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 July 31, 2020

 

[  ] 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   Name of each exchange on which registered
Common stock, $.001 par value   SRCO   Pink Open Market

 

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 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 [  ]   Smaller reporting company [X]
(Do not check if a smaller reporting company)   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 September 21, 2020, we had 656,192,904 shares of common stock issued and outstanding.

 

 

 

 

 

 

SPARTA COMMERCIAL SERVICES, INC.

 

FORM 10-Q

 

FOR THE QUARTER ENDED July 31, 2020

 

TABLE OF CONTENTS

 

    Page
     
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements (Unaudited) 3
     
  Condensed Consolidated Balance Sheets as of July 31, 2020 (unaudited) and April 30, 2020 3
  Condensed Consolidated Statements of Operations for the Three Months Ended July 31, 2020 and 2019 (unaudited) 4
  Condensed Consolidated Statement of Changes in Deficit for the Three Months ended July 31, 2020 (unaudited) 5
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended July 31, 2020 and 2019 (unaudited) 6
  Notes to Unaudited Condensed Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
     
Item 4. Controls and Procedures 21
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 22
     
Item 1A. Risk Factors 22
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
     
Item 3. Defaults Upon Senior Securities 23
     
Item 5. Other Information 23
     
Item 6. Exhibits 23
     
Signatures 24

 

  2  
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

SPARTA COMMERCIAL SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    July 31, 2020     April 30, 2020  
    (Unaudited)        
ASSETS                
Current Assets                
Cash and cash equivalents   $ 58     $ -  
Accounts receivable     19,326       1,420  
Inventory     32,160       23,331  
Other current assets     519       470  
Total Current Assets     52,063       25,221  
Property and equipment, net of accumulated depreciation and amortization of $213,262 and $212,905, respectively     -       -  
Other assets     9,628       9,628  
Deposits     9,000       9,000  
                 
Total assets   $ 70,691     $ 43,849  
                 
LIABILITIES AND DEFICIT                
                 
Liabilities:                
Current Liabilities                
Bank overdraft   $ 869     $ 14,773  
Accounts payable and accrued expenses     3,081,821       3,427,587  
Current portion notes payable     5,072,768       4,942,324  
Deferred revenue     14,044       16,254  
Derivative liabilities     4,252,446       2,802,125  
Total Current Liabilities     12,421,948       11,203,063  
Loans payable-related parties     432,403       432,403  
Total Long Term Liabilities     432,403       432,403  
Total liabilities   $ 12,854,351     $ 11,635,466  
                 
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, 4,145 and 4,005 shares issued and outstanding, respectively     4,145       4,005  
Preferred stock D, 2,000,000 shares have been designated as Series D redeemable, convertible preferred, $0.001 par value, with a liquidation and redemption value of $1.00 per share, 1,494 and 1,132 shares issued and outstanding, respectively     1,494       1,132  
Common stock, $0.001 par value; 750,000,000 shares authorized, 627,092,904 and 627,092,904 shares issued and outstanding, respectively     627,093       627,093  
Common stock to be issued 98,119,845 and 84,786,511, respectively     98,120       84,787  
Additional paid-in-capital     50,416,173       49,406,954  
Accumulated deficit     (64,919,397 )     (62,702,339 )
Total deficiency in stockholders’ equity     (13,759,872 )     (12,565,868 )
Non-controlling interest     976,212       974,251  
Total Deficit     (12,783,660 )     (11,591,617 )
Total Liabilities and Deficit   $ 70,691     $ 43,849  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  3  
 

 

SPARTA COMMERCIAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JULY 31, 2020 AND 2019

(UNAUDITED)

 

    Three Months Ended  
    July 31,  
    2020     2019  
Revenue            
Information technology   $ 73,947     $ 72,967  
New World Health Brands     2,660       12,262  
Total Revenue     76,607       85,229  
Less Cost of goods sold     20,148       14,787  
Gross profit     56,459       70,442  
                 
Operating expenses:                
General and administrative     713,676       224,709  
Depreciation and amortization     -       357  
Total operating expenses     713,676       225,066  
                 
Loss from operations     (657,217 )     (154,624 )
                 
Other (income) expense:                
Other income     -       (1,200 )
Forgiveness of debt     (63,053 )     (311,127 )
Financing cost     310,424       212,632  
Amortization of debt discount     0       6,825  
Loss (gain) in changes in fair value of derivative liability     1,310,307       1,682,995  
Total other (income) expense     1,557,678       1,590,125  
                 
