XOTC:QLTS Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the Quarterly Period Ended June 30, 2012

 

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

 

For the transition period from __________________ to __________________

 

Commission File Number 000-52595

 

Q LOTUS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

     
Nevada   14-1961383
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)
     

520 North Kingsbury Street, Suite 1810

Chicago, Illinois

  60654
(Address of Principal Executive Offices)   (Zip Code)

 

(312) 379-1800


Registrant’s telephone number, including area code:

  


(Former name and former address, if changed since last report)

 

 

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, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).

 

Large Accelerated Filer ¨    Accelerated Filer ¨ 
       
 Non-Accelerated Filer ¨  (Do not check if a smaller reporting company) Smaller Reporting Company x

  

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

 

As of August 8, 2012 there were 57,189.762 shares of the registrant's common stock outstanding.

 

 
 

 

Q LOTUS HOLDINGS, INC.

(A Development Stage Company)

FORM 10-Q

QUARTERLY PERIOD ENDED JUNE 30, 2012

INDEX

 

PART I – FINANCIAL INFORMATION  
   
Forward-Looking Statements 3
   
Item 1 – Unaudited Financial Statements 4-19
   
Item 2 – Management’s Discussion and Analysis of Financial Condition  
and Results of Operations 20-23
   
Item 3 – Quantitative and Qualitative Disclosures about Market Risk 24
   
Item 4 – Controls and Procedures 24-25
   
PART II – OTHER INFORMATION  
   
Item 1 – Legal Proceedings 26
   
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds 26
   
Item 3 – Defaults Upon Senior Securities 26
   
Item 4 – (Removed and Reserved) 26
   
Item 5 – Other Information 26
   
Item 6 – Exhibits 26
   
Signatures 27

  

2
 

   

FORWARD-LOOKING STATEMENTS

 

This Form 10-Q contains forward-looking statements that are not statements of historical fact and may involve a number of risks and uncertainties. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to our future prospects, developments and business strategies. We have used the words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project” and similar terms and phrases, including references to assumptions, in this Form 10-Q to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. You should keep in mind that any forward-looking statements made by us in this Form 10-Q or elsewhere speak only as of the date on which we make them. New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this Form 10-Q after the date of this Form 10-Q, except as may be required by law. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may be disclosed from time to time in our SEC filings or otherwise, including the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K/A filed on July 10, 2012 for the fiscal year ended March 31, 2012, and in our periodic reports on Form 10-Q.

 

3
 

 

Q LOTUS HOLDINGS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
   June 30, 2012     
   (unaudited)   March 31, 2012 
Assets          
Current Assets          
Cash  $74   $14 
Prepaid expenses   2,500    2,500 
           
Total Current Assets   2,574    2,514 
           
Property and Equipment, Net   33,178    35,751 
           
Non-Current Assets          
Due from Urban R2 - related party   96,256    - 
Advances to Southshore Development   115,000    - 
Advances to MBC, LLC   400,000    - 
           
Total Non-Current Assets   611,256    - 
           
Total Assets  $647,008   $38,265 
           
Liabilities and Stockholders' (Deficit) Equity          
Current Liabilities          
Accounts payable  $280,196   $269,454 
Accrued interest   51,683    20,673 
Demand note payable   6,000    6,000 
Notes payable - related party   202,500    194,375 
Convertible note payable   107,500    75,500 
Notes payable   2,166,607    1,399,607 
           
Total Current Liabilities   2,814,486    1,965,609 
           
Stockholders' (Deficit) Equity          
Preferred stock, $.001 par value; 100,000,000 shares authorized,          
no shares issued and outstanding          
Common stock, $.0001 par value; 400,000,000 shares authorized,          
56,583,585 and 56,349,057 shares issued and outstanding at          
June 30, 2012 and March 31, 2012, respectively   5,658    5,635 
Additional paid-in-capital   1,545,802    1,540,325 
Deferred Compensation   (55,000)   (137,500)
Deficit accumulated during development stage   (3,663,938)   (3,335,804)
           
Total Stockholders' (Deficit) Equity   (2,167,478)   (1,927,344)
           
Total Liabilities and Stockholders' (Deficit) Equity  $647,008   $38,265 

 

 

See the accompanying notes to these condensed consolidated financial statements. 

 

4
 

 

Q LOTUS HOLDINGS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
           For the Period from 
           March 31, 2010 
   -------- Three Months Ended ---------   (Inception) 
   June 30, 2012   June 30, 2011   to June 30, 2012 
             
Revenue  $--   $--   $-- 
                
Operating Expenses   (259,128)   (278,489)   (3,202,714)
                
Other Income/(Expense)               
Impairment of Investment   --    --    (45,250)
Interest (Expense) Income   (69,006)   (13,778)   (415,974)
                
Total Other Income/(Expense)   (69,006)   (13,778)   (461,224)
                
Net Loss  $(328,134)  $(292,267)  $(3,663,938)
                
Net Loss per Common Share:               
Basic and diluted  $(0.01)  $(0.01)     
                
Weighted Average Number of Shares Outstanding               
Basic and diluted   55,937,955    53,727,994      

  

  

See the accompanying notes to these condensed consolidated financial statements.

