SRCO 10-Q/A
Sparta Commercial Services, Inc. (SRCO)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
Amendment No. 1
(Mark One)
| QUARTERLY REPORT according to SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
| TRANSITION REPORT according to SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from ________ to ___________.
Commission
file number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
(Address of principal executive offices) (Zip Code)
(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 | ||
| 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. ☒
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). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller reporting company | ||
| (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
As of January 31, 2024, we had shares of common stock issued and outstanding.
EXPLANATORY NOTE
Item 6 of Part II of this Amendment has been amended to include currently-dated certifications from our principal executive officer and principal financial officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 101 provides the financial statements and related notes from the Filing formatted in XBRL (eXtensible Business Reporting Language).
This Form 10-Q/A continues to describe conditions as of the date of the Original Filing. This Form 10-Q/A does not reflect events occurring after the date of the Original Filing nor does it modify or update disclosures affected by subsequent events. Accordingly, this Form 10-Q/A should be read in conjunction with the Company’s Form 10-K for the fiscal year ended April 30, 2023.
SPARTA COMMERCIAL SERVICES, INC.
FORM 10-Q/A
FOR THE QUARTER ENDED January 31, 2024
TABLE OF CONTENTS
| 2 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPARTA COMMERCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 2024, AND APRIL 30, 2023
(Unaudited)
| January 31, 2024 | April 30, 2023 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net of accumulated depreciation and amortization of $ | ||||||||
| Deposits - rent deposit | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND DEFICIT | ||||||||
| Liabilities: | ||||||||
| Current Liabilities | ||||||||
| Bank overdraft | $ | - | $ | |||||
| Short Term Loan | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Derivative liabilities | ||||||||
| Current portion notes payable | ||||||||
| Deferred revenue | ||||||||
| Total Current Liabilities | ||||||||
| Loans payable-related parties | ||||||||
| Total Long Term Liabilities | ||||||||
| Total liabilities | $ | $ | ||||||
| Stockholders’ Deficit: | ||||||||
| Preferred stock, $ par value; shares authorized of which shares have been designated as Series A convertible preferred stock, with a stated value of $ per share, and shares issued and outstanding as of January 31, 2024 and April 30, 2023, respectively | ||||||||
| Preferred stock C, shares have been designated as Series C redeemable, convertible preferred, $par value, with a liquidation and redemption value of $ | ||||||||
| Preferred stock D, shares have been designated as Series D redeemable,
convertible preferred, $ par value, with a liquidation and redemption value of $ | ||||||||
| Common stock, $ par value; shares authorized, and and shares issued and outstanding, respectively | ||||||||
| Common stock to be issued | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total deficiency in stockholders’ equity | ( | ) | ( | ) | ||||
| Non-controlling interest | ||||||||
| Total Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Deficit | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 3 |
SPARTA COMMERCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JANUARY 31, 2024 AND 2023
(Unaudited)
| For three months ended January | For nine months ended January | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue | ||||||||||||||||
| Information technology | $ | $ | $ | $ | ||||||||||||
| New World Health Brands | ||||||||||||||||
| Total Revenue | ||||||||||||||||
| Less Cost of goods sold | ||||||||||||||||
| Gross profit | $ | $ | $ | $ | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Compensation and Related Cost | ||||||||||||||||
| Consulting Fee | ||||||||||||||||
| Rent and lease | ||||||||||||||||
| Accounting and Legal | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and Development | ||||||||||||||||
| Total operating expenses | $ | $ | ||||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other Income ( expense) | ||||||||||||||||
| Commission on municipal bonds | $ | $ | $ | $ | ||||||||||||
| Financing cost | ( | ) | ( | ) | ||||||||||||
| Write off convertible notes and bad debt | ( | ) | ||||||||||||||
| Gain (loss) in changes in fair value of derivative liability | ||||||||||||||||
| Total other (income) expense | $ | $ | $ | $ | ||||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||
| Net profit attributable to minority shareholder | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Preferred dividend | ||||||||||||||||
| Net income (loss) attributed to common stockholders | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Basic and diluted loss per share: | ||||||||||||||||
| Loss from continuing operations attributable to Sparta Commercial Services, Inc. common stockholders | ||||||||||||||||
| Net loss attributable to Sparta Commercial Services, Inc. common stockholders | $ | ) | $ | ) | $ | ) | $ | |||||||||
| Weighted average shares outstanding | ||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 4 |
SPARTA COMMERCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER’S DEFICITS
FOR THE NINE MONTHS ENDED JANUARY 31, 2024 AND 2023
| Series A | Series C | Series D | Common Stock | Additional | Non | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | Capital | Deficit | Interest | Total | |||||||||||||||||||||||||||||||||||||||||||
