SRCO Sparta Commercial Services Inc (PK)

	Large accelerated filer o	Accelerated filer o
	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company x

PART I.  FINANCIAL INFORMATION

 

ITEM 1.    FINANCIAL STATEMENTS

SPARTA COMMERCIAL SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		July 31, 2013				April 30, 2013
		(unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	20,148			$	38,213
Accounts receivable			224,514				153,847
Other current assets			32,629				48,280
Total Current Assets			277,291				240,340
Property and equipment, net of accumulated depreciation and amortization of $197,216 and $194,795, respectively (NOTE B)			12,125				14,546
Goodwill			10,000				10,000
Other assets			9,627				9,628
Deposits			40,568				40,568
Total assets from continuing operations			349,612				315,081
Assets from discontinued operations (NOTE C)			90,382				109,669
Total assets		$	439,994			$	424,750
LIABILITIES AND DEFICIT
Liabilities:
Current Liabilities
Accounts payable and accrued expenses		$	1,346,520			$	1,333,187
Notes payable net of beneficial conversion feature of $101,975 and $105,029, respectively (NOTE D)			2,034,529				2,004,475
Loans payable-related parties (NOTE E)			392,022				393,260
Derivative liabilities			417,445				378,802
Total current liabilities			4,190,516				4,109,724
Liabilities from discontinued operations (NOTE C)			176,402				189,720
Total liabilities			4,366,918				4,299,444
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, 157 and 157 shares issued and outstanding, respectively			1,570				1,570
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, 0 and 0 shares issued and outstanding, respectively			-				-
Common stock, $0.001 par value; 740,000,000 shares authorized, 16,205,665 and 14,131,242 shares issued and outstanding, respectively			16,206				14,131
Common stock to be issued, 215,950 and 625,340, respectively			216				625
Preferred stock B to be issued, 60.71 and 56.8 shares, respectively			61				57
Additional paid-in-capital			39,072,967				38,483,198
Subscriptions receivable			(2,118,309	)			(2,118,309	)
Accumulated deficit			(41,625,662	)			(40,991,658	)
Total deficiency in stockholders' equity			(4,640,451	)			(4,597,885	)
Noncontrolling interest			713,527				723,191
Total Deficit			(3,926,924	)			(3,874,694	)
Total Liabilities and Deficit		$	439,994			$	424,750

 

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

 

 

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SPARTA COMMERCIAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF LOSSES

FOR THE THREE MONTHS ENDED JULY 31, 2013 AND 2012

(UNAUDITED)

 

		Three Months Ended July 31,
		2013				2012
Revenue
Information technology		$	136,116			$	110,364
Cost of goods sold			37,577				34,613
Gross profit			98,539				75,750
Operating expenses:
General and administrative			470,986				598,134
Depreciation and amortization			2,421				2,493
Total operating expenses			473,407				600,627
Loss from continuing operations			(374,868	)			(524,877	)
Other (income) expense:
Other income			(20,505	)			(17,169	)
Interest expense and financing cost, net			91,278				98,582
Non-cash financing costs			12,333				44,435
Amortization of debt discount			75,491				174,612
(Gain) loss in changes in fair value of derivative liability			60,248				28,498
Total other (income) expense			218,846				328,958
Net loss from continuing operations		$	(593,714	)		$	(853,836	)
Net loss from discontinued operations			(10,620	)			(168,312	)
Net Loss			(604,334	)			(1,022,148	)
Net loss (gain) attributed to non-controlling interest			9,664				(70	)
Preferred dividend			(39,334	)			(39,764	)
Net loss attributed to common stockholders		$	(634,004	)		$	(1,061,981	)
Basic and diluted loss per share		$	(0.04	)		$	(0.11	)
Basic and diluted loss per share attributable to common stockholders		$	(0.04	)		$	(0.12	)
Weighted average shares outstanding			15,241,713				9,093,687

 

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

 

 

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  SPARTA COMMERCIAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENT OF DEFICIT

FOR THE THREE MONTHS ENDED JULY 31, 2013

(UNAUDITED)  

 

																		Series B Preferred Stock
		Series A								Series B								Shares																Common Stock												Additional								Non-
		Preferred Stock								Preferred Stock								to be issued								Common Stock								to be issued								Subscriptions				Paid in				Accumulated				controlling
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Receivable				Capital				Deficit				Interest				Total
Balance April 30, 2013			125			$	12,500				157			$	1,570				567,847			$	57				14,131,242			$	14,131				625,340			$	625			$	(2,118,309	)		$	38,483,198			$	(40,991,658	)		$	723,191			$	(3,874,695	)
Preferred dividend to be issued																			39,142				4				-																				39,138												39,142
Derivative liability reclassification																																															84,542												84,542
Sale of common stock																											1,252,686				1,253				(82,720	)			(83	)							298,493												299,663
Shares issued for financing cost																											34,282				34																12,299												12,333
Shares issued for conversion of notes and interest																											572,893				573				(326,670	)			(326	)							94,504												94,751
Stock compensation																											214,562				215																57,454												57,669
Employee options expense																																															3,339												3,339
Net loss																																																			(634,004	)			(9,664	)			(643,668	)
Balance July 31, 2013			125			$	12,500				157			$	1,570				606,989			$	61				16,205,665			$	16,206				215,950			$	216			$	(2,118,309	)		$	39,072,967			$	(41,625,662	)		$	713,527			$	(3,926,924	)

 

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

 

 

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SPARTA COMMERCIAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED JULY 31, 2013 AND 2012

(UNAUDITED)

 

		Three Months Ended July 31,
		2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss		$	(634,004	)		$	(1,061,981	)
Adjustments to reconcile net loss to net cash used in operating activities:
Dividend on preferred stock			39,344				39,764
Loss allocable to non-controlling interest			(9,664	)			(70	)
Depreciation and amortization			2,421				2,493
Amortization of debt discount			75,491				174,612
Change in fair value of derivative liabilities			60,248				28,498
Shares issued for finance cost			12,333				44,435
Shares issued upon conversion of interest			-				34,022
Equity based compensation			61,007				315,835
(Increase) decrease in operating assets:
Accounts receivable			(79,339	)			-
Prepaid expenses and other assets			15,652				(9,684	)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses			57,051				137,120
Net cash used in operating activities			(399,460	)			(294,956	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash provided by investing activities			-				-
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of subsidiary stock			-				55,000
Net proceeds from sale of common stock			299,664				136,000
Net proceeds from convertible notes			164,500				83,000
Net payments on notes payable			(112,500	)			(27,125	)
Net proceeds from other notes			25,000				-
Net loan proceeds from (payments to) other related parties			(1,238	)			7,000
Net cash provided by financing activities			375,426				253,875
Cash flows from discontinued operations:
Cash provided by operating activities of discontinued operations			5,969				68,979
Cash provided by investing activities of discontinued operations			-				111,091
Cash provided by (used in) financing activities of discontinued operations			-				(125,746	)
Net Cash flow from discontinued operation			5,969				54,324
Net (decrease) increase in cash		$	(18,065	)		$	13,243
Unrestricted cash and cash equivalents, beginning of period		$	38,213			$	19,138
Unrestricted cash and cash equivalents , end of period		$	20,148			$	32,382
Cash paid for:
Interest		$	5,585			$	39,638
Income taxes		$	3,214			$	330

See Note I for non-cash investing and financing activities.

