XOTC:QLTS Annual Report 10-K/A Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K/A

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended

March 31, 2012

Commission File No:  000-52595

 

Q LOTUS HOLDINGS, INC.

(Exact Name of Registrant as specified in its charter)

 

Nevada 14-1961383
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

 

520 North Kingsbury Street, Suite 1810, Chicago, IL 60654

(Address, including zip code, of principal executive offices)

Registrant's telephone number, including area code:  (312) 379-1800

 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001 par value

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  YES ¨ NO x

 

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 ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x NO ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

 

Large Accelerated Filer o    Accelerated Filer o    Non-Accelerated Filer o    Smaller Reporting Company x

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III or any amendment to this Form 10-K.  YES x   NO ¨


Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  YES ¨ NO x

 

As of September 30, 2011, the aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant, based on the closing sales price of $.25 per share for the registrant's common stock, as quoted on the Over-the-Counter Bulletin Board was approximately $8,204,498.50 (calculated by excluding shares owned beneficially by directors, officers and 10% shareholders). As of June 8, 2012, there were 56,583,585 shares of the registrant's common stock outstanding.

 

 
 

 

 

Explanatory Note – Amendment

 

This 10K/A is hereby being filed to modify certain disclosures in item 9A.  No other changes to this Form 10K have been made.

 

 

 

 

 
 

 

Q LOTUS HOLDINGS, INC.

(A Development Stage Company)

FORM 10-K

ANNUAL REPORT FOR YEAR ENDED MARCH 31, 2012

INDEX

 

PART I    
     
Forward-Looking Statements   3
     
Item 1 – Business   4
     
Item 1A – Risk Factors   6
     
Item 1B – Unresolved Staff Comments   14
     
Item 2 – Properties   14
     
Item 3 – Legal Proceedings   14
     
Item 4 – Mine Safety Disclosures   15
     
PART II    
     
Item 5 – Market for the Registrant’s Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   15
     
Item 6 – Selected Financial Data   15
     
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations   15
     
Item 7A – Quantitative and Qualitative Disclosures about Market Risk   20
     
Item 8 – Financial Statements and Supplementary Data   20
     
Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   20
     
Item 9A – Controls and Procedures   20
     
Item 9B – Other Information   22
     
PART III    
     
Item 10 – Directors and Executive Officers of the Registrant   23
     
Item 11 – Executive Compensation   26
     
Item 12 – Security Ownership of Certain Beneficial Owners and Management   27
     
Item 13 – Certain Relationships and Related Transactions and Director Independence   28
     
Item 14 – Principal Accounting Fees and Services   30
     
Item 15 – Exhibits, Financial Statement Schedules   30
     
Signatures   31
     
Report of Independent Registered Public Accounting Firm   36

 

2
 

 

PART I

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-K contains forward-looking statements that convey our current expectations or forecasts of future events. All statements in this Form 10-K other than statements of historical fact are forward-looking statements. Forward-looking statements include statements about our future financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. The words “may,” “might,” “should,” “predict,” “potential,” “continue,” “estimate,” “intend,” “plan,” “will,” “believe,” “project,” “expect,” “seek,” “anticipate” and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking.

 

Any or all of our forward-looking statements in this Form 10-K may turn out not to occur as contemplated. They are based largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. These factors include the effects of competition in the industries we conduct business in today and in the future, the failure by us to anticipate changes in consumer and business preferences, the loss of key employees, changes in general business conditions and other factors which are beyond our control. In particular, you should consider the numerous risks described in the “Risk Factors” section of this Form 10-K.

Although we believe the expectations reflected in the forward-looking statements are reasonable, in light of these risks and uncertainties, the forward-looking events and circumstances discussed in this Form 10-K may not occur as contemplated and actual results could differ materially from those anticipated or implied by the forward-looking statements.

 

You should not unduly rely on these forward-looking statements, which speak only as of the date of this Form 10-K. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this Form 10-K. 

 

3
 

 

Item 1. BUSINESS

 

Company Overview

 

Q Lotus Holdings, Inc. (“Q Lotus” or the “Company”) is a Nevada Corporation formed as a financial services company for its operating subsidiaries. As of March 31, 2012, the close of its most recently completed fiscal year end, the Company had two wholly owned subsidiaries, Q Lotus, Inc. (“QLI”), a Nevada corporation whose operations through such date have consisted of the acquisition of certain mining claims, and Midwest Business Credit, Inc. (“MBC”), a Nevada corporation that was formed in order to acquire the assets of Midwest Business Credit LLC (“MBC LLC”), an asset based lending company which provides secured financing. The acquisition of MBC LLC is contingent on the Company securing the necessary financing to complete the transaction and is expected to close in 2012. The Company intends to expand its holdings by (i) either acquiring additional subsidiaries to facilitate its business plan or (ii) acquiring controlling interests in companies. Currently, our business consists solely of holding mineral rights in a portfolio of minerals and our activities through March 31, 2012 have been limited to formation of the legal and business structure, business planning, the pursuit of capital and the exploration of possible acquisitions and investments.

 

The Company was originally incorporated as Extreme Home Staging, Inc. on May 2, 2006. The primary revenue-generating activity of this business until June 11, 2010 was home staging, which is the art and process of preparing a house, a condominium, or any private residence to be as visually and aesthetically pleasing as possible prior to going up for sale in the real estate marketplace. On June 11, 2010, Extreme Home Staging, Inc. entered into and closed an Agreement and Plan of Share Exchange with QLI and its sole shareholder, Marckensie Theresias, pursuant to which Extreme Home Staging, Inc. acquired 100% of the issued and outstanding capital stock of QLI in exchange for the issuance of 30,000,000 shares of Extreme Home Staging, Inc. common stock, par value $0.0001 (the “Exchange”). The 30,000,000 shares issued to Marckensie Theresias constituted 57.6% of our issued and outstanding capital stock on a fully diluted basis. The acquisition was accounted for as a recapitalization effected by a share exchange, wherein QLI was considered the acquirer for accounting and financial reporting purposes. As a result of the Exchange, QLI became a wholly owned subsidiary of Extreme Home Staging, Inc.

 

On July 16, 2010, Extreme Home Staging, Inc. underwent a name change to Q Lotus Holdings, Inc.

 

On July 16, 2010, the Company also executed a 3 for 1 common stock split.  Accordingly, all common share and per common share information has been restated within this Form 10-K to reflect the stock split.