 

5
 

 

Q LOTUS HOLDINGS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Unaudited)
                       Total 
                       Stockholders' 
   Common Stock   Additional   Accumulated   Deferred   (Deficit) 
   Shares   Amount   Paid-in-Capital   Deficit   Compensation   Equity 
                         
Balances - March 31, 2011   53,727,994   $5,373   $1,181,208   $(1,368,011)  $(137,500)  $(318,930)
                               
Warrants cancelled   -    -    (16,659)   -    -    (16,659)
                               
Warrants issued   -    -    10,038    -    -    10,038 
                               
Amortization of compensation for services   -    -    -    -    137,500    137,500 
                               
Shares issued as fee payment   84,246    8    9,992    -    -    10,000 
                               
Shares issued for interest   350,000    35    34,965    -    -    35,000 
                               
Shares issued for services   500,000    50    164,950    -    (165,000)   - 
                               
Shares issued to directors and consultants   850,000    85    118,915    -    -    119,000 
                               
Amortization of compensation for services   -    -    -    -    27,500    27,500 
                               
Shares issued as conversion of loan principal   836,817    84    36,916    -    -    37,000 
                               
Net loss   -    -    -    (1,967,793)   -    (1,967,793)
                               
Balances - March 31, 2012   56,349,057   $5,635   $1,540,325   $(3,335,804)  $(137,500)  $(1,927,344)
                               
Amortization of compensation for services   -    -    -    -    82,500    82,500 
                               
Shares issued as conversion of loan principal   234,528    23    5,477    -    -    5,500 
                               
Net loss   -    -    -    (328,134)   -    (328,134)
                               
Balances - June 30, 2012   56,583,585    5,658    1,545,802    (3,663,938)   (55,000)   (2,167,478)

 

  

See the accompanying notes to these consolidated financial statements. 

 

6
 

 

Q LOTUS HOLDINGS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
           For the Period from 
   For the three   For the three   March 31, 2010 
   Months Ended   Month Ended   (Inception) to 
   June 30, 2012   June 30, 2011   June 30, 2012 
             
Cash Flows from Operating Activities               
Net Loss  $(328,134)  $(292,267)  $(3,663,938)
Adjustments to reconcile net loss to net cash               
used in operating activities:               
Depreciation expense   2,573    2,573    22,934 
Amortization of deferred compensation   82,500    37,500    260,000 
Loss on disposal of assets   --    --    21,915 
Fair value of warrants   --    --    10,038 
Accretion of debt discount   37,000    (729)   259,500 
Stock based compensation   5,500    --    349,540 
Investment impairment   --    --    45,250 
Changes in operating assets and liabilities               
Prepaid expenses   --    (250)   (2,500)
Accounts payable and accrued expenses   10,742    (20,256)   280,197 
Accrued interest   31,010    6,837    51,683 
                
Net Cash Used in Operating Activities   (158,809)   (266,592)   (2,365,381)
                
Cash Flows from Investing Activities               
Purchase of property and equipment   --    --    (78,028)
Investment   --    (250)   (45,250)
Due from Urban R2 - related party   (96,256)   --    (96,256)
Advances   (515,000)   --    (515,000)
                
Cash Used in Investing Activities   (611,256)   (250)   (734,534)
                
Cash Flows from Financing Activities               
Proceeds from demand note payable   --    --    6,000 
Proceeds from convertible note   32,000    --    144,500 
Proceeds from notes payable - related parties   30,000    7,500    250,000 
Proceeds from short term notes payable   730,000    231,000    1,942,107 
Repayments to short term notes payable   (21,875)   --    (47,500)
Proceeds from the issuance of common stock   --    --    804,882 
                
Cash Provided by Financing Activities   770,125    238,500    3,099,989 
                
Net (Decrease) Increase in Cash and Cash Equivalents   60    (28,342)   74 
                
Cash and Cash Equivalents - Beginning   14    30,829    -- 
                
Cash and Cash Equivalents - Ending  $74   $2,487   $74 
                
Supplemental Disclosure of Cash Flow Information               
    Cash paid for interest  $-    --   $55,680 
    Cash paid for taxes   --    --    -- 
Supplemental Disclosure of Non-Cash Information               
    Conversion of promissory note to stock  $5,500    --   $42,500 

 

  

 See the accompanying notes to these consolidated financial statements.

 

7
 

  

Q LOTUS HOLDINGS, INC.

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 - Organization and liquidity

 

Organization

 

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 June 30, 2012, the close of its most recently completed fiscal quarter, 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. Currently, our business consists solely of holding mineral rights in a portfolio of minerals and our activities to date 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. in 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-Q 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.

 

Liquidity and Going Concern

 

The accompanying unaudited condensed 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 created on March 31, 2010, the Company has had no revenue and has generated losses from operations. At June 30, 2012, the Company had negative working capital of approximately $2,812,000 and an accumulated deficit of approximately $3,664,000. Since its formation on March 31, 2010 through June 30, 2012, the Company raised approximately $805,000 in cash from the issuance of common stock and approximately $2,343,000 in proceeds from the issuance of notes payable. 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.

 

8
 

 

 

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 June 30, 2012, the Company’s activities have been limited to its formation, business planning, pursuing capital and the exploration of possible acquisitions and investments.

