UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





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





For
the quarterly period ended October 31, 2009





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





For the
transition period from ________ to ___________.





Commission
file number: 0-9483





SPARTA
COMMERCIAL SERVICES, INC.


(Exact
name of registrant as specified in its charter)





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





462
Seventh Ave, 20th Floor, New York, NY 10018


(Address
of principal executive offices)  (Zip Code)





(212)
239-2666


(Registrant’s
telephone number, including area code)





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.  Yes x No o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.


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





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





As of
December 10, 2009, we had 340,966,610 shares of common stock issued and
outstanding.





SPARTA
COMMERCIAL SERVICES, INC.





FORM
10-Q


FOR
THE QUARTER ENDED OCTOBER 31, 2009





TABLE
OF CONTENTS





PagePART
      I.
              FINANCIAL
      INFORMATIONItem
      1.
              Financial
      Statements (Unaudited)
              3Condensed
      Consolidated Balance Sheets as of October 31, 2009 and April 30,
      2009
              3Condensed
      Consolidated Statements of Losses for the Three and Six Months Ended
      October 31, 2009 and 2008
              4Condensed
      Consolidated Statement of Stockholders’ Deficit for the Six Months ended
      October 31, 2009
              5Condensed
      Consolidated Statements of Cash Flows for theSix
      Months Ended October 31, 2009 and 2008
              6Notes
      to Unaudited Condensed Consolidated Financial Statements
              7Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              21Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              28Item
      4.
              Controls
      and Procedures
              28PART
      II.
              OTHER
      INFORMATIONItem
      1.
              Legal
      Proceedings
              29Item
      1A.
              Risk
      Factors
              29Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              34Item
      3.
              Defaults
      Upon Senior Securities
              35Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              35Item
      5.
              Other
      Information
              35Item
      6.
              Exhibits
              35Signatures
              
              36


2


PART
I. FINANCIAL INFORMATION





ITEM 1.   FINANCIAL
STATEMENTS





SPARTA
COMMERCIAL SERVICES, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


October 31,
                
                
                April 30,2009
                
                
                2009(Unaudited)ASSETSCash
      and cash equivalents
                
                $
                7,298
                
                
                $
                2,790RISC
      loan receivables, net of reserve of $173,070 and $235,249 as of October
      31, 2009 and April 30, 2009, respectively (NOTE D)
                
                
                2,350,675
                
                
                
                3,248,001Motorcycles
      and other vehicles under operating leases net of accumulated depreciation
      of $241,130 and $ 256,485  as of October 31, 2009 and April 30,
      2009 respectively, and loss reserve of $37,550 and $32,726  as
      of October 31, 2009 and April 30, 2009 respectively (NOTE
    B)
                
                
                472,033
                
                
                
                621,797Interest
      receivable
                
                
                33,826
                
                
                
                49,160Purchased
      Portfolio (NOTE F)
                
                
                42,458
                
                
                
                72,635Accounts
      receivable
                
                
                68,936
                
                
                
                17,899Inventory
      (NOTE C)
                
                
                60,509
                
                
                
                12,514Property
      and equipment, net of accumulated depreciation and amortization of
      $156,476 and $147,905 as of October 31, 2009 and April 30, 2009,
      respectively  (NOTE E)
                
                
                34,771
                
                
                
                43,342Prepaid
      expenses
                
                
                415,470
                
                
                
                593,529Restricted
      cash
                
                
                223,666
                
                
                
                348,863Deposits
                
                
                48,968
                
                
                
                48,967Total
      assets
                
                $
                3,758,610
                
                
                $
                5,059,497LIABILITIES
      AND DEFICIENCY IN STOCKHOLDERS’ EQUITYLiabilities:Bank
      overdraft
                
                $
                -
                
                
                $
                57,140Accounts
      payable and accrued expenses
                
                
                1,382,163
                
                
                
                1,851,876Notes
      payable-Senior Lender (NOTE F)
                
                
                2,749,207
                
                
                
                3,694,838Note
      payable, net (NOTE G)
                
                
                1,371,399
                
                
                
                5,102,458Loans
      payable-related parties (NOTE H)
                
                
                378,260
                
                
                
                378,260Other
      liabilities
                
                
                -
                
                
                
                88,285Deferred
      revenue
                
                
                10,350
                
                
                
                13,050Total
      liabilities
                
                
                5,891,380
                
                
                
                11,185,907Deficiency
      in Stockholders’ Equity:Preferred
      stock, $.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 as of October 31, 2009 and April 30,
      2009,  respectively
                
                $
                12,500
                
                
                $
                12,500Preferred
      Stock Series 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 90 shares and 0 shares outstanding as of October 31,
      2009 and April 30, 2009, respectively
                
                
                .09
                
                
                
                -Preferred
      Stock Series 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, 12,500 and 0 shares outstanding as
      of October 31, 2009 and April 30, 2009, respectively
                
                
                12.5
                
                
                
                -Common
      stock, $.001 par value; 750,000,000 shares authorized, 324,118,949 and
      170,730,064 shares issued and outstanding as of October 31, 2009 and April
      30, 2009, respectively
                
                
                324,119
                
                
                
                170,730Common
      stock to be issued, 1,107,000 and 16,735,453 shares as of October 31, 2009
      and April 30, 2009, respectively
                
                
                1,107
                
                
                
                16,735Additional
      paid-in-capital
                
                
                26,694,258
                
                
                
                20,820,672Accumulated
      deficit
                
                
                (29,164,766
                )
                
                
                (27,147,047
                )Total
      deficiency in stockholders’ equity
                
                
                (2,132,770
                )
                
                
                (6,126,410
                )Total
      liabilities and deficiency in stockholders’ equity
                
                $
                3,758,610
                
                
                $
                5,059,497





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




3




SPARTA
COMMERCIAL SERVICES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF LOSSES


FOR
THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2009 AND 2008


(UNAUDITED)





Three Months Ended
                    October 31,
                  
                  
                  Six Months Ended
                    October 31,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenue
      :Rental
      Income, Leases
                  
                  $
                  46,241
                  
                  
                  $
                  78,643
                  
                  
                  $
                  99,310
                  
                  
                  $
                  168,337Interest
      Income, Loans
                  
                  
                  115,893
                  
                  
                  
                  193,664
                  
                  
                  
                  254,758
                  
                  
                  
                  397,707Other
                  
                  
                  26,412
                  
                  
                  
                  28,742
                  
                  
                  
                  51,282
                  
                  
                  
                  129,924Total
      Revenues
                  
                  
                  188,546
                  
                  
                  
                  301,049
                  
                  
                  
                  405,350
                  
                  
                  
                  695,969Operating
      expenses:General
      and administrative
                  
                  
                  840,826
                  
                  
                  
                  977,427
                  
                  
                  
                  1,433,023
                  
                  
                  
                  2,341,579Depreciation
      and amortization
                  
                  
                  115,808
                  
                  
                  
                  48,088
                  
                  
                  
                  238,500
                  
                  
                  
                  109,171Total operating
      expenses
                  
                  
                  956,633
                  
                  
                  
                  1,025,515
                  
                  
                  
                  1,671,522
                  
                  
                  
                  2,450,750Loss
      from operations
                  
                  
                  (768,087
                  )
                  
                  
                  (724,466
                  )
                  
                  
                  (1,266,173
                  )
                  
                  
                  (1,754,782
                  )Other
      expenses:Interest
      expense and financing cost, net
                  
                  
                  (235,314
                  )
                  
                  
                  (273,507
                  )
                  
                  
                  (731,685
                  )
                  
                  
                  (952,234
                  )Net
      Loss
                  
                  
                  (1,003,402
                  )
                  
                  
                  (997,973
                  )
                  
                  
                  (1,997,858
                  )
                  
                  
                  (2,707,016
                  )Preferred
      dividend payable
                  
                  
                  19,671
                  
                  
                  
                  1,261
                  
                  
                  
                  19,862
                  
                  
                  
                  2,522Net
      loss attributed to common stockholders
                  
                  $
                  (1,023,072
                  )
                  
                  $
                  (999,234
                  )
                  
                  $
                  (2,017,720
                  )
                  
                  $
                  (2,709,538
                  )Basic
      and diluted loss per share
                  
                  $
                  (0.00
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.01
                  )Basic
      and diluted loss per share attributed to common
    stockholders
                  
                  $
                  (0.00
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.02
                  )Weighted
      average shares outstanding
                  
                  
                  314,765,615
                  
                  
                  
                  158,640,140
                  
                  
                  
                  246,399,212
                  
                  
                  
                  152,754,485





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


4


SPARTA
COMMERCIAL SERVICES, INC.