 

The Company is a development stage company and is in its initial stage of operations. The Company has funded its operations to date from proceeds received from the sale of its common stock totaling approximately $805,000, from advances made by the Company’s Chairman and other advances from unaffiliated third parties.

 

Plan of Operations and Planned Operating Segments

 

We plan to operate as a financial services company. We will acquire controlling interests in and/or develop profitable companies in the areas of (i) commercial finance/asset based lending, (ii) real estate investment and development and (iii) natural resources/mining. The Company’s operating segments will generally encompass the same areas as noted in the preceding sentence.

 

Real Estate Investments

 

The Company will also directly and indirectly purchase real estate, when management determines that pricing within the market presents buying opportunities. In the event the Company is able to execute its funding strategy, we will seek to invest in large apartment complexes, industrial facilities, and commercial (Class A and Class B) properties at reasonable prices that produce substantial rent rolls. We also expect to participate with Urban R2 Development Company, LLC in various real estate investments.

 

Experienced management

 

We will generally require that companies we acquire or invest in have an experienced management team. We also will require that such companies have the proper incentives in place to induce management to succeed and to act in concert with our interests as investors, including having significant equity interests.

 

4
 

 

Strong and defensible competitive market position in industry

 

We seek to acquire or invest in target companies that have developed or are in the process of developing leading market positions within their respective markets and are or will be well positioned to capitalize on growth opportunities. We also seek to acquire or invest in companies that demonstrate significant competitive advantages versus their competitors which should help to protect their market position and profitability.

 

We believe it is critical to conduct extensive review of investment targets. In evaluating new investments, we plan to conduct a rigorous due diligence process that draws from the experience, industry expertise and network of contacts of our President and Chief Executive Officer, Mr. Gary A. Rosenberg, and the Q Lotus Board of Directors.

 

Competition

 

Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we possess. For example, we believe some competitors have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more financing relationships than we have.

 

Liquidity and Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. Since Q Lotus was originally formed on March 31, 2010, the Company has had no revenue and has generated losses from operations. At March 31, 2012, the Company had negative working capital of approximately $1,963,000 and an accumulated deficit of approximately $3,336,000. Since its formation on March 31, 2010 through March 31, 2012, the Company raised approximately $805,000 in cash from the issuance of common stock and approximately $1,551,000 in proceeds from the issuance of short-term notes. These funds were primarily used in ongoing operations, to formulate business plans and explore investment opportunities. The Company needs to raise additional capital from external sources in order to sustain operations while executing its business plan. The Company cannot provide any assurance that it will be able to raise additional capital. If the Company is unable to secure additional capital, it may be required to reduce its current operating expenses, modify its existing business plan and take additional measures to reduce costs in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations.

 

There can be no assurance that such funding initiatives will be successful and any equity placement could result in substantial dilution to current stockholders. The above factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern. As of March 31, 2012, the Company’s activities have been limited to formation of the legal and business structure, business planning, the pursuit of capital and the exploration of possible acquisitions and investments.

 

As of June 8, 2012, the Company had a minimal available cash balance.  Our primary sources of liquidity to date have been limited to the sale of our securities and other financing activities. We will need to raise additional funds to continue to meet ongoing operating requirements through fiscal year 2013.

 

Employees

 

As of March 31, 2012, we had no employees.

 

Seasonality and Backlog

 

Our business is not subject to significant seasonal fluctuations, and there are no material backlogs in our business.

 

Research and Development and Environmental Matters

 

We have not incurred any research and development expenses since our formation; nor have we incurred any significant costs or any significant negative effects as a result of compliance with federal, state and local environmental laws.

 

5
 

 

Item 1A. RISK FACTORS

 

Risks Related to our Business and Industry

 

Accumulated deficit and operating losses and anticipated earnings; explanatory language in Auditor’s Report.

 

The Company had an accumulated deficit at March 31, 2012 of approximately $3,336,000 and net loss to common shareholders of approximately $1,968,000 for the year ended March 31, 2012. The Company had an accumulated deficit at March 31, 2011 of approximately $1,368,000 and net loss to common shareholders of approximately $1,367,000 for the year ended March 31, 2011.  The auditor’s opinion on the financial statements expresses substantial doubt about the Company’s ability to continue as a going concern. The financial statements are presented on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the ordinary course of business. While there can be no assurance of this outcome, management believes its plan of operation will allow the Company to achieve this goal.

 

Risks related to the loan portfolio and lending activities of Midwest Business Credit.

 

After the Company’s acquisition of MBC closes, MBC may experience delinquencies, impairments and non-accruals which could affect the Company’s overall financial condition. If this were to occur, it may indicate that the risk of credit loss for a particular loan(s) has materially increased. When a loan is over 90 days past due or if management believes it is probable that we will be unable to collect principal and interest contractually owed to us, it will be our policy to place the loan on non-accrual status and classify it as impaired. In certain circumstances, a loan could be classified as impaired, but continue to be performing as a result of a troubled debt restructuring.

 

In light of the lending risks noted above, management periodically reviews the appropriateness of our allowance for credit losses. However, it may be difficult to judge the expected credit performance of our loans since it is sometimes hard to predict future losses. Our estimates and judgments with respect to the appropriateness of our allowance for credit losses may not be accurate, and the assumptions we use to make such estimates and judgments may not be accurate. Our allowance may not be adequate to cover credit or other losses related to our loans as a result of unanticipated adverse changes in the economy or events adversely affecting specific customers, industries or markets. If we were to experience material credit losses related to our loans, such losses could adversely impact our ability to fund future loans and our business and, to the extent losses exceed our allowance for credit losses, our results of operations and financial condition would be adversely affected.

 

We have a limited operating history upon which to base an investment decision.

 

We are a development-stage company and as a result we have limited financial information on which you can evaluate an investment in our company or our prior performance. We are subject to all of the business risks and uncertainties associated with any new business including the risk that we will not achieve our investment objectives and that the value of your investment could decline substantially or become worthless.

 

Since the Exchange on July 16, 2010 (as defined in “Company Overview”), our operations have been limited to organizing and exploring business opportunities, performing due diligence reviews of potential target companies and the holding of certain mining properties. These operations provide a limited basis for you to assess our ability to achieve our business strategy and the advisability of investing in our securities.