Net Income (loss)   $ (2,214,895 )   $ (1,744,749 )
                 
Net income attributed to non-controlling interest     (1,972 )     (3,383 )
                 
Preferred dividend     (191 )     (191 )
                 
Net income (loss) attributed to common stockholders   $ (2,217,058 )   $ (1,748,323 )
                 
Basic and diluted loss per share:                
Net loss attributable to Sparta Commercial Services, Inc. common stockholders   $ (0.00 )   $ (0.00 )
                 
Weighted average shares outstanding     627,092,904       627,092,904  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  4  
 

 

SPARTA COMMERCIAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN DEFICIT

FOR THE THREE MONTHS ENDED JULY 31, 2020

(UNAUDITED)

 

    Series A     Series B     Series C     Series D                 Common Stock     Additional           Non-        
    Preferred Stock     Preferred Stock     Preferred Stock     Preferred Stock     Common Stock     to be issued     Paid in     Accumulated     controlling        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Capital     Deficit     Interest     Total  
Balance April 30, 2020     125     $ 12,500       -     $ -       4,005     $ 4,005       1,132     $ 1,132       627,092,904     $ 627,093       84,786,511     $ 84,787     $ 49,406,954       (62,702,339 )   $ 974,251       (11,591,617 )
Sale of preferred stock                                     140       140                                                       69,860                       70,000  
Sale of common stock units                                                                                     13,333,334       13,333       6,667                       20,000  
Stock based compensation                                                                                                     464,718                       464,718  
Shares issued for conversion of notes and interest                                                                                                                             -  
Shares issued for settlement of accounts payable                                                     311       311                                       311,067                       311,378  
Options issued for settlement of accounts payable                                                                                                     156,947                       156,947  
Shares issued for conversion of subsidiary preferred                                                     51       51                                       (40 )             (11 )     -  
Preferred dividend                                                                                                             (191 )             (191 )
Net loss                                                                                                             (2,216,867 )     1,972       (2,214,895 )
Balance July 31, 2020     125     $ 12,500       -     $ -       4,145     $ 4,145       1,494     $ 1,494       627,092,904     $ 627,093       98,119,845     $ 98,120     $ 50,416,173     $ (64,919,397 )   $ 976,212     $ (12,783,660 )

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  5  
 

 

SPARTA COMMERCIAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED JULY 31, 2020 AND 2019

(UNAUDITED)

 

    Three Months Ended  
    July 31,  
    2020     2019  
             
             
CASH FLOWS FROM OPERATING ACTIVITIES                
Net loss   $ (2,214,895 )   $ (1,744,749 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     -       1,595  
Stock based compensation     464,718       -  
Gain from change in fair value of derivative liabilities     1,310,307       (1,420,804 )
Amortization of debt discount     -       66,829  
Non-cash financing cost     140,014       1,839,314  
Forgiveness of debt     (63,053 )     (311,127 )
Changes in operating assets and liabilities                
Accounts receivable     (1,250 )     (2,048 )
Inventory     (4,235 )     (9,761 )
Other assets     (49 )     (1,827 )
Accounts payable and accrued expenses     164,171       440,687  
Deferred revenue     (2,210 )     (2,911 )
Net cash used in operating activities     (206,482 )     (1,144,802 )
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of equipment     -       -  
Net cash (used in) investing activities     -       -  
CASH FLOWS FROM FINANCING ACTIVITIES                
Bank overdraft     (13,904 )     9,614  
Proceeds from sale of stock     90,000       696,050  
Proceeds from notes payable     130,944       57,800  
Payments on notes payable     (500 )     (7,450 )
Proceeds from related party notes     -       12,000  
Payments on related party notes     -       (9,950 )
Net cash provided by financing activities     206,540       758,064  
                 
Cash flows from discontinued operations:                
Cash used in operating activities of discontinued operations     -       -  
Net cash flow from discontinued operation     -       -  
                 
Net (decrease) increase in cash   $ 58     $ (386,738 )
                 
Cash and cash equivalents, beginning of period     -       998  
Cash and cash equivalents , end of period   $ 58     $ (385,740 )
                 
Cash paid for:                
Interest   $ -     $ 249  
Income taxes   $ -     $ 700  

 

See Note G for non-cash investing and financing activities. See accompanying notes to unaudited condensed consolidated financial statements.