 

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

 

 

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SPARTA COMMETRCIAL SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2013

 

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 is as follows.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of July 31, 2013 and for the three month periods ended July 31, 2013 and 2012 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, 2013 as disclosed in the Company’s Form 10-K for that year as filed with the Securities and Exchange Commission.

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

Business

 

Sparta Commercial Services, Inc. (“Sparta” “we,” “us,” or the “Company”), since May 2010, has concentrated its efforts on developing and marketing vehicle history reports, over the internet, and mobile apps for vehicle dealers and other market segments. Historically, the Company had been in the business as an originator and indirect lender for consumer retail installment loans and consumer lease financing for the purchase or lease of new and used motorcycles (specifically 550cc and higher) and utility-oriented 4-stroke all-terrain vehicles (ATVs). These consumer financing products were discontinued during the fiscal year ending April 30, 2013 (see Discontinued Operations).  The Company continues to offer a leasing program for municipalities.  

 

The results of operations for the three months ended July 31, 2013 are not necessarily indicative of the results to be expected for any other interim period or the full year ending April 30, 2014.

Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures.  Accordingly, actual results could differ from those estimates.

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 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.

Revenue Recognition

Revenues from history report and mobile app products are recognized on a cash basis.

The Company’s leases, which are included in Discontinued Operations, are accounted for as either operating leases or direct financing leases.  At the inception of operating leases, no lease revenue is recognized and the leased motorcycles, together with the initial direct costs of originating the lease, which are capitalized, appear on the balance sheet as “motorcycles under operating leases-net”.  The capitalized cost of each motorcycle is depreciated over the lease term, on a straight-line basis, down to the Company’s original estimate of the projected value of the motorcycle at the end of the scheduled lease term (the “Residual”).  Monthly lease payments are recognized as rental income.

 

 

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SPARTA COMMETRCIAL SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2013

Direct financing leases are recorded at the gross amount of the lease receivable (principal amount of the contract plus the calculated earned income over the life of the contract), and the unearned income at lease inception is amortized over the lease term.

The Company’s Retail Installment Sales Contracts (“RISC”) , which are included in Discontinued Operations,   are secured by liens on the titles to the vehicles.  The RISCs are accounted for as loans.  Upon purchase, the RISCs appear on the Company’s balance sheet as RISC loan receivable current and long term.  Interest income on these loans is recognized when it is earned.  

 

The Company realizes gains and losses as the result of the termination of leases, both at and prior to their scheduled termination, and the disposition of the related motorcycle.  The disposal of motorcycles, which reach scheduled termination of a lease, results in a gain or loss equal to the difference between proceeds received from the disposition of the motorcycle and its net book value.  Net book value represents the residual value at scheduled lease termination.  Lease terminations that occur prior to scheduled maturity as a result of the lessee’s voluntary request to purchase the vehicle have resulted in net gains, equal to the excess of the price received over the motorcycle’s net book value.

Early lease terminations also occur because of (i) a default by the lessee, (ii) the physical loss of the motorcycle, or (iii) the exercise of the lessee’s early termination.  In those instances, the Company receives the proceeds from either the resale or release of the repossessed motorcycle, or the payment by the lessee’s insurer.  The Company records a gain or loss for the difference between the proceeds received and the net book value of the motorcycle.

Inventories

Inventories, which are included in Discontinued Operations,  are valued at the lower of cost or market, with cost determined using the first-in, first-out method and with market defined as the lower of replacement cost or realizable value.

 

Website Development Costs

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

Cash Equivalents

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

Income Taxes

Deferred income taxes are provided using the asset and liability method for financial reporting purposes in accordance with the provisions of ASC 740-10, “ Accounting for Income Taxes” .  Under this method, deferred tax assets and liabilities are recognized for temporary differences between the tax bases of assets and liabilities and their carrying values for financial reporting purposes and for operating loss and tax credit carry forwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be removed or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.

ASC 740-10 , “Accounting for Uncertainty in Income Taxes,” prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  ASC 740 also provides guidance on derecognition, classification, treatment of interest and penalties, and disclosure of such positions.  As a result of implementing ASC 740, there has been no adjustment to the Company’s financial statements and the adoption of ASC 740 did not have a material effect on the Company’s consolidated financial statements for the year ending April 30, 2013 or the three months ended July 31, 2013.

Fair Value Measurements

The Company adopted ASC 820, “Fair Value Measurements”.   ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets the lowest priority to unobservable inputs to fair value measurements of certain assets and Liabilities.  The three levels of the fair value hierarchy under ASC 820 are described below:

 

 

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SPARTA COMMETRCIAL SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2013

·

Level 1 — Quoted prices for identical instruments in active markets.  Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain securities that are highly liquid and are actively traded in over-the-counter markets.

·	Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

·

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurements.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques based on significant unobservable inputs, as well as management judgments or estimates that are significant to valuation.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.  For some products or in certain market conditions, observable inputs may not always be available.

 

Impairment of Long-Lived Assets

In accordance ASC 360-10, “ Impairment or Disposal of Long-Lived Assets, ” long-lived assets, such as property, equipment, motorcycles and other vehicles and purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future cash flows or quoted market prices in active markets if available, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Comprehensive Income

In accordance with ASC 220-10, “ Reporting Comprehensive Income ,” establishes standards for reporting and displaying of comprehensive income, its components and accumulated balances.  Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners.  Among other disclosures, ASC 220-10 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.  At July 31, 2013 and April 30, 2013, the Company has no items of other comprehensive income.

Segment Information

The Company adopted ASC 280-10 “ Disclosures about Segments of an Enterprise and Related Information ”.  ASC 280-10 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in consolidated financial reports issued to stockholders.  ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas.  Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions how to allocate resources and assess performance.  The information disclosed herein, materially represents all of the financial information related to the Company's principal operating segments.

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 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. As these lines of business were discontinued during the fiscal year ending April 30, 2013, the Company has discontinued segment reporting.