 

Note 2 – Basis of Presentation

 

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal accruals) considered for a fair presentation have been included. The Company has evaluated subsequent events through the issuance date of this Form 10-Q. Operating results for the three months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2013. For further information, refer to the financial statements and footnotes thereto for the Company included in the Company’s Form 10-K/A filed on July 10, 2012 for the fiscal year ended March 31, 2012.

 

Note 3 - Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company’s wholly owned subsidiaries QLI and MBC. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities and disclosure of contingent assets, (ii) liabilities at the dates of the financial statements and (iii) the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities, share based payment arrangements, deferred taxes and related valuation allowances. Certain of our estimates could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.

 

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 grant, using the Black-Scholes Option Valuation Model method for stock options and the quoted price of its common stock for unrestricted shares and 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.

 

9
 

 

 

Income Taxes

 

The Company determines income taxes using the asset and liability approach which results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of those assets and liabilities, as well as operating loss and tax credit carry-forwards, using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

The Company has adopted the provisions of ASC 740, “Income Taxes”, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. The interpretation requires that the Company recognize the impact of a tax position in its financial statements if it is more likely than not that the position will be sustained on audit, based on the technical merits of the position. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure. In accordance with the provision of ASC 740, any cumulative effect resulting from the change in accounting principle is to be recorded as an adjustment to the opening balance of accumulated retained earnings. The Company has filed its Federal and state income tax returns for the year ended March 31, 2011. The Company has no material uncertain tax positions that would require recognition in the financial statements at this time.

 

The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as selling, general and administrative expenses.

 

Common Stock Purchase Warrants and Derivative Financial Instruments

 

The Company classifies all of its common stock purchase warrants and other derivative financial instruments as equity if the contracts (1) require physical settlement or net-share settlement or (2) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (1) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), (2) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (3) contracts that contain reset provisions. The Company assesses classification of its common stock purchase warrants and other derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.

 

Fair Value Measurements

 

The Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.

 

The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. The carrying amounts of our long-term credit obligations approximate fair value because the effective yields on these obligations are comparable to rates of returns for instruments of similar credit risk.

 

10
 

 

 

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

 

Level 1 — quoted prices in active markets for identical assets or liabilities

 

Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable

 

Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

 

The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

 

Net Loss Per Common Share

 

Basic net loss per share is computed by dividing net loss per share available to common stockholders by the weighted average shares of common stock outstanding for the period and excludes any potentially dilutive securities.  Diluted earnings per share reflect the potential dilution that would occur upon the exercise or conversion of all dilutive securities into common stock.  The computation of loss per share for the quarter ended June 30, 2012 excludes potentially dilutive securities, including warrants of 4,507,000 and convertible securities of 1,916,000, because their inclusion would be anti-dilutive. The computation of loss per share for the quarter ended June 30, 2011 excludes potentially dilutive securities, including warrants of 360,000 because their inclusion would be anti-dilutive.

 

Recent Accounting Pronouncements

 

We reviewed new accounting standards as issued. Although some of these accounting standards issued or effective after the end of our previous fiscal year may be applicable to us, we have not identified any standards that we believe merit further discussion. We expect that none of the new standards will have a significant impact on our consolidated financial statements.

 

Note 4 – Commitments and Contingencies

 

Facility Lease

 

The Company is not currently leasing any office space.

 

Mineral Rights

 

The Company holds mining rights of properties located in Utah, Arizona and Oregon.  As consideration for the mining rights, the Company entered into a Revenue Sharing Agreement that would provide the transferors with a percentage of the net revenue realized from the sale of minerals that have been extracted and mined from each respective claim. In valuing such consideration (rights to receive fees in the future) the Company considered many factors in determining an appropriate fair value of the consideration/rights. Since the Company did not exchange any monetary consideration for the acquired mining rights, the Company will account for the mining rights in accordance with the guidance described with respect to “Nonmonetary Transactions”.  The assets acquired provide no further support of fair values since there appears to be an absence of objective support to measure the value of the rights within reasonable limits that any value can be realized.  It should be noted that the Company has not begun any mining operations as of June 30, 2012.  No studies have been performed as to the magnitude of the cost necessary to extract any value and at present, based on the information available, no reliable estimates as to the realizable nature of the assets can be determined.  Given that no monetary consideration was paid, and that no minimum payments have been guaranteed, and given that the Company does not currently have the means to pay for such rights, the fair value of the consideration was determined to be de minimus and therefore valued at zero. Payments to the transferors for future revenue from said minerals will be charged to expense when incurred. There were no transactions relating to these mineral rights through June 30, 2012.  In June 2011, the Company entered into an agreement to swap four of its mining claims, representing approximately one-third of such claims, with an unrelated third party in exchange for four equivalent claims.

 

11
 

 

 

Litigation, Claims and Assessments

 

From time to time, in the normal course of business, the Company may be involved in litigation.  The Company’s management has determined any asserted or unasserted claims to be immaterial to the consolidated financial statements at this time. 

 

Note 5 – Advances

 

During the quarter ended June 30, 2012, the Company made advances to Southshore Real Estate Development, LLC, in the amount of $115,000 and also advanced funds to Midwest Business Credit, LLC in the amount of $400,000. Monies advanced to Midwest Business Credit, LLC are to be converted to capital as part of the Company’s desire to acquire Midwest Business Credit, LLC. If the acquisition is ultimately not consummated within one year, Midwest Business Credit, LLC is required to repay such advances to Q Lotus upon its request.

