Lotus Pharmaceuticals Inc (OTC:LTUS)

BEIJING, April 10, 2012 /PRNewswire-Asia/ -- Lotus Pharmaceuticals, Inc. (OTCBB: LTUS) ("Lotus" or the "Company") issued the following statement: For the past five years when Lotus Pharmaceuticals became a public company on the OTC bulletin board, the Company invested a significant amount of capital every year in maintaining a good listing status. In the past two years, the Company has put in a large amount of capital in the building and furnishings of its new headquarters in Beijing Chaoyang District. The funding for the new building all came from the Company's operational income and the Company has not received any external funding support. As a result, the Company is experiencing a liquidity crunch currently with an extremely low level of working capital, and will be unable to continue to spend on auditing and other professional services that are required for a public company. Given our financial condition, if we could not secure additional investments from outside, the Company will not be able to fund professional services that are necessary for a public company, such as auditing and legal services, and the Company could get delisted eventually. If there are investors that would like to support us and provide us with additional funding, we would be glad to work out a solution so that we could maintain our good listing status. We appreciate your understanding, help, and support over the years.

 

BEIJING, January 5, 2012 /PRNewswire-Asia-FirstCall/ -- Lotus Pharmaceuticals, Inc. (OTCBB: LTUS) ("Lotus" or the "Company"), a profitable developer, manufacturer and seller of medicine and drugs in the People's Republic of China ("PRC"), today announced it entered into an agreement to dispose its Inner Mongolia branch company, including land use right for the 1000 Mu (approximately 165 acre) land in Inner Mongolia, in order to focus its business on the Beijing wholesale market.

Pursuant to the agreement with Meng Xin Vegetable Product Company (Meng Xin), the previous owner of the land use right for this tract of land, Lotus Pharmaceuticals will transfer ownership of Liang Fang Pharmaceutical, Ltd. Inner Mongolia branch company and certain assets and liabilities to Meng Xin. The assets, valued at approximately $52.6 million (based on RMB6.298/$), include the entire 1000 Mu land and building thereon (valued at approximately $44.5 million), approximately $7.3 million of account receivables, and three retail drug stores in Beijing (Feng Tai store, Yong An Zhong Sheng store, and He Ping Li store). The liabilities, also valued at approximately $52.6 million, include all tax payable and late payment fees, land use taxes and compensation to farmers which are collected retroactively, unpaid utilities and sewage, as well as management fees to the local government. Meng Xin will receive the assets and assume the liabilities after the transaction. There is no cash payment between Lotus and Meng Xin.

Chairman and Chief Executive Officer Mr. Zhongyi Liu stated, "Because we have not undertaken development of the 1000 Mu land in Inner Mongolia as stipulated in the original agreement when we made the purchase in 2008, we are subject to some significant taxes and penalties, which are collected retroactively. As a result, we could not afford to hold the land any more. In addition, our decision to dispose of the Inner Mongolia branch and the 1000 Mu land is based on our strategic decision to focus on the Beijing wholesale market once the headquarters building is put into use. The transaction enables us to reduce current liabilities, which is very important to us as our resources are currently tied to the operation of the new headquarters building in Beijing."

Separately, the Company started moving into its new headquarters building in Beijing's Chaoyang district at the end of December 2011. This over 34,000 square meter multi-story building will host the Company's key divisions, including manufacturing, R&D, sales and marketing, storage warehouse, and administrative offices. The Company expects the new storage warehouse to become functional by March 2012.

Mr. Liu commented, "We expect the storage warehouse in the new headquarters building will be put into use by March, and the manufacturing facility by the end of Q3 of 2012, after inspection and certification are completed. With these new facilities, we anticipate additional capacity for growth and significant efficiency improvements in the coming years."

Weak Internal Controls: Lack of attention to detail

For some reason the amount of ALLEGED capital is spent on land use rights disclosed in the 2011 10Q third quarter differs from what was disclosed in the 2010 First quarter 10Q

2011 10Q

If Lotus East fails to obtain all of the funding necessary to complete the construction of the new facility in Inner Mongolia, which is estimated to be approximately $50 million in the next few years, approximately $34.9 million for the payments on the land use right which is refundable if the Chinese local government does not grant it land use right certificate, could be returned to Lotus East.

2010 10Q

If Lotus East fails to obtain all of the funding necessary to complete the construction of the new facility in Inner Mongolia, which is estimated to be approximately $52.9 million in the next five years, it could get back approximately $40.6 million spent to date, including the approximately $33.4 million for the payments on the land use rights, which is refundable if the Chinese local government would not grant it land use rights certificate.

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

		For the Three Months Ended						For the Nine Months Ended
		September 30,						September 30,
		2011			2010			2011			2010
NET REVENUES:
Wholesale		$	15,276,053		$	15,347,372		$	38,585,730		$	42,309,596
Retail			3,768,485			2,957,488			12,070,485			9,652,235
Total Net Revenues			19,044,538			18,304,860			50,656,215			51,961,831
COST OF REVENUES:
Wholesale			12,855,958			5,791,825			27,287,898			16,318,673
Retail			2,874,778			2,133,906			9,014,537			6,956,438
Total Cost of Revenues			15,730,736			7,925,731			36,302,435			23,275,111
GROSS PROFIT			3,313,802			10,379,129			14,353,780			28,686,720
OPERATING EXPENSES:
Selling expenses			846,919			2,452,629			2,987,630			6,996,741
Research and development expenses			470,311			21,517			1,889,535			21,517
General and administrative expenses			728,164			1,145,412			4,170,350			3,242,617
Total Operating Expenses			2,045,394			3,619,558			9,047,515			10,260,875
INCOME FROM OPERATIONS			1,268,408			6,759,571			5,306,265			18,425,845
OTHER INCOME (EXPENSE):
Debt issuance costs			—			—			—			(52,226	)
Other income			47,717			200,074			141,331			597,016
Interest income			439			525			2,005			2,711
Interest expense			(63,223	)		(59,896	)		(187,256	)		(551,726	)
Total Other Income (Expense)			(15,067	)		140,703			(43,920	)		(4,225	)
INCOME BEFORE INCOME TAXES			1,253,341			6,900,274			5,262,345			18,421,620
INCOME TAXES			—			200,348			149			470,514
NET INCOME			1,253,341			6,699,926			5,262,196			17,951,106
OTHER COMPREHENSIVE INCOME:
Foreign currency translation gain			930,264			1,426,434			3,054,039			1,760,632
COMPREHENSIVE INCOME		$	2,183,605		$	8,126,360		$	8,316,235		$	19,711,738
NET INCOME PER COMMON SHARE:
Basic		$	0.05		$	0.25		$	0.19		$	0.69
Diluted		$	0.04		$	0.25		$	0.19		$	0.67
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic			27,784,732			26,697,892			27,675,063			26,000,584
Diluted			28,094,644			27,047,556			27,985,245			26,872,434

• For the three months ended September 30, 2011, wholesale revenues decreased $71,319 or 0.5%, compared to wholesale revenues for the three months ended September 30, 2010. The decrease was primarily attributable to a
  
  • decrease in sales of approximately $2,836,000 from Mu Xin (an eye drop) which is one of our self-branded products since our sales quantity for Mu Xin decreased by 100% due to the termination of our out-sourcing manufacture agreement,
    
  •  decrease in sales of approximately $1,986,000 from Mai Xin (Valsartan) which is one of our self-branded products, although we increased our wholesale distribution price for Mai Xin by 5.3% due to the increase in our purchase price for the drug, our sales quantity for the drug decreased by 79.5%
    
  • decrease in sales of approximately $1,083,000 from Yipubishan which is one of our self-branded products, though we increased our wholesale distribution price for Yipubishan by 7.0% in order to deal with the increase in our purchase price, our sales quantity for this drug decreased by 61.9%,
  •  decrease in sales of approximately $4,100,000 from twelve third party manufactured products distributed through our wholesale distribution channel for which we act as a non-exclusive wholesale distributor since our sales quantity for these twelve drugs decreased by 100%.
    
• For the three months ended September 30, 2011, retail revenues increased by $810,997 or 27.4%, compared to retail revenues for the three months ended September 30, 2010. The increase was mainly attributable to an
  
  • increase in revenue from our own ten drug stores of approximately $35,000
  • increase in revenue from our direct sales to other Over-the-Counter drug stores in Beijing of approximately $776,000.

Due to the growth and success of our OTC Drug Division’s sales force, our retail revenues for the third quarter of fiscal 2011 substantially increased. We expect our retail revenue from our own ten drug stores will remain in its current level with small growth and our retail revenue from our direct sales to other drug stores in Beijing will continue to increase in the future

• Our gross profit from our wholesale operations for the three months ended September 30, 2011 was $2,420,095 or 15.8% of net wholesale revenues, as compared to $9,555,547 or 62.3% of net wholesale revenues for the three months ended September 30, 2010. We expect that our gross profit margin from our wholesale operations will maintain in its current quarter level in the near future.

