Lotus Pharmaceuticals second-quarter net income increases 32% to $6.3 million

Aug 16 2010

Lotus Pharmaceuticals, Inc. (OTC Bulletin Board: LTUS) ("Lotus" or the "Company"), a growing developer, manufacturer and seller of medicine and drugs in the People's Republic of China (the "PRC"), reported today its financial results for the quarter and six months ended June 30, 2010.

-- The Company attended the 63rd PHARMCHINA exhibition to strengthen customer relationships and attract new distributors. Through the event, the Company added three independent distributors in Guizhou, Gansu and Ningxia provinces and signed one year Supply Contracts with these distributors. In addition, the Company signed Over-the-Counter ("OTC") Drug Purchase Agreements with 11 drug manufacturers.

-- The Company received SFDA's approval for the anti-Asthma drug R- Bambuterol(R) Hydrochloride Tablets to commence clinical trials as a Class 1 New Drug under special/fast track review.

-- The board approved the extension of the contract term between Lotus Pharmaceuticals, Inc.'s wholly-owned foreign enterprise and two operating entities in China from 10 years to 30 years.

-- As of today, the Company has completed the pilot scale production of R- Bambuterol with sufficient active pharmaceutical ingredient and tablets for use in clinical trials I & II, an important step towards entering clinical trials.

-- The construction of Lotus' new building complex in Beijing continued, construction approximately 65% completed as of today.

-- Attended the Global Hunter Securities 2010 China Conference.

-- Terminated the Standby Equity Distribution Agreement with YA Global Master SPV LTD prior to obtaining any financing under the agreement to help protect against stock dilution.

-- In July, the board of directors unanimously approved a maximum of 3 million shares to be allocated to a stock incentive plan as a means to attract, retain and reward individuals who can contribute to the long term financial success of the Company.

-- The Company reaffirms FY2010 Revenue and Net Income Guidance and provides exact targets.

"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."

Net Revenues for the second quarter of 2010 increased 40% to $19.1 million from $13.6 million during the same period of 2009. Wholesale revenues, one of our revenue segments (which accounted for 67% of the Company's total revenues) increased 19% primarily due to the Company's five new prescription drugs covered by the National Health Insurance Program having established their market acceptance. They are both Western and TCM prescription drugs treating duodenal ulcer, chronic prostate infection, psoriasis, influenza and meridian pain, respectively. Retail revenues (which accounted for 32% of total revenues) increased 123% due to relatively fast growth in direct sales to OTC drug outlets in Beijing. Once our new 10,000 sqm storage facility is ready for use, we would be qualified for bidding through the centralized tender process for hospitals in Beijing.

Gross margins for the second quarter of 2010 decreased to 52.3% as compared to 57.9% in the second quarter of 2009. The decrease in gross profit margin was attributable to the increase in cost of sales as a higher percentage of total net revenues than during the prior year's period. The increase in cost of sales as a percentage of total net revenues is a result of reducing sales price per unit by increasing inventory turnover. The management reduced average sales prices per unit to speed up inventory turnover because our warehouse space was insufficient due to 1) the removal of one of the Company's warehouses during construction of our new facility in Beijing, and 2) humidity-related problems occurring in spring and summer that increased the need for warehouse space.

Total operating expenses for the second quarter of 2010 were $3.5 million, a 34% increase from the second quarter of 2009. The increase resulted from the increase of selling expenses mainly as a result of our increase of sales activities in relation to direct sales to OTC drug stores in Beijing, as well as increases in professional fees.

Net income for the second quarter of 2010 was $6.3 million, or $0.12 per diluted share, compared to $4.8 million, or $0.10 per diluted share, in the second quarter of 2009.

Financial Condition

Cash for operations and liquidity needs are funded through cash flows from operations. Cash and cash equivalents were approximately $1.1 million as of June 30, 2010. Current assets and current liabilities as of June 30, 20010, were $9.0 million and $7.8 million, yielding a current ratio of 1.1X. For the six months ended June 30, 2010, net cash provided by operating activities was approximately $8.9 million, which resulted primarily from the Company's organic growth and effective management of cash flow.

Six-Month Results

For the six-month period ended June 30, 2010, total revenues were $34.1 million, an increase of 34% from $25.5 million in the same period last year. Gross profit was $18.7 million, up 28.8% from gross profit of $14.5 million for the six months of 2009. Gross margin was 54.9 %, compared to 57.1% for the first six months of 2009. Operating income was $12.1 million, compared to $9.5 million for the six months ended June 30, 2009.

Net income for the period was $11.3 million, an increase of 35% from $8.4 million during the same period last year. Earnings per share (diluted) for the first half of 2010 was $0.21, as compared to $0.17 in the first half of 2009.

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 and for net income to rise from $16.4 million in 2009 to $21.4 million in 2010.