 

Note 6 – Debt

 

Demand Note Payable

 

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

 

Notes Payable – Related Parties

 

In July 2010 the Company received an advance totaling $22,500 from a minority shareholder of the Company that was used to pay operating expenses.  In October 2010, the Company entered into a loan agreement with this shareholder 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 May 2011 the Company received an advance of $7,500 from 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 this shareholder 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 of $6,875 that was paid on April 27, 2012 fully retiring the obligation.

 

In March 2012, the Company received an advance of $25,000 from an officer of the Company that was used to pay operating expenses. This note is non-interest bearing and payable on demand. In April 2012, the Company received an additional advance of $30,000 and repaid $15,000 resulting in a balance due of $40,000 as of June 30, 2012.

 

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Notes Payable

 

Notes payable consist of the following:

 

   June 30,
2012
   March 31,
2012
 
Southshore  $582,107   $582,107 
           
Bellcourt   250,000    250,000 
           
Husain   192,500    187,500 
           
Urso   150,000    150,000 
           
Powers    230,000    230,000 
           
MBC, LLC   212,000     
           
Corey Marie   150,000     
           
Goldstein, LP   400,000     
           
Total notes payable  $2,166,607   $1,399,607 

 

Southshore Note

 

In February 2011, the Company issued a $200,000 promissory note to Southshore Real Estate Development, LLC (“Southshore”), an unaffiliated third party. These funds were used to pay operating expenses. In May 2011, the Company and Southshore 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 to increase the principal amount to $425,000 and extend the maturity date to August 24, 2011. 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 August 31, 2012. A portion of these funds was used to make a deposit relating to a proposed financing transaction and a portion of these funds were used to pay operating expenses. This note bears interest at the rate of 11% per annum.

 

Bellcourt Note

 

On September 12, 2011, the Company issued a note to Timothy Bellcourt, in the principal amount of $125,000 that matured on March 7, 2012. Upon maturity, the Company agreed to pay Mr. Bellcourt $250,000. In the event that a transaction contemplated by the Company is not consummated within 60 days, Mr. Bellcourt may demand repayment of the original principal amount, which may be paid in shares of the Company's common stock, valued at the date of repayment. Accordingly, the Company will amortize the amount to be repaid at maturity in excess of the amount of the original principal over the life of the Note. The maturity date of the note was extended to May 31, 2012, and further extended to August 31, 2012. As of June 30, 2012, accretion to the note was $125,000 and is recorded as a charge to interest expense. At June 30, 2012, the principal balance as recorded was $250,000.

 

13
 

 

Husain Note

 

On September 12, 2011, the Company issued a note to Matloob Husain, in the principal amount of $125,000 that matured on March 7, 2012. Upon maturity, the Company agreed to pay Mr. Husain $187,500. In the event that a transaction contemplated by the Company is not consummated within 60 days, Mr. Husain may demand repayment of the original principal amount, which may be paid in shares of the Company's common stock, valued at the date of repayment. Accordingly, the Company will amortize the amount to be repaid at maturity in excess of the amount of the original principal over the life of the note. The maturity date of the note was extended to May 31, 2012, and further extended to August 31, 2012. As of June 30, 2012, total accretion to the note was $67,500 $5,000 of which was recorded as a charge to interest expense during the three months eneded June 30,2012. As of June 30, 2012, the principal balance as recorded was $192,500.

 

Urso Note

 

On September 12, 2011, the Company issued a note to Estefania Urso, in the principal amount of $150,000 that matured on January 10, 2012 and was extended to June 30, 2012. Upon maturity, the Company will pay Ms. Urso $150,000. In the event that transaction contemplated by the Company is not consummated and escrowed funds are not returned to the Company, then the Company will be obligated to repay the principal amount of the loan, plus interest ($180,000 in the aggregate) to Ms. Urso in shares of the Company's common stock, valued at the date of repayment. Accordingly, the Company amortized the amount repaid at maturity in excess of the amount of the original principal over the life of the note. At June 30, 2012, accretion to the note was $30,000 and is recorded as a charge to interest expense. On March 14, 2012, the Company provided 350,000 shares of Company common stock to Ms. Urso valued at $.10 per share to compensate her for $35,000 of accrued interest. At June 30, 2012, the principal balance as recorded was $150,000. The note is in default and accordingly is classified as a current liability. The Company is in discussion with the note holder to amend the maturity date of the note. There can be no assurance that the Company will be successful in its effort to obtain an amendment.

 

Powers Note

 

In December 2011, the Company entered into a $100,000 note with an unaffiliated third party. These funds were used to pay operating expenses. The note bears interest at the rate of 10% per annum, matured on May 31, 2012 and was extended to July 31, 2012, and further extended to August 31, 2012. In January 2012, the principal amount of this note was increased to $130,000, and in March 2012, the principal amount of the note was further increased to $230,000.

 

MBC, LLC Note

 

In April 2012, the Company received $180,000 from MBC, LLC. The funds were used to pay operating expenses. A $16,000 loan fee was recorded to interest expense at the original maturity date of June 21, 2012. On June 21, 2012 the loan was extended to July 6, 2012 for an additional loan fee of $16,000 that was recorded to interest expense resulting in a loan balance as of June 30, 2012 of $212,000. On July 6, 2012 the maturity date of the note was extended to August 31, 2012 for an additional $16,000 loan fee.