 

The Company may be exposed to various risks under revenue sharing agreements it has entered into in connection with mining claims.

 

The Company holds mining rights to certain properties located in Utah, Arizona and Oregon.  As consideration for the mining rights, the Company entered into several revenue sharing agreements that would provide the transferors with a percentage of the net revenue realized from the sale of minerals that could be mined and extracted from each respective claim. In valuing the consideration/rights provided to the transferors (rights to receive fees in the future), the Company considered many factors in determining an appropriate fair value for such consideration/rights. Since the Company (i) did not exchange any monetary consideration at the time it acquired the mining rights, (ii) has not conducted any studies as to the magnitude of the cost necessary to extract any value from such mineral rights, and (iii) does not currently have the means to pay for mining and extraction of such rights, the value of such consideration for such rights has been determined to be de minimus and valued at zero for accounting purposes. See Note 11 to the Financial Statements, entitled Commitments and Contingencies, under “Mineral Rights”.

 

6
 

 

If, and when, the Company seeks to develop the mining claims, it may encounter certain risks associated with the revenue sharing agreements. Each revenue sharing agreements identifies the parties, provides a listing of the claims in question and indicates that the transferor will be paid thirty percent (30%) of the Net Revenue (gross revenue less all related expenses), and essentially provides no additional detail. The agreements do not contain most of the standard provisions found in contacts, such as defined terms, representations and warranties (including those related to potential environmental claims), conditions of default and termination, dispute resolution, indemnification and conditions precedent to and subsequent to performance, among others. For example, the agreements do not indicate how net revenue and expenses will be calculated, including what expenses will be paid before net revenue can be allocated between the parties. If these agreements are not revised to address such shortcomings prior to the mining and extraction of the claims, if, and when that should occur, there is a significant risk of conflict between the Company and the transferor, in each case. The cost of resolving these disputes in the absence of a detailed agreement or related contracts to guide the parties and others who may be affected, could have a material adverse effect on the Company. For example, Company may not be able to realize net revenue in a timely to cover the expenses of development and earn a profit on its efforts; the Company could also be exposed to material losses for the same reasons. Moreover, there is a risk that the Company could be exposed to significant environment costs if such risks are not addressed in the agreements or related contracts. The Company could also face greater regulatory scrutiny from federal, state and local governmental entities, over environmental and other matters, including scrutiny by the SEC as to disclosure matters, unless such issues are addressed in the agreements or related contracts.

 

We are dependent upon senior management and the loss of their services could harm our ability to implement our business strategy.

 

We depend on the experience, diligence, skill and network of the leadership team consisting of our President and Chief Executive Officer, Gary A. Rosenberg, the officers and directors of Q Lotus, and Timothy Bellcourt, founder and President of Midwest Business Credit, all of whom will identify, evaluate, negotiate, structure, close, monitor and/or service our investments. Our future success will depend to a significant extent on the continued service and coordination from our leadership team, as well as our ability to attract highly qualified talent to the Company as needed.   The departure of any members of senior management or key employees could have a material adverse effect on our ability to achieve our objectives. While our senior management expects to devote a majority of their business time to our operations they are not currently subject to any employment contracts. We do not maintain any "key-man" insurance policies on any of our senior management and we do not intend to obtain such insurance.

   

Our ability to grow will depend on our ability to raise capital.

 

In order for us to have the opportunity for future success and profitability, we will need to access the capital markets to raise cash. Unfavorable economic conditions could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. We have actively pursued a variety of funding sources and have consummated certain transactions in order to address our capital requirements. We may need to consider raising additional capital through other available sources, including borrowing additional funds from third parties. There can be no assurance that we will be successful in such pursuits.  Additionally, the issuance of new securities to raise capital will cause the dilution of shares held by current stockholders. An inability to successfully access the capital markets could limit our ability to grow our business and fully execute our business strategy and could decrease our earnings, if any, in the early years of operation. As a result, our ability to generate revenues in our initial years of operation will be based on our ability to raise funds.

 

We may raise capital through debt offerings; the potential for loss on amounts invested would be magnified and may increase the risk of investing in us.

 

The use of leverage magnifies the potential for loss on amounts invested and therefore increases the risks associated with investing in our securities.  We may raise capital and issue senior debt securities to institutional investors.  Lenders and purchasers of these senior securities would have fixed dollar claims on our assets that are superior to the claims of our common shareholders and we would expect such lenders to seek recovery against our assets in the event of a default. If the value of our assets decreases, leveraging would cause our value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Our ability to service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. 

 

Our financial condition and results of operations will depend on our ability to manage our future growth effectively.

 

Our ability to achieve our business objectives will depend on our ability to grow, which will depend, in turn, on our ability to identify, analyze, and invest in and finance companies that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of our management’s proper structuring and implementation of the investment process, its ability to identify and evaluate companies that meet our investment criteria, its ability to provide competent, attentive and efficient services to us, and our ability to access financing on acceptable terms. In order to grow, we may need to hire, train, supervise and manage new employees. Failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations.

 

7
 

 

Our risk management policies and procedures may leave us exposed to unidentified risks or an unanticipated level of risk.

 

The policies and procedures we employ to identify, monitor and manage risks may not be fully effective. Some methods of risk management are based on the use of observed historical market behavior.  As a result, these methods may not accurately predict future risk exposures, which could be significantly different or greater than the historical measures indicate.  Other risk management methods depend on evaluation of information regarding markets, clients or other matters that are publicly available or otherwise accessible by us.  This information may not be accurate, complete, up-to-date or properly evaluated.  Management of operational, legal and regulatory risks requires, among other things, policies and procedures to properly record and verify a large number of transactions and events.  We cannot assure that our policies and procedures will effectively and accurately record and verify this information.

 

We seek to monitor and control our risk exposure through a variety of separate but complementary financial, credit, operational and legal reporting systems.  We believe that we are able to evaluate and manage the market, credit and other risks to which we are exposed.  Nonetheless, our ability to manage risk exposure can never be completely or accurately predicted or fully assured.  For example, unexpectedly large or rapid movements or disruptions in one or more markets or other unforeseen developments could have a material adverse effect on our results of operations and financial condition.  The consequences of these developments can include losses due to adverse changes in inventory values, decreases in the liquidity of trading positions, higher volatility in earnings, increases in our credit risk to customers as well as to third parties and increases in general systemic risk.