| Balance April 30, 2023 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of Preferred and Common Stock for Cash | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of notes to common shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares for cash | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for services | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of convertible notes | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred dividend | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance July 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Preferred and Common Stock for Cash | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stocks issued as a note holder incentive | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares for cash | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred dividend | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the quarter | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance October 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of notes payables | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of preferred shares | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | - | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares for services | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance for cash received | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Prior period adjustments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance January 31, 2024 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance April 30, 2022 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Conversion of Preferred to common shares | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of notes to common shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of preferred shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares for cash | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares for services | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stocks issued for equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the quarter | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance July 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Preferred to common shares C | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Preferred to common shares D | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stocks issued as note holder incentive | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares for equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares for cash | 505,861 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the quarter | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance October 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of preferred shares | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance for Notes payable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares for equity | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock for services | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the quarter | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance January 31, 2023 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 5 |
SPARTA COMMERCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDING JANUARY 31, 2024 AND 2023
(UNAUDITED)
| For nine months ended | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Income ( loss ) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | - | |||||||
| Depreciation and amortization | ||||||||
| Loss (Gain) from change in fair value of derivative liabilities | ( | ) | ( | ) | ||||
| Amortization of debt discount | ||||||||
| Non-cash financing cost | ||||||||
| Non-cash consulting fees | ||||||||
| Write off promissory notes | ( | ) | ( | ) | ||||
Non-cash services rendered (shares issued) | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Accrued interest | ||||||||
| Deferred revenue | ( | ) | ||||||
| Net cash used in operating activities | $ | ( | ) | $ | ( | ) | ||
| CASH FLOWS FROM INVESTING ACTIVITIES: | $ | $ | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Bank overdraft | $ | ( | ) | $ | ||||
| Proceeds from sale of stock net of conversion | ||||||||
| Proceeds from notes payable | ||||||||
| Proceeds from related party notes | ( | ) | ||||||
| Payments on related party notes | ||||||||
| Net adjustments /conversion of promissory notes | ||||||||
| Net cash provided by financing activities | $ | $ | ||||||
| Net (decrease) increase in cash | $ | $ | ||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Cash paid for: | ||||||||
| Interest | ||||||||
| Income taxes | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 6 |
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2023
(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
General Overview
Sparta Commercial Services, Inc. (“Sparta,” “we,” “us,” or the “Company”) is a Nevada corporation with headquarters in New York City. We are a multi-disciplined parent corporation operating across three business sectors – Financial Services, E-Commerce & Mobile Technology, and Health and Wellness.
Sparta’s historic roots were in the Powersports industry until the financial crisis that began 2008. The Company provided consumer retail installment loans and leases through authorized motorcycle dealerships in 33 states, with financing lines of credit provided by institutional lenders. In 2007, the Company introduced a Municipal Financing program which has financed over 100 jurisdictions to date.
Vehicle History Reports are a staple of Sparta’s E-Commerce Technology subsidiary iMobile Solutions, Inc. Whether a vehicle is intended for personal, business or recreational use, Sparta’s Vehicle History Reports are highly regarded for accuracy and completeness and have been sold across all 50 states and in 62 countries worldwide.
With iMobile App, the Company additionally provides mobile technology services, including web and mobile application creation, development and management, text messaging services, CRM (Customer Relationship Management) tools, and custom kitchen ordering systems for a wide range of businesses to increase revenue, build brand recognition, and improve customer engagement.
Sparta’s subsidiary, New World Health Brands, Inc., offers high quality dietary supplements.
Sparta’s subsidiary, Sparta Crypto, Inc., is in the process of completing a proprietary state-of-the-art platform designed to connect users of widely adopted digital currencies with sellers of various goods and services; and has completed and tested a cryptocurrency payment gateway called SpartaPayIQ. Agoge Global USA, Inc. (“Agoge”) was formed as a subsidiary of Sparta Crypto, Inc. in December 2022 and entered into a Joint Venture Agreement with WeDev Group of Brazil to facilitate cross-border transactions between importers and exporters of goods from the U.S. and Brazil and is expected to launch in last fiscal quarter of 2024
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as of January 31, 2024 and for the nine months ended January 31, 2024 and 2023 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, 2023 as disclosed in the Company’s Form 10-K for that year as filed with the Securities and Exchange Commission on August 15, 2023.