CONDENSED
CONSOLIDATED STATEMENT OF (DEFECIENCY IN) STOCKHOLDERS’ EQUITY


FOR
THE SIX MONTHS ENDED OCTOBER 31, 2009





Common Stock
                              
                              
                              AdditionalPreferred Stock
                              
                              
                              Common Stock
                              
                              
                              to be issued
                              
                              
                              Paid in
                              
                              
                              AccumulatedShares
                              
                              
                              Amount
                              
                              
                              Shares
                              
                              
                              Amount
                              
                              
                              Shares
                              
                              
                              Amount
                              
                              
                              Capital
                              
                              
                              Deficit
                              
                              
                              TotalBalance,
      April 30, 2009
                              
                              
                              125
                              
                              
                              $
                              12,500
                              
                              
                              
                              170,730,063
                              
                              
                              $
                              170,729
                              
                              
                              
                              16,735,453
                              
                              
                              $
                              16,735
                              
                              
                              $
                              20,820,672
                              
                              
                              $
                              (27,147,047
                              )
                              
                              $
                              (6,126,410
                              )Cancellation
      of shares
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (400
                              )
                              
                              
                              (0.40
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              0.4
                              
                              
                              
                              -
                              
                              
                              
                              -Correction
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,950
                              )
                              
                              
                              (1.95
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (2
                              )Sale
      of  Preferred Stock B
                              
                              
                              90
                              
                              
                              
                              .09
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              650,000
                              
                              
                              
                              -
                              
                              
                              
                              650,000Preferred
      Stock C issued for accounts payable
                              
                              
                              12,500
                              
                              
                              
                              12.5
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              124,988
                              
                              
                              
                              -
                              
                              
                              
                              125,000Sale
      of common stock
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,409,869
                              
                              
                              
                              1,410
                              
                              
                              
                              1,007,049
                              
                              
                              
                              1,007
                              
                              
                              
                              117,583
                              
                              
                              
                              -
                              
                              
                              
                              120,000Shares
      issued for Preferred A conversion
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              10,733,974
                              
                              
                              
                              10,733
                              
                              
                              
                              (10,733,980
                              )
                              
                              
                              (10,733
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Shares
      issued for financing
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,544,000
                              
                              
                              
                              2,544
                              
                              
                              
                              (84,000
                              )
                              
                              
                              (84
                              )
                              
                              
                              141,462
                              
                              
                              
                              -
                              
                              
                              
                              143,922Shares
      issued for accrued interest
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              200,000
                              
                              
                              
                              200
                              
                              
                              
                              (200,000
                              )
                              
                              
                              (200
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Shares
      issued for conversion of notes and interest
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              132,556,857
                              
                              
                              
                              132,558
                              
                              
                              
                              (3,615,520
                              )
                              
                              
                              (3.616
                              )
                              
                              
                              4,383,208
                              
                              
                              
                              -
                              
                              
                              
                              4,512,150Stock
      compensation
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              4,000,000
                              
                              
                              
                              4,000
                              
                              
                              
                              (2,000,000
                              )
                              
                              
                              (200
                              )
                              
                              
                              72,500
                              
                              
                              
                              -
                              
                              
                              
                              74,500Shares
      issued for payables
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,944,586
                              
                              
                              
                              1,945
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              119,271
                              
                              
                              
                              -
                              
                              
                              
                              121,216Employee
      Option Expense
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              70,284
                              
                              
                              
                              -
                              
                              
                              
                              70,284Warrant
      Compensation
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              132,515
                              
                              
                              
                              -
                              
                              
                              
                              132,515Warrant
      liability
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (3,826
                              )
                              
                              
                              -
                              
                              
                              
                              (3,826
                              )Forgiveness’
      of payables
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              \-
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              65,601
                              
                              
                              
                              -
                              
                              
                              
                              65,601Net
      Loss
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (2,017,720
                              )
                              
                              
                              (2,017,720
                              )Balance,
      October 31, 2009
                              
                              
                              12,715
                              
                              
                              $
                              12,513
                              
                              
                              
                              324,118,949
                              
                              
                              $
                              324,119
                              
                              
                              
                              1,107,052
                              
                              
                              $
                              1,107
                              
                              
                              $
                              26,694,259
                              
                              
                              $
                              (29,164,767
                              )
                              
                              $
                              (2,132,771
                              )





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


5


SPARTA
COMMERCIAL SERVICES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE SIX MONTHS ENDED OCTOBER 31, 2009 AND 2008


(UNAUDITED)


Six Months Ended
                  October 31,2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES :Net
      Loss
                
                $
                (2,017,720
                )
                
                $
                (2,707,016
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and Amortization
                
                
                233,800
                
                
                
                109,171Allowance
      for loss reserves
                
                
                (57,356
                )
                
                
                (8,548
                )Amortization
      of deferred revenue
                
                
                -
                
                
                
                (6,867
                )Beneficial
      conversion discount
                
                
                -
                
                
                
                318,282Equity
      based compensation
                
                
                273,473
                
                
                
                134,281Stock
      based finance cost
                
                
                143,922
                
                
                
                855,119Changes
      in operating assets and liabilities:(Increase)
      decrease in:Inventory
                
                
                (47,995
                )
                
                
                -Interest
      Receivables
                
                
                15,333
                
                
                
                18,489Accounts
      Receivable
                
                
                (46,972
                )
                
                
                (10,060
                )Restricted
      cash
                
                
                125,197
                
                
                
                (690
                )(Increase)
      decrease in:Accounts
      payable and accrued expenses
                
                
                165,043
                
                
                
                (46,117
                )Portfolio
                
                
                30,177
                
                
                
                -Net
      cash used in operating activities
                
                
                (1,183,097
                )
                
                
                (1,343,956
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Net
      Proceed from motorcycles and other vehicles
                
                
                95,071
                
                
                
                251,370Net
      Proceed from RISC
                
                
                959,505
                
                
                
                13,460Paid
      for Purchase of AML Portfolio
                
                
                -
                
                
                
                (80,000
                )Net
      cash provided by (used in) investing activities
                
                
                1,054,576
                
                
                
                184,830CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      proceeds from sale of common stock
                
                
                120,000
                
                
                
                -Net
      proceeds from sale of preferred stock
                
                
                645,000
                
                
                
                -Net
      Repayment to senior lender
                
                
                (945,631
                )
                
                
                (338,281
                )Net
      Proceeds from convertible notes
                
                
                370,800
                
                
                
                1,052,500Net
      Proceeds from other notes
                
                
                -
                
                
                
                263,500Net
      Loan proceeds from other related parties
                
                
                -
                
                
                
                97,500Net
      Proceeds from secured note
                
                
                -
                
                
                
                100,000Net
      cash provided by financing activities
                
                
                190,169
                
                
                
                1,175,219Net
      Increase (decrease) in cash and cash equivalents
                
                $
                61,648
                
                
                $
                16,093Unrestricted
      cash and cash equivalents, beginning of period
                
                $
                (54,350
                )
                
                $
                68,642Unrestricted
      cash and cash equivalents , end of period
                
                $
                7,298
                
                
                $
                84,735Cash
      paid for:Interest
                
                $
                205,678
                
                
                $
                156,726Income
      taxes
                
                $
                2,412
                
                
                $
                993Non-Cash
      Transactions:Common
      stock issued in exchange for previously incurred debt
                
                $
                4,512,150
                
                
                
                900,000





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




6




SPARTA
COMMERCIAL SERVICES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER
31, 2009


(UNAUDITED)





NOTE
A – SUMMARY OF ACCOUNTING POLICIES





A summary
of the significant accounting policies applied in the preparation of the
accompanying financial statements follows.





Basis of
Presentation





The
accompanying unaudited condensed consolidated financial statements as of October
31, 2009 and for the three and six month periods ended October 31, 2009 and 2008
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 and
Form 10-Q and Regulation S-B. The information furnished herein reflects all
adjustments (consisting of normal recurring accruals and adjustments), which
are, in the opinion of management, necessary to fairly present the operating
results for the respective periods. Certain information and footnote disclosures
normally present in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been omitted pursuant to such rules and regulations. The Company believes that
the disclosures provided are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
audited financial statements and explanatory notes for the year ended April 30,
2009 as disclosed in the Company’s 10-K for that year as filed with the
SEC.





The
results of operations for the three and six months ended October 31, 2009 are
not necessarily indicative of the results to be expected for any other interim
period or the full year ending April 30, 2010.





New Accounting Requirements
and Disclosures





Accounting Standards Codification
and GAAP Hierarchy —Effective for interim and annual periods
ending after September 15, 2009, the Accounting Standards Codification and
related disclosure requirements issued by the FASB became the single official
source of authoritative, nongovernmental GAAP. The ASC simplifies GAAP, without
change, by consolidating the numerous, predecessor accounting standards and
requirements into logically organized topics. All other literature not included
in the ASC is non-authoritative. We adopted the ASC as of October 31, 2009,
which did not have any impact on our results of operations, financial condition
or cash flows as it does not represent new accounting literature or
requirements.  All references to pre-codified U.S. GAAP have been
removed from this Form 10Q.





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.





Revenue
Recognition





The
Company originates leases on new and used motorcycles and other powersports
vehicles from motorcycle dealers throughout the United States. The Company’s
leases 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. 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.


7


SPARTA
COMMERCIAL SERVICES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER
31, 2009


(UNAUDITED)





NOTE
A – SUMMARY OF ACCOUNTING POLICIES (continued)





The
Company purchases Retail Installment Sales Contracts (“RISC”) from motorcycle
dealers. The RISCs 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.





The
Company charges fees to manufacturers and other customers related to creating a
private label version of the Company’s 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.





The
Company evaluates its operating and retail installment sales leases on an
ongoing basis and has established reserves for losses, based on current and
expected future experience.





Inventories





Inventories
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.


8


SPARTA
COMMERCIAL SERVICES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER
31, 2009


(UNAUDITED)





NOTE
A – SUMMARY OF ACCOUNTING POLICIES (continued)





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, 2009 or the three months or six months
ended October 31, 2009.