 

  6  
 

 

SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2020

(Unaudited)

 

NOTE A – SUMMARY OF SIGNIFICANT 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 mobile application (mobile apps) for smartphones and tablets. The Company also owns and manages websites which sell on-demand motorcycle, recreational vehicle, power-sport 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 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 and EMS equipment. The Company also introduced a new business line in the rapidly expanding Hemp-CBD (cannabidiol) market.

 

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. Presently, through our subsidiary, iMobile Solutions, Inc. (“IMS”), we offer mobile application development, sales, 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, 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.

 

New World Health Brands, Inc. (NWHB) was formed in April 2019 as a subsidiary and new business line of Sparta Commercial Services, Inc. While anticipating, and with the passing of the 2018 Farm Bill, which resulted in the removal of hemp (CBD) from Schedule 1 of the Controlled Substances Act. Sparta’s management recognized a substantial potential business opportunity in the rapidly expanding Hemp-CBD (Cannabinol) market in the United States. During 2019-2020, management sourced, developed and tested 5 CBD product categories totaling 31 products, procured product packaging, labeling, implemented fulfillment and launched an on-line B to C website, www.newworldhealthcbd.com.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements as of July 31, 2020 and for the three month periods ended July 31, 2020 and 2019 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 unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and explanatory notes for the year ended April 30, 2020 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 three months ended July 31, 2020 are not necessarily indicative of the results to be expected for any other interim period or the full year ending April 30, 2020.

 

  7  
 

 

SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2020

(Unaudited)

 

The condensed consolidated balance sheet as of April 30, 2020 contained herein has been derived from the audited consolidated financial statements as of April 30, 2020, but do not include all disclosures required by the U.S. GAAP.

 

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

 

Revenue Recognition

 

During the first quarter of 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), using the cumulative-effect method. The new standard requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The adoption did not have an impact in our consolidated financial statements, other than the enhancement of our disclosures related to our revenue-generating activities. 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 and New World Health 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 an original maturity of three months or less are considered to be cash equivalents.

 

 Website Development Costs

 

The Company recognizes website development costs in accordance with ASC 350-50, “Accounting for Website Development Costs.” As such, the Company expenses all costs incurred that relate to the planning and post implementation phases of development of its website. Direct costs incurred in the development phase are capitalized and recognized over the estimated useful life. Costs associated with repair or maintenance for the website are included in cost of net revenues in the current period expenses. 

 

Fair Value Measurements

 

The Company has 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

JULY 31, 2020

(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.

 

Inventories

 

The Company’s inventories represent finished goods, consist of products available for sale and are accounted for using the first-in, first-out (FIFO) method and valued at the lower of cost or net realizable value. Inventory consists of finished goods for the Company’s New World Health business.

 

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 July 31, 2020 and 2019, 4,748,292,511 potential shares (including 98,119,845 shares to be issued on the balance sheet) and 3,949,236,328 potential shares (including 81,786,511 shares to be issued on the balance sheet), respectively, were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.

 

  9  
 

 

SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2020

(Unaudited)

 

Derivative Liabilities

 

The Company assessed the classification of its derivative financial instruments as of July 31, 2020 and April 30, 2020, 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.

 

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-

 

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 adopted Topic 842 effective May 1, 2019 using a modified retrospective method and will not restate comparative periods. Adoption of this ASU did not have a material impact on the Company’s 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 July 31, 2020, the Company had an accumulated deficit of $64,919,397 and a working capital deficit (total current liabilities exceeded total current assets) of $12,369,885. 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.

 

  10  
 

 

SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2020

(Unaudited)

 

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 – 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  

July 31,

2020

   

April 30,

2020

 
Notes convertible at holder’s option   $ 2,590,309     $ 2,590,309  
Notes convertible at Company’s option     75,700       75,700  
Non-convertible notes payable     2,406,759       2,276,315  
Subtotal     5,072,768       4,942,324  
                 
Less debt discount     -       -  
    $ 5,072,768     $ 4,942,324  

 

  11  
 

 

SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2020

(Unaudited)

 

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. At July 31, 2020, the Company has reserved 238,630,500 shares of its common stock for issuance upon the conversion of debentures.

 

Amortization of debt discount for the three month periods ended July 31, 2020 and 2019 was $0 and $6,825, respectively.

 

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 July 31, 2020 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     0.11 to 0.2 %
Expected stock price volatility   Ranging from     135 to 273 %
Expected dividend payout            
Expected life in years   Ranging from     0.25 to 3.0 Years  

 

The change in fair value of the derivative liabilities of convertible notes outstanding at July 31, 2019 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     1.83% to 2.00 %
Expected stock price volatility         118% to 187 %
Expected dividend payout         0 %
Expected life in years   Ranging from     0.25 year to 2.0 years  

 

During the three months ended July 31, 2020 and 2019, the Company recorded a (loss) of $1,310,307 and a (loss) of $1,682,995, respectively, related to the change in value of the derivative liabilities.