The results of operations for the nine months ended January 31, 2024 are not necessarily indicative of the results to be expected for any other interim period or the full year ending April 30, 2024.
| 7 |
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. 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 the 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 said period. Accordingly, actual results could differ from those estimates.
Revenue Recognition
During the first quarter of 2018, the Company adopted A.S.U. 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 impact our consolidated financial statements other than enhancing our disclosures related to our revenue-generating activities.
The Company acts as a principal in its revenue transactions as it is the primary obligor.
| 3-months ended | 9-months ended | |||||||||||||||
| Revenue | Jan 2024 | Jan 2023 | Jan 2024 | Jan 2023 | ||||||||||||
| Information technology | $ | $ | $ | $ | ||||||||||||
| New World Health | $ | $ | $ | $ | ||||||||||||
| Total | ||||||||||||||||
Revenues from mobile app products and New World Health Brands products are generally recognized upon delivery. Revenues from History Reports are typically recognized upon delivery/download. Prepayments received from customers before delivery (if any) are recognized as deferred revenue and recognized upon delivery. The Company records deferred revenues when cash payments are received or due before our performance, including refundable amounts.
Cash Equivalents
All liquid investments with three months or less maturity are cash equivalents for the accompanying financial statements.
| 8 |
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 scale gives the highest priority to unadjusted quoted prices in active markets and 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, derivative contracts traded in an active exchange market, and certain highly liquid securities 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 supported by little or no market activity and 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 the 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. Observable inputs may not always be available for some products or in certain market conditions.
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 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 position in the financial statements only if that position is more likely than not to be sustained upon examination by taxing authorities based on the technical merits of the position. Our practice recognizes interest or penalties related to income tax matters in income tax expense.
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. It is recognized over the service period, usually the vesting period. This guidance establishes standards for accounting transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services based on the fair value of the entity’s equity instruments, or the issuance of those equity instruments may settle that.
We use the fair value method for equity instruments granted to non-employees and the Black-Scholes model to measure options’ fair value. The stock-based fair value compensation is determined as of the date of the grant or 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, consisting of available products. They 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.
| 9 |
Property and Equipment
Property and equipment are recorded at cost. Minor additions and renewals are expensed in the year incurred. Significant 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. The estimated useful lives of significant depreciable assets are as follows:
| Leasehold improvements | |
| Furniture and fixtures | |
| Website costs | |
| Computer Equipment |
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 more than the FDIC insurance limit.
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.
Derivative Liabilities
The Company assessed the classification of its derivative financial instruments as of January 31, 2024, and April 30, 2024, which consist of convertible instruments and rights to shares of the Company’s common stock. It 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 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.”
| 10 |
The Company assessed the classification of its derivative financial instruments as of January 31, 2024 and April 30, 2023, 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.
Reclassifications
Certain reclassifications have been made to conform with prior periods’ data to the current presentation. These reclassifications did not affect reported losses.
Recent Accounting Pronouncements-
No recent pronouncements have been made or adopted in the quarter ended January 31, 2024. All of the pronouncements that affect our business have been adopted.
NOTE B – GOING CONCERN MATTERS
The
accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying unaudited condensed
consolidated financial statements, the Company has incurred recurring losses and generated negative cash flows from operating activities
since inception. As of January 31, 2024, the Company had an accumulated deficit of $
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.
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The Company’s existence depends on management’s ability to develop profitable operations. Management is devoting substantially all its efforts to growing its business and raising capital, and there can be no assurance that the Company’s efforts will be successful. The management’s actions are not guaranteed to result in profitable operations or resolve 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.
The Company’s management actively pursues 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 numerous outstanding notes payable to various parties. The notes bear interest at rates of
| Notes Payable | January 31, 2024 | April 30, 2023 | ||||||
| Notes convertible at holder’s option | $ | $ | ||||||
| Notes convertible at Company’s option | ||||||||
| Non-convertible notes payable | ||||||||
| Subtotal | ||||||||
| Total | $ | $ | ||||||
The
balance of accrued interest of the above notes as of January 31, 2024, and April 30, 2023, were
Certain
notes payable contains 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
The Company’s derivative financial instruments are embedded derivatives related to the outstanding short-term Convertible Notes Payable. These embedded derivatives included 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, including 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 products is lower at the subsequent balance sheet date, the Company will record non-operating, non-cash income. These Notes are subject to a six-year Statute of Limitations in which to bring any potential claims.