 

Corey Marie Leasing Note

 

On May 3, 2012 the Company issued a note to Corey Marie Leasing, LLC in the principal amount of $150,000 that matures on August 31, 2012. The note bears interest at the rate of 15% per annum, and $115,000 of the funds was advanced to Southshore Development Company, LLC and $35,000 was used for operating expenses.

 

Goldstein LP Note

 

On June 2, 2012 the Company issued a note to the Goldstein Family Limited Partnership in the principal amount of $400,000. The note bears interest at the rate of 15% per annum and matures on August 31, 2012. The funds were advanced to Midwest Business Credit, LLC.

 

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Total interest expense on the notes payable for the three months ended June 30, 2012 and 2011 was approximately $56,000 and $14,000, respectively.

 

Convertible Note Payable

 

On August 12, 2011, the Company entered into a financing transaction with Asher Enterprises, Inc., ("Asher") pursuant to which the Company issued a $42,500 principal amount, 8% Convertible Note (the "Note") to Asher. The Note was converted into common stock as of May 7, 2012, is unsecured, and provides for the conversion of all principal and interest outstanding under the Note into shares of the Company's common stock beginning six months after the issuance date of the Note (“conversion date”), at a rate of 55% of the market price (no lower than $0.01) of the Company's common stock for the six lowest trading days during the ten day period prior to such conversion; provided, however, that the Note requires 61 days prior written notice of conversion to the Company if such conversion would put Asher and/or its affiliates over 4.99% beneficial ownership in the Company.

 

The conversion price of the Notes is subject to adjustment in the event of stock splits, dividends, distributions and similar adjustments to our capital stock. The number of shares of common stock subject to the Note may be adjusted in the event of mergers, distributions, a sale of substantially all of the Company's assets, tender offers and dilutive issuances.

 

In connection with the financing, the Company entered into a Securities Purchase Agreement that grants Asher a limited right of first refusal in the event the Company wishes to obtain additional working capital loans that are under $150,000. During February and March 2012, Asher converted $37,000 of convertible notes into 836,817 shares of common stock of the Company at variable conversion prices as defined in the note agreement. During April 2012 Asher converted the remaining $5,500 of convertible notes into 234,528 shares of common stock of the Company at variable conversion prices as defined in the note agreement.

 

On January 5, 2012, the Company entered into another financing transaction with Asher pursuant to which the Company issued a $37,500 principal amount, 8% Convertible Note (the "Note") to Asher. The Note matures on October 9, 2012, is unsecured, and provides for the conversion of all principal and interest outstanding under the Note into shares of the Company's common stock beginning six months after the issuance date of the Note, at a rate of 51% of the market price (no lower than $0.01) of the Company's common stock for the six lowest trading days during the ten day period prior to such conversion; provided, however, that the Note requires 61 days prior written notice of conversion to the Company if such conversion would put Asher and/or its affiliates over 4.99% beneficial ownership in the Company.

 

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On March 20, 2012, the Company entered into an additional financing transaction with Asher pursuant to which the Company issued a $32,500 principal amount, 8% Convertible Note (the "Note") to Asher. The Note matures on December 26, 2012, is unsecured, and provides for the conversion of all principal and interest outstanding under the Note into shares of the Company's common stock beginning six months after the issuance date of the Note, at a rate of 51% of the market price (no lower than $0.01) of the Company's common stock for the six lowest trading days during the ten day period prior to such conversion; provided, however, that the Note requires 61 days prior written notice of conversion to the Company if such conversion would put Asher and/or its affiliates over 4.99% beneficial ownership in the Company.

 

On May 2, 2012, the Company entered into another financing transaction with Asher pursuant to which the Company issued a $37,500 principal amount, 8% Convertible Note (the "Note") to Asher. The Note matures on February 4, 2013, is unsecured, and provides for the conversion of all principal and interest outstanding under the Note into shares of the Company's common stock beginning six months after the issuance date of the Note, at a rate of 51% of the market price (no lower than $0.01) of the Company's common stock for the six lowest trading days during the ten day period prior to such conversion; provided, however, that the Note requires 61 days prior written notice of conversion to the Company if such conversion would put Asher and/or its affiliates over 4.99% beneficial ownership in the Company.

 

Derivative Financial Instrument

 

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 815, Derivatives and Hedging which requires issuers of financial statements to make a determination as to whether (1) an embedded conversion meets the definition of a derivative in its entirety and (2) the derivative would qualify for a scope exception to derivative accounting, which includes evaluating whether the embedded derivative would be considered indexed to the issuer’s own stock.

 

ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as separate derivatives in the event such derivatives would not be classified in stockholders’ equity if they were free standing. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other applicable US GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides for an exception to this rule if a debt host instrument is deemed to be a conventional debt instrument.

 

The Company evaluated the conversion option embedded in its Convertible Notes in accordance with the provisions of ASC 815 and determined that on the conversion date, the conversion option will have all of the characteristics of a derivative in its entirety and does not qualify for an exception to the derivative accounting rules. Specifically, because the exercise price of the conversion option is not fixed at any time during the term of the note based on the occurrence or non-occurrence of certain events also entitles the counterparty to an adjustment of the exercise price in the event that the Company subsequently issues equity securities or equity linked securities at prices more favorable than the exercise price of the conversion option embedded in the Note. Accordingly, the conversion option is not considered indexed to the Company’s own stock.