 

We operate in a highly competitive market for acquisition and investment opportunities.

 

We compete for investments with a number investment funds (including private equity funds and venture capital funds), reverse merger and special purpose acquisition company (“SPAC”) sponsors, investment bankers which underwrite initial public offerings, hedge funds that invest in private investments in public equity (“PIPE”), traditional financial services companies such as commercial banks and other sources of financing.  Many of our competitors are substantially larger than us and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than we can. There can be no assurance that the competitive pressures we face will not have a material adverse effect on our business, financial condition, and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objectives.

 

We are unlikely to generate capital gains during our initial years of operation, and thus our income if any, during that period will likely be limited primarily to interest and dividends earned on specific investments prior to conversion thereof or as a return of capital.

 

Since we expect to have an average holding period for our target company investments of one to three years, it is unlikely we will generate any capital gains during our initial years of operations and thus we may generate income in our initial years of operation principally from interest and dividends we may receive from some of our investments prior to our conversion thereof or as a return of capital.  However, our ability to generate revenues in our initial years of operation will be based on our ability to invest our capital in suitable target companies in a timely manner and to realize capital gains from the disposition of our portfolio investments

 

In addition, the micro-cap and small-cap companies in which we intend to invest are generally more susceptible to economic downturns than larger operating companies, and therefore may be more likely to default on their payment obligations to us during recessionary periods.  Any such defaults could substantially reduce our net investment income.

 

Our quarterly and annual operating results will be subject to fluctuation as a result of the nature of our business, and if we fail to achieve our investment objective, the value of our common stock may decline.

 

We could experience fluctuations in our quarterly and annual operating results due to a number of factors, some of which are beyond our control, including the interest rates and dividend rates payable on our debt securities and preferred stock investments, respectively, the default rate on any such securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.  In addition, the currently prevailing negative economic conditions may cause such default rates to be greater than they otherwise would be during a period of economic growth.

 

8
 

 

Changes in laws or regulations governing our operations may adversely affect our business.

 

We are subject to laws and regulations at the local, state and federal levels. These laws and regulations, as well as their interpretation, may be changed from time to time. Any change in these laws or regulations, or their interpretation, could have a material adverse effect on our business.

 

Changes to the laws and regulations governing our business operations or their interpretations may cause us to alter our investment strategy in order to avail ourselves of new or different opportunities. If legislation is enacted, new rules are adopted, or existing rules are materially amended, we may need to change our investment strategy. Such changes could result in material differences to the strategies and plans set forth in this Form 10-K and may result in our investment focus shifting.

 

No protection under the Investment Company Act.

 

The Company intends to structure its business operations so that it is exempt from registration under the Investment Company Act of 1940, as amended, and the rules and regulations promulgated there under (the “40 Act”). The Company has not and does not intend to register as an investment company under the 40 Act. The Company will not submit a no-action letter to the SEC, to verify that its intended organizational structure and business objectives fall outside of the definition of an investment company under the 40 Act or meet any exemption under the 40 Act. The Company intends to follow other no-action letters in structuring its investments and acquisitions. If the Company was deemed to be an investment company and unable to avail itself of any safe-harbors or other exemptions under the 40 Act, it would be required to register as an investment company. The cost would be prohibitive and could have very serious consequences for the Company. In the event that the Company is required to register under the 40 Act, the added regulatory burden could make it more difficult for the Company to continue as a viable business.

 

We will be subject to substantial fluctuation to our investments due to our focus on capital appreciation from equity investments.

 

Our primary emphasis will be to generate capital gains through our equity investments in micro-cap and small-cap companies, which we expect to become public reporting companies with their securities being quoted either on the Pick Sheets, the Over the Counter Markets or a national securities exchange.  We do not expect the securities in our publicly traded target companies to be quoted or have an active trading market and, as such, these securities will be illiquid until an active market develops.  However, there can be no assurance that our target companies will be quoted or that an active trading market will ever develop in the securities of our publicly traded target companies.

 

Even if our target companies are successful in becoming publicly traded companies, there is no assurance that they will be able to achieve their projected revenue and earnings targets or effectively maintain their status as public reporting companies.  In such case, there may be little or no demand for the securities of our target companies in the public markets, we may have difficulty disposing of our investments, and the value of our investments may decline substantially.

 

We do not expect to generate capital gains from the sale of our portfolio investments on a level or uniform basis from quarter to quarter.  This may result in substantial fluctuations in our revenue.  In addition, since we expect to have an average holding period for our target company investments of one to three years, it is unlikely we will generate any capital gains during our initial years of operations.   However, our ability to generate revenue will be based on our ability to invest our capital in suitable target companies in a timely manner and to realize capital gains from the disposition of our portfolio investments.

 

There are significant potential conflicts of interest that could impact our investment returns.

 

Our senior management may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do or of target companies that we acquire or in which we invest. In such situations, senior management could be faced with conflicts between the interests of the Company and the interests of other businesses in which they may be involved.

 

We incur significant costs as a result of being a public company.

 

As a public company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Exchange Act, corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as amended and other rules implemented by the SEC. We believe that complying with these rules and regulations may make some business activities time-consuming and costly and may divert the attention of our management away from implementing our business objectives.

 

9
 

 

No assurance of acquisitions.

 

Until binding agreements regarding acquisitions or investments are in place there can be no assurance that any proposed transaction will be consummated or that adequate, acceptable and affordable financing will be available.

 

Acquisition risks.

 

Acquisitions involve a number of special risks, some or all of which could have a material adverse effect on our results of operations or financial condition. Such risks include, but are not limited to, the diversion of management’s attention from core operations, difficulties in the integration of acquired operations and retention of personnel, customers, and suppliers, unanticipated problems or legal liabilities, tax and accounting issues, and the inability to obtain all necessary governmental and other approvals and consents.

 

Risks related to our target companies.

 

Current market conditions have adversely affected the capital markets and have reduced the availability of debt and equity capital for the market as a whole, and financial firms in particular.  These conditions make it more difficult for us to achieve our acquisition and investment objectives particularly as they are likely have an even greater impact on the micro-cap and small-cap companies we intend to target.  This may adversely affect the financial condition and operating results of certain micro-cap and small-cap companies in which we may acquire or invest in, as well as reduce the availability of attractive micro-cap and small-cap targets.