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The change in fair value of the derivative liabilities on January 31, 2024, 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 | % | ||||
| Expected stock price volatility | Ranging from | % | ||||
| Expected dividend payout | ||||||
| Expected life in years | Ranging from | |||||
| Expected life in years | Ranging from |
Changes in derivative liability during the three months ended January 31, 2024, and 2023 were:
| January 31, | January 31, | |||||||
| 2024 | 2023 | |||||||
| Balance, beginning of year | $ | $ | ||||||
| Derivative liability extinguished | ( | ) | ( | ) | ||||
| Derivative financial liability arising on the issuance of convertible notes and warrants | ||||||||
| Fair value adjustments | ( | ) | ( | ) | ||||
| Balance, end of period | $ | $ | ||||||
NOTE D – LOANS PAYABLE TO RELATED PARTIES
As
of January 31, 2024, and April 30, 2023, aggregated loans and notes payable, without demand and with no interest, to officers, directors,
and other related parties were $
NOTE E – EQUITY TRANSACTIONS
Preferred Stock
The
Company is authorized to issue shares
of preferred stock with $ par
value per share, of which shares
have been designated as Series A convertible preferred stock with a $ stated
value per share; shares have been designated as Series B Preferred Stock with a $
During the nine months ended January 31, 2024, the Company:
| ● | Sold to eleven accredited
investors shares of common stock for cash of $ | |
| ● | Issued shares valued at $ | |
| ● | Issued shares valued at $ |
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Common Stock:
The Company is authorized to issue shares of common stock, $ par value. As of January 31, 2024 and April 30, 2023 the Company’s issued and outstanding shares are and respectively.
During the nine months ended January 31, 2024, the Company:
| ● | Sold
shares valued at $ | |
| ● | Issued shares to accredited investors for cash | |
| ● | Issued shares upon the conversion of shares of Series C and Series D Convertible Preferred Stock. | |
| ● | Issued shares valued at $ | |
| ● | Issued shares for consulting
services valued at $ |
NOTE F – FAIR VALUE MEASUREMENTS
The Company follows the guidelines established according 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 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.
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The table below summarizes the fair values of financial liabilities as of January 31, 2024:
| Fair Value at | Fair Value Measurement Using | |||||||||||||||
| January 31, 2024 | Level 1 | Level 2 | Level 3 | |||||||||||||
| Derivative liabilities | $ | $ | ||||||||||||||
Fair values of financial liabilities as of April 30, 2022, are as follows:
| Fair Value at | Fair Value Measurement Using | |||||||||||||||
| April 30, 2023 | Level 1 | Level 2 | Level 3 | |||||||||||||
| Derivative liabilities | $ | $ | ||||||||||||||
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 incorporating 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 following A.S.C. Topic 825, “The Fair Value Option for Financial Issuances.”
NOTE G – PROPERTY AND EQUIPMENT
Significant classes of property and equipment on January 31, 2024, and April 30, 2023, consist of the following:
| January 31, 2024 | April 30, 2023 | |||||||
| Computer equipment, software and furniture | $ | $ | ||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Net property and equipment | $ | $ | ||||||
All equipment is fully depreciated as of January 31, 2023, and 2022. No additional investment in equipment for both fiscal years.
NOTE H – WARRANTS:
No
warrants were issued to employees or services. As of January
31, 2024, a total of
NOTE I – COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
Our
executive offices are located in New York, NY. We have an agreement for use of office space at this location under a sublease which expired
on July 31, 2018, and continues on a month-to-month basis thereafter. The monthly base rent is $
Rent
expense was $
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Litigation
The Company is subject to legal proceedings and claims arising in its business’s ordinary course. Sparta can make no representations about the potential outcome of such proceedings.
As of January 31, 2024, we have not been named as parties to any further legal proceedings except those disclosed prior and updated below. From time to time, we may become involved in other legal proceedings, which sometimes arise due to the very nature of and in the ordinary course of this business.
By
way of background, the Company had received notices dated April 1, 2016, May 13, 2016, and July 22, 2016, from two lenders claiming defaults
relating to conversion requests of $
For
the above claims, on September 22, 2016, a motion for summary judgment instead of complaint was filed in the Supreme Court in the State
of New York: County of Kings against the Company by a lender for the amount of $
NOTE J – SUBSEQUENT EVENTS
The Company had evaluated subsequent events for recognition and disclosure as of June 14, 2024 when the financial statements were available to be issued.
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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 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, 2023, as disclosed in our annual Report on Form 10-K for that year as filed with the S.E.C.
