UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

(Mark One)

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

For the quarterly period ended October 31, 2006

o
TRANSITION REPORT UNDER 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
(IRS Employer
incorporation or organization)
Identification No.)
 
462 Seventh Ave, 20th Floor, New York, NY 10018
(Address of principal executive offices)

(212) 239-2666
(Issuer's telephone number)

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes o No x

As of December 13, 2006, we had 123,216,157 shares of common stock issued and outstanding.

Transitional Small Business Disclosure Format (check one): Yes o No x
 
 

SPARTA COMMERCIAL SERVICES, INC.

FORM 10-QSB
FOR THE QUARTER ENDED OCTOBER 31, 2006

TABLE OF CONTENTS

   
Page
PART I.
FINANCIAL INFORMATION
  
     
Item 1.
Financial Statements (Unaudited)
3
     
 
Condensed Consolidated Balance Sheets as of October 31, 2006 and April 30, 2006
3
     
 
Condensed Consolidated Statements of Operations for the Three and Six Months Ended October 31, 2006 and 2005
4
     
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended October 31, 2006 and 2005
5
     
 
Notes to Unaudited Condensed Consolidated Financial Statements
6
     
Item 2.
Management's Discussion and Analysis and Plan of Operation
16
     
Item 3.
Controls and Procedures
27
     
PART II.
OTHER INFORMATION
  
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
28
     
Item 6.
Exhibits
28
     
Signatures
29
 
2
 

PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
SPARTA COMMERCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
     
October 31,
2006
    
April 30,
2006
  
     
(Unaudited)
        
ASSETS              
Current assets:              
Cash and cash equivalents
  
$
11,518
  
$
856,382
  
Lease payments receivable, current, net of
              
reserve of $31,731 and $5,090, respectively
    
983,948
   
206,986
 
Other receivables
    
23,250
   
-
 
Loan proceeds receivable
    
21,061
   
389,998
 
Prepaid expenses
    
19,724
   
51,939
 
Inventory
    
48,173
   
-
 
Other current assets
    
8,400
   
4,250
 
Total current assets
    
1,116,074
   
1,509,555
 
               
Motorcycles and other vehicles under operating leases, net of
              
accumulated depreciation of $210,894 and $75,873, respectively and
              
loss reserve of $47,349 and $16,409, respectively.
    
1,268,964
   
667,286
 
               
Property and equipment, net of accumulated depreciation and
              
amortization of $74,838 and $53,249, respectively
    
114,689
   
121,544
 
               
Lease and retail installment sale contract receivables, net of current portion and
              
 loss reserve of $55,415 and $14,654, respectively.
    
1,738,072
   
595,895
 
Restricted cash
    
233,828
   
112,503
 
Deferred financing cost
    
17,300
   
-
 
Deposits
    
50,817
   
48,967
 
Total assets
  
$
4,539,744
  
$
3,055,750
  
               
LIABILITIES AND STOCKHOLDERS' EQUITY
              
               
Current liabilities:
             
Accounts payable and accrued expenses
  
$
957,402
  
$
424,692
  
Accrued equity based compensation
    
7,645
   
333,600
 
Accrued equity based penalties
    
2,564
   
47,468
 
Notes payable Senior Lender
    
858,944
   
358,549
 
Notes payable - other
    
275,000
   
-
 
Loans payable - related parties
    
83,260
   
-
 
Deferred revenue
    
3,300
   
-
 
Total current liabilities
    
2,188,115
   
1,164,309
 
               
Deferred revenue
    
788,359
   
186,245
 
Notes payable Senior Lender
   
1,403,811
   
330,799
 
Warrant liability
    
-
   
834,924
 
Total liabilities
    
4,380,285
   
2,516,277
 
               
Stockholders' equity:
              
Preferred stock, $0.001 par value; 10,000,000 shares authorized of which 35,850 shares have been designated as Series A convertible preferred stock, with a stated value of $100 per share, 19,795 and 19,795 shares issued and outstanding, as of October 31,2006 and April 30, 2006
   
1,979,500
   
1,979,500
 
               
Common stock, $0.001 par value; 340,000,000 shares authorized, 123,146,657 and 114,180,301 shares issued and outstanding as of October 31,2006 and April 30, 2006, respectively
   
123,145
   
114,180
 
Common stock to be issued, 0 and 5,838,302 shares as of October 31,2006 and April 30, 2006, respectively.
    
-
   
5,838
 
Common stock subscribed
    
-
   
330,000
 
Additional paid-in capital
    
14,450,661
   
12,553,884
 
Deferred compensation
    
(126,000
)
  
(293,500
)
Accumulated deficit
    
(16,267,847
)
  
(14,150,429
)
Total stockholders' equity
    
159,459
   
539,473
 
Total liabilities and stockholders' equity
  
$
4,539,744
  
$
3,055,750
  

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
 
3
 

SPARTA COMMERCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2006 AND 2005
(UNAUDITED)

   
Three Months Ended
October 31,
  
Six Months Ended
October 31,
  
   
2006
  
2005
  
2006
  
2005
  
                   
Revenue
  
$
219,555
  
$
30,295
  
$
411,197
  
$
47,621
  
                           
Operating expenses:
                          
General and administrative
    
1,324,556
   
910,737
   
2,491,337
   
1,497,469
 
Depreciation and amortization
    
82,313
   
23,654
   
156,610
   
35,887
 
                           
Total operating expenses
    
1,406,869
   
934,391
   
2,647,947
   
1,533,356
 
                           
Loss from operations
    
(1,187,314
)
  
(904,096
)
  
(2,236,750
)
  
(1,485,735
)
                           
Other expense:
                          
Interest expense and financing cost, net
    
(102,381
)
  
