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"We are pleased to have improved our profitability in the third quarter of2008. We started a sales and accounts receivable collections incentive programin the second quarter of 2008 which paid higher than usual sales commissionsand bonuses for collecting accounts receivable. The amount that we paid incommissions and bonuses in these incentive programs declined in the thirdquarter compared to the second quarter of 2008, which helped improve ourmargins and net income. Sales remained good and profitability improved afterthe impact of these incentive programs on our expenses declined," said Dr.Zhongyi Liu, Chairman and CEO of Lotus Pharmaceuticals, Inc. "During thisquarter, we continued working toward getting government approvals for newpharmaceutical products which we plan to manufacture and distribute as soon aswe receive those approvals."
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Third Quarter 2008 Results
Lotus Pharmaceutical's total net revenue was $16.7 million in the thirdquarter of 2008, compared to $16.5 million in the third quarter of 2007.Wholesale distribution and manufacturing revenue was $13.8 million in thethird quarter of 2008, compared to $11.4 million in the third quarter of 2007,a $2.4 million or 208.9% increase. Retail revenue was $1.2 million in thethird quarter of 2008, compared to $1.6 million in the third quarter of 2007,a $0.4 million or 26.8% decrease. Retail sales by the Company's pharmacieswere affected by China's summer Olympic Games, during which there was anoverall slowdown of pharmaceutical product sales to consumers in Beijing. Theslowdown of overall economic growth in China throughout the third quarter of2008 also resulted in fewer non-essential pharmaceutical items being purchasedfrom the pharmacies. Other revenues were $1.7 million in the third quarter of2008 compared to $3.5 million in the third quarter of 2007 mostly because of adecrease in third-party manufacturing, research and development and labtesting services.
Gross profit in the third quarter of 2008 was $8.5 million, an increase of26.7% from $6.7 million in the third quarter of 2007. Gross margin was 50.8%,up from 40.5% in the third quarter of 2007.
Operating expenses were $4.7 million in the third quarter of 2008, a 30.9%increase from $3.6 million in the third quarter of 2007. Most of the increasewas because of an increase in selling expenses, which were $4.3 million in thethird quarter of 2008 compared to $1.4 million in the third quarter of 2007.Selling expense as a percentage of total revenue was 25.7% of total netrevenue in the third quarter of 2008 and 8.7% in the third quarter of 2007.For the third quarter of 2008, selling expense declined by $1.6 million ascompared to the second quarter of 2008. Consequently, the Company's operatingmargin improved in the third quarter of 2008 compared to the second quarter of2008 because the impact of an incentive program that paid higher than usualcommissions to sales people and accounts receivable personnel in the secondquarter decreased in the third quarter of 2008.
Research and development expenses were $12,448 in the third quarter of2008, compared to $1.3 million in the third quarter of 2007. General andadministrative expenses were $420,716, down from $912,546 in the secondquarter of 2007.
Operating income was $3.8 million in the third quarter of 2008, a 21.7%increase from $3.1 million in the third quarter of 2007.
Net income for the third quarter of 2008 was $3.2 million, or $0.07 perdiluted share, compared to $2.2 million, or $0.05 per fully diluted share, inthe third quarter of 2007.
Adjusting net income for non-cash financing costs associated with itsconvertible notes and convertible preferred stock, adjusted net income was$3.6 million, or $0.08 per fully diluted share, in the third quarter of 2008,compared to adjusted net income of $2.9 million, or $0.07 per fully dilutedshare, in the third quarter of 2007.
Nine Month Financial Results
Revenues for the first nine months of 2008 were $47.8 million, up 27.0%from revenues of $37.6 million for the first nine months of 2007. Thisincrease was attributable to strong sales for the Company's BrimonidineTartrate Eye Drops, used in the treatment of glaucoma, and strong sales of anumber of third party manufactured drugs. Gross profit was $22.1 million, up46.3% from gross profit of $14.9 million for the first nine months of 2007.Gross margin was 46.3%, compared to 39.6% for the first nine months of 2007.The cost of sales as a percentage of sales declined to 53.7% in the first ninemonths of 2008 compared to 60.4% in the first nine months of 2007 because ofmore efficient production cost controls and improved purchasing practices.Operating income was $8.0 million, compared to $7.9 million for the first ninemonths of fiscal 2007.