 

Note 7 – Stockholders’ Deficit

 

Common Stock

 

The Company has authorized 400,000,000 shares of common stock, $0.0001 par value per share, and as of June 30, 2012, adjusted for the stock split, 56,583,585 shares were issued and outstanding. The holders of the Company’s common stock are entitled to one vote per share. The holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of legally available funds. However, the current policy of the Board of Directors is to retain earnings, if any, for the operation and expansion of the business. Upon liquidation, dissolution or winding-up of the Company, the holders of common stock are entitled to share ratably in all assets of the Company, which are legally available for distribution and after payment of or provision for all liabilities. The holders of common stock have no preemptive, subscription, redemption or conversion rights.

 

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Preferred Stock

 

The Company has authorized 100,000,000 shares of preferred stock, $0.001 par value per share, and as of June 30, 2012, no shares were issued and outstanding.

 

Reverse Merger

 

On April 16, 2010, in contemplation of the reverse merger described below, the sole shareholder of QLI (now our wholly owned subsidiary), Marckensie Theresias, acquired 26,550,000 shares of our common stock for $266,620, primarily from its former CEO, Milka Fixler. 

 

On June 11, 2010, QLI entered into and completed an Agreement and Plan of Share Exchange with the Company.

 

The Company had 22,019,994 common shares par value $0.0001 outstanding at the time of the merger.

 

The Company agreed to acquire all of the QLI common stock from the QLI stockholder in exchange for 30,000,000 newly issued shares of common stock.  As a condition of the exchange agreement, the 26,550,000 shares as referred to above were cancelled. The name of the Company was subsequently changed to Q Lotus Holdings, Inc.  After the exchange was completed, a total of 52,019,994 common shares were outstanding.

 

The completion of the transactions as described above was accounted for as a “reverse merger” and recapitalization since the stockholder of QLI gained control over the Company following the completion of the transactions.

 

Common Stock Issued

 

In August 2010, the Company issued 1,250,000 shares of common stock with an ascribed value of $50,000 (based on the value of the services) to Real Holdings Capital, LLC (“RHC”) in exchange for $125 and services that related to the formation and establishment of the Company and its business operations. The Company’s President and Chief Executive Officer, Mr. Rosenberg, is a beneficiary under a trust that owns RHC. These shares are subject to a voting agreement with Mr. Theresias.

 

In September 2010, the Company issued 300,000 shares of common stock with an ascribed value of $150,000 (based on the value of the services) in exchange for web marketing services. This amount was fully amortized as operating expenses during the fiscal ended March 31, 2011.

 

In December 2010, the Company issued 8,000 shares of common stock with a value of $15,040, in exchange for services, based on the closing price of the Company’s common stock on the date of issuance.

 

In March 2011, the Company issued 150,000 shares of its common stock valued at $150,000 based on the closing price of the Company’s common stock on the date of issuance in exchange for investment banking services. This amount is being amortized over the twelve-month period of the service agreement and was fully amortized in the year ended March 31, 2012.

 

In December 2011, the Company issued 84,246 shares of common stock with a value of $10,000, based on the average of the ten (10) day historical closing price of the Company’s common stock, in exchange for professional fees.  This amount was expensed in the quarter ended December 31, 2011.

 

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In February and March 2012, the Company issued 836,817 shares of common stock with an aggregate value of $37,000 as partial conversion of the Asher notes payable. These amounts were recorded as stockholders equity in the quarter ended March 31, 2012.

 

In February 2012, the Company issued 500,000 shares of common stock with a value of $165,000, in exchange for professional fees to be amortized over six months. The stock price was based on the closing price of the Company’s common stock on the date of issuance.

 

In March 2012, the Company issued 25,000 shares of common stock to each of four independent Directors. The shares were valued at $3,500 to each Director based on the closing price on the date the shares were granted. The Company issued 250,000 shares each to three consultants as compensation for services. The shares were valued at $35,000 to each consultant based on the closing price on the date the shares were granted. These amounts were expensed in the quarter ended March 31, 2012.

 

In March 2012, the Company issued 350,000 shares valued at $35,000 on the date of issuance as payment of interest on the Urso note. This amount was recorded as stockholders equity in the quarter ended March 31, 2012.

 

In April 2012, the Company issued 234,528 shares of common stock with an aggregate value of $5,500 as partial conversion of the Asher notes payable. These amounts were recorded as stockholders equity in the quarter ended June 30, 2012.

 

Warrants Issued

 

In February 2011, the Company issued a two-year warrant to an individual affiliated with Southshore to purchase an aggregate of 150,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The fair value of the warrant was calculated using the Black-Scholes Option Valuation Model. The Company recorded a charge of $16,659 that was included in interest expense in the fiscal year ended March 31, 2011. This warrant was subsequently cancelled and reissued on May 20, 2011 at $.50 per share having a fair value of $4,368 and was charged to interest expense during the year ended March 31, 2012.