• Our gross profit from our retail operations for the three months ended September 30, 2011 was $893,707 or 23.7% of net retail revenues, as compared to $823,582 or 27.8% of net retail revenues for the three months ended September 30, 2010. We expect that our gross profit margin from our retail operations will maintain in its current quarter level in the near future.

Second Quarter 2011 Results

• Revenues for the three months ended June 30, 2011 decreased by 1.1% year-over-year to $18.7 million, down from $18.9 million in the second quarter of 2010
• Net income for the quarter decreased 71.9% to $1.8 million, compared to $6.3 million in the second quarter of 2010
• Earnings per diluted share were $0.06 for the quarter, compared with diluted EPS of $0.24 achieved in the same period a year ago

 

Mr. Zhongyi Liu, Chairman and CEO of Lotus, stated, "Our 2011 second quarter results, especially those of the wholesale segment, were negatively impacted by changes in the competitive landscape and increases in labor costs. Retail sales continue to deliver solid results with 19.2% growth in revenue versus the same period in 2010. The increase in the retail segment was driven primarily by our Over-the-Counter division's sales. Construction of our Beijing facility continues to progress, and we anticipate additional capacity for growth and significant efficiency improvements once we move into the new building by the end of the year."

Mr. Liu continued, "We plan to focus our capital expenditures in the foreseeable future on the completion of our Beijing facility and our core business in Beijing. Lotus has a well-established nationwide sales and distribution network, and strong product development capabilities. With the completion of our new headquarters, we believe we are well positioned with respect to the ongoing consolidation of the Chinese pharmaceutical industry.

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

		For the Three Months Ended
		March 31,
		2011			2010
NET REVENUES:
Wholesale		$	8,719,023		$	11,498,086
Retail			4,198,217			3,252,392
Total Net Revenues			12,917,240			14,750,478
COST OF REVENUES:
Wholesale			3,752,509			3,913,198
Retail			3,011,797			2,330,431
Total Cost of Revenues			6,764,306			6,243,629
GROSS PROFIT			6,152,934			8,506,849
OPERATING EXPENSES:
Selling expenses			1,403,546			2,168,953
Research and development expenses			727,431			—
General and administrative expenses			1,772,299			1,021,857
Total Operating Expenses			3,903,276			3,190,810
INCOME FROM OPERATIONS			2,249,658			5,316,039
OTHER INCOME (EXPENSE):
Debt issuance costs			—			(52,226	)
Other income			46,514			198,434
Interest income			690			1,280
Interest expense			(61,629	)		(432,402	)
Total Other Income (Expense)			(14,425	)		(284,914	)
INCOME BEFORE INCOME TAXES			2,235,233			5,031,125
INCOME TAXES			149			102,207
NET INCOME			2,235,084			4,928,918
OTHER COMPREHENSIVE INCOME:
Foreign currency translation gain			577,069			10,928
COMPREHENSIVE INCOME		$	2,812,153		$	4,939,846
NET INCOME PER COMMON SHARE:
Basic		$	0.08		$	0.20
Diluted		$	0.08		$	0.18
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic			27,490,088			24,779,592
Diluted			27,800,769			26,854,462

First Quarter Results:

• Revenues for the three months ended March 31, 2011 decreased by 12.4% year-over-year to $12.9 million, down from$14.8 million in the first quarter of 2010
• Gross profit for the first quarter was $6.2 million, a decrease of 27.7% compared to $8.5 million in the first quarter of 2010. Gross margin was 47.6% and 57.7% for the three months ended March 31, 2011 and 2010, respectively
• Net income for the quarter decreased 54.7% to $2.2 million, compared to $4.9 million in the first quarter of 2010
• Earnings per diluted share were $0.08 for the quarter, compared with diluted EPS of $0.18 achieved in the same period a year ago

Mr. Zhongyi Liu, Chairman and CEO of Lotus, stated, "While our first quarter results were impacted by changes in our wholesale segment, our retail sales continue to outperform with 29.1% growth versus the same period in 2010. The substantial increase in the retail segment was driven by our Over-the-Counter Drug Division's sales force. We expect this channel to continue being a major sales growth driver in the coming year. Construction of our Beijing facility continues to progress, and we anticipate additional capacity for growth and significant efficiency improvements once we move into the new building."

Comments From Press Release....

The Company has stated it plans to make the best use of its land asset in Inner Mongolia. Specifically, management plans to build a 100-mu pharmaceutical distribution center in Inner Mongolia, which is expected to begin construction in 2011 and will provide a base for continued sales into the five northwestern provinces. For the remaining estimated 900 mu of land, the Company intends to make the best use of the asset, including co-developing or selling it to a third party.

...contradict with a press release from December 2010:

December 2010 release:

Lotus' Chairman and CEO, Mr. Zhongyi Liu, stated, "We have decided not to move forward with the construction of our planned facility in Inner Mongolia in order to focus our efforts and resources on expanding our core business in Beijing. We believe that selling or transferring this property will be a more effective use of our capital."

Business Outlook for 2011 

Management anticipates that 2011 will be a transitional year for Lotus Pharmaceuticals, as the Company will be completing and moving into its new headquarters and shifting its focus to the wholesale business in Beijing and the surrounding areas. After the completion of the headquarters, the Company expects strong growth driven by the wholesale business in Beijing and surrounding areas starting in 2012.

The Company expects total revenue and profitability in 2011 will be lower than that of 2010. Specifically, the revenue from the wholesale segment will down from 2010, driven by the manufacturing disruption of Mu Xin and lower revenue from products with non-exclusive rights. However, management anticipates continued growth in Lotus' retail business in 2011, driven primarily by strong growth in the OTC sales division.

 

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

		For the Three Months Ended
		March 31,
		2011			2010
NET REVENUES:
Wholesale		$	8,719,023		$	11,498,086
Retail			4,198,217			3,252,392
Total Net Revenues			12,917,240			14,750,478
COST OF REVENUES:
Wholesale			3,752,509			3,913,198
Retail			3,011,797			2,330,431
Total Cost of Revenues			6,764,306			6,243,629
GROSS PROFIT			6,152,934			8,506,849
OPERATING EXPENSES:
Selling expenses			1,403,546			2,168,953
Research and development expenses			727,431			—
General and administrative expenses			1,772,299			1,021,857
Total Operating Expenses			3,903,276			3,190,810
INCOME FROM OPERATIONS			2,249,658			5,316,039
OTHER INCOME (EXPENSE):
Debt issuance costs			—			(52,226	)
Other income			46,514			198,434
Interest income			690			1,280
Interest expense			(61,629	)		(432,402	)
Total Other Income (Expense)			(14,425	)		(284,914	)
INCOME BEFORE INCOME TAXES			2,235,233			5,031,125
INCOME TAXES			149			102,207
NET INCOME			2,235,084			4,928,918
OTHER COMPREHENSIVE INCOME:
Foreign currency translation gain			577,069			10,928
COMPREHENSIVE INCOME		$	2,812,153		$	4,939,846
NET INCOME PER COMMON SHARE:
Basic		$	0.08		$	0.20
Diluted		$	0.08		$	0.18

		2011		2010
Wholesale	$	8,719,023	$	11,498,086
Retail		4,198,217		3,252,392
Total net revenues	$	12,917,240	$	14,750,478

Wholesale revenues:

• The decrease was primarily attributable to a decreased sale of approximately $2,313,000 from Muxin (an eye drop) which is one of our self-branded products due to the termination of our out-sourcing manufacture agreement and a decrease in sales of approximately $2,825,000 from twelve third party manufactured products distributed through our wholesale distribution channel for which we act as a non-exclusive wholesale distributor. This was partially offset by an increase in revenues of approximately $1,427,000 from three third party manufactured products (The manes of these three drugs are Recombinant Human Erythropoietin Injection, Recombinant Human Interleukin-2 Injection and Recombinant Human Granulocyte Stimulating Factor Injection.) for which we hold exclusive distribution rights, and an increase in revenues of approximately $932,000 from other miscellaneous drugs distributed through our wholesale distribution channel. In the three months ended March 31, 2011, it is our belief that numerous drug sales agents sold drugs for which they hold non-exclusive rights to some regions in where they did not have any distribution rights. In order to compete with our competitors, we lowered our wholesales distribution price of these drugs for which we hold non-exclusive distribution rights and concentrated our sales efforts on these drugs for which we hold exclusive distribution rights. As a result, our sales from the twelve drugs for which we hold non-exclusive distribution rights decreased and our sales from the three drugs for which we hold exclusive distribution rights increased. We expect our total wholesale revenue will maintain at its current level with minimal growth in the remaining part of fiscal 2011.