 

Changes in derivative liability during the three months ended July 31, 2020 and 2019 were:

 

    July 31,  
    2020     2019  
Balance, beginning of year   $ 2,802,125     $ 3,496,696  
Derivative liability extinguished     -       -  
Derivative financial liability arising on the issuance of convertible notes and warrants     140,014       63,613  
Fair value adjustments     1,310,307       1,682,995  
Balance, end of period   $ 4,252,446     $ 5,243,304  

 

  12  
 

 

SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2020

(Unaudited)

 

NOTE D – LOANS PAYABLE TO RELATED PARTIES

 

As of July 31, 2020 and April 30, 2020, aggregated loans and notes payable, without demand and with no interest, to officers and directors were $432,403 and $432,403, respectively.

 

NOTE EEQUITY 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, 200,000 shares have been designated as Series C Preferred Stock with a $10 per share liquidation value, and 2,000,000 shares have been designated as Series D Preferred Stock with a $1 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 July 31, 2020 and April 30, 2020. The Company had no shares of Series B preferred stock issued and outstanding as of July 31, 2020 and April 30, 2020. The Company had 4,145 and 4,005 shares of Series C preferred stock issued and outstanding as of July 31, 2020 and April 30, 2020. The Company had 1,494 and 1,132 shares of Series D preferred stock issued and outstanding as of July 31, 2020 and April 30, 2020. The Company had 627,092,904 and 627,092,904 shares of common stock issued and outstanding as of July 31, 2020 and April 30, 2020, respectively. The Company had 98,119,845 and 84,786,511 shares of common classified as to be issued at July 31, 2020 and April 30, 2020.

 

Preferred Stock

 

During the three months ended July 31, 2020, the Company:

 

Sold 140 Units Series C Convertible Preferred stock for $70,000. 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 311 Units Series D Convertible Preferred stock in settlement of $311,378 in 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) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

Issued 51 Units Series D Convertible Preferred stock upon conversion of $51,000 of the Company’s subsidiary’ 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) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

During the three months ended July 31, 2019, the Company:

 

Sold 206 Units C Convertible Preferred stock for $103,000. 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 92 Units C Convertible Preferred stock upon the 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) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.005 per share.

 

Issued 125 Units D Convertible Preferred stock upon the conversion of $125,000 of the Company’s subsidiary’ 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) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

Common Stock

 

During the three months ended July 31, 2020, the Company:

 

Sold to two accredited investors 13,333,334 shares of common stock and two year warrants, to purchase 6,666,667 shares of common stock at $0.004 per share, for $20,000.

 

During the three months ended July 31, 2019, the Company:

 

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

 

NOTE F – 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:

 

  13  
 

 

SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2020

(Unaudited)

 

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 July 31, 2020:

 

    Fair Value at     Fair Value Measurement Using  
   

July 31, 2020

    Level 1     Level 2     Level 3  
Derivative liabilities   $ 4,252,446       -       -     $ 4,252,446  

 

Fair values of financial liabilities as of April 30, 2020 are as follows:

 

    Fair Value at     Fair Value Measurement Using  
   

April 30, 2020

    Level 1     Level 2     Level 3  
Derivative liabilities   $ 2,802,125       -       -     $ 2,802,125  

 

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

 

Derivative liabilities — 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”.

 

NOTE G – NON-CASH INVESTING AND FINANCING INFORMATION

 

During the three months ended July 31, 2020, the Company:

 

Issued 311 Units Series D Convertible Preferred stock in settlement of $311,378 in 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) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

Issued 51 Units Series D Convertible Preferred stock upon conversion of $51,000 of the Company’s subsidiary’ 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) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

During the three months ended July 31, 2019, the Company:

 

Issued 92Units C Convertible Preferred stock upon the 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) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.005 per share.

 

Issued 125 Units D Convertible Preferred stock upon the conversion of $125,000 of the Company’s subsidiary’ 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) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

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

 

  14  
 

 

SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2020

(Unaudited)

 

NOTE H – 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 sub-lease which expired on July 31, 2019, and continues on a month-to-month basis thereafter. The monthly base rent is $5,100.