Net income was $6.4 million, or $0.13 per fully diluted share, compared to$6.1 million, or $0.14 per fully diluted share, for the first nine months offiscal 2007.
Adjusting net income for non-cash financing costs associated with itsconvertible notes and convertible preferred stock, adjusted non-GAAP netincome was $7.5 million, or $0.15 per fully diluted share, for the first ninemonths of 2008, compared to adjusted net income of $7.3 million, or $0.16 perfully diluted share, for the first nine months of 2007.
Financial Condition
As of September 30, 2008, Lotus had $2.7 million in cash and equivalents,and $18.7 million of working capital. Accounts receivable net of allowance fordoubtful accounts and sales returns were $13.9 million, compared to $20.4million as of December 31, 2007. Total assets were $54.8 million compared to$36.9 million as of December 31, 2007. Total liabilities were $16.4 millioncompared to $10.3 million as of December 31, 2007. Stockholders' equity as ofSeptember 30, 2008 was $38.4 million, up 44.1% from $26.6 million as ofDecember 31, 2007.
The Company generated $16.0 million in net cash flow from operatingactivities in the first nine months of 2008, compared to $3.7 million in thefirst nine months of 2007. Net cash used in investing activities for the ninemonths ended September 30, 2008 amounted to $21.1 million made up of a $2.9million deposit for a patent right to Laevo-Bambutero, a payment for land userights in the Cha You Qian Qi Economy zone in Inner Mongolia of $16.8 millionand the purchase of property and equipment of $1.4 million.
Recent Events
In September 2008, Lotus received formal notice from China's State Foodand Drug Administration (SFDA) that it is evaluating the Company's drug Laevo-Bambutero for clinical trials. This evaluation is expected to take from six tonine months and will determine if and when stringent clinical trials begin. Ifapproved, those clinical trials should take approximately eighteen months.Pending final approval for manufacturing and distribution from the SFDA, Lotusplans to launch sales of Laevo-Bambutero by 2012.
In September 2008, Lotus submitted a manufacturing patent application toChina's State Intellectual Property Office for the production of Gliclazidesustained-release tablets, used for the treatment of diabetes andcomplications associated with diabetes. The patent office will take about sixmonths to evaluate the patent and make its final decision public. With anincreasing elderly population and increasing ratio of people developingdiabetes, Lotus believes that there will be a large market for this drug inthe coming years.
In June 2008, Lotus entered into an agreement with the Cha You Qian QiEconomic Commission, Inner Mongolia, to purchase land use rights for propertyon which it plans to construct a facility for developing and manufacturingpharmaceutical products. The agreement through which Lotus acquired land userights to the property stipulates that construction of a manufacturingfacility on the property must start by September 3, 2008. Lotus recentlyinstalled water, gas and electrical lines on the property. Construction isscheduled to continue in April 2009 because it is too difficult and expensiveto build in the winter months.
2008 Outlook
"We are pleased that there is progress on our getting approval fro theSFDA to manufacture and distribute Laevo-Bambutero, which we think will be animportant new asthma drug. We look forward to finding out if we will begranted a patent to manufacture Gliclazide sustained-release tablets, used forthe treatment of diabetes, an illness that is rapidly spreading in China,"said Dr. Liu. "In the fourth quarter of 2008, we expect to expand ourwholesale distribution of pharmaceutical products manufactured by third-parties along with our own branded products. We see sustainable growth inChina for the products that we manufacture and distribute."
"Construction of a research and development and manufacturing facility inInner Mongolia is currently delayed because of the approach of winter weather.We look forward to moving forward on this project in the spring of 2009,"concluded Dr. Liu."
Conference Call
Lotus' management will host a conference call at 9:00 a.m. EasternStandard Time on Tuesday, November 18, 2008 to discuss results for the quarterended September 30, 2008. To participate in this live conference call, pleasedial the following number five to ten minutes prior to the scheduledconference call time: 866-800-8648. International callers should call 617-614-2702. The Conference Pass Code is 151 721 84.