Stock Based Compensation

The Company adopted ASC 718-10, which records compensation expense on a straight-line basis, generally over the explicit service period of three to five years.

 

 

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SPARTA COMMETRCIAL SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2013

 

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.

 

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.

Property and Equipment

Property and equipment are recorded at cost.  Minor additions and renewals are expensed in the year incurred.  Major additions and renewals are capitalized and depreciated over their estimated useful lives.  Depreciation is calculated using the straight-line method over the estimated useful lives.  Estimated useful lives of major depreciable assets are as follows:

Leasehold improvements	3 years
Furniture and fixtures	7 years
Website costs	3 years
Computer Equipment	5 years

 

Advertising Costs

The Company follows a policy of charging the costs of advertising to expenses incurred.  During the three months ended July 31, 2013 and 2012, the Company incurred $2,500 and $2,000 in advertising costs, respectively.

Net Loss Per Share

The Company uses ASC 260-10, “ Earnings Per Share, ” for calculating the basic and diluted loss per share.  The Company computes basic loss per share by dividing net loss and net loss attributable to common shareholders by the weighted average number of common shares outstanding.  Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive.

Per share basic and diluted net loss attributable to common stockholders amounted to $0.04 and $0.12 for the three months ended July 31, 2013 and 2012, respectively.  At July 31, 2013 and 2012, 5,076,396 and 4,721,308 potential shares, respectively, were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.

Liquidity

As shown in the accompanying unaudited condensed consolidated financial statements, the Company has incurred a net loss attributable to common stockholders of $634,004 and $1,061,981 during the three months ended July 31, 2013 and 2012, respectively.  The Company had a negative net worth of $3,926,924 at July 31, 2013.

 

Reclassifications

Certain reclassifications have been made to conform prior periods’ data to the current presentation.  These reclassifications had no effect on reported losses.

 

Recent Accounting Pronouncements

There were various updates recently issued, most of which represented technical corrections to the accounting literature or applications to specific industries and are not expected to have a material impact on the Company’s unaudited condensed consolidated financial position, results of operations or cash flows.

 

 

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SPARTA COMMETRCIAL SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2013

NOTE B – PROPERTY AND EQUIPMENT

Major classes of property and equipment at July 31, 2013 and April 30, 2013 consist of the followings:

		July 31, 2013				April 30, 2013
Computer equipment, software and furniture		$	209,341			$	209,341
Less: accumulated depreciation			(197,216	)			(194,795	)
Net property and equipment		$	12,125			$	14,546

Depreciation expense for property and equipment was $2,421 and $2,493, respectively for the three months ended July 31, 2013 and 2012, and $11,165 for the year ended April 30, 2013.

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 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.

		Three Months Ended
		July 31,				July 31,
		2013				2012
Revenues		$	21,011			$	51,551
Net (loss)		$	(10,620)			$	(168,312	)

 

As the Company sold all of its portfolio of RISCs, and a portion of its portfolio of leases with the remaining leases in final run-off mode, therefore there no portfolio performance measures were calculated for the year ending April 30, 2013

ASSETS INCLUDED IN DISCONTINUED OPERATIONS

 

MOTORCYCLES AND OTHER VEHICLES UNDER OPERATING LEASES

Motorcycles and other vehicles under operating leases at July 31, 2013 and April 30, 2013:

		July 31,				April 30,
		2013				2013
Motorcycles and other vehicles		$	126,334			$	152,157
Less: accumulated depreciation			(32,604	)			(36,687	)
Motorcycles and other vehicles, net of accumulated depreciation			93,730				115,470
Less: estimated reserve for residual values			(10,382	)			(8,880	)
Motorcycles and other vehicles under operating leases, net		$	83,347			$	106,591

 

At April 30, 2013, motorcycles and other vehicles are being depreciated to their estimated residual values over the lives of their lease contracts. Depreciation expense for vehicles for the three months ended July 31, 2013 was $7,684 and for the year ended April 30, 2013 it was $53,191. All of the assets are pledged as collateral for the note described in SECURED NOTES PAYABLE in this Note C.  These remaining leases are in a run-off mode.

 

 

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SPARTA COMMETRCIAL SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2013

 

INVENTORY

Inventory is comprised of repossessed vehicles and vehicles which have been returned at the end of their lease. Inventory is carried at the lower of depreciated cost or market, applied on a specific identification basis. At July 31, 2013 and at April 30, 2013, the Company had no repossessed vehicles which are held for resale.

 

RETAIL (RISC) LOAN RECEIVABLES

All of the Company’s RISC performing  loan receivables were sold in August 2012.  As of July 31, 2013 and April 30, 2013, the Company had: RISC loans of $5,615 and $0, respectively, and deficiency receivables of $6,417 and $6,157, respectively. At July 31, 2013 and at April 30, 2013, the reserve for doubtful RISC loan receivables was $5,099 and $3,078, respectively.

 

As the Company sold all of its portfolio of RISCs, and a portion of its portfolio of leases with the remaining leases in final run-off mode, therefore there no portfolio performance measures were calculated for the quarter ending July 31, 2013 or the year ending April 30, 2013.

    

LIABILITIES INCLUDED IN DISCONTINUED OPERATIONS

SECURED NOTES PAYABLE

		July 31,				April 30,
		2013				2013
Secured, subordinated  individual lender (a)		$	171,058			$	181,258
Secured, subordinated individual lender (b)			14,337				14,337
Total		$	185,395			$	195,595

(a)	The Company had financed certain of its leases and RISCs through two third parties. The repayment terms are generally one year to five years and the notes are secured by the underlying assets. The weighted average interest rate at July 31, 2013 is 15.29%.

(b)

On October 31, 2008, the Company purchased certain loans secured by a portfolio of secured motorcycle leases (“Purchased Portfolio”) for a total purchase price of $100,000.  The Company paid $80,000 at closing, $10,000 in April 2009 and agreed to pay the remaining $10,000 upon receipt of additional Purchase Portfolio documentation. As of April 30, 2013, no such documents have been received. Proceeds from the Purchased Portfolio started accruing to the Company beginning November 1, 2008. To finance the purchase, the Company issued a $150,000 Senior Secured Note dated October 31, 2008 (“Senior Secured Note”) in exchange for $100,000 from the holder.  Terms of the Senior Secured Note require the Company to make semi-monthly payments in amounts equal to all net proceeds from Purchased Portfolio lease payments and motorcycle asset sales received until the Company has paid $150,000 to the holder. To finance the purchase, the Company issued a $150,000 Senior Secured Note dated October 31, 2008 (“Senior Secured Note”) in exchange for $100,000 from the holder.  Terms of the Senior Secured Note require the Company to make semi-monthly payments in amounts equal to all net proceeds from Purchased Portfolio lease payments and motorcycle asset sales received until the Company has paid $150,000 to the holder. The Company was obligated to pay any remainder of the Senior Secured Note by November 1, 2009 which was extended to May 1, 2013, and has granted the note holder a security interest in the Purchased Portfolio. On January 31, 2013, the holder converted $50,000 of the outstanding balance of the Note into 60,606 shares of the Company’s restricted common stock. The note, which had an outstanding balance of $14,337 at July 31, 2013, has been extended to October 13, 2013.