“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, future events, or performances are not historical facts and may be forward-looking. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” and other similar expressions can, but do 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, and our knowledge of facts when the statements are made. These statements, by their nature, involve substantial risks and uncertainties, sure of which are beyond our control, and actual results may differ materially depending on various 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 outlined in our filings with the Securities and Exchange Commission (“S.E.C.”), including Item 1A of the Company’s Annual Report of Form 10-K for the year ended April 30, 2023. 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. It would be best to consider any forward-looking statements in light of this explanation, and we caution you about relying on them.
General Overview
Sparta Commercial Services, Inc. (“Sparta,” “we,” “us,” or the “Company”) is a Nevada corporation with headquarters in New York City, www.spartacommercial.com. We are a multi-disciplined parent corporation operating across three business sectors – Financial Services, E-Commerce & Mobile Technology, and Health and Wellness, (www.spartacommercial.com).
Sparta’s roots are in the Powersports industry. The Company provided retail installment loans and leases through authorized motorcycle dealerships in 33 states, with financing lines of credit provided by institutional lenders. The Company also created and maintained a full underwriting and servicing platform for its portfolio. Notwithstanding the discontinuance of our initial focus on consumer loans and leases post Lehman and during the 2008 financial crisis; in 2007, the Company had introduced a new initiative which continued without interruption, Municipal Financing, (www.spartamunicipal.com), which has financed over 100 jurisdictions to date. Sparta’s Municipal Finance program is also currently available to all nonprofit organizations, institutions and entities. All nonprofit organizations which adhere to IRS guidelines, including 501 (c) 3 of the Internal Revenue Code, are eligible. Both public nonprofits, also known as public charities supported with publicly collected funds, and private nonprofits, also known as private foundations supported by an individual or business entity, qualify for the program.
Vehicle History Reports are a staple of Sparta’s E-Commerce Technology subsidiary iMobile Solutions, Inc. Whether a vehicle is intended for business or recreational use, Sparta’s Vehicle History Reports are highly regarded for accuracy and completeness and have been sold across all 50 states and in 62 countries worldwide.
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They provide a trusted layer of assurance to vehicle buyers and are available online and at a range of various dealership websites and showrooms. They include Cyclechex (Motorcycle History Reports at www.cyclechex.com ). RVchex (Recreational Vehicle History Reports at www.rvchex.com), and Truckchex (Heavy Duty Truck History Reports at www.truckchex.com). Consumers, retailers, auction houses, banks and insurance companies alike scrutinize title history reports for the vital information needed and factored into crucial business decisions that affect the bottom line.
The Company’s E-Commerce and Mobile Technology subsidiary name change to iMobile Solutions, Inc., from Specialty Reports, Inc., in 2016, signifies its ever-broadening service offerings in the evolving technology landscape. With iMobile App (www.imobileapp.com), the Company provides mobile technology services, including web and mobile application creation, development and management for a wide range of businesses to increase revenue, build brand recognition, and improve customer engagement. Our ever-broadening business base of mobile application includes vehicle dealerships and racetracks, private clubs and country clubs, schools and entertainment venues, restaurants and grocery stores, as well as various other merchant types. (www.imobileapp.com/app-gallery). The Company also designs, launches, maintains and hosts websites for businesses incorporating SEO (search engine optimization), social media marketing, and online reviews to improve their presence online. We provide specific, tailored action plans for our clients’ websites that include services such as eCommerce, CRM (Customer Relationship Management) development and integration. This custom software not only helps businesses communicate with customers but can also be inward-facing used for employees to communicate internally. The CRM software can be web based, integrated with a mobile app, or both. We work with clients to understand their unique needs and incorporate the features and requirements that are most important to them and will facilitate their business growth and success. Correspondingly, the Company designs and builds custom kitchen ordering software for independent grocery stores, delicatessens, and other customer-facing food service businesses. The software can be designed for use in a combination of ways including mobile devices and in-store ordering. The kitchen ordering software is enabled with payment integration, text messaging notification, wireless printing, and other features. iMobile Solutions, Inc. provides a turn-key solution for any business looking to simplify or streamline their kitchen ordering process. Additionally, we offer text messaging services, which supplement business marketing strategies both to gain and retain brand loyalty among its clients, customers and investors. Our text messaging platform allows our clients to easily manage, schedule and analyze text message performance.
Sparta created its subsidiary, New World Health Brands, Inc., in April 2019, initially offering cannabidiol products which we ceased offering effective March 31, 2023. Sparta’s response to the onset of the COVID 19 pandemic in early 2020 quickly took shape with thorough investigations into evolving customer trends in health and wellness. As a result, we expanded New World Health Brands and developed a new product line of natural dietary supplements.