Fair Value
Measurements





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





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




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




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





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.


9


SPARTA
COMMERCIAL SERVICES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER
31, 2009


(UNAUDITED)





NOTE
A – SUMMARY OF ACCOUNTING POLICIES (continued)





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 October31, 2009 and April 30, 2009, the Company has no
items of other comprehensive income.





Segment
Information





The
Company does not have separate, reportable segments under 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 interim 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 segment.





Stock Based
Compensation





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


10


SPARTA
COMMERCIAL SERVICES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER
31, 2009


(UNAUDITED)





NOTE
A – SUMMARY OF ACCOUNTING POLICIES (continued)





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.





Allowance for
Losses





The
Company has 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.





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
      yearsFurniture
      and fixtures
                
                7
      yearsWebsite
      costs
                
                3
      yearsComputer
      Equipment
                
                5
      years





Advertising
Costs





The
Company follows a policy of charging the costs of advertising to expenses
incurred. During the six months ended October 31, 2009 and the year ended April
30, 2009, the Company
incurred  $3,454  and  $18,318 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.


11


SPARTA
COMMERCIAL SERVICES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER
31, 2009


(UNAUDITED)





NOTE
A – SUMMARY OF ACCOUNTING POLICIES (continued)





Per share
basic and diluted net loss attributable to common stockholders amounted to $0.00
and $0.01 for the three months ended October 31, 2009 and 2008, respectively,
and $0.01 and $0.02 for the six months ended October 31, 2009 and 2008,
respectively. At October 31, 2009 and 2008, 55,230,357and 35,116,084 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 consolidated financial statements, the Company has incurred
a net loss of $2,017,720 and $4,921,846 during the six months ended October 31,
2009 and the year ended April 30, 2009, respectively. The Company’s liabilities
exceed its assets by $2,132,770 as of October 31, 2009.





Reclassifications





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





NOTE
B – MOTORCYCLES AND OTHER VEHICLES UNDER OPERATING LEASES





Motorcycles
and other vehicles under operating leases at October 31, 2009 and April 30, 2009
consist of the following:





October 31,
                      
                      
                      April 30,2009
                      
                      
                      2009Motorcycles
      and other vehicles
                      
                      $
                      750,713
                      
                      
                      $
                      911,008Less: accumulated
      depreciation
                      
                      
                      (241,130
                      )
                      
                      
                      (256,485
                      )Motorcycles
      and other vehicles, net of accumulated depreciation
                      
                      
                      509,583
                      
                      
                      
                      654,523Less: estimated reserve
      for residual values
                      
                      
                      (37,550
                      )
                      
                      
                      (32,726
                      )Motorcycles
      and other vehicles under operating leases, net
                      
                      $
                      472,033
                      
                      
                      $
                      621,797





Depreciation
expense for vehicles for the three and six months ended October 31, 2009 was
$22,687 and $49,870, respectively. Depreciation expense for vehicles for the
three and six months ended October 31, 2008 was $43,608 and $100,212,
respectively.





NOTE C – 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 October 31, 2009, the
Company’s inventory of repossessed or returned vehicles valued at market was
$60,509, which will be resold.


12


SPARTA
COMMERCIAL SERVICES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER
31, 2009


(UNAUDITED)





NOTE D – RETAIL (RISC) LOAN
RECEIVABLES





RISC loan
receivables, which are carried at cost, were $2,523,745 and $3,483,250 at
October 31, 2009 and April 30, 2009, respectively, including deficiency
receivables of $51,317 and $122,554, respectively. The following is a schedule
by years of future principal payments related to these receivables. Certain of
the assets are pledged as collateral for the note described in Note
F.





Year ending October 31,2010
                
                $
                855,4372011
                
                
                846,8542012
                
                
                615,1142013
                
                
                206,3392014
                
                
                -$
                2,523,745








NOTE E – PROPERTY AND
EQUIPMENT





Major
classes of property and equipment at October 31, 2009 and April 30, 2009 consist
of the followings:





October 31,
                    2009
                  
                  
                  April 30,
                    2009Computer
      equipment, software and furniture
                  
                  $
                  191,247
                  
                  
                  $
                  191,247Less:
      accumulated depreciation and amortization
                  
                  
                  (156,476
                  )
                  
                  
                  (147,905
                  )Net
      property and equipment
                  
                  $
                  34,771
                  
                  
                  $
                  43,342





Depreciation
and amortization expense for property and equipment was $4,091and $10,571 for
the three months and six months ended October 31, 2009, respectively, and
$17,919 for the year ended April 30, 2009. Depreciation and amortization expense
for the three and six months ended October 31, 2008 were $4,479 and $8,959,
respectively.





NOTE
F – PURCHASED PORTFOLIO AND SECURED SENIOR NOTE





The
Company finances certain of its leases through a third party. 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 October 31, 2009 is
10.48%.





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 and agreed to pay the
remaining $20,000 upon receipt of additional Purchase Portfolio
documentation.  Proceeds from the Purchased Portfolio start 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
Senior Secured Note 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 Senior Secured Note
holder.  The Company is obligated to pay any remainder of the Senior
Secured Note by November 1, 2009 and has granted the Senior Secured Note holder
a security interest in the Purchased Portfolio.


13


SPARTA
COMMERCIAL SERVICES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER
31, 2009


(UNAUDITED)





NOTE
F – PURCHASED PORTFOLIO AND SECURED SENIOR NOTE (continued)





Once the
Company has paid $150,000 to the Senior Secured Note holder from Purchased
Portfolio proceeds, the Company is obligated to pay fifty percent of all net
proceeds from Purchased Portfolio lease payments and motorcycle asset sales
until the Company and the Senior Secured Note holder mutually agree the Purchase
Portfolio has no remaining proceeds.





As of
October 31, 2009, the Company carries the Purchased Portfolio at $42,458
representing its $100,000 cost, which is less than its estimated market value,
less collections through the period. The Company carries the liability for the
Senior Secured Note at $111,760, which is net of note reductions.





At
October 31, 2009, the notes payable mature as follows:





12
      Months EndedOctober 31,
                  
                  Amount2010
                  
                  $
                  1,047,3872011
                  
                  
                  869,5712012
                  
                  
                  635,8222013
                  
                  
                  196,4272014
                  
                  
                  —$
                  2,749,207





Notes
payable to Senior Lender at April 30, 2009 were $3,694,838.





NOTE
G – NOTES PAYABLE





Notes Payable
                
                October 31,
                  2009
                
                
                April 30,
                  2009Convertible
      notes (a)
                
                $
                732,000
                
                
                $
                4,055,560Notes
      payable (b)
                
                
                140,000
                
                
                
                547,500Bridge
      loans (c)
                
                
                176,000
                
                
                
                176,000Collateralized
      note (d)
                
                
                220,000
                
                
                
                220,000Convertible
      note (e)
                
                
                103,399
                
                
                
                103,399Total
                
                $
                1,371,399
                
                
                $
                5,102,458





(a)
            As
      of October 31, 2009, the Company had outstanding convertible unsecured and
      convertible demand notes with an original aggregate principal amount of
      $500,240, which accrue interest ranging from 6% to 12% per
      annum.  All of the notes are past due. A majority of the notes
      are convertible into shares of common stock, at the Company’s option,
      ranging from $0.002 to $0.053 per share.  The Company had
      outstanding notes that are convertible, at the holder’s option, of
      $231,760 with a conversion prices ranging from $0.02 to $0.06 per share.
      The holders of these later notes had agreed to contingently convert their
      notes plus accrued interest into shares of the Company’s common stock upon
      theCompany’s
      ability to meet all conditions precedent to begin drawing down on a
      senior credit facility.  The balances of the notes are
      convertible at the Company’s
option.


14


SPARTA
COMMERCIAL SERVICES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER
31, 2009


(UNAUDITED)





NOTE
G – NOTES PAYABLE (continued)





(b)
            As
      of October 31, 2009, the Company had outstanding unsecured notes with an
      original principal amount of $140,000, which accrues interest ranging from
      6% to 10% per annum of which $120,000 were past due with the remaining
      note maturing by November 8, 2009. The Company and the holders of the
      notes are in negotiation as to the disposition of these
    notes.





(c)
            During
      the year ended April 30, 2007, the Company sold to five accredited
      investors’ bridge notes in the aggregate amount of $275,000. The bridge
      notes were originally scheduled to expire on various dates through
      November 30, 2006, together with simple interest at the rate of 10%. The
      notes provided that 100,000 shares of the Company's unregistered common
      stock are to be issued as “Equity Kicker” for each $100,000 of notes
      purchased, or any prorated portion thereof. The Company had the right to
      extend the maturity date of notes for 30 to 45 days, in which event the
      lenders were entitled for “additional equity” equal to 60% of the “Equity
      Kicker” shares. In the event of default on repayment by the Company, the
      notes provided for a 50% increase in the “Equity Kicker” and the
      “Additional Equity” for each month, as penalty, that such default has not
      been cured, and for a 20% interest rate during the default
      period.  The repayments, in the event of default, of the notes
      are to be collateralized by certain security interest.  The
      maturity dates of the notes were subsequently extended to various dates
      between December 5, 2006 to December 30, 2006, with simple interest rate
      of 10%, and Additional Equity in the aggregate amount of 165,000
      unregistered shares of common stock to be issued. Thereafter, the Company
      was in default on repayment of these notes.  During the year
      ended April 30, 2009, $99,000 of these loans was repaid. The holder of one
      remaining note for $100,000 plus the accrued interest thereon has agreed
      to convert into shares of the Company’s common stock.  The
      holders of the remaining $76,000 notes had agreed to contingently convert
      those notes plus accrued interest into shares of the Company’s common
      stock upon theCompany’s
      ability to meet all conditions precedent to begin drawing down on a
      senior credit facility.