(925,961
)
  
(120,268
)
  
(1,583,214
)
Change in value of warrant liabilities
    
(333,470
)
  
-
   
299,474
   
-
  
Loss on sale of asset
    
-
   
-
   
-
   
(6,500
)
                           
Net loss
   
(1,623,165
)
  
(1,830,057
)
  
(2,057,544
)
  
(3,075,449
)
                           
Preferred dividend
    
29,936
   
54,217
   
59,873
   
1,857,492
 
                           
Net loss attributed to common stockholders
  
$
(1,653,101
)
$
(1,884,274
)
$
(2,117,417
)
$
(4,932,941
)
                           
Basic and diluted loss per share
  
$
(0.01
)
$
(0.02
)
$
(0.02
)
$
(0.04
)
                           
Basic and diluted loss per share attributed to
                         
common stockholders
  
$
(0.01
)
$
(0.02
)
$
(0.02
)
$
(0.06
)
                           
Weighted average shares outstanding
    
121,947,292
   
87,040,454
   
121,350,018
   
86,555,857
 
 
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

4
 

SPARTA COMMERCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2006 AND 2005
(UNAUDITED)

   
Six Months Ended October 31,
  
   
2006
 
2005
  
CASH FLOWS FROM OPERATING ACTIVITIES:
              
Net loss
  
$
(2,057,544
)
$
(3,075,449
)
Adjustments to reconcile net loss to net cash
              
used in operating activities:
              
Depreciation and amortization
   
156,610
   
35,887
 
Allowance for loss reserve
    
98,342
   
-
 
Amortization of deferred revenue
    
(6,600
)
  
(6,600
)
Amortization of deferred compensation
    
223,500
   
118,500
 
Equity based compensation
    
302,950
   
85,228
 
Stock based finance cost
    
48,500
   
973,607
 
Change in fair value of penalty warrant and warrant liability
    
(267,855
)
  
-
 
Loss on sale of assets
    
-
   
6,500
 
Changes in operating assets and liabilities:
              
(Increase) decrease in:
              
Lease payments receivable
    
(2,034,714
)
  
(41,167
)
Other receivable
    
(23,250
)
  
-
 
Prepaid expenses
    
32,215
   
(90,000
)
Loan proceeds receivable
    
368,937
   
-
 
Other current assets
    
(4,150
)
  
666
 
Inventory
    
-
   
-
 
Restricted cash
    
(121,325
)
  
-
 
Deposits
    
(1,850
)
  
(106,512
)
Increase (decrease) in:
              
Accounts payable and accrued expenses
    
599,967
   
644,371
 
Deferred revenue
    
612,014
   
62,048
 
Net cash used in operating activities
    
(2,119,157
)
  
(1,392,921
)
               
CASH FLOWS FROM INVESTING ACTIVITIES:
              
Proceeds from sale of asset
    
-
   
25,000
 
Cost of asset sold
    
-
   
(31,500
)
Payments for motorcycles and other vehicles
    
(767,640
)
  
(384,887
)
Purchases of property and equipment
    
(14,734
)
  
(31,109
)
Net cash used by investing activities
    
(782,374
)
  
(422,496
)
               
CASH FLOWS FROM FINANCING ACTIVITIES:
              
Proceeds from sale of preferred stock, net
    
-
   
1,592,517
 
Proceeds from notes from Senior Lender
    
1,802,989
   
104,340
 
Payments on notes from Senior Lender
    
(229,582
)
  
(150,049
)
Proceeds from other notes
    
275,000
   
-
 
Loan proceeds from other related parties
    
83,260
   
-
 
Exercise of warrants
    
125,000
   
180,000
 
Payments for fractional shares
    
-
   
(16
)
Net cash provided by financing activities
    
2,056,667
   
1,726,792
 
               
Net decrease in cash
    
(844,864
)
  
(88,625
)
               
Cash and cash equivalents, beginning of period
  
$
856,382
  
$
108,365
  
Cash and cash equivalents, end of period
  
$
11,518
  
$
19,740
  
               
Cash paid for:
              
Interest
  
$
72,513
  
$
10,424
  
 
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
 
5
 
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2006
(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, 2006 and for the three and six month periods ended October 31, 2006 and 2005 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission, including Form 10-QSB 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, 2006 as disclosed in the Company's 10-KSB for that year as filed with the SEC.

The results of the six months ended October 31, 2006 are not necessarily indicative of the results to be expected for the full year ending April 30, 2007.

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Sparta Commercial Services, LLC. All significant intercompany transactions and balances have been eliminated in the consolidated financial statements.

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, and unearned income at lease inception is amortized over the lease term.

6
 

SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2006
(UNAUDITED)

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 elated documents and processes. Fees received are amortized and booked as income over the length of the contract. At October 31, 2006, the Company had recorded deferred revenue related to these contracts of $3,300.

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.
 
7
 

SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2006
(UNAUDITED)

Stock Based Compensation

Prior to the adoption of FASB No. 123R, during the third quarter of Fiscal 2006, the Company recorded employee stock based compensation pursuant to APB No. 25. Had compensation costs for the Company's stock options been determined based on the fair value at the grant dates for the awards, the Company's net loss and losses per share for the period prior to the adoption of FAS 123R would have been as follows:

   
Three
Months Ended
  
Six
Months Ended
  
   
October 31, 2005
  
Net Loss - as reported
  
$
(1,830,057
)
$
(3,075,449
)
Add: Total stock based employee compensation expense as reported under intrinsic value method (APB No. 25)
    
—
    
—
  
               
Deduct: Total stock based employee compensation expense as reported under fair value based method (SFAS No. 123)
    
(12,355
)
  
(24,710
)
   
$
(1,842,412
)
$
(3,100,159
)
               
Net loss attributable to common stockholders- Pro forma
  
$
(1,896,629
)
$
(4,957,651
)
Basic(and assuming dilution) loss per share-as reported
  
$
(0.02
)
$
(0.06
)
Basic(and assuming dilution) loss per share - Pro forma
  
$
(0.02
)
$
(0.06
)

As of October 31, 2006 the number of options which have vested are 1,656,250 and the number of unvested options are 3,878,750. As of October 31, 2006 the number of shares which have vested are 200,000 and the number of unvested shares are 625,000.