In August 2020, we launched an online B to C website: www.newworldhealthbrands.com, featuring high quality dietary supplements, including vitamins and minerals, such as, Iodine for children and adults, Boron, copper/Zinc/Selenium, Magnesium, Spermidine, Vitamin B Complex, Vitamin C and PQQ. We continue to study the market as we consider new products to add to our offerings. To ensure the safety and quality of our products, all health and wellness offerings are exclusively sourced and manufactured in the United States and adhere to strict U.S standards and guidelines. Sparta’s commitment to high standards and transparency are tantamount to being a trusted brand.
Sparta’s subsidiary, Sparta Crypto, Inc., www.SpartaCrypto.com, was established in September 2020 and is in the process of completing a proprietary state-of-the-art platform designed to connect users of widely adopted digital currencies with sellers of various goods and services. The platform is scheduled to launch in 2023 and the Company can make no assurances that the described plan will reach implementation. In addition, the Company has completed and tested a cryptocurrency payment gateway called SpartaPayIQ, www.SpartaPayIQ.com, which is functional and was formally announced on March 3, 2022. Subsequently, SpartaPayIQ is the transactional engine behind Sparta Crypto and Agoge Global USA, Inc. (“Agoge”). Agoge was formed as a subsidiary of Sparta Crypto, Inc. in December 2022 and entered in to a Joint Venture Agreement with WeDev Group of Brazil to facilitate cross-border transactions between importers and exporters of goods from the U.S. and Brazil.
In addition, Agoge Global USA provides business intermediary services to global importers and exporters of goods and services. These business-to-business services provided through our joint venture agreement with WeDev include, but are not limited to, industry introductions, providing tax and regulatory compliance guidance, import and export documentation assistance, reselling services in other jurisdictions, and facilitation of cross-border transactions.
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RESULTS OF OPERATIONS
Comparison of the nine Months Ended January 31, 2024, and 2023
For the nine months ended January 31, 2024, and 2023, we have generated limited sales revenues, incurred significant expenses, and sustained substantial operating losses.
Revenues
Revenues totaled $151,433 during the nine months ending January 31, 2024, compared to $189,042 during the nine months ending January 31, 2023. Revenues from information technology were down by $37,609 or 20% and sales of New World Health Products remain on the same level for both periods. This decrease was due primarily to a reduction in mobile application fees.
Cost of Revenue
The revenue consists of costs and fees paid to third parties to construct and maintain mobile apps and payments for subscription services related to vehicle history reports and the cost of goods purchased for New World Health Brand products. The cost of revenue was $31,987 during the nine months ended January 31, 2023, compared to $31,069 during the nine months ended January 31, 2024.
Operating Expenses
Operating expenses were $893,386 during the nine months ended January 31, 2024, compared to $1,281,423 during the nine months ended January 31, 2023, a decrease of $388,037 or 30%, primarily due decrease in compensation and consulting fees in the current period. General office expenses increased by $70,114 was due mainly to software development cost for the new business venture in Sparta Crypto.
Expenses incurred during the current nine months period consisted primarily of the following expenses:
| January 31, 2024 | January 31, 2023 | Increase (Decrease) | % | |||||||||||||
| Compensation, option, and related cost | $ | 428,021 | $ | 594,300 | $ | (166,279 | ) | (28 | )% | |||||||
| Accounting, audit and professional fees | 51,921 | 42,763 | 9,158 | 21 | % | |||||||||||
| Consulting Fees | 50,670 | 356,001 | (305,331 | ) | (86 | )% | ||||||||||
| Rent and Utilities | 54,000 | 49,700 | 4,300 | 9 | % | |||||||||||
| General office expenses | 282,273 | 238,659 | 43,614 | 18 | % | |||||||||||
| Research and development | - | |||||||||||||||
| $ | 866,886 | $ | 1,281,423 | $ | (414,537 | ) | (32 | )% | ||||||||
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Other (income) expense
Other income is comprised primarily of writing off some convertible notes of $158,294, which were expired and no longer an obligation for the company and financing costs of $434,385 offset by gain in valuation in fair value of our derivative liabilities of $342,940. In the previous year, debt forgiveness of $625,064, and a loss on the change in fair value of our derivative liabilities was $5,044,879 resulted in net of $5,590,990 or 99% decrease in other income.