(d)
            During
      the year ended April 30, 2009, the Company sold a secured note in the
      amount of $220,000. The notes bore 12.46% simple interest. The note
      matures on October 29, 2010 and was secured by a second lien on a pool of
      motorcycles.  In July 2009, the note holder agreed to convert
      the note and all accrued interest thereon into shares of the Company’s
      common stock.





(e)
            On
      September 19, 2007, the Company sold to one accredited investor for the
      purchase price of $150,000 securities consisting of a $150,000 convertible
      debenture due December 19, 2007, 100,000 shares of unregistered common
      stock, and 400,000 common stock purchase warrants. The debentures bear
      interest at the rate of 12% per year compounded monthly and are
      convertible into shares of the Company's common stock at $0.0504 per
      share. The warrants may be exercised on a cashless basis and are
      exercisable until September 19, 2007 at $0.05 per share. In the event the
      debentures are not timely repaid, the Company is to issue 100,000 shares
      of unregistered common stock for each thirty day period the debentures
      remain outstanding. The Company has accrued interest and penalties as per
      the terms of the note agreement.  In May, 2008, the Company
      repaid $1,474 of principal and $3,526 in accrued interest. Additionally,
      from April 26, 2008 through April 30, 2009, a third party to the note
      paid, on behalf of the Company, $41,728 of principal and $15,272 in
      accrued interest on the note, and the note holder converted $3,399 of
      principal and $6,601 in accrued interest into 200,000 shares of the
      Company’s common stock.  As of October 31, 2009, the balance
      outstanding was past due and the Company and the note holder are in
      negotiations as to the disposition of the
note.


15


SPARTA
COMMERCIAL SERVICES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER
31, 2009


(UNAUDITED)





NOTE
H – LOANS PAYABLE TO RELATED PARTIES





As of
October 31, 2009, aggregated loans payable, without demand and with no interest,
to officers and Directors were $378,260. At October 31, 2009 and April 30, 2009,
included in accounts payable, are $169 and $169, respectively, due to American
Motorcycle Leasing Corp., a company controlled by a director and formerly
controlled by the Company's Chief Executive Officer.





NOTE
I – FAIR VALUE MEASUREMENTS





The
following table sets forth certain liabilities as of October 31, 2009 which are
measured at fair value on a recurring basis by level within the fair value
hierarchy. As required by ASC No. 820, these are classified based on the
lowest level of input that is significant to the fair value measurement, (in
thousands):





(inthousands)
                  
                  Level1
                  
                  
                  Level2
                  
                  
                  Level3RISC
      Loan receivables
                  
                  $
                  
                  
                  
                  $
                  2,523,745
                  
                  
                  $
                  -Senior
      secured notes payable
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  2,637,447Loans
      payable-related party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  378,260Notes
      payable
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  1,483,159





NOTE J – EQUITY
TRANSACTIONS





The
Company is authorized to issue 10,000,000 shares of preferred stock with $0.001
par value per share, of which 35,850 shares have been designated as Series A
convertible preferred stock with a $100 stated value per share, 1,000 shares
have been designated as Series B Preferred Stock with a $10,000 stated value per
share, and 200,000 shares were designated as Series C Preferred Stock with a $10
per share liquidation value in November 2009, and 750,000,000 shares of common
stock with $0.001 par value per share. The Company had 125 and 125 shares of
Series A preferred stock issued and outstanding as of October 31, 2009 and April
30, 2009, respectively.  The Company had 90 and no shares of Series B
preferred stock issued and outstanding as of October 31, 2009 and April 30,
2009, respectively.  The Company has 324,118,949 and 170,730,064
shares of common stock issued and outstanding as of October 31, 2009 and April
30, 2009, respectively.





Preferred Stock Series
A





During
the quarter ended July 31, 2009, 10,733,974 common shares previously recorded as
shares to be issued for conversion of preferred were issued.


16


SPARTA
COMMERCIAL SERVICES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER
31, 2009


(UNAUDITED)





NOTE J – EQUITY TRANSACTIONS
(continued)





Preferred Stock Series
B





On July
24, 2009, the Company designated 1,000 shares as Series B Preferred
Stock.  The Series B shares, with respect to dividend rights and
rights upon liquidation, winding-up or dissolution, rank senior to the Company’s
common stock and any other class or series of preferred stock, and junior to all
of the Company’s existing and future indebtedness.  The Series B
shares accrue dividends at an annual rate of 10%.  Accrued dividends
are payable upon redemption of the Series B shares.  The Company’s
common stock may not be redeemed while Series B shares are
outstanding.  The Series B certificate of designations provides that,
without the approval of a majority of the Series B shares, the Company cannot
authorize or create any class of stock ranking as to distribution of assets upon
a liquidation senior to or otherwise pari passu with the Series B shares,
liquidate, dissolve or wind-up the Company’s business and affairs, or effect
certain fundamental corporate transactions, or otherwise alter or change
adversely the powers, preferences or rights given to the Series B
shares.  The Series B shares have a liquidation preference per share
equal to the original price per share thereof plus all accrued dividends thereon
upon liquidation, including upon consummation of certain fundamental corporate
transactions, dissolution, or winding up of the Company’s
business.  The Series B shares are redeemable at the Company’s option
on or after the fifth anniversary of the date of its issuance.





On July
29, 2009, the Company entered into a Preferred Stock Purchase Agreement with
Optimus Capital Partners, LLC, an unaffiliated investment fund.  Under
the agreement, Optimus is committed to purchase up to $5,000,000 of the
Company’s Series B Preferred Stock for a one year period.  From time
to time, the Company may send a notice requiring Optimus to purchase shares of
the Company’s Series B Preferred Stock, subject to satisfaction of certain
closing conditions.  Optimus will not be obligated to purchase the
Series B Preferred Stock (i) in the event the closing price of the Company’s
common stock during the nine trading days following delivery of a purchase
notice falls below 75% of the closing price on the trading day prior to the date
such notice is delivered to Optimus, or (ii) to the extent such purchase would
result in Optimus and its affiliates beneficially owning more than 9.99% of the
Company’s common stock.





On the
date of delivery of each purchase notice under the agreement, the Company will
also issue to Optimus five-year warrants to purchase the Company’s common stock
at an exercise price equal to the closing price of the Company’s common stock on
the trading day prior to the delivery date of the notice. The number of shares
issuable upon exercise of the warrant will be equal in value to 135% of the
purchase price of the Series B Preferred Stock to be issued in respect of the
related notice.  Each warrant will be exercisable on the earlier of
(i) the date on which a registration statement registering for resale the shares
of common stock issuable upon exercise of such warrant becomes effective and
(ii) the date that is six months after the issuance date of such
warrant.





The
Company agreed to file after each drawn down, and to seek and maintain
effectiveness of, a registration statement covering the shares underlying the
issued warrants. On the earlier of the first draw down or 6 months from the date
of the agreement, the Company agreed to pay a non-refundable commitment fee of
$250,000.00 to Optimus. Pursuant to a concurrent transaction between Optimus and
several of the Company’s non-affiliated stockholders, Optimus may borrow up to
33,990,000 shares of the Company’s common stock from such
stockholders.  On July 31, 2009, pursuant to the agreement, the
Company requested Optimus to purchase 90 shares of the Company’s Series B
Preferred Stock valued at $900,000 and issued 13,500,000 five year warrants to
purchase 13,500,000 shares of common stock at $0.09 per share.  On
August 14, 2009, the Company sold to Optimus 90 shares of Series B Preferred
stock for gross proceeds of $900,000. On October 21, 2009, pursuant to the
agreement, the Company requested Optimus to purchase 67 shares of the Company’s
Series B Preferred Stock valued at $670,000 and issued 18,066,176 five year
warrants to purchase 18,066,176 shares of common stock at $0.068 per
share.  On November 6, 2009, the Company sold to Optimus 67 shares of
Series B Preferred stock for gross proceeds of $670,000, and purchased from
Optimus 2,000,000 shares of our common stock at a price of $0.05 or
$100,000.


17


SPARTA
COMMERCIAL SERVICES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER
31, 2009


(UNAUDITED)





NOTE J – EQUITY TRANSACTIONS
(continued)





Preferred Stock Series
C





In
November 2009, the Company authorized a new series of 200,000 shares of
preferred stock as Series C Convertible Preferred Stock, each share having a par
value of $0.001 per share. The Series C Preferred Stock shall, upon liquidation,
winding-up or dissolution, rank: (a) senior to the Company's common stock
and any other class or series of Preferred Stock of the Company which by their
terms are junior to the Series C Preferred Stock (collectively, together with
any warrants, rights, calls or options exercisable for or convertible into such
Preferred Stock, the “Junior Shares”); (b) junior to all existing and
future indebtedness of the Company; and (c) junior to the Company's Series A and
Series B Preferred Stock. The Series C Preferred Stock is not entitled to
receive any dividends, has a liquidation value of $10.00 per share, redeemable
at the Company’s option at $10.00 per share, and is convertible at the option of
the holder into shares of common stock as follows: the number of such shares of
Common Stock to be received for each share of Series C Preferred Stock so
converted shall be determined by (A) dividing the number of shares of Series C
Preferred Stock to be converted by the weighted average closing price per share
of the Company's Common Stock for the ten (10) trading days immediately
preceding the date on which the Company agrees to issue shares of Series C
Preferred Stock to such holder multiplied by (B) the Series C liquidation
value.