• Retail revenues increased by $945,825 or 29.1%, compared to retail revenues for the three months ended March 31, 2010. The increase was mainly attributable to an increase in revenue from our own ten drug stores of approximately $128,000 and an increase in revenue from our direct sales to other Over-the-Counter drug stores in Beijing of approximately $818,000. Due to the growth and success of our OTC Drug Division’s sales force, our retail revenues for the three months ended March 31, 2011 substantially increased. We expect our retail revenue from our own ten drug stores will remain in its current level with small growth and our retail revenue from our direct sales to other drug stores in Beijing will continue to increase in the future.

BEIJING, April 25, 2011 /PRNewswire-Asia-FirstCall/ -- Lotus Pharmaceuticals, Inc. (OTCBB: LTUS) ("Lotus" or the "Company"), a fast-growing, profitable developer, manufacturer and seller of medicine and drugs in the People's Republic of China ("PRC"), announced today that its Vice President of Corporate Development, Dr. Xing Shen, was interviewed by Gary Eelman, Director of Institutional Sales at RedChip Companies, Inc.

A full transcript of the interview is below:

Q: First, congratulations on the Company's recent quarterly and fiscal year-end results. Lotus has been executing well, with solid double-digit growth in both its retail and wholesale segments. Presently, the Company's focus appears to be on completing the construction of your new headquarters in Beijing. You mentioned that construction may be delayed till year's end, an additional six months from your earlier guidance. Do you expect to meet the new deadline?

A: Yes. I recently visited the site and spoke with the builder. He believes they will still meet the June 2011 deadline, but to my untrained eye, there appears to be a fair amount of work that still needs to be done. After discussing with the management team, we decided to extend the timeline by six months to ensure the quality of the facility and buffer any unforeseeable delays. I thought it prudent to inform shareholders that an extra six months may be needed. We prefer to be conservative when providing timelines.

Q: For the benefit of those reading this interview, please clarify why the new Lotus headquarters is so important to the future of the Company.

A: The primary reason is that it provides us with the opportunity to market to hospitals in Beijing. Pharmaceutical companies are required to maintain warehousing facilities large enough to guarantee shipment on designated dates. The current minimum size requirement is 5,000 square meters. Once our new building is operational, we will meet the requirement and can enter the bidding for hospitals in the Beijing area.

Please note that over 70% of our 2010 revenue came from our wholesale division, and this was without selling to Beijing hospitals. At the same time, we estimate that pharmaceutical sales in Beijing will account for two-thirds of our total sales in northern China, or approximately one-third of our total domestic sales in 2011. So the opportunity is significant for Lotus.

Q: In 2008, Lotus paid $32.6 million to acquire property in Mongolia, which is about a two-hour drive from Beijing, to build your headquarters. Shortly thereafter, Lotus received permission to upgrade its manufacturing facility in Beijing. Chairman Liu and the board decided the new building in Beijing makes more sense due to its closer proximity to your target hospitals, which I agree. On the March 30 earnings call, some of your shareholders requested Chairman Liu sell the property in Mongolia, using the proceeds to buy back stock and concentrate on selling higher-margin pharmaceutical products. Can you provide us with the estimated value of that property today and the main reason Lotus has decided not to sell, but to develop 10% of the property?

A: We recently spoke with the local Land Resource and Trade Center and estimate the property's value at $60 million to $80 million. When we invested in the land in Inner Mongolia, we received a favorable tax benefit with the first 8-year full exemption and the second 8-year half exemption. Lotus received tax breaks of $5 million in 2009 and $6 million in 2010. As a return, we are obliged to make a further investment in this property. We plan to use approximately 10% of the land, or approximately 100 square meters, to build a pharmaceutical distribution center serving primarily the five northwestern provinces in China. We are negotiating with several potential collaborators to share the cost of building the distribution center and receive rights to develop the other 90% of the land as payment. By doing this, we can preserve the tax breaks. Alternately, we could sell 90% of the property outright and use the sales proceeds to pay for the distribution center. No matter which transaction we decide to pursue, we intend to coordinate with related parties to ensure that we will continue to enjoy the tax break with the transaction.

Q: You wrote off the $6.2 million used to improve the Mongolian property this quarter. Why not sell and take the gross profit of approximately $20 million to $40 million [not including the tax benefit for 2009-10]?

A: The value of building a distribution center in Mongolia is clear: to serve as a base for our continued sales growth into the five northwestern provinces, which remain underdeveloped and will be a major contributor to China's growth in the coming years. In addition, as mentioned above, the tax advantages amounted to $11 million in the last two years and will extend to 2024. Furthermore, the land purchase came with an obligation to develop this site. To put all this together, we believe it makes sense to implement our plan instead of pocketing the short-term gain.

Q:  With China's central bank raising interest rates for the sixth time this year, coupled with increased reserve rate requirements to cool both inflation and the real estate market, are you concerned that the value of the property will fall and potentially reduce your profit on the Mongolian land, or that Lotus may be unable to sell the property?

A: Let me be clear: we did not obtain the land in Mongolia for a land trade. Both projects, Beijing and Inner Mongolia, were undertaken after considerable thought. We are in discussions with several potential collaborators for the Inner Mongolia land and will provide cost information and start and completion date estimates once we complete the process.

Q: Companies listed in the U.S. referred to as "China reverse mergers" have been under considerable pressure lately. A number of small-cap Chinese companies have had their stock halted from trading due to concerns about the alleged overstatement of their revenue and earnings. How are you different from these companies? 

A: We are comfortable with our financial reporting. In preparation to uplist to a senior exchange, we have strengthened our required internal control measures, including the audit committee and independent directors. Additionally, we have a good working relationship with our auditing firm, Friedman LLP. Friedman has been operating for over 85 years and has offices in both the U.S. and Beijing, so its auditing and accounting staff is thoroughly familiar with U.S. and Chinese regulatory requirements.

Q: One of the drugs being developed by Lotus, R-bambuterol, is currently in clinical trials. You mentioned that controlled-release gliclazide and isosorbide mononitrate are waiting for SFDA approval to start clinical trials, yet will only require one phase of clinical trials. Please give us some sense of the R&D costs associated with bringing three drugs to market during the 2013-2014 period.

A: Our lead candidate in the pipeline, R-bambuterol for asthma, is currently in Phase I trials, and we expect Phase I data this quarter. R-bambuterol is a Class 1 new drug and will therefore need to go through Phase I to III clinical trials before we can submit the application for approval to the SFDA. We estimate the total clinical trial cost will be approximately RMB 50 million, or roughly $8 million. Controlled-release gliclazide for diabetes and isosorbide mononitrate for cardiovascular indications are currently awaiting approval to start clinical trials, but the approval will come after our manufacturing facility becomes functional. These two candidates will only need to run one trial each for regulatory approval, as they are branded generics. We estimate the clinical trial cost for those two candidates will be RMB 10 million, or roughly $1.5 million.

Q: With clinical trials for R-bambuterol estimated to cost $8 million, two other drugs in development, and two building projects underway in Beijing and Mongolia, is there any concern that Lotus has taken on too much at one time? Also, please tell us about financial provisions taken to provide for unexpected cost overruns with clinical trials or construction in Beijing and Mongolia, or both.

A: Those projects are part of our growth plan, and frankly we do not have the resources to take them all on at the same time. Our plan is to work on them one or two at a time, so the expense will be spread out over the years. This year, our focus is on completing the construction of our Beijing facility. After that, we will focus our resources on building our pipeline. As for the project in Inner Mongolia, we plan to fund it through the sale of our land assets there.

Q: With the addition of an OTC sales team as well as a new sales manager, Jinzhong Han, and the Beijing and Mongolian facilities coming online soon, are there plans to increase sales distribution of foreign drugs, acting as a broker? If so, are there plans to further leverage your sales force to sell third-party medical devices?

A: After we complete the construction in Beijing, we will focus on two things: first, to establish and improve our sales platform to Beijing hospitals. With a new and modern storage warehouse, we will be well-positioned for this large market, but it will still take time to build relationships and grow our reputation in the new field. Second, we will continue to strengthen our pharmaceutical offerings, focusing on drugs for which we can obtain patent protection or exclusive rights. We believe as the industry evolves and matures, we will have to build our proprietary drug pipeline to stay competitive. On this front, we will actively seek new opportunities, including collaboration with foreign companies trying to expand in China and local companies with limited distribution, as well as in-licensing promising candidates or products.

Q. Please discuss your international sales plans for self-branded drugs.

A: That is in our growth plan as well, although it is more complicated as those drugs will need regulatory approval from equivalent foreign agencies. Our new manufacturing facility in the new corporate building is designed to comply with U.S. and European regulatory standards, so we will have the capability to manufacture and sell drugs internationally if we overcome the regulatory hurdle.