 

At July 31, 2013, the notes payable mature as follows:

Year ended July 31,		Amount
2014		$	163,807
2015			21,588
Total Due		$	185,395

 

 

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SPARTA COMMETRCIAL SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2013

 

NOTE D – NOTES PAYABLE

 

Notes Payable		July 31, 2013				April 30, 2013
Notes convertible at holder’s option (a)		$	1,746,504			$	1,694,504
Notes with interest only convertible at Company’s option (b)			360,000				360,000
Non-convertible notes payable (c)			30,000				55,000
Subtotal			2,136,504				2,109,504
Less, Debt discount			(101,975	)			(105,029	)
Total		$	2,034,529			$	2,004,475

 

(a)

Notes convertible at holder’s option consists of: (i) a $1,175,105, 8% note originally due April 30, 2013, but subsequently amended to such time as the law suit filed by the Company (see: PART II, ITEM 1 LEGAL PROCEEDINGS) is fully adjudicated, convertible at the holder’s option at $0.495 per share. The Company had recorded a $663,403 beneficial conversion discount for this note which was fully amortized during fiscal 2013; (ii) a $20,000, 8% note due November 11, 2013. The Company has recorded a beneficial conversion discount of  $14,483 for this note. The discount is being fully amortized over the terms of the note.   The note is convertible at the note holder’s option at a variable conversion price such that during the period during which the notes are outstanding, with both notes convertible at 58% multiplied by the average of the three lowest closing bid prices for the common stock during the ten trading day period ending one trading day prior to the submission date of the conversion notice by the note holder to the Company (the “Discount Conversion Rate”). Other convertible notes issued in prior periods to this note holder and outstanding at April 30, 2013 were repaid in cash. The Company has reserved up to 1,344,487 shares of its common stock for conversion pursuant to the terms of the notes.  In the event the notes are  not paid when due, the interest rate is increased to twenty-two percent until the note is paid in full; (iii)  a $103,399, 12% note due August 31, 2012, convertible at the holder’s option at $3.75 per share. The Company is paying $2,000 in monthly penalty shares on this note until the note is paid in full (the number of penalty shares is based on the five day volume weighted average closing price of the Company’s common stock for the five trading days prior to the 19th of each month); (iv) seven notes aggregating $118,250, all due October 30, 2013 with interest ranging from 15% to 20%, the Company is paying 667 monthly penalty shares until the note is paid in full on one  $25,000 note which had been past due, all of the notes are convertible at the holder’s option at $0.375 per share. The Company has recorded a $5,340 beneficial conversion discount for these notes. The discount is being fully amortized over the term of the notes; (v) three notes aggregating $106,250, all due October 30, 2013 with interest ranging from 20% to 25%, all of the notes are convertible at the holder’s option at $0.375 per share. The Company has recorded a $6,120 beneficial conversion discount for these notes. The discount is being fully amortized over the term of the notes; (vi) a $50,000, 8% convertible note due November 30, 2013, convertible at the holder’s option at the lower of $0.25 or the closing market price on the day of conversion. The note holder received 10,000 shares of common stock as inducement for the note. The note carries an 18% default interest rate. The Company has recorded a $24,000 beneficial conversion discount for this note. The discount is being fully amortized over the initial term of the note, $25,000 of the note was received subsequent to July 31, 2013; (vii) a 55,000, 5% convertible note due August 10, 2013, a $59,000, 5% convertible note due April 24, 2014, and a $22,000, 5% convertible note due June 27, 2014. This lender has committed to lend up to $330,000 (three hundred thousand) in the form of two $165,000 notes. The Lender initially advanced $55,000 against one $165,000 note which amount was repaid via conversion. The Lender advanced an additional $55,000 and an additional $22,000 against one $165,000 note and $59,000 against the other note. The lender may lend additional consideration to the Company in such amounts and at such dates as Lender may choose in its sole discretion.  The principal sum due to lender shall be prorated based on the consideration actually paid by lender (plus an approximate 10% original issue discount that is prorated based on the consideration actually paid by the lender as well as any other interest or fees) such that the borrower is only required to repay the amount funded and the Company is not required to repay any unfunded portion of this note.  The maturity date is one year from the effective date of each payment and is the date upon which the Principal Sum of this Note, as well as any unpaid interest and other fees, shall be due and payable.  The Conversion Price is the lesser of $1.20 or 70% of the average of the three lowest closing prices during the 20 trading days immediately previous to the day the conversion notice is delivered to the Company (In the case that conversion shares are not deliverable by DWAC an additional 5% discount will apply; and if the shares are chilled for deposit into the DTC system and only eligible for Xclearing deposit an additional 7.5% discount shall apply).  Unless otherwise agreed in writing by both parties, at no time will the lender convert any amount of this note into common stock that would result in the lender owning more than 4.99% of the common stock outstanding. The Company has recorded a $58,289 beneficial conversion discount for the three outstanding notes. The discount is being fully amortized over the initial term of the notes; (viii)  a $27,500, 5% convertible note due July 16, 2014. This lender has committed to lend up to $165,000 . The Lender initially advanced $27,500. The lender may lend additional consideration to the Company in such amounts and at such dates as Lender may choose in its sole discretion.  The principal sum due to lender shall be prorated based on the consideration actually paid by lender (plus an approximate 10% original issue discount that is prorated based on the consideration actually paid by the lender as well as any other interest or fees) such that the borrower is only required to repay the amount funded and the Company is not required to repay any unfunded portion of this note.  The maturity date is one year from the effective date of each payment and is the date upon which the Principal Sum of this Note, as well as any unpaid interest and other fees, shall be due and payable.  The Conversion Price is the lesser of $0.60 or 70% of the lowest closing prices during the 20 trading days immediately previous to the day the conversion notice is delivered to the Company. (In the case that conversion shares are not deliverable by DWAC, the principal amount of the note shall be increased by $10,000, and the conversion price shall be redefined to equal the lesser of (a) $0.60 or (b) 50% of the lowest closing prices during the 20 trading days immediately previous to the day the conversion notice is delivered to the Company).  Unless otherwise agreed in writing by both parties, at no time will the lender convert any amount of this note into common stock that would result in the lender owning more than 4.99% of the common stock outstanding. The Company has recorded an $11,786 beneficial conversion discount for this note. The discount is being fully amortized over the initial term of the note; and (ix) a $35,000 ,5% convertible note due August 1, 2014. The Conversion Price is the lesser of $0.60 or 70% of the lowest closing prices during the 20 trading days immediately previous to the day the conversion notice is delivered to the Company. In the case that conversion shares are not deliverable by DWAC, the principal amount of the note shall be increased by $10,000, and the conversion price shall be redefined to equal the lesser of (a) $0.60 or (b) 50% of the lowest closing prices during the 20 trading days immediately previous to the day the conversion notice is delivered to the Company. The Company has recorded a $15,000 beneficial conversion discount for this note. The discount is being fully amortized over the initial term of the note.