Pursuant
to an agreement reached on October 31, 2009 to convert certain accounts payable
to Series C preferred stock, the Company recorded the conversion of $125,000 of
accounts payable as of October 31, 2009.





Common
Stock





During
the six months ended October 31, 2009 and the six months ended October 31, 2008,
the Company expensed $70,284 and $134,281, respectively, for non-cash charges
related to stock and option compensation expense.





During
the six months ended October 31, 2009:





·
            the
      Company sold 1,409,869 shares of its common stock for $120,000,1,007,049
      of  the shares were classified as to be issued as of October 31,
      2009 and issued three year warrants to purchase 1,409,869 shares of its
      common stock exercisable at $0.15 per
share;


·
            the
      Company issued, pursuant to penalty provisions of notes,
      2,544,000 shares of unregistered common stock, valued at
      $143,922;


·
            the
      Company issued, pursuant to the terms of a note, 200,000 shares of its
      common stock in payment of $6,600 in accrued interest and $3,400 for
      principal reduction of the note;


·
            the
      Company issued 132,556,857 shares of unregistered common stock (of which
      3,615,520 had been classified as shares to be issued at April 30, 2009),
      valued at $4,512,150, upon conversion of $3,955,343 in notes and
      convertible notes  and accrued interest resulting in an increase
      in additional-paid-in capital of
$4,383,208;


·
            the
      Company issued, pursuant to a consulting agreement, 4,000,000 shares of
      its common stock valued at $74,500;
and


·
            the
      Company issued 1,944,586 shares of common stock under its 2009 Consultant
      Stock Plan in satisfaction of accounts payable of
  $121,216.


18


SPARTA
COMMERCIAL SERVICES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER
31, 2009


(UNAUDITED)





NOTE J – EQUITY TRANSACTIONS
(continued)





On August
14, 2009, the Company filed a Schedule 14C with the Securities and Exchange
Commission, and at the same time notified the Company’s shareholders via an
Information Statement, that in April, 2009, the holders of a majority of votes
represented by the issued and outstanding shares of the Company common stock, at
that time, by means of a written consent in lieu of a special meeting of the
stockholders, voted in favor of amending the Company’s Articles of Incorporation
to increase the authorized number of shares of the Common Stock from 340,000,000
to 750,000,000. This increase in authorized shares of common stock became
effective on September 21, 2009.





On May 1,
2009, the Company adopted its 2009 Consultant Stock Plan.  The plan
provides for the issuance of up to 10,000,000 shares of the Company’s common
stock, pursuant to stock awards, to eligible consultants.  The plan is
effective for ten years from its adoption.





NOTE K– SUBSEQUENT EVENTS





In
accordance with ASC No. 855, the Company has evaluated subsequent events through
the date of this filing.





In
November 2009:





·
            the
      Company issued 13,500,000 shares of our unregistered common stock upon the
      exercise of a warrant to purchase 13,500,000 shares at $0.09 per share,
      paid for by a secured full recourse note in the amount of
      $1,215,000;


·
            the
      Company issued 870,785 shares pursuant to its 2009 Consultant Stock Plan
      in payment of accounts payable of
$45,539.23;


·
            the
      Company issued to a consultant three year warrants to purchase 500,000
      shares of our common stock at $0.066 per
share;


·
            the
      Company issued 30,000 shares of our series C Preferred Stock to a
      consultant for services valued at
$300,000;


·
            the
      Company sold to Optimus 67 shares of Series B Preferred Stock for gross
      proceeds of $670,000, issued 18,066,176 five year warrants to purchase
      18,066,176 shares of common stock exercisable at $0.05 per share, and
      purchased from Optimus 2,000,000 shares of our common stock at a price of
      $0.05 or $100,000;


·
            the
      Company issued 296,000 shares of our restricted common stock, valued at
      $14,800, pursuant to penalty provisions of notes,
  and


·
            the
      Company, pursuant to a consulting agreement dated November 30, 2009,
      issued 500,000 shares of its restricted common stock valued at
      $25,000.





In
December 2009:





·
            In
      December 2009, the Company was verbally notified by representatives of DZ
      Bank that the Company’s request to extend the term of its Revolving Credit
      Agreement (the “RCA”) for one year was denied due to DZ Bank’s German
      parent’s concern over the United States general economic condition and
      more specifically, the weakness in the overall U.S. consumer market.
      Therefore, the RCA will terminate on December 18,
  2009;


·
            the
      Company, pursuant to a consulting agreement dated March 25, 2009, issued
      500,000 shares of its restricted common stock valued at $15,000,
      and


·
              the
      Company issued 296,000 shares of our restricted common stock, valued at
      $11,840, pursuant to penalty provisions of notes.·
              The
      holder of the warrant to purchase 18,066,176 shares of common stock at
      $0.05 per share delivered an Exercise Notice for all of the shares to the
      Company along with a secured full recourse note in the amount of
      $903,308.80 to pay for the exercise. The Company has instructed its
      transfer agent to issue the
shares.


19


SPARTA
COMMERCIAL SERVICES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER
31, 2009


(UNAUDITED)





NOTE L – GOING CONCERN
MATTERS





The
accompanying unaudited condensed 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 financial statements during the period October 1, 2001 (date of
inception) through October 31, 2009, the Company incurred loss of $29,164,766.
Of these losses, $2,017,720 was incurred in the six months ending October 31,
2009 and $2,709,538 in the six months ending October 31, 2008. 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, no assurance can be given
that management’s actions will result in profitable operations or the resolution
of its liquidity problems. The accompanying 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 and the US Government. There can be no assurance the
Company will be successful in its effort to secure additional equity
financing.


20


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, 2009 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





Comparison
of the Three Months Ended October 31, 2009 to the Three Months Ended October 31,
2008





For the
three months ended October 31, 2009 and 2008, we have generated limited sales
revenues, have incurred significant expenses, and have sustained significant
losses.





Revenues





Revenues
totaled $188,546 during the three months ended October 31, 2009 as compared to
$301,049 during the three months ended October 31, 2008. Current period revenue
was comprised of $46,241 in lease revenue, $115,893 in interest income from RISC
loans, and $26,412 in other income. Prior period revenue was comprised of
$78,643 in lease revenue, $193,664 in interest income from RISC loans, and
$28,742 in other income.





Costs
and Expenses





General
and administrative expenses were $840,826 during the three months ended October
31, 2009, compared to $977,427 during the three months ended October 31, 2008, a
decrease of $136,601 or 14%. Expenses incurred during the current three month
period consisted primarily of the following expenses: Compensation and related
costs, $332,749; Accounting, audit and professional fees, $230,280; Consulting
fees, $22,959; Rent, utilities and Telecomm expenses $112,374; Travel and
entertainment, $12,518;and stock based compensation, $69,425. Expenses incurred
during the comparative three month period in 2008 consisted primarily of the
following expenses: Compensation and related costs, $360,678; Accounting, audit
and professional fees, $178,158; Consulting fees, $39,375; Rent, utilities and
Telecomm expenses $104,236; Travel and entertainment, $20,561;and stock based
compensation, $67,736.





We
incurred a non-cash charge of $71,624 during the three months ended October 31,
2009 related to options and shares of common stock and common stock options
issued for consulting fees and services. The comparable non-cash charges for the
three months ended October 31, 2008 was $67,480.


21


Net
Loss





We
incurred a net loss before preferred dividends of $1,003,402 for our three
months ended October 31, 2009 as compared to $997,973 for the corresponding
interim period in 2008, a $5,429 or 1% increase. The increase in our net
loss before preferred dividends for our three month interim period ended October
31, 2009 was attributable primarily to a $112,503 or 37.4% decrease in revenue
which was not offset by a 6.7% decrease in operating expenses and a14% decrease
in interest expense and financing costs..





We also
incurred non-cash preferred dividend expense of $19,671for our three month
period ended October 31, 2009, with an expense of $1,261 in the corresponding
interim period of 2008. The increase in preferred dividend expense was
attributable to the issuance of series B Preferred stock during the
quarter.





Our net
loss attributable to common stockholders decreased to $1,023,072 for our three
month period ended October 31, 2009 as compared to $999,234 for the
corresponding period in 2008. The $23,838 or 2.4% increase in net loss
attributable to common stockholders for our three month period ended October 31,
2009 was due primarily to the $18,409 or 1460% increase in preferred
dividends.





Comparison
of the Six Months Ended October 31, 2009 to the Six Months Ended October 31,
2008





For the
six months ended October 31, 2009 and 2008, we have generated limited sales
revenues, have incurred significant expenses, and have sustained significant
losses.





Revenues





Revenues
totaled $405,350 during the six months ended October 31, 2009 as compared to
$695,969 during the six months ended October 31, 2008. Current period revenue
was comprised of $99,310 in lease revenue, $254,758 in interest income from RISC
Loans and $51,282 in other income. Prior period revenue was comprised of
$168,337 in lease revenue, $397,707 in interest income from RISC loans, $25,495
in gain on disposition of vehicles, $3,867 in Preferred Provider Program and
$100,562 in other income.