Q: When does Lotus expect to be uplisted to a senior exchange?

A: We are still working with a senior exchange for an uplisting. However, probably due to the recent shakeout in the Chinese small-cap sector, the senior exchange is taking more time to scrutinize applications these days. We have not yet received guidance from the senior exchange on the timeline.

Q: Is there any plan to switch to a Big 4 or Big 6 accounting firm in the near future?

A: We have no immediate plan to upgrade our auditor. As a small company with limited resources, we believe our current auditor, Friedman, meets our needs at this time. We understand the potential positive impact of an upgrade on investor confidence, but on the other hand, an upgrade will not change our fundamentals. If we continue to grow and someday our current auditor no longer meets our needs, we will make a change.

Here we go again:

We estimate that our working capital is not sufficient to fund our current operations for the next 12 months. Lotus East has historically funded its capital expenditures from its working capital. As of December 31, 2010, Lotus East has contractual commitments of approximately $52 million related to a Technology Transfer Agreement and the construction of the new facility in Inner Mongolia and a New Drug Patent Transfer Agreement and a research and development agreement. While it intends to fund the costs with its existing working capital associated with the Technology Transfer Agreement and the New Drug Patent Transfer Agreement and the research 39 and development agreement and a portion of the construction of the new facility in Inner Mongolia, it is dependent upon the continued growth of its operations and prompt payment of outstanding accounts receivables by its customers to ensure that it has sufficient cash for these commitments. Our ability to fully fund the costs associated with the new facility in Inner Mongolia is materially dependent upon our ability to obtain secured bank financing and/or government grants and/or other third party finance. 

The construction of the project began in August 2008 and the Company anticipates that it will take five years to complete the construction of the project.

Included in the total cost of the project is land cost of approximately $33.4 million (RMB 223.66 million) which was paid in full to Cha You government. Other components of the project include construction costs of approximately $17.9 million (RMB 120 million), costs associated with the various production lines estimated at approximately $34.3 million (RMB 230 million) and working capital of approximately $7.5 million (RMB 50 million).

There is no guarantee that Lotus East can obtain these financings on favorable terms at the right time. Although the Chinese government has announced an economic stimulation plan, there is no guarantee that we will be awarded the government grants successfully. While Lotus East’s management believes the Company will be successful in securing the necessary funding through its increasing revenue, faster collections on receivables, and continuing discussions with various commercial banks, there are no assurances that the funding will be available in the amounts or at the time required to meet Lotus East’s commitments. In the event that Lotus East is not successful in obtaining the funds it needs for the Technology Transfer Agreement and the New Drug Patent Transfer Agreement, it is possible that it could default under the terms of the two agreements and forfeit any funds paid to date. If Lotus East fails to obtain all of the funding necessary to complete the construction of the new facility in Inner Mongolia, which is estimated to be approximately $48.3 million in the next few years, it could get back approximately $34 million for the payments on the land use right, which is refundable if the Chinese local government does not grant it land use right certificate.

GeoTeam® Note:

Why is LTUS still even discussing the construction on the Inner Mongolia Project when ,in December 2010, it clearly said it was ditching the project with plans to sell its Inner Mongolia land interest?

Lotus' Chairman and CEO, Mr. Zhongyi Liu, stated, "We have decided not to move forward with the construction of our planned facility in Inner Mongolia in order to focus our efforts and resources on expanding our core business in Beijing. We believe that selling or transferring this property will be a more effective use of our capital."

Well, now the plans have changed again:

The Company announced its plan to make the best use of its land asset in Inner Mongolia. Specifically, management plans to build a 100-mu pharmaceutical distribution center in Inner Mongolia, which is expected to begin construction in 2011. For the remaining approximately 900 mu of land, the Company plans to make the best use of the asset, including co-developing or selling it to a third party.

Why no update on the potential suitors for the Inner Mongolia land (the land the LTUS still has does not have the land use rights certificate for)?

Why no disclosure, as far as we can tell, of the its relationship with the "vegetable company," including payments it made to this company for land use rights (no certificate has not been granted)? The 10K still comments that LTUS paid funds to the Cha You government.

We are very unimpressed that the auditors did not require more complete disclosures.  (But we will continue to read the 10k to determine if we missed some disclosures)

Fiscal Year 2010 Financial Highlights

• Revenues for the 2010 fiscal year increased by 28.7% year-over-year to $72.7 million, up from $56.5 million in 2009.
  • Wholesale revenue was $51.4 million, or 70.7% of total revenues.
  • Retail revenues were $21.3 million, or 29.3% of total revenues
    
• Gross profit for the year was $39.8 million, an increase of 26.6% compared to $31.4 million in 2009. Gross margin was 54.7% and 55.6% in 2010 and 2009, respectively.

• Adjusted* net income increased 16.7% to $21.2 million, compared to $18.2 million in 2009

• GAAP net income decreased 12.2% year-over-year to $14.4 million, compared to $16.4 million in the previous year

• Earnings per diluted share were $0.54 for the year, compared with diluted EPS of $0.66 achieved in the previous year

Fourth Quarter Financial Highlights

• Revenues for the three months ended December 31, 2010 increased by 21.9% year-over-year to $20.1 million, up from $16.5 million in the fourth quarter of 2009
  • Wholesale revenues were $13.9 million, or 69.0% of total revenues
  • Retail revenues were $6.2 million, or 31.0% of total revenues
• Gross profit for the fourth quarter was $10.5 million, an increase of 25.2% compared to $8.4 million in 2009. Gross margin was 52.1% and 50.8% for the three months ended December 31, 2010 and 2009, respectively.
  
• Adjusted* net income decreased 26.6% to $3.2 million, compared to $4.4 million in 2009
  
• GAAP net loss for the three months ended December 31, 2010 was $3.5 million.
  
• Loss per diluted share was $0.13 for the quarter, compared with diluted EPS of $0.11 achieved in the same period a year ago

Mr. Zhongyi Liu, Chairman and CEO of Lotus, stated, "We continued to expand our business in 2010 and saw especially strong growth of 83% in our retail sales segment. We entered the market for direct sales to over-the-counter drugstores in Beijing in 2010 and have already experienced tremendous success, serving more than 1,000 OTC drugstores in addition to our own 10 stores. We expect this channel to continue being a major sales growth driver in the coming year. Construction of our Beijing facility continues to progress, and we anticipate significant efficiency improvements and additional capacity for growth once we move into the new building." Mr. Liu continued, "We plan to focus our capital expenditures in the foreseeable future on the completion of our Beijing facility and our core business in Beijing; as a result, we recognized a one-time, non-cash impairment loss for construction expenditures on our property in Inner Mongolia in 2010. Lotus has a well-established nationwide sales and distribution network, strong product development capabilities, and access to capital. Due to the trends of consolidation and increasing regulatory oversight in China's pharmaceuticals industry, we believe these characteristics position Lotus to emerge as an industry leader."

Business Outlook for 2011

Management anticipates that 2011 will be a transitional year for Lotus Pharmaceuticals, as the Company will be completing and moving into its new headquarters and shifting its focus to the wholesale business in Beijing and the surrounding areas. After the completion of the headquarters, the Company expects strong growth driven by the wholesale business in Beijing and surrounding areas starting in 2012.

The Company expects total revenue and profitability to be flat or slightly down in fiscal 2011 compared to 2010. Specifically, management anticipates continued growth in Lotus' retail business in 2011, driven primarily by strong growth in the OTC sales division. However, revenue from the wholesale business is expected to decrease in 2011, as the Company will lose revenue from one of its self-branded products, Muxin (an eye drop), due to the termination of its outsourcing agreement and inability to stock the product. In addition, the Company will undertake a strategic shift as management prepares to enter the wholesale market in Beijing.

BEIJING, Feb. 4, 2011 /PRNewswire-Asia-FirstCall/ – Lotus Pharmaceuticals, Inc., today announced that it will add two additional stories to its new headquarters building in Chaoyang District,Beijing, which is currently under construction and is scheduled to be completed in the second quarter of 2011.

The facility was originally designed to have nine floors with a gross area of approximately 25,000 sq. meters (269,000 sq. feet) and house the Company's GMP-certified manufacturing facility, 10,000 sq. meters (108,000 sq. feet) of storage space, a research and development center, and Lotus' main administrative offices. The two new floors will contain between 90 and 120 apartments for employees and will add approximately 9,000 sq. meters (97,000 sq. feet) of space to the building, bringing the total gross area to 34,000 sq. meters (366,000 sq. feet).