Net Loss Per Share

The Company uses Statement of Financial Accounting Standards (SFAS) No. 128, "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. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential shares had been issued and if the additional shares were dilutive. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive.

Per share basic and diluted net loss attributable to common stockholders amounted to $0.009 and $0.013 for the three months ended October 31, 2006 and 2005, respectively, and $0.02 and $0.06 for the six months ended October 31, 2006 and 2005, respectively. At October 31, 2006 and 2005, 30,928,051 and 37,468,324 potential shares, respectively, were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.

8
 

SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2006
(UNAUDITED)

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157 `Fair Value Measurements'. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles ("GAAP"), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on the financial statements.

In March 2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of Financial Assets - an amendment to FASB Statement No. 140. Statement 156 requires that an entity recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a service contract under certain situations. The new standard is effective for fiscal years beginning after September 15, 2006. The adoption of SFAS No. 156 did not have a material impact on the Company's financial position and results of operations.

In February 2006, the FASB issued SFAS 155, which applies to certain "hybrid financial instruments," which are instruments that contain embedded derivatives. The new standard establishes a requirement to evaluate beneficial interests in securitized financial assets to determine if the interests represent freestanding derivatives or are hybrid financial instruments containing embedded derivatives requiring bifurcation. This new standard also permits an election for fair value remeasurement of any hybrid financial instrument containing an embedded derivative that otherwise would require bifurcation under SFAS 133. The fair value election can be applied on an instrument-by-instrument basis to existing instruments at the date of adoption and can be applied to new instruments on a prospective basis. The adoption of SFAS No. 155 did not have a material impact on the Company's financial position and results of operations.

In May 2005 the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to prior periods' financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. The adoption of SFAS No. 154 did not have a material impact on the Company's financial position and results of operations.

9
 

SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2006
(UNAUDITED)

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect that the adoption of FIN 48 will have an impact on the Company’s financial position and results of operations.

In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 was issued in order to eliminate the diversity of practice in how public companies quantify misstatements of financial statements, including misstatements that were not material to prior years’ financial statements. The Company will initially apply the provisions of SAB 108 in connection with the preparation of its annual financial statements for the year ending April 30, 2007. The Company has evaluated the potential impact SAB 108 may have on our financial position and results of operations and do not believe the impact of the application of this guidance will be material.

NOTE B - MOTORCYCLES AND OTHER VEHICLES UNDER OPERATING LEASES

Motorcycles and other vehicles under operating leases at October 31, 2006 and April 30, 2006 consist of the following:

   
October 31,
2006
  
April 30,
2006
  
Motorcycles and other vehicles
  
$
1,527,207
  
$
759,568
  
Less: accumulated depreciation
    
(210,894
)
  
(75,873
)
Motorcycles and other vehicles, net of accumulated depreciation
    
1,316,313
    
683,695
  
Less: estimated reserve for residual values
    
(47,349
)
  
(16,409
)
Motorcycles and other vehicles under operating leases, net
 
$
1,268,964
  
$
667,286
  
 
Depreciation expense for vehicles for the three and six months ended October 31, 2006 was $71,474 and $135,022, respectively, depreciation expense for property and equipment for the three and six months ended October 31, 2006 was $8,075 and $16,058, respectively. Depreciation expense for vehicles for the three and six months ended October 31, 2005 was $14,104 and $17,600, respectively, depreciation expense for property and equipment for the three and six months ended October 31, 2005 was $9,550 and $18,287, respectively.

10
 

SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2006
(UNAUDITED)

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. During the period ended October 31, 2006, the Company repossessed Vehicles of value $48,173, which will be resold.

NOTE D - NOTES PAYABLE TO SENIOR LENDER

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, 2006 is 9.59%.

At October 31, 2006, the notes payable mature as follows:

12 Months Ended
       
October 31,
  
 Amount
  
2007
  
$
858,944
  
2008
    
538,420
  
2009
    
343,361
  
2010
    
353,071
  
2011
    
168,959
  
   
$
2,262,755
  

During the six month period ended October 31, 2006, the Company repaid $229,582 of the loans in cash.

NOTE E - NOTES PAYABLE OTHERS

In September and October 2006, the Company sold to four accredited investors’ bridge notes in the aggregate amount of $275,000. Three bridge notes aggregating $175,000 mature in 45 days and one note in the amount of $100,000 matures in 90 days, originally scheduled to expire on various dates through November 30, 2006, together with simple interest at the rate of 10%. The notes provide that 100,000 shares of the Company's restricted common stock are to be issued as “Equity Kicker” for each $100,000 of notes purchased, or any pro rated portion thereof. The Company has the right to extend the maturity date of notes for 30 to 45 days. In the event of extension, lender will be entitled for “additional equity” equal to 60% of the “Equity Kicker” shares. In the event of default on repayment by the Company, the “Equity Kicker” and the “Additional Equity” to be issued to the lender shall be increased by 50% for each month or portion thereof, as penalty, that such default has not been cured. During default period interest will be at the rate of 20%. The repayment, in the event of default, of the notes are to be collateralized by certain security interest as per the terms of the agreement.