 

In connection with a series of amendments to the Southshore Note during the year ended March 31, 2012, the Company issued two year warrants to purchase an aggregate 357,000 shares of the Company’s common stock at an exercise price of $.05 per shares. The fair value of the warrants was calculated using the Black-Scholes Option Valuation Model. The Company recorded a charge of $5,654 that was included in interest expense in the fiscal year ended March 31, 2012.

 

On March 16, 2012, the Company issued a five-year warrant to a note-holder to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $1.75 per share as an added inducement for additional advances from the note-holder. On the same date, the Company also issued a five-year warrant to a related party note holder to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $1.75 per share. The fair value of these warrants was calculated using the Black-Scholes Option Valuation Model. The Company recorded an aggregate charge of $16 that was included in interest expense in the fiscal year ended March 31, 2012.

 

Note 8 – Related Party Transactions

 

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 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 quarters ended June 30, 2012 and 2011, the Company's share of these expenses totaled approximately $70,000 and $113,000, respectively.

 

18
 

 

During the fiscal year ended March 31, 2011, the Company paid on behalf of its Chairman, Mr. Theresias, approximately $52,000 of personal expenses.  The Company recorded approximately $19,000 of these expenses as a reduction of amounts due the Chairman for expenses he incurred on behalf of the Company.  The remaining balance, of approximately $33,000, was recorded as compensation to the Chairman for the fiscal year ended March 31, 2011.

 

In August 2010, the Company issued 1,250,000 shares of common stock to Real Holdings Capital, LLC (“RHC”) with an ascribed value of $50,000 in exchange for and based on the value of services that related to the formation and establishment of the Company and its business operations. The Company’s President and Chief Executive Officer, Mr. Rosenberg, is a beneficiary under a trust that owns RHC. These shares are subject to a voting agreement with Mr. Theresias.

 

Note 9 - Capital Structure

 

On June 17, 2010, the Company filed a Schedule 14C Information Statement disclosing the following actions, to be effective on July 16, 2010, that had been approved by the shareholders of the Company:

 

1.the Company’s Articles of Incorporation was amended to change the name to Q Lotus Holdings, Inc.;

 

2.the authorized capital stock of the Company was increased to 500,000,000 shares, of which 400,000,000 shares will be Common Stock par value $0.0001 per share, and 100,000,000 shares will be Preferred Stock par value $.001 per share; and

 

3.the outstanding common shares of the Company were split so that each outstanding share on the books of the Company was split into three outstanding common shares.

 

Note 10 – Subsequent Events

 

On July 16, 2012 the Company issued a Note to Arlyne Goldstein in the principal amount of $30,000. The note bears interest at 10% per annum and matures on August 31, 2012. The funds were used to advance the asset backed note issuance.

 

In July and August 2012, the Company issued 606,177 shares of common stock with an aggregate value of $22,000 as partial conversion of the Asher notes payable, based on the average of the ten (10) day historical closing price of the Company’s common stock. These amounts were recorded as stockholders equity in the quarter ending September 30, 2012.

 

On August 1, 2012 the Company issued a warrant to Jorge Gonzalez, the Company’s Chief Financial Officer, to purchase up to 156,000 shares of common stock at an exercise price equal to $1.00. The Warrant expires August 1, 2014.

 

In July 2012 the Company entered into a partnership arrangement to raise funds by issuing collateralized notes.  No funds have yet to be secured.  There can be no assurance the Company will be successful in its efforts.     

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDTION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the results of operations and financial condition of Q Lotus Holdings, Inc. (the “Company”) for the three months ended June 30, 2012 and 2011 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. 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 Form 10-Q contains forward-looking statements that are not statements of historical fact and may involve a number of risks and uncertainties. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to our future prospects, developments and business strategies. We have used the words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project” and similar terms and phrases, including references to assumptions, in this Form 10-Q to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. You should keep in mind that any forward-looking statement made by us in this Form 10-Q and/or elsewhere speak only as of the date on which we make them. New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this Form 10-Q after the date of this Form 10-Q, except as may be required by law. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may be disclosed from time to time in our SEC filings or otherwise, including the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K/A filed on July 10, 2012 for the fiscal year ended March 31, 2012, and in our periodic reports on Form 10-Q.

 

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 June 30, 2012, the close of its most recently completed fiscal quarter, 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.

 

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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-Q 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.

 

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.

 

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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:

 

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 June 30, 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 three months ended June 30, 2012 of approximately $259,000 were incurred relating to consulting fees of approximately $35,000, promotional expenses of approximately $83,000, professional fees of approximately $63,000, payroll expense of approximately $6,000, and supplies and services of approximately $72,000.

 

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Operating expenses for the three months ended June 30, 2011 of approximately $278,000 were incurred relating to travel of approximately $1,000, consulting fees of approximately $24,000, promotional expenses of approximately $1,000, professional fees of approximately $124,000, payroll expense of approximately $36,000, and supplies and services of approximately $92,000

 

Liquidity and Capital Resources

 

As of June 30, 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 April 2012, the Company received $180,000 MBC, LLC. The funds were used to pay operating expenses. A $16,000 loan fee was recorded to interest expense at the original maturity date of June 2, 2012. On June 20, 2012 the maturity date of the note was extended to August 31, 2012 for an additional $32,000 loan fee resulting in a total balance due of $228,000.