 

The U.S. economy continues to experience recessionary and slow growth conditions and events have significantly constrained the availability of debt and equity capital for the market as a whole, although there are some positive economic indicators that suggest a slow, but steady recovery, is underway.  

 

The current economic situation, together with the limited availability of debt and equity capital, including through bank financing, will likely continue to have a disproportionate impact on the micro-cap and small-cap companies we intend to target, notwithstanding recent positive economic indicators.  As a result, we will likely experience an ongoing challenge in obtaining attractive acquisition and investment opportunities that fit our criteria.  In addition, our interests in target companies could be impaired to the extent such target companies experience financial difficulties arising out of the current economic environment.  Our inability to locate attractive target opportunities, or the impairment of our target companies as a result of economic conditions, could have a material adverse effect on our financial condition and results of operations. 

 

Our equity and debt investments in the companies that we are targeting may be extremely risky and we could lose all or part of our investments.

 

The securities that we acquire as a part of our business objectives are not likely to be rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade (rated lower than “Baa3” by Moody’s or lower than “BBB-” by Standard & Poor’s), which investments are commonly referred to as “junk.” Indebtedness of below investment grade quality is regarded as having predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal and is, therefore, commonly subject to additional risks.

 

We expect we will also acquire equity securities as part of our business objective, including preferred securities convertible into common stock and warrants.  These debt and equity investments will entail additional risks that could adversely affect our business objectives.

 

In addition, the micro-cap and small-cap companies that we are targeting involve a number of significant risks, including:

 

¨They may have limited financial resources and may be unable to meet their obligations, which could lead to bankruptcy or liquidation.

 

¨They typically have limited operating histories, narrower, less established product lines or offerings and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions, market conditions, operational risks and consumer sentiment in respect of their products or services, as well as general economic downturns.

 

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¨Since they are primarily privately owned, there is generally little publicly available information about these businesses; therefore, although management will perform “due diligence” investigations on these target companies, their operations and their prospects, we may not learn all of the material information we need to know regarding these businesses.

 

¨They are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our target company and, in turn, on us.

 

¨Since under our business plan we expect that these companies will become publicly traded companies, they will need resources, processes, procedures and systems to satisfy the additional regulatory burdens, they will incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Exchange Act, corporate governance requirements, including requirements under the Sarbanes-Oxley Act, and other rules implemented by the SEC, and they may not be able to attract retail and institutional investor interest in the secondary market, all of which may have a material adverse impact on our target companies and, in turn, on us.

 

A target company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of a target’s loans and foreclosure of its assets, which could trigger cross-defaults under other agreements and jeopardize the target company’s ability to meet its obligations under any debt securities that we hold and/or render our equity investments in that target company worthless. In addition, a substantial portion of our investments will be in the form of equity, which will generally rank below any debt issued by our target companies in priority of payment.

   

Even if our target companies are successful in becoming publicly traded companies, there is no assurance that they will be able to achieve their projected revenue and earnings targets or effectively maintain their status as publicly reporting companies.  In such case, if there is little or no demand for the securities of our target companies in the public markets, we may have difficulty disposing of our investments, and the value of our investments may decline substantially.

 

Our target companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies.

 

Our target companies may have, or may be permitted to incur, other debt, or issue other equity securities that rank equally with, or senior to, our investments. By their terms, such instruments may provide that the holders are entitled to receive payment of dividends, interest or principal on or before the dates on which we are entitled to receive payments in respect of our investments. These debt instruments will usually prohibit the target companies from paying interest or dividends on or repaying our investments in the event and during the continuance of a default under such debt. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a target company, holders of securities ranking senior to our investment in that target company will typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such holders, the target company may not have any remaining assets to use for repaying its obligation to us. In the case of securities ranking equally with our investments, we would have to share on an equal basis any distributions with other security holders in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant target company.

 

We may not realize any income or gains from our equity investments.

 

As part of our business strategy a substantial portion of our interests in target companies is expected to be comprised of equity securities, including convertible preferred securities and debt securities convertible into equity securities and warrants that convert into equity securities. These equity interests may not appreciate in value and, in fact, may decline in value if a target company fails to perform financially or achieve its growth objectives.  We will generally have little, if any, control over the timing of any gains we may realize from our equity investments since the securities of our target companies could have restrictions on their transfer or may not have an active trading market. 

 

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Even if the equity securities of our public target companies may be sold in the public markets, we expect these securities will initially be thinly traded and, as a result, the lack of liquidity of target company securities may adversely affect our business, and will delay distributions of gains, if any.

  

While our target companies will typically be private companies, we expect that, as part of our business plan, that some of these companies will become public reporting companies with their common stock initially being listed or quoted on an exchange or quotation system. We do not expect the preferred equity of our target companies to be listed or quoted on an exchange or quotation system. We do not expect the common stock in our public target companies to initially have an active secondary trading market and, as such, these securities will be illiquid until an active market develops. We believe that typically this liquidity will develop in conjunction with a senior exchange listing upgrade. It is anticipated that our convertible preferred stock instruments will generally provide for conversion upon the target companies’ achievement of certain milestone events, including a senior exchange listing for their common stock. However, there can be no assurance that our target companies will obtain either a junior exchange or senior exchange listing or, even if a listing is obtained, that an active trading market will ever develop in the securities of our publicly traded target companies.

 

We expect substantially all of the common stock we purchase in a target company will be “restricted securities” within the meaning of Rule 144 under the Securities Act (“Rule 144”).  As restricted securities, these shares may be resold only pursuant to an effective registration statement under the Securities Act or pursuant to the requirements of Rule 144 or other applicable exemption from registration under the Securities Act, and in accordance with any applicable state securities laws.

 

A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to a registration statement, may have a depressive effect upon the price of the common stock of our target companies in any market that may develop.

 

Our failure to make additional investments in our target companies could impair the value of our portfolio.

 

Following our initial acquisition or, or investment in, a target company, our target companies may require additional financing. We may elect not to provide such additional financing or otherwise lack sufficient funds to make such financings. We have the discretion to make any additional subsequent investments, subject to the availability of capital resources. The failure to make additional financing available to our target companies may, in some circumstances, jeopardize the continued viability of a target company and our prior investments, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired additional subsequent investment, we may elect not to make that investment because we do not want to increase our concentration of risk, and/or because we prefer other opportunities. If our target companies are not able to generate sufficient cash flow from operations, they may be unable to obtain sufficient capital to continue to grow their businesses, or they may not be able to continue their operations at all.  If our target companies lack sufficient capital before they are able to obtain a senior exchange listing, there may be few, if any, options available to them to raise additional capital, jeopardizing the continued viability of, and our investments in, such target companies.