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 105,000 restricted shares of common stock to be issued.

11
 

SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2006
(UNAUDITED)

These notes payable for $275,000 are classified as current on the Company’s balance sheet. Furthermore, In connection with such notes payable, the Company has recorded $55,450 financing cost, $4,226 interest expense and $17,300 deferred financing cost.

NOTE F - LOANS PAYABLE TO RELATED PARTIES

In September and October 2006, the Company borrowed $60,000 and $8,500, respectively from a Director and officer on a demand basis without interest. On August 24, 2006, the Company borrowed $14,760 from another Director and Officer on a demand basis without interest. As of October 31, 2006, aggregated loans payable to officers were $83,260. These loans are classified as current on the Company’s balance sheet.

NOTE G - EQUITY TRANSACTIONS

The Company is authorized to issue 10,000,000 shares of preferred stock with $0.001 par value per share and $100 stated value per share, of which 35,850 shares have been designated as Series A convertible preferred stock, and 340,000,000 shares of common stock with $0.001 par value per share. As of October 31, 2006 and April 30, 2006, the Company has 19,795 shares of preferred stock issued and outstanding for each period. The Company has 123,146,657 and 114,180,301 shares of common stock issued and outstanding as of October 31, 2006 and April 30, 2006, respectively.

Common Stock

During May 2006, the Company issued 550,000 shares of common stock, valued at $286,000, for accrued expenses recorded during the year end April 30, 2006.

During July 2006, the Company issued 320,000 shares of common stock, valued at $132,600, for accrued expenses recorded during the year end April 30, 2006.

During June and July 2006, the Company issued an aggregate of 208,500 shares of common stock, pursuant to a consulting agreement. The shares have been valued at $74,365.

During July 2006, the Company issued 70,000 shares of common stock, valued at $38,500, for accrued costs related to loans received by the Company during the year end April 30, 2006.

During July 2006, the Company issued 48,077 shares of common stock, valued at $13,285, related to penalty provision accrued during the year end April 30, 2006.

During July 2006, the Company issued 5,838,302 shares of common stock for shares subscribed for in March 2006.

During July 2006, the Company received $62,500 upon the exercise of 320,513 warrants. The shares were issued September, 2006.

12
 

SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2006
(UNAUDITED)

During the six months ended October 31, 2006, the Company issued 250,000 shares of common stock, valued at $48,500, as additional costs related to loans received by the Company. This amount was charged to financing cost during the six months ended October 31, 2006.

During August 2006, the Company issued an aggregate of 139,000 shares of common stock, pursuant to a consulting agreement. The shares have been valued at $26,410.

During September 2006, the Company issued 350,000 shares of common stock, pursuant to a consulting agreement. The shares have been valued at $56,000.

During October 2006, the Company issued 550,001 shares of common stock for shares subscribed for in November 2005.

During October 2006, the Company issued 320,963 shares of common stock for warrants exercised for $62,500.

During six months ended October 31, 2006, the Company granted options to purchase an aggregate of 4,500,000 shares of common stock to one employee and one Director. At grant date, 1,000,000 options vested immediately. The vested and unvested options have been valued at $636,433 using the Black-Sholes option pricing model with the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 131%; (3) risk-free interest rate of 5.04% and 5.24%, vest over a 36 month period and expire if unexercised in five years. During the three and six months periods ended October 31, 2006, the Company expensed $309,409 and $526,450 respectively in non-cash charges related to stock and option compensation expense.

Preferred Stock Series A

During the three months ended July 31, 2005, the Company issued 17,750 preferred shares at a stated value of $100 per share and warrants to purchase 5,689,108 shares of common stock, exercisable for three years at $0.195 per share, for aggregate gross proceeds of $1,775,000 received from investors. In connection with the private placement, during the three months ended July 31, 2005, the Company issued as compensation to the placement agent warrants to purchase 1,137,822 shares of common stock, exercisable for five years at $0.172 per share. The warrants, which were valued at $406,665 using the Black-Scholes option pricing model, were recognized as an expense during the quarter.

In accordance with EITF 00-27, a portion of the proceeds were allocated to the warrants based on their relative fair value, which totaled $931,800 using the Black Scholes option pricing model. Further, the Company attributed a beneficial conversion feature of $843,200 to the series `A' preferred shares based upon the difference between the conversion price of those shares and the closing price of our common shares on the date of issuance. The assumptions used in the Black Scholes model are as follows: (1) dividend yield of 0%; (2) expected volatility of 188%, (3) weighted average risk-free interest rate of 3.65%, and (4) expected life of 2 years as the conversion feature and warrants are immediately exercisable. Both the fair value of the class `C' warrants and the beneficial conversion feature were recorded as a dividend and were included in the financial statements of that period.

13
 

SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2006
(UNAUDITED)

In connection with the private placement described above, the Company granted 1,755,537 common stock purchase warrants to the placement agent. The warrants were exercisable immediately, have an exercise price of $0.215 per share and expire in five years. The warrants were valued at $1,033,100 using the Black-Sholes pricing model. The assumption ranges used in the Black-Scholes model are as follows:  (1) dividend yield of 0%; (2) expected volatility of 174% - 177%, (3) risk-free interest rate of 3.65% - 4.7%, and (4) expected life of 2 years.

Since the warrants contain registration rights for the underlying shares and since the delivery of such registered shares was not deemed controllable by the Company, we recorded the net value of the warrants at the date of issuance as a warrant liability on the balance sheet at April 30, 2006 of $834,924. A Registration Statement under Form SB-2, including the shares underlying the warrants, was declared effective by the Securities and Exchange Commission on May 31, 2006. Therefore, the change in the fair value from April 30, 2006 to May 31, 2006 was included in other income (expense) for three months ended October 31, 2006, in accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”. The fair value of the warrants was $567,069 and $834,924 at May 31, 2006 and April 30, 2006, respectively. Additionally, as the Registration Statement covering the underlying shares was declared effective, the accrued warrant liability at May 31, 2006 was credited to additional-paid in capital. The amount credited to additional-paid-in capital was $567,069.

