Lotus fiscal year revenue increases 28.7% to $72.7 million for 2010

Mar 29 2011

Lotus Pharmaceuticals, Inc. (OTC Bulletin Board: 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"), today announced its financial results for the fourth quarter and fiscal year ended December 31, 2010. Summary financial data is provided below:

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 revenue
• 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."

Fiscal Year 2010 Results of Operations

Revenues

Revenues for the fiscal year ended December 31, 2010 were $72.7 million, compared to $56.5 million in 2009. The increase of 28.7%, or $16.2 million, was primarily due to increased sales from the Company's five new wholesale drugs added to its wholesale distribution channel in fiscal 2010. Wholesale revenue increased 14.7% year-over-year to $51.4 million, or 70.7% of total revenues. Retail revenues increased 82.9% year-over-year to $21.3 million, or 29.3% of total revenues. The growth in retail revenues was primarily attributable to the success of the Company's sales force and new general manager for its Over-the-Counter Drug Division, which served the Company's ten stores and more than 1,000 other OTC drug stores in Beijing during fiscal 2010.

Gross Profit

Gross profit for the year ended December 31, 2010 was $39.8 million or 54.7% of total net revenues, as compared to $31.4 million or 55.6% of total net revenues for the year ended December 31, 2009.  The increase of 26.6%, or $8.3 million, was primarily attributable to the revenue growth and the margin improvement in the wholesale segment from 2009 to 2010. The increase in wholesale gross margin was offset by higher growth in the lower-margin retail segment, as well as lower unit sales prices and higher inventory turnover in Lotus' retail operations to compensate for a loss of warehouse space due to the construction of the new Beijing facility, causing overall gross margin to decline slightly.

Income from Operations

Operating income amounted to $14.5 million for the year ended December 31, 2010 as compared to operating income of $18.0 million for the previous year. The decrease of 19.2%, or $3.5 million, was due largely to a one-time property and equipment impairment loss recognized in the amount of $6,762,659 and an increase in professional fees. The Company purchased land in Inner Mongolia in 2008 and had originally intended to build a pharmaceutical manufacturing and storage facility on a portion of the property. Construction began in August 2008 and stopped because priority of capital expenditure was given to construction of the Company's new building complex in Beijing. Because management currently believes it is probable that Lotus will not move forward with the construction of the planned facility in Inner Mongolia, the Company recorded an impairment loss on the entire construction in progress in fiscal 2010.

Net Income

Net income for the year ended December 31, 2010 was $14.4 million as compared to $16.4 million for the year ended December 31, 2009, due to the reasons set forth above. Earnings per diluted share were $0.54 for the year, compared with diluted EPS of $0.66 for the previous year.

Non-GAAP net income in 2010, adjusted net of the non-cash asset impairment expense, was $21.2 million, as compared to non-GAAP adjusted net income of $18.2 million in 2009, representing a year-over-year increase of 16.7%. Adjusted diluted EPS was $0.78 and $0.73 for fiscal 2010 and 2009, respectively.

Liquidity and Capital Resources

As of December 31, 2010, the Company's current assets were $4.5 million and current liabilities were $8.1 million. Cash and cash equivalents totaled $1.3 million as of December 31, 2010. The Company's shareholders' equity at December 31, 2010 was $89.0 million. The Company generated $26.8 million in cash from operating activities in 2010, compared to $31.4 million in 2009. The Company used $29.4 million in net cash for investing activities during 2010, compared to $28.7 million in 2009.

Recent Business Highlights

• The Company began constructing its headquarters building in March 2010. Once completed, this state-of-the-art building will host the Company's GMP manufacturing facility, a storage warehouse, an R&D center, a sales and marketing center, and administrative offices, as well as employee apartments. Currently the building is in its final external and internal furnishing stage. Due to a number of events that are out of the Company's control, such as a temporary ban on construction projects during the National People's Congress and Chinese People's Political Consultative Conference in March, and the requirement for government inspection at numerous stages of the construction to ensure the high quality of the building, the Company now expects to complete and move into the facility by the end of the year.
• The Company's wholly owned subsidiary, En Ze Jia Shi Pharmaceuticals, has been issued a patent by the State Intellectual Property Office of the People's Republic of China for controlled-release oral gliclazide, which is commonly used to control mild to moderate adult-onset Type 2 diabetes. The patent covers the composition and preparation methods for the drug through 2028.
• R-bambuterol, the Company's proprietary drug candidate for the treatment of asthma, entered the clinical trial stage in August 2010 and began Phase I clinical trials in November 2010. The Phase I studies were designed to evaluate the drug's safety, tolerability, and pharmacokinetics, and Lotus expected to enroll 78 healthy volunteers. Based on the contract with the clinical research organization (CRO), Beijing Zenith International Medical Science and Technology Development Company, management expects to receive the results from the Phase I trial in the second quarter of 2011.
• Liang Fang Pharmaceutical Co., the Company's operating entity, signed contracts at the PHARMCHINA 64th National Drug Fair Conference with five additional regional distributors for the Company's products from multiple regions across China. The addition of the new distributors increases Lotus' sales distribution network from 195 hospitals and distributors to 200. In addition, the Company entered into distribution contracts with six pharmaceutical manufacturing companies and will act as the exclusive distributor for their products in the Beijing area.
• 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.
• The Company announced that it will add an additional 9,000 sq. meters (97,000 sq. feet) to its new headquarters building in Chaoyang District, Beijing, which is currently under construction and is scheduled to be completed by the end of June 2011. The new construction will contain between 90 and 120 apartments for employees, bringing the total gross area to 34,000 sq. meters (366,000 sq. feet).
• Lotus submitted an application for a listing on a U.S. national securities exchange in December 2010. In February, the Company received the initial comments from the exchange. The Company filed a response letter shortly thereafter and is currently waiting for a response from the exchange.

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.