We believe that our working capital is sufficient to fund our current operations for the next 12 months. Lotus East has historically funded its capital expenditures from its working capital. As of September 30, 2010, Lotus East has contractual commitments of approximately $55.0 million related to a Technology Transfer Agreement and the construction of the new manufacturing facility in Inner Mongolia and a New Drug Patent Transfer Agreement. While it intends to fund the costs with its existing working capital associated with the Technology Transfer Agreement and the New Drug Patent Transfer Agreement and a portion of the construction of the new manufacturing facility in Inner Mongolia, it is dependent upon the continued growth of its operations and prompt payment of outstanding accounts receivables by its customers to ensure that it has sufficient cash for these commitments. Our ability to fully fund the costs associated with the new manufacturing facility in Inner Mongolia is materially dependent upon our ability to obtain secured bank financing and/or government grants and/or other third party finance.

There is no guarantee that Lotus East can obtain these financings on favorable terms at the right time. Although the Chinese government has announced an economic stimulation plan, there is no guarantee that we will be awarded the government grants successfully. While Lotus East’s management believes the Company will be successful in securing the necessary funding through its increasing revenue, faster collections on receivables, and continuing discussions with various commercial banks, there are no assurances that the funding will be available in the amounts or at the time required to meet Lotus East’s commitments. In the event that Lotus East is not successful in obtaining the funds it needs for the Technology Transfer Agreement and the New Drug Patent Transfer Agreement, it is possible that it could default under the terms of the two agreements and forfeit any funds paid to date. If Lotus East fails to obtain all of the funding necessary to complete the construction of the new facility in Inner Mongolia, which is estimated to be approximately $52.9 million in the next five years, it could get back approximately $40.6 million spent to date, including the approximately $33.4 million for the payments on the land use rights, which is refundable if the Chinese local government would not grant it land use rights certificate.

The following tables summarize our contractual obligations as of September 30, 2010, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

		Payments due by period
		Total			Less than 1 year			1-3 Years			3-5 Years			5+ Years
Related parties indebtedness		$	6,964,630		$	1,723,155		$	67,183		$	—		$	5,174,292
Interest payment on notes payable – related parties		$	2,070,440		$	—		$	—		$	—		$	2,070,440
Technology purchase obligations		$	1,642,256		$	821,128		$	821,128		$	—		$	—
New drug patent purchase obligations		$	447,888		$	447,888		$	—		$	—		$	—
Construction obligations in Inner Mongolia		$	52,874,341		$	322,274		$	10,749,168		$	41,802,899		$	—
Obligations from research and development agreement		$	118,242		$	118,242		$	—		$	—		$	—
Total contractual obligations		$	64,117,797		$	3,432,687		$	11,637,479		$	41,802,899		$	7,244,732

• Total net revenues for the three months ended September 30, 2010 were $18,504,934 as compared to total net revenues of $14,512,704 for the three months ended September 30, 2009, an increase of $3,992,230 or 27.5%.

• Net income of $6,699,926 for the three months ended September 30, 2010 as compared to net income of $5,390,797 for the three months ended September 30, 2009.

• Basic earnings per common share of $0.13 and $0.12, and diluted earnings per common share of $0.12 and $0.11, for the three months ended September 30, 2010 and 2009, respectively.

Chairman and Chief Executive Officer Mr. Zhongyi Liu stated, "Our strong third-quarter results reflect the effectiveness of our sales team, the breadth of our product offerings, and the continued growth of the Chinese pharmaceutical market. The Chinese government's $125 billion healthcare reform plan has stimulated strong domestic demand for pharmaceuticals, and we are very optimistic about the growth opportunities we see in this market. We are particularly excited about beginning Phase 1 clinical trials for our leading drug candidate, R-Bambuterol, in the coming months. We expect this medication, upon its approval, to contribute significantly to our revenues."

Mr. Liu added, "We will continue to focus on developing our nationwide sales and distribution network, boosting our direct sales to hospitals, and advancing our internal drug development pipeline.

We are on track to reach our financial guidance of $73.6 million in revenues and net income of $21.4 million for 2010. We expect our retail revenue from our own ten drug stores will remain in its current level with small growth and our retail revenue from our direct sales to other drug stores in Beijing will continue to increase in the future.  As we prepare to apply for uplisting to a senior exchange, our outlook remains extremely bright

Lotus Pharmaceuticals, Inc.  announced today that the Company's Board of Directors has accepted the resignation of Dr. Ian Ashley from the Board.

Chairman and CEO Mr. Zhongyi Liu stated, "Dr. Ashley has served as a valued member of the Board for four years, and we sincerely appreciate his service. We are preparing to apply for a listing on a national securities exchange and are adding experienced directors who will be actively involved in guiding the Company."

The Company's management also reaffirms its previously issued guidance of $73.6 million in revenues and $21.4 million in net income for fiscal 2010. Management is confident in the Company's performance for the rest of the year and looks forward to updating investors on Lotus' third quarter results in the 10-Q filing and earnings release, which are scheduled to be released on or before Monday, November 15.

On October 15, 2010, Liu Zhongyi, the Chairman and Chief Executive Officer of Lotus Pharmaceuticals, Inc.  received an email from Ian Ashley  pursuant to which Dr. Ashley resigned as a member of the Board, effective immediately.

Dr. Ashley delivered his Resignation Notice following his receipt of an email from Dr. Zhongyi pursuant to which Dr. Zhongyi, following consultation with the Board and shareholders, suggested that Dr. Ashley resign from the Board. At the time of his resignation, Dr. Ashley did not serve on any committee of the Board of Directors. In the Resignation Notice, Dr.

Ashley claims, among other things, that the transparency, communication, and operations of the Company are in question. The Company strongly disagrees with the claims made by Dr. Ashley in the Resignation Notice.

I am curious of about the following:

 

1. You have a small account payable position on your balance sheet. It has also decreased since Dec 2009. From your experience, does this make sense when a company is embarking on a major expansion project? 

 

2. It seems like a good deal of your operating cash flow and a reduction in your cash balance have paid for construction. This does not leave much room for marketing to drive new business. I am wondering if you will need to raise capital?

 

Most transactions related to the construction were settled in cash, so the portion ended up in payable is relatively small. In addition, AP is mostly for business trade. For expenses related to the construction, they go into other payables.

 

The company is generating enough profit to cover our operational needs, including the major capital expenditure of the construction. So unless there are some urgent needs for additional funds, for example, emerging good business opportunity such as a perfect M&A target etc, we don't anticipate a need to raise capital. 

Effective September 3, 2010, Lotus Pharmaceuticals, Inc.  appointed Hon Yung Kwon as its Chief Financial Officer. Mr. Yan Zeng, the prior Chief Financial Officer, resigned as of September 2, 2010.

Second Quarter 2010 Highlights and Developments:

• Diluted EPS of $0.12 vs. $0.10 for Q2 2009.
• Net income increased 32% from Q2 2009 to $6.3 million.
• Gross margin of 52.3% compared to 57.9% in Q2 of 2009

"During the first half of 2010, the value-added output of China's pharmaceutical industry increased 14.9% over the same period in 2009. China's investments in (i) providing medical insurance to over 90% of its population and (ii) improving quality of rural care contribute to the long-term growth opportunities over the course of the next ten years," commented Dr. Zhongyi Liu, Chairman and CEO of Lotus. "We implement our business strategies to align with China's medical reforms. We are working on upgrading our facilities. We also continue to deepen our customer relationships, and structure our high quality prescription drug offerings and services according to market opportunities."

"On one hand, we are now offering 20 different types of prescription drugs through our nationwide wholesales channels which are complimented by our over 60 performing independent distributors. On the other hand, in the direct sales to other drug stores in Beijing, we have had great success mainly because we are driven by the market demand in the Beijing area, and by our OTC sales team's excellent performance."

Fiscal Year 2010 Guidance

Lotus both reiterates its prior guidance for the fiscal year 2010, and also provides exact guidance for the fiscal year 2010 due to its growth in the first half of 2010. Lotus expects:

• Net revenues to increase from approximately $57.8 million in 2009 to $73.6 million in 2010.
• Net income to rise from $16.4 million in 2009 to $21.4 million in 2010.

Lotus Pharmaceuticals management takes a step that investors may view as a sign of a commitment to enhance shareholder value:

Announced today that it has entered into a termination agreement with Yorkville Global Master SPV Ltd. ("Yorkville") whereby the parties agreed to mutually terminate the Standby Equity Distribution Agreement, dated March 3, 2010, between the company and Yorkville (the "SEDA") with no further obligations.

CEO, Dr. Zhongyi Liu, commented, "We appreciate the capital commitment from Yorkville, but we won't utilize the SEDA. The reason is that currently we have sufficient working capital and growth capital to carry out the construction and outfitting of our new building complex in Beijing, which is expected to open in 2010. We will consider alternative funding options and structures only when our stock valuation improves, in order to protect against stock dilution."