Costs
and Expenses





General
and administrative expenses were $1,433,023 during the six months ended October
31, 2009, compared to $2,341,579 during the six months ended October 31, 2008, a
decrease of $908,556, or 38.86%. Expenses incurred during the current six month
period consisted primarily of the following expenses: Compensation and related
costs, $641,280; Accounting, audit and professional fees, $289,044; Consulting
fees, $66,825; Rent, utilities and Telecomm expenses $200,841; Travel and
entertainment, $19,220; and stock based compensation, $145,284. Expenses
incurred during the comparative six month period in 2008 consisted primarily of
the following expenses: Compensation and related costs, $787,722; Accounting,
audit and professional fees, $224,345; Consulting fees, $104,175; Rent,
utilities and Telecomm expenses $198,129; Travel and entertainment, $31,273; and
stock based compensation, $654,730.





We
incurred a non-cash charge of $75,000 during the six months ended October 31,
2009 related to options and shares of common stock issued for consulting fees
and services as compared to $520,449 for the six months ended October 31, 2008.
For the six months ended October 31, 2009, we incurred a non-cash charge of
$272,109 related to shares of common stock and warrants issued for financing
cost. For the six months ended October 31, 2008, we incurred a non-cash charge
of $638,447 related to shares of common stock and warrants issued for financing
cost.


22


Net
Loss





We
incurred a net loss before preferred dividends of $1,997,858 for our six months
ended October 31, 2009 as compared to $2,707,016 for the corresponding interim
period in 2008. The $709,158 or 26.2% decrease in our net loss before preferred
dividends for our six month interim period ended October 31, 2009 was
attributable to a $290,619, 41.8%, decrease in revenue,  a $908,556,
38.8% decrease in general and administrative expenses, a $129,329, 118.5%
increase in depreciation and amortization and a $220,549, 23.2% decrease in
interest expense and financing cost.





We also
incurred non-cash preferred dividend expense of $19,862 for our six month period
ended October 31, 2009 as compared with a non-cash expense of $2,522 in the
corresponding interim period of 2008. The increase in preferred dividend expense
was attributable to the issuance of Series B Preferred Stock.





Our net
loss attributable to common stockholders decreased to $2,017,720 for our six
month period ended October 31, 2009 as compared to $2,709,5382, for the
corresponding period in 2008. The $691,818 decrease in net loss attributable to
common stockholders for our six month period ended October 31, 2009 was due to
the decrease in net loss and the increase in preferred dividends.





LIQUIDITY
AND CAPITAL RESOURCES





As of
October 31, 2009, we had a deficit net worth of $2,132,770. We generated a
deficit in cash flow from operations of $1,183,097 or the six months ended
October 31, 2009. This deficit is primarily attributable to our net loss from
operations of $2,017,720, partially offset by depreciation and amortization of
$233,800, other non-cash charges totaling $574,751 and to changes in the
balances of current assets and liabilities. Accounts payable and accrued
expenses decreased by $165,043, other receivables and inventory increased
$62,305 and $47,995 respectively and portfolio assets declined by
$30,177.





Cash
flows provided by investing activities for the six months ended October 31, 2009
was $1,054,576, primarily due to the net proceeds of RISC contracts of
$959,505and payments from motorcycle and vehicle leases of $95,071.





We met
our cash requirements during the six month period through net proceeds of notes
and convertible notes of  proceeds of notes payable $370,800, and the
net proceeds from the sale of common and preferred equity in the amount of
$765,000.We made net payments on senior secured debt financing of $945,631.
Additionally, we have received limited revenues from leasing and financing
motorcycles and other vehicles, fees from our municipal lease program, and from
our Preferred Provider Program.





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. As of December 4, 2009, we signed a
letter of intent to purchase certain assets, including a portfolio of motorcycle
loans for a total value of approximately $15 million. To purchase these assets
we have agreed to assume approximately $9 million in bank debt and issue notes
and common stock valued at approximately $5 million. However, there can be no
assurances that this transaction will be consummated.  At October 31,
2009 we had 13 full time employees. If we fully implement our business plan, we
anticipate our employment base may increase by approximately 50% during the next
twelve months. As we continue to expand, we will incur additional cost for
personnel. This projected increase in personnel is dependent upon our generating
revenues and obtaining sources of financing. There is no guarantee that we will
be successful in raising the funds required or generating revenues sufficient to
fund the projected increase in the number of employees.


23


In
December 2008, we, along with our wholly-owned affiliate, Sparta Funding LLC, a
Delaware limited liability company, entered into a $25,000,000 committed,
extendable, secured credit facility with DZBank AG Deutsche
Zentral–Genossenschaftsbank, Frankfurt am Main, New York Branch pursuant to a
Revolving Credit Agreement (the “RCA”).  We were required to satisfy
certain tangible net worth and committed capital thresholds as a condition of
accessing funds under the DZBank credit facility. On October 13, 2009, we
notified DZ Bank that we believed we had satisfied such conditions and requested
that we be allowed to start utilizing the credit facility. As we were
approaching the one year anniversary of the signing of the RCA we formally
requested that the RCA be extended for one year as provided for in the RCA.
Subsequently, without permitting us to commence utilizing the credit facility,
in December 2009, the Company was verbally notified by representatives of DZ
Bank that the Company’s request to extend the term of its Revolving Credit
Agreement (the “RCA”) for one year was denied due to DZ Bank’s German parent’s
concern over the United States general economic condition and, more
specifically, the weakness in the overall U.S. consumer market. Therefore, the
RCA will terminate on December 18, 2009.





On July
29, 2009, we entered into a Preferred Stock Purchase Agreement with Optimus
Capital Partners, LLC, pursuant to which Optimus, upon the terms and subject to
the conditions of the agreement, is committed to purchase up to $5,000,000 of
our Series B Preferred Stock. From time to time until July 28, 2010, we may
require Optimus to purchase shares of our Series B Preferred Stock, subject to
satisfaction of certain closing conditions.  On August 12, 2009, we
closed the initial tranche sale to Optimus in the amount of $900,000, and on
November 6, 2009 we closed a second tranche sale to Optimus in the amount of
$670,000.





We
continue seeking additional financing, which may be in the form of subordinated
debt, senior debt or equity to support our operations. Other than described
above, we currently have no commitments for financing. There is no guarantee
that we will be successful in raising the funds required.





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.





GOING
CONCERN ISSUES





The
independent auditors report on our April 30, 2009 and 2008 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.


24


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





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





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





To
address these issues, we 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, the amount
and timing of capital expenditures and other costs relating to the commercial
and consumer financing; 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.


25


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.





The
present officers and directors own approximately 20% of the outstanding shares
of common stock, without giving effect to shares underlying convertible
securities, and therefore are in a position to elect all of our Directors and
otherwise control the Company, including, without limitation, authorizing the
sale of equity or debt securities of Sparta, the appointment of officers, and
the determination of officers’ salaries. Shareholders have no cumulative voting
rights.





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





The
Company originates leases on new and used motorcycles and other powersports
vehicles from motorcycle dealers throughout the United States. The Company’s
leases 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. 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.


26


The
Company purchases Retail Installment Sales Contracts (“RISC”) from motorcycle
dealers. The RISCs 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.





The
Company charges fees to manufacturers and other customers related to creating a
private label version of the Company’s 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.





The
Company evaluates its operating and retail installment sales leases on an
ongoing basis and has established reserves for losses, based on current and
expected future experience.





Stock-Based
Compensation





On
December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123(R), (revised 2004) now codified as ASC
718,  “Share-Based Payment” which is a revision of FASB Statement No.
123, “Accounting for Stock-Based Compensation”.  ASC 718 supersedes
APB opinion No. 25, “Accounting for Stock Issued to Employees”, and amends FASB
Statement No. 95 now ASC 230, “Statement of Cash Flows”. Generally, the approach
in ASC 718 is similar to the approach described in SFAS 123. However, ASC 718
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Pro-forma disclosure is no longer an alternative. Management has elected
to apply ASC 718 in the third quarter of fiscal year 2006.





Website
Development Costs





We have
incurred costs to develop a proprietary web-based private label financing
program for processing including web access, processing credit applications,
consumer contracts and other related documents and processes. The Company has
elected to recognize the costs of developing its website and related
intellectual property the website development costs in accordance with Emerging
Issue Task Force (“EITF”) No. 00-02, now ASC 720 “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 is included in cost of net revenues in the current period expenses.
During the six months ended October 31, 2009 and, 2008, the Company expensed
$3,507 and $4,457 respectively as website development costs.





RECENT
ACCOUNTING PRONOUNCEMENT





See Note
A to the 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.


27


ITEM
3.  QUANTITATIVE 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, 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 are effective.





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.


28


PART
II. OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





Not
applicable.





ITEM
1A.  RISK FACTORS





We have a history of operating
losses.





Through our fiscal year ended April 30,
2009, we have generated cumulative sales revenues of $3,297,271, have incurred
significant expenses, and have sustained significant losses. Our net loss for
the year ended April 30, 2009 was $4,921,846 (after $1,794,610 in non-cash
charges). As of April 30, 2009, we had a deficit net worth of
$6,126,410.