 

We may not hold controlling equity interests in our target companies, we therefore may not be in a position to exercise control over such target companies or to prevent decisions by management of such target companies that could decrease the value of our investments.

 

We may not be in a position to control the management, operation and strategic decision-making of our target companies.  As a result, we will be subject to the risk that a target company we do not control, or in which we do not have a majority ownership position, may make business decisions with which we disagree, and the stockholders and management of such a target company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity for the debt and equity investments that we will typically hold in our target companies, we may not be able to dispose of our investments in the event that we disagree with the actions of a target company, and may therefore suffer a decrease in the value of our investments.

 

Risks Related to our Common Stock

 

The fact that our common stock is quoted on the OTC Bulletin Board that may have an unfavorable impact on our stock price and liquidity.

 

Our common stock is quoted on the OTC Bulletin Board. The OTC Bulletin Board is a significantly more limited market than established trading markets such as the New York Stock Exchange or NASDAQ. The quotation of our shares on the OTC Bulletin Board may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital. There may be other significant consequences associated with our common stock trading on the OTC Bulletin Board rather than a national exchange.  The effects of not being able to list our common stock on a national exchange may include:

 

¨limited release of the market price of our securities;
   
¨limited news coverage;
   
¨limited interest by investors in our securities;
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¨volatility of our common stock price due to low trading volume;
   
¨increased difficulty in selling our securities in certain states due to "blue sky" restrictions; and
   
¨limited ability to issue additional securities or to secure additional financing.

 

Our common stock has low trading volume and any sale of a significant number of shares is likely to depress the trading price.

 

Traditionally, the trading volume of our common stock has been limited. For example, for the 30 trading days ended on June 8, 2012, the average daily trading volume was approximately 34,000 shares per day and on certain days there was no trading activity. During this 30-day period the closing price of our common stock ranged from a high of $0.08 to a low of $0.04. Because of this limited trading volume, holders of our securities may not be able to sell quickly any significant number of such shares, and any attempted sale of a large number of our shares will likely have a material adverse impact on the price of our common stock. As a result of the limited number of shares being traded, the price per share is subject to more volatility and may continue to be subject to rapid price swings in the future.

 

The price of our common stock is volatile.

 

The price of our common stock has fluctuated substantially.  The market price of the common stock may be highly volatile as a result of factors specific to us, and the securities markets in general.  Factors affecting volatility may include: variations in our annual or quarterly financial results or those of competitors; economic conditions in general; and changes in applicable laws or regulations, or their judicial or administrative interpretations that affect us, our subsidiaries or the securities industry generally.  In addition, volatility of the price of our common stock is further affected by its thinly traded market.

 

Our principal stockholders including our directors and officers control a large percentage of shares of our common stock and can significantly influence our corporate actions.

 

As of June 8, 2012, our executive officers, directors and/or entities that these individuals are affiliated with, beneficially owned approximately 29.3% of our outstanding common stock. Accordingly, these individuals and entities will be able to significantly influence most, if not all, of our corporate actions, including the election of directors, the appointment of officers, and potential merger or acquisition transactions.

 

We may be subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.

 

The SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock is a “penny stock” and is subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000, excluding their primary residence, or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and obtain the purchaser's written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities in the primary market and may affect the ability of purchasers to further sell any of our securities in the secondary market, thus possibly making it more difficult for us to raise additional capital.

 

For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in the penny stock.

 

There can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.

 

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Provisions in our articles of incorporation and bylaws or Nevada law might discourage, delay or prevent a change of control of us or changes in our management and, therefore depress the trading price of the common stock.

 

Nevada corporate law and our articles of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of our Company or changes in our management that our stockholders may deem advantageous. These provisions (i) deny holders of our common stock cumulative voting rights in the election of directors, meaning that stockholders owning a majority of our outstanding shares of common stock will be able to elect all of our directors; (ii) require any stockholder wishing to properly bring a matter before a meeting of stockholders to comply with specified procedural and advance notice requirements; and (iii) allow any vacancy on the board of directors, however the vacancy may occur, to be filled by the directors.

 

Our board of directors can issue shares of "blank check" preferred stock without further action by our stockholders.

 

Our board of directors has the authority, without further action by our stockholders, to issue up to 100,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions in each series of the preferred stock, including:

 

¨dividend rights;
   
¨conversion rights;
   
¨voting rights, which may be greater or lesser than the voting rights of our common stock;
   
¨rights and terms of redemption;
   
¨liquidation preferences; and
   
¨sinking fund terms.

 

We currently do not have any shares of preferred stock issued or outstanding.  The issuance of shares of preferred stock could adversely affect the voting power of holders of our common stock and the likelihood that these holders will receive dividends and payments upon our liquidation and could have the effect of delaying, deferring or preventing a change in control of the Company. We have no current plans to issue any preferred stock, although the issuance of preferred stock may be necessary at any time in order to raise additional capital and is possible in the next 12 months.

 

We do not intend to pay dividends for the foreseeable future.

 

For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Accordingly, investors must be prepared to rely on sales of their common stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law or regulation and other factors our board deems relevant.

 

Item 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

Item 2. PROPERTIES

 

The Company owns no real property and the Company is not currently leasing any office space. The Company conducted its operations from office space in Chicago, Illinois, that was leased by Urban R2 Development ("Urban R2").  Urban R2 is controlled by Mr. Rosenberg, the Company's President and Chief Executive Officer, and during a portion of the fiscal year ended March 31, 2011, the Company agreed to reimburse Urban R2 for fifty percent of its monthly occupancy expenses.  Effective as of April 1, 2011, all of the offices and resources of this office space were maintained for the benefit of the Company.  Effective March 1, 2012 the Company’s offices were moved in Chicago to space leased personally by Mr. Rosenberg who will be reimbursed for 100% of the operating expenses. For the fiscal years ended March 31, 2012 and 2011, the Company's share of these expenses totaled approximately $302,000 and $16,000, respectively.