Replay of the conference call will be available from 11 a.m. EasternStandard Time on Tuesday, November 18 for fourteen days. To access the replay,call 888-286-8010. International callers should call 617-801-6888. TheConference Pass Code is 346 912 68.
Use of Non-GAAP Financial Information
GAAP results for the three and nine month periods ended September 30, 2008and September 30, 2007 include certain non-cash debt financing expensesrelated to the Company's convertible notes and convertible mandatorilyredeemable preferred stock. To supplement the Company's condensed consolidatedfinancial statements presented on a GAAP basis, the Company has provided non-GAAP financial information, adjusted net income and adjusted earnings pershare, excluding the impact of these items in this release. The Company'smanagement believes that these non-GAAP measures provide investors with abetter understanding of how the results relate to the Company's historicalperformance. A reconciliation of adjustments to GAAP results appears below.This additional non-GAAP information is not meant to be considered inisolation or as a substitute for GAAP financials. The non-GAAP financialinformation that the Company provides also may differ from the non-GAAPinformation provided by other companies.
About Lotus Pharmaceuticals, Inc.
Lotus Pharmaceuticals, Inc. ("Lotus") controls and operates LiangfangPharmaceutical, Ltd. ("Liangfang") and Enze Jiashi Pharmaceutical, Ltd. ("Enze"), two Chinese pharmaceutical companies located in Beijing (together "LotusEast"). Lotus East is a comprehensive enterprise, which deals in anintegration of the production, trade, sales and marketing of pharmaceuticals.The Company possesses some of the most advanced pharmaceutical-productionequipment used in China, workshops authenticated by the National GMP, a suiteof various medicines produced by Lotus East, and a number of high-techpersonnel. Lotus East has business and office facilities of 2,000 squaremeters, warehouse of 1,000 square meters and operates ten retail pharmacies inthe Beijing area. Lotus East performs scientific research on new medicines,and the production, wholesale and retail sale of medicines through 10 retailpharmacy location through Beijing.
Safe Harbor Statement
Safe Harbor Statement Under the Private Securities Litigation Reform Actof 1995: Any statements set forth above that are not historical facts areforward-looking statements that involve risks and uncertainties that couldcause actual results to differ materially from those in the forward-lookingstatements. Forward-looking statements include, without limitation, anystatement that may predict, forecast, indicate, or imply future results,performance or achievements, and may contain the words "estimate," "project,""intend," "forecast," "anticipate," "plan," "planning," "expect," "believe,""will likely," "should," "could," "would," "may" or words or expressions ofsimilar meaning. Such statements are not guarantees of future performance andare subject to risks and uncertainties that could cause the Company's actualresults and financial position to differ materially from those included withinthe forward-looking statements. The potential risks and uncertainties include,among others, the Company's limited operating history, the limited financialresources, domestic or global economic conditions -- especially those relatingto China, activities of competitors and the presence of new or additionalcompetition, and changes in Federal or State laws, restrictions andregulations on doing business in a foreign country, in particular China, andconditions of equity markets. More information about the potential factorsthat could affect the Company's business and financial results is included inthe Company's filings, available via the United States Securities and ExchangeCommission.Third Quarter 2008 Highlights -- Total revenues were $16.7 million, compared to $16.6 million in the third quarter of 2007 -- Gross profit was $8.5 million, up 26.7% from the third quarter of 2007, and gross margin was 50.8% compared to 40.5% in the third quarter of 2007 -- Net income was $3.2 million, or $0.07 per diluted share, up 44.7% from $2.2 million, or $0.05 per diluted share, in the third quarter of 2007 -- Excluding non-cash financing costs, adjusted net income was $3.6 million, or $0.08 per fully diluted share, compared to adjusted net income of $2.9 million, or $0.07 per fully diluted share, in the third quarter of 2007 -- Received formal notice from China's State Food and Drug Administration (SFDA) that it has started to evaluate the asthma drug Laevo-Bambutero for clinical trials -- Submitted a manufacturing patent application to the State Intellectual Property Office for Gliclazide sustained-release tablets used in the treatment of diabetes
SOURCE Lotus Pharmaceuticals, Inc.