Through our second fiscal quarter ended
October 31, 2009, we have generated cumulative sales revenues of $3,702,621,
have incurred significant expenses, and have sustained significant losses. Our
net loss for the six months ended October 31, 2009 was $1,997,858 (after
$655,896 in non-cash charges). As of October, 2009, we had a deficit net worth
of $2,132,770.





We have entered into credit lines with
institutional lenders, which have acquired preferences and rights senior to
those of our capital stock and placed restrictions on the payment of
dividends.





In July 2005, we entered into a secured
senior credit facility with New World Lease Funding for a revolving line of
credit. New World received a security interest in substantially all of our
assets with seniority over the rights of the holders of our preferred stock and
our common stock. Until the security interests are released, those assets will
not be available to us to secure future indebtedness. Presently, New World is
not extending new loans to us. As of October 31, 2009, we owed an aggregate of
$2,637,447 (which is secured by $3,033,328 of consumer Retail Installment Sales
Contracts and Leases and $223,666 of restricted cash) to New World. In granting
the credit line, New World also required that we meet certain financial criteria
in order to pay dividends on any of our preferred shares and common shares. We
may not be able to repay our outstanding indebtedness under the credit
line.





In December 2008, our wholly owned
special purpose subsidiary, Sparta Funding LLC, entered into an agreement for a
secured credit facility with DZ Bank(the “RCA”). The DZ Bank facility required, among
other things, that we have a minimum tangible net worth of $2,000,000 (plus (i)
50% of the aggregate amount of our consolidated net income since December 19,
2008 and (ii) 90% of the net proceeds (net capital less expenses and
distributions) of any new equity contributions we raise after December 19, 2008,
including any subordinated debt) before Sparta Funding can draw upon that credit
facility. In addition to the tangible net worth, we had to obtain
commitments for $3,000,000 of additional capital (in the form of subordinated
debt or other committed capital satisfactory to DZ Bank) to access the DZ Bank
facility.On October 13, 2009, we notified DZ Bank that we believed we
had satisfied such conditions and requested that we be allowed to start
utilizing the credit facility. As we were approaching the one year anniversary
of the signing of the RCA we formally requested that the RCA be extended for one
year as provided for in the RCA. Subsequently, without permitting us to commence
utilizing the credit facility, in December 2009, the Company was verbally
notified by representatives of DZ Bank that the Company’s request to extend the
term of its Revolving Credit Agreement RCA for one year was denied due to DZ
Bank’s German parent’s concern over the United States general economic condition
and, more specifically, the weakness in the overall U.S. consumer market.
Therefore, the RCA will terminate on December 18, 2009.


29


There can be no assurance that the
funding available under the Purchase Agreement with Optimus Capital Partners
will be sufficient to fund our working capital requirements.If Spartais not able to secure senior debt
financing,we will not be
able to implement our business plan, which would have a material adverse effect
on our future viability.





Our business requires extensive amounts
of capital and we will need to obtain additional financing in the near
future.





In order to expand our business, we need
capital to support the portion of the value which is not financed by the senior
lender. We generally refer to this portion as the “equity requirement” and the
“sub-debt requirement”. Presently, we have very limited operating capital to
fund the equity requirements for new financing transactions or to execute our
business plan. In order to accomplish our business objectives, we expect that we
will require substantial additional financing within a relatively short period.
The lack of capital has made it difficult to offer the full line of financing
products contemplated by our business plan.Without a senior bank line of credit,
it will be extremely difficult to maintain and grow our business. We will have
to raise approximately $1.5 million over the next twelve months to support our
business. Asour business
grows, wewillneed to seek additional financing to
fund growth. To the extent that our revenues do not provide sufficient cash flow
to cover such equity requirements and any reserves required under any additional
credit facility, we may have to obtain additional financing to fund such
requirements as may exist at that time. There can be no assurance that we will
have sufficient capital or be able to secure additional credit facilities when
needed. The failure to obtain additional funds, when required, on satisfactory
terms and conditions, would have a material and adverse effect on our business,
operating results and financial condition, and ultimately could result in the
cessation of our business.





We are required to have our common stock
traded on the OTC Bulletin Board or one of several other national markets for
trading equity securities as a condition of selling Optimus shares of our Series
B Preferred Stock. Therefore, if we are removed from the OTC Bulletin Board, we
may not be able to require Optimus to purchase shares of our Series B Preferred
Stock.




To the extent we raise additional
capital by issuing equity securities; our stockholders may experience
substantial dilution. Also, any new equity securities may have greater rights,
preferences or privileges than our existing common stock. A material shortage of
capital will require us to take drastic steps such as reducing our level of
operations, disposing of selected assets or seeking an acquisition partner. If
cash is insufficient, we will not be able to continue
operations.





Our auditor’s opinion expresses doubt
about our ability to continue as a “going concern”.





The independent auditor’s report on our
April 30, 2009 financial statements state that our historical losses raise
substantial doubts about our ability to continue as a going concern. We cannot
assure you that we will be able to generate revenues or maintain any line of
business that might prove to be profitable. Our ability to continue as a going
concern is subject to our ability to generate a profit or obtain necessary
funding from outside sources, including obtaining additional funding from the
sale of our securities, increasing sales or obtaining credit lines or loans from
various financial institutions where possible. If we are unable to develop our
business, we may have to discontinue operations or cease to exist, which would
be detrimental to the value of our common stock. We can make no assurances that
our business operations will develop and provide us with significant cash to
continue operations.


30


A significant number of customers may
fail to perform under their loans or leases.





As a lender or lessor, one of the
largest risks we face is the possibility that a significant number of customers
will fail to pay their payments when due. If customers’ defaults cause losses in
excess of our allowance for losses, it could have an adverse effect on our
business, profitability and financial condition. If a borrower enters into
bankruptcy, we may have no means of recourse. We have established an evaluation
process designed to determine the adequacy of the allowance for losses. While
this evaluation process uses historical and other objective information, the
establishment of losses is dependent to a great extent on management’s
experience and judgment. We cannot assure you that our loss reserves will be
sufficient to absorb future losses or prevent a material adverse effect on our
business, profitability or financial condition.





A variety of factors and economic forces
may affect our operating results.





Our operating results may differ from
current forecasts and projections significantly in the future as a result of a
variety of factors, many of which are outside our control. These factors
include, without limitation, the receipt of revenues, which is difficult to
forecast accurately, the rate of default on our loans and leases, the amount and
timing of capital expenditures and other costs relating to the expansion of our
operations, the introduction of new products or services by us or our
competitors, borrowing costs, pricing changes in the industry, technical
difficulties, general economic conditions and economic conditions specific to
the motorcycle industry. The success of an investment in a consumer financing
based venture is dependent, at least, in part, on extrinsic economic forces,
including the supply of and demand for such services and the rate of default on
the consumer retail installment contracts and consumer leases. No assurance can
be given that we will be able to generate sufficient revenue to cover our cost
of doing business. Furthermore, our revenues and results of operations will be
subject to fluctuations based upon general economic conditions. Economic factors
like unemployment, interest rates, the availability of credit generally,
municipal government budget constraints affecting equipment purchases and
leasing, the rate of inflation, and consumer perceptions of the economy may
affect the rate of prepayment and defaults on customer leases and loans and the
ability to sell or dispose of the related vehicles for an amount at least equal
to their residual values which may have a material adverse effect on our
business.





A material reduction in the interest
rate spread could have a negative impact on our business and
profitability.





A significant portion of our net income
is expected to come from an interest rate spread, which is the difference
between the interest rates paid by us on interest-bearing liabilities, and the
interest rate we receive on interest-earning assets, such as loans and leases
extended to customers. Interest rates are highly sensitive to many factors that
are beyond our control, such as inflation, recession, global economic
disruptions and unemployment. There is no assurance that our current level of
interest rate spread will not decline in the future. Any material decline would
have a material adverse effect on our business and
profitability.





Failure to perfect a security interest
could harm our business.





An ownership interest or security
interest in a motor vehicle registered in most states may be perfected against
creditors and subsequent purchasers without notice for valuable consideration
only by complying with certain procedures specific to the particular state.
While we believe we have made all proper filings, we may not have a perfected
lien or ownership interest in all of the vehicles we have financed. We may not
have a validly perfected ownership interest and security interest, respectively,
in some vehicles during the period of the loan. As a result, our ownership or
security interest in these vehicles will not be perfected and our interest could
be inferior to interests of other creditors or purchasers who have taken the
steps described above. If such creditors or purchasers successfully did so, the
affected vehicles would not be available to generate their expected cash flow,
which would have a material adverse effect on our
business.


31


Risks associated with
leasing.





Our business is subject to the risks
generally associated with the ownership and leasing of vehicles. A lessee may
default in performance of its consumer lease obligations and we may be unable to
enforce our remedies under a lease. As a result, certain of these customers may
pose credit risks to us. Our inability to collect receivables due under a lease
and our inability to profitably sell or re-lease off-lease vehicles could have a
material adverse effect on our business, financial condition or results of
operations.





Adverse changes in used vehicle prices
may harm our business.





Significant increases in the inventory
of vehicles may depress the prices at which we can sell or lease our inventory
of used vehicles composed of off-lease and repossessed vehicles or may delay
sales or leases. Factors that may affect the level of used vehicles inventory
include consumer preferences, leasing programs offered by our competitors and
seasonality. In addition, average used powersports vehicle prices have
fluctuated in the past, and any softening in the used powersports vehicle market
could cause our recovery rates on repossessed vehicles to decline below current
levels. Lower recovery rates increase our credit losses and reduce the amount of
cash flows we receive.





