    Principal financial and accounting

 

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