 

Rent expense was $16,200 and $13,250 for the three month periods ended July 31, 2020 and 2019, 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 July 31, 2020, 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. On August 22, 2019, Plaintiff brought a second motion seeking summary judgment on the issue of liability which was denied on March 14, 2020. The Court found that there existed issues of fact warranting a trial. The Company believes the claim is contingent, unliquidated and disputed. There is no assurance that the Company will prevail in this litigation. These liabilities have been recorded in the unaudited condensed consolidated financial statements.

 

On October 26, 2019, a lender commenced an action in the Supreme Court of the State of New York in New York County alleging damages from unpaid principal and interest, attorney’s fees, costs, and expenses arising from a promissory note dated February 26, 2015 in the amount of $50,000.00. The case is presently in the discovery phase of the litigation. The Company believes the claim is contingent, unliquidated and disputed.

 

NOTE I – SUBSEQUENT EVENTS

 

Subsequent to July 31, 2020 the Company:

 

Sold, to an accredited investor, 3,333,334 Shares of Common stock (and two year warrants to purchase 1,666,667 shares of common stock at $0.004 per share) for $5,000.

 

Sold, to an accredited investor, 10 Units of Series C convertible preferred stock for $10,000. 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.

 

On July 9, 2020, the Company filed with the Securities and Exchange Commission, a Schedule 14C Information Statement whereby a majority of the Company’s shareholders approved a 1 for 100 reverse stock split of the Company’s common shares outstanding. As of the date of this filing, FINRA (the Financial Industry Regulatory Authority) has yet to approve the reverse stock split.

 

  15  
 

 

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 condensed consolidated financial statements and their explanatory notes included as part of this quarterly report, and (2) our annual audited consolidated financial statements and explanatory notes for the year ended April 30, 2020 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, 2016. 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 mobile applications (mobile apps) for smartphones and tablets. The Company also owns and manages websites which sell on-demand motorcycle, recreational vehicle, power-sport 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 for local and/or state agencies seeking to finance municipal vehicles and essential equipment. The Company also introduced a new business line in the rapidly expanding Hemp-CBD (cannabidiol) market.

 

In 2020, 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 fast-growing mobile application market.

 

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, 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); RVchex (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, and EMS equipment. We are continuing to expand our roster of equipment manufacturers and the types of equipment we lease.

 

  16  
 

 

New World Health Brands, Inc. (NWHB) was formed in April 2020 as a subsidiary and new business line of Sparta Commercial Services, Inc. While anticipating, and with the passing of the 2019 Farm Bill, which resulted in the removal of hemp (CBD) from Schedule 1 of the Controlled Substances Act. Sparta’s management recognized a substantial potential business opportunity in the rapidly expanding Hemp-CBD (Cannabinol) market in the United States. During 2019-2020, management sourced, developed and tested 5 CBD product categories totaling 31 products, procured product packaging, labeling, implemented fulfillment and launched an on-line B to C website, www.newworldhealthcbd.com.

 

RESULTS OF OPERATIONS

 

Comparison of the Three Months Ended July 31, 2020 to the Three Months Ended July 31, 2019

 

For the three months ended July 31, 2020 and 2019, we have generated limited sales revenues, have incurred significant expenses, and have sustained significant losses.

 

Revenues

 

Revenues totaled $76,607 during the three months ended July 31, 2020 as compared to $85,229 during the three months ended July 31, 2019, a decrease of $8,622 or 10.12%, primarily due to Covid-19. Revenues from our Information Technology products declined $908 or 1.34% to $73,947 while revenues from our New World Health Brands products declined $9,602 or 78.31 % to $2,660.

 

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 and cost of goods purchased for New World Health Brand products. Cost of revenue was $20,148 during the three months ended July 31, 2020 as compared to $14,787 during the three months ended July 31, 2019. This $5,361 or 36.25% increase was due to New World Health Brands product line inventory purchases.

 

Operating Expenses

 

General and administrative expenses were $713,676 during the three months ended July 31, 2020, compared to $224,709 during the three months ended July 31, 2020, an increase of $488,967 or 217.60%, primarily due to the non-cash Black Scholes $464,718 valuation of options issued to management and directors. Expenses incurred during the current three month period consisted primarily of the following expenses: Compensation, options and related costs, $594,763; Accounting, audit and professional fees, $52,620; Consulting fees, $12,580 and Rent, utilities and telecommunication expenses $21,447. Expenses incurred during the comparative three month period in 2019 consisted primarily of the following expenses: Compensation and related costs, $151,421; Accounting, audit and professional fees, $17,130; Consulting fees, $7,134; and Rent, utilities and telecommunication expenses $22,244.