Our business is dependent on
intellectual property rights and we may not be able to protect such rights
successfully.





Our intellectual property, including our
license agreements and other agreements, which establish our rights to
proprietary intellectual property developed in connection with our credit
decisioning and underwriting software system,iPLUS®, is of great value to our business
operations. Infringement or misappropriation of our intellectual property could
materially harm our business. We rely on a combination of trade secret,
copyright, trademark, and other proprietary rights laws to protect our rights to
this valuable intellectual property. Third parties may try to challenge our
intellectual property rights. In addition, our business is subject to the risk
of third parties infringing or circumventing our intellectual property rights.
We may need to resort to litigation in the future to protect our intellectual
property rights, which could result in substantial costs and diversion of
resources. Our failure to protect our intellectual property rights could have a
material adverse effect on our business and competitive
position.





We face significant competition in the
industry.





We compete with commercial banks,
savings and loans, industrial thrifts, credit unions and consumer finance
companies, including large consumer finance companies such as GE Capital. Many
of these competitors have well developed infrastructure systems in place as well
as greater financial and marketing resources than we have. Additionally,
competitors may be able to provide financing on terms significantly more
favorable than we can offer. Providers of motorcycle financing have
traditionally competed on the basis of interest rates charged, the quality of
credit accepted, the flexibility of terms offered and the quality of service
provided to dealers and customers. We seek to compete predominantly on the basis
of our high level of dealer service and strong dealer relationships, by offering
flexible terms, and by offering both lease and loan options to customers with a
broad range of credit profiles. Many of our competitors focus their efforts on
different segments of the credit quality spectrum. While a number of our
competitors have reduced their presence in the powersports financing industry
because of industry specific factors and the current situation in the global
credit markets, our business may be adversely affected if any of such
competitors in any of our markets chooses to intensify its competition in the
segment of the prime or sub-prime credit spectrum on which we focus or if
dealers become unwilling to forward to us applications of prospective customers.
To the extent that we are not able to compete effectively within our credit
spectrum and to the extent that the intensity of competition causes the interest
rates we charge to be lower, our results of operations can be adversely
affected.


32


Our business is subject to various
government regulations.





We are subject to numerous federal and
state consumer protection laws and regulations and licensing requirements,
which, among other things, may affect: (i) the interest rates, fees and other
charges we impose; (ii) the terms and conditions of the contracts; (iii) the
disclosures we must make to obligors; and (iv) the collection, repossession and
foreclosure rights with respect to delinquent obligors. The extent and nature of
such laws and regulations vary from state to state. Federal bankruptcy laws
limit our ability to collect defaulted receivables from obligors who seek
bankruptcy protection. Prospective changes in any such laws or the enactment of
new laws may have an adverse effect on our business or the results of
operations. Compliance with existing laws and regulations has not had a material
adverse affect on our operations to date. We will need to periodically review
our office practices in an effort to ensure such compliance, the failure of
which may have a material adverse effect on our operations and our ability to
conduct business activities.





We are controlled by current officers,
directors and principal stockholders.





Our directors, executive officers and
principal stockholders beneficially own approximately 21% of our common stock as
of November 18, 2009. Accordingly, these persons and their respective affiliates
have the ability to exert substantial control over the election of our Board of
Directors and the outcome of issues submitted to our stockholders, including
approval of mergers, sales of assets or other corporate transactions. In
addition, such control could preclude any unsolicited acquisition of our company
and could affect the price of our common stock and limit our ability to sell
shares of our Series B Preferred Stock to Optimus Capital Partners,
LLC.





We are subject to various
securities-related requirements as a reporting company.





We may need to improve our reporting and
internal controls and procedures. We have in the past submitted reports with the
SEC after the original due date of such reports. If we fail to remain current on
our reporting requirements, our common stock could be removed from quotation
from the OTC Bulletin Board, which would limit the ability to sell our common
stock.





We are dependent on our management and
the loss of any officer could hinder our implementation of our business
plan.





We are heavily dependent upon
management, the loss of any one of whom could have a material adverse effect on
our ability to implement our business plan. While we have entered into
employment agreements with certain executive officers, including our Chief
Executive Officer and Chief Operating Officer, employment agreements could be
terminated for a variety of reasons. We do not presently carry key man insurance
on the life of any employee. If, for some reason, the services of management, or
of any member of management, were no longer available to us, our operations and
proposed businesses and endeavors may be materially adversely affected. Any
failure of management to implement and manage our business strategy may have a
material adverse affect on us. There can be no assurance that our operating and
financial control systems will be adequate to support our future operations.
Furthermore, the inability to continue to upgrade the operating and financial
control systems, the inability to recruit and hire necessary personnel or the
emergence of unexpected expansion difficulties could have a material adverse
effect on our business, financial condition or results of
operations.


33


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.





On July
29, 2009, the Company entered into a Preferred Stock Purchase Agreement with
Optimus Capital Partners, LLC pursuant to which Optimus is committed to purchase
up to $5,000,000 of the Company’s Series B Preferred Stock for a one year
period.  On November 4, 2009, Optimus exercised a warrant for
13,500,000 shares of common stock that was issued in connection with the first
tranche closing under the purchase agreement, in consideration for a secured
recourse note in the amount of $1,215,000.  In a second tranche
closing held on November 6, 2009, the Company sold to Optimus 67 shares of
Series B Preferred stock for gross proceeds of $670,000.  In
connection with the second tranche closing, the Company issued to Optimus a
five-year warrant to purchase up to 18,066,176 shares of common stock at $0.05
per share.  The Company also purchased from Optimus 2,000,000 shares
of our common stock at a price of $0.05 or $100,000.





During
the three months ended October 31, 2009, the Company sold to an accredited
investor a four month unsecured note and warrants in the aggregate amount of
$5,000.  The warrants are for a term of three years and entitle the
holder to purchase a total of 100,705 shares of our common stock at $0.15 per
share. The note bore 8% simple interest, payable in cash or shares, at the
Company’s option, with principal and accrued interest payable at maturity. At
the Company’s option, the notes were convertible into shares of common stock at
$0.0496 per share.  The note was to mature on December 28,
2009.  The note plus accrued interest thereon was converted into
100,815 shares of common stock in September 2009.





During
September 2009, the Company sold 1,409,869 shares of common stock and three-year
warrants to purchase 1,409,869 shares of common stock at an exercise price of
$0.15 per share. These securities were sold to three accredited investors for an
aggregate purchase price of $70,000.





Pursuant
to an agreement reached on October 31, 2009, the Company converted $125,000 in
fees owed to John W. Loofbourrow Associates, a private investment banking firm,
into 12,500 shares of Series C Convertible Preferred Stock.  On
November 2, 2009, the Company converted an additional $300,000 in fees owed to
John W. Loofbourrow Associates into 30.000 shares of Series C Convertible
Preferred Stock.  The conversion was at a price per share of
$0.057308.  The Company redeemed 500 of the Series C preferred stock
at $10 per share on November 17, 2009.  In connection with the
agreement, the Company issued John W. Loofbourrow Associates a three-year
warrant to purchase up to 500,000 shares of the Company's unregistered common
stock at a per share price of $0.066.


34


ITEM
3.  DEFAULTS UPON SENIOR SECURITIES





Not
applicable.





ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





On August
14, 2009, the Company filed a Schedule 14C with the Securities and Exchange
Commission, and at the same time notified the Company’s shareholders via an
Information Statement, that in April, 2009, the holders of a majority of votes
represented by the issued and outstanding shares of the Company common stock, at
that time, by means of a written consent in lieu of a special meeting of the
stockholders, voted in favor of amending the Company’s Articles of Incorporation
to increase the authorized number of shares of the common stock from 340,000,000
to 750,000,000.  This increase in authorized shares of common stock
became effective on September 21, 2009.





ITEM
5.  OTHER INFORMATION





Not
applicable.





ITEM
6.  EXHIBITS





The
following exhibits are filed with this report:





Exhibit No.
                      
                      Description3(i)(1)
                      
                      Certificate
      of Designation for Series B Preferred Stock (Incorporated by reference to
      Exhibit B to Preferred Stock Purchase Agreement, dated as of July 29,
      2009, filed as Exhibit 10.1 of Form 8-K filed on July 30,
      2009)3(i)(2)
                      
                      Certificate
      of Amendment of Articles of Incorporation for increase in authorized
      capital, September 21, 2009 (Incorporated by reference to Exhibit 3(i)(8)
      of Form S-1 filed on October 2, 2009)3(i)(3)
                      
                      Certificate
      of Designations of Preferences, Rights and Limitations of Series C
      Convertible Preferred Stock (Incorporated by reference to Exhibit 5.03(i)
      of Form 8-K filed on November 19, 2009)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
    135032.2*
                      
                      Certification
      of Principal Financial Officer pursuant to 18 U.S.C. Section
      1350*
      Filed
herewith


35


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:  December
      18, 2009
              By:
              /s/ Anthony L. HavensAnthony
      L. HavensChief
      Executive OfficerDate:  December
      18, 2009
              By:
              /s/ Anthony W. AdlerAnthony
      W. AdlerPrincipal
      Financial Officer


36