Net income (loss)
Our net loss attributable to common stockholders for the nine months ended January 31, 2024, was $675,291 compared to a net income of $4,536,254 for the nine months ended January 31, 2023, primarily due to the change in valuation of derivative liabilities for this period as compared to nine months ending January 31, 2023, we have a gain in valuation in fair value of derivative liabilities of $5,044,879 compared to 2024 loss of $342,940.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2024, we had an accumulated deficit of $66,791,131. The net cash flow used by operations was $499,244 for the nine months ending January 31, 2024. This deficit results primarily from our net loss of $667,097 with loss in fair valuation of derivative liabilities of $342,940 as the significant item in our cash flow.
We met our cash requirements during the period through proceeds from the issuance of stock for a total of $301,043, proceeds from notes payable for a net total of $254,000 of Promissory notes to equity.
We anticipate minimal research and development expenditures or expect the sale or acquisition of any significant property, plant, or equipment during the next twelve months. On January 31, 2024, we had five full-time employees, three part-time employees, and one intern. If we fully implement our business plan, our employment base may increase during the next twelve months. As we continue to expand, we will incur additional costs for personnel. This potential increase in personnel is dependent upon our generating increased revenues and obtaining sources of financing. We are still determining if we will successfully raise the necessary funds or generate revenues sufficient to fund the potential increase in the number of employees. A union does not represent our employees.
While we have raised capital to meet our working capital and financing needs in the past, additional financing is required to meet our current and potential future cash flow deficits from operations.
We continue to seek additional financing, whether 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 successfully raise funds required to support our operations.
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. Such additional equity securities may have rights, preferences, or privileges that are senior to those of our existing common or preferred stock. Furthermore, if available, debt financing will require the payment of interest. However, it may involve restrictive covenants limiting our operating flexibility if we cannot generate sufficient liquidity from operations or raise enough capital resources on acceptable terms. In that case, this could have a material adverse effect on our business, results of operations, liquidity, and financial condition. We must 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 no seasonal aspects would have a material impact on our financial condition or results of operations.
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GOING CONCERN ISSUES
The Company’s historical losses and the lack of revenues raise substantial doubts about the Company’s ability to continue as a going concern. We cannot assure that our business operations will develop and provide us with significant cash to continue operations. If we cannot build our business, we have to discontinue operations or cease to exist, which would be detrimental to the value of the Company’s common stock.
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 that 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 all our efforts to growing our business and raising capital. Our net operating losses increase the difficulty in meeting such goals, and there can be no assurance that such methods will prove successful.
The primary issues management will focus on in the immediate future include: seeking additional credit facilities from institutional lenders, 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 substantial effect on future operations.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not maintain off-balance sheet arrangements or 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 various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While several significant accounting policies affect our financial statements, the following critical accounting policy involves the most complex, difficult, and subjective estimates and judgments.
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 impact our consolidated financial statements other than the enhancement of our disclosures related to our revenue-generating activities.
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The Company acts as a principal in its revenue transactions as it is the primary obligor.
Revenues from mobile app products and New World Health Brands 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. The Company records deferred revenues when cash payments are received or due before our performance, including refundable amounts.
Information Technology:
The Company recognizes revenue when the following criteria have been met:
| ● | Persuasive evidence of an arrangement exists. | |
| ● | No significant Company obligations remain. | |
| ● | Collection of the related receivable is reasonably assured. | |
| ● | The fees are fixed or determinable. |
The Company acts as a principal in its revenue transactions as it is the primary obligor.
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:
Revenues from New World Health Brands 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.
ASC 718-10 requires companies to estimate the fair value of share-based payment awards on the grant date 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 the 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 several highly complex and subjective variables. These variables include but are not limited to the Company’s expected stock price volatility over the awards term and other market variables, such as the risk-free interest rate.
Inventories
Inventory comprises finished goods for the Company’s New World Health Brands business. The Company’s inventories represent finished goods, consisting of products available for sale. They are accounted for using the first-in, first-out (FIFO) method and valued at the lower cost or net realizable value.
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”).
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ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control and could or require net cash settlement, then the contract shall be classified as an asset or a liability. 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 on 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. 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 underlying common stock’s fair value at the note transaction’s commitment date 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 redemption date.
Derivative Liabilities
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 conventional, as described.
RECENT ACCOUNTING PRONOUNCEMENTS
For information regarding recent accounting pronouncements and their effect on the Company, see “Recent Accounting Pronouncements” in Note A of the Notes to Consolidated Financial Statements contained herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act, that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the 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. Under the supervision and participation of our management, including our Chief Executive Officer and Principal Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures as of January 31, 2024. 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 were not effective.