 

On May 3, 2012 the Company issued a note to Corey Marie Leasing, LLC in the principal amount of $150,000 that matures on August 31, 2012. The note bears interest at the rate of 15% per annum, and $115,000 of the funds were invested in the Southshore Development Company, LLC and $35,000 were used for operating expenses.

 

On June 2, 2012 the Company issued a note to the Goldstein Family Limited Partnership in the principal amount of $400,000. The note bears interest at the rate of 15% per annum and matures on August 31, 2012. The funds were invested in Midwest Business Credit, LLC.

 

Our common stock currently trades on the OTCBB under the symbol “QLTS.”

 

We also may initiate corporate bond offerings to raise capital for our planned investments. There can be no assurance that the Company will be successful in raising these funds or executing its business plans.

 

Liquidity and Going Concern

 

The accompanying unaudited condensed 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 created on March 31, 2010, the Company has had no revenue and has generated losses from operations. At June 30, 2012, the Company had negative working capital of approximately $2,812,000 and an accumulated deficit of approximately $3,664,000. Since its formation on March 31, 2010 through June 30, 2012, the Company raised approximately $805,000 in cash from the issuance of common stock and approximately $2,343,000 in proceeds from the issuance of notes payable. 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 June 30, 2012, the Company’s activities have been limited to its formation, business planning, pursuing capital and the exploration of possible acquisitions and investments.

 

23
 

   

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable

 

ITEM 4. Controls and Procedures

  

Disclosure Controls and Procedures

 

Management, with the participation of our Principal Executive Officer and Principal Financial Officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report on Form 10-Q (the “Evaluation Date”). Based upon that evaluation, our Principal Executive and Financial Officers concluded that, as of the Evaluation Date, our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms and (ii) is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Notwithstanding the conclusion that our disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report, the Principal Executive and Financial Officers believe that the condensed consolidated financial statements and other information contained in this Quarterly Report present fairly, in all material respects, our business, financial condition and results of operations.

 

Our management, including our Principal Executive and Financial Officers, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

 

In connection with the audit of our annual 2012 consolidated financial statements, our independent auditors identified certain significant deficiencies that together constitute a material weakness in our disclosure controls and procedures. These significant deficiencies primarily relate to our lack of formalized written policies and procedures in the financial accounting area, our lack of appropriate resources to handle the accounting for complex equity and other transactions, our lack of sophisticated financial reporting systems, due in part to the small size of our Company prior to the merger, and our lack of a formalized disaster recovery plan in the information technology area. These significant deficiencies together constitute a material weakness in our disclosure controls and procedures.

 

We continue to work towards bringing our disclosure controls and procedures up to public-company standards. Due to the early development stage of the Company, we have been unable to upgrade our disclosure controls and procedures to the level required of a public company prior to the end of the period covered by this quarterly report. Nevertheless, we have performed additional analyses and other post-closing procedures to ensure that our financial statements contained in this Quarterly Report were prepared in accordance with U.S. GAAP and applicable SEC regulations. Our planned remediation includes formalizing written policies and procedures, determining the appropriate resources to handle complex transactions as they arise in the future, upgrading our financial reporting systems, and developing and documenting a formalized IT disaster recovery plan.

 

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Internal Control over Financial Reporting

 

The term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the registrant’s principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

 

  · pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions of the registrant;

 

  · provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant; and

 

  · provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant’s assets that could have a material effect on the financial statements.

 

Changes in Internal Control over Financial Reporting.

 

The Company maintains a system of internal controls designed to provide reasonable assurance that transactions are executed in accordance with management's general or specific authorization; transactions are recorded as necessary to (1) permit preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, and (2) maintain accountability for assets. Access to assets is permitted only in accordance with management's general or specific authorization.

 

There was no change in the Company’s internal control over financial reporting during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

It is the responsibility of the Company’s management to establish and maintain adequate internal control over financial reporting. However, due in part to the small size of our Company, we lack formalized written policies and procedures in the financial accounting area, we lack the appropriate resources to handle the accounting for complex equity and other transactions and lack a sophisticated financial reporting systems.

 

Our independent auditors have reported to our Board of Directors certain matters involving internal controls that our independent auditors considered to be a material weakness as of the Evaluation Date, under standards established by the Public Company Accounting Oversight Board. As previously stated, the material weakness relates to our lack of formalized written policies and procedures in the financial accounting area, our lack of appropriate resources to handle the accounting for complex equity and other transactions and our lack of sophisticated financial reporting systems.

 

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PART II – OTHER INFORMATION

 

ITEM 1. 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.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. (REMOVED AND RESERVED)

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q.

 

Exhibit No.

Description

 

31.1 Chief Executive Officer’s Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer’s Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer’s Certificate pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2

Chief Financial Officer’s Certificate pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

   Q LOTUS HOLDINGS, INC.
   (A Development Stage Company)
     
     
     
August 14, 2012 /s/ Gary A. Rosenberg
  Gary A. Rosenberg 
  Chief Executive Officer 
     
     
     
August 14, 2012 /s/ Jorge Gonzalez 
  Jorge Gonzalez 
  Chief Financial Officer 

 

 

27

XOTC:QLTS Quarterly Report 10-Q Filling

XOTC:QLTS Stock - Get Quarterly 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.

XOTC:QLTS Quarterly Report 10-Q Filing - 6/30/2012
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