 

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. Other loss was $1,557,678 for the three months ended July 31, 2020, compared to net other loss of $1,590,125 for the three months ended July 31, 2019, a decrease in net other expense of $32,447 or 2.04%. The decrease results from the change in the fair value of our derivative liabilities.

 

Net income (loss)

 

Our net loss attributable to common stockholders for the three months ended July 31, 2020 increased by $468,735 or 26.81% to $2,217,058 from $1,748,323 for the three months ended July 31, 2019. This increase in net loss attributable to common stockholders for the three months ended July 31, 2020 was primarily due to the factors discussed above.

 

  17  
 

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of July 31, 2020, we had an accumulated deficit of $64,919,397 and a total deficit for the three months of $12,783,660. We generated a deficit in cash flow from operations of $206,482 for the three months ended July 31, 2020. This deficit results primarily from our net loss of $2,214,895, partially offset by noncash expense of $1,915,039 and an increase of $164,171 in accounts payables and accrued expenses.

 

We met our cash requirements during the period through proceeds from the sale of preferred stock for proceeds of $90,000, and the sale of notes payable in the amount of $130,944. We repaid notes in the amount of $500.

 

We do not anticipate incurring significant research and development expenditures, and we do not anticipate the sale or acquisition of any significant property, plant or equipment, during the next twelve months. At July 31, 2020, we had 6 full time employees. If we fully implement our business plan, we anticipate our employment base may increase during the next twelve months. As we continue to expand, we will incur additional cost for personnel. This potential increase in personnel is dependent upon our generating increased 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 potential 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 potential future cash flow deficits from operations.

 

We continue to seek 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, 2020 and 2019 consolidated 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.

 

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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.

 

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 policy involves the most complex, difficult and subjective estimates and judgments.

 

Revenue Recognition

 

Information Technology:

 

During the first quarter of 2019, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), using the cumulative-effect method. The new standard requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The adoption did not have an impact in our consolidated financial statements, other than the enhancement of our disclosures related to our revenue-generating activities. 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.

 

New World Health Brands (“NWHB”):

 

Revenues from NWHB products are generally recognized upon delivery.

 

Stock-Based Compensation

 

The Company adopted Financial Accounting Standards Board Accounting Standard Codification Topic 718 (“ASC 718-10”), which records compensation expense on a straight-line basis, generally over the explicit service period of three to five years.

 

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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 July 31, 2020 and April 30, 2020, 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.

 

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 unaudited condensed consolidated financial statements, which is incorporated herein by reference.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

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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 July 31, 2020. 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 July 31, 2020, 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 July 31, 2020 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 three months ended July 31, 2020 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 three months ended July 31, 2020 are fairly stated, in all material respects, in accordance with U.S. GAAP.

 

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.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

As at July 31, 2020, 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. On August 22, 2018, Plaintiff brought a second motion seeking summary judgment on the issue of liability which was denied on March 14, 2019. The Court found that there existed issues of fact warranting a trial. The Company believes the claim is contingent, unliquidated and disputed. There is no assurance that the Company will prevail in this litigation. These liabilities have been recorded in the unaudited condensed consolidated financial statements.

 

On October 26, 2018, a lender commenced an action in the Supreme Court of the State of New York in New York County alleging damages from unpaid principal and interest, attorney’s fees, costs, and expenses arising from a promissory note dated February 26, 2015 in the amount of $50,000.00. The case is presently in the discovery phase of the litigation. 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, 2020, and 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.

 

  22  
 

 

Sales of Preferred Stock, Common Stock and Warrants:

 

During the three months ended July 31, 2020 the Company:

 

Sold 206 Units C Convertible Preferred stock for $103,000. 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 92 Units C Convertible Preferred stock upon the 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) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.005 per share.

 

Issued 125 Units D Convertible Preferred stock upon the conversion of $125,000 of the Company’s subsidiary’ 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) and 150 two year Warrants to purchase one share of the Company’s common stock at $0.01 per share.

 

Sold to two accredited investors 13,333,334 shares of common stock and two year warrants, to purchase 6,666,667 shares of common stock at $0.004 per share, for $20,000.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 5. OTHER INFORMATION

 

Not applicable.

 

ITEM 6. EXHIBITS

 

The following exhibits are filed with this report:

 

Exhibit No.   Description
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: September 21, 2020 By: /s/ Anthony L. Havens
    Anthony L. Havens, Chief Executive Officer,

 

  Principal financial and accounting officer

 

  24  

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