Lotus (LTUS) results promosing for the future

Some highlights of their 10-Q filing today:

Total net revenues for the three months ended March 31, 2010 were $14,948,912 as compared to total net revenues of $11,824,287 for the three months ended March 31, 2009, an increase of $3,124,625 or approximately 26.4%.

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.

For the three months ended March 31, 2010, other revenues decreased by $548,260 or approximately 73.4%. This is not important because it is only a fraction of their revenues. 
Gross profit for the three months ended March 31, 2010 was $8,705,283 or 58.2% of total revenues, as compared to $6,638,129 or 56.1% of total revenues for the three months ended March 31, 2009. The slight increase in gross profit margin was attributable to the decrease in cost of sales as a percentage of revenue. The decrease in cost of sales as a percentage of revenue was primarily contributed to better managed raw materials and third party manufactured finished goods purchase as well as more efficient control in labor fees. We expect that our gross profit margin will remain in its current level with slight growth in the future.

Lotus reported net income of $4,928,918 for the three months ended March 31, 2010 as compared to net income of $3,568,102 for the three months ended March 31, 2009. This translated to basic earnings per common share of $0.10 and $0.08, and diluted earnings per common share of $0.09 and $0.07, for the three months ended March 31, 2010 and 2009, respectively.

At March 31, 2010 and December 31, 2009, we had a cash balance of $1,125,181 and $3,945,740, respectively. These funds are distributed in financial institutions located in China.

Our working capital position increased $3,014,169 from $(4,952,734) at December 31, 2009 to $(1,938,565) at March 31, 2010. This increase in working capital is primarily attributed to an increase in inventories of approximately $2.26 million, an increase in prepaid expenses and other assets (current portion) of approximately $0.24 million, a decrease in accounts payable and accrued expenses of approximately $0.13 million, a decrease in other payables of approximately $0.84 million, a decrease in taxes payable of approximately $0.65 million, a decrease in unearned revenue of approximately $0.37 million, a decrease in Series A convertible redeemable preferred stock of approximately $1.69 million offset by a decrease in cash of approximately $2.82 million, a decrease in accounts receivable of approximately $0.11 million and an increase in due to related parties (current portion) of approximately $0.18 million.

At March 31, 2010, we had Series A Convertible Redeemable Preferred Stock of $2,477,433 as compared to $4,170,572 at December 31, 2009, a decrease of $1,693,139. The decrease was primarily attributable to the conversion of the Series A Convertible Redeemable Preferred Stock of $2,166,000 offset by the amortization of discount on convertible redeemable preferred stock of $151,553 and the issued additional convertible redeemable preferred stock of $321,308 as dividends in the first quarter of fiscal 2010.

Our balance sheet as of March 31, 2010 also reflects notes payable to related parties of $5,069,839 due on December 30, 2015 which was a series of working capital loans made to us since December 31, 2005 by the Company’s Chief Executive Officer, his wife, two employees of the Company and a Board member. These loans bear interest based on a floating annual interest rate, which is 80% of China bank interest rate and are unsecured. During the three months ended March 31, 2010, we did not repay any portion of the principal of these loan balances.

The changes in asset and liabilities discussed above is based on a comparison of amounts on our balance sheets as of March 31, 2010 and December 31, 2009 and does not necessarily reflect changes in assets and liabilities reflected on our cash flow statement, for which we use the average foreign exchange rate during the period to calculate these changes.

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. Lotus East has contractual commitments for approximately $53.9 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, 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. In addition, its ability to fully fund the costs associated with the new manufacturing facility is materially dependent upon its ability to obtain secured bank financing and/or government grants and/or third party finance.

A lot of reading but I still think an EPS of $ 0.45 this year is possible. The stock is trading below book value of $ 1.44.