 

 

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SPARTA COMMETRCIAL SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2013

    

(b)

Notes with interest only convertible at Company’s option consist of: (i) two 22% notes in the amounts of $10,000 each, due October 31, 2012 and August 30, 2012 respectively, and a $25,000 note due May 1, 2011, was extended to October 31, 2013. The Company is paying the note holder 3,334 shares per month until the note is paid or renegotiated. Interest is payable on all three notes at the Company’s option in cash or in shares at the rate of $1.50 per share; and (ii) a $315,000, 12.462% note due April 30, 2014. Interest is payable quarterly with a minimum or $600 in cash with the balance payable in cash or stock at the Company’s option  as calculated as the volume weighted average price of the Company’s common stock for the ten day trading period immediately preceding the last day of each three month period.

 

(c)	Non-convertible notes consist of a $30,000 note due October 31, 2012 which bears no interest; the Company has agreed to pay 2,667 monthly penalty shares until the note is paid in full on this note which had been past due.

 

Amortization of Beneficial Conversion Feature for the three months ended July 31, 2013 and 2012 was $75,491 and $174,612, respectively and for the fiscal year ended April 30, 2013 was $854,569.

 

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 of warrants outstanding at July 31, 2013 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			0.04	%		to	1.16	%
Expected stock price volatility								121	%
Expected dividend payout								0
Expected options life in years	Ranging from			.3	year		to	4.4	years

The change in fair value of the derivative liabilities of convertible notes outstanding at July 31, 2013 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			0.03	%		to	0.11	%
Expected stock price volatility	Ranging from			121	%		to	128	%
Expected dividend payout								0
Expected options life in years	Ranging from			.24	year		to	1	year

  

NOTE E – LOANS PAYABLE TO RELATED PARTIES

As of July 31, 2013 and April 30, 2013, aggregated loans payable, without demand and with no interest, to officers and directors were $392,022 and $393,260, respectively. 

 

 

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SPARTA COMMETRCIAL SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2013

 

NOTE F – EQUITY TRANSACTIONS

On May 18, 2012, the Company’s Board of Directors declared effective a one for seventy-five reverse common stock split. All per share amounts in these unaudited condensed consolidated financial statements and accompanying notes have been retroactively adjusted to the earliest period presented for the effect of this reverse stock split.

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 740,000,000 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, 2013 and April 30, 2013.  The Company had 157 shares of Series B preferred stock issued and outstanding as of July 31, 2013 and April 30, 2013.  The Company had nil shares of Series C preferred stock issued and outstanding as of July 31, 2013 and April 30, 2013.  The Company has 16,205,665 and 14,131,242 shares of common stock issued and outstanding as of July 31, 2013 and April 30, 2013, respectively.

Preferred Stock, Series A

During the quarter ended July 31, 2013, there were no transactions in Series A Preferred, however, at July 31, 2013, there were $6, 236 of accrued dividends payable on the Series A Preferred, compared to the accrual of $5,287 at April 30, 2013.  At the Company’s option, these dividends may be paid in shares of the Company’s Common Stock.

Preferred Stock, Series B

During the quarter ended July 31, 2013, there were no transactions in Series B Preferred Stock, however, at July 31, 2013, there were $39,142.47 of dividends accrued and re-classed as 3.91 shares of Series B Preferred Stock payable. There were a total of 60.7 shares of Series B Preferred payable at July 31, 2013 representing a total of $606,989 in accrued dividends as compared to 56.8 shares of Series B Preferred payable at April 30, 2013 representing $567,847 in accrued dividends

Preferred Stock Series C

There were no shares of Series C Preferred Stock issued and outstanding at July 31, 2013 and at April 30, 2013.

Common Stock

During the three months ended July 31, 2013, the Company expensed $61,007 for non-cash charges related to stock and option compensation expense.

 

During the three months ended July 31, 2013, the Company:

 

●	issued 426,670 shares of common stock which had been classified as to be issued at April 30, 2013,
●	sold 1,169,966 shares of common stock to fourteen accredited investors for $299,663, of which 17,280 shares remained to be issued at July 31, 2013,
●	issued 196,223 shares of common stock upon the conversion of $50,000 principal amount of convertible notes and accrued interest thereon and $29,500 accrued interest on another note,
●	issued 34,282 shares of common stock valued at $12,333 pursuant to terms of various notes,
●	issued 214,562 shares of common stock valued at $57,668 pursuant to consulting agreements, and
●	issued 50,000 shares of common stock in payment of $15,250 in accounts payable.

 

 

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SPARTA COMMETRCIAL SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2013

 

NOTE G – NONCONTROLLING INTEREST

For the three months ended July 31, 2013, the non-controlling interest is summarized as follows:

 

		Amount
Balance at April 30, 2013		$	723,191
Noncontrolling interest’s share of losses			(9,664)
Balance at July 31, 2013		$	713,527

 

NOTE H – 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 July 31, 2013:

 

						Fair Value Measurement Using
		Fair Value at   July 31,   2013				Level 1				Level 2				Level 3
Derivative liabilities		$	417,445				-				-			$	417,445

 

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.

 

 

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SPARTA COMMETRCIAL SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2013

 

Changes in Derivative liability during the three months ended July 31, 2013 were:

 

						Increased				Decrease
		April 30,				During				in Fair				July 31,
		2013				Period				Value				2013
Derivative liability		$	378,802			$	175,727			$	137,084			$	417,445
Total		$	378,802			$	175,727			$	137,084			$	417,445

                     
NOTE I – NON-CASH FINANCIAL INFORMATION

During the three months ended July 31, 2013, the Company:

·	classified preferred dividends to be issued of $39,143

·	issued 34,282 shares of common stock valued at $12,333 pursuant to the terms of the notes

·	issued 50,000 shares of common stock in settlement of $15,250 in accounts payable

·	issued 246,223 shares of common stock upon conversion of $94,750 of notes payable and accrued interest.