NOTE H - NON-CASH FINANCIAL INFORMATION

During the six months ended October 31, 2006, the Company:
 
·  
Issued 870,000 shares of common stock for expense accrued during the year ended April 30, 2006. The shares have been valued at $418,600.

·  
Issued 70,000 shares of common stock, valued at $38,500, for accrued additional costs related to loans received by the Company during the year end April 30, 2006.

·  
Issued 48,077 shares of common stock, valued at $13,285, related to penalty provision accrued during the year end April 30, 2006.

·  
Issued 550,001 shares of common stock for subscription $330,000 received during the year end April 30, 2006.

·  
Issued 697,500 shares of common stock, valued at $156,775, pursuant to consulting agreements.

·  
Issued 250,000 shares of common stock, valued at $48,500, for additional costs related to loans received by the Company.
 
·  
Expensed $178,532 in non-cash charges related to option compensation expense.

14
 

SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2006
(UNAUDITED)

NOTE I - SUBSEQUENT EVENTS.

During November 2006, the Company received subscription of $100,000 for $100,000 in notes of the Company bearing interest at the rate of 6% per year and maturing August 1, 2007.
 
NOTE J - GOING CONCERN MATTERS

The accompanying 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, 2006, the Company incurred losses of $16,267,847. Of these losses, $2,057,544 was incurred during the six months ending October 31, 2006 and $3,075,449 in the six months ending October 31, 2005. As of October 31, 2006, the Company also had a working capital deficit of $1,072,041. 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. While, the planned principal operations have commenced, 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 pursing additional equity financing through discussions with investment bankers and private investors. There can be no assurance the Company will be successful in its effort to secure additional equity financing.

15
 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION

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, 2006 as disclosed in our annual report on Form 10-KSB for that year as filed with the SEC.

"FORWARD-LOOKING" INFORMATION

This report on Form 10-QSB 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.

INTRODUCTORY STATEMENT

The period from inception through January 31, 2005 was a developmental period for us, setting up credit procedures, setting our arrangements with vehicle distributors, obtaining personnel, seeking financing to support our developmental efforts, and seeking credit facilities. Consequently, our operations are subject to all the risks inherent in the establishment of a new business enterprise. In fiscal year 2005, we began to obtain regulatory approval in several states, where required, prior to commencing active operations. In February 2006, we attended our first national motorcycle industry dealer only trade show "Dealer EXPO 2006" and over 200 dealers visited our booth during the show. We are actively signing up dealers to participate in our financing programs, including our private label financing programs. As of October 31, 2006, 1,409 (compared to 777 at October 31, 2005) dealers have logged onto our web site and downloaded dealer applications and of that number, 511 have been approved as Sparta or private label authorized dealers. We believe this trend will continue over the foreseeable future. We have signed up four manufacturers to our private label programs, and are in negotiations with other manufacturers who have indicated an interest in a private label program. Additionally, we have signed three third party marketing arrangements with industry recognized consulting firms who will introduce our programs to their dealer clients and train them how to effectively use them. We have increased our marketing staff from 1 at January 2005 to 4 at the present time. The Company obtained a senior credit facility in July 2005 which was renewed for one year in August 2006, which allowed us to commence and continue our operations. This facility was further amended in November 2006 to allow us to extend credit to individuals with lower FICO scores than prior to the amendment. Additionally, the facility was amended to allow us to extend credit to municipalities. Despite these amendments, we will need to obtain additional credit facilities so that we have the funding sources which allow us to originate leases and finance contracts across all credit profiles of our business model. We are presently seeking additional credit facilities and long term debt and additional equity to support the additional debt.

16
 

In May 2006, we entered into an agreement with netLoan Funding, LLC (“netLoan”), a provider of lender management services through its operation of a multi-asset finance portal linked to internet auction and sale websites. That agreement allows users who successfully bid on or purchase specified powersports vehicles, and who wish to lease or finance those vehicles, to apply for financing via a link between the auction web site and the netLoan site. Once the users “click” on the netLoan link they land on the netLoan site where they then “click” on a button (which has a “picture” of the type of vehicle they wish to finance) and in the case of motorcycles, ATVs and scooters are routed by netLoan Funding to a dedicated portal on the Sparta web site where they will be able to complete online credit applications and, subject to credit approval, conclude the process within minutes. We will pay netLoan a fee for each funded transaction. To ensure a rapid and smooth implementation of this agreement, netLoan and Sparta commenced the program on a limited basis in October with Sparta providing secured financing options for ATVs, select motorcycles, and scooters only. This program was completely rolled out to fifty states by November 2006.

In July 2006, we announced an agreement for routing of motorcycle, ATV, and scooter loan applications from a Fortune 500 global diversified financial provider. In October 2006, this agreement was extended for a minimum of one year. The agreement calls for that company to electronically transmit to Sparta loan applications submitted to them and which meet Sparta’s lending/leasing criteria. iPLUS™ will immediately approve or decline the application, and, if approved, notify the applicant through the internet within minutes. This agreement will allow consumers to be pre-approved before they even start shopping. We will pay that company a fee for each funded transaction. We have commenced receiving and decisioning applications on a manual test basis while final technical details needed to ensure a seamless automated process are implemented. This project is expected to be fully automated and operational by January 2007.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED OCTOBER 31, 2006 TO THE THREE MONTHS ENDED OCTOBER 31, 2005

For the three months ended October 31, 2006 and 2005, we have generated limited, but increasing, sales revenues, have incurred significant expenses, and have sustained significant losses. We believe we will continue to earn increasing revenues from operations during the remainder of fiscal 2007 and in the upcoming fiscal year.