Added to the GeoSpecial list  on September 30, 2009 @ $0.84

    Catalyst: Clarified its liquidity rumors. Had good EPS quarters, despite revenue declines. Was selling under its book value per share.

    Peak performance: Reached a high of of $2.00 on January 21, 2010.

    Current road block: dilution will hinder EPS growth up until late 2010 or early 2011, Still has some balance sheet issues. Given the strong first quarter performance where  2010 net income grew 38%, the full year net income guidance of 20% to 30%  could imply some inconsistent or lack luster growth quarters.

    Remains coded as a GeoSpcial for long-term investors as shares still trade below book value share and company finally delivered revenue growth.  Short-term investors will likely need to observe more evidence of further revenue gains and EPS growth that may occur in 2011.

Please note: On July 6, 2010, the GeoTeam® removed all Chinese stocks that were on GeoBargains and GeoSpecial lists to respective Radar lists as we complete our "quality assessment."

***Very Important GeoTeam® note. We have yet to verify if the Chinese filings for ChinaHybrid stocks we monitor match respective SEC filings. We are in the process of completing this task. Although we are not totally convinced that SAIC filings are an accurate represenation of financial statements the issue is impacting stock prices. Conservative investors may want to limit exposure or buy put options on stocks, that have this availability, as insurance against long positions, until we publish our findings. Odds are we will identify some promising companies that will fail this litmus test.

see relevant articles

For the three months ended March 31, 2010, wholesale revenues increased $2,557,681 or approximately 28.6%. In the first quarter of fiscal 2010, we added five new prescription drugs to our products delivered through our national wholesale channels. The five new prescription drugs covered by the National Health Insurance Program have proven their market acceptance. One of the five new prescription drugs is Omeprazole Enteric-coated Capsule which is for the treatment of duodenal ulcer. The other four drugs are traditional Chinese medicine in capsules, tablets and ointment for the treatment of chronic prostate infection, psoriasis, influenza and meridian pain, respectively. As a result, our wholesale revenues for the three months ended March 31, 2010 increased. We anticipate that our wholesale revenues will continue to increase in the rest of 2010 since the newly added five prescription drugs are expected to increase our market share.

For the three months ended March 31, 2010, retail revenues increased by $1,115,204 or 52.2%. At the end of fiscal 2009, we appointed a general manager for our Over-the-Counter Drug Division that manages our own ten drug stores' sales, and the newly created direct sales to other Over-the-Counter drug stores in Beijing. The general manager has strong management skills in medical sales and marketing and logistics and is an expert in delivery of services to drug stores in Beijing. As of the end of last fiscal year, our Over-the-Counter Drug Division successfully entered into supply contracts with more than five hundred drug stores in Beijing. All contracts have a term from one to two years and are renewable upon mutual agreement. In the first quarter of fiscal 2010, we served more than 700 other Over-the-Counter drug stores in Beijing. Due to the growth and success of our OTC Drug Division's sales force, our retail revenues for the first quarter of fiscal 2010 substantially increased. We expect our retail revenue from our own ten drug stores will remain in its current level with small growth and our retail revenue from our direct sales to other drug stores in Beijing will continue to increase in the rest of 2010.

GeoSpecial LTUS surprised us today with a impressive top line performance for its 2010 first quarter...

December Qtr.	1st Quarter 2010	1st Quarter 2009	Period Change
GAAP Revenue	$11.50 million	$8.94 million	28.7%
GAAP Net Income	$4.93 million	$3.57 million	38.1%
GAAP EPS	$0.09	$0.07	28.6%
Tax Rate	2.1%	2.1%	0.0%
Fully Tax-Adjusted Geo Supplied Non-GAAP EPS a	$0.08	$0.06	33.4%
Fully Diluted Shares	53,708,923	49,254,950	19.6%

The company also issued guidance:

"We have delayed the buildup in Inner Mongolia to focus on our efforts in Beijing. We use our internally generated cash to fund the construction of the Beijing new building complex so that our dispersed operating units can be consolidated into one single location. We are positioning to capture the fast growing demand in the pharmaceutical sector by establishing the foundations of a modern facility, a pipeline of innovative drugs under patent protection and an excellent sales network."

"Looking forward for the balance of 2010, the Company continues to expect to grow its revenues and net income by 20-30% compared to its performance in 2009. The growth drivers are growth in direct sales to OTC drug stores and hospitals, increased medical equipment sales and increased prescription drug sales."

This would imply...

December Year	Full Year 2010 Guidance	Full Year 2009 Reported	Period Change
GAAP Revenue	$69.36 to 75.14 million	$57.8 million	20.0% to 30.0%
GAAP net Income	$19.68 to $21.36 million	$16.43 million	20.0% to 30.0%
GAAP EPS	$0.37 to $0.40 b	$0.33	12.2% to 21.3%
Tax Rate	minimal	2.0%	n/a
Geo-Calculated Fully Tax-Adjusted Non-GAAP Net Income a	Not enough information provided by company	$15.57 million	n/a
Geo-Calculated Fully Tax-Adjusted Non-GAAP EPS a	Not enough information provided by company	$0.31	n/a
Fully Diluted Shares	At Least 53,708,923	50,046,381	7.4%

a Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . For a more complete explanation of the company's definition of Non-GAAP please refer to its financial press releases. The GeoTeam® Non-GAAP figures may, from time to time, differ from company supplied figures. The GeoTeam® Non-GAAP figures apply a 25% and 36% tax rate for Chinese and United States companies respectively.

^b LTUS did not provide EPS guidance. The GeoTeam® calculated an implied EPS figure using the current outstanding share count and net income guidance.

Taking a look at the balance sheet reveals issues:

• Current ratio is less than 1.
• Negative, although improved, working capital position.

LTUS ultimately need to resolve these issues in order for its:

• P/E to expand.
• Price to exceed its Book Value per share of  $1.37.

We only view LTUS as low tier GeoSpecial due to:

• The unknown regarding how dilution from a recent financing will play out.
• Since the first quarter 2010 net income guidance grew 38% the full year net income guidance could imply some inconsistent or lack luster growth quarters.
• Weak balance sheet. 

The trailing non-GAAP fully taxed P/E currently stands at 3.46 and could appeal to risk tolerant value investors.

On April 1, 2010 Lotus Pharmaceuticals reported full year 2009 results 

December Yr. End	Full Year 2009	Full Year 2008	Period Change
GAAP Revenue	$57.8 million	$73.8 million	-21.7%
GAAP EPS	$0.33	$0.27	22.3%
GeoCalculated Non-GAAP EPS a	$0.41	$0.31	$32.3%
Tax Rate	2.0%	0.0%	n/a
Fully Tax-Adjusted Non-GAAP EPS a	$0.31	$0.20	55.0%
Fully Diluted Shares	50,046,381	48,054,880	4.2%

---

December Qtr.	4th Quarter 2009	4th Quarter 2008	Period Change
GAAP Revenue	$17.9 million	$26.0 million	-45.3%
GAAP EPS	$0.05	$0.13	-61.6%
GeoCalculated Non-GAAP EPS a	$0.09	$0.15	-40.0%
Tax Rate	0.07%	0.0%	n/a
Fully Tax-Adjusted Geo Supplied Non-GAAP EPS a	$0.08	$0.11	-27.3%
Fully Diluted Shares	52,818,878	44,174,435	19.6%

^a Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . For a more complete explanation of the company's definition of Non-GAAP please refer to its financial press releases. The GeoTeam® Non-GAAP figures may, from time to time, differ from company supplied figures.The GeoTeam® Non-GAAP figures apply a 25% and 36% tax rate for Chinese and United States companies respectively.

As we can see, although adjusted year end results were strong, fourth quarter results were somewhat dismal, marking the first weak quarter in some time.

Guidance isn't spectacular:

"I'm pleased with our strong results for 2009," said Dr. Zhong Yi Liu, chairman and chief executive officer. "China's pharmaceutical sector presents us with tremendous growth opportunities. We have maintained strong relationships with our clients, leading research and development institutes and leading drug makers. At such time as we begin to use our new Beijing building complex, we hope to increase our sales and achieve both top and bottom line growth."

"Based on information available to management at this time, Lotus anticipates its EBIT of fiscal year 2010 to grow by 15-20%, because its direct sales of drugs to third-party pharmacies in Beijing are expected to generate additional earnings."

So...EPS growth will likely be no more than 20%, especially as they just entered into an equity line of credit .  We are not near as excited as we once were on the LTUS story.  But, for now,  we will continue to code LTUS as a GeoSpecial, as the it still has a favorable risk/reward profile:

• P/E ratio= 3.8
• Peg ratio= 0.19 

Remember that GeoSpecials often deal with companies which have depressed stock prices due to issues such as financial liquidity problems , lack of exposure or general survival. When these issues become rectified the stock price inches up to book, sometimes even before profitability is attained.   Ultimately, achieving a multiple of book depends on EPS growth. In 2009 we saw a number of similar situations where companies performed well, but many of them will be tested in 2010 on the EPS front.