 

NOTE J – SUBSEQUENT EVENTS

 

During August and September 2013, the Company:

·	Issued 20,000 shares of S-8 stock for $12,000 in accounts payable.

·	Issued 128,553 shares of common stock upon the conversion of $52,394.21 notes and accrued interest thereon.

·	Issued 48,976 shares of common stock upon the conversion of $32,902.48 of accrued interest.

·	Sold 180,653 shares of common stock to five accredited investors for $63,500

·	Issued 32,739 shares valued at $10,938 pursuant to the terms of their notes.

·	Issued 15,000 shares of common stock valued at $4,500 to a consultant.

·

Borrowed $33,000, pursuant to the terms of a $165,000, 5%, convertible note with an institutional lender. The note is subject to a 10% original issue discount (“OID”) in addition to the interest. On closing, the lender advanced an initial $50,000 and may make additional advances in such amounts and at such dates as the lender chooses. Each advance is for a term of twelve months and the Company will pay no interest if the note is repaid within 90 days. The Conversion Price of the note is the lesser of $1.20 or 70% of the average of the three lowest closing prices during the 20 trading days immediately previous to the day the conversion notice is delivered to the Borrower.

·

Borrowed from an institutional investor, $67,000 at 8% due May 12, 2014, convertible at the note holder’s option at a variable conversion price such that during the period during which the note is outstanding,  the note is convertible at 58% multiplied by the average of the three lowest closing bid prices for the common stock during the ten trading day period ending one trading day prior to the submission date of the conversion notice by the note holder to the Company (the “Discount Conversion Rate”). The Company has reserved up to 1,200,000 shares of its common stock for conversion pursuant to the terms of the note.

·

Borrowed from an accredited investor, $5,000, 5% convertible note due March 1, 2014. The note is convertible at the holder’s option at $0.39 per share. In the event of default on repayment by the Company, the Default interest rate on the unpaid principal balance shall be increased to an annual rate of fifteen (15%) percent. Additionally, in the event of default on repayment by the Borrower, The Borrower shall issue to the Holder one thousand (1,000) shares of its common stock for each month or portion thereof that such default has not been cured.

 

 

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SPARTA COMMETRCIAL SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2013

 

NOTE K   – 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 during the period July 1, 2004 (date of inception) through July 31, 2013, the Company incurred loss of $41,625,662.  Of these losses, $634,004 was incurred in the three months ending July 31, 2013.  These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.

The Company’s existence is dependent upon management’s ability to develop profitable operations.  Management is devoting substantially all of its efforts to developing its business and raising capital and there can be no assurance that the Company’s efforts will be successful.  However, there can be no assurance can be given that management’s actions will result in profitable operations or the resolution of its liquidity problems.  The accompanying 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 the Company will be successful in its effort to secure additional equity financing.

 

 

 

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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, 2013 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 certain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations and beliefs, including, but not limited to statements concerning the Company’s expected growth.  The words “believe,” “expect,” “anticipate,” “estimate,” “project,” and similar expressions identify forward-looking statements, which speak only as of the date such statement was made.  These statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors.

RESULTS OF OPERATIONS

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 all of the Company’s portfolio of 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
		July 31,				July 31,
		2013				2012
Revenues		$	21,011			$	51,551
Net (loss)		$	(9,664)			$	(168,312	)

 

RESULTS OF CONTINUING OPERATIONS

Comparison of the Three Months Ended July 31, 2013 to the Three Months Ended July 31, 2012

For the three months ended July 31, 2013 and 2012, we have generated limited sales revenues, have incurred significant expenses, and have sustained significant losses

 

Revenues

Revenues totaled $136,116 during the three months ended July 31, 2013 as compared to $110,364 during the three months ended July 31, 2012.  This $25,753 (23%) increase in revenues was due to increased sales of mobile apps with sales of history reports being relatively unchanged from the same period last year

 

Costs and Expenses

Cost of goods sold increased 8.56% from $34,613 to $37,577 which percentage increase was less than our 23% increase in revenues resulting in an increase in our gross profit margin to 72% in the current quarter from 68% in the quarter ended July 31, 2012. General and administrative expenses were $470,986 during the three months ended July 31, 2013, compared to $598,134 during the three months ended July 31, 2012. The $127,148 (21.%) decrease was primarily due to a $60,821 (26%) decrease in employee compensation from $230,036 to $169,215 and a $49,479 (51%) decrease in rent and utilities from $96,943 to $47,464.

 

 

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Net Loss from continuing operations

We incurred a net loss from continuing operations and before preferred dividends and non-controlling interest of $593,714 for our three months ended July 31, 2013 as compared to a net loss of $853,836 for the corresponding interim period in 2012, a $260,120 (30%) decrease.  The decrease in our net loss before preferred dividends for our three month interim period ended July 31, 2013 was attributable primarily to the decrease in general and administrative expenses discussed above, a $99,121 (57%) decrease in amortization of debt discount, a $32,102 (72%) decrease in non-cash finance costs, a $7,304 (7%) decrease in interest expense and financing costs, net, a $3,336 (19%) increase in other income partially offset by a $31,750 (111%) increase in the change in the non-cash charge for fair value of derivative liabilities, aided by the $22,789 (30%) increase in gross profit.

Net loss from discontinued operations

Our net loss from discontinued operations for the quarter ended July 31, 2013 was $10,620 as compared to a net loss of $168,312 for the three months ended July 31, 2012, a $157,692 (94%) decrease.

Our net loss attributable to common stockholders

We incurred non-cash preferred dividend expense of $39,334 and $39,764, respectively for our three month periods ended July 31, 2013 and 2012.

 

Our net loss attributable to common stockholders decreased to $634,004 for our three month period ended July 31, 2013 as compared to a net loss of $1,061,981 for the corresponding period in 2012.  The $427,977 or 40% decrease in net loss attributable to common stockholders for our three month period ended July 31, 2013 was due primarily to the factors described above. 

 

LIQUIDITY AND CAPITAL RESOURCES OF CONTINUING OPERATIONS

As of July 31, 2013, we had a negative net worth of $3,936,924.  We generated a deficit in cash flow from operating activities of $399,460 for the three months ended July 31, 2013.  This deficit is primarily attributable to our net loss attributed to common stockholders of $634,004, partially offset by, other non-cash charges including: depreciation of $2,421, amortization of debt discount of $75,491, equity based compensation of $61,007, stock based finance cost of $12,333 and changes in the value of derivative liabilities of $60,248, and to changes in the balances of current assets and liabilities.  Accounts payable and accrued expenses increased by $57,051, receivables increased $79,339, and other assets decreased by $15,652.