 

Item 3. LEGAL PROCEEDINGS

 

Our management knows of no material existing or pending legal proceeding, litigation or claim against us, nor are we involved as a plaintiff in any material existing legal proceeding or pending legal proceeding, litigation or claim. To our knowledge, none of our directors, officers or affiliates, and no owner of record or beneficial owner of more than five percent (5%) of our securities, or any associate of any such director, officer or security holder is a party adverse to us or has a material interest adverse to us in reference to a material existing or pending legal proceeding, litigation or claim.

 

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Item 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

Item 5. MARKET FOR THE REGISTRANT'S EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

On July 19, 2010, our common stock commenced trading under the symbol “QLTS” on the Over-the-Counter Bulletin Board (“OTCBB”) reflecting the Company’s name change at the time. Quotations on the OTCBB reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

The following table sets forth the high and low closing sales prices for our common stock as reported on the OTCBB for the period from July 19, 2010 to March 31, 2012.

 

Period  High   Low 
         
July 19, 2010/September 30, 2010  $2.95   $1.85 
October 1, 2010/December 31, 2010  $3.25   $1.20 
January 1, 2011/March 31, 2011  $2.25   $0.45 
           
April 1, 2011/June 30, 2011  $0.99   $0.20 
July 1, 2011/September 30, 2011  $0.50   $0.10 
October 1, 2011/December 31, 2011  $0.29   $0.03 
January 1, 2012/March 31, 2012  $0.33   $0.04 

 

The closing price of our common stock on June 8, 2012, as quoted on the OTCBB, was $0.08 per share.

 

Shareholders

 

As of June 8, 2012, there were 56,583,585 shares of our common stock outstanding and the Company had 93 shareholders of record. The Company’s transfer agent is Pacific Stock Transfer Company, 4045 South Spencer Street, Suite 403, Las Vegas, NV 89119.

 

Dividends

 

We do not anticipate that we will pay any dividends to holders of our common stock in the foreseeable future.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

We do not currently have any equity compensation plans.

 

Issuer Purchases of Equity Securities

 

We have not announced any currently effective authorization to repurchase shares of our common stock.

 

Item 6. SELECTED FINANCIAL DATA

 

Not applicable.

 

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the results of operations and financial condition of Q Lotus Holdings, Inc. (“Q Lotus” or the “Company”) for the fiscal year ended March 31, 2012 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Annual Report on Form 10-K. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations or Plan of Operations to “ us,” “ we,” “ our,” and similar terms refer to the Company. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. Words such as “anticipate,” “estimate,” “plan,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking statements.

 

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OVERVIEW

 

Q Lotus Holdings, Inc. (“Q Lotus” or the “Company”) is a Nevada Corporation formed to operate as a financial services company for its operating subsidiaries. As of March 31, 2012, the close of its most recently completed fiscal year end, the Company had two wholly owned subsidiaries, Q Lotus, Inc. (“QLI”), a Nevada Corporation whose operations through such date have consisted of the acquisition of certain mining claims, and Midwest Business Credit, Inc. (“MBC”), a Nevada corporation that was formed in order to acquire the assets of Midwest Business Credit LLC (“MBC LLC”), an asset based lending company which provides secured financing. The acquisition of MBC LLC is contingent on the Company securing the necessary financing to complete the transaction and is expected to close in 2012. The Company intends to expand its holdings by (i) either acquiring additional subsidiaries to facilitate its business plan or (ii) acquiring either minority or controlling interests in companies which we identify as undervalued and/or where our management participation in operations can aid in the recognition of the business’s potential fair value, as well as create additional value, (ii) to make capital investments in a variety of privately held companies, or (iii) invest in real estate assets. The Company anticipates that the primary revenue sources will come from revenues from acquired operations, and interest, dividends, rents, royalties and capital gains (from both loans and equity investments) in both (a) startup companies with proprietary technology and (b) medium sized businesses with an established operating history. Currently, our business has consisted solely of holding mineral rights in a portfolio of minerals and our activities have been limited to the formation of the legal and business structure, business planning, the pursuit of capital and the exploration possible acquisitions and investments.

 

The Company was originally incorporated as Extreme Home Staging, Inc. on May 2, 2006. The primary revenue-generating activity of this business until June 11, 2010 was home staging, which is the art and process of preparing a house, a condominium, or any private residence to be as visually and aesthetically pleasing as possible prior to going up for sale in the real estate marketplace. On June 11, 2010, Extreme Home Staging, Inc. entered into and closed an Agreement and Plan of Share Exchange with QLI and its sole shareholder, Marckensie Theresias, pursuant to which Extreme Home Staging, Inc. acquired 100% of the issued and outstanding capital stock of QLI in exchange for the issuance of 30,000,000 shares of Extreme Home Staging, Inc. common stock, par value $0.0001 (the “Exchange”). The 30,000,000 shares issued to Marckensie Theresias constituted 57.6% of our issued and outstanding capital stock on a fully diluted basis. The acquisition was accounted for as a recapitalization effected by a share exchange, wherein QLI was considered the acquirer for accounting and financial reporting purposes. As a result of the Exchange, QLI became a wholly owned subsidiary of Extreme Home Staging, Inc.

 

On July 16, 2010, Extreme Home Staging, Inc. underwent a name change to Q Lotus Holdings, Inc.

 

On July 16, 2010, the Company also executed a 3 for 1 common stock split.  Accordingly, all common share and per common share information has been restated within this Form 10-K to reflect this stock split.

 

The Company is a development stage company and is in its initial stage of operations. The Company has funded its operations to date from proceeds received from the sale of its common stock totaling approximately $805,000, from advances made by the Company’s Chairman and other advances from unaffiliated third parties.

 

PLAN OF OPERATIONS

 

Our Planned Operating Segments

 

We plan to diversify our business primarily into three operating segments:

 

·Commercial Finance / Asset-Based Lending
·Real Estate Investment and Development
·Natural Resources / Mining

 

We may invest in other industries if we are presented with attractive investment opportunities.

 

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Real Estate Investments

 

The Company will also directly and indirectly purchase real estate, when management feels that prices within the market represent substantial buying opportunities. In the event the Company is able to execute its funding strategy we will seek to invest in large apartment complexes, industrial facilities, and commercial (Class A and Class B) properties at reasonable prices that produce substantial rent rolls. We also expect to participate with Urban R2 Development Company, LLC in various real estate investments.