The next few quarters will be key for LTUS as it begins to implement an invigorated growth plan. LTUS is partly hurt by the absence of adjusted EPS numbers in its press releases. There were actually as much as seven Non-GAAP adjustments we made in our calculations.

Seeking Clarity with Lotus Pharmaceuticals

On August 27, 2009, we published an update on Lotus Pharmaceuticals (OTCBB:LTUS), a China-based manufacturer and distributor of pharmaceutical products. The update echoed similar thoughts shared in prior notes about liquidity constraints. We derived our conclusions from verbiage contained in SEC filings.  

After speaking with Lotus management, we believe the stock offers an attractive risk/reward opportunity and is in part the reason why we identified the stock as a special situation play on September 30, 2009 at $0.84.

At first glance, we identified four issues that were cause for concern:

Issue 1 - Ownership Structure

The ownership structure is addressed in the Company’s most recent filings, after which the text indicates a past due payment of several million dollars accompanied by the following verbiage:

Lotus East is comprised of two pharmaceutical companies in the PRC, both of which have contractual obligations to Lotus Pharmaceuticals (USA). Lotus provides guidance and instructions on Lotus East's daily operations, financial management and employment issues. As a result of these contractual arrangements, which enable Lotus International to control Lotus East, Lotus International is considered the primary beneficiary of Lotus East.

The filing goes on to infer that this ownership structure obligates Lotus East to pay Lotus (USA) management fees.

Question Posed to LTUS Management

Please explain in simple terms what the ownership structure really is and why it had to be structured in such a manner?

Answer

The Company’s structure is commonly used to allow foreign investors to invest in operating businesses in China.   Our holding company Lotus Pharmaceuticals and its subsidiary in the US have no operations. All of our operations are conducted through our two controlled entities (called “Lotus East”) in China. A set of contractual agreements provide the holding company with effective voting and management control over Lotus East in Beijing.  In fact, the management of the holding entity is the same as the management in Lotus East. The board of Lotus Pharmaceuticals has decided that incomes generated by the operating entities are retained within China for operating purposes.

The Company spoke with us about these and other statements made in the filings, explaining that some commentary was made in error and that there is no money owed to Lotus (USA). The ownership structure does not contractually obligate Lotus East to pay Lotus (USA).

Issue 2 – Lotus Pharmaceutical’s Current Ratio

Question Posed to LTUS Management

In simple terms, please explain why LTUS current ratio in less than one?

Answer

Current ratio is less than on, because the Company’s capital expenditures are being spent on preparing a new office in Beijing to be built, completing the foundation of the Inner Mongolia facility.

Issue 3 - Accounts Receivable Issue

Question

In simple terms, please explain your AR situation?

Answer

Days outstanding in accounts receivable for the company’s hospital customers are around 30 days. Its distributor customers pay on a cash basis.

Issue 4 - Pricing Pressure

Lotus has been experiencing pricing pressure on its products, resulting in lower sales for the first six months of 2009. The Company addressed this concern to us by briefly outlining its 2010 two pronged growth strategy.

First, Lotus plans on increasing its product offerings. The Company currently sells its products through its own retail locations as well as through third party distribution channels. Lotus plans to offer an additional 5 drugs through these channels.

Second, Lotus intends to increase its third party distribution network.  The Company currently has about 200 third party distributors and sees additional 15 to 20 in 2010. The company was not able to provide an “average revenue per distributor” figure.

Lotus has expectations that its increased product offerings and distribution channels will more than offset a soft pricing environment. The Company is also comfortable with maintaining net-margins of at least 30%. We were not able to pin down a concrete revenue and EPS growth scenario. However, based purely on new product offerings, it seems safe to assume that the company should be able to grow sales by at least 20% in 2010.  This year, we feel that Lotus sales will achieve $50 to $60 million in revenue. Furthermore, the Company is on track to hit its make good net income target of $16.8 million.

It is important to note that apart from this year, Lotus has been able to achieve over 25% quarterly revenue growth in 2007 & 2008, missing this mark only once. Although the Company has maintained profitability in every quarter since 2006 and had consistently posted year over year growth, we would like to see a little more consistency in quarterly EPS growth.

Finally, we asked the company about its need to raise equity capital, an event that could possibly lead to dilution. Management indicated that it is not a consideration at the stock’s current price.   However, the Company is mindful of shareholder value if and when it decides what capital raising methods to employ.

Ongoing clarifications of the Company’s improved liquidity standings would temper our fear of the Company’s immediate need to raise capital at unfavorable prices and terms.  It is the GeoTeam’s opinion that the confusing verbiage in SEC filing has been a major factor in the stock was selling below its fully diluted book value per share of $0.98 ($1.23 non-diluted) with a PE of around 2. Getting substantially above book will depend on the future EPS growth, keeping in mind that the company has 5 million shares of potentially exercisable warrants. 

If the company continues to shed light on its liquidity standings and successfully implements its growth strategy, the stock may reflect a better valuation.

We are impressed that the Company has been able to dramatically increase profitability in a declining sales environment. Investors have been taking notice of the stock since our earlier article that identified stocks trading below book value. As of yesterday’s close, LTUS is actually up 123% since July 1. We have urged the company to immediately clarify its story and retain qualified investor relations representation.

New article available for LTUS.

As participants in the equity markets for over twenty year, we are constantly seeking new profit opportunities to exploit. We came upon the US listed China market in 2005. Our first investments in this venue were American Oriental Bioengineering (NYSE:AOB) and China Security & Surveillance (NYSE:CSR) when they were both on the OTCBB. Investments in this arena have continued to fuel above average returns for our portfolio, a large reason why we are always seeking new ways to identify new opportunities in the U.S. listed Chinese stock space.

We have never been a fan of investing in penny stocks, but the recent market turmoil combined with the nature of some of the China reverse merger transactions resulted in profitable Chinese firms selling for pennies, many times below book value. While we don't view book value as the most important criterion when valuing stocks, we do believe that in certain cases it can be a useful tool, especially when valuing companies growing their EPS. We have found that the Chinese market is full of this circumstance.

Obviously, you must ascertain why a stock is selling below book. Three major reasons why this may be the case in the China sector revolve around capital structure, liquidity and lack of exposure. The key to capitalizing on the investment opportunity is to identify a catalyst for change (see table below).

We have found that companies that can address these issues will eventually see their stock prices gravitate to their book values. Here are some examples:

Symbol	Date and Price Mentioned on GeoInvesting	Book Value per Share	Catalyst for Change	High Price Since Initial Mention on GeoInvesting
China Carbon Graphite (OTC BB:CHGI)	7/1/09 @ $0.75/shr	$2.61	Improved capital structure	$1.98
Orient Paper Inc (OTC BB:OPAI)	5/22/09 @ $0.42/shr	$0.86	Net working capital turned positive; hires IR firm	$1.50
Home System Group (OTC BB:HSYT)*	7/8/09 @ $1.35	$0.24	Restructures debt payments	$2.96
China Kangtai Cactus Bio (OTC BB:CKGT)	8/14/09 @ $0.95	$1.51	Hires IR Firm	$1.80
China Agritech Inc (NASDAQ:CAGC)	8/17/09 @ $11.00	$11.64	Accounts receivable situation improving	$15.80
Asia Cork Inc (OTC BB:AKRK)	8/20/09 @ $0.27	$0.57	TBA**	$1.01

*Stock was not selling below book, but had potential liquidity issues
**The GeoTeam is currently investigating the Asia Cork story. Investors are urged to do their own due diligence before making conclusions.

The beauty about most of these examples is not only were they selling below book when we found them, but they were growing their earnings and/or have bright futures. It was an ideal situation in that these stocks had value and growth.

That being said, our initial goal with this strategy is to identify stocks for which the market will re-price risk away from a failure assumption (below book).

We have currently identified over 40 stocks selling below book value per share. Here are a few:

China Medicine Corp (OTC BB:CHME)
Lotus Pharmaceuticals (OTC BB:LTUS)
China Growth Development (OTC BB:CGDI)
Huifeng Bio-Pharma Tech (OTC BB:HFGB)
China Green Mat Tech Inc (OTC BB:CAGM)
China Agri-Business Inc (OTC BB:CHBU)
Sino Gas Intl Holdings (OTC BB:SGAS)

Due Diligence with Lotus Pharmaceuticals

Lotus Pharmaceuticals is the only company from the above list on which we have performed extensive due diligence, including an interview with the Company. We noticed Lotus was selling under book despite maintaining profitability. After reading SEC filings we came across many misleading paragraphs insinuating liquidity problems about which you can read more on GeoInvesting. An alert investor who read our notes suggested that our assumptions were incorrect and that we should call the company to get a better understanding of the situation. In a nutshell, it turns out that the verbiage in the filings was incorrect.