We met our cash requirements during the three month period through net proceeds from the sale of common in the amount of $299,664 and net proceeds from convertible notes of $164,500 and other notes of $25,000.  We repaid $112,500 in notes and we repaid $1,238 of notes to a director of the Company.  Additionally, we have received limited revenues from our discontinued leasing and financing activities, and have received fees from our municipal lease program, as well as from our continuing operations. 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, 2013, we had 10 full time employees.  If we are able to fully implement our business plan, we anticipate our employment base may increase by approximately 30% 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 obtaining sources of financing originating loans and leases and generating revenues there from.  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.

We continue seeking additional financing, which may be in the form of senior debt, subordinated debt or equity. 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 $1,500,000 in addition to our normal operating cash flow to conduct operations during the next twelve months. There can be no assurance that additional private or public financing, including debt or equity financing, will be available as needed, or, if available, on terms favorable to us. Any additional equity financing may be dilutive to stockholders and such additional equity securities may have rights, preferences or privileges that are senior to those of our existing common or preferred stock. Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on our operating flexibility. However, if we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition, and we will have to adjust our planned operations and development on a more limited scale.

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

 

 

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GOING CONCERN ISSUES

The independent auditors report on our April 30, 2013 and 2012 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 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 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 are negotiating the potential sale of securities with investment banking companies to assist us in raising capital. We are also presently in discussions with several institutions about obtaining additional credit facilities.

INFLATION

The impact of inflation on 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.

TRENDS, RISKS AND UNCERTAINTIES

We have sought to identify what we believe to be the most significant risks to our business, but we cannot predict whether, or to what extent, any of such risks may be realized nor can we guarantee that we have identified all possible risks that might arise.

Our annual operating results may fluctuate significantly in the future as a result of a variety of factors, most of which are outside our control, including: the demand for our products and services; seasonal trends in purchasing; price competition or pricing changes in the market; technical difficulties or system downtime; general economic conditions and economic conditions specific to the consumer financing sector.

Our annual results may also be significantly impacted by the impact of the accounting treatment of acquisitions, financing transactions or other matters.  Particularly at our early stage of development, such accounting treatment can have a material impact on the results for any quarter.  Due to the foregoing factors, among others, it is likely that our operating results may fall below our expectations or those of investors in some future quarter.

Our future performance and success is dependent upon the efforts and abilities of our management.  To a very significant degree, we are dependent upon the continued services of Anthony L. Havens, our President and Chief Executive Officer and member of our Board of Directors.  If we lost the services of either Mr. Havens, or other key employees before we could get qualified replacements, that loss could materially adversely affect our business.  We do not maintain key man life insurance on any of our management.

 

Our officers and directors are required to exercise good faith and high integrity in our management affairs.  Our bylaws provide, however, that our directors shall have no liability to us or to our shareholders for monetary damages for breach of fiduciary duty as a director except with respect to (1) a breach of the director’s duty of loyalty to the corporation or its stockholders, (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) liability which may be specifically defined by law or (4) a transaction from which the director derived an improper personal benefit.

 

 

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We may experience growth, which will place a strain on our managerial, operational and financial systems resources.  To accommodate our current size and manage growth if it occurs, we must devote management attention and resources to improve our financial strength and our operational systems.  Further, we will need to expand, train and manage our sales and distribution base.  There is no guarantee that we will be able to effectively manage our existing operations or the growth of our operations, or that our facilities, systems, procedures or controls will be adequate to support any future growth.  Our ability to manage our operations and any future growth will have a material effect on our stockholders.

 

If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.  Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board.  If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board.  As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.

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

Revenues from our history report and mobile apps products are recognized on a cash basis.

Our Retail Installment Sales Contracts (“RISCs”), which are included in Discontinued Operations, are secured by liens on the titles to the vehicles. The RISCs are accounted for as loans.  Upon purchase, the RISCs appear on our balance sheet as RISC loans receivable current and long term. When the RISC is entered into our accounting system, based on the customer's APR (interest rate), an amortization schedule for the loan on a simple interest basis is created. Interest is computed by taking the principal balance times the APR rate then divided by 365 days to get your daily interest amount. The daily interest amount is multiplied by the number of days from the last payment to get the interest income portion of the payment being applied. The balance of the payment goes to reducing the loan principal balance.

Our leases, which are included in Discontinued Operations,  are accounted for as either operating leases or direct financing leases. At the inception of operating leases, no lease revenue is recognized and the leased motorcycles, together with the initial direct costs of originating the lease, which are capitalized, appear on the balance sheet as "motorcycles under operating leases-net". The capitalized cost of each motorcycle is depreciated over the lease term, on a straight-line basis, down to the original estimate of the projected value of the motorcycle at the end of the scheduled lease term (the "Residual"). Monthly lease payments are recognized as rental income. An acquisition fee classified as fee income on the financial statements is received and recognized in income at the inception of the lease. Direct financing leases are recorded at the gross amount of the lease receivable, and unearned income at lease inception is amortized over the lease term.

We realize gains and losses as the result of the termination of leases, both at and prior to their scheduled termination, and the disposition of the related motorcycle. The disposal of motorcycles, which reach scheduled termination of a lease, results in a gain or loss equal to the difference between proceeds received from the disposition of the motorcycle and its net book value. Net book value represents the residual value at scheduled lease termination. Lease terminations that occur prior to scheduled maturity as a result of the lessee's voluntary request to purchase the vehicle have resulted in net gains, equal to the excess of the price received over the motorcycle's net book value.

Early lease terminations also occur because of (i) a default by the lessee, (ii) the physical loss of the motorcycle, or (iii) the exercise of the lessee's early termination. In those instances, we receive the proceeds from either the resale or release of the repossessed motorcycle, or the payment by the lessee's insurer. We record a gain or loss for the difference between the proceeds received and the net book value of the motorcycle. We charge fees to manufacturers and other customers related to creating a private label version of our financing program including web access, processing credit applications, consumer contracts and other related documents and processes. Fees received are amortized and booked as income over the length of the contract.

 

 

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Stock-Based Compensation

The Company adopted ASC 718-10, which records compensation expense on a straight-line basis, generally over the explicit service period of three to five years.

 

ASC 718-10 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statement of Operations. The Company is using the Black-Scholes option-pricing model as its method of valuation for share-based awards. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and certain other market variables such as the risk free interest rate.