REVENUES

Revenues totaled $219,555 during the three months ended October 31, 2006 as compared to $30,295 during the three months ended October 31, 2005. Current period revenue was comprised of $166,559 in lease revenue, $50,300 in Private Label and PPF Program fees and $2,696 in other income. Prior period revenue was comprised of $24,223 in lease revenue, $2,772 in dealer fees, and $3,300 in private label fees.

17
 
 
COSTS AND EXPENSES

General and administrative expenses were $1,324,556 during the three months ended October 31, 2006, compared to $910,737 during the three months ended October 31, 2005, an increase of $413,819, or 45%. Expenses incurred during the current three month period consisted primarily of the following expenses: Compensation and related costs, $414,505; Accounting, audit and professional fees, $195,785; Consulting fees, $55,027; Rent and utilities, $74,634, Travel and entertainment, $22,448 and stock based compensation $309,409. Expenses incurred during the comparative three month period in 2005 consisted primarily of the following expenses: Compensation and related costs, $400,925; Accounting, audit and professional fees, $114,008; Consulting fees, $215,529; Rent, $44,857; and Travel and entertainment, $17,905.

We incurred a non-cash charge of $309,409 during the three months ended October 31, 2006 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, 2005 were a non-cash expense of $323,672 related to shares of common stock issued in connection with debt financing. Additionally, during the three month period ended October 31, 2005, we recorded an expense of $600,000 related to the failure to have an effective registration statement covering the underlying shares of common stock issuable upon conversion of the preferred stock and the related warrants. During three months ending October 31, 2006, we have also recorded non-cash charge of $333,470 related to the increase in value of warrants issued with registration rights. There was no comparable charge in the three months ended October 31, 2005.

NET LOSS

We incurred a net loss before preferred dividends of $1,623,165 for our three months ended October 31, 2006 as compared to $1,830,057 for the corresponding interim period in 2005. The $206,892 or 11% decrease in our net loss before preferred dividends for our three month interim period ended October 31, 2006 was attributable primarily to an increase in revenue and a decrease in non-cash financing costs which decrease was greater than an increase in operating expenses and the charge for change in the value of warranty liability.

We also incurred non-cash preferred dividend expense of $29,936 for our three month period ended October 31, 2006, with an expense of $54,217 in the corresponding interim period of 2005. The decrease in preferred dividend expense was attributable to the conversion of preferred stock to common stock.

Our net loss attributable to common stockholders decreased to $1,653,101 for our three month period ended October 31, 2006 as compared to $1,884,274 for the corresponding period in 2005. The $231,173 decrease in net loss attributable to common stockholders for our three month period ended October 31, 2006 was due to the decrease in net loss of $206,892 and the decrease in preferred dividends of $24,281.

COMPARISON OF THE SIX MONTHS ENDED OCTOBER 31, 2006 TO THE SIX MONTHS ENDED OCTOBER 31, 2005

For the six months ended October 31, 2006 and 2005, we have generated limited, but increasing, sales revenues, have incurred significant expenses, and have sustained significant losses. We believe we will continue to earn increasing revenues from operations during the remainder of fiscal 2007 and in the upcoming fiscal year.

18
 

REVENUES

Revenues totaled $411,197 during the six months ended October 31, 2006 as compared to $47,621 during the six months ended October 31, 2005. Current period revenue was comprised of $332,574 in lease revenue, $60,500 in private label fees and Preferred Provider Program and $18,125 in other income. Prior period revenue was comprised of $34,974 in lease revenue, $6,047 in dealer fees, and $6,600 in private label fees.

COSTS AND EXPENSES

General and administrative expenses were $2,491,337 during the six months ended October 31, 2006, compared to $1,497,469 during the six months ended October 31, 2005, an increase of $993,868, or 66%. Expenses incurred during the current six month period consisted primarily of the following expenses: Compensation and related costs, $853,899; Accounting, audit and professional fees,$330,425; Consulting fees, $160,442; Rent and utilities, $160,978, Travel and entertainment, $62,038 and stock based compensation $526,450. Expenses incurred during the comparative six month period in 2005 consisted primarily of the following expenses: Compensation and related costs, $656,294; Accounting, audit and professional fees, $173,149; Consulting fees, $361,587; Rent, $72,814; and Travel and entertainment, $35,331.

During six months ending October 31, 2006, we recorded non-cash income of $299,474 related to the decrease in value of warrants issued with registration rights. We incurred a non-cash charge of $526,450 during the six months ended October 31, 2006 related to options and shares of common stock issued for consulting fees, services and financing cost. For the six months ended October 31, 2005, we had expensed non-cash costs of $406,665 related to warrants granted to a private placement agent. Additionally, we incurred a non-cash charge of $599,642 during the six months ended October 31, 2005 related to shares of common stock issued in connection with debt financing and has recorded an expense of $600,000 related to the failure to have an effective registration statement covering the underlying shares of common stock issuable upon conversion of it preferred stock and the related warrants.

NET LOSS

We incurred a net loss before preferred dividends of $2,057,544 for our six months ended October 31, 2006 as compared to $3,075,449 for the corresponding interim period in 2005. The $1,017,905 or 33% decrease in our net loss before preferred dividends for our six month interim period ended October 31, 2006 was attributable to an increase in revenue, a decrease in non-cash financing costs, and a partial recovery, in the amount of $299,474, of prior years charges for warrant liability.