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Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our Chief Executive Officer and Principal Financial Officer, we evaluated the effectiveness of our internal control over financial reporting as of January 31, 2024, using the criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
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 necessary enough to merit attention by those responsible for oversight of the Company’s financial reporting. In our assessment of the effectiveness of internal control over financial reporting as of January 31, 2024, 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 been unable to improve our internal controls over financial reporting during the year ending January 31, 2024. However, to the extent possible, we will implement procedures to ensure that the initiation of transactions, the custody of assets, and the recording of transactions will be performed by separate individuals. Management is currently evaluating the steps to address these material weaknesses.
Accordingly, these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by our internal controls.
As a result of the material weaknesses described above, management has concluded that we did not maintain effective internal control over financial reporting as of January 31, 2024, based on criteria established in Internal Control Integrated Framework issued by COSO.
In light of these significant deficiencies, we performed additional analyses and procedures to conclude that our consolidated financial statements for the year ended April 30, 2023, included in this quarterly report on Form 10-Q, were fairly stated in accordance with U.S. GAAP. Accordingly, management believes that despite our significant deficiency, our consolidated financial statements for the nine months ended January 31, 2024, are fairly stated, in all material respects, in accordance with U.S. GAAP.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit a smaller reporting company to provide only management’s report in its annual report.
Statement of Auditing Standards No. 100, Interim Financial Information (“SAS100”) requires a registrant to engage an independent accountant to review the registrant’s interim financial information. The financial statements included in this filing has not been subject to a review by its independent public accountant
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of January 31, 2024, we have not been named as parties to any further legal proceedings except those disclosed prior and updated below. From time to time, we may become involved in other legal proceedings, which sometimes arise due to the very nature of and in the ordinary course of this business.
By way of background, the Company had received notices dated April 1, 2016, May 13, 2016, and July 22, 2016, from two lenders claiming defaults relating to conversion requests of $8,365.00 in principal plus interest, attorney fees, and $5,000.00 in principal plus interest also seeking stock conversions aside from the stated principal and interest concerning notes in the total amounts of $55,125.00 and $27,500.00, respectively, which the Company has declined to process and believes it has valid, meritorious defenses in that regard. The Company believes these claims are contingent and unliquidated and disputes the same. While there can be no assurances that the Company would prevail in any potential litigation concerning allegations brought against the Company, these potential liabilities have been recorded in the unaudited condensed consolidated financial statements.
Concerning the above claims, on September 22, 2016, a motion for summary judgment in lieu of complaint was filed in the Supreme Court in the State of New York: County of Kings against the Company by a lender for the amount of $102,170.82 in principal and stock conversion interest, plus fees and costs. 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 liability issue, again denied by the Court on March 14, 2019. The most recent appearance in this matter had been scheduled for March 13, 2020, at which time the Court marked the case “adjourned without a date” due to the restrictions imposed on the Courts arising from the COVID-19 pandemic. To date, no further Court appearances have been scheduled in this matter. However, most notably, a favorable decision from the New York State Court of Appeals regarding the same types of transactions has since been determined to be criminally usurious and, therefore, unenforceable management believes. These were the very same defenses raised on behalf of the Company.
ITEM 1A. RISK FACTORS
We are subject to certain risks and uncertainties in our business operations, including those described below. The risks and uncertainties described below are not the only risks we face. Additional risks and uncertainties not presently known or deemed immaterial may also impair our business operations. A description of factors that could materially affect our business, financial condition, or operating results was included in Item 1A, “Risk Factors,” of our Form 10-K for the year ended April 30, 2023, and is incorporated herein by reference.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Each issuance and sale of securities described below was deemed 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). Each received adequate information about the Company or had access to such information, through employment or other relationships, to such information.
Sales of Preferred Stock, Common Stock, and Warrants:
During the nine months that ended January 31, 2024 the Company:
| ● | Sold to eleven accredited investors 2,230,094 shares of common stock for cash of $381,929. | |
| ● | Entered into promissory notes with five accredited investors totaling $254,000. |
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. I.N.S.* | Inline XBRL Instance Document | |
| 101. S.C.H.* | Inline XBRL Taxonomy Extension Schema | |
| 101. C.A.L.* | Inline XBRL Taxonomy Extension Calculation Linkbase | |
| 101. D.E.F.* | Inline XBRL Taxonomy Extension Definition Linkbase | |
| 101. L.A.B.* | Inline XBRL Taxonomy Extension Label Linkbase | |
| 101. P.R.E.* | Inline XBRL Taxonomy Extension Presentation Linkbase | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
*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: June 14, 2024 | By: | /s/ Anthony L. Havens |
| Anthony L. Havens, Chief Executive Officer, | ||
| Principal financial and accounting officer | ||
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