 

Allowance for Losses

Included in our Discontinued Operations, the Company maintains loss reserves for its portfolio of Leases and for its portfolio of Retail Installment Sales Contracts (“RISC”). The allowance for Lease and RISC losses is increased by charges against earnings and decreased by charge-offs (net of recoveries). To the extent actual credit losses exceed these reserves, a bad debt provision is recorded; and to the extent credit losses are less than the reserve, additions to the reserve are reduced or discontinued until the loss reserve is in line with the Company’s reserve ratio policy. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past lease and RISC experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. The Company periodically reviews its Lease and RISC receivables in determining its allowance for doubtful accounts.

The Company charges-off receivables when an individual account has become more than 120 days contractually delinquent. In the event of repossession, the asset is immediately sent to auction or held for release.

RECENT ACCOUNTING PRONOUNCEMENT

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.

 

 

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ITEM 3 . QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.   CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and our Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.  Based on that evaluation, and in light of the material weaknesses found in our internal controls, our 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.  In our assessment of the effectiveness of internal control over financial reporting, 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.

Management is currently evaluating what steps can be taken in order to address these material weaknesses. 

 

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

I TEM 1.  LEGAL PROCEEDINGS

The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity.

 

On December 18, 2012, a suit was filed by the Company, as plaintiff, asserting claims against a former credit provider seeking substantial damages for the credit provider's alleged breaches of fiduciary duties it owed to the Company, among other causes of action the Company has alleged in a Complaint filed in the United States District Court for the Southern District of New York.  There can be no assurance that the Company will prevail on any of its claims in this action.

 

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, 2013, filed August 13, 2013, 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(2) of the Securities Act as transactions by an issuer not involving a public offering. No advertising or general solicitation was employed in offering the securities. Each purchaser is a sophisticated investor (as described in Rule 506(b) (2) (ii) of Regulation D) or an accredited investor (as defined in Rule 501 of Regulation D), and each received adequate information about the Company or had access to such information, through employment or other relationships, to such information.  The Company applied proceeds from financing activities described below to working capital.

During the quarter ended July 31, 2013, the Company:

 

Borrowed $22,000 pursuant to the terms of a $165,000 convertible note commitment. The lender may lend additional consideration to the Company in such amounts and at such dates as Lender may choose in its sole discretion.  The principal sum due to lender shall be prorated based on the consideration actually paid by lender (plus an approximate 10% original issue discount that is prorated based on the consideration actually paid by the lender as well as any other interest or fees) such that the borrower is only required to repay the amount funded and the Company is not required to repay any unfunded portion of this note.  The maturity date is one year from the effective date of each payment and is the date upon which the Principal Sum of this Note, as well as any unpaid interest and other fees, shall be due and payable.  The Conversion Price is the lesser of $0.60 or 70% of the lowest closing prices during the 20 trading days immediately previous to the day the conversion notice is delivered to the Company (In the case that conversion shares are not deliverable by DWAC an additional 5% discount will apply; and if the Company fails to maintain its status as DTC Eligible, the Principal amount of the Note shall increase by $10,000 and the conversion price shall be redefined to equal the lesser of $0.60 or 50% of the lowest closing prices during the 25 trading days immediately previous to the day the conversion notice is delivered to the Company. Unless otherwise agreed in writing by both parties, at no time will the lender convert any amount of this note into common stock that would result in the lender owning more than 4.99% of the common stock outstanding;

Borrowed $27,500, 5% convertible note due July 16, 2014. This lender has committed to lend up to $165,000 . The Lender initially advanced $27,500. The lender may lend additional consideration to the Company in such amounts and at such dates as Lender may choose in its sole discretion.  The principal sum due to lender shall be prorated based on the consideration actually paid by lender (plus an approximate 10% original issue discount that is prorated based on the consideration actually paid by the lender as well as any other interest or fees) such that the borrower is only required to repay the amount funded and the Company is not required to repay any unfunded portion of this note.  The maturity date is one year from the effective date of each payment and is the date upon which the Principal Sum of this Note, as well as any unpaid interest and other fees, shall be due and payable.  The Conversion Price is the lesser of $0.60 or 70% of the lowest closing prices during the 20 trading days immediately previous to the day the conversion notice is delivered to the Company. (In the case that conversion shares are not deliverable by DWAC, the principal amount of the note shall be increased by $10,000, and the conversion price shall be redefined to equal the lesser of (a) $0.60 or (b) 50% of the lowest closing prices during the 20 trading days immediately previous to the day the conversion notice is delivered to the Company).  Unless otherwise agreed in writing by both parties, at no time will the lender convert any amount of this note into common stock that would result in the lender owning more than 4.99% of the common stock outstanding;

Borrowed $35,000, 5% convertible note due August 1, 2014. The Conversion Price is the lesser of $0.60 or 70% of the lowest closing prices during the 20 trading days immediately previous to the day the conversion notice is delivered to the Company. In the case that conversion shares are not deliverable by DWAC, the principal amount of the note shall be increased by $10,000, and the conversion price shall be redefined to equal the lesser of (a) $0.60 or (b) 50% of the lowest closing prices during the 20 trading days immediately previous to the day the conversion notice is delivered to the Company.

 

 

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Borrowed $30,000, 8% convertible note, convertible at $0.495 per share which amount has been added to an existing note originally due April 30, 2013, but subsequently amended to such time as the law suit filed by the Company (see: PART II, ITEM 1 LEGAL PROCEEDINGS) is fully adjudicated; and

Borrowed $50,000, 8% convertible note due November 30, 2013, convertible at the holder’s option at the lower of $0.25 or the closing market price on the day of conversion. The note holder received 10,000 shares of common stock as inducement for the note. The note carries an 18% default interest rate.

Issued to two note holders 196,223 shares of common stock upon the conversion of $79,500 of notes and accrued interest thereon. Issued 214,562 shares, valued at $57,668, pursuant to consulting agreements.

Issued 63,297 shares of common stock, valued at $21,038 pursuant to terms of notes payable.

Sold 1,169,966 shares of common stock to fourteen accredited investors for $299,663, of which 17,280 remained to be issued at July 31, 2013.

Issued 50,000 shares of common stock in payment of $15,250 in accounts payable.

 

ITEM 3 .  DEFAULTS UPON SENIOR SECURITIES

 

None.

ITEM 4 .  MINE SAFETY DISCLOSURES

None.

ITEM 5 .  OTHER INFORMATION

Not applicable.

 

ITEM 6.  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 pursuant to 18 U.S.C. Section 1350
32.2*		Certification of Principal 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 20, 2013	By:  /s/ Anthony L. Havens
	Anthony L. Havens
	Chief Executive Officer
Date:  September 20, 2013	By:  /s/ Anthony W. Adler
	Anthony W. Adler
	Principal Financial Officer

 

 

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