We also incurred non-cash preferred dividend expense of $59,873 for our six month period ended October 31, 2006 as compared with a non-cash expense of $1,857,492 in the corresponding interim period of 2005. The decrease in preferred dividend expense was primarily attributable to the beneficial conversion feature expense of $1,775,000 in the corresponding interim period in 2005 (related to warrants issued with the convertible preferred stock and a beneficial conversion feature associated with the preferred stock) with no such comparable expense in the current period. Preferred dividends in the current period also decreased as a result of preferred stock conversions to common stock.

19
 
 

Our net loss attributable to common stockholders decreased to $2,117,417 for our six month period ended October 31, 2006 as compared to $4,932,941 for the corresponding period in 2005. The $2,815,524 decrease in net loss attributable to common stockholders for our six month period ended October 31, 2006 was due to the decrease in net loss and the decrease in preferred dividends.

LIQUIDITY AND CAPITAL RESOURCES

As of October 31, 2006, we had a working capital deficit of $1,072,041. We generated a deficit in cash flow from operations of $2,119,157 for the six months ended October 31, 2006. This deficit is primarily attributable to our net loss from operations of $2,057,544, an increase in lease receivables of $2,034,714 and a change in warrant liability of $267,855, partially offset by depreciation and amortization of $156,610 and to changes in the balances of current assets and liabilities. Accounts payable and accrued expenses increased by $599,967, deferred revenue increased by $612,014, prepaid expenses decreased by $32,215 and loan proceeds receivable decreased by $368,937.

Cash flows used in investing activities for the six months ended October 31, 2006 was $782,374, primarily due to the purchase of property and equipment of $14,734 and payments for motorcycles and vehicles of $767,640.

We met our cash requirements during the six month period through net proceeds for equity of $125,000, proceeds of notes payable $275,000 and loans payable to officers $83,260 and debt financing of $1,802,989, offset with payments of $229,582. Additionally, we have received limited revenues from leasing and financing motorcycles and other vehicles, our recently launched private label programs and from dealer sign-up fees.

While we have raised capital to meet our working capital and financing needs in the past, additional financing is required in order to meet our current and projected cash flow deficits from operations and development. We are seeking financing, which may take the form of debt, convertible debt or equity, in order to provide the necessary working capital. There is no guarantee that we will be successful in raising the funds required.

We estimate that we will need approximately $1,800,000 in additional funds to fully implement our business plan during the next twelve months for a credit line reserve and for our general operating expenses. Although we obtained a senior credit facility in July 2005, which allowed us to commence our initial active operations, this facility does not allow us to finance individuals with lower FICO scores nor does it provide financing for other markets we wish to enter. Thus, we will need to obtain additional credit facilities to fully implement our business plan. We are presently seeking those additional credit facilities and long term debt. This additional, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on our operating flexibility. If we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources to finance our growth, 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.
 
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AUDITOR'S OPINION EXPRESSES DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A "GOING CONCERN"

The independent auditors report on our April 30, 2006 and 2005 financial statements included in our Annual Report states that our historical losses and the lack of revenues raise substantial doubts about our 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 our common stock. We can make no assurances that our business operations will develop and provide us with significant cash to continue operations.

PLAN OF OPERATIONS

ADDRESSING THE GOING CONCERN ISSUES

In order to improve our liquidity, our management is actively pursing additional financing through discussions with investment bankers, financial institutions and private investors. There can be no assurance that we 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.

The primary issues management will focus on in the immediate future to address this matter include:
 
 
·
seeking additional credit lines from institutional lenders;

 
·
seeking institutional investors for debt or equity investments in our company; and

 
·
initiating negotiations to secure short term financing through promissory notes or other debt instruments on an as needed basis.

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.

PRODUCT RESEARCH AND DEVELOPMENT

We do not anticipate incurring significant research and development expenditures during the next twelve months.

ACQUISITION OR DISPOSITION OF PLANT AND EQUIPMENT

We do not anticipate the sale or acquisition of any significant property, plant or equipment during the next twelve months.

21

NUMBER OF EMPLOYEES

At October 31, 2006, we had 22 full time employees. If we fully implement our business plan, we anticipate our employment base may increase by approximately 100% during the next twelve months. As we continue to expand, we will incur additional cost for personnel. This projected increase in personnel is dependent upon our generating revenues and obtaining sources of financing. There is no guarantee that we will be successful in raising the funds required or generating revenues sufficient to fund the projected increase in the number of employees.

INFLATION

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

CRITICAL ACCOUNTING POLICIES

The preparation of our consolidated 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 consolidated financial statements; we believe the following critical accounting policy involves the most complex, difficult and subjective estimates and judgments.

REVENUE RECOGNITION

We originate leases on new and used motorcycles and other powersports vehicles from motorcycle dealers throughout the United States. Our 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 original estimate of the projected value of the motorcycle at the end of the scheduled lease term (the "Residual"). Monthly lease payments are recognized as rental income. An acquisition fee classified as fee income on the financial statements is received and recognized in income at the inception of the lease. Direct financing leases are recorded at the gross amount of the lease receivable, and unearned income at lease inception is amortized over the lease term.

We realize gains and losses as the result of the termination of leases, both at and prior to their scheduled termination, and the disposition of the related motorcycle. The disposal of motorcycles, which reach scheduled termination of a lease, results in a gain or loss equal to the difference between proceeds received from the disposition of the motorcycle and its net book value. Net book value represents the residual value at scheduled lease termination. Lease terminations that occur prior to scheduled maturity as a result of the lessee's voluntary request to purchase the vehicle have resulted in net gains, equal to the excess of the price received over the motorcycle's net book value.
 