 

Investment Selection

 

We are committed to a value oriented investment philosophy that seeks to minimize the risk of capital loss without foregoing potential capital appreciation. We are developing criteria that we believe are important in identifying and investing in prospective acquisition or financing targets. These criteria provide general guidelines for our investment decisions.

 

Value orientation and positive cash flow

 

Our business philosophy places a premium on fundamental analysis from an investor’s perspective and has a distinct value orientation. We will focus on companies and real estate investments in which we can invest or acquire at relatively low multiples of operating cash flow and that are profitable at the time of the transaction on an operating cash flow basis.

 

Experienced management

 

We will generally require that our target companies have an experienced management team. We also will require the companies to have proper incentives in place to induce management to succeed and to act in concert with our interests as investors, including having significant equity interests.

 

Competition

 

Our primary competitors provide financing to middle-market companies and include business development companies, commercial and investment banks, commercial financing companies, and to the extent they provide an alternative form of financing, private equity funds. Additionally, because competition for investment opportunities generally has increased among alternative investment vehicles, such as hedge funds, those entities have begun to invest in areas they have not traditionally invested in, including investments in middle-market companies. As a result of these new entrants, competition for investment opportunities at middle-market companies has intensified. However, at the same time, we believe that there has been a reduction in the amount of debt capital available for lending to (i) emerging growth companies and (ii) leveraged buyout transactions since the downturn in the credit markets. This has resulted in a less competitive environment for debt capital financing.

 

Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, we believe some competitors have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more financing relationships than we have.

 

Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations is based on the consolidated financial statements of the Company, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosures. We review our estimates on an ongoing basis.

 

We consider an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made but also recognize that if changes in the estimate or different estimates had been made originally that could have had a material impact on our results of operations or financial condition. Our critical accounting policies include the following:

 

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Stock-Based Compensation

 

The Company accounts for equity instruments issued to employees in accordance with accounting guidance, which requires that such equity instruments be recorded at their fair value on the date of a grant, using the Black-Scholes Option Valuation Model method for stock options and the quoted price of its common stock for unrestricted shares that are amortized over the vesting period of the award. For non-employee stock-based awards, the Company calculates the fair value of the award on the date of a grant in the same manner as employee awards. The Company recognizes the compensation costs over the requisite period of the award, which is typically the date the services are performed. Stock-based compensation is reflected within operating expenses. These are non-cash transactions that require management to make judgments related to the fair value of the shares issued, which affects the amounts reported in the Company’s consolidated financial statements for certain of its assets and expenses. For historic fiscal years when there was not an observable active, liquid market for the Company’s common stock, the valuation of the shares issued in a non-cash share payment transaction relies on observation of arms-length transactions where cash was received for its shares, before and after the non-cash share payment date.

 

Results of Operations

 

General and Administrative Expenses

 

Through March 31, 2012, the Company’s activities have been limited to formation of the legal and business structure, business planning, the pursuit of capital and the exploration of possible acquisitions and investments.

 

Operating expenses for the fiscal year ended March 31, 2012 of approximately $1,595,000 were incurred relating to travel of approximately $1,500, consulting fees of approximately $286,000, promotional expenses of approximately $30,000, professional fees of approximately $636,500, payroll expense of approximately $125,000 other income/expense of approximately $280,000 and supplies and services of approximately $236,000.

 

Operating expenses for the fiscal year ended March 31, 2011 of approximately $1,348,000 were incurred relating to travel of approximately $119,000, consulting fees of approximately $184,000, promotional expenses of approximately $468,000, professional fees of approximately $220,000, payroll expense of approximately $24,000, and supplies and services of approximately $333,000.

 

Liquidity and Capital Resources

 

As of March 31, 2012, the Company had a minimal available cash balance.  Our primary sources of liquidity to date have been limited to the sale of our securities and other financing activities. We will need to raise additional funds in order to continue funding our ongoing operations through fiscal year 2013.

 

In July 2010, the Company received an advance totaling $22,500 from Zenith Estates, Inc., (“Zenith”), a minority shareholder of the Company that was used to pay operating expenses.  In October 2010, the Company entered into a loan agreement with Zenith for advances totaling $150,000, only $140,000 of which was funded to the Company and used to pay operating expenses.  Both the advance and the note are non-interest bearing and payable on demand.

 

In February 2011, the Company entered into a $200,000 promissory note with Southshore Real Estate Development, LLC, an unaffiliated third party. These funds were used to pay operating expenses. In May 2011, the Company and the unaffiliated third party entered into a note amendment at maturity whereby the $200,000 Promissory Note was increased to a principal amount of $300,000 with a maturity date of June 30, 2011. In June 2011, the promissory note was further amended twice to increase the principal amount to $425,000 and extend the maturity date to August 24, 2011. These funds were used to pay operating expenses. This promissory note bears interest at the rate of 11% per annum. In the quarter ended September 30, 2011, the promissory note was further amended to increase the principal amount to $544,000 and extend the maturity date to October 7, 2011, which was subsequently extended to December 2, 2011. In January 2012, this promissory note was retired, and a new promissory note in the amount of $582,107 that includes accrued interest, was issued with a maturity date of May 31, 2012, that has been extended to July 31, 2012. A portion of these funds was used to make a deposit relating to a proposed financing transaction (See Note 6.) and a portion of these funds was used to pay operating expenses. This new note bears interest at the rate of 11% per annum.

 

In April 2011, the Company received an advance of $6,000 from an unaffiliated third party that was used to pay operating expenses. The note is non-interest bearing and payable on demand.

 

In May 2011, the Company received an advance of $7,500 from Joel Greenberg (“Greenberg”), a minority shareholder of the Company that was used to pay operating expenses. The note is non-interest bearing and payable on demand. In August 2011, the Company received advances of $5,000 and $15,000 from Mr. Greenberg that were used to pay operating expenses. These advances are non-interest bearing and payable on demand. Payments were made of $5,000 on August 12, 2011, $5,625 on September 12, 2011 and $10,000 on December 5, 2011, resulting in a balance due Mr. Greenberg of $6,875 as of March 31, 2012.

 

XOTC:QLTS Annual Report 10-K/A Filling

XOTC:QLTS Stock - Get Annual Report SEC Filing of XOTC:QLTS stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

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XOTC:QLTS Annual Report 10-K/A Filing - 3/31/2012
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