The company maintains that it is in good financial health. We are convinced that Lotus understands the importance of clarifying this issue in the near future. We are hopeful that investors will eventually re-price LTUS shares by eliminating liquidity issues from their analyses. The stock has actually seen its shares more than double from mid July levels.

Furthermore, the company is embarking on a 2010 growth strategy that it believes will lead to increased sales through the introduction of new products and increased distribution channels. It is somewhat impressive that the company has been able to grow its earnings in 2009 regardless of lower sales due to pricing pressures. We will be establishing a position in the stock based on a favorable risk/reward ratio.

Due Diligence with Asia Cork

We are currently investigating Asia Cork, a profitable cork-based building materials company we initially mentioned on August 20, 2009. At the time it was selling at $0.27 per share with a book value of $0.57. Although comments in its recent quarterly filing were bullish, the following commentary is somewhat worrisome:

"At the present time we do not have sufficient cash or cash equivalents to repay promissory notes should the investors demand payment upon maturity."

Ideally, a resolution to this issue (the catalyst) may pique investor interest.

As indicated on GeoInvesting, the GeoTeam established a position in AKRK, recognizing that there was a high risk for a dilutive event to rectify the current liquidity situation. There is also a convertible note outstanding which could lead to dilution.

We will soon be publishing a list of companies selling below book. We are not sure how long this market inefficiency will last, so do your homework and find a company's catalyst for change.

Disclosure: Long CGDI, AKRK, CKGT, CAGC, OPAI, CHGI

It appears that investors are beginning to take notice of Lotus Pharmaceuticals (OTCBB:LTUS). The GeoTeam® has been tracking LTUS with some trepidation, due in part to the following issues:

• The Company comments, "We believe that our working capital may not be sufficient to fund our current operations for the next 12 months unless Lotus East pays us the amounts due to us ($23.7 million)." ** (Source: SEC 10K Filing)
• Lotus Pharma current ratio is less than 1, which may signify a difficulty in meeting some short-term obligations.
• Lotus Pharma has been experiencing pricing pressures in its wholesale pharmacy division which are negatively effecting sales. The Company comments, "We expect our wholesale revenue will maintain at its current level with minimal growth in the remaining part of fiscal 2009." Wholesale revenue represents the majority of the Lotus's total sales.

** Lotus East is comprised of two pharmaceutical companies in the PRC, both of which have contractual obligations to Lotus Pharmaceuticals. Lotus provides guidance and instructions on Lotus East's daily operations, financial management and employment issues. As a result of these contractual arrangements, which enable Lotus International to control Lotus East, Lotus International is considered the primary beneficiary of Lotus East.

Still, the stock has some pretty compelling valuation characteristics

• Price: $0.94 (8/26/09)
• Geo Calculated Fully Tax-Adjusted Trailing non-GAAP EPS: $0.24
• Tax-Adjusted P/E: 3.92
• Book Value Per Share: $1.09

A key determinant contributing to the attractiveness of the Lotus Pharma story depends on how the Company ultimately plans to rectify its current liquidity situation. For example, will a solution lead to significant dilution? The GeoTeam® speculates that investors are betting that Lotus Pharma will take steps to solve its liquidity problems.

Although the GeoTeam® will not currently code Lotus Pharmaceuticals as a GeoSpecial, we feel some of our risk tolerant readers will be interested in following this story.

'We are very pleased with our bottom line growth and gross margin for the first six months of 2009. We believe we will have consistent growth for the rest of the year mainly because the majority of drugs we sell to our national network are covered under the National Health Insurance Policy, and our continuous efforts to improve operational efficiency,' said Mr. Liu. 'While we are making progress in expanding our production capacity in Inner Mongolia, we believe we are on track to achieve the earnings guidance we provided previously.'

Source: PR Newswire (August 14, 2009)

We believe that our growth will benefit from the Chinese government's $124.3 billion universal health plan package which we believe will generate increased demand for our products. We also believe we may benefit from the Chinese government's May 13 endorsement of 62.8 billion yuan (or $9.2 billion) by 2010 into stimulating the country's biological technology development in areas including medicine. This is another move that China has made to manage and maintain steady growth amid the global economic downturn.

2009 Earnings Guidance

The Company's guidance is based on the assumption that the Company benefits from the tax preferential policy offered in Inner Mongolia, strong profitability due to cost saving initiatives, and continued growth in demand for the Company's prescription and OTC drugs.

FULL YEAR 2009 Guidance ^a

	Full Year 2009	Full Year 2008	Period Change
GAAP Revenue	$55.4 to $59.7 million	$73.80 million	-25% to -19%
Net Income	$16.6 to $17.9 million	$12.8 million	30% to 40%
GAAP EPS b	$0.35 to $0.37	$0.26	35% to 42%
Fully Diluted Shares b	49,254,950	47,783,076	3.08%

Source: See Release, May 18, 2009

^a Company forecasts reflect the Company's current and preliminary view and are subject to change.

^b The company did not provide EPS guidance. The GeoTeam® used 2009 first quarter diluted outstanding share count of 49,254,950 to derive an implied EPS number.

The above forecast reflects the Company's current and preliminary view and is therefore subject to change. Please refer to the Company's Safe Harbor Statement for the factors that could cause actual results to differ materially from those contained in any forward-looking statement.

After reading through varuios SEC documents the GeoTeam was able to uncover serious liquidity constraints that investors should be aware of when making an investment decision regarding Lotus Pharmaceuticals:

Lotus Pharmaceuticals operates, controls and beneficially owns the pharmaceutical businesses in China of Lotus East under the terms of the Contractual Arrangements.

We have no operations other than the Contractual Arrangements with Lotus East and, accordingly, we are dependent upon the quarterly service fees due us to provide cash to pay our operating expenses.

At December 31, 2008, Lotus East owed us approximately $ 23.7 million for such fees and we do not know when such funds will be paid to us. Our CEO is also the CEO and principal shareholder of Lotus East. Accordingly, we are solely reliant upon his judgment to ensure that the funds advanced to Lotus East are repaid to us. If these funds should not be repaid, or if Lotus East should continue to withhold payment of the quarterly service fee due us under the Contractual Arrangement, it is possible that we will not have sufficient funds to pay our operating expenses in future periods.

Other than our existing cash we presently have no other alternative source of working capital. We believe that our working capital may not be sufficient to fund our current operations for the next 12 months unless Lotus East pays us the amounts due to us. Lotus East has historically funded its capital expenditures from their working capital and has advised us that they believe this capital is sufficient for their current needs.

We believe that it is in our best long term interests to assist Lotus East in their growth plans. Accordingly, it is likely that we will seek to raise working capital not only for our operating expense but to provide capital to Lotus East for these projects as well as providing working capital necessary for its ongoing operations and obligations.

Key financial targets with regards to the reverse merger transaction:

In connection with the Share Exchange Agreement, management entered into a 'make good agreement' and has placed 7.5 million of its shares into an escrow to secure its obligations to meet specific 'Earnings per Share' targets for 2007, 2008 and 2009. If the targets are not achieved, a number of shares derived from a formula will be transferred pro-rata to the investors in the private placement.

2007 Performance threshold - net income 8.5 Million(after one time non-cash charges are added back).

2008 Performance threshold - net income 13.8 Million (after one time non-cash charges are added back).

2009 Performance threshold - net income 17.5 Million (after one time non-cash charges are added back).

The GeoTeam is researching the tax rate assumed in these net income figures. But thus far the company has paid no taxes.

Adjustments to a fully taxed situation (assuming the above targets were non-taxed):

2007 Performance threshold - net income 5.4 Million(after one time non-cash charges are added back).

2008 Performance threshold - net income 8.8 Million (after one time non-cash charges are added back).

2009 Performance threshold - net income 11.2 Million (after one time non-cash charges are added back)

Source SEC (FORM 8-K February 26 2008)

Diluted Outstanding Shares: 47,783,076

Source SEC (FORM 10-QSB March 2008)

2008 Outlook

'We began 2008 on strong footing and expect continued growth throughout the year. In the coming months, we plan to continue advertising and promoting our best selling proprietary products. We recently obtained the patent and exclusive production rights to a promising new asthma treatment, Laevo- Bambutero, and plan to launch the drug in 2012, pending approval from the SFDA. We are excited about this new drug, as it has a large addressable patient population and few side effects,' said Mr. Liu. 'We will continue to seek opportunities to further diversify our product pipeline and improve profitability in the long term. We are also actively pursuing strategic acquisitions to improve our position in the growing pharmaceutical market in China.'


( Source: Press, May 21, 2008 )