22

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. We record a gain or loss for the difference between the proceeds received and the net book value of the motorcycle.

We charge fees to manufacturers and other customers related to creating a private label version of our financing program including web access, processing credit applications, consumer contracts and other related documents and processes. Fees received are amortized and booked as income over the length of the contract.

STOCK-BASED COMPENSATION

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123R (revised 2004), "Share-Based Payment" which is a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation". Statement 123R supersedes APB opinion No. 25, "Accounting for Stock Issued to Employees", and amends FASB Statement No. 95, "Statement of Cash Flows". Generally, the approach in Statement 123R is similar to the approach described in Statement 123. However, Statement 123R 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 Statement 123R in the third quarter of fiscal year 2006.

RECENT ACCOUNTING PRONOUNCEMENT

In September 2006, the FASB issued SFAS 157 `Fair Value Measurements'. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles ("GAAP"), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on the financial statements.

In March 2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of Financial Assets - an amendment to FASB Statement No. 140. Statement 156 requires that an entity recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a service contract under certain situations. The new standard is effective for fiscal years beginning after September 15, 2006. The adoption of SFAS No. 156 did not have a material impact on the Company's financial position and results of operations.
 
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In February 2006, the FASB issued SFAS 155, which applies to certain "hybrid financial instruments," which are instruments that contain embedded derivatives. The new standard establishes a requirement to evaluate beneficial interests in securitized financial assets to determine if the interests represent freestanding derivatives or are hybrid financial instruments containing embedded derivatives requiring bifurcation. This new standard also permits an election for fair value remeasurement of any hybrid financial instrument containing an embedded derivative that otherwise would require bifurcation under SFAS 133. The fair value election can be applied on an instrument-by-instrument basis to existing instruments at the date of adoption and can be applied to new instruments on a prospective basis. The adoption of SFAS No. 155 did not have a material impact on the Company's financial position and results of operations.

In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to prior periods' financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. The adoption of SFAS No. 154 did not have a material impact on the Company's financial position and results of operations.

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect that the adoption of FIN 48 will have an impact on the Company’s financial position and results of operations.

In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 was issued in order to eliminate the diversity of practice in how public companies quantify misstatements of financial statements, including misstatements that were not material to prior years’ financial statements. We will initially apply the provisions of SAB 108 in connection with the preparation of our annual financial statements for the year ending April 30, 2007. We have evaluated the potential impact SAB 108 may have on our financial position and results of operations and do not believe the impact of the application of this guidance will be material.
 
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OFF-BALANCE SHEET ARRANGEMENTS

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

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. Investors should carefully consider all of such risk factors before making an investment decision with respect to our common stock.

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

We have sought to identify what we believe are 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.

POTENTIAL FLUCTUATIONS IN ANNUAL OPERATING RESULTS

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.

DEPENDENCE UPON MANAGEMENT

Our future performance and success is dependant 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, and Mr. Richard Trotter, our Chief Operating Officer. If we lost the services of Mr. Havens, Mr. Trotter, or other key employees before we could get qualified replacements that loss could materially adversely affect our business. We do not maintain key man life insurance on any of our Management.

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

The present officers and directors own approximately 54.44% 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.

MANAGEMENT OF GROWTH

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 the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and must be current in their reports under the Exchange Act, 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.
 
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ITEM 3. CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and our Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of 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 were 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.

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PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In September and October 2006, in transactions deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, the Company sold to four accredited investors bridge notes in the aggregate amount of $275,000. Three 45-day bridge notes aggregating $175,000 and one 90-day $100,000 note were originally scheduled to expire on various dates through November 30, 2006, together with simple interest at the rate of 10%. The notes provide that 100,000 shares of the Company's restricted common stock are to be issued for each $100,000 of notes purchased, or any pro rated portion thereof. In the event of default on repayment, for each uncured month, as penalty, the equity kicker and the additional equity to be issued to the lenders are to be increased by 50%, on a pro rata basis, and during default period, interest is to be at the rate of 20%. The repayment, in the event of default, of the notes are to be collateralized by certain security interest as per the terms of the agreement. The Company had the right to extend the maturity date of notes for 30 to 45 days, and, in the event of extension, the lender would be entitled to an additional equity equal to 60% of the equity kicker shares. 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 of in the aggregate amount of 165,000 restricted shares of common stock to be issued.

During November 2006, in transactions deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, the Company received from an accredited investor a subscription of $100,000 for $100,000 in notes of the Company bearing interest at the rate of 6% per year and maturing August 1, 2007.

Item 6. Exhibits.

The following exhibits are filed with this report:

Exhibit Number
 
Description of Exhibit
Exhibit 10.1
 
Employment Agreement with Anthony W. Adler (incorporated by reference to Exhibit 10.1 of Form 8-K, filed on October 2, 2006
     
Exhibit 10.2
 
Stock Option Agreement with Jeffrey Bean, dated October 23, 2006 (incorporated by reference to Exhibit 10.1 of Form 8-K, filed on October 24, 2006
     
Exhibit 10.3*
 
Form of Promissory Note
     
Exhibit 10.4*
 
Form of Promissory Note
     
Exhibit 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-QSB.
     
Exhibit 31.1*
 
Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
     
Exhibit 31.2*
  
Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
     
Exhibit 32.1*
 
Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350
     
Exhibit 32.2*
 
Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350

* Filed herewith.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
     
 
SPARTA COMMERCIAL SERVICES, INC.
 
 		  
 		  
 
Date: December 18, 2006 By:   /s/ Anthony L. Havens
 
Anthony L. Havens
 
Chief Executive Officer
 
     
Date: December 18, 2006 By:   /s/ Anthony W. Adler
 
Anthony W. Adler
 
Principal Financial Officer


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